Gas Prices, Housing and the Slow Economy

Saturday, November 24, 2012

By Marshall Kaplan from his article in the OC Register:

Several respected analysts theorize that increased commuting costs generated the collapse of housing markets in the latter part of the last decade and fueled (excuse the pun) the five-year-long economic malaise in the United States.

Steven Sexton and his colleagues at the University of California's Center for Energy and Environment Economics suggest that low energy prices during the housing boom, in combination with lax lending practices and new mortgage products, made suburban houses affordable to a new class of homeowners with low incomes, high leverage, low credit worthiness and long work commutes.

While cheap fuel prices lead to urban sprawl and the expansion of homeownership, dramatic increases in fuel prices disproportionately impacted suburban homeowners. High commuting costs decreased home values. Mortgages became unaffordable for some households and imprudent for others, leading to unavoidable and strategic defaults.

While predatory and subprime lending have been blamed for the housing crisis and certainly contributed to the problem, another economic factor has been almost entirely overlooked in the timing and the geography of the nation's housing market implosion. The rise in gas prices during the last decade dealt a major blow to consumer purchasing power and weighs most heavily on people who have to drive the farthest.

The analytical trifecta linking three real economic variables — increased costs of gas, the end of the housing bubble and the crisis in the national economy — should generate intellectual curiosity. Gas spikes have occurred at the same time as the recent decline in house values and the down economy. But before we accept the assumed relationships, more analysis is needed. The data suggests a correlation but not yet causation.

Clearly, there are more powerful variables than gasoline prices driving the slow economy, among them the collapse of subprime mortgages and related problems in mortgage-backed securities and the decline in purchasing power related to unemployment and underemployment.

While the price of gasoline may have affected housing values and certainly affects household budget decisions, the impact of both on household location decisions will require more knowledge. Clearly, analysts need to link different household and housing characteristics to urban employment patterns, including the suburbanization of employment. In this context, it's too early to conclude that continued high gas costs will lead to a revival of central cities and a corollary decline of the suburbs.

More likely, continued high gas costs will directly reduce the housing and job choices of the poor, near poor and moderate income groups. Over time, this will lead to increased market and geographic segmentation of housing and jobs. It sounds like America might be on its way back to the future. I hope not.

Orange County has a stake in the outcome of the gas-price, housing-value hypothesis. The county's current land use patterns suggest a suburbanization of upwardly mobile jobs and an urbanization of poverty. My informal interviews with a small number of low-income residents in Santa Ana suggest that the high costs of gasoline restricts job choices and requires a relative large percentage of income for fuel, restricting their choices of basic goods and services.

For many Americans, the choice between "gas, gas and gas" at most fueling stations has become part of our genetic structure, as well as an addiction. We have no real choices at the pump. Consumer costs are real. America's costs are real.

We don't have to wait on new studies to measure the negative impact of America's dependence on imported oil on the economy, the environment and security. We can do better. We must do better. Congress and the Obama Administration are weighing new open fuel standards and environmental regulatory reforms that would open up restricted transportation fuel markets to competition from alternative fuels such as natural gas, methanol and ethanol. Flex-fuel automobiles should become a common sight and flex-fuel choices should become standard at fuel stations.

Marshall Kaplan is an adviser to Fuel Freedom Foundation. You can email him at Marshall.Kaplan@FuelFreedom.org.

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Ethanol Saves Americans $29.13 on Average Thanksgiving Trip

Tuesday, November 20, 2012

We need to widen and expand fuel competition. Right now the thin edge of the wedge we're using to open the market is ethanol. On that subject, the Renewable Fuels Association has this to say about gasoline's first competitor:

Ethanol is helping reduce the cost of the Thanksgiving holiday for the average American family. More than 39 million Americans will take to the road for their Thanksgiving holiday, traveling an average distance of 588 miles, according to AAA. That means the average American family traveling by automobile this holiday will save $29.13 on gasoline purchases because of ethanol.*

In May, the Center for Agricultural and Rural Development released a study by economists at the University of Wisconsin and Iowa State University finding that in 2011, ethanol reduced wholesale gasoline prices by $1.09 per gallon nationally. Those savings have a very real impact on the average household budget. Ethanol reduced the average American household’s spending on gasoline by more than $1,200 last year, based on average gasoline consumption data. Since 2000, ethanol has helped save $39.8 billion annually in excess gasoline costs – roughly $340 per household per year.

“Thanks to ethanol, hardworking American families will get a break as they drive to spend the Thanksgiving holiday with loved ones.  The average American family will save $29.13 because ethanol helps lower the price of each and every gallon of gasoline. Ethanol and the Renewable Fuel Standard (RFS) are also helping to reduce this country’s dependence on foreign oil, thus creating a stronger country and a stronger economy. Ethanol is a product made by Americans for Americans and we are proud that on this most American of holidays that we can offer a solution to sky-high gas prices,” said Bob Dinneen, President and CEO of the Renewable Fuels Association.

Dinneen continued, “Now, you will hear some squawking from livestock and poultry producers who oppose the RFS and ethanol.  Don’t let their scare tactics ruin your holiday. The fact is turkey prices are lower this year than the last two years, according to the Bureau of Labor Statistics. The bottom line is ethanol production has nothing to do with the price of Thanksgiving dinner. Food costs are driven by energy costs. Only 14 percent of the food bill goes to raw agricultural ingredients like vegetable oils, dairy products, corn and other grains and commodities. Meanwhile, 86 percent of your grocery bill pays for energy, processing, packaging, marketing, labor and other costs. Don’t let Big Food fool you into believing anything different.”

To read more about Thanksgiving turkey prices and real driving forces behind food costs, click here for RFA’s white paper: “This Thanksgiving, Avoid Big Meat’s Baloney”.

Highlights:

• Turkey prices are lower this year than in 2011 and 2010. The U.S. city average price for turkey is $1.66/lb., down slightly from the previous two years, according to the Bureau of Labor Statistics.

• USDA projects 2012 turkey hen prices will be just 3.8 cents/lb. higher than 2011 prices, while 2013 prices could decrease by nearly 5 cents/lb.

• Turkey production is projected to hit a five-year high in 2012, followed by strong output again in 2013.

• Thanksgiving dinner for 10 people will be $0.80 lower this year in Virginia and $0.61 lower in North Carolina, according to the same Farm Bureau sources.

• The groups decry that “food prices have spiked nearly 18% since 2005,” the year the first RFS was passed by Congress. That’s an average of just 2.57% per year, which is right in line with the 20-year average for annual food inflation.

• Additionally, 2010 saw the lowest year-over-year food inflation in nearly 50 years. Meanwhile, the ethanol industry produced a record amount of fuel that year.

• If there was any truth to the myth that retail food prices have increased abnormally since 2005, it would be mostly because of surging energy prices. In fact, 86% of the average household’s food bill pays for energy, transportation, processing, packaging, marketing, and other supply chain costs. Just 14% pays for the raw agricultural ingredients in our groceries.

• Contrary to Big Food’s rhetoric, ethanol is helping reduce the cost of the Thanksgiving holiday for the average American family. Recent economic analysis from Louisiana State University, the University of Wisconsin and Iowa State University demonstrate that ethanol significantly reduces gasoline prices. According to AAA, 39.1 million Americans will travel by automobile an average distance of 588 miles this Thanksgiving holiday. That means the average American family traveling this holiday will save $29.13 on gasoline purchases because of ethanol.*

_________________

*Assumes average mileage of 22 miles per gallon and ethanol savings of $1.09/gallon (Du & Hayes, 2012)

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Black Friday Versus Black Gold

Monday, November 19, 2012

By Gal Sitty, reprinted from Fuel Freedom.

You know how on Black Friday, the notorious shopping day after Thanksgiving, some people camp out in front of the stores that are offering amazing deals to burst inside as soon as the doors open, sometimes trampling fellow shoppers or store employees? Shoppers tend to become frantic because there is a very limited supply of the items they really want at a cheap price. The demand for these items can become very intense; there have been instances of violence, sometimes resulting in injuries and even a few reported deaths.

This may sound crazy, but our dependency on oil really isn’t much different than a Black Friday shopper’s need for discounted merchandise. Like Black Friday deals, there is a limited supply of cheap oil and a huge demand for the commodity. The excessive demand is mainly due to our dependence on oil for our transportation needs, and we need to transport things in order to have a functioning economy. In fact, this actually makes us more desperate than Black Friday shoppers who can (technically) continue to live normal lives without those notorious post-Thanksgiving steals.

Now think what would happen to the average Black Friday shopper in the absence of the highly anticipated deals. They would undoubtedly be forced to cut back on the quantity, or quality, of the holiday presents they planned to buy, spend more money on their shopping or cut their budget for other items, such as groceries. In the case of oil, the “Black Friday” days of $35 a barrel are long gone and, as a result, most of us are either spending less on oil, or, more realistically, cutting back on other expenses.

Worse still is that the increased price of oil has caused the price of other necessary goods to increase as well. From rising food costs to airline travel, the increased cost of oil affects us far beyond the pump. As oil prices continue to rise, our desperation to secure the disappearing supply of affordable oil will also increase. The only way to avoid the devastating consequences of our oil dependency is to embrace replacement fuels. After all, consumer choice is the cornerstone of a properly functioning, free and competitive market place.

. . . 


After successful experiences in finance at Morgan Stanley and an AIG company, Gal Sitty continued to graduate school where he became the first person to receive a joint Master's in Public Policy from the University of Chicago and Tel Aviv University. There he excelled in research, analytics and communication in public policy. He then combined his academic achievements with his professional experiences to design and carry out successful grassroots fundraising and advocacy campaigns for which he received Congressional recognition for Outstanding Humanitarian Advocacy.

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This is a Game We Can Win

The following is an excerpt from the book, Energy Victory, by Robert Zubrin:

"As for converting trash, it doesn't matter whether the feedstock is composed of packaging materials, old rags, used candy wrappers, plastic forks, or Styrofoam coffee cups. The stuff is all just compounds of carbon, hydrogen, and oxygen, with a few impurities thrown in here and there, and all of it can be pyrolyzed and reacted with steam to produce sythesis gas, and then methanol...

"The chemistry needed to dethrone oil from its trump-suit status is well understood. We can readily convert our fuel strong suits into an alcohol supply bountiful enough to wash OPEC off the map.

"The only issue is that we need to have cars and trucks that can use it."

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Petropoly: The Collapse of America's Energy Security Paradigm

Wednesday, November 14, 2012

We are happy to announce the publication of Anne Korin and Gal Luft's new book:

Petropoly: The Collapse of America's Energy Security Paradigm

In the book they address:

  • Why nine US presidents' preoccupation with self-sufficiency in oil has been counterproductive
  • How OPEC members manipulate oil prices to ensure sufficient flow of money into their coffers 
  • Why the Arab Spring will make us all pay more at the pump
  • Why are cars blocked to competitive fuels
  • How America’s natural gas can change the game
  • How Communist China is offering its people more fuel choice than capitalist America 
  • How can the free market, rather than pork and subsidies, solve our oil predicament 
  • Why auto makers resist fuel choice and why they shouldn't
  • Big Oil: part of the problem or part of the solution?

To order the book on Amazon visit http://www.amazon.com/exec/obidos/ASIN/1478324864/iags-20

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U.S. to Export Natural Gas Because Our Cars Aren't Warranted to Burn Methanol

Saturday, November 10, 2012

Cheniere Energy won approval from the U.S. government to build America's largest natural-gas export terminal. The United States is overflowing with natural gas and has the potential to become a major exporter.

Meanwhile we're all paying exorbitant prices to fuel our cars because the only fuel our cars can burn is made of petroleum, and oil prices are controlled by an illegal cartel hell-bent on bleeding the world of its wealth. Robert Zubrin proved that cars already on the road are capable of burning methanol. They just aren't warranted to do it.

What we need are cars that are warranted to burn fuels other than gasoline. What we need is fuel competition. What we need is to turn that natural gas into methanol and use this superior fuel for transportation right here at home.

What we need is the Open Fuel Standard.

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Since the High Price of Oil Helps Us Conserve, OPEC is Actually Helping the World by Raising the Price of Oil, Right?

Wednesday, November 7, 2012

In the article, Achieving Energy Victory, Robert Zubrin writes:

According to [some], OPEC is a blessing because the world is allegedly running out of oil, and by raising the price, the wise men of the cartel are helping us all to conserve. 
click on image to see larger
Now it is true that raising the price of oil will tend to cut consumption, but not by much. Oil demand is very inelastic — it takes enormous price increases to effect any significant change in consumption. If we accept the demand curve hypothesized in Figure 1, we see that a cut in oil consumption from 85 to 70 million barrels per day (an 18 percent reduction) needs a near quadrupling of the oil price to be enforced. 
The real historical data...suggests that the situation is far worse — the quintupling of oil prices since 2001 was implemented by OPEC simply by cutting 5 million barrels — or 7 percent — out of the oil supply. During the same period, sales of cars with low gas mileage, such as SUVs, continued to grow without missing a beat. 
If we actually wanted to enforce global petroleum conservation through price increases, we would have to raise costs several hundred dollars per barrel. That would give the Saudis control of the world. 
Fortunately, however, the claim that the world is running out of oil has no foundation whatsoever. Such claims have been made repeatedly in the past, and all have proven false. For example, as Learsy notes in Over a Barrel, in 1874, the state geologist of Pennsylvania, then the world’s leading oil producer, estimated that the United States had only enough oil for another four years. In 1914, the Federal Bureau of Mines said we had only ten years of oil left. In 1940, the bureau revised its previous forecast and predicted that all our oil would be exhausted by 1954. In 1972, the prestigious Club of Rome, using an inscrutable but allegedly infallible M.I.T. computer oracle, handed down the ironclad prediction that the world’s oil would run out by 1990. The club said at that time that only 550 billion barrels were left to humanity. 
Since then we have used 600 billion barrels, and are now looking at proven reserves of a trillion more. There is little new about today’s fascination with “peak oil”; since 1972, there have been repeated predictions of imminent oil-supply exhaustion published every few years by various authorities, and not one has come true. 
In fact, if we look at the ratio of proven reserves to consumption rate, the world has a bigger oil supply today than it ever has at any time in the past. The argument that we are threatened with near-term oil exhaustion is simply untrue.

Robert Zubrin is the author of one of our recommended booksEnergy Victory.

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