Why Gas Prices are so high

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.nytimes.com/interactive/2022/06/14/business/gas-…

**Why Gas Prices Are So High**

**By Ella Koeze and Clifford Krauss, the New York Times, June 14, 2022**

**...**
**The single biggest factor driving the spike now is the price of crude oil. As of April, according to the Energy Information Administration, the cost of the raw material accounted for 60 percent of the price of a gallon of regular gasoline. ...**

**The United States is the second largest importer in the world after China. That’s partly because American refineries are often set up to process types of oil that are different from those produced in the United States. ... Last year, about 8 percent of U.S. crude oil imports came from Russia. ...**

**U.S. oil companies and other large producers of oil are reluctant to increase their output. That’s because oil executives are fearful that the price could fall if they increase production too much. And countries like Saudi Arabia and the United Arab Emirates cannot quickly ramp up output enough to offset the expected drop in Russian supplies....**

**Until more supply comes online or demand falls, prices at the pump will likely stay high.** [end quote]

Oil producers are listening to the jawboning about reducing carbon emissions, increasing alternative energy sources and electric vehicles. They don’t want to invest in new O&G production when world leaders say that demand will be driven lower. They expect a crash in oil prices later, so it would be foolish to invest in more production now.

But until the alternative energy sources are online, the world still competes for oil and gas. High fuel prices impact consumers and also producers of goods. Naturally, all costs are passed on to consumers. This will keep pressure on inflation as it did in the 1970s.

Wendy

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For a slightly contrary opinion, here’s Business Insider and WaPo:

https://markets.businessinsider.com/news/commodities/us-gas-…
https://www.washingtonpost.com/business/2022/06/20/refinerie…

Summary: oil prices are still pretty high, but they’re actually a bit lower than they were back in March - but gas prices are through the roof relative to oil prices. The culprit is more refinery capacity than oil and gas production. Several million bpb of refinery capacity was taken offline in response to the pandemic - but unlike wellfield production (which has mostly recovered) there’s been little to no effort to bring back refinery capacity. Indeed, refinery capacity is continuing to fall, as companies aren’t stopping their planned shutdowns.

As you point out, oil companies are responding to the likelihood of big future shifts in the market for their products (and the likelihood of future regulation, though that’s a taboo subject here). Unlike marginal increases to wellfield capacity - which can be small and can amortize quickly - investments in refineries are in the billions and take decades of operation to recoup. So they’re not opening new refineries in the U.S. Perhaps ever again.

Albaby

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Here’s another slightly different opinion.

Eric Nuttall: OPEC running out of spare capacity confirms our multi-year bull case for oil

"We have for more than a year argued the world was hurtling into an energy crisis of epic proportions that would result in a multi-year bull market for oil. Our bullish thesis had four basic tenets: persistent demand growth for at least the next 10 years, the end of shale hyper-growth in the United States, defined as shale production growth rates that no longer exceed global demand growth, stagnant production growth from the global super-majors resulting from eight years of insufficient investment and, finally, the exhaustion of OPEC’s spare capacity.

The hardest of these four core assumptions to prove by far was the last one."

https://financialpost.com/commodities/energy/oil-gas/opec-ex…

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Off-point, but I’m curious.

unlike wellfield production

I was first exposed to the oil & gas industry in the summer of 1954 when I worked as a roustabout (laborer) for Shell in the marshes of South Louisiana. Later worked for Esso/Humble/Exxon for four decades and have kept in touch for almost three more.

This is my first exposure to a “wellfield”. Is that a recent development by the media? A collective term for oil, gas, water injection, etc. wells?

Of course, I never saw a Jackalope either except for a statue in Odessa TX.

No offense intended.

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Thank you for recommending this post to our Best of feature.

Here’s another slightly different opinion.

Eric Nuttall: OPEC running out of spare capacity confirms our multi-year bull case for oil

Yup, running low on the easy stuff, takes time to get the hard stuff out of the ground and refined.

Just imagine when everyone has an EV and the Nat gas supplies needed to produce the excess power have been shipped off to foreign destinations as LNG?

Anymouse

US Oil Imports by Country 2022

https://worldpopulationreview.com/country-rankings/us-oil-im…

Here are the 10 countries providing the most U.S. oil imports:

Canada (1,584,269)
Mexico (259,496)
Russia (245,194)
Saudi Arabia (156,875)
Colombia (74,185)
Ecuador (61,303)
Iraq (57,277)
Brazil (52,229)
Netherlands (46,117)
Nigeria (45,699)

Country,  2021 Barrels,   2020 Barrels,  2019 Barrels

Canada,     1,584,269,   1,509,646,  1,613,262
Mexico,       259,496,     274,757,    237,401
Russia,       245,194,     197,720,    187,960
Saudi Arabia, 156,875,     190,929,    193,357
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Oil producers are listening to the jawboning about reducing carbon emissions, increasing alternative energy sources and electric vehicles. They don’t want to invest in new O&G production when world leaders say that demand will be driven lower. They expect a crash in oil prices later, so it would be foolish to invest in more production now.

But until the alternative energy sources are online, the world still competes for oil and gas. High fuel prices impact consumers and also producers of goods. Naturally, all costs are passed on to consumers. This will keep pressure on inflation as it did in the 1970s.

Pretty much spot on. Renewables are catching on, but you can’t change a grid overnight, and you can’t change transportation overnight. This will take time, it will be a transition, but it has to happen. I keep thinking that oil shocks will shock the public, but that never seems to happen. “Oil is wrecking our lives again! Should we find an alternative to oil? No, we should find even more of it and deepen our dependency even further!”

PBS Frontline has a recent 3-part series called “The Power of Big Oil”. I highly suggest watching it. I simply cannot recommend it high enough. For those too lazy to Google:

https://www.pbs.org/wgbh/frontline/film/the-power-of-big-oil…

Notice how the oil companies acted as if they were pivoting to be “energy companies”, not just oil companies. Which makes enormous sense. But it was all lip service.

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No offense intended.

None taken. I’m a lay person - I have virtually no knowledge of any particulars of how actual oil production or extraction takes place. I happened to be looking at the EIA numbers for field production of crude oil at the time:

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&…

…and just typed “wellfield production” as a term to distinguish getting oil out of the ‘field’ instead of refining it. I’m sure it’s the wrong term - or possibly not even a real term at all!

Albaby

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World events remind us that renewable energy is the future.

Under investment in renewables leaves us vulnerable.

We should be more aggressive.

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As you point out, oil companies are responding to the likelihood of big future shifts in the market for their products (and the likelihood of future regulation, though that’s a taboo subject here). Unlike marginal increases to wellfield capacity - which can be small and can amortize quickly - investments in refineries are in the billions and take decades of operation to recoup. So they’re not opening new refineries in the U.S. Perhaps ever again.

Albaby

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United States has not built a new refinery since the 1970s. The CEO of Chevron recently stated that there will be no new refineries built in the United States.

https://oilprice.com/Latest-Energy-News/World-News/Chevron-C…

Jaak

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Eric Nuttall: OPEC running out of spare capacity confirms our multi-year bull case for oil

Our bullish thesis had four basic tenets: persistent demand growth for at least the next 10 years …

========================================================================

I do not see the demand lasting 10 years - at most 3-5 years.

Jaak

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- investments in refineries are in the billions and take decades of operation to recoup. So they’re not opening new refineries in the U.S. Perhaps ever again.

They may or may not build new refineries but it is very common to add capacity to existing refineries through upgrades or new construction. Some recent examples of large increases include

In 2012, Motiva upgraded its refinery in Port Arthur, Texas, making it the largest U.S. refinery, with a capacity of 607,000 b/cd as of January 1, 2021.
In 2015, Valero expanded its Corpus Christi, Texas refinery after previous expansions, bringing its capacity as of January 1, 2021, to 290,000 b/cd.

https://www.eia.gov/tools/faqs/faq.php?id=29&t=6

When was the last refinery built in the United States?
As of January 1, 2021, there were 129 operable petroleum refineries in the United States.

The newest refinery in the United States is the Targa Resources Corporation’s 35,000 barrels per calendar day (b/cd) condensate splitter in Channelview, Texas, which began operating in 2019. Condensate splitters are distillation units that process condensate, which is lighter than crude oil. Splitter capacity is included as atmospheric distillation units in U.S. Energy Information Administration (EIA) data.

However, the newest refinery with significant downstream unit capacity is Marathon’s facility in Garyville, Louisiana. That facility came online in 1977 with an initial atmospheric distillation unit capacity of 200,000 b/cd, and as of January 1, 2021, it had a capacity of 578,000 b/cd.

Capacity has also been added to existing refineries through upgrades or new construction. Some recent examples of large increases include

In 2012, Motiva upgraded its refinery in Port Arthur, Texas, making it the largest U.S. refinery, with a capacity of 607,000 b/cd as of January 1, 2021.
In 2015, Valero expanded its Corpus Christi, Texas refinery after previous expansions, bringing its capacity as of January 1, 2021, to 290,000 b/cd.

Tim

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I do not see the demand lasting 10 years - at most 3-5 years.
- Jaak

Well, that’s worth bookmarking and revisiting in a few years.

DB2

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I do not see the demand lasting 10 years - at most 3-5 years.

I assume you mean the demand growth, as in the post you were responding to.

Even so, I suspect you’re wrong. I think that we’ve got a fair more demand growth out there.

We’ve only just started to get serious adoption of electric cars (right now, BEV’s are only about 7% of global market share). Even with double or even triple that market penetration, we’ll still likely be adding more ICE cars to the road each year than get removed due to the end of their useful life. The global ICE passenger automobile fleet will probably still be increasing even five years from now.

But more importantly, passenger automobiles represent only a small portion of global petroleum use. Half of petroleum use isn’t for roadway transport, and only a portion of roadway transport consists of the passenger cars that are being electrified. All of the other uses will likely continue their upward demand growth once the pandemic/Russian war shakes out. Unlike passenger cars, penetration of electric vehicles in other roadway sectors - small trucks, semis, and buses - has barely gotten started. We’re even further away from any serious conversion of aviation from petroleum fuels. And of course, the many industrial and non-energy uses of petroleum (which make up about a quarter of global demand) will continue to grow as the global economy grows.

Why do you think global demand will top off in 3-5 years? Apart from EV’s, what will be the driving force in reducing demand growth for petroleum?

Albaby

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Well Jaak, you are a true believer. I think three to five years is super optimistic to say the least. I would love if that were true,but I think not. Massive transformation of our energy systems will take at least thirty years from 3 to 5% adoption to 80% adoption country wide. The demands on production of capital goods are enormous for the transition. I think oil will still be in use twenty years from today in transportation,albeit at a much lower level.My WAG would be 20% of today’s total use,mostly in airplanes.

JK

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Well Jaak, you are a true believer. I think three to five years is super optimistic to say the least

Remember “cash for clunkers”? It took out one of the upper tiers of the used-car market, forcing those who could only afford the lower tiers to try to keep the real clunkers on the road longer than they otherwise would have.

If the auto-makers all went 100% electric on cars suvs and minivans today, it would take 3-5 years before even the top tier of the used-car market is all-electric. So about 25% of vehicles of those types on the highway would be electric. That, imho, isn’t a massive transformation of our ground transport - what about semis, buses, train, motorhomes, etc.?

And that abrupt change isn’t happening.

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Why do you think global demand will top off in 3-5 years? Apart from EV’s, what will be the driving force in reducing demand growth for petroleum?

=====================================================================

My opinion is that we will reach peak oil demand in 3-5 years is based on the following:

  1. Climate change is accelerating and destroying infrastructure, agriculture, water resources, forests and land faster than previously estimated and which is more valuable than previously estimated. There will be mass migrations due to climate change in ever increasing numbers.

  2. To mitigate these climate change effects there will be worldwide regulations adopted to reduce CO2 emissions from transportation, industry, buildings and power generation.

  3. These regulations will force energy companies to develop alternative energy sources.

  4. The efforts have already been made within the energy industry in finding alternative to the fossil fuel. One such alternative generating is hydrogen. The most abundant chemical element in the universe has become of particular interest due to its potential as an energy carrier. Similar to oil it may serve as a feedstock or main ingredient for transportation fuels, energy generation and storage, and also chemicals production.

  5. Already hydrogen is being used in power generation, transportation fuels, building heating, and industrial heating.

  6. Battery technology will continue to improve and be used more than it is today.

  7. Fuel cell technology will continue to improve and be used more than it is today.

  8. Heavy trucks, buses, ships and airplanes will begin to use hydrogen based fuels, batteries, and fuel cells instead of fossil fuels.

  9. Efficiency improvements in the transport sector

Jaak

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Why do you think global demand will top off in 3-5 years? Apart from EV’s, what will be the driving force in reducing demand growth for petroleum?

Starting in the US and spreading to the rest of the western world hooking up to the grid will become a very easy fast process.

What do I mean?

FERC in the US is in the process of setting up a much more rapid process to allow alternative energy projects to connect to the grid. The permission process to connect is very slow.

Currently there is a large backlog of projects not connected to the grid. The new process will clear the backlog quickly.

The number of projects going forward from is an even greater. The new process of being allowed to connect will make bringing the power onto the grid much less painful and much more rapid.

The future number of projects will be exponentially greater.

Because of the backlog of unconnected projects it feels right now as if there is very little alternative energy out there. That is not entirely true. It is about to radically shift.

As the US does all of this our competitors need will need to keep up economically.

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My opinion is that we will reach peak oil demand in 3-5 years

Can you please clarify, when you say “we” are you referring to the entire world, or just the U.S.

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All of those things might one day happen. But they’re not happening in 3-5 years.

For example, one day we might have large numbers of fuel cell vehicles; but right now, there’s virtually none in production. It would take more than 3-5 years to bring those vehicles into mass production, let alone to get that production up to a scale where we were actually reducing the number of ICE vehicles on the roads. It doesn’t matter what regulations are adopted. Legislatures can’t regulate factories into existence. It takes time to build out those things. From where we sit today, it’s literally impossible for FCV’s to be more than a rounding error in global new vehicle sales three years from now - no matter what regulations we have.

The same is true of all of the other technical measures you mention. Sure, it’s possible that over the long- or intermediate-term we might start seeing significant adoption of hydrogen as an energy store outside of vehicles, or massive changes in efficiency in the transport sector. But those changes literally can’t happen in 3-5 years in sufficient magnitude to materially reduce oil demand, no matter the regulatory climate.

And as far as those regulations, I think you’re both way too optimistic and pessimistic at the same time. The cruel dilemma of climate change is that while the world is getting hotter, it’s getting hotter slowly. In only 3-5 years, the climate will be pretty much the same as it is today - a little warmer, to be sure, but not enough that there are likely to be any greater “mass migrations” than there are today. So there’s not likely to be any significantly different “worldwide regulations” on carbon emissions in the next few years than there are today, because there’s not going to be any significantly different climate facts on the ground in the next few years.

Albaby

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In only 3-5 years, the climate will be pretty much the same as it is today - a little warmer, to be sure, but not enough that there are likely to be any greater “mass migrations” than there are today.

And it could even be cooler. Looking at the HadCRU5 global temperature series:
www.metoffice.gov.uk/hadobs/hadcrut5/data/current/analysis/d…


       Temp
Year  Anomaly 
2021   0.76
2018   0.76
2016   0.93

DB2

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