PowerPoint Presentation

Gas prices, Broccoli and Doughnuts

ECNS 594Montana Council on Economic EducationJune 20, 2013The economics of gas prices, and how broccoli and doughnuts fit in1Our lesson today.

Energy industry in MontanaEnergy security = energy independence?Gas pricesBroccoli and doughnutsOur challenge in teaching economics, relevancy!!!The joys of teaching economicsNotice not only is he asleep, the gal next to him is texting2Why only 2 percent?

Among those who walk into auto dealer showrooms, 75% desire a hybrid vehicleonly 2% drive out in oneWhy have we been so unsuccessful in getting people to give up the doughnut (SUV) and eat broccoli (the hybrid)?Hint: Biggest determinant for future of hybrids is the price of gas3Teens and the price of a gallon of gas

How many drive to school?

How many drive as a pastime?

How many care about fuel efficiency?

How many ride the bus or ride a bike?

How many drive in a fuel conserving manner?

How many could tell you the price of a gallon of gas?

Price of gas probably a good topic for teens, since all can relate to it4Wheels & Womena teachable moment?How are oil prices determined?Drill baby drill?Price asymmetry?SUV sales?

My father to me as a teen, lose control when it comes to wheels and womenOil prices determined in world oil markets, not local nor nationalCan domestic reserves wean us off foreign dependency?Why did I buy that SUV?

5Lots of teachable economic topicsPlus unintended consequences of public policy, our doughnut and broccoli dilemma6The oil price see-sawDownside of rising prices:Relationship between the price of substitutesOil prices ripple through to everything, we eat oil$10 increase in price of barrel of oil shaves 0.2% off GDP10% in gas prices shaves point off CSI$1 increase in gas prices reduces shopping frequency by 10%, expenditures by 3%The upside to rising energy prices:For resource endowed states, new jobs and income and all the ripple effects$1 increase in price of gas yields 16,000 lives saved from diabetes, $17 billion in reduced health costsOil company profits:27% oil stocks support pension funds9.2 million jobs14% stocks are in IRAs and 30% held in mutual funds7Oil prices? What, me worry?

Consumers

Taxpayers

Producers

Society

Its all about from whose perspective.Consumers: not just a the pump, but in the prices of everything we buyTaxpayers: policies to conserve fuel, such as the CAF standardspolicies to encourage/discourage domestic productionhow to fund our highways? oil rich counties of eastern MontanaProducers: What happens if they lose their tax favored treatment? Will gas prices fall or increase?distortions in incentives, drill for more oil or develop alternatives?high wagesSociety:housing in oil patch boom areascongestion on highwaysI drive something big because you do8Energy is Everywhere

Blue Diamond Shapes = Hydroelectric facilitiesLibby--Noxon Rapids--Hungry Horse--Kerr dam--Yellowtail Hydroelectric Power Plant--Fort Peck HydroPurple Captains Wheel= Import facilitiesSweetgrass Import--Great falls PortPurple Box within Box=RefineriesGreat Falls Refinery--Cenex refinery--Conoco-Phillips refinery--Exxon-Mobil refineryBlack Triangles = Coal PlantsJ E Corette Coal Plant--Hardin Coal Power--ColstripBlack Box with triangle=Coal MinesAbsaloka Coal Mine--Spring Creek Coal Mine--Decker Coal Mine--Rosebud Coal Mine9

Montanas Energy IndustriesMontanas energy resources concentrated in fossil fuelsMT total employment in Energy, by type of energy 10

Drilling Oil and Gas WellsNAICS 213112009 Employment = 333Number of firms = 49Liberty, Hill, BlaineRichland11

Support Activities for Oil and GasNAICS 2131122009 Employment = 1,256Number of firms = 159Hi Line, Yellowstone, Richland, Dawson12

Petroleum RefiningNAICS 324112009 Employment = 1,069Number of firms = 5Yellowstone, Cascade13

Coal Mining NAICS 21212009 Employment = 946Number of firms = 7Richland, Big Horn, Rosebud, Musselshell14

Colstrip SteamElectrical Station2009 Employment = 578Number of firms = 1Rosebud15Energy security = interdependence, not independence

Oil is truly a globalized commodity

World energy security requires both consuming and oil producing countries to cooperate in protecting the stability of global marketsEven if U.S. shifted all oil purchases to friendly oil fields in Canada and Mexico, we would still not be protected from disruptions16proven reserves

Who owns the oil and market power?

Reserves: given todays technology and todays prices

Explain economic depletion and physical depletion17Add recoverable and unconventional

Higher prices are the key to finding more ways to extract oilStudent: is it in the interest of oil rich countries to price gouge?unconventional to provenelasticity of supply and demand18The Canadian tar sands

Reserves equal to those in Saudi Arabia potentially19The marginal barrel of oil soldDoes not matter where or by whom

There is no use thinking nationalistically

OPEC as a united marginal producer

OPEC as a formal oligopolycontrast to informal oligopoly price leadershipSwing producer in 1986Mixed success in controlling prices: mistakes in timing and controlling cheaters21The world price is the price that mattersCushing, Oklahoma (where pipelines meet)Bakken Oil Shales: EIA projects 350,000 b/day by 2035 (fracking technology), or 4% of U.S. productionTotal U.S. production: 10 million b/dayTotal U.S. consumption 19 million b/day 22Whats the backbone of what we pay at the pump?

Its the price of a barrel of crude more than anything else23up from the ground come a bubblin crude

To understand the price we pay at the pump, have to understand what determines the price of crudeAnd crude isnt just gas at the pump. It can be refined into:heating oilsdiesel and jet fuelslubricantsasphaltethanebutanepropaneand many others24Refiner Acquisition Cost of Crude OilPADD Region 4(dollars per barrel)Acquisition TypeSep-2010Oct-2010Nov-2010Dec-2010Jan-2011Feb-2011Composite67.5069.8976.0580.6482.5077.97Domestic69.7774.8478.0682.7484.7181.62Imported64.7963.1073.5977.8878.9373.15And crude prices can be volatilePADD = Petroleum Administration for Defense DistrictPADD 4 includes MT, WY, CO, ID, UTComposite is the weighted average cost of both domestic and imported oilPrice fluctuation of 22% in just a 6 month period25Movement of oil by pipeline between PADD DistrictsPADD DistrictAnnual-Thousand barrels 2010From PADD 1 to PADD 40From PADD 2 to PADD 444,604From PADD 3 to PADD 49,906From PADD 5 to PADD 40Total Oil From Other PADD Regions54,510From PADD 4 to PADD 2122,722From PADD 4 to PADD 370,895From PADD 4 to PADD 511,548Total Oil To Other PADD Regions205,165PADD 4 Exports+150,655PADD 4 is an exporter to the rest of the nation26Wholesale traded in open market

Wholesale prices can change by the minuteNotice that blue line (wholesale) changes direction before red line (retail)Each nickel increase per gallon wholesale costs retailer $450 per deliveryRetail lags wholesale by 8-12 weeks, but most of effect is in first week or soFor each $10 increase per barrel, price per gallon increases $.2527Imports make up the difference

Given todays prices, technology, and infrastructure built on fossil fuel dependency, we need imports51% of our imports come from Western Hemisphere, 17% Persian Gulf, 22% Africa, Other 10%Canada is our leading exporter: 23%, followed by Venezuela 11%, Saudi Arabia 10%, Mexico 9% Nigeria 8%We import crude, most petroleum products consumed in U.S. are refined here

The U.S. consumes 22% of the worlds petroleum, produces only 11%28But how about wind, Montana has lots of it?

Judith Gap Wind Farm

29NERC Regions

MT is in Western Electric Coordinating Council Region (WCC) and Midwest Reliability Organization (MRO) Region30Low expectations for wind energy

NERC (North American Electric Reliability Corporation ) Region 31Retail gas purchases determined bySupply arrangements and ownership structureOil company owned and operated (