I thought it was supposed to hit 80-100 bucks and gas to $4 a gallon by now. According to nbadan that is!
It's below $50 a barrel because speculators overestimated summer demand and refineries stocked up.
Gasoline inventory is really high right now.
Gas prices might go back up to $2.15/gal or so once summer vacation hits.
$80-$100 a barrel won't happen for a few more years.
Keep in mind that $45-$50 a barrel isn't exactly low anyway.
Oil at a steady $40/bbl will do wonders for the Texas economy... wherever it goes, it needs to stabilize. Most people don't realize that it would be disasterous for the price to plummet right now, because oil companies are investing a lot of money in going after old zones that are now profitable and exploring for new ones. The X factor is China and their Buick-loving selves, no one seems to know how to predict demand there.
great answers, but it was supposed to be a joke bc dan was saying we'd be there by the summer, and the sky was falling, etc...
Well, Dan has fantasies about the sky falling in because that would validate his ideology.
Oh please, the 'sky is falling' routine to try and marginalize Democrats is as old as Extra Stout's seething hate for anything progressive apparently. Fact is, any scare in production, be it a attack on Saudi oil facilities, a hurricane, earthquake, any other natural disaster, or even just unanticipated demand from China and India could send oil prices climbing again.
The world is running out of cheap oil. This is why oil companies need to make more money off the supply all ready in the lines. It costs more to get at the oil still left in the ground.
If you define cheap as "less than $80/bbl," and if you define running out as "still a lot around, just not enough to keep up with burgeoning demand anymore," then you are right.
But understand that around $80, a whole lot of doors come open.
Eh, trouble is, all the doors that 'could' come open require large amounts of petroleum to happen. Fuel Cells use a trememdous amount of petroleum to produce. Modern wind mills require petroleum to keep lubricated. Hybrid cars aren't nearly as efficient without light-weight body parts made of petroleum.
There is no real alternative to cheap fuel, and that is the harsh reality we are all going to accept in the next few decades.
That's not what I was referring to. I was referring to things like shale extraction and coal liquefaction that start to become economical at that price point.
We have a LOT of coal, BTW.
I don't know but I like the fact that I filled up yesterday for $1.86 a gallon!!
Good job Dubya!!
The answer isn't as simple as "stocks are building" or "we have plenty of supply". There are a lot of different variables pulling on the oil market right now, and the signal that $46 oil sends to Average Joe isn't necessarily the right one.Why is oil below $50 right now?
Maybe a little too much oversimplification, but generally accurate. WTI is in a steep contango, which encourages refineries with available storage capacity (this is a finite amount too) to purchase prompt while it is cheap. This is why we see stocks building. If you look at inventory optimization models, you basically need to factor the cost of holding excess inventory versus the cost of running out of crude versus the cost of maintaining a JIT inventory strategy. In a contango market (prompt prices lower than forward prices), you would want to hold inventory whereas in a backwardated market you would want to move to more of a JIT strategy.It's below $50 a barrel because speculators overestimated summer demand and refineries stocked up.
Another critical reason for lower prompt WTI prices right now, and possibily more important, is that we are coming out of refinery maintenance season. A lot of hydroskimming and cracking refineries (as opposed to coking refineries) were under turnaround turning the first two quarters, especially in Asia. The result has been a relative decline in the demand for light sweet (which is the same thing as a relative increase in demand for medium to heavy sours).
In many ways, crude is NOT cheaper right now for some refineries. Because of the relative decrease in demand for light sweet, the relative price for medium to heavy sours has INCREASED. This can be most seen by the Maya discount to WTI over the last two months, which has risen from 18 under to around 10 under. PEMEX prices Maya off a formula which incorporates Fuel Oil, WTS, Brent, and LLS. Fuel Oil has really strenghtened as it has had a major demand pull from Asia as some of their energy facilities have switched to Fuel Oil in the short term while they are in turnarond season.
As these facilities that typically run light sweet come back on line, you should expect to see a moderate rise in prompt WTI prices (forward WTI is still above $50, btw). I say moderate, because the inventory builds we have seen recently should provide an offset to the increase in demand.
This is an interesting statement, because when you really think about it, it is the "cheap" oil that is coming into more of an abundance. It is just that we are not currently prepared to do anything about it.The world is running out of cheap oil. This is why oil companies need to make more money off the supply all ready in the lines. It costs more to get at the oil still left in the ground.
Now, I know you were meaning that the days of cheap WTI are over, which I agree with save for the occassional cyclical recessions in the oil market. However, the incremental supply is widely accepted to be medium to heavy sour, despite the Saudi's claim they can come up with more light sweet. One thing is for certain, there will not be a great deal of light sweet coming online domestically.
So, the "cheap" medium to heavy sour will be available in the near to medium term for anyone who wants it, but right now... who does? This is the reason for record Maya and Mars spreads this year. You can pump a trillion barrels of Maya out of the ground, but without the upgrading and coking capacity at the refineries, it doesn't do anyone any good. More on this later.
Tar sands (shale) extraction is a good alternative of sorts, and I think it is a technology that will continue to grow at $40 oil just as it will at $80. I'd have to check some assays, but I believe SynCrude is a heavy sour and has an upper price limit independent of WTI prices. As WTI gets more expensive, the SynCrude discount just gets wider. We will see SynCrude and other Tar Sand crude demand increase just because it is a good product. The problem now is logistics. There is no easy way to get the stuff down to the major refining centers and for now it will remain a Group3 feedstock.That's not what I was referring to. I was referring to things like shale extraction and coal liquefaction that start to become economical at that price point.
Coal to Liquids and Gas to Liquids are also two emerging areas, but the problem now is that it takes so much coal to produce so little product. Regardless of oil prices, my opinion is we are still a long way away from seeing real breakthroughs here. However, remember these alternative technologies are MORE economical at $40 oil with a $15 gas crack than they are at $50 oil with $3 gas crack. Watching product prices will give a better indicator than watching crude as to the velocity at which R&D moves.
As I've tried to hammer for a while now, the bottleneck continues to be refining capacity, and $80 oil doesn't really do anything to open that bottleneck. For refiners, the cost of oil is an expense and high oil is not good for refineries, all else held equal.But understand that around $80, a whole lot of doors come open.
Right now, so much of refiner's relative capital budgets are tied into having to meet regulatory specs, that it leaves less to use for building upgrading capacity or expanding refineries. We are moving to 15 ppm sulfur diesel and gasoline, and building those sulfur plants, GDUs, and HCUs costs a lot of money. Also, it will see what happens with Ethanol. Lobbyists are doing a great job at getting into the ears of their politicians, and if the push for Ethanol continues, it will pull on gasoline supply. Using Ethanol as opposed to other oxygenates requires the use of MORE gasoline.
So, we are building a lot of desulfurization capacity on the product side, but the feedstock supply side isn't getting the necessary upgrades because funds are diverted to meet regulatory spec. This just further increases the demand for light sweet... pushing prices up (and sour discounts up as well).
Also, it is important to remember that oil is a highly cyclical business and all the oil companies have seen es like this before. They are cautious to run into multi billion projects when they aren't sure this isn't just a normal part of the historical 9 year cycle (4 up, 5 down). They don't want to get stuck in a project that the economics don't end up supporting 3 years down the road. There is a bit of a Keynesian price stickiness in that regard. I'd expect prices to stick in the $50s for a few more years, before settling around the new standard of $35-45 WTI.
ps: once I get all the technology together, my plan to make oil out of carbohydrate rich people will solve all of the world's energy needs.
If you know any one in Venture Capital... pm me... I'm on the verge of something big!!!
Making fuel out of fat people - hummm....there is great potential for this in Fat Antonio.
That post is much too long for Clandestino to handle, but thank you Scott.
go suck your girlfriend's manny...
when i started this thread it was meant for nbadan bc he said oil would hit $80 by now.
America in general would be perfect for such an endevor. A carbohydrate rich diet is essential, and no doubt America leads the world in the that. Carbohydrates are CH30... Methane is CH4... I'll let you make the connection.
The problem of course is getting politicians to buy into it, especially under the current administration. Despite Republicans love of oil, they have this whole moral values thing working for them, and as evidenced by some of their feelings towards stem cell research, they REALLY hate science.
However... Republicans DO love capital punishment... so I propose using prisoners. Clones would be ideal, but aren't viable at this time due to the aformentioned reasons.
I know I can get environmental wackos on my side... the idea of killing people to save animals and nature is a winning ticket with them.
I think I'll call it Soilent Black.
I'm not sure about all oil companies, but I know that ExxonMobil has more money (cash) on hand than they know what to do with. Around 27 Billion and growing. Saying they can't afford to add refining capacity with the current environmental controls is complete and utter horse . This is a perferct storm for big oil...
Prices are so high that they're making so much money they literally can't spend it fast enough. They decide to play the "restrictions keep us from expanding" card, and wait. If nothing happens, they continue to make a load of money. If restrictions are relaxed, the get to add capacity without having to comply with newer air qualtiy regulations.
It would be one thing if prices were going up but oil company profits are stable or decreasing. But to be paying so much more at the pump at the same time that record profits are rolling for companies like ExxonMoblie in just doesn't seem right.
Well Mark, I can't speak for Exxon, but having cash around doesn't necessarily allow you to toss money at every project you can think of. Obviously the capital budgeting decision is more complex than having available funds.
Just for kicks, here is a highly simplified example.
For comparison sake, let's use the Valero Acquisition of Premcor. Valero has agreed to purchase Premcor for an effective $8bn. This gets VLO 4 refineries and about ~800 mbpd crude throughput. However, the biggest part of the deal is centered around 2 refineries, the Port Arthur and Delware City facilities, with combined throughput of ~430mbpd.
For simplicities sake, we are going to value that 430 mbpd at 75% of the acquisition cost times the replacement value factor of this deal (it's estimated we are paying roughly 80% of replacement value).
That gets us to $7.5bn replacement value on 430 mbpd, or roughly $1.75 bn for every 100 mbpd of capacity.
So let's say we want to try to build a 250 mbpd refinery comparable to these two. You would probably end up building something more complex, which would pump the cost up - but let's just be conservative and say it's going ot be $4.4 bn to build this refinery (my guess it that it would really be more like $6).
Let's assume that the refinery runs 90% full (this is high) and prices stay at historically high levels. The refinery will gross ~$1.2bn a year based on a gross per barrel margin of $15. Let's say that our OPEX factor is 50%. That gives us net profit margin of ~$616MM/yr. However, this only gets us a 13% IRR on a 20 year project life, which would not be enough to justify such a huge project with so many risks.
Now, let's say that margins only stay at their historically high levels for 3 more years. Drop down to a $7 gross per barrel margin and annual net income drops down to ~$287MM/yr, and you only get a 5% IRR on a 20 year project life. No way you can justify building this refinery.
Now, on the other hand, it is far less difficult to justify expansions to existing refineries, and such expansions are taking place among just about every refiner you can think of.
But that's the way free markets work. The high price level is obviously what keeps supply and demand in balance. And high profit levels are what give companies the incentive to invest. It is just a slow process, for the reasons I mentioned above. No one in their right mind can forcast these margins forever, so it is still tough to justify some projects. Not to mention it takes time for investments to be implemented.But to be paying so much more at the pump at the same time that record profits are rolling for companies like ExxonMoblie in just doesn't seem right.
And oh yeah, prompt month WTI is back above $50.
Save the fat people, invest our money in bike trails.
Hey Scoot, why is it that the US, especially states along our Southern borders like Texas, New Mexico, Arizona, California, don't try to import fuel that can be processed in refineries built in Mexico for much cheaper than it could probably be built in the U.S., given our tight enviromental regulations, higher land costs,..etc? I know nobody refines like U.S. companies, but given our willingness to already 'help' with oil extraction there, it seems like the next logical step. Is there some sort of federal regulation that we have to process oil domestically?
Sorry for the delay, Dan, I was out of town.
We import refined product in the event of a shortfall of domestic supply, most from Europe (and a bit from our Aruba refinery). We export a lot of product to Mexico as it is, however, because they don't have the refining capacity to meet their needs.
As for why not build refineries there, I can't really answer that. Inland refineries are not preferred, so Arizona and New Mexico border options are essnetially ruled out. Maybe there is room for a new refinery there, but I am not up to speed on the politics of it.
Sorry I'm not more help on that question.
Scott, I understand the historical reasons why adding refining capacity was tricky when oil was so much cheaper. The point I was trying to make is that in this case, the return on investment concern is substantially mitigated by the fact that they have $27 Billion profit on hand right now, with a ton more on the way in the next six months if these prices stabilize around 50.
As far as the laws of a free market economy, we aren't a true free market, as you undoubtedly know. (Similarly, we aren't a pure Democracy, although we value many democratic principles.) Therefore talking in absolutes doesn't get you anywhere beyond the most remedial explanations of how the system works. There are plenty of cases (war profiteering, anti-trust, etc) where the federal government steps in and says "you can't charge that amount of money for your product."
I know at this point there are probably a few posters lining up to stamp socialist all over my forehead, but hear me out on this:
When President Bush talks about shared sacrifice should that not apply to the companies that stand to benefit the most from the US activity in Iraq? Does it not smack of profiteering if during a time of war, a valueable resource's (gas/oil) price is going up, but production company profits are going up at a much higher rate?
Tell me, scott. Are you that in love with Bill Gates? I mean, really, your signature evokes many thoughts...all containing the phrase, "ad naseum."
Well Mark, I would point to the times in our history where the government has tried to regulate prices and/or profits (for whatever reason) and the failures that followed (Airlines, Oil and Gas in the 70s, Savings & Loans in the 80s).
At least in the Refining and Marketing segment of the Oil Industry, I don't see any connection between their profitability and the war in Iraq. Oil prices are up due to fundementals, not because of the war in Iraq (sure, there may be speculation and a "terror" premium at work, but its still the fundementals driving prices). I would generally make the same statement for Exploration and Production companies as well, with some exceptions/qualifiers.
War Profiteering is an interesting indictment. Howard Hughes was accused of such for his attempts to produce the Hercules and a spy plane. Personally, I find it to be insulting. Companies are not gouging the consumers, they are simply following the dynamics of supply and demand. People complain about high prices, but I don't see a mass shift towards public transport, car pooling, cutting down on summer vacations, or changing driving habits. All companies are doing is providing the market with what it demands. The profits therein are just a byproduct of the supply/demand dynamic. Even in a psuedo-capitalist environment, this is the case. By limiting prices and/or profits, all that would happen is you would create long lines at the gas pump.
There are currently 1 users browsing this thread. (0 members and 1 guests)
Posting Permissions
Reply With Quote
