Even Keeled

A coworker and I bet that gas prices in the San Francisco Bay Area will average $6/gallon by 8/1/2008. The irony is only in the when, not the if (loser fills the winners tank with Gas). I’m taking the over. I strongly believe we’ve smashed through whatever theoretical barrier kept oil prices in check for the last 8-10 years and have now entered a period of compounding price increases.

There is actually a fairly well known theory that predicted the inflection point, Hubbert’s Peak, or Peak Oil.

Peak oil as a proper noun, or “Hubbert’s peak” applied more generally, refers to a singular event in history: the peak of the entire planet’s oil production. After Peak Oil, according to the Hubbert Peak Theory, the rate of oil production on Earth will enter a terminal decline. Based on his theory, in a paper he presented to the American Petroleum Institute in 1956, Hubbert predicted that production of oil from conventional sources would peak in the continental United States around 1965-1970 (actual peak was 1970). Hubbert further predicted a worldwide peak at “about half a century” from publication and approximately 12 gigabarrels (GB) a year in magnitude.

Turns out Hubbert was fairly accurate. The doomsday-ers have co-opted the theory and started a website called, smartly enough, PeakOil. There was an article recently in the NYTimes about survivalists moving off the grid and becoming self-sufficient driven by the fear that roving droves of gas seekers will storm their homes.. (Guns! Wack Jobs! Wacko Texas Revisited!). What I find interesting is the similarities with many green movements: locally grown foods, reduction in carbon footprint, reduced use of motor-vehicles, etc. In other words, the fringe is less fringy these days.

Below are a few charts which highlight the recent rapid rise of gas, along with an interesting chart that compares with crude oil prices. If I had the time, and honestly the aptitude, I’d like to pull apart the annual high/low delta. It seems there are three key price points: 1) ~mid-December which is the yearly low point, 2) early May which is the pre-summer peak, 3) early August which is the summer high before a run towards the December valley.

Chart with just gas (5 year)

With crude oil:

What is really interesting (scary?) is the fact crude prices appear to be increasing faster than gas at the pump. To me, this indicates there is the potential for gas prices to increase even more if they were to keep their historical correlation to crude. I won’t go into the whole “oil companies are evil and stealing from the public”. They are stockpiling profits. To do any less would be irresponsible to their shareholders. They claim this is required to fund present and future investments in alternative fuels. Lets all hope this is true. In the the meantime, public transportation and other forms of getting to around are now much more viable. A positive and natural outcome.

There are tons of ways to start cutting this data and looking at correlations, both obvious and obtuse. From a purely intellectual perspective, the (recent) oil crisis may be one of the more interesting challenges to surface in the last 50 years. (Passion! Profits! Hippies! More at 11!)