Passenger Trains > Why gas is going to $10 per gallon

There has been a good discussion on the All Aboard group about gas prices, and this is my point of view. It's long....

Because we have two railroads in the Permian Basin oilfield, and because fuel prices have a big impact on our freight and passenger businesses, I read just about everything I can find on this subject, and this is my opinion about fuel prices going forward: We will see $6 this year or next, and $10 by 2015. The era of highways may not be ending, but it is certainly in twilight.

The single biggest factor is China, and the free market. Very little is related to politics (either red or blue), the oil companies or Iran. Here’s a simple fact: The Chinese are buying about 20 million new cars a year. Those cars replace bicycles, or carts, not other cars. They represent new consumption of oil. If you look at the International Energy Agency Oil Market Report for February ( www.omrpublic.iea.org/currentissues/full.pdf ) you will see that demand for the developed (OECD) world will be down 2.6% this year while demand for the rest of world will be up 2.8%. China, up 3.9% this year, will drive the non-OECD growth. So this means that every gallon of gas you don’t buy is replaced by a gallon of gas bought somewhere else in the world. Demand is going up even if US vehicle-miles-traveled peaked in 2007 and will continue to go down this year.

But supply isn’t going up. Production is around 90.2 million barrels a day, and either production has to grow by 800,000 barrels a day this year, or demand won’t be met. Unless the price goes up. Of course, US crude oil production is growing again, after years of decline, thanks to the frenetic drilling in the Bakken and Permian. US crude production should increase by 250,000 barrels a day this year. But it’s expensive oil. It can take up to $1 million in frac sand to frac a single well in the Permian. And it’s getting more expensive to produce oil in fields around the world. And even with that it’s hard to move the needle on production.

So the Chinese (and the Indonesians, Indians, and others in the developing world) are going to buy every gallon available as they continue to put cars on the road. How can they afford these prices? Well, the Chinese average fuel economy on new cars is 35 mpg, going to 42 in a few years, and they don’t have an overhang of 14 mpg vehicles from the 70’s like we do…. So everyone is driving a fuel efficient car, and effective cost per mile in China is lower than in the US. Their vehicles miles traveled will continue to grow rapidly (even in a recession) for the next 20 years, at least. They will continue to drive demand for oil, and unless there is a major shift in the US, oil will reach $200 a barrel, and gas will hit $10 in the next few years.

What would keep gas prices stable, or at least reduce the rate of increase? Well, our demand (US, Europe, the developed world) would have to drop faster than the growth in the underdeveloped world. Or, there would have to growth in supply or a different fuel. Our demand is dropping, of course. When gas costs $4.20, people just don’t drive as much. Usually, in Chicago, Metra’s traffic drops off in the spring and summer: The weather is nicer so people drive into the city. At $5 or $6 some of those will continue to take the train, reducing demand. There will continue to be a modal shift from truck to rail, as fuel-driven truck prices continue to rise, and this will reduce demand: If it takes 400 gallons to move it by truck, it takes only 100 to 200 gallons to move it by rail (100 if it is bulk, 200 if intermodal – intermodal is less efficient because the tare-to-cargo ratio is a lot worse than in bulk). So a shift to rail and to public transit would help hold down prices.

Can we grow the supply? Well, there is plenty of oil that has not yet started to be developed, and we haven’t yet found all the oil. But the existing oilfields are slowing down at a time when demand is rising. I saw an announcement from BP that they discovered a new field with 1 billion barrels of oil in the Gulf! Wow, fantastic! That’s 11 days consumption for the world at the current rate… The Saudis supposedly have “spare capacity” of 2 million barrels a day, which would absorb some increase, but everything I read tells me that it’s more like “surge capacity” good for only a few months, not sustainable.

I was at a conference in Texas where a speaker talked about compressed natural gas as an alternative, so I did some research. It would cost almost $4 trillion to convert the US to compressed natural gas for transportation. If natural gas is the equivalent of $2 per gallon, that means a total cost, net present value, of about $10-12 per gallon when you factor in the conversion. And that’s if natural gas stays at the equivalent of $2, which is unlikely since it’s a replacement for lost nuclear capacity in Japan and Germany.

This is different from 2008. When oil spiked that year, the Saudis and others said it didn’t make sense because there was a glut of oil in the world. This year, there isn’t a glut. “Physical oil,” the stuff that actually moves, is still tight according to the IEA. So if there is a supply disruption (read: Iran) we could see $8 gasoline this year. There may be some risk of disruption priced into oil currently, but not the full value.

So what does this mean for railroads? I think it means more freight diverted to railroads this year, and more passengers for commuter, Amtrak, light rail. It’s bad for tourist railroads that can only be reached by auto. I think the additional freight traffic will make it more difficult and expensive to add passenger traffic to freight lines. For the long term, governments will need to undergo a shift in thinking on roads and transit, that has only begun in a few places. For once I’m glad I live in Illinois, where we have a robust commuter network in place, with a developing high-performance intercity passenger network rolling out over the next few years.

If gas prices go down (or if you see any mistakes in my analysis) feel free to point it out to me, but I believe any price reduction will simply be a temporary adjustment to a drop in demand, and the price rise is inevitable.

Ed Ellis



Edited 1 time(s). Last edit at 03/06/12 11:15 by eee.

do the Chinese have enough roads for all these cars ? that can limit some driving, america is running out of truckers


america is exporting gas now, make more money selling it in europe?



Edited 1 time(s). Last edit at 03/04/12 08:51 by dan.

Good insights, thanks for sharing them.

The impact of oil prices, the possible substitution of natural gas for transportation, electric vehicles, additional efficiency in home energy use, will certainly create a lot of change in what people take for granted today.

One big change the US could make, right now, is to simplify the crazy patchwork quilt of pollution and gasoline content rules. Many states and regions impose their own formula requirements on gasoline for pollution content, which restricts the flow of gasoline moving across state borders. The practical result is a limited number of refineries serving an large area. Gasoline is restricted from flowing across some state borders. Merely creating three or four national standards for gasoline / oxygenation / ethanol would go a long way toward rewarding efficient refinery utilization.

Let each state or region choose the plan they want, and the refineries will tool up for that.

eee Wrote:
-------------------------------------------------------
> There has been a good discussion on the All Aboard
> group about gas prices, and this is my point of
> view. It's long....

Thanks for your insight from dealing with this issue on a daily basis.

With trends like this, it easy for people to throw up their hands and say we have to do something. But often times, doing something is the danger. Look at Solyndra and solar power, the Chevy Volt, and windmills as examples of doing wrong things that confine resources to lower uses. The free market, both nationally and internationally, is capable of sorting out the energy crisis as long as we let it function properly.

When it comes down to it, for passenger transportation, all the modes are pretty much in the same ballpark in regards to energy efficiency, depending upon the specific circumstances. If any mode is more energy efficient, it would be the intercity bus. But when it comes to freight transportation, as you pointed out, railroads have a clear advantage over trucking. As an example of how the marketplace is messed with, heavy <high axle loading> trucks already don't pay their share of highway initial cost and road damage, yet recently we have had Congress talk about increasing the weight limit on trucks.

One further thought - "crony capitalism" is not free market economics. We have to be very careful about how we choose our leaders if we are going to prosper and thrive in the coming years. They need to have a least some understanding of economics and what constitutes a subsidy.

dan Wrote:
-------------------------------------------------------
> do the Chinese have enough roads for all these
> cars ? that can limit some driving, america is
> running out of truckers

Last time I was in China, I was surprised at how good the roads were. And it's been several years.

If America is running out of truckers, we need to get more material that is now trucked back on trains.

eee Wrote:
-------------------------------------------------------
> So what does this mean for railroads? I think it
> means more freight diverted to railroads this
> year, and more passengers for commuter, Amtrak,
> light rail. It’s bad for tourist railroads that
> can only be reached by auto. I think the
> additional freight traffic will make it more
> difficult and expensive to add passenger traffic
> to freight lines. For the long term, governments
> will need to undergo a shift in thinking on roads
> and transit, that has only begun in a few places.
> For once I’m glad I live in Illinois, where we
> have a robust commuter network in place, with a
> developing high-performance intercity passenger
> network rolling out over the next few years.
>
> If gas prices go down (or if you see any mistakes
> in my analysis) feel free to point it out to me,
> but I believe any price reduction will simply be a
> temporary adjustment to a drop in demand, and the
> price rise is inevitable.
>
> Ed Ellis

Thanks for posting this. Predicting price is a fool's game, so no matter which way the gasoline price goes, I won't hold it against you. Those regions around the world who have already invested and built public transportation will be rewarded for thinking ahead, which includes where you live in Illinois, and here in California.

I'm looking forward to ridiculing people who consider train to be "anti-freedom" when they whine about $8 per gallon gas. They should stay home and write blogs, or be quiet. :-)

As for China, they've already invested in providing transportation other than the automobile, so their impact to world oil prices might not be as bad as you say, although there will be impact. For example, many people in Japan own cars because they can afford it, but many of them still take the train, because automobile transportation do NOT scale well in areas with high population density.

Excellent discussion, thank you all.
The comment about all forms of passenger transport being nearly equal in energy efficiency may be a gross average, however there are huge variations within the rail sector. European high capacity HSR trains are very efficient, partly loaded Amtrak trains are not. The biggest variables are tare weight and load factor. Any transport mode that carries around lots of empty seats (e.g. automobiles most of the time and off-season trains) is not very efficient.

IMHO the American economy cannot take the "low blow" from $5.00+ gasoline and diesel fuel. If it gets that high a severe recession will happen (again) and we are not completely out of the last one! Sections of the country, especially area's where people have long driving commutes and public transportation is not a valid option, are the most vulnerable. And there is nothing more inflationary than rising fuel prices, because the costs are passed down to the consumer in some shape or form. The majority of the working public is not getting pay raises so how are they supposed to keep up?? On economy is based on consumer spending...something has to give. The current rise in gas prices have already negatively effected me...



Allen

Stop buying Chinese stuff. Then they will not have our bucks to buy oil from anyone!

cchan006 Wrote:
-------------------------------------------------------
> I'm looking forward to ridiculing people who
> consider train to be "anti-freedom" when they
> whine about $8 per gallon gas. They should stay
> home and write blogs, or be quiet. :-)

I hate it when someone states a target price such as "$2.50 per gallon" for gasoline as one of the Republican candidates has. Fluctuating prices is how a free market economy equalizes supply and demand. On the other hand, the tremendous amount of tax on motor fuel that a European pays is a distortion to the marketplace. Intercity rail in France has just about reached its maximum practical marketplace penetration at less that 20% of the intercity trips. However a Frenchman that has to travel by car is paying a tremendous subsidy to the rail passenger.

Another problem with oil is that much of the oil from Alaska goes to Japan, and why is that. It's simple we only have four refineries on the west coast capable of refining Alaska crude (two in Washington State and two on San Francisco Bay).We made a deal with the Japanese to buy and transport Saudi crude to the US in exchange for Alaska crude as they have over a dozen refineries capable of refining Alaska crude.
The new pipeline from Canada to the gulf would help alleviate shortages for the fore seable future but long term we need to develope the reserve in Alaska that so far has been off limits. This is estimated to be one of the largest untapped oil field in the world. We also have oil reserves under the Artic Ice north of Alaska that we have the know how to tap.
If nothing else we can make a deal with the Chinese like we did with the Japanese for Alaska crude or commit to more refining capacity on the West Coast capable of refining Alaska crude. We also have a huge oil reserve off the California Coast near Santa Barbara that is off limits when we have hundreds of Gulf rigs that are pumping oil for the gulf refineries daily.
I can show anyone who wants to see as you travel on I-80 west of of the Wyoming state line oil oozing out of the shale down the side of the side of the hills, this is also oil we are capable of recovering. The only oil shortage we have in this country is caused by the short sightedness of the politicians in washington and California.

railstiesballast Wrote:
-------------------------------------------------------
> Excellent discussion, thank you all.
> The comment about all forms of passenger transport
> being nearly equal in energy efficiency may be a
> gross average, however there are huge variations
> within the rail sector. European high capacity
> HSR trains are very efficient, partly loaded
> Amtrak trains are not. The biggest variables are
> tare weight and load factor. Any transport mode
> that carries around lots of empty seats (e.g.
> automobiles most of the time and off-season
> trains) is not very efficient.

Things are not always what they seem. Even lightweight rail equipment is heavy compared to the vehicles of other modes. Also speed costs energy, whether you are on the ground or in the air. Amtrak's little secret is that its electric NEC trains are less energy efficient than its diesel trains. Comparative energy efficiency is an area that needs more study and scholarship. What we don't need is using energy efficiency as the justification for selecting a particular mode when the numbers used are based on averages.

BBC article:

http://www.bbc.com/future/story/20120301-here-come-the-megabuses

"China is a country of extremes. The world’s most populous nation; the world’s fastest-growing major economy, the world’s biggest exporter. It has the world’s longest sea bridge, the world’s fastest train and is the world’s biggest market for cars. The list goes on and on. And its record breaking ways look like they are set to continue for a while yet.

Take that last point. In the mid 80s the country only produced a few thousand cars and hardly anyone actually owned one. Now, it is the world’s largest producer of cars and the world’s largest consumer. Last year, 18 million vehicles were sold, dwarfing the 12.7 million sold in the US. And this sudden explosion has meant a massive rise in one thing: traffic."

Thanks to Ed Ellis for a thought provoking post. I traded commodity futures full time on the exchange floor for 32 years ( 1957-89) and the by far greatest lesson I learned in that carreer is that no one, repeat no one can successfully predict the future over time.

I can say that if the world price of oil skyrockets as many "experts" are now predicting ( on account of us or the Israelis bombing the Iranians out of the nuclear game and/or soaring Chinese demand etc.) and that results in limiting the supply available in America ( aka rationing), which would undoubtedly result in the lights going out in some sections of the nation and homes freezing up in winter due to no home heating oil, then perhaps we'll either muzzle or eliminate the EPA and let the free market work???

Were that to happen I have a ready to go design for a modern, computer controlled coal fired locomotive that could handily power America's trains, both freight and passenger.

You never know !!

Ross Rowland



Edited 2 time(s). Last edit at 03/05/12 05:46 by co614.

dan Wrote:
-------------------------------------------------------
> america is exporting gas now, make more money
> selling it in europe?

America is importing oil, refining it, and then sending the products overseas.

The reason for that is an overhang in American refinery capacity compared to current demand. We have a refinery infrastructure sized for 22+ million barrels per day consumption, but we are actually only using 18-19 million barrels.

At the margin, Americans do not want $3.75 gas and $4.00 diesel, and they sure as heck won't want $5, $6, $7 gas. So our surplus refining capacity is being used to provide fuel to societies that waste less of it than we do and are better able to buy the marginal barrels, ut don'thave therefining capacity to make it.

ts1457 Wrote:
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> air. Amtrak's little secret is that its electric
> NEC trains are less energy efficient than its
> diesel trains. Comparative energy efficiency is an
> area that needs more study and scholarship. What

But all energy is not created equal. "Free" hydropower and low cost Nuclear power on the NEC hardly compares to diesel fuel.

abyler Wrote:
-------------------------------------------------------
> ts1457 Wrote:
> --------------------------------------------------
> -----
> > air. Amtrak's little secret is that its
> electric
> > NEC trains are less energy efficient than its
> > diesel trains. Comparative energy efficiency is
> an
> > area that needs more study and scholarship.
> What
>
> But all energy is not created equal. "Free"
> hydropower and low cost Nuclear power on the NEC
> hardly compares to diesel fuel.

Amtrak owns no generation. They pay market price for power from utilities in the NEC. In the deregulated power market, the price is driven by the price of natural gas - today's fuel of choice for peaking generation. Amtrak load is highly peaked - they need the most power at the same times as utilities are maxed-out. Due to that, they pay a "demand" rate: a rated based not on the sum of power consumed but on Amtrak's maximum demand for power at peak periods.

All this is to say that Amtrak electric power cost in the NEC is neither "free" nor "low cost."

Much of this may be true if it was not for other factors.

Four dollar gasoline effectively triggered the current recession/depression and 10% unemployment. Gas at $5 or $6 will likely cause 20% unemployment resulting in lower demands for products and services. Ten dollar fuel may cause 40% unemployment.

At some point, with low wages, it is no longer economical to drive a distance to work and its more reasonable to be unemployed or under-employed. If you make $8 an hour and it costs you $30/three gallons to get to work, it it worth it? In addition, you might want a 40mpg car, but you cannot afford one on your wages, so you are stuck with whatever you have.

Mass transit is not a realistic option since it does not or cannot serve 95% of the country. The transit systems would also have severely declining income from taxpayers and fuel taxes and may not be able to continue operating with out subsidy or bailout (from where/who?) or huge fare increases which will drive away most ridership. Unemployed voters surely are not going to be taxed to provide cheap rides for those who are still employed.



Edited 1 time(s). Last edit at 03/04/12 19:21 by emd_mrs1.

> Four dollar gasoline effectively caused the
> current recession/depression and 10% unemployment.
> Gas at $5 or $6 will likely cause 20%
> unemployment resulting in lower demands for
> products and services. Ten dollar fuel may cause
> 40% unemployment.
>
>
Gibberish! Gasoline has averaged over $4 only for a few weeks (at most) in the summer of 2008. Do you really think those few days or weeks of $4 gas "caused the current recession/depression"? Get real!



Edited 1 time(s). Last edit at 03/04/12 12:08 by Ptolemy.

Will we see the return of the jitney?