Thursday, October 25, 2012


Where we've been...where we are...where we're headed.

By Charles Stuart
Retired Petroleum Exploration and Research Geologist

Earlier this year I wrote a brief review (“Petroleum Imports, Exports, and the Price of Gasoline—A Review”) outlining the major factors that contribute to crude oil and gasoline prices.  This seemed necessary to counter misinformation from Republicans blaming President Obama for high gasoline prices last spring in the face of rising domestic production of crude oil and increased exports of U.S. refined petroleum products.  Gasoline prices fell during the summer, but rose sharply in late summer and early fall, again resulting in criticism of the President for not doing more to promote the petroleum industry and other energy industries.

As summarized in my earlier report, crude oil prices are set on global markets such as the futures (purchases made for delivery in the future), spot (oil sold for immediate delivery) and private markets, and not by U.S. companies or by any U.S. government entity, including the President.  Factors that contribute to crude oil prices are:

  • How much oil OPEC --the most important producing cartel-- exports (more or less oil is shipped); at present, there are adequate crude oil supplies in the global market, although the international embargo has reduced Iranian oil exports, primarily to Europe.
  • Sharp changes in demand (e.g., China, India, the U.S.); at present global demand is down because of weak economic conditions decreasing demand. 
  • The risk, or fear of risk, of supply disruption from geopolitical tensions (e.g., recurring issues with Iran and potential closure of the Strait of Hormuz); recently there has been unrest in the middle east, but there has been little or no affect on oil supplies.

The price of crude oil was in the $100-120 range early in the year mostly because of concerns over Iranian threats and the Strait of Hormuz.  This accounted for much of the rise in gas prices last spring.  However, in late spring oil prices fell and have remained in the $80 to $100 range for most of the time.  Today’s price (10/25/2012) ~$88 is still in that price range.  My conclusion is that global prices don’t account for the late summer (post-Labor day) surge in gasoline prices.

Other factors that contribute to crude oil and gasoline prices are domestic in nature:

  • 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.  

All of these are important, but the most talked about is domestic oil production.  We’re currently in the middle of an oil boom brought about by hydraulic fracturing of shale (“fracking”).  The boom has centered on North Dakota but is spreading to a number of states primarily in the mid-continent.  New production from these sources, as well as in the deepwater Gulf of Mexico, has boosted oil production significantly. Total U.S. production for the first seven months of 2012 increased 13% over the same period last year.  Part of this increased production has offset oil imports, so is making us less dependent on foreign sources.  In addition, U.S. exports of crude oil and refined products have increased 10.5% in the first seven months of this year compared to last year.  This includes gasoline.  It seems that if we export there should be an excess of product and that should drive down the price of gasoline, but it hasn’t happened.  I don’t know why not, but it’s difficult to see how the President could be held responsible.

The President has also been criticized for not leasing more Federal land for oil and gas exploration.  The fracking boom is primarily in the mid-continent where there is little Federal land, so there’s not much the President can do there.  Also fracking has potential environmental risks that may not always be considered.  Drilling and leasing in the Gulf of Mexico has resumed, so there shouldn’t be a problem there.  Gov. Romney wants leases to be granted off Virginia where prospects are uncertain.  Could this be an attempt to influence Virginia voters?  In the Rocky Mountains, much Federal land is already leased, but companies want to drill near (or in?) national parks and monuments in order to frack; probably not a good idea.  Utah has vast oil shale deposits, much of them on Federal lands that could be leased, but a viable extraction process hasn’t been demonstrated yet that doesn’t potentially contaminate the land surface or groundwater supplies.  The Bureau of Land Management is currently hosting public review meetings to address local concerns.

Most of the factors noted above should decrease oil prices not increase them.  This should factor into lower gasoline prices.  Why then have gas prices shot up so abruptly?  There are two additional factors of a temporary or seasonal nature that I didn’t mention before that partially explain higher prices:
  1. Fires or mechanical problems shut down or decreased production from three major refineries, two in California and one in Houston.  This significantly limited supplies in California, which cannot import gasoline from other states because of strict requirements for emission-reduction components of the gasoline.  While California gas prices are always the highest in the nation, it has resulted in $5 gas at some locations.  The loss of refined products from the Texas refinery could be made up by supplies from surrounding areas, so the affect has not been as significant.
  2. This is the time of year for many areas to change gasoline additives for the winter season, which adds to the price.

Of the major factors affecting gas prices, this leaves speculation.  While I don’t have any specific information on whether someone is trying to influence the crude oil and/or gasoline markets, it does seem odd that prices have gone up so abruptly this close to the presidential election.  However, all I can do is speculate about it.

Lastly I have a few words about natural gas and coal in the overall context of energy utilization.  Natural gas production has gone up markedly because of the fracking technology currently being exploited for oil production.  It has been so successful, in fact, that there is a huge glut of natural gas on the market.  This has driven down natural gas prices, slowed exploration efforts to find more, and made natural gas a strong competitor to coal for electricity generation.  At present, the cost of generating electricity is close to the same for gas and coal, but natural gas has half the CO2 emissions as coal and none of the particulate pollutants.  Consequently many coal-fired power plants have converted to natural gas.  When Republicans tell coal miners that Obama and the EPA have somehow forced this change, it’s not true.  It’s the free market for low-cost and trouble-free fuels.  (It is true that the EPA stopped some hilltop mine developments in the Appalachians, because this kind of mine pollutes and clogs stream channels with silt, and destroys towns.)  As an added side benefit of coal replacement, in addition to improved auto efficiency, annual CO2 emissions in this country have declined over the past few years.  Natural gas is the ideal bridge fuel from oil and coal to energy sources of the future whatever they may be.

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