What follows is one hour of work trying to understand what is driving the price
of Gasoline at the pump and wondering if there is a path to reduction on
foreign oil dependence.
This is not a real analysis – just a little fun – the equivalent of web browsing to
understand more on this topic.
I have not looked at this data lately but I obtained most of the data from
http://www.eia.doe.gov/oil_gas/petroleum/info_glance/petroleum.html and ran
it through SAS JMP for analysis. I will update it one weekend when I have
The two graphs describing how we have or we will reach a peak in production
of crude are “borrowed” from the web without permission. But since this was
just a fun exercise and I am not publishing this I am sure they won’t mind.
Please complete your own analysis and reach your own conclusions
1. The primary driver of the cost of gasoline is the cost per barrel of crude oil.
2. The primary driver of the cost of crude is the market. The price is supposedly
driven by what we understand of supply and demand, and I am sure supply and
demand have an impact however speculation may have been the primary driver.
3. Supply – Many supply prediction models show a decline in availability while
demand grows. By the way only 26% of our supply comes from OPEC most
comes from Canada.
4. Demand – US, China and Europe are the primary consumers of crude oil.
5. US Petroleum reserve holds 36 days of US petroleum consumption.
6. Demand – The vehicles you and I drive comprise 81% of the gasoline demand in
the US. Trucks, trains and planes etc. represent 19%.
7. So if we want to reduce our dependence on foreign oil (Canadian) you and I
need to change what we drive.
A – Why would refinery cost and profits track
the price of crude in 2006 (when it is going up)
but not after 2007 week 28 for almost a year?
B – What has triggered the major increase in
crude oil (the primary driver now of our latest
price increase) starting in July of 2007?
Impact of cost component has on retail sales price*
Cost component Correlation
Distribution Marketing and Profits .02
Crude Oil .85
Refinery Costs and Profits .04
State storage fees .00
State and local sales tax .99
State Excise Tax .00
Federal Excise tax .00
*Data from the California energy commission
- Main cost component driving price at retail pumps is Crude Oil
- State and local sales tax are based on price at pump thus high correlation
Theory - Demand Will Continue to Grow
China and USA
By the way
- US consumes 20 million barrels of crude per day
It is silly for politicians to propose using the Strategic Petroleum Reserve to help
lower the price of gas. The reserve has 689 million barrels or 34 days of petroleum
- Only 26% of our imports come from OPEC countries, Canada is our largest supplier
What is our highest use of petroleum products = Motor gasoline followed by fuel oil (heating)
US Highest Consumers of Crude
USA Fuel Consumption by Mode of Transportation
Passenger cars, motorcycles, farm vehicles, and combination trucks comprise 81%
Things we could do to reduce dependence on Oil
-Energy technology innovation center focused on consumer vehicles
- Renewable sources of fuel that will not impact other parts of the economy
(for example increase in ethanol consumption will impact the price of corn)
- Improving battery technology
- Gap bridging technologies to convert existing vehicles to electric
-Incentives to convert existing vehicles
-Local government rental programs – electric community vehicles
-Tax deductions on purchase of new vehicles (fuel cell)
-Government grants to build community walkways/pathways/mini roads that will
allow bicycles, segways types and other smaller vehicles at danger in the highways
etc to incentivize use of bicycle to work etc.
-SUV tax or MPG tax
-Improve intra city travel Rail and others
You and I can purchase an electric or alternative energy vehicle next time we buy