The Oil Drum

36 comments on Waiting for the lights to go out...

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Nate Hagens on October 16, 2005 - 11:01am

This was an interesting comment from that article:
"The cost of owning a Ford Taurus over its 150,000 mile lifetime is estimated to be $60,000 in purchase price, insurance, repairs and taxes. At $1.50 per gallon, the total cost rises to $71,000, of which only 15 percent is gas. At $3 per gallon, the total cost goes to $82,000, of which 27 percent is gas. "

If you use a discount rate on the dollar timeline - the bulk comes up front and the rest is spread out over 10 years - so at $1.50 per gallon static for next 10 years that works out to like 95c a gallon in todays dollars -meaning gas is even a SMALLER % of total vehicle cost than 15 (or 30)%. What would be interesting is if peoples (and the markets) expectation for gas prices was a positively sloped curve $3 in 2005 $4 in 2006...$10 in 2010 etc - then the present value 'cost' of owning a vehicle would go way up - to an eventual point where it wouldnt make sense to make the purchase, or at the margin, would alter a purchase to a hybrid, Vespa or bicycle.

As Ive said before, the faster we get oil into triple digits the more time it buys policymakers to come up with Plan B which gets us to Plan C (Sustainability)...

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Steve Bower on October 16, 2005 - 1:26pm

Good to note that the cost of fuel is still relatively small as a fraction of the total lifecycle cost. The same is true of power plants (though closer to 50%, I believe).

You have to factor in that as the cost of oil goes up, so will the cost of constructing, transporting and maintaining the car. The base cost of $25k may increase to $30k, the total cost from $60k to $70k. As the total cost increases, fuel's portion of the total cost may not change too much.

On a related note, there must be macro-economic methods to estimate how prices will increase as the cost of oil goes up, but I haven't seen these. I've read that the U.S. currently expends roughly 7% or 8% of GDP on energy, down from ~13% in the early 1980's. What portion of that is oil? What happens when the cost of a barrel of oil (or natural gas) doubles? How about globally? If anyone can steer me to useful info on such economic analysis, I'd appreciate it.

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Gloomy on October 18, 2005 - 9:36am

Maybe this is not the right place to pose this problem, but I'd like for us to start to be little more carefull about the parameters we use in our statements:

"...the U.S. currently expends roughly 7% or 8% of GDP on energy, down from ~13% in the early 1980's."

Each time I see "US" and "GDP" in one sentence I start to shiver. In 2004 over 80% of the USA GDP consisted of services. My lawyer charges $250 per hour. So he contributes to the US GDP per hour about the same value as 200 chinese workers contributed to the China GDP. Well there are price deflators, purchasing power parities, etc. but to my mind they also tend to hide some structural imbalances - ok you deflate some sort of services with deflator coefficient but what happens if one service is very well developed in USA and other is not in the other country?

I think that the real strength of an economy can be best measured by its industrial production. The industrial production was somehow in the 25-30%-s in the 80-s, now is in the 15%-s. So there is actually no real progress in energy spendings per real economic output. Maybe even more important parameter is export - because export are priced at international prices and is not that influenced by domestic statistical equilibristics. If US was a person trading with other persons, export would equal this person's income. What US economy has been doing for the recent years is to earn about 1000$ (billions) and spend around 1500$ (billions) per year. For the difference we print obligations or sell parts of our businesses at inflated prices.

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Stuart Staniford on October 18, 2005 - 3:12pm

I don't think it's true at all that 80% of the economy is "services" for any good definition of services. 2/3 of GDP is spent by consumers, and this is what they spend it on (CPI breakdown by Federal Bureau of Statistics). There is a 60% services number in there, but that's because they count "Housing" and "Transportation" under services, pretty bogus to me - my house and our cars are large physically present energy consuming beasts as far as I'm concerned. Things that are more truly services are a pretty small part of the total. Eg. all of medicine is 6% - and some of that should get accounted to the physical building stuff, not the service component, education is 6% - ditto, and after that it gets really tiny. True services are probably less than 15% of consumer spending. My guess is it's sort of similar on the producer side.