Gas Prices My Friends, Gas Prices
To all the parents and teachers out there...
I know you all care for your children and students. I know you care for your entire families and their well being. As summer rushes up, I would like to share with you some of my learnings about the world we live in. For framing, I'll start with the hot topic of gasoline prices.
Gas prices have been on the rise. You may remember that $1.50 per gallon (or less) was the average price for a decade, right up until 2003. That was only three and a half years ago. Since then, gasoline prices have risen to a new record high of $3.65 per gallon.
Why?
It makes perfect sense to want to know. Why is it that gas prices were basically flat for a decade, and then suddenly started rising, and fluctuating so much? What is going on here? Should this concern me?
Nearly two years ago, in August of 2005, I started thinking about this.
Gasoline, at the time, had risen to $2.79 per gallon. I realized that many of our students... more specifically, their parents... were probably feeling the pinch of the higher prices. After all, most of our students families are living paycheck to paycheck, and just trying to do their best to hold down a job, and take care of their modest needs. I wondered to myself, "How will this impact them?"... and more obviously, "Why have prices risen so much recently?"
That is the same question I ask you to consider about the past several months.
What is going on here?
The television, radio, newspapers, magazines and Internet are all reporting on this on a daily basis. This mainstream or popular media points to several reasons.
1. Gas gouging
2. Refinery shortages
3. Tight supply
4. Growing demand in Asia
5. Increase in fuel use
Some of these might make sense in the short term. These are the facts of the matter.
1. There isn't any gas gouging. The various state attorney generals are looking into this constantly. A new bill in congress will put extremely still fines on anyone guilty of gas gouging.
2. The USA is only able to refine about 85% of the gasoline we burn, and the rest of our gasoline is imported, by tanker, from Asia (for the east coast) or Europe (for the rest of us).
3. The Organization of Petroleum Exporting Countries (OPEC) has stated that it is restricting supply. African and South American exporting countries are reducing production.
4. Asia, specifically China, is importing more oil.
5. Nationwide sales of gasoline are higher than a year ago.
In a sense, this may allay some of the concerns of reasonable people. Even though projections of $4 gasoline this summer are common, this will still not yet as expensive as the record of March 1981 (after adjusting for inflation and the better mileage of today's cars).
Analysis of Gas Prices by the U.S. Department of Energy's "Energy Information Agency" (EIA)
Perhaps this will console the masses for the remainder of the summer, until (hopefully), demand for petroleum drops again, and brings back prices below $3 per gallon.
But this still leaves questions that should be burning in the back of your mind.
Why has gas doubled in price? Why are prices so seasonal?
In my research, over the past 21 months, I have found that there is one issue that is NOT coming up in the mainstream media. The issue is that we are now at, or very near, the peak of global oil production.
Notice that global production maxed out over two years ago, and hasn't increased above that level since then.
Why is this important?
Because it is a supply and demand, global market that we live in. The world had been used to 1.5% growth in the supply since 1983. That managed to moderate consumption, keeping the gasoline (and other petroleum prices) somewhat flat... that is, until about three and a half years ago.
Now, the supply isn't growing. The demand continues to rise as more people are born, and more people, worldwide, have money to buy. That is the root reason that the prices for gasoline have risen over the past three and a half years. That is also why the prices for gasoline and oil have fluctuated so much on a seasonal basis.
Why isn't supply increasing? Where's the 1.5% annual growth?
Oil in is non-renewable resource. It is the remains of living things from millions of years ago. The best estimates suggest that we have already consumed up to half of all the oil that we will ever be able to get out of the ground. The second half is going to be harder to get out of the ground, found in smaller pockets, and in places much more difficult to access.
Within a few years, if not already, global oil production will begin a permanent decline. The start of this decline is commonly known as "peak oil". As the supply declines, the patterns we've seen in price will likely continue. Recall, there are two patterns.
1. Overall cost of gasoline is increasing from year to year
2. The variation of the price throughout the year is increasing
You might be thinking, "okay, so I shouldn't buy a gas guzzler, since prices are going to keep right on rising". You would be absolutely correct about that, but the issue is much more significant than that...
What do you mean "more significant"?
Our own federal government is telling us that we are at risk of having "an imminent peak and sharp decline in oil production could cause a worldwide recession". In this context, that is similar to saying, we don't know how bad it could get, but it could get extremely bad.
Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production
Less oil means less energy. Less energy mean less production. Less production means less jobs. Less jobs means rising unemployment. Rising unemployment means less consumption. Less consumption means less production. And etc...
Less oil means higher energy prices. Higher energy prices mean higher prices on everything. Higher prices on everything mean increasing inflation. Increasing inflation means pressure from employees for raises. Success from employees leads to higher prices. And etc...
This is known as stagflation. For those of you who recall the oil shock of 1974, or the oil shock of 1979, our federal government is telling us that it could be worse.
Not only could it be worse, but it could be a permanent condition, yet sporadic, condition. Prices will go up. People will be forced to change their spending. Demand will decrease. Prices will decrease. Consumption will increase. Supply continues to decrease. Prices to up faster than before. And etc...
Is this real?
Yes, absolutely. Oil is a finite resource. Oil is liquid energy: the lifeblood of industrial civilization. It is inevitable that it would decline. It will directly impact the global economy; the value of money, savings, and investments; and the likelihood that you or I will get a raise, or even have a job.
The federal government is not developing this idea out of thin air. The peak of U.S. oil production (in 1970) was predicted over a decade before it happened. Numerous books, magazine articles, movies, documentaries, web sites, and people all have extensive knowledge on this topic of peak oil. The President himself has been pointing out the issue in his "America is addicted to oil" remarks. Scientists, oil geologist, economists, investors, and bankers from every possible political and religious perspective have weighed in on this and say, "Yes, this is the biggest issue to face our civilization".
Why are you telling me this?
Because as you go about your daily life, it is important that you have a vision of the future which is realistic. I know that you care for your family, and the students, and their families. It doesn't make any sense for us to ignore the evidence that very rough times are ahead.
On a more personal note, many of you have personal beliefs about what safe investments are. I can assure you of this: there are no investments out there that are as safe as you think they are. The stock and bond market are all dependent on growth in the economy. Our retirement funds are all dependent on the stock and bond markets. Our ability to pay off loans and mortgages is based on our ability to hold down a job.
For my part, I made it a top priority to pay off every little thing that I could. The house. The car. The credit cards. The bills. And I'm trying to figure out what the next step is, as we stand on the cusp of either spiraling inflation, spiraling deflation, or some monster mix that leaves us with little ability to protect our savings.
This is not the cheeriest news I could share with you as summer vacation approaches, but I have found that the truth about things is damn important, and I'd rather know the bad news early enough that I can do my best to prepare, rather than having it hit me blind upside the head.
Ready to Learn More?
Good Films and Videos about Peak Oil
My 10 Minute Video Explaination of Peak Oil
A Web Site that does a Great job of addressing the "What If's" and "Could We's"
A One Click Google Search for Peak Oil
Addendum I - Why have gas prices gone up?
As you may know, gasoline prices have increased recently in many parts of the country. What do you think is the main reason gas prices have gone up?
33% -- Oil companies/greed/profit
8% -- Iraq war
8% -- Political reasons
8% -- Supply - less gas available or gas production problems
7% -- Bush administration
4% -- OPEC/foreign oil producers
3% -- Demand - people driving more
2% -- Market forces
2% -- Time of year/season
6% -- Other
12% -- No opinion
Source: Washington Post Poll - May 24, 2007
Let me summarize, the general public is clueless about how the overall supply of oil determines the price of gasoline. This is the challenge that those of us "in the know" have to overcome, in order to help everyone make sense of the crisis we are entering.
Related: Ipsos Public Affairs - Gasoline Price Poll Results (PDF file) - May 24, 2007
Addendum II - Midwest - Michigan, Illinois, Etc.
Peak oil aside for a moment, the short term reason that gasoline prices are markedly higher in the Midwest is that there are a couple of refineries that are not, or were not, operating at full capacity. One was near Chicago, the other, near Toledo.
US lawmaker queries BP on US refinery outages - May 24, 2007
U.S. Gas Prices Temperature Map plus Michigan Gas Temperature Map
If these refinery outages had not happened, the Midwest would probably be experiencing a similar price rise as the rest of the nation. The tricky part about this is that people might stop short and simply blame refinery outages for the entire problem. That is not it at all. It is refinery outages, on top of increased demand, on top of the biggie... peak oil. And what "wags the dog" here is peak oil.
I know you all care for your children and students. I know you care for your entire families and their well being. As summer rushes up, I would like to share with you some of my learnings about the world we live in. For framing, I'll start with the hot topic of gasoline prices.
Gas prices have been on the rise. You may remember that $1.50 per gallon (or less) was the average price for a decade, right up until 2003. That was only three and a half years ago. Since then, gasoline prices have risen to a new record high of $3.65 per gallon.
Why?
It makes perfect sense to want to know. Why is it that gas prices were basically flat for a decade, and then suddenly started rising, and fluctuating so much? What is going on here? Should this concern me?
Nearly two years ago, in August of 2005, I started thinking about this.
Gasoline, at the time, had risen to $2.79 per gallon. I realized that many of our students... more specifically, their parents... were probably feeling the pinch of the higher prices. After all, most of our students families are living paycheck to paycheck, and just trying to do their best to hold down a job, and take care of their modest needs. I wondered to myself, "How will this impact them?"... and more obviously, "Why have prices risen so much recently?"
That is the same question I ask you to consider about the past several months.
What is going on here?
The television, radio, newspapers, magazines and Internet are all reporting on this on a daily basis. This mainstream or popular media points to several reasons.
1. Gas gouging
2. Refinery shortages
3. Tight supply
4. Growing demand in Asia
5. Increase in fuel use
Some of these might make sense in the short term. These are the facts of the matter.
1. There isn't any gas gouging. The various state attorney generals are looking into this constantly. A new bill in congress will put extremely still fines on anyone guilty of gas gouging.
2. The USA is only able to refine about 85% of the gasoline we burn, and the rest of our gasoline is imported, by tanker, from Asia (for the east coast) or Europe (for the rest of us).
3. The Organization of Petroleum Exporting Countries (OPEC) has stated that it is restricting supply. African and South American exporting countries are reducing production.
4. Asia, specifically China, is importing more oil.
5. Nationwide sales of gasoline are higher than a year ago.
In a sense, this may allay some of the concerns of reasonable people. Even though projections of $4 gasoline this summer are common, this will still not yet as expensive as the record of March 1981 (after adjusting for inflation and the better mileage of today's cars).
Analysis of Gas Prices by the U.S. Department of Energy's "Energy Information Agency" (EIA)
Perhaps this will console the masses for the remainder of the summer, until (hopefully), demand for petroleum drops again, and brings back prices below $3 per gallon.
But this still leaves questions that should be burning in the back of your mind.
Why has gas doubled in price? Why are prices so seasonal?
In my research, over the past 21 months, I have found that there is one issue that is NOT coming up in the mainstream media. The issue is that we are now at, or very near, the peak of global oil production.
Notice that global production maxed out over two years ago, and hasn't increased above that level since then.
Why is this important?
Because it is a supply and demand, global market that we live in. The world had been used to 1.5% growth in the supply since 1983. That managed to moderate consumption, keeping the gasoline (and other petroleum prices) somewhat flat... that is, until about three and a half years ago.
Now, the supply isn't growing. The demand continues to rise as more people are born, and more people, worldwide, have money to buy. That is the root reason that the prices for gasoline have risen over the past three and a half years. That is also why the prices for gasoline and oil have fluctuated so much on a seasonal basis.
Why isn't supply increasing? Where's the 1.5% annual growth?
Oil in is non-renewable resource. It is the remains of living things from millions of years ago. The best estimates suggest that we have already consumed up to half of all the oil that we will ever be able to get out of the ground. The second half is going to be harder to get out of the ground, found in smaller pockets, and in places much more difficult to access.
Within a few years, if not already, global oil production will begin a permanent decline. The start of this decline is commonly known as "peak oil". As the supply declines, the patterns we've seen in price will likely continue. Recall, there are two patterns.
1. Overall cost of gasoline is increasing from year to year
2. The variation of the price throughout the year is increasing
You might be thinking, "okay, so I shouldn't buy a gas guzzler, since prices are going to keep right on rising". You would be absolutely correct about that, but the issue is much more significant than that...
What do you mean "more significant"?
Our own federal government is telling us that we are at risk of having "an imminent peak and sharp decline in oil production could cause a worldwide recession". In this context, that is similar to saying, we don't know how bad it could get, but it could get extremely bad.
Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production
Less oil means less energy. Less energy mean less production. Less production means less jobs. Less jobs means rising unemployment. Rising unemployment means less consumption. Less consumption means less production. And etc...
Less oil means higher energy prices. Higher energy prices mean higher prices on everything. Higher prices on everything mean increasing inflation. Increasing inflation means pressure from employees for raises. Success from employees leads to higher prices. And etc...
This is known as stagflation. For those of you who recall the oil shock of 1974, or the oil shock of 1979, our federal government is telling us that it could be worse.
Not only could it be worse, but it could be a permanent condition, yet sporadic, condition. Prices will go up. People will be forced to change their spending. Demand will decrease. Prices will decrease. Consumption will increase. Supply continues to decrease. Prices to up faster than before. And etc...
Is this real?
Yes, absolutely. Oil is a finite resource. Oil is liquid energy: the lifeblood of industrial civilization. It is inevitable that it would decline. It will directly impact the global economy; the value of money, savings, and investments; and the likelihood that you or I will get a raise, or even have a job.
The federal government is not developing this idea out of thin air. The peak of U.S. oil production (in 1970) was predicted over a decade before it happened. Numerous books, magazine articles, movies, documentaries, web sites, and people all have extensive knowledge on this topic of peak oil. The President himself has been pointing out the issue in his "America is addicted to oil" remarks. Scientists, oil geologist, economists, investors, and bankers from every possible political and religious perspective have weighed in on this and say, "Yes, this is the biggest issue to face our civilization".
Why are you telling me this?
Because as you go about your daily life, it is important that you have a vision of the future which is realistic. I know that you care for your family, and the students, and their families. It doesn't make any sense for us to ignore the evidence that very rough times are ahead.
On a more personal note, many of you have personal beliefs about what safe investments are. I can assure you of this: there are no investments out there that are as safe as you think they are. The stock and bond market are all dependent on growth in the economy. Our retirement funds are all dependent on the stock and bond markets. Our ability to pay off loans and mortgages is based on our ability to hold down a job.
For my part, I made it a top priority to pay off every little thing that I could. The house. The car. The credit cards. The bills. And I'm trying to figure out what the next step is, as we stand on the cusp of either spiraling inflation, spiraling deflation, or some monster mix that leaves us with little ability to protect our savings.
This is not the cheeriest news I could share with you as summer vacation approaches, but I have found that the truth about things is damn important, and I'd rather know the bad news early enough that I can do my best to prepare, rather than having it hit me blind upside the head.
Ready to Learn More?
Good Films and Videos about Peak Oil
My 10 Minute Video Explaination of Peak Oil
A Web Site that does a Great job of addressing the "What If's" and "Could We's"
A One Click Google Search for Peak Oil
Addendum I - Why have gas prices gone up?
As you may know, gasoline prices have increased recently in many parts of the country. What do you think is the main reason gas prices have gone up?
33% -- Oil companies/greed/profit
8% -- Iraq war
8% -- Political reasons
8% -- Supply - less gas available or gas production problems
7% -- Bush administration
4% -- OPEC/foreign oil producers
3% -- Demand - people driving more
2% -- Market forces
2% -- Time of year/season
6% -- Other
12% -- No opinion
Source: Washington Post Poll - May 24, 2007
Let me summarize, the general public is clueless about how the overall supply of oil determines the price of gasoline. This is the challenge that those of us "in the know" have to overcome, in order to help everyone make sense of the crisis we are entering.
Related: Ipsos Public Affairs - Gasoline Price Poll Results (PDF file) - May 24, 2007
Addendum II - Midwest - Michigan, Illinois, Etc.
Peak oil aside for a moment, the short term reason that gasoline prices are markedly higher in the Midwest is that there are a couple of refineries that are not, or were not, operating at full capacity. One was near Chicago, the other, near Toledo.
US lawmaker queries BP on US refinery outages - May 24, 2007
U.S. Gas Prices Temperature Map plus Michigan Gas Temperature Map
If these refinery outages had not happened, the Midwest would probably be experiencing a similar price rise as the rest of the nation. The tricky part about this is that people might stop short and simply blame refinery outages for the entire problem. That is not it at all. It is refinery outages, on top of increased demand, on top of the biggie... peak oil. And what "wags the dog" here is peak oil.