From a crowd-pleasing chant at the Republican National Convention to op-eds at the New York Times, the refrain “Drill, Baby, Drill” is looming large in the American psyche. In the Gray Lady’s pages, Robert Hahn of the American Enterprise Institute and Peter Passel of the Milkin Institute (motto: Milkin’ The Issues) investigate the idea of penetrating mother Earth for more of that sweet, sweet dino juice. Opponents of drilling offshore and oil extraction in the Arctic National Wildlife Preserve (ANWR) argue that the benefits would be marginal. Hahn and Passel don’t necessarily disagree. They reckon 7b barrels could be pulled from ANWR, with another 11b available offshore, Hahn and Passel estimate the U.S. could thusly increase output by six percent, resulting in a 1.3 percent drop in worldwide prices. Meh. But the two argue that at $100/barrel, that oil would be worth nearly $2t not including the benefits of reduced pump prices for consumers. Development costs including environmental clean-ups would cost only $400b, making drilling an “economic no-brainer.” Hahn and Passel estimate the “non-use value” of ANWR at “only” $11b. The authors could “imagine a political bargain in which several hundred billion dollars went into a fund with a charter to preserve wilderness in the United States, or climate-stabilizing rainforests in Africa and Latin America.” In short, to protect the environment we must defile the environment. In reality, drlling is one of those idealism vs. pragmatism issues where win-win is a no-no. As long as the “Drill, Baby, Drill” refrain is still echoing out of St Paul, this kind of compromise is a long way off.

Tropical Storm Gustav, which some experts say will be the worst Gulf of Mexico hurricane since Katrina, is projected to hit the Louisiana Gulf Coast early next week. After the Katrina fiasco, you can count on three things: 1. Residents of New Orleans will evacuate when they're told to; 2. FEMA will be on full alert; and 3. Gasoline prices will go up. Bloomberg reports Royal Dutch Shell Plc, BP Plc and ConocoPhillips are already cutting production and evacuating workers from their off-shore platforms along the Louisiana coast. If Gustav follows the predicted path (there's a 70-75 percent likelihood it will), it could halt production of 1.2m barrels of crude per day. Crude oil for October delivery has already gone up 1.5 percent; overall, oil has gained 3.3 percent since Gustav formed on August 25. The price of natural gas for September delivery also went up, with a 4.9 gain so far. Even if Gustav changes course, it could still affect prices because 42 percent of U.S. refining capacity is located along the Louisiana and Texas Gulf Coasts. Hold onto your wallets, folks. It's going to be a bumpy ride.

GM CEO Rick Wagoner and his Motown pals maintain that "nobody could have predicted" the recent surge in gas prices. You know, the price hike that's driven a stake through the heart of their high profit light truck biz. Never mind the fact that TTAC and others were bemoaning The General's re-investment in their GMT900 trucks back in '03. Well, guys, here's an article in The New York Times that says that nationalization of oil resources around the globe could lead to a drop in supply. (Maybe we should drill nearer to home? Nah.) OK, it's kind of funny (ironic) that the Gray Lady's piece paints Big Oil as the good guy. But that's not the point. Now pay attention: this trend could mean oil prices will go up again. Which would raise the price of gas. Now there's many a slip between the well and the ship, but do NOT tell us that you're surprised if pump prices go up again. That is all. 

According to the Bible, God toppled the walls of Jericho, parted the Red Sea and made the sun move backwards in the sky. Now He's taken a few minutes out of working on world peace and a few other projects to drop the price of gas in the U.S. by 20 cents a gallon. Rocky Twyman, described by BBC News as a "veteran community campaigner," has been holding "Pray at the Pumps" meetings all over the country since April. Twyman told BBC when they prayed in Huntsville, Alabama, "immediately the owners came out and changed the gas prices. They brought it down." They're not resting on their laurels, though. They plan to continue their prayer meetings to drive gas prices down even more. Hopefully the group won't stop until gas is back down around $1/gallon. Only then can every American exercise their God-given Constitutional right to drive the biggest, gas-suckingest SUV or pickup the automakers can screw together. Then we can all say with the poet, "God's in his Heaven – All's right with the world." Can I get an "Amen"? [thanks to KatiePuckrick for the link]

Turns out TTAC isn't alone with its Tesla Death Watch and Volt Birth Watch series: Toyota has its own going. EV World's (sub) Bill Moore got this and a few other juicy tidbits from a casual conversation with Toyota's "grumpy old man" Bill Reinert, National Manager of the Advanced Technology Group. Toyota has a Death Watch going on Fisker , Tesla, and…the Chevy Volt. Toyota doesn't think any of them will ever be built in large volumes, because their Li-Ion batteries are simply too expensive to be cost-effective. He also cited concerns over global supplies of lithium. Meanwhile, Toyota is hard at work on next-generation batteries , especially air battery chemistry, including zinc-air, as well as stepping up production of NiMH packs and starting Li-Ion factories. What's the line about not "having all your eggs in one basket"? Reinert also thinks it's unrealistic to expect owners of plug-in to only tap the mains at night. Utilities are going to have to step up capacity. And forget about all the 2010 Prius spy shots floating around the web, they're just cobbled-up mules based on the current Prius. Toyota is famous for keeping their final products under wraps (just one of the many differences with GM). And one more goodie from the grumpy Toyota brain trust: "liquid peak" (every conceivable liquid fuel from petroleum, coal and biofuel) arrives in 2018. That's when global demand will outstrip capacity to produce them all.

The day before I left in my jet for an exercise in Goldsboro, North Carolina on the 18th of this month, I filled my ancient Audi Quattro's 25 gallon tank to the tune of $98, with gas on-base hovering around $3.94. I then staggered into the station to get Swedish Fish and Tequila to drown my sorrows, as a 25 year-old Audi with AWD only gets 25mpg at best. Upon landing yesterday, the 30th, I drove past the pumps, and saw prices are now $3.34, a drop of $0.60 in 15 days. I would have only saved about $13 or so, but that buys at least three overpriced coffees at Starbucks. Are the plummeting gas prices in the most oil-cheap of states a portent of things to come? I believe so, as my father, an engineer for Occidental Petroleum in Texas has started analyzing all oil wells that cost more than $100 per barrel to extract the dino-juice from the Earth. Oxy is starting to prepare for a crash, as are the other oil companies (per rumor). The rumors flying around the offices in Midland, Texas are saying middle of 2009 to early 2010. Regardless of whether an oil crash occurs, who ever predicts the crash, or the rise in prices will surely make a lot of money.

Our previous blog post made the connection between China's increasing demand for imported oil, The People's Republic's subsidies for the black gold ($40b p.a.) and the policy's inflationary effect on U.S. gas prices. Common sense (and The New York Times) suggest that other "managed economies" are using the same pro-growth strategy, amplifying the inflationary effect on world oil prices. "The oil company BP, known for thorough statistical analysis of energy markets [excellent hat tip to Big Oil!], estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year — growth that has helped drive prices to record levels." Hey, what happened to "Let's all blame the evil speculators?" Anyway, you think the U.S. is "addicted to oil?" Malaysia spent 7.5 percent of its economic output on oil subsidies. Indonesia shelled-out $20b this year to keep prices down. And where there's no political will to let the free market do its thing, there's no way they'll stop. "You talk about subsidies, you’re not only talking about the economy," asserts Purnomo Yusgiantoro, Indonesia’s minister of energy and mineral resources. "You’re talking about politics.” I.e. his job. So they're damned if they do, damned if they don't. And for this you pay at the pump. [thanks to OldDavid for the link]

Those who claim that the current price of oil is a supply – demand deal have some new ammo. Industrialinfo.com reports that The People's Republic of China imported 90.53 million tons of crude oil in the first half of 2008, up 11 percent over the same period last year. And you know all those dollars we send over to China to build the cheap stuff we buy at Wal-Mart? A big chunk of that went to "Angora, Saudi Arabia and Iran" [sic]. "The value of imported oil rose to $64.98 billion, representing a dramatic 85.8% increase in costs." Although China exports some oil (2.37m barrels worth $1.42b), experts reckon the percentage of imported oil will continue to rise. The only possible brake on Chinese oil consumption: the lowering of government subsidies. The New York Times pegs that number at $40b per annum. So far, nothing much happening on that front. All of which means the current status is likely to remain quo. 

The AP gets straight to the heart of this story: "As the price of oil drops dramatically, some analysts wonder if the bubble is bursting." When the markets closed on Friday, August oil futures had dropped from their recent high of $147/barrel to "only" $128.88. That still leaves oil about $100/barrel over it's long term inflation adjusted average of $27-$28. Detroit, especially Ford, appears to be moving full steam ahead to convert capacity from trucks to small cars as fast as possible, which means in about two years. So… what if fuel prices will drop back down, keep going up or stay about where they are now during that two-year timeframe? Whatever happens, it seems that $4/gallon has been a behavioral tipping point for the US' car and truck buyers. It took about a decade of stable fuel prices for people to forget the shocks of the 1970s. Once again it seems that even a slight moderation of prices would not mean a wholesale return to 1990s style gas-guzzlers. The only sensible strategy for a mainstream automaker: offer a compelling line-up across the board and flexible factories ready to zig when the market zags. But hey, what do I know?

The drop in fuel consumption continues. The Wall Street Journal reports that "gasoline consumption dropped 3.3% from last year to 9.347 million barrels a day." This puts current domestic gas usage at the lowest level since 2003, effectively rolling back five years of growing demand. Consequently, fuel supplies at refiners are growing, up by one million barrels in the last week alone. Of course, compared to 9.347m barrels per day of consumption, having an additional million barrels in inventory is hardly a glut. The reduced consumption started with a one percent drop (compared to last year) during April, ramped to a 2.2 percent drop in June and then hit 3.3 percent during the week surrounding the 4th of July. But, while consumers are cutting back, trucking and farming are doing the drunken sailor routine. U.S. diesel consumption is up a full six percent compared to last year– even though diesel fuel prices are up 65 percent while the price of gasoline rose by only 38 percent. Ironically, some of the boom in diesel fuel use is down to increased ethanol feedstocks and the fleet of tanker trucks required to move the stuff around. (Gasoline can be transported over long distances in pipelines; ethanol has to go one tanker truck at a time.) As for the clean diesel car revolution, dead on arrival.