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Gas prices, Broccoli and Doughnuts

ECNS 594 Montana Council on Economic Education June 20, 2013. Gas prices, Broccoli and Doughnuts. Our lesson today…. Energy industry in Montana Energy security = energy independence? Gas prices Broccoli and doughnuts. Why only 2 percent?. Teens and the price of a gallon of gas.

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Gas prices, Broccoli and Doughnuts

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  1. ECNS 594 Montana Council on Economic Education June 20, 2013 Gas prices, Broccoli and Doughnuts

  2. Our lesson today…. Energy industry in Montana Energy security = energy independence? Gas prices Broccoli and doughnuts

  3. Why only 2 percent?

  4. Teens 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?

  5. Wheels & Women…a teachable moment? • How are oil prices determined? • Drill baby drill? • Price asymmetry? • SUV sales?

  6. Lots of teachable economic topics…

  7. The oil price see-saw

  8. Oil prices? What, me worry? Consumers Taxpayers Producers Society

  9. Energy is Everywhere

  10. Montana’s Energy Industries

  11. Drilling Oil and Gas Wells NAICS 21311 2009 Employment = 333 Number of firms = 49

  12. Support Activities for Oil and Gas NAICS 213112 2009 Employment = 1,256 Number of firms = 159

  13. Petroleum Refining NAICS 32411 2009 Employment = 1,069 Number of firms = 5

  14. Coal Mining NAICS 2121 2009 Employment = 946 Number of firms = 7

  15. Colstrip Steam Electrical Station 2009 Employment = 578 Number of firms = 1

  16. Energy security = interdependence, not independence

  17. “proven” reserves

  18. Add recoverable and unconventional…

  19. The Canadian tar sands

  20. The marginal barrel of oil sold • Does not matter where or by whom • There is no use thinking nationalistically

  21. OPEC as a united marginal producer

  22. The world price is the price that matters

  23. What’s the backbone of what we pay at the pump?

  24. up from the ground come a bubblin’ crude…

  25. Refiner Acquisition Cost of Crude OilPADD Region 4(dollars per barrel)

  26. Movement of oil by pipeline between PADD Districts

  27. Wholesale traded in open market

  28. Imports make up the difference

  29. But how about wind, Montana has lots of it?

  30. NERC Regions

  31. Low expectations for wind energy

  32. Retail gas purchases determined by… • Supply arrangements and ownership structure • Oil company owned and operated (<2%) • Refining company owned and operated (<3%) • Branded independent (45%) • Unbranded independent (51%) • Competition for consumers • Traffic patterns (one third will go out of their way to save just 3 cents per gallon)

  33. Other regional influences… • Taxes • Location to refineries (jobbers buy at rack) • Fuel blend requirements • Rent (usually not downtown) • Replacement cost pricing (average retailers take several deliveries per week) • Brand (market support, discounts, “market inversion”

  34. The world consumes 80 million barrels of oil per day……. • World events determine world prices which determine local prices • Political unrest • Growth in Asia • OPEC • Hurricanes • Refineries (conversion to ethanol additive)

  35. How elastic is supply and demand?

  36. Gas price asymmetry float like a butterfly sting like a bee

  37. Are oil markets efficient?

  38. Now for the broccoli and doughnuts…

  39. U.S. encourages consumption!

  40. So how do we get more Americans to eat broccoli?

  41. Is $4.00 per gallon the tipping point?

  42. Consumer behavior • Nominal v. real prices • Gas complementary good to autos • Price elasticity of demand

  43. Early attempt to encourage broccoli consumption

  44. Small Car Market Price/Unit D0 D2 D1 Quantity/Time

  45. Large Car Market Price/Unit D1 D0 D2 Quantity/Time

  46. Do high gas prices sell small cars?Sales = βo + β1 (Fuel Price) + ε

  47. Why hybrids are difficult to sell

  48. Only two ways to fund highways

  49. 2 criteria for judging policy

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