Monday, March 30, 2009

Vehicle Efficiency Market

(above: Morgan Downey. This vehicle is a little extreme but shows what is possible.)

Oil consumption efficiency in the US is currently tied to oil price cycles and low retail taxes on oil. Following is a simple idea for improving the efficiency of the US vehicle fleet independent of oil prices and without increasing gasoline/diesel taxes. The evidence is clear that increases in gasoline/diesel taxes have not been and are not politically tenable in the US.

A Vehicle Efficiency Market (VEM) involves subsidizing efficient cars with money raised directly at the point of purchase from buyers of inefficient cars. The efficiency of a car relative to the rest of fleet sales would be determined by a monthly miles per gallon (MPG) assessment of new vehicles sold. The monthly MPG balancing point would be posted on the internet and at all new car dealer showrooms along with a schedule of credits or levies. Consumers would pay or receive a cash amount depending on whether the vehicle purchased was under or over the average miles-per-gallon (MPG) balancing point for the prior month. The further a vehicle is from the average MPG, the higher the cash payment or credit.

Taxpayers nationwide would not have to pay any additional taxes. There would merely be a simple direct cash transfer from those who are inefficient to those who are efficient. There would be a constant incentive for consumers to purchase more efficient vehicles, even when oil prices are low.

A portion of the revenue raised from buyers of inefficient cars would go toward improving public mass transportation. This would ensure that buyers of efficient cars wouldn't simply use all their savings to buy more oil and drive more miles by living further from their place of work.

More Details
Any vehicle in the plan would have to meet US safety and emission standards. The VEM would be structured such that the cash paid to those buying an efficient vehicle maxes out at a certain dollar level (e.g. $3,500). The goal of a VEM is to move the average MPG of vehicles (meeting US emissions and safety standards) steadily higher - not to provide incentives for anyone to buy any more vehicles than if the VEM didn't exist.

Non-commercial vehicles would be placed in simple classes depending on how many passengers the vehicles are designed to carry safely. Commercial vehicle classes would depend on cargo weight capacity.

The MPG balancing point would move higher each month with an equal sum of money paid (by those below the balancing point) and received (by those above the balancing point). The further the vehicle is away from the balancing point the more paid or received. The VEM payouts/receipts would not be linear (see example table below). A simple schedule posted on the internet and at car dealers would outline the amounts. It may look something like this if the monthly assessment found the balancing point assessment for the prior month to be 25MPG, for example:

How is the VEM different from current US CAFE standards?

US CAFE standards have been a rubber stamping of existing efficiency capabilities rather than incentivizing efficiency. Since 1983, US$735million has been levied against auto makers via CAFE. No US or Asian auto maker has ever been fined via CAFE. Almost all the CAFE fines have been paid by European luxury auto makers (Porsche, Mercedes etc) which account for only 8% of vehicles sold in the US.

The US Energy Independence and Security Act of 2007 set an ultimate CAFE goal of 35MPG by 2020 (current US CAFE standard is 27.5MPG for cars and 22.2MPG for SUVs). On May 19, 2009, the Obama Administration announced a requirement for 2016 passenger cars to average 39mpg and 30mpg for SUVs. This is not aggressive enough. The European Union efficiency goal, by comparison, is 47MPG for new vehicles by 2012 - and this doesn't require any technological discoveries. US CAFE standards don't even bring the US to today's (2009) European vehicle efficiency level. It is unlikely any US administration will have the guts to call for for more stringent measures. Whereas, by putting a price directly on efficiency via a Vehicle Efficiency Market, the Administration can stand back and allow the public to push efficiency very aggressively.

[The oil drum (thanks Gail) kindly allowed me to post the VEM idea on March 27, 2009.]

Monday, March 23, 2009

Oil Demand Wave Crests Across Globe

China's General Administration of Customs released trade data for February on Monday March 23, 2009. As you can see from the chart above, China's apparent total oil demand grew by 0.5% in Feb 2009 versus Feb 2008. This is the first yr/yr growth figure to come out of China following three months of negative oil demand growth. The Lunar New Year fell in January this year and February last year, with distorts the numbers somewhat.

The Chinese data shows that the lag between the bottoming of US total oil demand (1st week of October 2008) and Chinese demand growth was four months. This appears to sync with market anecdotes of the wave length of the economic slowdown (and possible recovery) moving across the globe from the developed world to emerging markets.

Friday, March 20, 2009

Oil as a Currency

Oil is a currency. It floats in relation to the US dollar and all other paper currencies. This is why it is ridiculous when some say that oil should be traded in other currencies or that the US government has an agenda to keep oil trading in dollars. As I describe in Oil 101 (page 323), the global oil market chooses to trade oil in dollars because it is most efficient that way. Nobody tells oil traders to use dollars, it is simply cheaper for everyone involved to do so.

When the dollar weakens, oil prices rally (all other things being equal). When the dollar strengthens, oil prices fall (all other things being equal).

This wasn't the case before the world moved to benchmark oil pricing. Oil prices used to be fixed in US dollar terms for very long periods of time and it was the the weakness of the dollar in the early 1970s that caused all sort of problems (page 13, Oil 101).

Anyhow, the US government (and by extension us, the people) have decided that we are going to devalue the dollar to reduce our dollar debt burden. Other countries are sure to follow. Inflation is the goal. Printing money ("quantitative easing") is the mechanism.

On Wednesday March 18, 2009, the US Fed announced they intend to release an additional sum of around US$1 trillion of new money supply . The money will be added via the mortgage market. The dollar weakened. Oil appreciated as a currency. Following are two stories I was mentioned in (WSJ - DJN).

Saturday, March 14, 2009

Mentions ahead of the OPEC meeting

Ahead of the OPEC meeting on March 15, 2009 in Vienna, I was interviewed for a number of news articles. In summary, I said that OPEC do not need to and will not cut any further at this meeting. Apparently I held the minority view (less than 25% of those surveyed) heading into the meeting but in the end I was on the right side as OPEC didn't cut. Bloomberg TV also carried an interview.
"We have seen the lows in crude oil prices for this year" Morgan Downey...said in a Bloomberg Television interview.  "There will be a slow but steady increase in prices."  Oil, which traded around $43 a barrel in New York today will recover into "the low $60s" once seasonal demand for gasoline peaks after the second quarter and to $70 before the end of the year, Downey said.

Downey said the Organization of Petroleum Exporting Countries, supplier of 40 percent of the world's oil, is unlikely to announce further production cuts when it meets on March 15 as previous curbs have "been more than sufficient to remove excess supplies in the market."

Thirty-one of 41 analysts surveyed by Bloomberg last week said they expect OPEC to agree a new reduction at the gathering.." (source: Bloomberg TV, March 12, 2009)

Here is a short clip of the interview.

(source: Morgan Downey in New York - Bloomberg)

  • OPEC Meeting and a Few Related Thoughts and Graphs from Readers (Mar 14, 2009 - theoildrum
  • Opec back in the driving seat (Mar 11, 2009 - FT Alphaville)
  • Oil Rises a Second Day Before OPEC Meets to Discuss Output Cut (Mar 13, 2009 - Bloomberg)
  • Opec roundup: The Russians are coming (Mar 13, 2009 - FT Energy Source)
  • Американская нефть подорожала на 11%, европейская — на 9% (Mar 13, 2009 -
  • 测欧佩克减产,周四纽约油价暴涨11 (Mar 13, 2009 -
  • Downey Says Oil Set to Rebound Above $60 on OPEC Cuts: Video (Mar 12, 2009 – Bloomberg TV)
  • Nymex Crude Higher As Market Braces For OPEC Mtg (Mar 12, 2009 - Dow Jones News)
  • Opec round-up: Demand gloom, fail rate, Russian membership (Mar 11, 2009 - FT Energy Source)
  • Petróleo avança 3% em Nova York, mas cai em Londres (Mar 9, 2009 - PortalExame)

Tuesday, March 3, 2009

Oil 101 mentioned in Reuters WTI Article

Reuters mentioned Oil 101 today in a discussion of WTI as a benchmark. I made the case that WTI is a great benchmark, with liquidity, large physical volumes (which makes it more difficult to squeeze), its location in a stable market with a history of free trade and little government interference. As you will know from reading Oil 101, there are well over 100 benchmark grades of oil around the world. All of these oil benchmarks trade as spreads to one another and to WTI. The inherent flexibility of these spreads means that any changes to a single benchmark can be compensated for.

Monday, March 2, 2009

The Oil Drum Posts a Key Chart

The Oil Drum posted an updated chart of mine on Feb 26, 2009 showing crude oil inventories at Cushing beginning to fall. This is often indicative of a turnaround in oil prices which have been down in the $30s over the past few weeks.

Financial Times calls Oil 101 a "Must Read"

The Financial Times Alphaville Blog called Oil 101 a "must read" on Feb 25, 2009. They also published some of my charts on US oil inventories and demand.
Follow @CommodityMD