How Far is Up? How high do you expect gasoline prices to go?

Fri, 13 Jun 2008 13:50:55 -0400

The price of oil and the price of gasoline continue to climb. Last Friday, oil prices hit $140 per barrel. Last week, regular gasoline prices topped $4.00 on average for the first time.

In order to investigate the consumer aspect of these developments, Auto Futures Group and Technometrica partnered for a joint survey. The results show that consumers have begun to accept high prices as a fact of life; over one third of consumers expect gasoline prices to top $5 this summer, and a similar number expect to see $6 within the next three years. See our press release for more Info . . . .

The expectations of such consumers would amount to a faster rate of price increase than we have seen in the past. Based on historical data, a purely mathematical estimate would indicate prices between $5.35 and $7.35 within the next five years, i.e. about $4.50 to $5.75 in the next three years. The Energy Information Administration of the Department of Energy also projects continued strong prices for the next 12 months, but with a dampening tendency as more non-OPEC oil comes on late in 2009.

Here the question is whether the additional non-OPEC oil production capacity will re-establish a free-market style supply-demand market situation with softening prices, or whether continued speculation and price collusion might lead instead to a so-called oligopoly-driven “utility price model” with continued high prices. Wondering whether that is realistic?

Here I quote from OPEC itself: “Historically, most non-OPEC producers have taken advantage of OPEC's voluntary production restraint by increasing their own production whenever possible. As a result, the market share of non-OPEC producers rose for a number of years, but oil prices remained at relatively low levels and the markets were less stable than they could have been.”

“However, the oil price slump of 1998 and early 1999 reinforced OPEC's constant message that oil market stability can only be achieved through co-operation between OPEC and non-OPEC oil producers. In support of OPEC's efforts to restore stability to the oil market by restraining output, several non-OPEC oil producers also cut their production, thus helping prices recover from the slump. These countries included Mexico, Norway, Oman, and Russia. “

And on Tuesday June 10th, Reuters reported: “The International Energy Agency, adviser to 27 industrial economies, cut its expectations for supply growth from countries outside OPEC to 460,000 barrels per day above 2007 levels, down from 680,000 bpd a month ago. The U.S Energy Information Administration, the statistical arm of the Energy Department, cut its forecast for non-OPEC output growth nearly in half to 310,000 bpd from 600,000 bpd.”

For the consumer, it matters little whether oil prices are increasing due to collusion, security risks, refinery problems, delays in oil-field development or speculation. The effects on consumer confidence are more psychological than physical; on average americans still spend relatively little on gasoline compared to other expenses. But those expenses will likely rise more substantially than gasoline expense for two reasons:
Diesel prices have increased 68% over the last 12 months (from $2.83 to $4.70 average), whereas gasoline has only gone up 28% (from $3.12 to $4.04). Because the US economy is quite dependent on long-distance trucking, high Diesel fuel prices are already having a very deleterious effect on the prices of food, goods and services across the US. Higher diesel prices also cause a major drag on profits, with more to come.
Because natural gas prices and coal prices are increasing in addition to oil prices, utility bills are going up quickly - arguably for the average household the dollar increase in utility bills is likely greater than that of gasoline.

Re-establishing healthy gasoline prices, inflation and consumer confidence requires a concerted effort on the part of public policy makers, foreign relations, financial markets and the press. The presidential candidates would do well to use the campaign as a platform to focus public attention on Energy Policy.

The US government must re-orient Energy Policy away from unproductive subsidies and laissez-faire management approaches towards a consistent comprehensive policy of responsible energy management, foreign relations, industrial relations, public education and environmental regulations geared towards sustainable, profitable and stable energy planning.

The rest of the world is not waiting for the US in this regard, they are already well along with their plans. The dollar will not recover until the US demonstrates responsibility in energy policy (as well as defense, public debt and financial regulation).

-Bert Holland

What will it take to get Americans to burn less gasoline?

Thu, 12 Jun 2008 22:54:06 -0400

America is the land of the free and the home of the brave. And I, for one, am proud to be one of them. Our heroes tend to be loners and free spirits, mavericks if you will. They are the kind of people who instinctively do what is right, but do not like to be encumbered by laws. Interestingly, when it comes to the fuel efficiency of our cars, we prefer laws to good judgment.

Americans have always had the largest and generally speaking most powerful cars in the world. Our country is vast with good roads, many of them straight and flat. We can cruise with our families at high speeds for long periods of time in our spacious, climate controlled, padded, belted, and air bagged interior while playing our favorite tunes. I guess we just assumed that cheap gas was an entitlement and a part of the American Dream. Well those days are over for good.

It is not as if we could not imagine such a day. We did have both the first and second Arab Oil Crisis in the 70’s. As a result of this, the Government established the Corporate Average Fuel Economy requirements. We legislated the fact that car manufacturers would have to sell a fleet which would have to average 27.5 miles per gallon or pay penalties for any shortfalls. Well intentioned legislation, but aimed at the wrong party. Manufacturers build cars, the public buys them.

Auto manufacturers have produced many models that can achieve great fuel economy of the decades since the CAFÉ regulations were passed. Most of them ended up as failures in the market place, because the public did not want to buy physically small, relatively low power, cars that delivered excellent fuel economy.

It was just a few years ago that gasoline was under $2.oo per gallon. At those prices we really did not care about fuel economy. About a year ago we saw gas break $3.00 per gallon and we were mortified, but we quickly adjusted. Now, gas has broken $4.00 per gallon and we appear ready to consider serious changes in our behavior.

In a recent survey conducted by Auto Futures Group / TechnoMetrica, Americans were asked which types of cars they would consider buying. First they were asked what type of car they might purchase next at the current price of gas. About 37.5% indicated they would buy sub-compact or compact cars. Another 38.2% said they would buy mid-size or full-size cars, and 14.8% intended to buy SUVs. When given the same set of choices but with the assumption that gas had now risen to $6.00 per gallon, interest in compacts and sub-compacts rocketed to 58.7%, mid and full size dropped to 25.1%, and SUVs now accounted for just 7.1%. Now ask again with the price of gas at $8.00 per gallon. Interest in compacts and sub-compacts rises to 63.5%, mid and full size continues to drop to 18.9% and SUVs represent fewer than 6% of all intenders. See our press release for more info . . . . .

Can we learn anything from this? If you consider what the public tells us the roads will look like with gas at $8.00 a gallon, it will be a very different picture. Most cars in America will be significantly smaller than they are today. SUVs and other large vehicles will be almost extinct except for those people who genuinely need them for their real carrying capacity and all condition capabilities.

If you imagine what the roads would look like, well, they would look a lot like Europe. You remember Europe; it is that part of the world where gasoline has cost more than $4.00 per gallon for more than a generation. Perhaps that is why people in Europe tend to be so good at making even luxury cars which are smaller and more fuel efficient than their US counterparts. And families may own a larger vehicle for the occasional family outing, but it is also the vehicle they use least, not most frequently.

In America you would not think it would take a law to make us be more sensible about the cars we buy and how we use them. CAFÉ rules made car companies build more fuel efficient cars. Now, $4.00 per gallon gas may drive people to buy them.

-Bob Austin

Which new brand of car would you buy?

Tue, 6 May 2008 05:57:41 -0400

New manufacturers are gearing up to begin selling cars in the US, Europe and around the world. What would it take to get you to buy one? A revolutionary new type of vehicle from a relatively unknown manufacturer like Aptera, Smart, Tesla or Milner Motors? An relatively inexpensive new vehicle made in China by Brilliance, SAIC or Chery, or made in India by Mahindra or Tata Motors?

Consumers report that brand reputation is one of the most important considerations when purchasing a car. Recognition of a brand can be established to some extent by pouring millions into marketing and PR. But reputation takes years of customer experience with the vehicles, dealers, reliability, service and communications to establish. So what are the avenues which a manufacturer can take?

Adaptation of a well-known Car Brand to extend to new products: SAIC could use the MG name and Tata Motors could use the Land Rover and Jaguar names to immediately borrow from those established reputations. But each established marque carries a reputation, good and bad, which can be difficult to apply to new products. For instance MG left the world market as a volume brand in the 1980´s, and would effectively be a “new” brand for customers under 40 years of age - an important target market for new brands. Land Rover and Jaguar are premium brands known for luxury, driving characteristics and styling, but these brands may not fit so well for smaller vehicles which need to be marketed as fuel economical and environmentally responsible. In fact, large corporations such as Mercedes, BMW and Toyota have chosen to market such vehicles under sub-brands, respectively Smart, MINI and Scion.

Creation of a New Brand: For manufacturers like Aptera, Tesla and Milner, Mahindra or Chery, successfully building a new brand requires substantial investment and very clever communications. New brands with fuel-saving, hybrid or electric vehicles have the advantage of high public interest in fuel economy and the environment worldwide. However, consumers are generally skeptical of new brands, especially in the automotive sector, with cars being the single most expensive consumer product. Any mishap with quality, service or safety can easily become a substantial long-term sales barrier –it took Audi fifteen year sales for sales to rebound after the “unintended acceleration” discussion in the late 80’s.

Adaptation of a Non-Car Brand to extend to new products: A decade ago, no one associated Sony with laptops. Apple had nothing to do with the music or cell-phone business. When extending a well-established consumer brand to a new field, the brand reputation comes with it. One would expect a Sony car to be compact and well-made, an Apple car to be innovative and easy to drive, a Nike car to be sporty, or a Gucci car to be luxurious and stylish. Consumers would expect such cars to be different than ordinary cars. Without such brand association, consumers measure new entrants against the traditional category best, i.e. a Brilliance BS6 is up against a Toyota Camry.

Prerequisites to brand reputation: Besides a clever marketing campaign, customers want to know:
who will service their cars
whether they will be reliable
whether they will retain resale value
whether they are safe
BMW successfully leveraged its established sales, service, parts and dealer network to launch the MINI, requiring separate franchise agreements and separate sales facilities. Mercedes parent company Daimler has chosen instead to team up with the very US-savvy Penske organization to market its Smart car line in the US. Both car BMW and Mercedes placed a very high priority (and huge resources) on safety engineering and high safety ratings for their “offspring” – knowing that any new brand, and small cars in particular, must overcome consumer skepticism.

Other considerations in establishing a brand in the US are the sales channel (i.e. mega-dealers, individual franchises or even on-line, agents or chain stores) and the ownership concept (sales, finance, lease or even rental or time-share). But those are subjects for future blogs.

The challenge for these new entrants is to create a successful brand launch which stimulates demand, and then to make sure that this demand is met with the matching product characteristics and customer experience. Now lets see how this unfolds . . . . .

-Bert Holland

Fear of New Technologies: Hybrids and Electrics

Fri, 2 May 2008 19:34:24 -0400

Around the time of the invention of the gasoline powered automobile, gasoline was known to be a fairly dangerous liquid, inflammable at all temperatures as a liquid and with highly inflammable vapors. At the time, there was a public discussion about the safety and practicality of gasoline-fueled vehicles, especially in comparison with the horse-powered carriages of the time. In the mean time, appropriate measures were developed, and the entire world has become accustomed to using, handling and storing gasoline.

Similarly, the new electric and hybrid-electric vehicles have their own sets of safety challenges, some of which are now being aired in the public arena. For instance, in an article in the New York Times from May 29th, Jim Motavalli discusses the “Fear, but Few Facts, on Hybrid Risk”. http://www.nytimes.com/2008/04/27/... The article asks the question “Are hybrids healthy for drivers?”, and discusses scientific, consumer and advocacy group input on whether the flow of electrical current in such vehicles poses serious health concerns due to the resulting Electro Magnetic Fields or EMF.

EMF shielding is not a new field. Since around 1910, EMF shielding has been under development and implemented for electric trains, subways, electric trolleys, submarines, buses, etc. It doesn’t take an inordinate amount of shielding to reduce EMF to quite low levels, especially with the low frequency and DC signals present in electric and hybrid vehicles coming from well-defined sources (cables and wiring harness). Of course, as with anything else, it is a question how much cost and weight must be added to achieve the desired results.

Modern vehicles already incorporate systems which generate a significant amount of EMF at many different frequencies, in fact also microwave frequencies and other fairly well-understood but potentially harmful frequencies. Quite a bit of complexity is already incorporated into vehicles to deal with this, and because of liability concerns, manufacturers generally prefer to err on the "safe" side, incorporating EMF shielding to any system or wiring harness which might present a problem.

While one can assume that large manufacturers, (for instance Toyota and Honda, coming from Japan where electric vehicles of all descriptions are common such as trains, bicycles, etc.) take appropriate precautions, it is certainly appropriate to investigate further and establish appropriate standards.

There are other safety challenges in electric and hybrid-electric vehicles, in order to to lessen the chances of electric sparks (especially concerning if gasoline is present), acid burns, electrical fires and even electrocution, due to:
battery overheating or technical defects.
collisions (a heightened concern if gasoline has spilled).
rescue operations (jaws of life, etc.).
partial submersion in water (floods, accidents, etc.).
wiring damage due to vehicle age, animals, or undercarriage damage.
improperly executed repair in garages or body shops.
improperly installed entertainment systems (already a leading cause of gasoline vehicle fires)

As increasing numbers of electric and hybrid vehicles come into use, the industry redoubles its efforts to reduce the chances of headline-catching accidents or recall campaigns, either of which could act as a significant public-relations-related impediment to progress.

Numerous complex technical measures are in place and more will be needed, such as systems which automatically isolate each battery cell in a collision, careful monitoring of cell temperatures, automatic disconnection of electrical power, etc. On the training side, appropriate measures include widespread, in-depth technical training of dealer and independent service and body-shop personnel, police, EMT, fire and rescue personnel (http://cms.firehouse.com/...), inspection and certification personnel, entertainment system installers, and someday also battery station personnel.

These are fresh challenges for a changing automotive world, but not insurmountable. And certainly worth pursuing in order to decrease dependence on fossil fuels and decrease global warming.

-Bert Holland

I love my car, but I do not want to compete with it for fuel.

Sat, 19 Apr 2008 17:48:03 -0400

It is pretty obvious that we need to reduce our dependency on petroleum. With a single barrel going for $110 to $115 dollars, suddenly there is room to economically develop numerous substitute fuels. In the best government tradition of ready, fire, aim…we have done exactly that. What should we replace our gasoline with? Why ethanol of course, and let’s make it out of corn because we know how to grow it, it burns well, and we can grow it right here in the good old US of A.

In theory corn based ethanol will decrease our need for OPEC produced petroleum. But let’s take a moment and see what we are really accomplishing. In the US we are really not tooled up to produce ethanol in the kinds of quantities that are required for the motor fuel business. That means we have had to build high volume processing plants to even begin to make ethanol in the kind of volumes we will need.

Suddenly we need to feed those processing plants. That new demand in the market place drives up the price farmers can ask for corn. They like that. In fact they like it so much, that they plant corn instead of other crops like wheat and soy beans. Just one season later, when there is less wheat and soy available, the price of these products go up as well. Did I mention that some of that corn crop was traditionally used to feed cattle and other livestock? In America, we are seeing and will see increased prices on virtually all farm and ranch products as a result of the use of corn based ethanol as a motor fuel.

I do not like increased fuel prices, but I suppose I could live with them to help cut our dependency on OPEC. But there are other more disturbing ramifications. While I can pay a bit more for corn, people in other parts of the world, like Mexico where corn is a real staple in their diet do not have this luxury. When farmers sell their corn for higher prices to people who are going to make ethanol instead of to the local markets, people will starve. Starving people to feed cars I find morally unacceptable.

The problem does not end in Mexico either. In the Amazon basin, rain forest is being destroyed every single day. The increase of the price of corn means more land will be cleared faster so that farms can expand to produce more ethanol. We may end up reducing our dependence on OPEC and accelerating the decline of the rain forest at the same time.

Another thing: Ethanol has only about 80% of the energy density of gasoline. You have to burn more of it, and it is also a very energy intensive process to plant, raise, and harvest corn. Then it needs to be transported to a processing plant where it is converted by an energy intensive process into ethanol. At the end of the day, it takes nearly as much energy (typically provided by either petroleum or coal) to produce corn based ethanol as it ultimately returns to the system!

Ethanol is not a bad fuel…the problem is that we should not be using corn as a fuel stock. Ultimately, ethanol produce from the inedible, cellulose parts of plants will make better economic and moral sense, but we cannot do it today. We should keep working on developing this capability. Ethanol will have a place in the fuel mix of the future. But it is not the solution.
Our challenge is to develop a much broader and more integrated strategy incorporating alternative energy sources, distribution and alternative fuel vehicles before we go too far.

-Bob Austin