Friday, March 9, 2012

Moose Tracks

Where have we been...where are we going?


By Charles Stuart

Retired Petroleum Exploration and Research Geologist

President Obama has been recently criticized by the GOP because of rising gasoline prices. The big question is how can government, including the President, reduce gasoline prices, if at all?

The market for crude oil, from which gasoline, diesel and other products are refined, is mostly global. Oil is bought and sold:

  • In futures markets (purchases made for delivery in the future)
  • The spot market (oil sold for immediate delivery)
  • Private sales

The futures and spot markets are open to all buyers and sellers, but are significantly influenced by various factors:

  • How much oil OPEC --the most important producing cartel-- exports (more or less oil is shipped),
  • Sharp changes in demand (e.g., China, India, the U.S.)
  • The risk, or fear of risk, of supply disruption from geopolitical tensions (e.g., current issues with Iran and potential closure of the Strait of Hormuz).

In this system, crude oil and refined products trade freely back and forth across borders in an attempt to balance supply and demand.

The U.S. is a good example of how the system works. Last year we imported about half of the crude oil we use, down about 10% from 2006. At the same time, we exported some crude oil, and more diesel and other refined products than we imported.

Petroleum products were the top U.S. export commodity in 2011! If we export, there must be a surplus of gasoline and diesel (there is), but prices have been rising. Why?

Because we import a lot of oil, global markets have a major impact on domestic prices, especially in parts of the country that require the most imported oil. The current rise in gasoline prices is directly related to tensions over Iran. In addition to the impact of these markets, in the U.S., a number of other factors influence oil prices:

  • Increasing domestic production of crude oil
  • Capacity and proximity to pipelines and refineries
  • The recession and less driving
  • More efficient cars
  • Use of ethanol in gasoline
  • A glut of gasoline
  • Speculation.

Most of these things should decrease the cost of gasoline, but it hasn’t worked out that way. Speculation reflects what oil traders believe the market will bear.

Domestic crude oil mostly comes from Texas, Alaska, California, North Dakota, Oklahoma, and smaller amounts from a number of other states.

Peak production from these areas was reached about 1970 and has been decreasing since.

However, oil production recently has been increasing in the Williston Basin of North Dakota. This oil comes from tight shale that requires fracking (like shale gas reservoirs), and production has increased to nearly 500,000 barrels a day and is continuing to increase. Because of pipeline limitations, this oil has difficulty getting to Gulf Coast refineries, some of the largest and most efficient in the world. Consequently these refineries utilize more imported oil (~$105-$110 a barrel), which increases the cost of gasoline in the Gulf area. At the same time, because of a lack of pipeline capacity, oil from North Dakota (~$83 a barrel) has accumulated in Oklahoma and the Midwest creating a glut keeping the price of the gasoline there and in the Rocky Mountain west lower compared with other parts of the country.

The Keystone XL pipeline as proposed by the builder, TransCanada, would allow Canadian tar-sand oil to reach Gulf Coast refineries; some of it is currently being refined in the Midwest. If large volumes of this oil reach the Gulf, much of it and refined products are likely to be exported into higher-priced global markets, so would have little affect on local gasoline prices. On the other hand, if the glut of oil in Oklahoma is reduced or eliminated, prices will likely increase in the Midwest and Rockies. Unless most of the Canadian oil is guaranteed to be used internally and not exported, it appears that this pipeline is unneeded. Even so, TransCanada has just announced that it will build the southern segment of this pipeline from Oklahoma to the Houston area regardless of status of the pipeline as a whole being reviewed by EPA.

Interestingly, a different pipeline plan might serve the purpose of reducing Oklahoma’s oil glut. Owners of the Seaway pipeline are planning in June to reverse its present northward flow from the Gulf, to southward flow from Oklahoma. The capacity of this pipeline (150,000 barrels per day up to 400,000 barrels per day later) probably is sufficient only for North Dakota production, not Canadian oil.

What can government do to balance the system and avoid boom and bust cycles (abrupt changes in price). Not much. With a global market, an individual importing country has little chance of setting crude oil prices. These can change quickly over international tensions and immediately affect the cost of gasoline. In the U.S., producing and refining companies will sell their product to the highest bidder domestically or internationally. Government can restrict exports, but this is not likely to happen. Nixon set price controls on gasoline at the pump in the early 70’s, but this wasn’t especially successful and won’t happen now. Oil from the Strategic Petroleum Reserve might help lower gasoline prices, but I believe only under some kind of price control. The best option might be to support local or regional pipelines that would help even supply and demand.

The environmental implications of all of this are another story.

Main Sources: (Google: “us oil exports 2011”)

1. Oil boomlet sweeps U.S. as exports and production rise; USA Today, 12/19/2011 (source of the

first three charts)

2. Gasoline: The new big U.S. export; CNN, 12/5/2011

3. The dis-United States of gas prices: Why fuel is so cheap in Denver; The Atlantic, 2/23/2012

4. Why the Keystone pipeline would boost pump prices; The bottom line on MSNBC; 2/27/2012

(source for the last chart)