View Full Version : Implications of declining oil production(?)
I came across the following material about oil supplies that may be of general interest.
Briefly:
1. World total liquids production (Fig 1) remains on a peak plateau since 2006 and is forecast to fall off this peak plateau in 2009. According to the IEA, the current peak production of 86.13 mbd occurred on July 2006 and only one year later, June 2007 total liquids production fell to an unexpectedly low 84.28 mbd. As long as demand continues increasing then prices will also continue increasing.
2. Forecast world crude oil and lease condensate (C&C) production retains its 2005 peak (Fig 2). The forecast to 2100 shows declining C&C production, using a bottom up forecast to 2012 (Fig 3). The forecast to 2012 shows a 1%/yr decline rate to 2009, followed by a 4%/yr decline rate to 2012.
(Much more at: This Link (http://www.theoildrum.com/node/2828) )
The numbers suggest a developing imbalance between oil supply and demand, with the implication that prices will advance significantly. With the existing issues in the mortgage and debt markets, the implications for the U.S. and global economies are unpleasant.
I suspect the impact on global politics will be even sharper. China and India have expanded their usage, the U.S. needs considerable fuel to supply our domestic needs, and as supply is constrained, the potential for conflict seems likely to increase. The Middle East seems poised to get more attention, as will other producing areas such as Mexico and Venezuela.
My background in securities brokerage has given me some comfort with considering results in the markets and the overall economy – but I’m not qualified to speculate about the impact on diplomacy and possible military implications. I would guess that Saudi Arabia, Iran, Venezuela, and Mexico would all face greater instability; but it would be an uninformed guess.
Assuming such speculation wouldn't violate any security considerations, I’d very much appreciate any thoughts on the matter.
GratefulCitizen
08-26-2007, 22:18
Petroleum economics can get complicated.
First, what constitutes "reserves" needs to be carefully defined.
There are many sources of hydrocarbons on the planet.
The sources where product can be extracted and sold for a profit are the ones everyone is concerned about.
Here's part of where it gets complicated: when the price of oil goes up, more of the sources are now profitable, which means there is now more "oil" available.
It isn't quite like a gas tank which has a specific, finite capacity.
Second, the consequences of the changing price of oil might not be entirely intuitive.
When the price of oil increases, the US spends more to get it.
China and India also spend more.
If the US economy is competing with those of India and China, who has a relative advantage when paying for more expensive oil?
There are cries about the US "dependence" on foreign oil.
It is a two-way street.
Those foreign sources of oil are also "dependent" on US dollars. Would we rather have them dependent on the Chinese yuan and the Indian rupee?
Global economics are complicated.
Many of the views pushed in the American media are narrow and oversimplified.
All your points are well taken. The lack of transparency of the fundamental data - such as the condition of major oil fields - is a further complication.
The sheer size of the oil market suggests to me that changes will be slow due to scalability issues. So even if something (whatever that something might be) is an offsetting factor, it will take time to have any notable impact.
Still, despite the challenges in coming up with conclusions based on partial data, it seems a worthwhile effort.
GratefulCitizen
08-26-2007, 23:49
All your points are well taken. The lack of transparency of the fundamental data - such as the condition of major oil fields - is a further complication.
The sheer size of the oil market suggests to me that changes will be slow due to scalability issues. So even if something (whatever that something might be) is an offsetting factor, it will take time to have any notable impact.
Still, despite the challenges in coming up with conclusions based on partial data, it seems a worthwhile effort.
I'm curious what your opinions on the Russian/Ukrainian (abiotic) theory of oil are.
Given the massive increase in oil production in the former USSR since WW2, they seem to be onto something.
82ndtrooper
08-27-2007, 01:02
I came across the following material about oil supplies that may be of general interest.
Briefly:
1. World total liquids production (Fig 1) remains on a peak plateau since 2006 and is forecast to fall off this peak plateau in 2009. According to the IEA, the current peak production of 86.13 mbd occurred on July 2006 and only one year later, June 2007 total liquids production fell to an unexpectedly low 84.28 mbd. As long as demand continues increasing then prices will also continue increasing.
2. Forecast world crude oil and lease condensate (C&C) production retains its 2005 peak (Fig 2). The forecast to 2100 shows declining C&C production, using a bottom up forecast to 2012 (Fig 3). The forecast to 2012 shows a 1%/yr decline rate to 2009, followed by a 4%/yr decline rate to 2012.
(Much more at: This Link (http://www.theoildrum.com/node/2828) )
The numbers suggest a developing imbalance between oil supply and demand, with the implication that prices will advance significantly. With the existing issues in the mortgage and debt markets, the implications for the U.S. and global economies are unpleasant.
I suspect the impact on global politics will be even sharper. China and India have expanded their usage, the U.S. needs considerable fuel to supply our domestic needs, and as supply is constrained, the potential for conflict seems likely to increase. The Middle East seems poised to get more attention, as will other producing areas such as Mexico and Venezuela.
My background in securities brokerage has given me some comfort with considering results in the markets and the overall economy – but I’m not qualified to speculate about the impact on diplomacy and possible military implications. I would guess that Saudi Arabia, Iran, Venezuela, and Mexico would all face greater instability; but it would be an uninformed guess.
Assuming such speculation wouldn't violate any security considerations, I’d very much appreciate any thoughts on the matter.
Personally speaking I did not have a clue about the oil markets, their economic impact, infrastucture, or any of the foreign policy matters concerning oil during my 17 years in the financial services industry, especially being on the retail side of Morgan Stanley and Merrell Lynch to name two firms that worked under.
It was not until I recieved an MBA and aquired my CFA that I had some understanding of analysis of any given industry. But, in order to be in the oil analysis side of any firm it has to be the only industry that you cover and you'd better speak the languge of the region. With any decent firm your going to visit not only the HQ's of the major oil company's but the House of Saud as well. Ok, enough about that. The oill industry is especially complex to cover given the foreign relations and geographic emphasis on maintaining solid national and international housekeeping efforts both from policy and military perspective. Why do you think we went to Kuwait in 1991 ?
From a terrorist perspective their are some studies that have been done over the years, mostly those that Presidential administrations had the NSA, CIA and other intel agencies and think tanks conger up as dooms day scenarios.
From the mid 1930's to the 1960's Saudi Arabia was a branch office of America's oil giants.................a Republican internationalist fantasy. The United States remained secure in the knowledge that Saudi oil would alway's be there for us, under the sand, and as safe as if it were locked away at Ft. Knox. We built Saudi Arabia's oil business and , for our efforts, got full and easy access to it's crude. Has that changed ? and how has this administration's efforts afffected that relationship ?
The fist OPEC oil embargo took the petal off that rose, but anxiety turned into full panic in the early 1980's during the Iran-Iraq war, especially when it looked as if Iran might take the war to the Arab side of the gulf, including Saudi Arabia. With the nightmare of an Islamic praire fiire taking down the worlds economy, disaster planners in and out of government began to ask some uncomfortable questions. What points of the Saudi oil infrastructure were most vulnerable to terrorist attact ? And, by what means ? What sorts of disruptions to the flow of oil, short term and long term would be the result of such attacks? What are the real economic consequences ?
The Abqaiq extra light crude complex is both the most vunlnerable and the most spectacular target for Islamic radicals. Abqaig is the Godzilla of oil refinerys. The storage tanks and the large spheroids used to reduce pressure on oil during the refining process, and moderate damage to the stabilizing towers where the petroleum is purged of sulfar. Anybody heard of "hydrosulfurization" ? It takes place in ten tall towers, still to this day, where hydrogen is introduced into the oil in sufficient quantities to convert sulfur into hydrogen sulfide gas. This rises to the top of the tower.
Anybody wanna take a guess at what hydrogen sulfide can do to humans if let loose from ten big towers before it's rendered harmless, envirenmentally safe and usable sulfar ?
Here's three questions from Robert Baer that we should be asking.
1. Can the Wahhabis, the Shi'as, the Muslim Brothers and everyone else in Saudi Arabia who wants to bring down the Al Sa'ud lay their hands on enough firepower to do so ? it may sound easy, but believe it's not.
2. Is the House of Sa'ud beyond redemption or protection as a ruling authority ?
3. Does Washington have the capacity to see the Saudi kingdom for what it is ? Or does it have it's hand so deep in the Saudi wallet that it won't see and won't act ?
82ndtrooper
08-27-2007, 04:02
I'm curious what your opinions on the Russian/Ukrainian (abiotic) theory of oil are.
Given the massive increase in oil production in the former USSR since WW2, they seem to be onto something.
Russia is now posing like a super power because of this issue. Is Putin ready and willing to dow it out in the open markets in a more ample suppy ?
At the moment, they are using this as a cosmetic front.
I'm curious what your opinions on the Russian/Ukrainian (abiotic) theory of oil are.
Given the massive increase in oil production in the former USSR since WW2, they seem to be onto something.
As nearly as I can tell, the consensus among petroleum geologists dismisses abiotic oil.
For a more complete discussion of abiotic oil, along with footnoted references, you might wish to go to THIS LINK (http://www.energybulletin.net/2423.html). Mr. Heinberg addresses the issue in far more depth than I could.
It was not until I received an MBA and acquired my CFA
Thank you, Sir! If I may say so, I'm impressed - both by the credentials and the analysis.
Does Washington have the capacity to see the Saudi kingdom for what it is ? Or does it have it's hand so deep in the Saudi wallet that it won't see and won't act ?
Or could it be that the immediate cost of acting is so great that it is politically impractical?
Still worse - Saudi Arabia has a young, fast-growing population. Domestic consumption of crude oil is increasing at the same time production is rumored to be stagnating (or maybe in decline?). If the foregoing is true, revenues from oil will come under pressure, perhaps exacerbating the issues you mentioned.
82ndtrooper
08-27-2007, 07:58
Thank you, Sir! If I may say so, I'm impressed - both by the credentials and the analysis.
Or could it be that the immediate cost of acting is so great that it is politically impractical?
Still worse - Saudi Arabia has a young, fast-growing population. Domestic consumption of crude oil is increasing at the same time production is rumored to be stagnating (or maybe in decline?). If the foregoing is true, revenues from oil will come under pressure, perhaps exacerbating the issues you mentioned.
I believe you hit the point. It is simply politically and economically impractical until at which time the U.S. is entirely independent of foreign oil supply. I do not see this happening anytime soon.
If the Sau'ds were willing to run oil through and not around the triangle, then the supply could reach Europe faster and much cheaper. Until another Sa'ud holding the kingdom in his hands without the lust for fancy cars, expensive nights with prostitutes, palaces and golden shower handles, it's likely the person pulling the levers on how many barrels of oil spill out of Arabia is being done by the rulers wife not him. After all, the current is now shitting the palace pool from old age. Who's making the decisions now ?
IIRC we did have Bin Ladin in our sights during the Clinton Administration but were pulled off the last moment due to the fact that a C-130 holding the tail numbers of the Sa'ud family was present at that meeting. Don't wanna ruffle any feathers with the house of Sa'ud or the Bin Ladin Group Inc.
BTW: Dont be impressed by my credentials. I merely sat through a few more courses and scrubbed through a few more tests than my counterparts. Their just paper on the wall at this point. I do thank you none the less for the compliment.
An interesting little development...
Saudi Arabia has begun setting up a 35,000-strong security force to protect its oil infrastructure from potential attacks.
The move underlines the kingdom’s growing concern about its oil installations after threats from al-Qaeda to attack facilities in the Gulf, as well as rising tensions between Iran and the US.
The force already numbers about 5,000 personnel, a Saudi adviser said on Sunday. They are being trained in the use of new surveillance equipment, countermeasures and crisis management under a programme managed by US defence group Lockheed Martin, according to the Middle East Economic Survey in Nicosia.
The recruits are learning about laser security and satellite imaging from Lockheed on behalf of the Sandia National Laboratories’ Defense Systems and Assessments Unit – a US government run unit in New Mexico, said MEES.
LINK (http://www.ft.com/cms/s/0/3c32a024-5413-11dc-9a6e-0000779fd2ac.html)
incommin
08-27-2007, 11:07
My grand kids will be talking about the same stuff when they are grown and have kids...... When I was in high school in the early 60's the teachers were saying that we would start running out of oil by 1980 and that we were headed for another mini ice age......
THE SKY IS ALWAYS FALLING SOMEWHERE!
Jim
Team Sergeant
08-27-2007, 12:35
An interesting little development...
Saudi Arabia has begun setting up a 35,000-strong security force to protect its oil infrastructure from potential attacks.
The move underlines the kingdom’s growing concern about its oil installations after threats from al-Qaeda to attack facilities in the Gulf, as well as rising tensions between Iran and the US.
The force already numbers about 5,000 personnel, a Saudi adviser said on Sunday. They are being trained in the use of new surveillance equipment, countermeasures and crisis management under a programme managed by US defence group Lockheed Martin, according to the Middle East Economic Survey in Nicosia.
The recruits are learning about laser security and satellite imaging from Lockheed on behalf of the Sandia National Laboratories’ Defense Systems and Assessments Unit – a US government run unit in New Mexico, said MEES.
LINK (http://www.ft.com/cms/s/0/3c32a024-5413-11dc-9a6e-0000779fd2ac.html)
I read that today. I'm sure they have intelligence that place their oil fields in danger. 5000 to 35,000 that's a division plus guarding their future.
While the world trade towers might have been an ideological target, those oil fields are far more than a symbol.
TS
...When I was in high school in the early 60's the teachers were saying that we would start running out of oil by 1980 and that we were headed for another mini ice age......
THE SKY IS ALWAYS FALLING SOMEWHERE!
Jim
Sir, we come from the same era - I graduated from high school in 1970. A popular book of the time was Ehrlich's "Population Bomb", which forecast imminent doom. So, you've got a point.
It's also quite true that people have been advancing the argument for limitations since Malthus in 1798 - and, so far, the results haven't come to pass.
All of that said, North American crude did in fact peak in 1970, and our balance of payments hasn't been the same since. I find it interesting that we built the interstate highway system, but now we seem to have difficulty maintaining it.
The purpose of my posts, however, is not to persuade anyone that the sky is falling. Rather, I seek a better, deeper understanding of the dynamics of a situation that seems to loom large. And the reason I care? Because there is money to be made from correctly placed investments. So you see, I'm not guilty of running about the barnyard squawking about the sky falling. But I'm eager to gather more than my share of chicken feed. So far, it seems to be working. :cool:
A parallel situation exists in the mortgage market. Some people are experiencing personal distress because of some poor decisions. I, on the other hand, expect to gain quite a lot due to the Fed's choices. I mean no disrespect or offense by this display of raw avarice; but I thought it might put my explorations into better context.
Thus, the applicable graphic is not: :eek: but rather :munchin
Care for a pistachio? They're quite tasty. :D
..... I find it interesting that we built the interstate highway system, but now we seem to have difficulty maintaining it......
It is interesting that NC lifted $190,000,000 from the highway trust funds this year. The state government does it every year. They do it to pass slush funds around so they get reelected.
There is plenty of money available without raising taxes - if it was spent on what it was collected for.
I read that today. I'm sure they have intelligence that place their oil fields in danger. 5000 to 35,000 that's a division plus guarding their future.
While the world trade towers might have been an ideological target, those oil fields are far more than a symbol.
TS
The numbers seemed significant; thank you, Sir, for the confirmation.
The oil fields could well be the linchpin for both the Saudi royal family and the western economies; as you say, far more than a symbol.
Team Sergeant
08-28-2007, 07:05
The numbers seemed significant; thank you, Sir, for the confirmation.
The oil fields could well be the linchpin for both the Saudi royal family and the western economies; as you say, far more than a symbol.
Those numbers are very significant.
I would bet the Saud's didn't bump up those numbers on their own, they do not do anything on their own. My guess would be that they only did it at our request.
linchpin is an understatement.
I thought I would revisit this old thread, and post a chart of oil prices (West Texas Intermediate) from the inception of the thread through Friday.
Oil is up about 40%. What's interesting is that the economy is also slowing down, with some effects that we hear about on the news. There may be a connection between declining crude oil availability and GDP - if anyone cares, I could find a link to the report.
On the one hand, we may have a global recession, which could reduce global demand and slow the price increases for crude. But on the other hand, it appears that production is slowing in a great many fields. That could cause prices to continue higher. A lot higher.
The nations of the world need oil, and if shortages begin developing, as I suspect they will over the next few years, times are likely to get interesting.
In the FWIW department, it appears that one or more oil companies are building facilities between Steamboat Springs and Craig, CO to begin extracting oil shale in that area. I guess the price of foreign crude increased enough to make domestic extraction financially viable.
3SoldierDad
04-12-2008, 20:12
In the FWIW department, it appears that one or more oil companies are building facilities between Steamboat Springs and Craig, CO to begin extracting oil shale in that area. I guess the price of foreign crude increased enough to make domestic extraction financially viable.
This is actually good news. The oil shale sources in the Rockies as well as the oil sands in Canada are supposed to be absolutely enormous. There is plenty of oil on planet earth - the price just needs to stay over $90 / barrel. Many analysts say oil may come down 20% or more soon - by mid summer. This would actually hurt some of these efforts. Other analysts say oil is going higher. Capitalism is wonderful - It allows everyone to throw the dice.
Hey, let's see wind, solar, nuclear, and clean coal get going as well. I don't worry too much since I know big money can be made in energy. Great minds are thinking...
Please, keep gov't out of energy as much as is possible!
Pain is good.
Three Soldier Dad...Chuck
GratefulCitizen
04-12-2008, 22:01
A recent news release from the USGS:
http://www.usgs.gov/newsroom/article.asp?ID=1911
There's probably some endangered dirt or something on top of it...:rolleyes:
In the FWIW department, it appears that one or more oil companies are building facilities between Steamboat Springs and Craig, CO to begin extracting oil shale in that area. I guess the price of foreign crude increased enough to make domestic extraction financially viable.
Yes, Sir. They face some challenges.
1) The extraction is sure to be expensive.
2) Flow is likely to be limited.
We're dependent on cheap and abundant energy.
That said, from an entirely selfish perspective, I wish them the best.
The Reaper
04-13-2008, 20:09
I have a feeling that as the price of oil rises, it will inspire the creation of technological advancements that will in the long run end up driving the price of oil back down. For example, I saw in an article recently, I think it might have been Popular Mechanics, on oil rigs, and in it they said that oil rigs now are drilling at depths that only ten years ago were considered impossible.
So, figure the combination of the following:
1) Cars/trucks become more fuel-efficient due to advancements in technology (for example I believe the supply of gasoline doubled when carberators were replaced with fuel injectors).
2) Oil rigs will start drilling in more areas that right now are considered impossible or too expensive
3) Advancements in technology will make extraction of shale oil and from the sands in Canada much more profitable
4) More oil is found in the oceans by U.S. companies
5) Probably some other stuff I am not thinking about right now
There is already plenty of oil in and around the US right now.
The enviro whackos won't let them drill, so we send tons of money overseas and ruin our economy.:rolleyes:
TR
There is already plenty of oil in and around the US right now.
The enviro whackos won't let them drill, so we send tons of money overseas and ruin our economy.:rolleyes:
TR
But that oil will eventually run out as well, no? What then? We will be faced with the same choices of:
A) Come up with another, more efficient, fuel source
or
B) Dump all of our money into foreign countries and ruin our economy.
If we are eventually going to bite the bullet and get the fossil fuel monkey off of our back, why not do it now (rather than later, after all of our natural resouces have been pillaged and plundered)?
Also, call me crazy (or a conspiracy theorist), but part of me truly thinks that the oil companies, having failed in their attempts to defeat the enviro types, are now trying another tactic....artificially jacking up the gas prices until Joe Public gets so fed up that he demands that the oil compnaies be allowed to drill....
Oil companies get their hands on the oil, and make record breaking profits in the process of convincing us that it was in our own best interests to give more freedom to drill away..... it's win win for them.
The truth is out there.:D
....... until Joe Public gets so fed up that he demands that the oil compnaies be allowed to drill....
Oil companies get their hands on the oil, and make record breaking profits in the process of convincing us that it was in our own best interests to give more freedom to drill away..... it's win win for them.
The truth is out there.:D
Maybe we should turn drilling for oil over to the banking industry. The public seems to be OK with them operating on their 20% profite ratio vs the oil companies 10%.
Pete
Maybe we should turn drilling for oil over to the banking industry. The public seems to be OK with them operating on their 20% profite ratio vs the oil companies 10%.
Pete
http://www.americanprogress.org/pressroom/statements/2007/05/pain_gain.html
The American Petroleum Institute ran full page ads in The Washington Post this week declaring that the oil industry only made a 9.5 cent profit for every dollar spent on gasoline in 2006. Yet when they made this claim, it seems like they were banking on readers not remembering the similar ads that ran last year in The New York Times.
Last year’s New York Times ads showed oil industry earnings for 2005 at just 8.5 cents on each dollar of gasoline sales. By the industry’s own numbers, that means that the profit margin of the oil companies increased by 11.7 percent from 2005 to 2006, at a time when gasoline and crude oil prices rose.
The American Petroleum Institute ads imply that crude oil price jumps and not profits are a bigger part of the story of higher gas prices. But whenever the helpful people of America’s oil and natural gas industry try to educate consumers, it pays to be skeptical. After all, the statement about net income is taken out of context and misleading at best. Most consumers are not experts in gasoline production or corporate finance. And people paying the highest prices in more than a quarter century to fill their gas tanks probably want to know if their friendly neighborhood oil conglomerate is sharing in the pain by lowering their profit margins.
Since the beginning of this year, the ratio of gasoline prices to crude prices—a rough approximation of the oil companies’ mark-up over their input prices—rose 37 percentage points. In fact, gasoline prices jumped 39 percent while crude prices only increased by 9.1 percent since December 2006. That spells big profits for oil companies, and when the lobby runs the same ad next year, it just might show an even larger profit margin.
This is not the way it is supposed to work. When input prices rise in a short period of time, profit margins should decline. Companies often absorb input price shocks, such as higher crude oil prices, by reducing their profit margins while also passing on part of the price increase to their customers. If companies instead pass the full price shock on to their patrons, they may be able to preserve their profit margins, but they could lose business as demand for the product dropped off due to higher prices.
Imagine, for example, that the price of a gallon of milk increases by 25 percent over three months. Most food producers and grocers would not increase prices by 25 percent because such a steep increase would lead many consumers to switch to other substitute products, such as soy or rice milk.
Yet gasoline is clearly not milk. The data show that oil companies have increasingly been able to pass higher crude oil prices on to the consumer rather than absorb the price increase themselves.
If crude prices increase sharply, gasoline prices should rise at the pump as well, although the gasoline increase should be less significant. In other words, the ratio of gasoline prices to crude prices should fall since oil companies presumably cannot pass on the entire crude price increase to the consumer. The more the ratio of gasoline prices to crude oil prices falls, the less oil companies can pass the spike in crude prices on to consumers.
The data show that when crude prices rose by 10 percent, 15 percent, or even 20 percent over a period of six months, gasoline prices did not rise as quickly and the ratio of the two prices fell, just as expected (see Figure 1). When the crude oil price rose by 15 percent during a six-month period in the 1980s, for example, the ratio of gasoline prices to crude prices fell by 51.5 percentage points. The same ratio also declined in the 1990s and early 2000s, when there were sharp price increases.
Notes: Authors’ calculations based on data from the Energy Information Administration, 2007, Short-term Energy Outlook, Washington, DC: EIA. Averages are calculated for business cycles, unless otherwise noted.
The data also show that oil companies had a slightly harder time passing crude oil price increases to consumers in the 1990s than in the 1980s. In each instance, the drop in the ratio of gasoline prices to crude prices was on average larger for the 1990s than in the 1980s.
Yet after 2000, oil companies apparently became much better at passing the crude price increases on to consumers. The decline in the ratio of gasoline prices to crude prices during times of sharp oil price hikes dropped substantially to around 20 percent. And after 2004, the average decline was down in the single digits—the same time period that Americans experienced the largest price spikes of the current business cycle, which started in March 2001. Put differently, after 2004, oil companies were able to translate the jumps in crude prices almost one-for-one into higher gasoline prices at the pumps instead of absorbing some of the oil price hike themselves.
Had the relationship between crude and gas prices remained the same as in the 1980s, gas prices would have climbed substantially less than they did. The last time crude prices were as high in inflation-adjusted terms as they have been in the past year was in the middle of 1983. Back then, the ratio of gasoline prices to crude prices was approximately 170 percent. Now it stands at 225 percent. Prices at the pump would have to decline by 25 percent to $2.43 from their current level of $3.22 to reestablish the same relationship with crude oil prices that prevailed in 1983.
Another way to look at this is that crude prices would have to be much higher, based on past experience, to justify the high gas prices that are prevailing today. Based on the experience of the 1980s, the current price at the pump implies that a barrel of crude oil should cost $80 rather than the current $60.
The fact that gas prices and crude prices have parted ways means that oil companies have become better at passing on increases in input prices to their customers. This eventually shows up as higher profit margins for oil companies—as the friendly people at the oil industry’s own advertising firms have demonstrate in their full-page ads. So it is no surprise that the big five oil companies combined have made a quarter trillion dollar ($254 billion) profit since 2005.
The industry has apparently figured out how to turn higher crude prices to their advantage, turning basic economics on its head. Unfortunately, their extra billions in profits come straight from our pockets.
The Reaper
04-14-2008, 09:51
When the company owns oil production fields, they profit significantly from price increases.
The converse is also true.
It does not necessarily indicate any sort of unethical activity. The role of a publicly held company, as I understand it is to generate maximum returns for the owners.
I noticed refinery production numbers dropping earlier this year, which tightens supply and causes prices to rise. There are a number of possible explanations for this, the most common and most plausible was that the crack price spread (between cost per gallon of oil vs. wholesale price per gallon of gasoline) had narrowed and in some cases, inverted to a net loss per gallon.
It does remain curious that a recent 10% reduction in the cost per barrel of oil did not translate into a commensurate 10% (or roughly 30 cent per gallon) reduction in the cost of gasoline.
The cost of keeping the black helicopters flying must be enormous.
TR
When the company owns oil production fields, they profit significantly from price increases.
The converse is also true.
It does not necessarily indicate any sort of unethical activity.
TR
The converse is only true if the ratio between oil costs and gas prices remains roughly the same.. The data above, which comes from the oil industry itself, seems to indicate otherwise.
As the article states, simply using the ads run by the oil inductry, there has been over an 11 percent increase in profit margin in just the last year.
This is not the way it is supposed to work. When input prices rise in a short period of time, profit margins should decline. Companies often absorb input price shocks, such as higher crude oil prices, by reducing their profit margins while also passing on part of the price increase to their customers.
I thought oil companies were for-profit corporations, rather than charities. Inelastic demand doesn't provide much incentive to absorb input price increases.
I thought oil companies were for-profit corporations, rather than charities. Inelastic demand doesn't provide much incentive to absorb input price increases.
Agreed, I mean, just because we are engaged in a Global War on Terror and headed into a recession is no reason to not take advantage of the monopoly that you have on the market. Why cut into your already record breaking, unprecedented quarterly earnings when you have the opportunity to twist the knife a little harder?
I get that.... but don't expect me to be sympathetic or supportive when the industry then turns around and wants to drill and clearcut even more of our dwindling natural resouces...... karma is a mo'f#cker.
The government has done multiple investigations to see if the oil companies are colluding to raise prices, and have constantly found that they aren't. So if they are, they are doing an incredibly good job of hiding it.
I do not see what is wrong with oil companies making huge profits. Too many people (especially Democrats) seem to think that profit is some evil thing that government has to infringe upon. Heaven forbid a corporation make what is deemed too much profit.
I am sure that an administration comprised of and funded by the oil industry really got on it when it came to investigating the people that paid their way into office. Riiiiiiiiight..... :D
And I don't think that the govt shoudl regulate pricing, but that doesn't stop me from thinking that the industry is full of a bunch of greedy a##holes who are gouging us.
We are going to have to get off of this ride eventually (dependence on oil), we might as well do it now......
Mdb23's comments motivated me to bring up some charts (attached) that seem to suggest general parity between crude oil and gasoline prices.
In addition, I added a chart of the cost of crude in terms of gallons of gasoline. Of course, all of these are at the futures contract price, not at the corner store price. Anyway, a barrel of crude is worth 39.32 gallons of gas at today's close. If gasoline were expensive relative to crude, the ratio would be lower....and the ratio is close to the cheap side of the range.
Crude oil is the dotted line, gasoline is the solid line in the main chart. The ratio is plotted below.
My conclusion: the oil companies aren't adding excessive markups.
I have a feeling that as the price of oil rises, it will inspire the creation of technological advancements that will in the long run end up driving the price of oil back down. (snipped)
All good points.
In essence, we have a race going on between two trends. You've outlined one trend well - let's call it the innovation and conservation trend.
The competing trend is oil field depletion and rates of decline.
If the innovation and conservation trend equals or exceeds the decline trend, then prices will react accordingly, and all will be well. However, if the decline trend proves to be more rapid than the innovation and conservation trend, prices will continue higher, and availability will decline. Those who oppose domestic drilling will become remarkably unpopular.
No one has complete data. The Saudis treat the state of their fields as a state secret, or so I understand. Thus there is insufficient data to know which trend will prevail.
A study was done in 2005; it suggested that the depletion trend would overwhelm the innovation trend for the next 20 years. It's available from the DOE. LINK (http://www.netl.doe.gov/publications/others/pdf/Oil_Peaking_NETL.pdf)
My take: we shall live in interesting times.
Let's not forget the little guy gas station/quick stop down at the corner.
Is he ripping us off? Some think so.
Just how much gas does a small corner station have in the underground tanks? How much does the owner pay out to have then filled once a week or so?
He buys at a set price. As he is selling during the week the price goes up. Does he raise his rates in anticipation of the price he'll have to pay for the next fill up or keep selling it for what he paid. What if the price drops? Does he take a loss and sell it for less than he paid for it?
And all the while the guy on the other corner is checking his price sign. The other guy's employee's are all family so they can cut a few pennies under our man's price. Oh, what to do, what to do?
And those loyal SUV drivers? The ones he cashed personal checks for? They jump over to the other guy's place to save 90 cents on their next fill up.
incommin
04-14-2008, 18:03
I think I heard on the news today that Brazil just found a very large supply of crude off their coast....... I think we have crude supplies for the next century and a half.....if the left we allow us to get to it.
Jim
Clearcut? If you mean trees, there are more trees now than there were 150 years ago I believe.
Yes, and they are all 2" tall and wash away anytime there is a drizzle outside.:D
I think I heard on the news today that Brazil just found a very large supply of crude off their coast....... I think we have crude supplies for the next century and a half.....if the left we allow us to get to it.
Jim
Sir, it is my understanding that the new oil find is about 33 billion barrels in total. It is also my understanding that complete recovery is not possible.
However, for the sake of discussion, let us suppose we can do so.
The International Energy Agency contends that daily global usage is 83 million barrels daily. Doing a quick calculation, that suggests that the entire Brazilian find would be consumed in about 13 months. (Of course there are other supplies. I use this merely as an illustration). Link to EIA (http://www.eia.doe.gov/oiaf/ieo/oil.html)
So....this seems to imply that we must locate a new Brazilian field every 13 months simply to replace existing use. And yet, demand (see the above link) is projected to grow.
ANWR is a point of contention for some. The most optimistic estimate is a total reserve of 16 billion barrels. Link - see page 7 (http://tonto.eia.doe.gov/ftproot/service/sroiaf(2004)04.pdf). This is a valuable resource - but it represents only about 6 months of global usage, or perhaps 2 years U.S. usage.
I also wonder if it is wise to use our domestic resources. If our supply chain were ever interdicted, would it not be worthwhile to have untapped reserves? But I am ignorant of such matters, so perhaps others can shed light on this aspect.
The Reaper
04-14-2008, 20:05
Yes, and they are all 2" tall and wash away anytime there is a drizzle outside.:D
How many have you planted this year?
Or are you one of the guys who just likes to bitch about the situation?
You do consume paper and wood products do you not?
TR
Yes, and they are all 2" tall and wash away anytime there is a drizzle outside.:D
There is more protected forest now then there ever has been.
Logging companies also use alternating plots of land. They have been doing this for hundreds of years, and aren't going to work themselves out of a job.
How many have you planted this year?
Or are you one of the guys who just likes to bitch about the situation?
You do consume paper and wood products do you not?
TR
I try to live as "green" as possible, while recognizing that we are going to leave a footprint and that consumption is necessary.
There is a "middle ground" between "environmental wacko" and "let's cut, drill, pillage, plunder, and ravage since Jesus is coming back in 3 years anyway." I like to think that I am somewhere in that middle ground.
I don't agree with all of the stances taken by the environmentalists, but at the same time I am not swallowing all of the BS being spewed out by the oil and timber industries. Like someone else on here said, there are parts of the PNW that look like the dark side of the freaking moon due to logging.
And I planted multiple trees as part of a vounteer project that my wife's company did last year. I don't have the exact numbers.
GratefulCitizen
04-14-2008, 22:28
Also, call me crazy (or a conspiracy theorist), but part of me truly thinks that the oil companies, having failed in their attempts to defeat the enviro types, are now trying another tactic....artificially jacking up the gas prices until Joe Public gets so fed up that he demands that the oil compnaies be allowed to drill....
Oil companies get their hands on the oil, and make record breaking profits in the process of convincing us that it was in our own best interests to give more freedom to drill away..... it's win win for them.
The truth is out there.:D
Why in the world would oil companies want to defeat the enviro types?
Their activities drive up prices for oil and gasoline.
In the '60's mass-produced internal combustion engines were making dramatic increases in thermal efficiency.
The pollution controls of the '70s put a stop to that (and actually reversed it).
As auto manufacturers have devised ways to increase efficiency (thermal, mechanical, aerodynamic, etc), emissions and safety laws have been passed which undermine those efforts.
Enviromental regulations on refineries have bottlenecked the supply of gasoline.
(gee, I wonder who lobbied for those restrictions...it wasn't just the enviro types)
California decided a long time ago that new diesel cars weren't welcome...for environmental reasons.
(any guesses on the fuel efficiency of a late '70s or early '80s diesel VW Rabbit?)
The incredible tangle of regulations make startup costs so high that it virtually ensures existing oil companies will never see new players enter the market to compete.
Now the enviro types are pushing global warming...
Guess what. Biofuels have a much bigger net carbon footprint than petroleum.
Call me a conspiracy theorist, but it seems that all of the efforts of the "enviro types" end up helping oil companies.
A great irony is the Left love to make out as if Bush was behind the corruption/fall of Enron, because he and Ken Lay were friends, but actually the fact that Bush would not ratify Kyoto, despite his being friends with Ken Lay and Enron's pleading, shows he is not a corporate shill looking out only for his corporate buddies.
Big Business loves Hillary Clinton too.
My friend, you are drinking the Kool Aide.:D Big business does not love the radical left. I suppose that the leaders of the oil industry were merely engaging in "reverse psychology" when spending millions in an attempt to get Bush Sr. and Jr. into officer? They love the additional taxes being thrust on them, gag at the thought of a 10 Billion dollar tax cut, and can't wait for tougher environmental regs that will cut into their bottom line.....Come on.
And I guess Bush was being a hard ass environmentalist when he made emission regulations in Texas "vouluntary" for companies?
And when I referred to the companies not being able to "defeat" the enviros, I was referring to being able to get their hands on ANWR and the oil in CONUS, not regulation. They already won the latter.
Retired W4
04-15-2008, 10:31
Let's not forget the little guy gas station/quick stop down at the corner.
Is he ripping us off? Some think so.
Just how much gas does a small corner station have in the underground tanks? How much does the owner pay out to have then filled once a week or so?
He buys at a set price. As he is selling during the week the price goes up. Does he raise his rates in anticipation of the price he'll have to pay for the next fill up or keep selling it for what he paid. What if the price drops? Does he take a loss and sell it for less than he paid for it?
And all the while the guy on the other corner is checking his price sign. The other guy's employee's are all family so they can cut a few pennies under our man's price. Oh, what to do, what to do?
And those loyal SUV drivers? The ones he cashed personal checks for? They jump over to the other guy's place to save 90 cents on their next fill up.
I'd like to provide a little insight to the process of buying wholesale fuel. After I retired from the Army, I was the Chief Pilot of a corporate flight department. We had our own underground fuel storage tank that held 12,000 gallons, which allowed me to purchase jet fuel from a wholesale distributor. The price break was at 7,500 gallons. In the Atlanta market, the price of jet fuel changes each Tuesday and gasoline changes on Monday. I have no idea what drives the fluctuations of the retail price that we all see, but I do know those retailers get their price on Monday, and that is what they pay for the week. Like Pete said, they buy at a set price, and as I suspect they tweak the consumer at will.
On a different, but related subject, I believe we need to put a stop to the insane practice of making fuel out of food!