Stock levels are still above average. There is not a shortage of gasoline for delivery to retail distribution centers. This is only bringing stock levels back down to normal.
Posted on 04/23/2008 6:47:43 AM PDT by thackney
With crude approaching $120, experts look for hints of decline
With oil less than a buck away from $120 a barrel, analysts are growing weary at trying to anticipate the tipping point that will bring prices down.
Some say a six-score price could prompt developed countries to pressure the Organization of the Petroleum Exporting Countries to increase production whether or not the cartel sees a need to do so.
Others say it's folly to predict a tipping point until the weak dollar stabilizes and strengthens.
Either way, analysts say, it's reaching the point where something's got to give.
"I'm hopeful that we are in the grand finale of this 2008 event," said Tom Kloza, chief oil analyst at the Oil Price Information Service in Wall, N.J.
The side effect of high crude prices most visible to consumers, the price at the gasoline pump, also is setting records — and for the first time this week it surpassed its all-time inflation-adjusted high.
Oil crossed that threshold several months ago. The federal government says the average U.S. price per gallon of gasoline hit $3.508 on Monday, nearly a dime higher than the March 1981 high of $3.41 in today's dollars ($1.42 before adjustment for inflation.)
That continued push also prompted analysts to speculate that oil's run-up is reaching its last rally.
Kloza said attempting to identify the tipping point is "pretty much an exercise in abstract thought."
Earlier this year, though, he compared $100 oil to the pre-dot-com bust Nasdaq stock exchange rally in 1999 and 2000, though he wasn't clear on whether $100 oil represented Nasdaq at 4,000 or 5,000.
"It is now clear that it represented the former, and not the latter, which represented the last throes of the bubble," Kloza said. "I hope $120 a barrel is the equivalent of the Nasdaq 5,000, which would put us in the last inning."
Crude for May delivery came within a dime of $120 a barrel Tuesday before closing at a record $119.37 a barrel on the New York Mercantile Exchange. The push came amid the dollar's fall to another low against the euro, which makes oil a cheaper buy for foreign investors.
Demand in China, India and the Middle East remains strong, while U.S. demand is flat or falling, awash in worries about a recession fueled by the credit and housing crisis and negative jobs data.
Geopolitical factors that raised concerns about supply in recent days include militant attacks on Royal Dutch Shell's oil operations in Nigeria that shut down 169,000 barrels a day of production; a pirate attack on an oil tanker near Yemen; and revelations that oil production in Russia fell in January and February.
Dollar called driving force However, Addison Armstrong, director of market research for TFS Energy in Stamford, Conn., said the weak-and-weaker dollar is driving the ramp-up.
The Federal Reserve has slashed U.S. interest rates to aid efforts to stave off a recession.
The European Central Bank hasn't cut interest rates and hinted this week that it may raise rates to address inflation — which could widen the gap between the euro and the dollar.
"Until the dollar really stabilizes and turns, it's foolish to try to call a top in this market," he said. "This crude rally is all about the dollar."
Cushion of subsidies Also, consumers in emerging economies like China and India where demand is strong haven't felt the pressure of high prices prevalent in the U.S. because their governments subsidize their gasoline costs, Armstrong noted.
"I think the tipping point really has to come when we see more significant demand destruction here in the U.S.," he said.
"The longer and deeper the recession in the U.S. is, there is a chance that begins to impact China's economy and India's economy and some others where we get a lot of imports. In a slowdown, we wouldn't be buying as much, and that could impact what is happening overseas."
For now, however, demand in emerging economies is more than offsetting slower demand in the U.S. and other developed countries, said Brian Hicks, co-manager of the U.S. Global Investors Resource Fund in San Antonio.
An OPEC increase? And Hicks said $120 a barrel could prompt developed countries to pressure OPEC to "at least think about or consider" increasing production.
Top policymakers in Saudi Arabia, the world's biggest oil producer, have said recently the kingdom sees no need to increase output anytime soon. But International Energy Agency Executive Director Nobuo Tanaka said in a speech Sunday that OPEC should help boost oil inventories because prices are too high.
Hicks noted that OPEC has less spare capacity than in the past — now less than 2 million barrels a day — but there's room to talk about upping output with oil hitting its current level.
"That's probably at the point where you start to see global leaders maybe get involved," Hicks said. "It's becoming more and more of a headwind to the economy."
Kloza said $120 oil doesn't change his prediction that the average U.S. price for gasoline will range from $3.50 to $3.75 a gallon with exceptions in some areas, such as California.
He has said $4 per gallon gasoline isn't reasonable given the sluggish economy and underlying fundamentals of supply and demand.
"Let's hope so," he said Tuesday.
“US consumption consist of a lot more than gasoline. Gasoline is less than half our petroleum consumption.
The US consumes about 9 MMBPD of gasoline. The World consumes about 85 MMBPD of crude oil.
20% of 9 = 1.8”
It takes roughly 2 gallons of crude to produce 1 gallon of gas, thus, if the US consumes 9MM bbls of gasoline/day, a 20% reduction would translate into a 1.9MM bbl/day reduction of gasoline. Since it takes 2 parts crude to produce 1 part gasoline, this would equate to a roughly 3.8MM bbl/day reduction in crude consumption.
3.8MM bbl/85MM bbl = 4.5% global crude reduction.
We also use additional processing to further breakdown crude oil to bump up the ratio of gasoline above what we get through simple distillation. If our gasoline consumption ratio were to fall, we would not spend the energy for additional processing for the extra gasoline.
We would still be consuming those other products.
It doesn’t matter if we import it or not, it is still crude that won’t be consumed. A 20% reduction in US gasoline consumption translates into a ~4%-5% global crude oil consumption reduction. The math is quite straightforward.
No,
We do not make half of crude oil into gasoline and throw the rest away. We still consume the other products leftover after gasoline is removed from the Crude Oil.
In the situation described, we would not import the additional gasoline and we would not do the extra processing needed to make additional gasoline.
Where would all the other products we are still consuming come from?
http://tonto.eia.doe.gov/dnav/pet/pet_cons_psup_dc_nus_mbblpd_a.htm
No, holding a storage lot on retainer isn't a big deal.
In your previous post you claimed that the oil refineries were not being operated at full capacity because slowing delivery increases profit for the oil companies.
My question was how; that is in my study of economics, getting your product to the market quickly is how you increase profits, not by slowing!
BTW see post #74 for a more informed explanation of the points you raised.
Stock levels are still above average. There is not a shortage of gasoline for delivery to retail distribution centers. This is only bringing stock levels back down to normal.
I said nothing about “throwing the rest away”. What I said is that it takes ~2 gals of crude to make 1 gal of petroleum. That is a fact. To produce 9MM bbls/day of gasoline, it would require ~18MM bbls/day of crude.
Unless you have the ability to ration supply of a necessary product. Then you can maximize profits by limiting supply. A market with rising prices is a great time to slow down for necessary repairs. Here's a link where you can see some rationale. The money quote from the article is:
The gap between the price of crude and the price of gasoline and other refined products has pressured profit margins at refiners Valero Corp. (NYSE:VLO), Tesoro Corp. (NYSE:TSO) and Sunoco Inc. (NYSE:SUN), among others.
Earnings from downstream operations including refining slumped 62% for a group of 10 major U.S. oil companies in the fourth quarter. At the same time, these companies processed roughly the same volume of oil, says the Energy Department's Energy Information Administration.
So profits were down last quarter and now the gas price is moving up as refinery capacity is slowed in the current quarter. I realize mechanical equipment requires periodic maintenance. But given the price spread, it seems like the most immediate benefit of the maintenance will be to increase the profit margins of the refiners
You got that right. Don't like these sky-high gas prices? Thank the Democrats!!!!
I’ve posted on other threads like this, but I find it interesting that to my untrained eye, $4/gallon gas hasn’t made nearly the impact I expected.
Road congestion (at times that work commuting likely isn’t being done) seems unchanged.
Speed limits being exceeded by 80%+ of drivers.
That aside, people have to do what they have to do. But transportation cost increases feed into escalating prices for goods. Increased oil prices help fuel increased crop prices as fertilizers and processing costs increase. If speculators are having a hand in the run-up in prices I hope they bailout too late when the floor drops from under them. The dollar's decline is also pushing up prices.
We have hundreds of years of oil available in the US, but as long as we're told that we will run out in 70 to 80 years, nobody is going to invest in new refinery installations that will be useless in the not too distant future. We need to increase production in the US and stop sending our money to counties run by people who are trying to kill us.
So where will we get those other products if the crude is not refined? We are still using those.
What I said is that it takes ~2 gals of crude to make 1 gal of petroleum. That is a fact.
Not a fact. If all we did was the following, we could not change the ratio of gasoline from crude.
Using only distillation, the first step of a refinery, the yields look like:
But in today's refineries, we have several post-distillation processes that allow us to vary the amount of gasoline produced from the crude oil. A catalytic cracker, for instance, uses the gasoil (heavy distillate) output from crude distillation as its feedstock and produces additional finished distillates (heating oil and diesel) and gasoline. A reforming unit produces higher octane components for gasoline from lower octane feedstock that was recovered in the distillation process. A coker uses the heaviest output of distillation, the residue or residuum, to produce a lighter feedstock for further processing, as well as petroleum coke. So in simplified terms, a modern refinery looks like:
By adjusting the amount of heavier products sent through the downstream processes, we can vary the ratio of gasoline produced from the same crude oil. There are limits to the process, but currently we change the above crude yields into:
When you compare current gas prices to average income earned, the prices compare to the ‘50’s and ‘60’s.
We are spending about the same ratio to income that they were then, when gas was 10 cents a gallon. About the very least we ever paid in relation to income/price, was in the 1980’s.
The current price seems ridiculous, but in reality, they compare to times in the past and are not actually out of touch quite yet.
I have no problem with folks exceeding the speed limit, it’s a personal choice, not a moral one, IMHO.
What surprises me is that with all the gnashing of teeth about fuel cost, the huge majority of folks on the road are passing up a great opportunity to save money.
Even though I could easily afford a BMW or Mercedes, I drive a little old Saturn coupe that gets 35mpg.
What is the margin on these oil futures? I’d wager if the amount of money needed to purchase oil futures was increased, we would see considerably less speculation.
Even in a more modern refinery process, the ratio of gasoline/crude can’t be changed appreciably. It remains roughly ~2 to 1...which is what I’ve been posting.
To answer your question of “where will we get those other products...?”, it’s really quite simple. If gasoline demand drops by 20%, demand for other crude products would drop as well. The price for those that didn’t drop would go up if demand stayed high and supply was reduced.
BTW, I wasn't yelling at you about your speed comments, I just thought it was a funny observation.
You keep posting it, but it is still wrong. If we do not send as much product to post-distillation processes, we reduce the ratio of gasoline produced.
If gasoline demand drops by 20%, demand for other crude products would drop as well.
Follow this back to the orginal post. How is putting electric motors in passenger cars going to reduce the demand for fuel used in trains, 18 wheelers, jets and industrial feedstock for plastics and petrochemicals?
You have changed the original suggestion of reducing gasoline to something entirely different.
The auto industry relies completely on the petrochemical market.
They will start building electric/hybrid vehicles, but the demand for vinyl, tires, plastics, will not change. There will also be a much higher demand for electrical energy, which is based mostly on natural gas in most heavy urban areas. (Because NG emits less CO2 and is mandated)
Because a new form of motor energy is put in place, does not mean at all that the demand for oil will reduce. It will more than likely increase because of the mad scramble to replace all the politically incorrect vehicles on the road today.
Only an idiot would make the claim that electric cars use less energy and emit zero carbon. Not to mention, what about all of the Ozone emissions they will dump into our atmosphere? Ozone is one of the most concentrated green house gases on the planet.
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