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Posted by on Dec 29, 2010 in General | 14 comments

$5 per Gallon by 2012

From CBS News:

“John Hofmeister, an ex-president of Shell Oil, says we’re looking at $5 a gallon gas in 2012.”

From my observations, industry insiders tend to low-ball their price predictions.  On the other hand, he’s calling for more drilling, so he may be inflating the number in order to scare people into supporting it.

If the latter is true, he’s being very deceitful.  Our capacity to increase oil production is rather tiny compared to the amount of global production.  And since oil is traded and priced at the global level, any increase in U.S. production would have no noticeable effect on the global price.  The only ones to benefit from increased drilling in the U.S. would be the oil companies.

For solid information on oil supply, check out The Oil Drum.

14 Comments

  1. One positive result from increased fuel prices is that it will get more people onto their bicycles. It’s probably more effective than any education or encouragement on our part, but sadly, far too many of those occasional cyclists know little or nothing about riding safely. They stick to the sidewalks.

    • That’s one reason I’m so interested in growing CyclingSavvy as fast as we can. If masses of people just head out there on their bikes with their current limited knowledge and skills, we’ll have a sharp spike in cyclist injuries and deaths.

    • That’s true, but $5 per gallon gasoline is not a high enough price to do the job. I see from:

      http://www.petrolprices.com/

      That UK petrol prices are at $7.37 per US gallon, and the UK remains a car-sick nation of auto addicts.

      My prediction is that gas prices will have to hit $20 per gallon to really change mass behaviour. Even at that price, someone who is driving a 40 MPG car 20 miles to work and back each day is only paying $10 per day in gasoline costs. Affordable… and addicts will pay to support their habits.

  2. To quote from the linked article:

    “He also says there’s little Americans can do to cut their own demand, since many drive to work”

    The solution is simple: stop driving cars to work. Duhhh…

    Most disturbingly, he writes:

    “We have done nothing in the last two, two-and-a-half years to try to increase the domestic production back to where we were in the 1970s at 10 million barrels a day”

    The USA went over its domestic peak oil production in 1974. Going back to those levels of production is geologically impossible. This man is being a bare-faced liar if he says otherwise. Looks like he wants to achieve massive oil company profits by allowing drilling in dangerous, environmentally hazardous places in a futile effort to stave off inevitable decline in oil production.

  3. I note from:

    http://www.thestar.com/news/transportation/article/914343–407-raising-toll-rates-again

    The toll rates for cars on a private toll highway through Toronto’s suburbs are being increased to 22.9 cents per km plus a 50 cent flat fee no matter how far the customer drives.

    I note (detailed calculations upon request) that for a 40 MPG car, this works out to an equivalent gasoline cost of $14.85 per US gallon, even if we forget about the extra 50 cent fee.

    Since local prices in US gallons are around $4.37, this means that people driving their cars on this highway are paying an equivalent of $19.23 per gallon. Throw in the effect of the 50 cent bonus toll, and this brings the price to well over $20 per gallon.

    And this is not some small highway that few use. In 2009, there were 110 million trips, representing over 2 billion km of car driving on this highway.

    Conclusion: When gasoline prices hit $20 per gallon, there will still be a lot of cars driven long distances.

    • Further conclusion…

      The way to get cycle mode share is not primarily through price. People will cycle when cycling is the fastest, easiest and most convenient way of getting from A to B.

      • The cost has to be put in context.

        At $3.00 per gallon, plus adding in the other costs for auto ownership (not including tolls), a 15-mile one-way commute costs $2,522 per year for the driver of car that gets 22 mpg (about the US average). That works out to $1.21 per hour for a 40-hour work week. If you’re making $60 per hour, that’s 2% of your income. If you’re making $10 per hour, it’s 12%.

        At $5.00 per gallon it’s up to $1.55 per hour, over 15% of income for the guy making $10 per hour; still less than 3% for the guy making $60/hr. (The percentages are significantly higher if taken as a percentage take-home pay.)

        15 miles is an ambitious bike commute for most people. The low-wage guy is better off finding a job closer to home that pays the same, or even a bit less (or moving closer to work). Get a commute short enough and the bike becomes much more viable.

        The other big problem is that some of your auto costs are roughly the same even if you drive less (insurance, depreciation). But if you can get rid of the car you can really save some money. Living in a real city with a good transit system and a car-sharing program could make that doable for many.

        • Of course, the numbers above are only for commuting. For someone who drives 10,000 miles per year total, $3.00 per gallon plus other costs works out to $1.55 per hour for a 40-hour work week. Take-home pay works out to $8.61 per hour for a single person with no dependents. $1.55 is 18% of $8.61.

          For the equivalent $60 per hour worker, the take-home pay is $43.43 per hour. $1.55 is 3.5% of $43.43.

          $5.00 per gallon equals $1.99 per hour in this scenario. That’s 23% of take-home for the $10/hour worker, and 4.5% for the $60 per hour worker.

          I’d think increasing from 18% to 23% of take-home pay is way worse than going from 3.5% to 4.5%.

          Lower wage workers often have to travel farther for work than higher-wage workers.

          $5.00 per gallon will also mean increased costs for many necessities, such as food and clothing.

          • Omission: in the first paragraph above, the $8.61 per hour is take-home for $10 per hour gross pay.

  4. I note that CAA has put out a brochure about car ownership costs. Costs obviously depend upon how far the car is driven and what kind of car it is. However, using their numbers, $10,000 per year is a typical cost. See:

    http://www.caa.ca/documents/CAA_Driving_Costs_Brochure_2010.pdf

    However, CAA, being a car lobby, significantly low-balled the numbers. in particular, they completely ignored the cost of car parking. Even surburbanites with fully-detached houses pay capital and maintenance costs on their driveways and garages. That includes the land costs for the land the driveway and garage sits on, the construction costs for paving the driveway and building the garage and the maintenance costs for maintaining them. Repaving a driveway costs big dollars as does re-roofing a garage. My estimate of capital and maintenance costs (using mortgage rates as a cost of capital) is about $2,000 per year per car for parking at a fully-detached house.

    I note that (depending upon location) the price of renting a parking space ranges from about $2,000 to $6,000 per year.

    So, in reality, a typical cost to the owner for car ownership is $12,000 per year. There is, of course, a huge cost to society that is in addition to this.

    Needless to say, I do not regret having that extra $12,000 in my pocket every year.

  5. Further calculating…

    If we take a typical car driving distance as 12,000 miles per year, a 40 MPG car will use 300 gallons of gasoline for a total gas cost of $900 at $3.00 per gallon.

    $900 out of total car ownership costs of $12,000 is fairly insignificant – less than 10% of the total cost of car ownership.

    If gasoline increases in price to $5.00 per gallon, then the total gas cost will rise to $1,500. Still a minor component of car ownership. Insurance costs more than that.

  6. Further calculating…

    The Chevrolet Cobalt used in the CAA example gets about 30 MPG. Therefore about 400 gallons per year typical use. Therefore at $5.00 per gallon, its annual gas cost would be $2,000. Affordable for the typical car addict.

    • You’re still using too high a gas mileage rate, Kevin. FuelEconomy.gov shows the Cobalt getting 25 mpg city. The commute trip is going to get closer to the city mileage than the highway mileage.

      A recent report shows about 10% of US adults living under the poverty level. Those just above it are going to struggle, too. Yes, the “typical” driver might be able to handle it, but a significant number of people are going to be hit very hard by those costs at the same time that other costs will also be going up (food, etc). The US is a country of many people living paycheck-to-paycheck; some using pay-day loans (at insane interest rates) just to get by. They have no margin of error. Increasing their transportation costs by another 5% of take-home will sink them. The smart ones will sell their cars; others will drop their insurance, not replace worn tires…

      • I certainly agree that there are a large number of people who are going to have to give up their car habit even with a small gasoline price rise to $5.00 per gallon.

        How many of them will be priced out of their cars? 10%? 15%

        It seems safe to predict that induced demand will right away put almost as many more miles under the tires of wealthy car owners.

        Here is the key question: What gas price will be the tipping point that gets 80% or more of current car drivers to go car-free? Rest assured, that is the price that gasoline is going to be at as we go over peak oil. Price is the mechanism to bring demand back in line with supply.

        Remember, oil is used in industrial, military and agricultural applications where people will cheerfully pay $1,000 per barrel for oil. Because its value to them is much higher.