[alecifel]

You hear a lot about the "natural" price of gas, or oil, or whatever else in the financial news. What is a "natural" price. Last time I checked economists dealt with the laws (actually BY-laws) of economics rather than the real laws imposed by Nature. So what they should really call their "natural" price is "economic" price.

The Natural price (valued in Nature's currency) of a gallon of gasoline is 31,000 calories. It may vary from KC29 to KC33 (KC=KiloCalories) but it's right in that range.

The other day I decided to simply explain what a gallon of gasoline is worth by simplifying (and making more personal) Simmons' rickshaw analogy (which is based on a cup of gasoline, a unit of measure no one uses.)

1 gallon of unleaded has 31,000 calories.
A 180-pound person walking 3 mph burns 4.8 calories/minute.
Therefore, a gallon of gas has the energy equivalent of a 323-mile walk at 3 miles per hour.

How much is a gallon of gas worth? Would you walk 323 miles (in the dead of winter or middle of august even) for $3.83? Can that even be done? Add up the price of enough of the cheapest food you can think of and see if you can even generate 31,000 calories for $3.83, never mind the culinary aspects.

Suppose this food source was free. Can you carry 31,000 calories' worth of rice in your backpack and still walk 3 miles per hour? (maybe. That's about 12 pounds of rice. I'd use cornmeal because it's cheaper but it happens to be indigestible. If you tried to live on corn alone you'd die of malnutrition, unless it was nixtamalized and then you're way past $4).

If anyone can find a 12-pound bag of rice for less than $3.83, point me to it!

So that's my answer to the "gas is too expensive" whiners (self included on occasion). It's worth a 323 mile walk.

That and it can do things human power can't do. I may be able to walk 323 miles but I cannot, under any circumstances, carry 1,000 pounds of tools and two heavy construction workers on my back 15 miles in 15 minutes.

[heroineworshipper]

My computer must be worth $1 trillion.

[ohanian]

Your maths is terrible!!!

Here let me help you


Say your car can do 25 miles per gallon. So 1 gallon of unleaded is only worth 25 miles.

You can only walk at 3 miles per hour at 4.8 calories per minute
So you need 4.8 * 60 / 3 = 96 calories per mile.

So 1 gallon of unleaded is only worth 25 * 96 = 2400 human calories.

So 1 gallon of unleaded is only worth the cost of human food which provides 2400 calories.

One Big Mac Hamburger is only 540 calories (kilocalories).

So 1 gallon of unleaded is only worth 2400/540 = 4.44 Big Macs

One Big Mac Hamburger is only worth $3.41 US dollar

So 1 gallon of unleaded is only worth 4.44 * $3.41 = $15.15


That's right!!!


Only $15.15 for a gallon of unleaded.

[mattduke]

It's not worth your life.
Let the zombies take it.

[Blacksmith]

My vehicle will get 25 mpg if I carry 4 people and 4 large suitcases.

So YOU try carrying a large backpack (say 60 pounds), 4 Big Mac's and walk 25 miles.

[uhoh]

At any rate, a gallon of gas refined from crude oil seems a bargain even at today's prices. It's truly a super liquid as far as energy output. We've been spoiled during the oil and gas era of the past century, that's for sure.

[MrBill]

alecifel wrote:

You hear a lot about the "natural" price of gas, or oil, or whatever else in the financial news. What is a "natural" price. Last time I checked economists dealt with the laws (actually BY-laws) of economics rather than the real laws imposed by Nature. So what they should really call their "natural" price is "economic" price.

http://en.wikipedia.org/wiki/Natural_price

[wisconsin_cur]

alecifel wrote:

You hear a lot about the "natural" price of gas, or oil, or whatever else in the financial news. What is a "natural" price. Last time I checked economists dealt with the laws (actually BY-laws) of economics rather than the real laws imposed by Nature. So what they should really call their "natural" price is "economic" price.

http://en.wikipedia.org/wiki/Natural_price

the prices that the factors of production of a finished item attract.

So do I infer correctly that in a period of product scarcity, where potential demand is outstripping available supply, that "natural price" is relatively irrelevant? It is too many people competing for too little product driving up price currently not a fundamental increase in the price of production since most of our oil is coming from the same oil fields and the same oil wells.

Natural price would matter if there was more supply than demand for at that time the price would go down until it was no longer economical for some producers to create the product because the factors of production were higher than what the product would sell for. At that point we would see "supply destruction" until such time that the price bottomed and there was at least enough competition for the remaining supply to keep the price above the cost of production for the most efficient producers.

Is that about right?

A follow up question I would have is about the use of the phrase "the fundamentals" such as when I heard Steve Forbes say yesterday that the current price (of oil) was not supported by "the fundamentals." Is there a standardized use of the phrase or is the fact that we have different pronouncements (steve forbes versus matt simmons) reflect a different use of the term? Is one taking into account different data due to pre-existing assumptions or is one just really bad at math?

Thanks
cur

[MrBill]

Price could be a function of:

a) cost of production (supply); or
b) what the consumer is willing to pay (demand); or
c) a combination of both.

I am pretty sure I can grow potatoes on our farm. They would likely be worth more than the hay we are currently growing that sells for about $70 a bale. However, growing potatoes is very labor intensive, and I would probably find out that I would produce too many for my friends and family to eat, but I would not produce enough to supply the local grocery store year-round for their customers' needs.

I would also find out that my small holding could not compete on price or perhaps uniform quality as say potatoes grown elsewhere and shipped-in where the cost of transport is reflected in the price of potatoes. Even if I could I would likely not be able to earn enough money from growing potatoes on our small farm to replace the one or two salaries from working off the farm. My opportunity cost of a foregone salary(s).

So we do not grow potatoes even though we could, and we probably won't until demand and therefore the price of potatoes is such that it is economically worth our while. We therefore settle for a much smaller return from our hay production as it costs less to produce, takes less labor, is easier to market and frees up our labor that we can then sell it for wages off the farm thereby increasing our total economical return.

Of course, if we were willing to produce potates at a loss in terms of our opportunity and labor costs then we would help to contribute to lower potatoe prices, and therefore more demand, at least on a local and seasonal basis (i.e. by selling them at the farmer's market).

The fundamentals usually refer to supply and demand. Supply can be limited by:

a) cost of production (supply);
b) EROEI;
c) natural or artifical limits to supply;
d) what the consumer is willing to pay (demand); or
e) a combination of all or some of the above.

Potential demand is usually considered to be unlimited over time. That is not to say we can use all supply all at once, but if the price was zero then there would be an economic incentive to find new uses as well as develop new technologies to use it faster.

As demand cannot exceed available supply whether caused by natural or artificial limits then price has to destroy potential demand until actual demand EQUALS available supply at the prevailing market price.

Far from ignoring the physical limits of supply, fundamental supply and demand analysis starts first and foremost from the assumption that supply is limited and demand is unlimited.

Where potential demand exceeds available supply price has to increase until such a point where excess demand is destroyed. Where potential supply exceeds actual demand the price has to fall until such a point that excess supply is destroyed either by removing it from the market or cutting back on production until inventory clears.

We have to be mindful that inventories can and do build that is a temporary over-supply in excess of actual demand. This can be for strategic reasons or as producers continue to produce in the short-term covering their variable costs of production, while ignoring their long-term fixed costs. However, in the long-term producers need to cover both their fixed and variable costs, so they will not continue to add supply to the market at an economic loss.

Another way to view inventory is if we add time to the supply and demand curves to create a 3-dimensional picture. Inventories help meet future demand.

Of course, producers would also stop producing if the EROEI dropped below 1:1. Then they would be better off just selling the energy without the time or risk of exploring and extracting new energy.

Comparing the calorie content of petroluem (a source of energy for machines) and the calorie content of food (a source of energy for man and beast) is largely a red herring. Most humans and beasts cannot consume petroleum directly for their energy needs. And petroleum left in the ground produces zero calories and has zero economic value in any case.

Whereas some machines - such as those in a factory canning or preserving food for human consumption - can do the work of hundreds of manual workers for a tiny fraction of the energy that would be needed to feed those workers. Ditto for comparing draught power and muscle power to the energy needed to power a tractor. Animals and men need calories even when they are not working and their EROEI is negative. The tractor only needs energy when it is working and creating a positive EROEI. Not to mention that a tractor can do the work of many men and quite a few beasts.

But, yes, between Simmons and Steve Forbes their different interpretations of the fundamentals of oil supply and demand would depend on their time frames. In the short-term available supply may be adequate to meet existing demand even if in the medium-term we recognize that actual demand might be rising faster than available supply. And in the long-term potential demand is unlimited, while available supply will be finite.