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Gasoline and Natural Gas Prices: What’s Up?
Jerry ElligSenior Research Fellow
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’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
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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
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Is gas expensive?
Real gas prices ($1996)
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2
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5
6
7
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9
10
Source: Energy Information Administration
$/m
cf
ResidentialCitygateWellhead
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Is gas affordable?
Residential gas prices vs. affordability
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1000
2000
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9000
10000
1984
1985
1986
1987
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1991
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Source: Energy Information Administration
Residential price (cents/10 mcf, $1996)Real per capita disposable income/$mcf
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Price signals at work...
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1991
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Wellhead price ($1996/10mcf)
Gas w ells drilled (thousands)
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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
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Is gasoline expensive?
US Nominal vs. Real Gasoline Prices (cents/gallon)
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50
100
150
200
250
1949
1954
1959
1964
1969
1974
1979
1984
1989
1994
1999
2004
Nominal
Real ($1996)
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A historical perspective
Regular gasoline prices ($1996)
0.0
50.0
100.0
150.0
200.0
250.0
19491950195119521953195419551956195719581959196019611962196319641965196619671968196919701971197219731974197519761977197819791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004
Source: Energy Information Administration
Cen
ts/g
allo
n
OPEC formed 1960
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Is gasoline affordable?
Real gasoline prices and affordability
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50.0
100.0
150.0
200.0
250.0
1959
1962
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Source: Energy Information Administration
Real price (1996cents/gallon)Real per capita disposableincome/price
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Price signals at work...
0
10
20
30
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50
60
1973
1974
1975
1976
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1980
1981
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1984
1985
1986
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1992
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Source: Energy Information Administration
US crude ($/bbl), $2000US Oil wells drilled (1000s)
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Why?
• Crude oil prices?
• U.S. monetary policy?
• Cost of reformulated gasoline?
• Diminished competition?
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Gasoline tracks crude prices
Gasoline prices track crude prices(Inflation-adjusted $2000)
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50
100
150
200
250
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
Source: Energy Information Administration
US Crude ($/bbl)Gasoline (cents/gallon)
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Gasoline and crude since 2001
Gasoline and crude prices
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20
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60
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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/
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3/2/
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7/2/
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9/2/
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11/2
/200
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1/2/
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3/2/
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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)
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How high are world oil prices?Oil prices, $ vs. Euros
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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)
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Reformulated gasoline costs 6-12 cents more
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120
140
160
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1995 1996 1997 1998 1999 2000 2001 2002 2003Source: Energy Information Administration
cent
s/ga
llon
ConventionalReformulated
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Consequences
• Recession?
• Inflation?
• Economic dependence?
• Political vulnerability?
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How big are imports?
% of US petroleum consumption from imports and OPEC
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1960
1963
1966
1969
1972
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1984
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Source: Energy Informaiton Administration
ImportsOPEC
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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
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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
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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
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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