It’s a green day for oil companies. Gustav came, Hanna went, but Ike brought the spike. In other news, crude oil dropped to $95 a barrel. Wait. What?!
(Disclaimer: This post is in no way attempting to marginalize the loss that many Americans feel after the devastation from Ike or any other storm. We can all help our neighbors here or here.)
The blowhard behemoth that ripped through the Caribbean, cut across Key West, and shattered the Texas shore was the perfect storm. Ike managed to blow gasoline prices through the roof despite oil prices that haven’t been as low since January (when gas was below $3). Ike was the third-time charm for oil companies, and, like any good hurricane, the hot air is blowing fast.
But these high gas prices aren’t the doing of oil companies. They’re actually our fault.
Set the stage
If you came within 500 feet of a gasoline station last Friday afternoon, you probably saw what looked like a re-enactment of the 1970s energy crisis. I did. Idling cars for quarter-miles lined up like technicolor ribbons outside of gas stations and spilled onto interstate exits. That morning before the hype, gas was selling for $3.59 a gallon. En route to dinner that night, my wife and I saw prices near $3.89. On the way back, it had climbed to $4.09 – and people were still waiting in their cars.
Oddly enough, CNN reported earlier that day that U.S. oil drilling operations were not in danger from Hurricane Ike – a major factor in previous hurricane-induced gasoline spikes. In 2005, for instance, Katrina knocked out 25% of U.S. oil production, and $3/gallon gas ensued.
This wasn’t the case for Ike. Instead, 25% of the gulf’s oil refineries were on temporary shutdown during the storm. Whereas oil drillers extract crude oil from the earth, refineries process that oil to make gasoline for your car, and then pump it through massive pipes to distribution centers all over the United States. Our pumps could run dry!
This was the trigger! Scarcity! How many times have you heard the phrase “gas shortage” in the last week?
Let’s do some math. Let’s follow Friday’s newscasts and say that 25% of U.S. oil refinery capacity was shut down thanks to Ike, and let’s be generous and say it was shut down for two weeks. (Today it was reported that only 19% was affected, but I digress.) The loss equals 1/104 of a year’s supply, or less than 1%. That means that half-a-week’s-worth of gasoline will go missing during the next two weeks.
According to the U.S. Energy Information Administration, the average American driver uses 500 gallons of gas a year while driving an average of 12,000 miles. A half a week, then, equals 4.8 gallons and about 115 miles. According to the reports, you need to conserve 2.4 gallons this week and next before everything normalizes. 2.4 gallons? That’s it? You can save that by hypermiling alone.
The sky is falling!
Unfortunately, that’s not what happens with (perceived) scarcity. Everyone around the water cooler at work is thinking the same thing: “I need to top off my car’s gas tank.” This is terrible.
Topping off your car’s gas tank (when it’s not empty) is adding artificial demand. When enough people do this at the same time, artificial scarcity occurs, and prices skyrocket. Individual gas stations estimate future demand from previous demand, and overloading their patch of earth doesn’t help.
By the way, please leave me a comment if you have failed to find gasoline for your car since Ike. (Trying at gas stations without electricity doesn’t count.)
Half-empty or half-full?
Think about it like this: If gas tanks all over the country range between empty and full, we can only assume that the average car’s gas tank is half-full. Comparing everything from Honda Civics to Chevrolet Suburbans, I estimate that the average gas tank holds 16-18 gallons. By conservative calculations, we can say that half of the average gas tank is 8 gallons. In comparison, the same U.S. EIA stats say that each driver uses, on average, 9.6 gallons a week.
On average, each driver that lined up for the combustion parade last Friday bought almost a week’s worth of gas in advance. And, if Ike’s effect is anything like that of Katrina and Rita, then these same drivers will continue to top off again and again – creating more artificial demand. The worst part is that when we do this, we’re buying more gas than normal at a time when prices are higher! Whoops!
So, why was everyone lined up for gasoline that – hey, wait a minute! It’s now $4.19? Gas was $3.59 a gallon last week!
Scarcity, or perceived scarcity, is a powerful thing. It created a fear that we won’t have enough. The good news is that prices should decline significantly once the talking heads on TV start reporting that refinery production is back to normal. In the meantime, our irrational fears are adding to the profit line of oil companies. Let’s hear it for $3/gallon gas in time for the world series.
What do you think?
Leave it as a comment, and don’t forget to tell us the price for a gallon of good ol’ 87 octane in your neck of the woods.