How Is the price of barrel of oil linked to Nat. Gas Prices?Or is it?

[JLuckey]

[fizzana]

1. It is

but the effect takes some time to filter down to the local gas pump. Production and supply can offset price increases to some degree but I would expect to see gas prices start creeping up in the next few weeks because of current high oil prices.

[tandot]

2. I have the suspicion that Oil companies are holding the price down

as much as possible and don't pass the higher prices they pay on to consumers. They want Bush re-(s)elected and high gas prices might have an impact.

Just a guess, though...

[JLuckey]

3. What my concern was..........

Natural Gas prices and heating my home this winter. I do believe Bush's* buddies will control gasoline prices to help him out. Then God help us.

[tandot]

4. A lot of people will suffer extremely from that situation

People already have to decide if they should buy food or buy their medication instead. And it seems that Republicans just give a sh*t about it.

There is so much corruption with this administration.

I am extremely depressed about the rich getting richer and the poor having to pay for it. I don't know how anyone poor or middle class can vote for Bush. I just don't get it.

This country has gone crazy.

[happyslug]

5. Apples and Oranges

In economics you have the concept of substitution, that is when a particular item's price goes up, demand not only falls but switches to substitutes. For example if the Prices of Apples goes up, some people switch to Oranges (This both reduces the demand for Apples, keeping the price lower than if no substitution had occurred, but also increased the price of Oranges do to the increase demand caused by the Substitution).

Transferred this concept to Oil, Natural Gas, Coal and even electricity, to a degree, can an be substituted for each other (and for oil). For example people may decide to drive a Natural Gas powered car (or even an Electric car) if the price of oil goes up to much.

Remember while "base-line" electricity tends to be Coal or Nuclear powered, "Peak demand" is generally provided by Natural Gas or Hydroelectric plants. This is because Natural Gas and Hydro Electric Plants can be quickly turned on and off as needed, Coal and Nuclear can takes hours or even days to increase or decrease power production. Coal, Nuclear and Hydroelectric are your cheapest form of Electric Generation. Natural Gas is the cheapest type of electric plant to build in addition to quickest to start up and shut down (But more expensive to operate than other forms of electric generation).

Thus if you decide to go to an electric Car, the electricity may be produced by Natural Gas. Thus your drop in demand for Oil is being transferred to increase demand for natural gas (or may coal or Nuclear power).

Natural Gas can also be used to directly in a gasoline engine (Installation of a heavy duty tank to hold the Compressed Natural Gas has to done plus some minor changes to the engine, but once done the car is set to go). Many cities have Natural Gas powered Buses, thus increase use of Mass transit, while reducing the demand for oil, may increase the demand for Natural Gas.

Furthermore people may stay home increasing the cost of heating their home with natural gas instead of going out in their oil powered car.

And one more fact, if home heating oil goes up people may switch to Natural Gas, another area where these two fuels can be substituted for each other.

My point here is Natural Gas and Oil can to a degree be substituted for each other and were in the 1970s (and will be again). Thus any price increase in one will also lead to an increase in the other based on the concept of Substitution.

[JLuckey]

6. Thanks, Clears things up.

[phantom power]

7. Substitution is not frictionless

It's worth adding that substitution is not frictionless. For instance, if natural gas becomes cheaper than gasoline, I might contemplate switching to a car powered by natural gas (or modify my existing car). But that costs a lot of money, so I might not make the switch.

Likewise, if I wanted to switch my home from heating oil to natural gas, that requires me to buy and install a whole new furnace. Oil might be more expensive, but I might not be able to afford the new furnace.

So, this friction can allow for significant price increases in any established commodity, even if it's price rises above some other commodity that in theory can be subsituted. The "friction" prevents people from making the substitution.

[happyslug]

8. That is why I sued the phase "To a degree".

They are costs that are incurred by people as their switch from one to another, but you will be surprised how quick this can occur. For example in 2000 when the price of Oil sky-rocketed (and than was killed by Clinton's opening of the Strategic Oil Reserve) The Borough of Windber Pennsylvania (and old mining suburb of the City of Johnstown) started to install Natural Gas pipe lines so its citizens could convert from Oil to Natural gas. Many did, many also kept BOTH furnaces (or the ability to switch between the two fuels). Thus these people can switch relatively quickly between the two fuels. Many people are in this situation.

In the 1970s I helped my Father install a coal/wood supplemental heater in his House, it only costs a few hundred dollars but coal was cheaper than Natural Gas. You can get still get wood/coal supplemental heaters and many older homes (i.e. build prior to WWII) can still use them. If a newer house has a fireplace that can be converted to a wood/coal stove also (Stoves are more efficient than fireplaces) at relatively low cost.

Thus there is a "Friction" is the substitution between Oil and other energy sources, but except for areas without existing Natural Gas pipelines AND transportation, the Costs of such "Friction" is low.

Now I know the biggest use of Oil is Transportation followed by heating in areas without Natural Gas Pipelines. Thus for many people (if not most people) the costs of conversion will be high, but for others it will be low and do to that low costs will convert quickly. Do to these quick con conversion the demand for oil will NOT be as severe as if NO conversions had occurred. Thus this will lead to some relief on the upward pressure on price of oil caused by the shortage of Oil. Likewise it will increase the demand for Natural Gas and increase the price of Natural Gas (and coal and other sources of Energy).

Nothing happens in a vacuum, and the cost to convert will be a factor in any switch between forms of energy, but for some it will be a quick switch at low costs, for others a switch never quite possible (The cost of Conversion more than the saving from the conversion).

Full Substitution requires easy conversion, but that is NOT what anyone thinks is happening between the forms of energy. You will have substitution but part of the cost of substitution is the cost to convert, but that will be factored into the price of Natural Gas, Oil, Coal and all other forms of energy as the demand for energy exceed supply.

[German-Lefty]

9. Natural Gas for Cars is apperantly cheaper already

This new civic is kinda cool. You pump it up at home in 3-5min with gas you get from the gas company.
http://www.usatoday.com/money/autos/2003-08-26-natgascar_x.htm

Running a vehicle on natural gas historically costs about 80% of what it costs to run on gasoline.

Honda will sell an appliance, called a "Phill," with each Civic GX to fill the car's tank from the homeowner's gas line. Phill will cost $2,000, but tax credits may knock the end-cost down to $1,000. Civic GX will cost $20,000, about the same as a hybrid gas/electric Civic.


This thing probably has way more range than a gas powered car, and as long as power plants are burning gas this thing is probably more efficient too, since batteries loose a lot.

[phish_head]

10. Natural Gas for Cars

"This thing probably has way more range than a gas powered car, and as long as power plants are burning gas this thing is probably more efficient too, since batteries loose a lot."

This doesn't sound like it will have mass appeal. It takes 8 hours to fill it half way up. This is only good for 100 miles. Strictly a commuter car. If it would have decent range (300 miles) and you could refill anywhere I would definately buy one. Until then it isn't practical for my family.

[German-Lefty]

11. 3-5 min at stations

Oh, sorry I misread this:
"GX owners also can refill at approximately 1,300 natural-gas stations nationwide. Filling stations that dispense compressed natural gas under pressure can fill a tank in three to five minutes."

I figured the $2000 Phill would liquefy the gas beforehand (probably with electrical power). Anyway you can fill up on the the liquefied stuff in 3-5min. That's still longer than gasoline, but it's tolerable. Hell, convenience stores will love having people come in and shop for 3min while their tank fills.

I'm not sure that 1,300 stations is very much when spread throughout the country. If it had a few hundred in California it might take off there.

The range of 100 miles still sucks. I wonder what it's like if you get a full tank of liquid.

[ensemble]

12. NG and Oil

There is some substitution, I think esp. in power generation, but for the most part oil and NG are separate markets. NG used in the US mostly comes from North America. Oil in the US is mostly imported. Oil is mainly used for transportation and petrochemicals, NG is used for other manufacturing (fertilizer, etc.) and for heating. Note that there was a huge increase in NG prices in 1999/2000, while gas prices, IIRC, increased more moderately from historic lows.