Obama & McCain: Here’s a real way to reduce gas prices!

Oil prices have continued their steady march, breaking through $135/barrel (which implies gas around 4.25) and climbing. As noted previously, the fundamentals driving oil prices higher are steady growth in global demand for oil combined with flat supply – an Econ 101 recipe for higher prices. What’s a presidential candidate to do about the situation? John McCain and Hillary Clinton both expressed strong support for a repeal in summer gas taxes; Barack Obama chose not to hop on the bandwagon, but offered no immediate alternative. So what can we do in the short term in this regard?

First, eliminate the use of heating oil in American homes. Heating oil and diesel fuel are essentially the same product, so heating oil demand directly impacts the price of diesel and gasoline. Replacing oil heating with gas heating would replace demand for imported oil with demand for natural gas that is produced primarily in the US and Canada.

Eight million homes in the US still use heating oil, and it accounts for roughly 2% of all oil demand in the US. Since oil prices are decided at the margin, a 1% drop in demand could significantly impact price. A $4000 tax credit would convince most heating oil users to switch immediately, and would send a strong signal to gas utilities to expand their service areas. If four million homes switched to gas overnight, this would cost taxpayers $16 Billion in one-time tax credits, about the same as two summers of the McCain/Clinton tax holiday plan. But the additional natural gas demand would be manageable, and the market signal of reduced oil demand would have swift impact.

Second, buy out old gas guzzlers and crush them. Since new vehicles are much more efficient on average, buying old junkers that get less than 20mpg would be an efficient way to reduce oil demand, while potentially helping poorer consumers to find new transportation. For example, offering $2000 per inefficient old car would enable many drivers to retire their old vehicles and move to new, efficient vehicles by using the money as a down payment. 10 million cars could be retired by spending $20 billion, and if each 15mpg vehicle were replaced with a 25mpg vehicle, 210,000 barrels per day of consumption could be eliminated.

Replacing oil heat and getting rid of old gas guzzlers may sound wonkish, but together these ideas could reduce US oil consumption nearly 5%. Unlike many plans under discussions, these steps are feasible and can be implemented today. Of course, these are only steps in a larger energy plan – but it’s better than many of the steps that politicians are currently advocating!

Calculations:

8 million homes * 730 gallons per year / 42 gallons per barrel / 365 days = 381,000 barrels per day

Converting 200,000 bpd of heating to natural gas requires 7 BCF (billion cubic feet) per week of natural gas. Since this consumption is wintertime only, it’s probably closer to 20 bcf per week, which is large, but not unsustainable, given that the US draws roughly 100 BCF per week from storage during the winter.
For cars, if each old 15mpg car is driven 12,000 miles per year, it consumes 800 gallons per year, compared to 480 gallons for the same distance in a 25mpg car. This equates to a savings of 3.2 billion gallons per year, which is equivalent to 210,000 barrels/day.

5 thoughts on “Obama & McCain: Here’s a real way to reduce gas prices!

  1. Praveen, you should have paid closer attention to the falsehoods expressed and implied by “Ms. Cota”.  Here’s my dissection of her polemic (hoping the HTML works, because there’s no preview):

    Here is another idea….why don’t you put tens of thousands of Americans out of work.

    That is exactly what skyrocketing oil prices are doing.  The wealth transferred to oil-producing nations is drained from domestic enterprises, and results in the loss of jobs.

    Destroy small town communities by replacing locally owned businesses with foreign corporations.

    That is exactly what dependence on oil does:  it replaces local corporations with Saudi Aramco and its ilk.

    Don’t like that idea? Well that is what you are suggesting by eliminating heating oil and promoting gas.

    Ms. Cota appears to think that oil is domestically produced, while gas is foreign.  I have no idea where Ms. Cota lives, but Britain is an importer of both oil and gas, while N. America imports mainly oil.

    Not only will your bad idea have no impact on price, it will destroy lives and the economy. Nice work. Are you on the payroll of the the British or French owned natural gas conglomerates?

    It might surprise Ms. Cota to learn that those gas conglomerates don’t export much to North America, so they are largely irrelevant.

    Then again, probably not.  “Ms. Cota” appears to be attacking anything that could be an improvement over the status quo, and implicitly defending the use of heating oil.  She must be a paid shill for either Hugo Chavez (Mr. Discount Heating Oil, buying influence) or Saudi “war is deceit” Arabia.

  2. Natural gas prices are also rising and natural gas also is facing a peak. Making capital investments that replace currently peaking petroleum by not yet, but soon to be peaking natural gas is extremely shortsighted. What needs to be done is to improve the energy efficiency of buildings by increasing their insulation and air tightness. The only solutions that are going to work are those that reduce the total demand for fossil fuel energy. Check out Net Zero buildings.

  3. Sarah, thanks for your comment. My idea is based on the premise that crude oil is now too expensive to use as a heating fuel when cheaper alternatives are available. Even at a cost of $12 / thousand cubic feet, natural gas is almost 50% cheaper than $135 / barrel crude oil. Moreover, over 50% of all crude oil (including heating oil) used in the US is imported, whereas almost all of our natural gas production is from the US or Canada.

    While a switch to natural gas would have a negative impact on heating oil companies, the investment in oil furnace replacements would actually create thousands of jobs by pumping billions into locally owned hvac companies. The net impact on the economy would be positive, as the plan replaces a high cost imported fuel with a lower cost domestic fuel.

    If you’re in the heating oil business, I empathize with you, as I’m sure you’ve found business tough lately. Oil prices aren’t coming down anytime soon – and that’s a reality heating oil companies will have to face.

  4. Here is another idea….why don’t you put tens of thousands of Americans out of work. Destroy small town communities by replacing locally owned businesses with foreign corporations. Don’t like that idea? Well that is what you are suggesting by eliminating heating oil and promoting gas. Not only will your bad idea have no impact on price, it will destroy lives and the economy. Nice work. Are you on the payroll of the the British or French owned natural gas conglomerates?

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