By on March 5, 2015

Workers of French oil giant Total and the SFDM Society, and SNCF railway workers block the entrance of the deposit of the society SFDM near the oil refinery of Donges

 

If you drive a Tesla, Leaf or a Volt, you may not have been to a gas pump lately. For the rest of us you’re probably wondering how in the Hell did he get it so wrong! There are some pretty amazing things happening in the oil industry, and a perfect storm gathered to spike gasoline prices in the short term, and has set up a tidal wave of oil that could completely collapse both crude oil and refined fuel products just as the summer driving season begins.

To get an idea of what is going on, you need to look at three charts, which paint a fascinating picture. First, take a look at West Texas Intermediate (WTI) oil prices (NYMEX short contract).

chart1

Next, take a look at ethanol futures (short contract):

chart2

And finally, take a look at gasoline futures (short contract):

chart3

The price of oil was very volatile in the month of February. WTI hit a basement on January 28, 2015 of $44.08 per barrel, and then rose 21-1/2% in just 20 days, closing at $53.56 on February 17th. It has since dropped 8% in just six more days, which is as much data that was available as of this writing. If we were talking about equities, I would be calling this a classic “dead cat bounce.”

Now look at the price of gasoline futures.  At the same time oil started to go up, gasoline prices spiked up even faster, with one key difference, the prices have largely kept going up, settling in at just under $2.00 per gallon even as oil went back down.

If we look at ethanol we can see another, apparently disconnected trend, with ethanol prices dropping and not mirroring the increase in gasoline futures, trading in a rather narrow band of about fifteen cents in February. What in the name of the Wild World of Sports is going on here?

The biggest driver of rising gasoline prices, as much as a dollar a gallon in just a month in places like California, has been caused by a significant number of disruptions to US refinery capabilities in just the last 30 days:

There has been massive disruption to oil refining capabilities causing the price of gasoline, diesel, and aviation fuel to skyrocket. US refinery utilization is normally at 81% to 85%, a 20% loss of capacity just from the strike, has created a situation where less motor fuel is being produced to meet the needs of the buyers lined up for products. Supply of gasoline has tightened, so the prices have gone up.

According to the US Energy Information Association, Weekly US Refiner and Blender Adjusted Net Production of Finished Motor Gasoline hit an all-time production record of 10,195,000 barrels per day in December of 2014. By the week of February 6th, production had dropped a whopping 15%. Gasoline production is tied more to just-in-time economics, so disruptions in refinery capacity due to accidents, weather, normal seasonal transition from winter to summer blends, and work stoppages have swift impacts to prices. So, now you understand why gasoline prices have shot up, but what about oil?

Oil prices spiked, bouncing off the $44 basement, and have settled in to a narrow range of $49 to $50 a barrel. The reason these two trend lines have disconnected, with gasoline continuing to climb up and oil starting to decline again is simple economics of supply and demand. Refiners buy crude oil to turn it into finished motor fuels. But if refiners are offline due to strikes, accidents, weather, seasonal change over, or all of the above, then they are buying less oil, and that is exactly what is happening.

Crude oil markets are faced with a no win situation. They can either cancel contracts on the oil they promised to buy, and pay huge penalties on top of an already battered market, or they can accept the oil and stockpile it in storage tanks waiting for the refinery disruptions to end. With fall 2015 oil futures at higher prices than the current market, oil producers have little incentive to send their oil to refiners anyway, so they’re incentivized to stockpile, which is exactly what they’re doing. Currently, the United States is producing and importing about one-million excess barrels of crude oil a day.

This issue of over capacity has gotten worse because of the Flanagan South Pipeline. Haven’t heard of it? It hasn’t been very news worthy because Flanagan South isn’t USDA prime click bait that generates the fury of a thousand suns that headlines around Keystone XL create. The 36” pipe went online in November, and is now pumping 550,000 barrels a day of heavy oil from western Canada directly to the United States through Pontiac, Michigan. It is what Keystone XL is proposed to do, already happening today.  Huge amounts of crude oil from Canada oil sands are moving to Illinois refineries and Cushing, Oklahoma for storage.

Here is the critical problem. The United States is running out of room to store oil.  By April every forecast is indicating the United States will be at tank top. Producers are already signing leases for oil tankers to store crude oil off the coasts of the United States in anticipation of hitting the top for onshore storage. The 13 pipelines that flow into Cushing, Oklahoma are pouring 1.7 million barrels of oil a day into the facility.

It is a perfect storm coming together. Diminished refinery capacity nationwide sent gasoline prices up swiftly, but reduced the need for crude oil at the same time. Crude oil producers having no incentive to send their oil down to the Gulf of Mexico refineries for production and export, because current futures prices indicate more profit can be made if they wait, and the refineries can’t use it anyway because of the strike. Record amounts of oil are already in place and have reached the critical point where all possible storage for crude oil will be filled up.

Fine, so why doesn’t China just buy the stuff, or Europe, or Brazil? China oil consumption is down as their economy has cooled and Europe had a rather normal winter and near flat economic growth. The fundamental issue of too much oil and not enough consumption hasn’t changed. What has changed for the short term is a tightening of gasoline supply within the United States causing a temporary spike in gasoline prices.

So what happens if we top out in April? Commodity price Armageddon is what happens. Oil will start to flow southward and refiners will be under huge pressure to increase output, into a market with an oversupply problem as it is. Refiners will be under huge pressure to settle with the United Steelworkers union to get production back up.The price of oil and motor fuels will have nowhere to go but down, and there is a growing chorus of analysts saying that crude oil will drop to below $30 a barrel, and take gasoline with it.

If the crude oil has nowhere to go, producers will be forced to throttle back production. That means any plunge in both oil and gasoline prices will be short lived. The pendulum will swing back the other way as the supply tightens quickly, and that ugly price spike that I wrote about coming in 2016 right around the time of US elections, that would be the next step.

I still think it’s still OK to plan that cross country drive in your Challenger Hellcat, but maybe time it closer to Labor Day.

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72 Comments on “Dude, Where’s My Cheap Gasoline? The Truth about Oil Part III...”


  • avatar
    mkirk

    I am not sure that we can call 2 bucks a gallon “skyrocketing prices” anymore. After the past few years I’d call it “Bring back the Excursion” territory. More and More it is “wish I hadn’t sold my Land Cruiser” range.

  • avatar
    -Nate

    Interesting .

    I kept my economical vehicles , so many ran right out and bought gas guzzlers , I want to see what happens next .
    BTW : RUG whizzed past $3.50 / gallon in Southern California this week .

    -Nate

    • 0 avatar
      mkirk

      Wow…2.20ish in metro Louisville and we have been “enjoying” record snow for a couple of weeks now.

    • 0 avatar

      Agree its a predictable outcome that never ceases to baffle me.

      Take out a 60 month loan or hell maybe 72 month loan on a gas guzzler with the hope gas prices will stay low.

      Genius eh?

    • 0 avatar
      SaulTigh

      I bought a full sized, V8 powered pickup with the intention of having a 25+ year relationship with it. The fact that gas plunged from $3+ a gallon to $1.70 or so was just gravy. I just filled up at $2.11, which was psychologically annoying, but still far better than $3+ a gallon. I could afford to fill it up at $5 a gallon. Wouldn’t love it, but could do it. There are lots of folks like me out there in the same boat, and we’ll keep buying “evil” gas guzzlers.

      Wild swings in the price of gas are hardest on fleet owners trying to budget, and folks who have to drive long distances to make a decent wage.

      • 0 avatar
        JohnTaurus_3.0_AX4N

        THIS! Thank you for the healthy dose of realizm. I was starting to wonder if everyone commenting on TTAC was a truck-hating, Prius driving Yoga instuctor. Few days ago, a commenter on here was wishing for $5.00/gallon gas because he didnt like seeing pickup trucks when he was out cruising his LeCar. Seriously? You wish to destroy our fragile economy and put thousands of truck driving, hard working Americans out of work because they arent driving what youd prefer them to drive?

        Do I have a truck? No, not at the moment. My physical condition requires something comfortable (that includes ride quality), and my budget requires an affordable car that’s good on fuel, while also being one I can repair myself (cheaply) when/if the time comes.

        I do plan to aquire a pickup, 1st or 2nd gen Explorer/Mountaineer, or a late 80s or newer Ford Bronco. There are times when towing and hauling is on my agenda, and Im not sure an older Taurus with nearly 200k on it makes for the best tow vehicle, despite how well it fits me otherwise.

        • 0 avatar

          Not sure, but that may have been me. I was joking about a cure for the lack of visibility we have nowadays. In the end I did say I wouldn’t want gas to go up because it would be bad for the economy, or drive up food prices. I can’t remember.

  • avatar
    Lou_BC

    Wow

  • avatar
    Internet Commenter

    Thank you for these articles. It’s refreshing to see cogent objective analysis.

    More importantly, how can I profit from this situation? What do you think about buying into an energy ETF right now?

    • 0 avatar
      APaGttH

      GREAT question – I think the opportunity lies in catching the falling knife. If tank top happens and the prices collapse my goal would be to predict the basement. Try to buy on the bottom, to sell when it snaps back up. If we hit tank top the price drop will be swift for oil, and gasoline will follow. Oil will then shoot back up if supply doesn’t come back online. Money can be had buying the bottom, and selling on the increase.

      I’m not a stock broker – so take it all with a big grain of salt.

      • 0 avatar
        VW16v

        I was thinking the same. Oil stocks are taking a hit lately. And we will always be addicted/need oil. Crap it could be better then gold if WW III starts with Iran and Israel.

        • 0 avatar
          mcs

          Or if ISIS rolls into Riyadh.

          • 0 avatar
            APaGttH

            I wrote about that in Part II — it won’t happen unless the Saudi “government” (snicker) collapses.

            Relatively speaking, the average middle class slob in Saudi Arabia (middle class by Middle East standards) is better educated and has a higher standard of living that a middle class slob in Yemen, or Iraq, or Syria, or any other terrorist breeding ground Hellhole.

            It’s hard to convince people who are, relatively speaking, fat, dumb and happy, to revolt along the lines of radical thought.

            ISIL is losing strength and momentum, and have basically outraged the entire region.

  • avatar
    Lie2me

    Trying to understand oil prices is like trying to understand climate change. Everything means the opposite

  • avatar
    Landcrusher

    And, we can’t export the extra crude because it’s against the law to export US oil even though most our refineries are built to use imports and change is a big regulatory and capital headache.

    So, we are killing jobs to, ostensibly, keep the price of gasoline down while doing the opposite. One intended effect, keeping money out of Conservative Texas donors’ pockets, is still working so don’t expect it to end even though all the experts say exports would not raise our prices or reduce our security. .

    • 0 avatar
      28-Cars-Later

      I think the way around the law is to export refined products abroad which is what I believe has been happened in the past.

      • 0 avatar
        Landcrusher

        When there is capacity, you can import oil, refine it, and then export. My understanding is that you can’t refine US crude and export it either. Exported product has to come from imported crude.

        • 0 avatar
          28-Cars-Later

          That was not my understanding but I am not an expert. Although according to this footnote some crude is exportable:

          Notes: Crude oil exports are restricted to: (1) crude oil derived from fields under the State waters of Alaska’s Cook Inlet; (2) Alaskan North Slope crude oil; (3) certain domestically produced crude oil destined for Canada; (4) shipments to U.S. territories; and (5) California crude oil to Pacific Rim countries. Totals may not equal sum of components due to independent rounding. See Definitions, Sources, and Notes link above for more information on this table.
          Release Date: 2/27/2015
          Next Release Date: Last Week of March 2015

          http://www.eia.gov/dnav/pet/pet_move_exp_dc_nus-z00_mbblpd_m.htm

    • 0 avatar
      APaGttH

      Export it to who exactly? There is a global over supply problem. The OPEC nations are producing as much as they can and aren’t stopping. Russian production is at record levels. China’s growth is slowing down, Europe is flat, Russia will be lucky to just go into a deep recession. Japan’s car economy is shrinking as their “Millenials” don’t give a crap about cars. The US auto industry is expected to top out in the next year or two and start to shrink. Meanwhile, economy is going up across the board. We’ve got pickup trucks today that are getting fuel economy rivaling post-malaise era 4-banger sedans.

      You need to go back and reread part I and part II to understand that changing the laws so that crude can be direct exported is a lovely political talking point, but it isn’t economically viable.

      There is no “flooding” the market with cheap US oil. Publicly traded companies are not charities, if US oil could be direct exported it would lower market prices further, which would make it even more unprofitable to tap the oil in the first place, which would restrict production, and would send oil prices up. The price increase would hurt consumer and corporate spending, costing far more jobs than the regional recessions that are already starting to happen in areas of North Dakota.

    • 0 avatar
      Pch101

      The problem at the moment is that with sluggish demand, there is nowhere to export the oil.

      Type “contango” into a search engine. Right now, there is a lack of demand, so supplies are going into storage.

      At this rate, we are headed for “super contango,” which will mean that they will have run out of storage space and will be pressured to dump oil cheaply in order to get rid of it. Oil could dip to $20/bbl for a short time in response to the supply glut/ storage space shortage/ relative lack of demand.

      • 0 avatar
        APaGttH

        100% correct – and it will be short lived. After the glut is cranked through production won’t match consumption in the other direction, and it takes time to turn production back on. The price will swing the other way as the storage situation swings into under utilization.

      • 0 avatar
        Landcrusher

        Why then, is there a law, companies spending big bucks trying to get it repealed, and a President promising to keep it that way? I’m not sure what oil companies you guys run or advise. Maybe we have met and don’t know it?

        It’s amazing. What we ought to do is put everyone on an even field and just stop exporting anything. Or, maybe we should just pick on you two. How about we reduce the market for your labor to your local department of corrections? There isn’t a market for it anywhere else. Somebody on the internetz said so.

        It’s a nonsense law which fails at its stated purpose. You can pontificate all day about how it’s unnecessary, but that then makes you a couple jerks for not wanting to get rid of it.

        Pick your poison.

        • 0 avatar
          Pch101

          We have laws against exports because oil is a national security item. It doesn’t make sense for the US to export much oil when the US doesn’t produce enough oil to meet its own needs.

          The contango problem is a global problem. It’s not a political issue, it’s a function of demand.

          • 0 avatar
            Landcrusher

            Nice try, but bull. You were just arguing how no one wanted it.

            Your guys are currently trying to stop the import of bullets!!! Lol.

            The oil security ship sailed even before fracking. Soon, there won’t be much reason to stop exporting Uranium for Pete’s sake.

            Give it up. Maintaining that law is all about partisanship. They are killing jobs to hurt political enemies and that’s why none of the propaganda makes any sense.

          • 0 avatar
            Pch101

            It’s odd how basic information just flies above your head, time and time again.

            The oil export ban began in the 70s. If you know anything about history, then the reasons for that should be obvious.

            Contango is a short term issue that should resolve itself over the next several months. Even you ought to be able to figure out that long-term national security interests and a short-term oil storage issue don’t have anything to do with each other.

          • 0 avatar
            Landcrusher

            It’s odd how you think you know so much you don’t. Nothing you said supports your argument and just about every Houston businessman knows what Contango is. I’m not impressed.

            In the seventies, oil was a security issue. (Btw, you forget I was an Army officer again?) It no longer is, and that is not the argument you guys started with because it’s no longer the reason for the law, and you know it.

            The President stated he would keep the status quo for economic reasons and then started throwing the garbage you guys tried to pull. It’s currently counter to our security to prohibit export. In time of war, we could more easily stop exports than start production. The current situation is also less stable and will exacerbate tensions.

            There is no ethical reason to keep the law, and it is counter to every ostensible purpose. It helps no one, but hurts conservative fund raising along with jobs, prices, and national security.

  • avatar
    50merc

    Cheaper gas? There’s only one thing to do: ROAD TRIP!

    By the way, where are all those “Peak Oil” fear-mongers?

    • 0 avatar
      APaGttH

      Peak oil isn’t fear mongering or a myth. Oil is not an infinite resource. When we use it we convert it into a variety of waste products, most notably CO and CO2, as well as a variety of sulfur compounds depending on how “dirty” the source was to begin with.

      Eventually, as many have pointed out by the B&B, you will reach a point where the cost will drive down use and alternatives will be found. There isn’t a “peak” oil in the sense we will run out (in theory we could but lets not deal with far fetched hypothetical). The supply will tighten to the point that for more valuable needs, crude oil will be used, and cheaper alternatives. If we stick to just the automotive world that could be natural gas, electric, or hydrogen fuel cell. The math is already better for natural gas (as is the supply) and personally I’m a big proponent of natural gas powered cars. It makes so much sense but that’s a whole different conversation.

      When the conversation of peak oil was happening, hydraulic fracturing and horizontal drilling was still not fully baked. It has only been in the last 5 to 7 years this technology has come to fruition.

      When I was consulting at Conoco back in the early 90s, there was a ton of talk about the massive reserves available in the Bakken and other regions, but because it was trapped in shale, or in Canada trapped in sand, it wasn’t worth, or too hard to extract. But even then I saw Harvard Graphics presentations (you get points if you remember Harvard Graphics) that talked to the future of being able to tap those resources.

      I’ll warn you right now, if we hit, “tank top,” in the United States, you better brace yourself for a shocking price increase in oil that comes after production is dramatically cut back.

      • 0 avatar
        28-Cars-Later

        Based on my limited understanding US production will inevitability be cut back as the leveraged fracking operations begin to declare bankruptcy.

      • 0 avatar
        TrailerTrash

        But…this is kind of misleading. Yes, it is an infinite resource…but the million dollar question/argument has always been HOW limited. And it continues to be shown…this all depends upon the price.
        IF the price gets high enough, production cost of more expensive oil keeps moving the target.
        What is considered cost effective drilling today wasn’t so just a decade ago.
        Sooo. I guess what I am saying is this is not easy to get our collective arms around.

        And the philosophy that other forms of energy will be found IF oil becomes to expensive or limited is deceiving. I wonder what exactly will replace our plastics and the million other products that come from oil. How will we get our Corinthian Leather????

        As APaGttH explains above…catching the falling knife, or when do we invest in oil, is what we are looking for here. I want to find the right time to jump in.

        • 0 avatar
          S1L1SC

          I believe there also is technology out there to revert plastics back into oil – not energy efficient to do currently, but since there are huge amounts of plastic floating in the ocean there might be a future business right there in case oil does “Run Out”.

          Just trying to muddy the water a bit more on the whole peak oil issue :-)

    • 0 avatar
      ihatetrees

      Unless they’ve got a large option position in crude futures, Peak-Oil ass-hats should be given the same respect as Zimbabwe’s finance minister.

      Yes, oil will eventually go away. Maybe in ~50 years, or maybe in ~500,000,000 years. Tho I bet it’s closer to the latter.

      Either way, when oil gets scarce, the price will rise, people will use less, alternatives (natural gas? electric? hydrogen?) will take over. That said, the ICU will still be going strong in the year 3K.

  • avatar
    VW16v

    Great posting. I was just reading how the USA is running out of room to store oil. Thanks for posting. BTW not that I’m a fan of Toyota. But, my local Toyota dealer is selling Prius III’s for $21,000 ..

    • 0 avatar
      highdesertcat

      Much of that “excess” oil is being stored in railroad tanker cars parked in the desert. More of it is stored off the coast of the US in oil tankers. All waiting for the cost of oil to go up again.

  • avatar
    Big Al from Oz

    I see it this way.

    1. The oil companies require X amount of dollars to stay afloat.

    2. If they aren’t getting the price out of the ground, where else can they get it? At the bowser.

    Gasoline will not magically go down proportionally with crude prices. Crude prices are also speculative. In other words what are the refiners actually paying a couple of weeks ago for their oil?

    Companies can only afford to reduce pump prices so much. They need money to stay afloat. You also have other costs involved. Trucks still cost the same, wages are still the same, insurance is the same and on and on. Who pays for this?

    Also, I do think there is some profit taking as well. Oil companies aren’t managed by stupid people. They will also see how much we are prepared to pay before we get angry.

    Airlines have also profited. Fuel is the largest expense in an airlines operations. Prices didn’t move down proportionally to their fuel costs.

  • avatar
    turboencabulator

    Hats off to the author! Very concise!

    It’s far easier to empty the tank than to shut off a well. The tank storage pricing model also gets more expensive the fuller the tank is; another incentive to flood the crude market. The post’s prediction that refined prices could spike can happen, but it is very much depending on the transient response of the producers. What matters in other words is at what rate can they cut back, what rate they actually cut back, how quickly can put spare capacity in production and how much of the capacity they can actually use. How quickly the tank is drained and how low it goes is another variable.

    In steady state though, this analysis assumes the OPEC players will maintain their heading. The author can correct me if I’m wrong here. A steep drop in crude price (before an upwards spike) could be making a lot of damage to producers in the western hemisphere. Is this the open door that OPEC is looking for to get the market share they claim to be after?

    • 0 avatar

      I doubt it. I believe the drop in crude prices so far has only shaken out the risk takers, maybe 15% of the industry. Most are in for the long haul, oil is very cyclical and most serious producers factor this in when starting production.

  • avatar

    Brilliant analysis by u-tun, articles like this make TTAC a great site. As Lie2Me indicated, there are a lot variables with oil. E.G King Salman, Hugo Chavez, APPA etc, which individually can only make a dent, but collectively could change the course. However, even including these factors I see no reason to short Tesla right now

  • avatar
    Kinosh

    I’m thrilled for anything that keeps the price high.

    We’ve decided on various fronts that we don’t want to bear the costs of driving (infrastructure, environmental, land use, human health), so if people are sensitive to fuel prices, good on keeping them up there.

    • 0 avatar
      APaGttH

      Ahhh, this argument.

      You can be the greenest, crunchiest, most earth loving person on the planet, and if you’re cheering for higher prices – or prices so high that it ends the internal combustion engine, you’re cheering for economic Armageddon.

      Your sustainably developed, bamboo flooring? That was delivered in a container ship, that ran on diesel, and then delivered by a truck. The worker that installed showed up in a vehicle. If the price of gasoline in the US went to say $8 a gallon – all of that expense is passed on to – everyone.

      Your bike’s tires are going to be made by oil, as well as other components. You can’t escape it with plastic components and synthetic rubber compounds. Natural rubber? OK, that stuff comes from trees not growing in the United States. So unless you live next to a rubber plantation, there is that pesky need to ship it commercially.

      Not everyone can walk. My 85 year old mother couldn’t ride a bike, heck it’s a chore for her to walk 500 feet. So do you tell her too bad hooray and pay up $8 a gallon because well that’s the way it is.

      How about the buses and trains of mass transit? Who bears that added cost in fare increases?

      How about how food gets to the grocery store, even those ecologically sustainable, locally sourced, organic tomatoes? They still have to go onto a truck. Basic fertilizers use oil in their production.

      The impact to the developing and third world on increased food prices would create famine, war, and terrorism of a scope that would make the problems in the Middle East look like boy scout camp.

      I will never understand those who cheer on unsustainable economic policies that would directly impact them in a very, very, negative way.

      It doesn’t matter if you personally don’t consume one drop of oil, or one cubic foot of natural gas – the entire economy and infrastructure that supplies you with everything – does. Dramatic costs that collapse existing systems would collapse your life with it.

      • 0 avatar
        shaker

        As GW Bush once sagely said: “We are addicted to oil”.

        And so is our economy, which makes it exciting times for speculators and other non-value-added leeches to play oil prices for monetary gain – and fixed-income grandmas everywhere will suffer when they have to pay $5.00/gal to fill their Buicks later this year.

        That was kind of a nasty look at it, but sometimes, that’s what I see.

        I long for the time when EV’s and plug-in hybrids will lower and flatten the demand for transportation fuels, and make things more “boring” and sustainable.

      • 0 avatar
        Kinosh

        Thanks for your well thought out reply. I’ve always enjoyed reading your opinions.

        70% of oil is used for transportation, and it’s inclusion in other products is either minimal or substitutable.

        We’ve developed land use strategies that necessitate our currently huge (15k per year) levels of driving. One way or the other, that needs to decline. I’m often on work assignments between rural areas and urban areas. While living out in the boonies, I’ll average 30k per year, and then find myself going back down to about 2k per year when I’m back home in the city.

        My quality of life, environmental impact, job prospects, finances, and physical health is significantly better in the city. That’s what I’m shooting for when I hope that fuel prices stay high.

      • 0 avatar
        danio3834

        “That was delivered in a container ship, that ran on diesel”

        Heavy marine or bunker fuel, but that’s just pedantry.

        • 0 avatar
          CJinSD

          I’m under the impression that environmental regulations have made it so that ships which call on western ports have to run diesel, which was meant to put a pinch on oil supply, since it reduces the utility of various grades of crude, but was compensated for by greater supply growth.

  • avatar

    The seesaw continues. I got a 17 mpg truck back in the days of 2.50 gas. My cars are all long term relationships. Gas shot up. I bought a diesel. Now diesel is much more expensive, but it also gets 40 mpg. I’m enjoying the cheap gas, but don’t see myself replacing the truck with another guzzler when it dies. I’m also not too concerned with the relatively expensive (but still a dollar less a gallon than peak price) diesel.

    I’m glad I didn’t follow my hunch to buy oil stocks, but I’m also happy that we have a record winter with low oil prices……..

    Cheap oil is also part of the geopolitical chess game. Trust me that we aren’t factors there…just unintended beneficiaries.

  • avatar
    tomLU86

    Great piece!

    Oil was the wonder drug of the 20th century.

    Until the late 60s, the USA had abundance.

    America is ‘geared’ to run on $2.50 gasoline, or about $50-80 per barrel.

    The rest of the world is ‘geared’ to run on $100 per barrel.

    When these prices are exceeded, economies slow down or break down. The price of oil hitting $145 in the summer of 2008 was like lifting the carpet and discovering our financial system was a sick, maggot-infested, delusion–plentiful, relatively cheap energy had covered for it.

    When the price goes down, like now, we can’t store the ‘benefit’ for the future.

    We’ve been aware of how precious energy is, oil in particular, since 1973!

    In 1973, the average American car probably got 15 mpg, and was driven 8,000 miles. There were 210 million Americans. A higher percentage of them lived in areas served by viable mass transit–bus or rail.

    Today, the average American car probably gets 20 mpg (in real world). It’s probably driven 12,000 miles. There are 300 million Americans. A much higher percentage live in suburbia–no mass transit. A lot more of the working poor have–and NEED–autos.

    New houses today are more energy efficient–but a lot bigger. They have energy efficient washers and dryers–but a lot more other stuff.

    So basically, we use more energy per capita…and there is a lot more capita.

    And now the rest of the world is using a lot more energy.

    I hope I’m wrong—but this I feel this our Indian Summer, and we are going to have a long, cold, dark winter… Let’s hope not.

    • 0 avatar
      Lou_BC

      tomLU86 – actually…. no. Consumption has decreased. You need to read APaGttH other entries on the topic.

    • 0 avatar
      DC Bruce

      Actually gasoline prices went through cyclical ups and downs prior to 1973. Fuel economy was advertised and touted by Amercan car manufactures in the 1950s. For example, “overdrive” transmissions (essentially a 4th, overdrive planetary gear) behind the standard 3-speed transmissions of the eara) were advertised and promoted during the late 1950s. My uncle had a 1957 Chevrolet station wagon that had one. What made the 1973 embargo and gas spike so painful is the combination of the inefficiencies of early emission-controlled engines (usually achieved by dramatically lowering compression ratio and retarding the spark) which got worse fuel economy than their predecessors while developing less output and having terrible drivability with the increase in the price of gasoline. My dad’s 1963 Chevrolet 140 hp 6-cylinder sedan would get 20 mpg on the highway with a full load of people and stuff, running 65-70 mph. By 1973, the same car, equipped with a larger displacement V-8 which developed the same output, would be lucky to do 15. These economies can’t be “put back in the bottle” no matter how cheap gas becomes. “The Fast Lane Truck” website drove a 2015 F-150 pickup for about 50 miles on an interstate in eastern Colorado, achieving 23 mpg, as measured by the gas put in the tank and the actual number of miles driven. That’s with a gasoline engine that develops 325 hp from 2.8 liters with turbocharging.

      Energy per capita figures are meaningless, because they assign to individuals a share of energy used in manufacturing, etc. It’s not the amount of energy that you personally use getting your self from place to place, heating and cooling your home, keeping the lights on, etc. To be sure, the use of air conditioning is much more widespread than it was 50 years ago, people don’t use clotheslines anymore to dry their laundry, etc. and yes, the average house is bigger, even though the average household has fewer people in it.

      BTW, where did you get that 8,000 miles per year driving figure? That doesn’t seem at all correct. America was quite suburbanized 50 years ago (although less populous) and, before airline prices were deregulated in the 1980s, air travel was a luxury item. The typical American family took their vacation by going someplace in the family car.

  • avatar
    craiger

    It’s a solid analysis. I would add a couple of additional facts.

    Refiners are making a good profit on exporting refined products made from domestic feed stocks. That’s why the WTI price is so much lower than Brent. Brent is the global market price. Domestic producers aren’t allowed to sell crude on the world market, so they can only sell to domestic refiners.

    As for domestic production, investment in new E&P (exploration and production) has dropped dramatically. However, there are a lot of wells already paid for and the producers need the cash flow, so they’re producing as much as they possibly can right now using existing wells. Another factor is that they have to produce in order to comply with production contracts.

    Oil under $50 isn’t sufficient to sustain domestic E&P over the long term. That being said, the production technology is advancing rapidly, with the expected drop in costs.

    There’s isn’t only a dearth of storage capacity there’s also insufficient pipeline capacity between key points. There are about $18 billion worth of pipeline projects in various stages.

    We haven’t even begun to see significant uses of American technology used in other countries, but it’s viable above a certain price point, depending on the geology and regulatory landscape of each country. The same goes for offshore E&P although at higher price points for viability.

    The bottom line is there’s a lot of oil in the ground and it’s getting easier to find and cheaper to extract. Transport and storage is a bit constrained, and the inability to sell domestic crude on the global markets affects the prices artificially.

    I see oil staying low for decades. Similar to what we saw in the 80s when higher prices encouraged massive investment in domestic production.

  • avatar
    cwallace

    Producers storing oil offshore in tankers are going to be sorely disappointed when they try to bring it back in, thanks to the Jones Act.

    Unless crude is being stored on US-flagged tankers, which is unlikely simply because there aren’t many, the crude oil owners won’t be able to bring it back in. Way back when British warships threatened our shores, the US made it illegal for foreign-flagged vessels to move cargo between US ports, or from shore to ship and back again. This is one of the things that had to be accounted for in developing a spill response plan post-Macondo– availability of US-flagged tankers, so that whatever was captured could legally be sent to shore for proper disposal.

    But, if there’s enough oil floating around in tankers that can’t be exported, and can’t be brought back, it might force somebody’s hand to amend either the Jones Act or the export rules for crude. In an election year, however, I wouldn’t bet on it.

  • avatar
    LUNDQIK

    To the author – love reading these articles on here. These have been better than most contributions I’ve seen on investment sites!

    Question: Any thoughts on the guidance from US based producers (shale in particular)? I’ve listened / read several of the domestic producers earning reports over the last few weeks. All have a common theme: reduction; in CAPEX and E&P – but also in service costs. It seems the US is the new swing producer and is acting accordingly.

    US production is/was still heading up as existing wells and those near completion are still/being brought online. But the next few months should see a down turn.

    Timing will be key. Will the reduction matter against the over supply glut, current / increased summer demand, and the ability (or lack thereof) to refine it?

    • 0 avatar
      APaGttH

      Right – and I agree that the US is close to wrestling away swing producer status from Saudi Arabia – the question is who will blink first. If the price of oil crashed below the $44 level and holds someone is going to have to blink to constrain supply. Who? That is the multi-billion dollar question.

      For those producers, especially leveraged producers, who have wells about production ready, they have to turn them on. They have cost to recover and some revenue is better than none. We’ve already seen activity for new wells and permit applications crawl almost to a dead stop. No surprise.

      Here is the next ugly thing that is going to hit a lot of these companies. Accounting. This is going to be ugly. For energy companies part of the accounting is the market value of the reserves, or pumped crude, or finished product they “own,” (e.g. they by an accounting support hold as inventory). For many companies, because their most recent quarters were based on September pricing – showed in accounting the value of these assets as going up. In the quarter releases on the brink of coming up, those inventory values are going to have to be slashed, by about 50%.

      That is going to make the balance sheet math U-G-L-Y for just about everyone. But if you’re highly leveraged on reserves and inventory, investors are going to flee.

      • 0 avatar
        RobertRyan

        All you need is a crisis in the ME or other Oil producing regions to shoot it up again. Lower economic activity across the globe, is suppressing demand

  • avatar
    jimbob457

    Great article!

    Looking at the longer term for oil prices: “sweet spot” is the term to keep in mind. Fracking has expanded the resource base for oil and gas by a factor of two, maybe more.

    Yee hah! Old timey fossil fuels (not coal, but oil and natural gas) just got another 20 or 30 years lease on life. Kinda lucky, really, considering how much expertise we have about the ICE engines for transportation and the combined cycle gas turbines for making electricity.

  • avatar
    furiouschads

    How does USA become swing producer? Does TX RRC start limiting production again?

    • 0 avatar
      jimbob457

      Fracking has changed the game.

      • 0 avatar
        Pch101

        You really ought to look at global production data instead of continually repeating this point.

        Global oil production is relatively stable: it is growing at a pace that is above average but within historical norms.

        The real problem for the industry is that demand growth is sluggish, so there isn’t any particular need for the added supply. Along with a stronger dollar, this has dampened the mood of traders, so prices have fallen accordingly.

        • 0 avatar
          Landcrusher

          Pch isn’t way off here. The only thing he is overlooking is that supply was not really an issue during most longer shortages. The issue has always been OPEC and other governments.

          Supply could drop drastically tomorrow with government interference. Betting on low oil prices is betting on a bunch of governments, and most of them are so nasty you wouldn’t dare go to their countries.

        • 0 avatar
          Pch101

          OPEC hasn’t been the deciding factor since the end of the 70s crises.

          The oil market is fundamentally different now that oil is traded on exchanges. There was a time when oil prices were set by cartels (first, the western Seven Sisters that priced it low, then OPEC that priced it high.) Now, the market is bigger than OPEC.

          • 0 avatar
            Landcrusher

            OPEC is not a factor today only because they are currently dysfunctional. It doesn’t matter. Too much of the suppliers are governments rather than corporations. The reason the guys at Exxon don’t move the price is because of the penalty for being caught. If you are a bunch of princes, you are above the law. They can move your precious exchanges with a fracking phone call.

            Wake up and smell the oppression. Enough of these guys get together and they can move the price up, not just down.

            There is not, nor has there ever really been, a free market in oil. Free markets do not exist when the guys running the game are also big players in it.

          • 0 avatar
            Pch101

            Today, we have exchanges that set the price. One of the reasons that exchanges were created was to reduce the influence of OPEC, and that has worked quite well. The market is larger than any one participant within it.

            You’re more than 30 years behind the curve.

          • 0 avatar
            Landcrusher

            If you don’t think OPEC has affected the price since the exchanges, you are delusional. You might want to look back at the recent huge drop. It was a reaction to Saudi announcement.

            I wonder who was short before the announcement, btw?

            The reason OPEC can’t always move the price is because they lost respect. The players are betting they are lying. The less trustworthy players are getting squeezed out right now. When they lose the ability to fully produce or get cowed back into line, a cartel will again form and up goes the price.

  • avatar
    bd2

    And right on schedule – the near-annual fire/explosion at one of the California refineries (in conjunction with the other undergoing routine maintenance)to drive gas prices back up.

    • 0 avatar
      APaGttH

      This is why there is a strike going on. The steelworkers main complaints (of course they want more money and benefits) is about workplace safety. There are a lot of small accidents you never hear about.

      The issues of explosions at refineries are because…they are dangerous places. They are very dangerous places. Things are performed at extreme pressures, extreme temperatures, with products that are extremely volatile. Throw in the sour nature of preferred crude for US refineries and you got a bunch of toxic hydrogen sulfide to flare off.

      Many US refineries are old – but the premise that the government will not permit new refineries is a canard. The US has over capacity issues as it is, and our largest export in terms of real dollars has been motor fuels since 2011. We export a stunning amount of refined gasoline, diesel, and aviation fuel.

      In the 90s when I was consulting at Conoco, US producers were dismantling and selling whole refineries to third world countries. There were literally ads in the business section of the Houston Chronicle for, “complete refinery for sale and relocation.”

      It was during the stablized period between the 1986 oil crash and the 1998 dip. There is little incentive for producers to build refineries (beyond more stringent rules and an onerous permit process – these are true) because they could see the long term trend of shrinking US consumption (see my earlier pieces).

      I have to admit, I was among those who would think, “oh well isn’t that convenient,” but as I’ve matured, and climbed the professional ladder, and gotten closer to the sun, I’ve learned there isn’t dark auguries in dimly lit conference rooms going, “wouldn’t it be cool to blow up one of our refineries to raise the price of gasoline.”

      Where I work today (as far from the oil industry as you could get now) there are two events coming up that I’ve been involved in. Both of them are far and removed from each other but I can guarantee you when the two come together, some in the rank and file will go cause – causation — and be completely 100% wrong.

  • avatar
    shaker

    “Fracking has changed the game.”

    Yes, but expect to lose some value as a percentage of tank cars carrying this high-volatile crude to market derail and explode (or dump it into rivers, which rail lines are often adjacent to).

    • 0 avatar
      highdesertcat

      Regardless of whether a person is anti-oil, anti-rail-transport, anti-pipeline-transport, that oil will be extracted and it will be transported. Can’t afford not to.

      Oil is money in the bank. Cheap oil is money in the consumer’s pockets. Until, of course, the unions and/or the government gets involved to demand an even bigger share of the spoils, in return for nothing.

  • avatar
    Joss

    Nothings more opaque than a capitalist run oil indistry. We need Stalin and one minister. At the drunken table, conversation centers on the minister being shot if oils too low or high. The rest will sort itself.

  • avatar
    sllloyd

    A couple of things I would like to point out.

    First, it has become uncommon for US refinery utilization to drop below 86% in the last couple of years, and NOT uncommon at all for it to be higher than 90%.

    Second, two words: ‘banked wells.’ Sure, E&P companies are reducing capex budgets, laying down rigs, and only drilling wells to keep leases or contractual obligations, but they still have a very large number of wells that have been drilled, but not completed.

    Think of it as an oil well inventory. These wells just need to be hooked up, and they can be producing in a relatively short time span.

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