Doing the crude math

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Ah, how the costs associated with crude oil influence the prices we pay at the pump for diesel and gasoline: in short, it’s anything but a simple calculation.

Right now, several factors are coming together that may help spur oil prices – and thus fuel prices – higher in the coming weeks.

For starters, a big fire that engulfed one of Chevron’s major refineries out in Richmond, CA, this week is sure to remove vital fuel-making capacity from the market: meaning supply will tighten as demand stays relatively constant.

Then there’s the decline in crude oil output from the Organization of Petroleum Exporting Countries (OPEC) noted by energy research firm Platts– output which fell 270,000 barrels per day (b/d) in July to 31.45 million b/d as the impact of U.S. and European Union (EU) sanctions continued to affect Iran's oil exports.

“OPEC was producing well above demand in the second quarter, but now that the third quarter has begun – when demand historically starts to rise – the group has throttled back somewhat," noted John Kingston, Platts’ global director of news. "And it is not just Iran; there are other reductions coming from places where it wouldn't be expected, such as 80,000 b/d in Angola."

Iranian volumes plunged by 200,000 b/d to 2.9 million b/d in July, when sanctions directly targeting Iran's oil sales came into full force, Platts noted – which, I must say, is a good thing, as the Iranians continue to try and develop nuclear weapons and need to be stopped from doing so.

Platts noted that Europe had already been preparing over several months for the embargo on the import of Iranian oil, which came into effect on July 1. But the EU measures also include a ban on the provision of insurance for ships carrying Iranian oil, even to non-EU destinations.

This appears to have had a bigger impact on Tehran's customers in Asia than new U.S. financial sanctions because most of the world's shipping cover is linked to EU-based insurers, said Kingston.

Platts also recorded another sizeable output dip of 100,000 b/d from OPEC kingpin Saudi Arabia, although July's total 10 million b/d was still around recent highs. Its research also showed output dropped 80,000 b/d in Angola, 30,000 b/d in Libya and 10,000 b/d in Algeria.

Only three OPEC countries increased production: Iraq by 80,000 b/d to 3.05 million b/d, Kuwait by 50,000 b/d to 2.8 million b/d and Nigeria by 20,000 b/d to 2.2 million b/d.

The July total leaves OPEC's 12 members having overproduced their output ceiling of 30 million b/d by 1.45 million b/d, Kingston pointed out.

What does all this mean for fuel prices here in the U.S.? Well, for starters, gasoline prices shot up 13.7 cents this week to an average of $3.645 per gallon for the nation, according to the Energy Information Administration (EIA) – though that is still 2.9 cents per gallon cheaper than gasoline pump prices at the same time last year.

Diesel prices are also spiking in the U.S., too, though not as fast as gasoline, EIA noted – with diesel rising 5.4 cents to an average of $3.85 across the country. Again, though, that’s still 4.7 cents cheaper than what diesel cost at the same time in 2011, the agency reported.

Still, there are some potential bright spots developing in the global crude oil market. Platts’ Kingston noted for example that a possible settlement between the warring nations of South Sudan and Sudan could help both countries resume oil exports. “That would likely bring a shot of supply to the market that's suddenly confronting declines in OPEC output at – from the consumer's perspective – the wrong time of year," he explained.

The EIA also added a bit of good news, too, noting that proved reserves of U.S. oil and natural gas in 2010 rose by the highest amounts ever recorded since it began publishing proved reserves estimates in 1977.

Proved reserves of crude oil and lease condensate rose 13% to 25.2 billion barrels in 2010, marking the largest annual increase since 1977 and the highest total level since 1991, EIA pointed out, with proved reserves increasing in each of the five largest crude oil and lease condensate areas (Texas, the Gulf of Mexico Federal Offshore, Alaska, California, and North Dakota) between 2009 and 2010.

Of these, Texas had the largest increase, 860 million barrels (16%), resulting mostly from ongoing development in the Permian and Western Gulf Basins in the western and south-central portions of the state. North Dakota reported the second largest increase, 829 million barrels (78%), driven by development activity in the Williston Basin. Collectively, North Dakota and Texas accounted for nearly 60% of the net increase in total U.S. proved reserves in 2010.

The upshot of all this is pretty clear: fuel prices may indeed kick upwards even higher in the near term. But with more and more oil being found in the U.S., the potential is growing that our nation could rely far less on OPEC crude than ever before. In other words, the long term crude oil math may have just gotten better. We’ll see if those calculations hold true.  

Discuss this Blog Entry 1

on Aug 7, 2012

Sean,
I'm not a conspiracy nut, but oil companies create demand by limiting supply. If it isn't a fire, a pipeline will spring a leak.
Steve

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