Friday, May 18, 2007

Gas Prices: What the F$@&%CK

I admittedly am no expert in the mad cap world of crude oil futures. Friends, the price of gas at the pump in these parts is well over $3 a gallon now and it's becoming painful. The knee jerk response is to blame those greedy oil companies (and indeed they are making a pretty penny in this environment) but I suspect there is a lot more to it than just some fat cats conspiring to screw us all.

Doing even a little research on the Internet will wake you up to one important fact: the oil business is complicated. The reasons we are paying through the nose are legion. Here's the short list in no particular order:

- Demand
- Crude prices
- Tight refining capacity
- Emerging industries in China and India
- Nationalization of the oil companies in Venezuela, Nigeria and Russia
- Hurricane Katrina
- Boutique winter blends in the US
- Ethanol transport problems
- Wall Street speculators
oh yeah, I almost forgot - good old greed

Because of tight supplies of refined product even as crude supplies recover and prices have come down from the near $80 a barrel we still suffer mightily at the pump. According to Michele Markey of the Apache corporation very little additional capacity is expected to come online in 2007. The largest planned expansion will begin in 2007 at Marathon’s Garyville, La., refinery; however, this 180 thousand barrels per day (MBpd) expansion will not be completed until 2009. Also , there have been a larger-than-normal number of refinery shutdowns in the last couple of months, both planned and unplanned. U.S. refinery turnarounds shut down 1.5 MMBpd of capacity last month. Maintenance projects have curtailed 500 MBpd so far this month.

We need more refineries, no? Because the last American refinery was built nearly 30 years ago - with only a single new one now in the works - the pain at the pump is unlikely to disappear soon.

A large number of refineries in and around the gulf coast are still not up to pre-Katrina levels. Another hurricane in that region could send prices even higher. Hurricane season is right around the corner...

The nationalization of oil companies is a huge problem not just for the Western oil companies being asked to leave (and leave billions of invested infrastructure) but for all of us as output drops and there is that much less crude on the global market. Venezuela oil export revenues have fallen off as they struggle to keep capacity up in the wake of nationalization under Chavez.

Nigeria is another situation that puts a clamp on the global oil market. Western oil companies are being squeezed out just as they had succeeded in getting Nigeria in the game as a major crude supplier. Chevron announced recently it was withdrawing hundreds of workers and contractors from Nigeria's offshore waters. The company production has already been cut by 57,000 b/d due to the militant attacks.

Events in Nigeria lead toward more violence and the prospect of more companies taking action similar to Chevron's. Total oil production shut down in Nigeria now is about 815,000 b/d, nearly a third of the country's effective production capacity of 2.5 million b/d.

Nothing good will come of the continued nationalization of the oil business. Nation-states just don't possess the expertize that oil companies do. Efficiency suffers and so does the environment. In the end the promise of a better life for the poor in these countries never materializes as their world becomes a polluted cesspool.

One might ask "if demand is so high why aren't we seeing lines at the gas pumps like back in the 1970's?" Well, as of right now we are using 99% of every drop that is refined. Lines at the pump are just one crisis away.

We could drive less, I guess. We could start buying more fuel efficient cars. Nothing wrong with these things. But there is a lot of oil out there. Lots and lots. Oil should be $20 -30 a barrel and $1.30 at the pump. The high price problem is mostly artificial and political.

Ultimately we should get behind high tech solutions that will take oil out of the picture. High prices will spur this kind of development along - and that is the silver lining in this dark cloud that follows to the corner gas station every few days.