Alexis Madrigal: Why are gasoline prices falling?

Freshly returned from a few months spent with his new baby (congratulations!), Alexis Madrigal at the Atlantic wonders why gas prices are falling in the US. He notes that the national average is the lowest it’s been in almost three years.

He identifies a few factors that influence gas prices, most notably world oil prices. These prices have fallen, due both to demand and supply factors, and most importantly how higher gas prices induced consumers to change their behavior:

But they [gas prices post-Arab spring] couldn’t go too high because, at least here in the U.S., demand has softened. Americans are buying (slightly) more fuel-efficient cars, on average. And younger people are driving less.

Which is all a pretty rational response to the big run up in gas prices during the mid-2000s.

He then points out (courtesy of Brad Plumer) something that shows just how complex the dynamics are in gasoline markets — gasoline and diesel are joint products, so to produce more diesel you get more gasoline. Diesel is in high demand in Europe, thanks in part to the economical and energy-efficient, yet also sassy and full of fun, TDI diesel engines from Volkswagen and Audi (and it’s an interesting question to ask why US regulations still provide such barriers to TDI diesel, but I’ll leave that as an exercise for the reader ;-0 ). If you are refining diesel in the US to export to Europe, you will increase the supply of domestic gasoline, shifting the supply curve out. In the face of that softened demand, that’s going to mean lower prices.

A couple of neat points, but this post is mostly an excuse for me to say how glad I am that Alexis is back from paternity leave! I missed his writing.

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2 thoughts on “Alexis Madrigal: Why are gasoline prices falling?

  1. On Diesel engines, a few notes:
    1) Everyone offers TDIs in Europe; it’s just that VAG is the only company really importing to the US in quantity (Mercedes never really stopped selling diesels in the US, and BMW’s been trying again recently). But over there, everyone sells diesels as an option.

    2) These days it’s not really necessary to specify TDI (though it’s decent marketing for VW); I don’t think anyone’s sold any quantity of a non-turbo, indirect injection diesel in probably 20 years. Mercedes was the last holdout there, as I understand it. AFAIK every diesel you can buy in a passenger vehicle is a TDI now.

    3) The major reason they’re not as popular in the US is twofold, at this point, as I understand it –
    A) They just cost more, and Americans are more price-sensitive than Europeans on such things, if only because cars start more expensive in Europe, generally. The turbo and the emissions stuff adds significant cost to the mechanical end.
    B) I suspect – but haven’t checked for sure – that there are various tax incentives in Europe, as well.

    There’s also a less-important C) which is what Americans have a long memory for automotive things, and many remember the Old Days when “diesel” meant “slow, loud, smoky”, and often “horribly unreliable” (see the GM disasters of the 80s, and also the 80s-era BMW 5-series diesels).

    D) The US actually has, I’m led to believe, tighter diesel emissions standards than the EU, though e.g. Ford claims they could rapidly adapt their European drivetrains to meet EPA requirements … but it’s not free. Regulation never is.

  2. This article claims that the alleged regulatory barriers are just a myth: http://pesn.com/2012/05/01/9602085_VW_not_allowed_by_US_government_to_sell_high_mileage_cars_to_US_consumers/

    I found these three reasons convincing:
    “First, VW used to sell the same (or similar?) Passat as is sold in Europe here in the US. But it didn’t sell very well. It was too expensive and too small in the mid-size sedan segment. So they came up with a larger version with a better price point; and of course the size effects the mileage. [Americans are not nearly so concerned with mileage as Europeans are.]

    Second, the way the US’ EPA calculates mileage is different than the way the European equivalent does it. “The cycle is different,” he said. The driving course and rigor set in the dynamometer is different. The fuel types used are different. The EPA estimates for diesel mileage tend to be lower than reality. For example, while the EPA says the Passat is 44 mpg, the Consumer Reports number comes in at 51 mpg.

    “The number for the combined US cycle for the US Passat is 35 mpg, whereas the same powertrain in a European Passat gets 61.2 mpg on the Euro cycle.”

    Third, a US gallon (3.79 L) is less than an Imperial gallon (4.546 L).”

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