How Oil Prices Impact Almost Everything

There is a very informative story in the Dallas Morning News today covering what I recently discussed in The Ripple Effect:

Shoppers pay as oil costs trickle down

Ripple effect, trickle down effect – it all amounts to the same idea: There are few aspects of modern life that aren’t dependent upon oil. From the article:

“So far we haven’t seen much percolation of energy prices through to retail. That’s so far,” said Stephen Brown, director of energy economics for the Dallas Federal Reserve Bank. But some increases are inevitable.

And they’ll show up in products that most people don’t associate with black gunk from the ground. For Kevin Brown, an economist with the American Chemistry Council, the iconic product is a plastic bottle of shampoo. Aside from the water, 100 percent of the value of the ingredients comes from oil- or natural-gas-based products.

“That bottle is made of high-density polycarbonate. The cap is made from another plastic. The label is a composite of plastic resin and paper. The ink on that paper is petroleum-derived. The glue on the back is petroleum-derived. Now let’s look inside the bottle, at the surfactants, emulsifiers and fragrances,” he said.

“It’s all petrochemistry.”

He has calculated the value of the petro-ingredients of a variety of products: Tires, 62 percent (from the artificial rubber to carbon blacking); a vacuum cleaner, 30 percent (many plastic parts); lipstick, 100 percent (from the paraffin wax to the dyes and fragrances). Even paper, which mostly grows on trees, owes about a quarter of the cost of its materials to petro-products needed to convert pulp into pages, he said.

It may be a bigger challenge to find alternatives for the oil in tires and plastics than to find alternatives for oil as a fuel.

The article also discusses sky-rocketing asphalt prices. Not only is the cost of asphalt going up because the price of oil is going up, but many refiners are installing cokers to turn asphalt into liquid fuels. That will continue to take place until the price of asphalt is such that some refiners start to decide there is more money in the asphalt market than by further processing it.

This all points to more inflation, as the cost of oil works its way through to price increases throughout other sectors. This is also why I am not optimistic that the economy is going to recover soon – we simply have not seen the effects of $130 oil.

18 thoughts on “How Oil Prices Impact Almost Everything”

  1. Shampoo and asphalt aren’t even in the same league. The cost of petroleum is a much higher percentage for asphalt.

    The petroleum cost of the shampoo, including the bottle is maybe a few cents. Most of the cost is in profit and advertising. Here is a table with current plastic resin prices: PT Online Resin Pricing

    Somewhere I recall that a 2 liter soda bottle weighs about 25 grams (0.05 lbs). At $0.80 per pound, the cost of the PET resin in the bottle is just $0.04. Compare that to the $1.39 you might pay at the store. It is likely that the cost to transport the filled bottle is more than the bottle itself. Higher energy costs might reduce profits over the short run, but in the highly competitive soda and shampoo business they are not likely to be passed on.

    (My kids might have to go back to drinking store brands – or e-gad tapwater!)

  2. All the more reason that I’ve recently come to the conclusion that we need to keep a lot more of this stuff in the ground, and deplete our reserves much more slowly. It will be much more valuable in the future as feedstocks than it is now for propelling our oversized vehicles around in our poorly designed communities.

    The environmental case for limiting petrol extraction has always been pretty clear, but we have some real strategic reasons as well. We need to at least embrace higher oil costs. Perhaps not cheer them on, but accept the necessity of them at least to some degree.

    There’s a real conservative case to be made for slowing the flow. Think homeland and military security, long term. Remember all the concerns about certain industries essential to the military, fleeing the US? Same arguments apply here. How many years (or decades) do you think before Republican think tanks or politicians start making this case, if ever?

    I doubt any Democrats would beat them to the punch as they’re usually loathe to discuss such things. I bet they could sway millions of votes if they could do it convincingly, though.

  3. About half our oil use is gasoline for personal transport. The indirect cost of oil embedded in products and services for the average family is thus roughly equal to what they pay for gas.

  4. iftheshoe-
    Yea, we need to frame an energy policy as necessary for security and economic prosperity. You won’t get elected with Jimmy Carter-esque platitudes about living small. But, if you say the road to boom-times and a jobs bonanza is found in GM Volts, and wind, nukes, solar, and geothermal power, you might win.
    It’s also true.

  5. Oil prices impact even products that don’t contain much oil. I’ve been reading that the price of lumber has dropped because the real estate bubble bursting has decreased demand for construction lumber. Yet my friend in the construction business says this doesn’t save him any money because the small savings in lumber prices is more than eaten up in the increased price of getting the lumber shipped to the job site. It’s that transportation cost again.

  6. I don’t have any stats for car tires, but a new truck tire apparently takes about 22 gallons of oil to produce.

    That’s what – about $70 worth of oil at current prices?

    As I understand it, truck tyres cost at least 6 or 7 times that amount.

    We’re not talking huge cost imposts here.

  7. $130 spot price on light sweet crude can be tolerated by world economies, but things will slow down a bit. That’s not all bad.

    Investment is better now in bio-energy and other sustainables like utility-scale storage for wind and solar and load-leveling.

    People grumble at the gasoline pump but most people keep trucking. They find work arounds and kludges and ways to make things go despite the prices.

    Meanwhile, efficiencies improve because they have to. Necessity is the mother of invention.

    Bio oils can do anything petrol oils can do, given enough work. This is a biological world.

  8. Amyris and LS9 both claim they’ll have fuel from bugs on the market within 3 years. Amyris makes gas and diesel. LS9 makes crude oil. They both say their bugs can eat just about any plant,or plant waste,and poop fuel. LS9 says their crude will cost about $50 a barrel to make. They would need a facility the size of Chicago to supply all of America’s needs. That sounds pretty damned good if it pans out.


    I think we’ll eventually turn to coal as a feedstock. That’s another reason not to use CTL technology and to scale back our use of coal-fired electricity. I expect our coal reserves would last 1000+ years if used exclusively for steel and as chemical feedstocks. That’s long enough to get some sort of renewable feedstock solution in place.

  10. Amyris and LS9 . . . very interesting. Cellulosic decomposition using bugs. I hope the bugs don’t get out. 😉

    What will be the chemical compound that they produce? Will it be identical to traditional gas, diesel, and crude oil?

    Vinod Khosla still insists that $2/gallon cellulosic based gas/diesel is practical in 3 years.

    Doug I agree with you that Coal–combined with sequestration–will be used longer term for feedstock.

    RR, what is a reasonable pricing model for the cost of extracting shale and oil sands from the ground?

    Is the cost of 1 barrel = cost of two barrels of water + $40 ?

    We are seeing possible oil reserves surge. This translates into probable oil reserves in two years—especially with surging funding for phase 1 feasibility; which in turn translates into proven oil reserves two years after that (phase 2 feasibility.)

    What is the best source available for probable and possible oil reserves by country? This seems incomplete:
    Notice how oil production in Canada is surging.

  11. Can I change the topic RR? Could we discuss electricity production costs by type? At what cost do emerging electricity generation technologies become scalable without subsidies?

    wind = 6 to 8 cents per kilowatt hour
    Coal = 5 cents per kilowatt hour, maybe 10 cents including sequestration

    Natural gas = 5 to 10 cents/kilowatt hour

    oil = 40 cents/kilowatt hour

    concentrated solar = 15 cents/kilowatt hour

    CdTe PV thin film = 15 cents

    cellular PV = 18 cents

    new technologies for nano and super thin wafer cell based PV = maybe 10 cents

    hydroelectric = 3 to 10 cents.

  12. As far as it relates to inflation, though, a product that is 100% petroleum derived won’t see a 100% inflation in price because there are also labour components, middle-men and retailer markups, etc… and a certain amount of lost profit may be taken by any of those in the middle in order to remain competitive… but, obviously, petroleum costs will be a significant factor.

    Cars are obviously one of the things that will be hit the hardest. When you drive yourself around in a car, the headline story in that is not that you’re moving your own 200 lb. body around, but that you’re moving 2000 lb. or more of glass and steel around with you — each and every one of us, each and every time we drive.

  13. “Bio oils can do anything petrol oils can do, given enough work. This is a biological world.”

    Of course, if you have enough bio oil 🙂

  14. Anand, electricity from natural gas now costs more than 5-10 cents/kWh. The average US NG powerplant has a heat rate around 10,000. With NG at $13, fuel cost alone is 13 cents/kWh. Add a couple cents for capital costs and O&M and you’re well into the 15 cent range.

    Combined cycle has lower fuel cost (7-8 cents) but higher capital cost so you’re still above 10 cents.

  15. mattbg:

    I am not sure there is a solution to the 2000 lb + envelope of glass and steel. Moving at speeds about just 1 or 2 mph, 2 humans don’t fare well running into each other. Witness football players even with all their bulk and protective equipment.

    My take is even if the playground becomes equal for everyone and we all have super lightweight cars, I think road fatalities will increase exponentially.

    I think the extra bulk is a “given” or will be considered so after a few years of lightweight cars killing massive amounts of people.

    That said, any energy supply will have to take into account the margin of safety required by the average family, not counting the minimum performance many expect.

  16. There’s probably a warehouse full of old WWII gasoline ration stickers somewhere in DC and under Wall Street that they’re eager to put back in action. The A’s will be for politicians, government bureaucrats, liberal billionaires, movie stars, union bosses and trial lawyers. The B’s will be for university humanities professors, community organizers, and environmental activists.

    The FU stickers will be for the rest of us.

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