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Here’s a new twist to my post below on a $100 floor price of oil.
Creep up the floor price. Imagine something like a $5 rise in the floor per quarter, and leveling off at some point, maybe even at $150/barrel.
Several important reasons for this twist:
1. it would gradually phase in the pain (even though all the money should be given back in the form of lower taxes elsewhere — I propose this should be tax neutral. The only purpose should be encouraging different use patterns and stability and predictability.
2. it would be a dramatic boost to the car industry. Here’s what I learned about the car industry since I wrote my last post on this: the car industry needs predictability to succeed. The wild volatility in the price of fuel is what causes the making of the incorrect car models and the extra car inventory that is so harmful to the car industry. There is no other industry where the swing in the price of an outside substance — not under the control or predictability of the car industry — affects the demand / value of its product so much. Here’s what I heard from the CEO of Auto Nation at the WSJ:EcoNomics conference — when gas prices went from $2 to $3, to $$ and then back down to $3 and then $2 last year, he said that the value of a used Prius went from $15,000, to $20,000, and then to $25,000 at $4. Then it went back down to $20k, and $15k on the way back. It was completely symmetric on the way up and down and swung $10,000 (or more than 40% in value) just by a $2 swing in gas prices. Think about this. You are a car company planning to invest $1B or $2B to make your car making decision 3-4 years out and there’s something you don’t control that can make the value swing more than $10,000, or more than 6x your profit on that product! That’s insane, and unsustainable, and in fact, look what happened in that experiment.
Therefore, I think that it’s not even price of gas that matters, it’s just knowing with some stability what it will be, and if you took the current $50/barrel and just slowly phased in a $5/barrel floor increase, so it would be $70 in a year, $90 in two years, and so on, that would give an underlying hugely valuable signal to the market (both customers AND manufacturers). Let me know what you think of this idea.
Thanks,
Bill
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Hi Bill,
Good points. Your idea would certainly add enough predictability to make planning easier and more reliable for the auto industry. However, I would like to comment on another business that is affected by an outside substance not under that industry’s control and ask for your thoughts.
The jewelry industry has long enjoyed stability in raw materials pricing including, diamonds and metals such as gold and platinum. As a result of this stability the companies operating retail locations (mostly brick and mortar, but internet too) have been able to effectively plan depth and breadth of inventory, take chances on new designs and although margins have eroded everywhere, with the right planning still been able to maintain effective margins.
Over the last two years, we have seen the price of gold and platinum rise dramatically forcing the industry to respond, not just with retail strategies such as lowered pricing, gimmicky financing, etc., but by also looking for alternate materials with which to produce the end product. In this particular example, the industry turned to Palladium, a Platinum family member.
The benefit of palladium is that it has all of the positive characteristics of platinum, a few desirable characteristics of its own, all at a lower raw price.
Although palladium seemed like a good alternative at the time, the alternative metal required re-tooling of equipment and re-training of labor at the manufacturer level.
The result was that once prices for gold and platinum returned to previous levels, palladium was no longer the miracle metal it was touted to be just a few months before and the industry had spent inordinate amounts of money guarding against price fluctuations that they could neither plan for nor control.
In the end, jewelry manufacturers and retailers have been left with an overstock of palladium jewelry, palladium specific equipment collecting dust, debt related to re-training and re-education and a hole in their bank account big enough to drive a Bankruptcy filing through.
Although the industry’s problems are wider than the rise and fall of raw materials pricing, I would like to hear your thoughts on how an industry like this one can either plan for, resist or weather the storm of changes such as the one I describe.
Thanks for your time. I look forward to reading your response.
Do you have a pathway to the Obama Whitehouse? You’re thoughts on the stability of the oil industry should influence the engery policy of the country.
You make an interesting case for rationaling a course on energy usage. However, I must contend the current model is broken. More attention on a wrong path will not avail us a corrected solution. The fundamental issue boils down to the fact the lion’s share usage of our petroleum is allocated to vehicle use. Algebra will reveal quickly that at 26 miles per gallon on the exisitng cafe standard we need to get to approximently 72 miles per gallon to reach near sustainable supply balance. An at that, we still chase a diminishing target for petroleum production.
What happens if T. boone Pickens is right and the Arabs reserves aren’t 290 billion in reserves. Can we really wait 10 years for fleets to recycle?
Yes, Aptera is the right direction! Please also look at the Monotracer – http://www.monotracer.com We have a vehicle competing for the X prize that gets 300 mpg and can go 150 mile per hour safely – its is like straping on a high speed electric power drill that is highly efficient and comfortable.
I called you yesterday and left a voice message for you at Idealap. I have worked with Jason Hill, who designed the Aptera.
Can we ask to meet with you as I believe it is in all of ours best interest to speak, both personally and professionally? Furthermore, Felix Wagner will be in Los Angeles on the 26th of April to conference additionally. My cell number is 310-266-5626. Thank you!
Best Regards,
Rod Kuhns
Dear Bill,
did any body ever calculate the total impact of the high energy prices to the world economy? If I do, I get very impressiv numbers. Maybe I am wrong but I get this: The middle of the Oilprice from 2005 to 2009 was about 70 USD/barrel. This is 50 USD more than the everage bevor of approx. 20 USD.
The world demand of oil is more than 83 million Barrel per day or 30 billion barrel per year. This means that in the past 4 years the world economy lost 30 billion * 50 * 4 = 6 trillion USD. And this money is really lost for the wold economy because it is not quickly fed back. Since oil is just 1/3 of the energysupply the total lack is up to 18 trillion.
The total econimic output of the world of one year is about 25 trillion USD. So more than 50% of the total econimic output of the world of one year ist lost and does not circulat. 50% of this just in 2008!
Best regards
Andy
Unfortunately, in rather less than a decade the price of oil will fall to <$15/bbl. Solar and other alternate technologies will become economic road kill.
Because an alternate source of energy will be ramping up by then, at around $0.05/W installed, and $0.0025/kwh delivered. Available anywhere.
Bill, what I love about your stuff is that you seamlessly integrate business concept innovation and technology. The future of energy is going to be all about that. This issue of pricing – if one starts thinking through what would be required to make it really happen – also requires a focus on another problem with innovation: cooperative innovation between legally separate entities. This one isn’t going to be solved without a holistic approach understanding the intentions of many different players. Maddeningly complex.
Working on this issue over http://thethreepercent.com.
Keep up the provocative posts, Bill.
Hello Bill,
I saw your presentation on TED.I am interested getting that device for me.Can you tell me how can I buy one of those.I am from india.
I do believe that your idea would be good for the auto industry, but we have seen in the recent past that higher fuel prices don’t really do anything for the individual person ( purchaser ). While we had the higher fuel prices, the country was starting head long into the depression that we are now in. While the prices do help a little when higher for the people , they don’t seem to be the cure. I just have a hard time seeing how steadily increasing the price per barrel can help out the country as you say.
Gee Bill, for a reasonably smart guy, that has got to be the dumbest idea I’ve heard yet surrounding the energy debate. Your premise of price stability is good but your solution borders on the asinine. The price of gasoline has historically been reasonably stable. The wild market gyrations of the past couple of years was purely due to rampant market speculation by traders that had even less scruples than the criminals involved in the sub-prime debacle. If you want price stability (with a gradual increase due to rising market demand and dwindling supply) advocate for the imposition of some common sense regulations on the energy trading market. I’m a free market zealot but completely unrestricted markets do produce undesirable consequences that shouldn’t
be corrected with entirely artificial means. Perhaps your investments in
electric cars and alternative energy has clouded your judgment as a
capitalist?
Bill,
I agree with you that the price of gasoline does not matter. Gasoline prices have been very unpredictable and no one has a good explanation for that – it has certainly not followed the supply-and-demand model since 2007. Gasoline price is also very closely related to market volatility as well as dollar value. However, we ought to stabilize the use of gasoline as an ‘asset class’ in order to stabilize its price. To that end, manufacturers should pay attention to the price of generating alternative fuels and not just concentrate on the price of gasoline and how to predict it.
I realize this blog isnt updated very often, but worth a shot, bill, what do you think about desertec:
http://www.desertec.org/en/concept/technologies/
is it viable?
Interesting theory, but just that: theory. “Creep up the floor price” would just become a ticket for someone else’s “special project” funding. Thus, just more tax and spend. If you think in 200+ years of being a country that we’ve learned to adhere to the seemingly simple idea of not spending an offset but returning it as promised, go hang out in congress for a few minutes. They just can’t do it.
Of course, we continue to elect people who want to execute such brilliant ideas as making “green energy” more ‘appealing’ by inserting regulation and taxes that raise the cost of conventional energy to obscene levels. Kind of like encouraging you to buy $10 a gallon bottled water by raising your tap water bill to $3000 a month.
When you introduce poltics into the equation, you always get more than you bargained for. Or, maybe…less.
Holy Moly! Price controls? Last time I checked, that pretty much works… never. That’s just nuts. Back to Economics 101 for you.
An extra $1,200 per year may not mean much to someone with a great living and millions of dollars in the bank but for many people, $1,200 a year would have a material negative impact on their quality of life. The final cost would be much greater than this since oil is used in toys, computers, gel caps for medicine, etc. It would cause inflation across the board.
You would greatly reduce economic activity to funnel more money into government hands. Since US consumption is a major driver of global economic activity, you would affect the lives of billions in a negative way by slowing the growth of their economies and keeping more people in poverty than there otherwise would be.
There will undoubtedly be break thrus in alternative energies whether the price of oil is $100 or $40. Sure, it will happen faster at a sustained $100 per barrel but after the last price shock (caused by speculation and greed), I think that there is enough attention on the matter to drive continued innovation in the alternative energy space.
While reducing the fluctuations in oil prices and more accurately reflecting the cost to society of their use seem like excellent undertakings and goals worth pursuing, I have to ask, once suppliers – foreign and domestic – realize that the demand is inelastic for oil at any price under the set floor, what is to prevent them from pricing at whatever the floor is? We use taxes and credits as a method to encourage or discourage certain types of behavior while providing revenue to the government, so shifting the tax burden to oil consumption while reducing it elsewhere is just a method of altering behavior. But if we use a price floor as opposed to a percentage tax, how would we keep the increased revenue going to the government to offset a tax decrease elsewhere as opposed to the oil producers and refiners?