Ellig Gasoline And Natural Gas January 2005

Gasoline and Natural Gas Prices: What’s Up?

Jerry ElligSenior Research Fellow

’70s cultural commentary…If they don’t lower the gas, we’re gonna lower the boomStop shippin’ all that wheat and corn, forget the Golden RuleAnd if they still wanna play rough, we’re show ‘em that we’re tough:Cheaper crude, or no more food!

-- Brent Burns, 1979

Are we rollin' downhill like a snowball headed for hell? With no kind of chance for the flag or the liberty bell? I wish a Ford or a Chevy would still last ten years like they should.Is the best of the free life behind us now and are the good times really over for good?

-- Merle Haggard, 1981

Natural gas chronology• 1954 Phillips decision - wellhead price controls on interstate gas

• 1960s: Interstate reserves shrink

• 1970s: Widespread shortages in consuming states

• 1978: Natural Gas Policy Act allows phased decontrol of “new” gas, completed in 1985

• 1980s: FERC reforms interstate transportation

• 1992: Old gas prices decontrolled

Is gas expensive?

Real gas prices ($1996)

0

1

2

3

4

5

6

7

8

9

10

Source: Energy Information Administration

$/m

cf

ResidentialCitygateWellhead

Is gas affordable?

Residential gas prices vs. affordability

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Source: Energy Information Administration

Residential price (cents/10 mcf, $1996)Real per capita disposable income/$mcf

Price signals at work...

0

5

10

15

20

25

30

35

40

45

50

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Wellhead price ($1996/10mcf)

Gas w ells drilled (thousands)

Oil chronology

• 1971: Nixon wage and price controls

• 1973: Oil and gasoline price controls

• 1970s: Shortages and gas lines

• 1981: Executive Order decontrols oil and gas prices

Is gasoline expensive?

US Nominal vs. Real Gasoline Prices (cents/gallon)

0

50

100

150

200

250

1949

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

Nominal

Real ($1996)

A historical perspective

Regular gasoline prices ($1996)

0.0

50.0

100.0

150.0

200.0

250.0

19491950195119521953195419551956195719581959196019611962196319641965196619671968196919701971197219731974197519761977197819791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004

Source: Energy Information Administration

Cen

ts/g

allo

n

OPEC formed 1960

Is gasoline affordable?

Real gasoline prices and affordability

0.0

50.0

100.0

150.0

200.0

250.0

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

Source: Energy Information Administration

Real price (1996cents/gallon)Real per capita disposableincome/price

Price signals at work...

0

10

20

30

40

50

60

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Source: Energy Information Administration

US crude ($/bbl), $2000US Oil wells drilled (1000s)

Why?

• Crude oil prices?

• U.S. monetary policy?

• Cost of reformulated gasoline?

• Diminished competition?

Gasoline tracks crude prices

Gasoline prices track crude prices(Inflation-adjusted $2000)

0

50

100

150

200

250

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

Source: Energy Information Administration

US Crude ($/bbl)Gasoline (cents/gallon)

Gasoline and crude since 2001

Gasoline and crude prices

0

20

40

60

80

100

120

140

160

1/2/

2002

3/2/

2002

5/2/

2002

7/2/

2002

9/2/

2002

11/2

/200

2

1/2/

2003

3/2/

2003

5/2/

2003

7/2/

2003

9/2/

2003

11/2

/200

3

1/2/

2004

3/2/

2004

5/2/

2004

7/2/

2004

9/2/

2004

11/2

/200

4

Source: Energy Information Administration

WTI Crude ($/bbl)

Regular gas (cents/gal., Gulf coast)

How high are world oil prices?Oil prices, $ vs. Euros

0

5

10

15

20

25

30

35

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04Source: Energy Information Administration

$Saudi lightSaudi light (Euros)

Reformulated gasoline costs 6-12 cents more

0

20

40

60

80

100

120

140

160

180

1995 1996 1997 1998 1999 2000 2001 2002 2003Source: Energy Information Administration

cent

s/ga

llon

ConventionalReformulated

Consequences

• Recession?

• Inflation?

• Economic dependence?

• Political vulnerability?

How big are imports?

% of US petroleum consumption from imports and OPEC

0

10

20

30

40

50

60

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

Source: Energy Informaiton Administration

ImportsOPEC

US crude oil supply, October 2004(Thousands of barrels/day)

2,458, 16%

2,548, 16%

5,323, 34%

5,387, 34%

Persian Gulf OPECOther OPECNon-OPECDomestic

US petroleum imports, October 2004(thousands of barrels per day)

2,208, 17%

1,760, 13%

1,646, 12%

1,560, 12%1,066, 8%

647, 5%

486, 4%

352, 3%

299, 2%

3,299, 24% CanadaMexicoSaudi ArabiaVenezuelaNigeriaIraqUKVirgin IslandsRussiaOther

Free with your fill-up…• Flexible energy prices convey information about underlying scarcity

and demand

• Deregulated prices create winners and losers but minimize disruptions

• Recent price increases are much less severe when adjusted for inflation

• Principal factors explaining price increases are increased crude oil and wellhead gas prices

• Crude oil is an international market

• Energy prices unlikely to cause economywide calamity

For more information…• Energy Information Administration

www.eia.doe.gov

• Recent hearing testimonyhttp://reform.house.gov/EPNRRA/Hearings/EventSingle.aspx?EventID=1161

• GAO/FTC on competitionGAO: http://www.gao.gov/new.items/d04951t.pdf

FTC: http://www.ftc.gov/opa/2004/05/gaostatement.htm