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Permalink Reply by Jack Straw on March 23, 2012 at 3:27pm

Part II

Increased pipeline capacity from Cushing Oklahoma to the Gulf Coast will result in in higher prices for Cushing (WTI) Crude oil; as it will be able to more closely follow the pricing of like quality Crudes available on the Global Market. This will reduce the Crack Spread that the Mid-Continent refineries currently enjoy; reducing their profits – but not likely affecting the amount that they can charge for Gasoline. Increased pipeline capacity (Cushing to Gulf Coast) will result in greater availability of Cushing (WTI) Crude to those Gulf Coast Refineries best able to refine that quality of Crude. This will likely increase their Crack Spread, increasing their profits – but not likely affecting the amount that they can charge for Gasoline. That is the way Capitalism works.

To provide a simple analogy: There are two Farmers; Farmer A has good rich bottom land, Farmer B’s fields are on the side of a shaley hill. Both Farmers grow corn. Farmer A is able to grow corn at a cost of $2/Bushel. Farmer B is able to grow corn at a cost of $3/Bushel. It costs Farmer B more to grow a Bushel of corn (due to his lower yield per acre and increased fertilizer costs).

Does Farmer A sell his corn for less than Farmer B?
No, he sells it for the same price; he simply makes more profit.
That is the way Capitalism works.

In the U.S., Wholesale Gasoline can be expected to trade as in a single market; it will not vary in price in a regional manner - it does not care as to where it is made, it does not care as to what type of Crude oil it was made from. Variance in retail Gasoline price will vary by the respective State and local taxes; and by what the retailer feels the market will bear.

Right now, the price of Gasoline has more to do with how robust the economies of China and India are. The U.S. no longer is the Bus Driver; we have become more of a passenger - going along for the ride. This is not how I would like it to be, but this is how I see it to be.

Again, all IMHO,
JS

 

 

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Permalink Reply by Bluflame on March 23, 2012 at 4:33pm

Jack,

   As a Capitalist myself, I should have realized there is not necessarily a correlation between raw material cost and finished goods price, particularly when the manufacturer (in this case the refiner) can pretty much sell as much as he can make.

   The refining industry has done an excellent job of "price conditioning" consumers for higher retail gasoline prices. Furthermore, recent worldwide events have provided convenient justification for the price increases.

    But getting back to the main topic, I'd rather see the refiners use domestic or Canadian oil as a feedstock so at least the revenue is absorbed by North Americans versus sent to a marginally-friendly mideast autocracy. I therefore believe the pipeline should be built and ultimately extended to Canada via the North Dakota and Montana shale plays.

    I am a lessor in the Utica play. Higher energy prices work to my favor as long as they don't adversely affect the current economic recovery.

Thanks for your well-presented responses.

BluFlame

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Permalink Reply by Jack Straw on March 23, 2012 at 5:33pm

RE: “I'd rather see the refiners use domestic or Canadian oil as a feedstock so at least the revenue is absorbed by North Americans versus sent to a marginally-friendly mideast autocracy. I therefore believe the pipeline should be built and ultimately extended to Canada via the North Dakota and Montana shale plays.”

All the points I make are in an attempt to explain a very complex situation (as best I understand it); a situation that involves elements of the Upstream (Exploration and Production), Midstream (Tank Farms, Pipelines, Ocean Tankers, River Barges, Rail and Trucking) and Downstream (Refining, Marketing, and Retailing). Stir into this pot Domestic and International politics, International trade, economics, environmental concerns, taxation and conflicts.

Many of the Gulf Coast refineries are set up to refine Heavy Oil.
Refining Heavy Oil in a manner that will preferentially produce a maximum possible percentage of high value product (Gasoline, low sulfur diesel) requires large, complex (expensive) refineries expressly designed for that purpose. It is possible to blend (mix) a percentage of better quality crude with the Heavy Crude and process it; but, what they do best is profitably refine the Heavy Crude.
The Gulf Coast Refineries that process Heavy Crude were built with the expectation that they would be sourced from Mexico (Maya crude) and (particularly) Venezuela (Orinoco River Crude). Valero and Motiva Enterprises and Chevron (Pascagoula) specialize in purchasing lowered-priced heavy oil for processing in their large, complex Gulf Coast refineries.

The problem is that the fields in Mexico producing the Maya Crude are in steep decline (production peaking in 2004). Likewise the production from Venezuela is fast declining (currently producing at about 2/3rds of their 1997 peak production).
Venezuela could likely produce more, but Venezuela’s petroleum industry has been crippled by the bizarre politics and behavior of their leader Hugo Chavez.

The need to replace and offset the production shortfalls from Mexico and (potentially) unstable Venezuela have caused the Gulf Coast refiners dependent upon Heavy Crude to look North to Canada’s Athabasca Tar Sand Heavy Oil production. These refineries need BOTH the Northern and Southern Legs of the Keystone XL Pipeline. The Southern Leg does nothing for them, unless connected to the Northern Leg. The clock is ticking, as the production declines from “South of the Border” accelerate.

How long can we jerk around our Friends in the North and have them still look in a friendly manner towards us?
Canada is America’s largest trading partner.
America is Canada’s largest trading partner.
Many of the Dollars sent to Canada are subsequently used to purchase American goods and services – they do not end up in some Sheik’s Swiss Bank Account – they do not end up financing terrorist acts directed against America!

I am dumfounded when I hear erstwhile Americans rail against the Keystone XL Pipeline.

All IMHO,
JS

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Permalink Reply by 2s72s0k9mm8gd on March 23, 2012 at 5:18pm

Jack:

How do we explain the fact that the world is awash in oil (loads of supply) , yet the price has escalated to way beyond reality?

The last time we experienced runaway gasoline prices the excuse of too little refining capacity compared to demand was given. You know , the tired excuse that no new refineries have been built in the U.S. since nineteen seventy something blah blah blah.

Here we are a few years later EXPORTING refined gasoline , jet fuel , and diesel because refining capacity EXCEEDS domestic demand and , hmmm , 4.00 gasoline is the result....?

I ain't no Einstein but I sure as hell know when I'm getting screwed , and man are we getting the royal treatment!

How much does it REALLY cost to produce a barrel of oil out of the ground and into a pipeline?

Why are staples of life , such as oil , grain , and meat traded on a commodity market like stocks?

IMO this is not only unethical , it is immoral. Much undo strife for the common man is the result.

In this day and age , Farmer A would undercut Farmer B's price so as to drive him out of business and increase his market share. After successfully knocking out the competition he would jack up the price to whatever he desires and say the hell with everyone else!

Force the oil companies to sell there product at an honest profit margin and let the competition remain level and fair and honest and we will see 1.00 gas again and we will boom like never before.

Too bad their quarterly profits won't be so lopsidedly high.....waaaaaaaaa!

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Permalink Reply by Jack Straw on March 23, 2012 at 10:17pm

Part I

RE: “How do we explain the fact that the world is awash in oil (loads of supply) , yet the price has escalated to way beyond reality?”

That is very easy to explain, the World is not awash in oil. Right now, the supply/demand situation is very tight. Last year both the United States and Europe released oil from their respective Strategic Petroleum Reserves and China suspended the filling of their Strategic Petroleum Reserves in order to make up for the loss of production from Libya (a relatively small producer, compared to many). The oil released from the Strategic Petroleum Reserves has not yet been replaced.
And, last week it was leaked that the U.S. and the U.K. were discussing further releases from their respective Strategic Petroleum Reserves to ameliorate high prices caused by tight supply.
Saudi Arabia is currently producing flat out. Something that is driving the Saudi-Aramco Petroleum Engineers crazy; you can only do this so long as you risk damaging the reservoir (thus reducing ultimate recovery). They are sucking those old fields as hard as they can in order to keep up with demand.

After the recent Earthquake, Tsunami and Nuclear disaster, Japan has shut down 52 of its 54 Nuclear reactors (the other two are in the process of being shut down).
The absent nuclear power is now being replaced (as best they can) by increased import of Fuel Oil and LNG.

And, the situation could get much worse:
Oil Producer Libya is teetering on the brink of Civil War.
Oil Producer Yemen has endured a coup and is teetering on the brink of Civil War.
Oil Producer Sudan has endured a Civil War that resulted in the division of the Country into two new countries; North Sudan and South Sudan. They are teetering on the brink of War.
Oil Producer Egypt has endured a coup and is teetering on the brink of Civil War as the Muslim Brotherhood is seeking power while the military continues to delay elections.
Oil Producer Iraq is teetering on the brink of Civil War.
Oil producer Venezuela is being run by a nut case dictator that likely has terminal cancer. Venezuela could be ripe for a coup or Civil War.
Then there is Iran! Iran is the fourth largest oil producer (after Russia, Saudi Arabia and United States). The Shiite could really hit the fan there!

http://www.foxbusiness.com/news/2012/03/22/global-spare-oil-output-...

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Permalink Reply by Jack Straw on March 23, 2012 at 10:18pm

Part II

 

Now why has “the price has escalated to way beyond reality?’.

Oil supply is tight and there is a long list of oil producers that are unstable.

To paraphrase Jerry Lee Louis “There’s a Whole Lot of Teetering Go’in On!”.

I am not saying that something has to give; but, I am surprised that something has not given. Iran are bent on obtaining Nuclear Weapons and already have the means to deliver then to as far away as Europe. Israel will not allow Iran to obtain nuclear Weapons. Iran is run by nut cases and Israel has seen what genocide looks like and “Never Again!”. Unless something radically changes, Israel will attack Iran. An attack will (temporarily) close the Straits of Hormuz. That day (or the next), oil will hit something like $250/bbl. There will be long lines at gas stations (Worldwide). Most vehicles have a half of a tank of gas in them at any point of time.

Shortly after that first Bunker Buster burrows into the sand, everyone with a car will want a full tank of gas … Worldwide, that is a tremendous amount of Gasoline. There will be immediate shortages (not that they are necessary; just the result of panic hoarding). People will be filling every suitable (and many unsuitable) with Gasoline. The current price of a barrel of oil is carrying a fear premium (perhaps $10-$30).

 

RE: “The last time we experienced runaway gasoline prices the excuse of too little refining capacity compared to demand was given. You know , the tired excuse that no new refineries have been built in the U.S. since nineteen seventy something blah blah blah.”

No new refineries have been built in the U.S. for a very very long time.

But very many refineries in the U.S. and been expanded to the edges of their footprint. They have been built out, they have built up and their equipment has been upgraded such that there is considerably more throughput.

Also, the average vehicle is more fuel efficient; the 12 mpg muscle cars of the 60’s-70’s have been replaced by 20-30 mpg cars for the current fleet. We are using less Gasoline than we did 10 years ago. Pickup trucks and cars that ran on Gasoline 20 years ago are burning diesel.

 

RE: “Here we are a few years later EXPORTING refined gasoline , jet fuel , and diesel because refining capacity EXCEEDS domestic demand and , hmmm , 4.00 gasoline is the result....?”

We have the capacity to perhaps refine 5-10% more Crude Oil than we consume (particularly during the shoulder seasons).

In order to fully utilize available refining capacity we import additional Oil that we refine. The product is then exported (usually right back to the countries that we imported that Crude Oil from); in particular Mexico and Canada have insufficient refining capacity and surplus Crude Oil. We import the Oil, we export the value added product; we gain well paid American jobs, we gain a better balance of trade, tax paying American companies pay taxes (to American cities, American State and the U.S. Government), and American companies pay dividends (to America’s Pensioners, Widows and Orphans). What’s not to like about this?

 

 

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Permalink Reply by Jack Straw on March 23, 2012 at 10:19pm

Part III

 

RE:” How much does it REALLY cost to produce a barrel of oil out of the ground and into a pipeline?”

Saudi Arabia and Iran,  perhaps $12/bbl. Venezuela, perhaps $20/bbl. All three have very cheap subsidized Gasoline.

Deep water Gulf of Mexico closer to $80/bbl. (assuming you can make a profit after paying taxes).

You are free to choose where you would prefer to live. I choose America; they let me fly the “Stars & Stripes” on the fourth of July here.

 

RE:” Why are staples of life , such as oil , grain , and meat traded on a commodity market like stocks?

IMO this is not only unethical , it is immoral. Much undo strife for the common man is the result.”

 

We live in a Republic that runs using the Capitalist economic system.

If you find this system unethical and immoral, there are places the common man can go. I would suggest The People Republic of Korea (aka North Korea), or the People’s Republic of Vietnam, or the People’s Republic of China; or closer yet Cuba.  Sorry such few choices (there seem to be fewer ‘Peoples Republics” every day). They say than Havana is lovely this time of year.

 

RE: “Force the oil companies to sell there product at an honest profit margin”

That was tried in the former Soviet Union; in the end, it did not work out very well.

 

 All IMHO,

                     JS

 

 

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Permalink Reply by 2s72s0k9mm8gd on March 23, 2012 at 10:51pm

JS,

It saddens me that we have digressed to the point where an honest profit margin is equated to communism. There sure are alot of small businesses that fit this description (honest profit margins).............are they leading us down the road to communism?

Some of us are more adversely affected by the price of gasoline and heating oil than others more fortunate , I guess. 

Glenn

Permalink Reply by Jack Straw on March 24, 2012 at 1:57pm

RE: “Force the oil companies to sell there product at an honest profit margin”

Who would it be that would "“Force the oil companies to sell there product at" a certain price?

That would have to be the Government.

Who would determine what the fair price would be?

That would have to be the Government.

Specifically, the Department of Energy would control Petroleum and Petroleum products.

Our Energy Secretary, Dr. Chu, publicly stated that he felt the U.S. gasoline prices needed to be at the same price as in Europe (currently $10-$12/gallon). With an election on the horizon, he has back-tracked on that statement (under pressure from the Whitehouse, no doubt).

I would not want the government to have the power to set the wholesale price of gasoline (via taxation they have partial control of the retail price).

I would not want to currently pay $10-$12/gallon of gasoline. Some of us are more adversely affected by the price of gasoline and heating oil; I would not want Dr. Chou to be setting the price.

I would not want the government to suspend portions of the Constitution and the Bill of Rights such that they would have the power to "force" people or companies to sell what they own at an arbitrary price.

Would "force" extend to military force? Would "force" extend to arrest and imprisonment? This worked for a while in the former Soviet Union; but people ultimately rebelled against it.

The honest profit margin is best set by competition in a free Worldwide market - not by government fiat. We currently have an honest profit margin. Oil prices (Worldwide) are currently high, driven by the Law of Supply and Demand. Natural Gas prices are currently low (in the U.S.), driven by the Law of Supply and Demand. We are no more able to "suspend" the Law of Supply and Demand than we are able to suspend the Law of Gravity.

My vote is for Capitalism, it seems superior to Communism.

All IMHO,

                  JS 

 

Permalink Reply by Jim Litwinowicz on March 23, 2012 at 5:39pm

JS  great explanation but I think you missed a point or two. Gulf Coast refineries are paying $135/b for crude, a very high premium. When all three new lines become operational, they will pay less for crude, guessing around $110 if the international strife level remains the same. And it may drop more as drilling in the Bakken, Utica, and Eagle Ford expands. And it will at such high crude prices.

Competition between refineries should then drive down somewhat the prices of refined product. They will have larger margins and some will cut pricing in order to sell their product, especially if demand slows because of the high retail prices.

Much depends on the appetite of foreign countries and companies. If they are willing to pay top dollar, then exports will continue and support our high prices. But high international prices will also stimulate more drilling and refining in foreign countries which will in turn drive prices down.

I am not predicting $2.50/gal for gasoline like Newt is but prices may drop to the $3.00 range next year after these new pipelines are online.

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Permalink Reply by Jack Straw on March 23, 2012 at 10:42pm

Part I

I think you missed a point or two.

RE: “Gulf Coast refineries are paying $135/b for crude, a very high premium.”
The current Gulf Coast price is essentially World price for LLS (Light Louisiana Sweet); it does trades at a premium, very easy (cheap) to refine with a high ratio of Gasoline to lesser value products. It has traditionally traded at a premium to lesser quality crudes (like WTI). LLS traditionally trades at a premium of about $11- $12 to WTI.

Typically, WTI crude from Cushing, Oklahoma, has sold at a higher price than Brent crude. The difference is due to quality: the less sulfur, the easier it is to refine the crude into gasoline. WTI is both lighter and sweeter, containing about 0.24% sulfur. Brent crude has about 0.37% sulfur.

Just checked on my Bloomberg Screen: WTI (Cushing) Spot $106.47, Brent Spot $125.86, a differential of $19.39. If WTI can freely make it to the Gulf Coast; the WTI/Brent differential will doubtless shrink. When no longer stranded, WTI will gravitate to World Prices for a crude with its respective qualities; that would today be around $120-$125/bbl.

When all three new lines become operational, they will pay more for WTI at Cushing, guessing around $118-$123 ($2 less than WTI pipelined to Gulf Coast - $1-$2 pipeline tariff); if the international strife level remains the same and the World economies maintain their current tepid state of health.

You miss the point that Crude Oil is an internationally traded commodity; the U.S. does not set the price of oil (excepting stranded oil; when stranded oil finds its way to the World market; it is no longer stranded).

RE: “high international prices will also stimulate more drilling and refining in foreign countries which will in turn drive prices down.”

The “Elephant” fields that were found in the past are currently in steep decline. Oil Companies are scrambling, going to the ends of the Earth and depths of the Ocean to find and produce oil. The cheap and easy oil has been found (and much of it has already been produced and used). What is left is expensive to explore for, expensive to develop, expensive to produce; oil that is costly to obtain will not sell cheap.
We are on a treadmill, trying to replace each year what we are currently producing.
True, high oil prices will stimulate more (expensive) drilling and the construction of (expensive) refining in foreign countries; it will only be high prices that will make such moves economic. The transformation of societies in countries like China and India will require ever more oil, keeping prices high (or potentially driving them higher).

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Permalink Reply by Jack Straw on March 23, 2012 at 10:43pm

Part II

RE:” I am not predicting $2.50/gal for gasoline like Newt is but prices may drop to the $3.00 range next year after these new pipelines are online.”

New pipelines will not lower the price of Gasoline; the World sliding into a Worldwide recession could result in $2.50/gal Gasoline. Europe is likely currently re-entering recession; our anemic recovery is tenuous. Expensive Gasoline is painful; but, cheap Gasoline could be disastrous – as it would be indicative of a more severely depressed World economy.

 

RE: “Competition between refineries should then drive down somewhat the prices of refined product. They will have larger margins and some will cut pricing in order to sell their product, especially if demand slows because of the high retail prices.”

Except for the Mid-Continent refineries (benefitting from temporarily cheap WTI); refineries are hurting with current  low margins. East Coast refineries are shuttering their gates, un-economic. Conoco-Phillips are spinning off their refining; separating it from their (much) more profitable E&P. BP, EXXON/Mobil, Shell and Chevron are either unloading refineries or are discussing the possibility. This sentence “They will have larger margins and some will cut pricing in order to sell their product, especially if demand slows because of the high retail prices.” makes no sense to me – if demand slows because of high retail prices, their margins will collapse (as they have somewhat fixed operating costs). You do not cut prices because you have high margins, you are simply more profitable.

 

All IMHO,

                    JS

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