R-Squared Energy Blog

Pure Energy

Impending Gasoline Supply Crunch

Implicit in the previous post on the recovery of gasoline demand is that the conditions are setting up for a gasoline supply crunch – and the price rise that goes along with that. As I pointed out, refiners are cut back, but they can turn that around pretty quickly. The low utilization numbers could lead to a short-term supply crunch, but as prices recover refiners can bring capacity up quickly.

What they can’t do quickly is implement new capacity additions. Due to the collapse in oil and gas prices, projects are being delayed, both in upstream oil production and in downstream refining. This is setting up for another run on prices as demand begins to recover. More on this from Reuters:

U.S. oil refinery delays may spur supply crunch

NEW YORK (Reuters) – The stage is being set for a fuel supply crunch in the United States once the economy rebounds now that refiners have pushed back more than $10 billion worth of upgrades they had on the drawing board.

Pressured by the oil price collapse and the economic malaise, companies have also either slowed or scrapped expansions which could threaten 340,000 barrels per day of new capacity, spelling a return to lagging processing capability that helped push pump prices higher until last year.

“If the economy comes back faster than expected, we are going to be caught flat-footed and we’re going to see a big spike in prices,” said Phil Flynn, an analyst at Alaron Trading in Chicago.

This isn’t something that will play out short term, but if your strategy for investing is more long term (as mine is), these project postponements will come home to roost in the next 2-3 years. Gasoline prices in the next few years should be higher, and maybe much higher than they are right now.

Think back to Hurricane Katrina. We got a big price spike in the wake of Katrina. That was the short term impact. But longer term, a lot of refinery capacity was offline for a very long time, and that helped lead to two straight years of record-breaking gasoline prices.

February 13, 2009 Posted by | gas prices, Hurricane Katrina, refining | 28 Comments

Hurricane Gustav Threatens

I have been so preoccupied lately, that I have barely noticed that there is a potentially very dangerous hurricane moving into the Gulf of Mexico. Furthermore, Tropical Storm Hanna is not far behind. Here are a couple of graphics I picked up from The Oil Drum, which in my opinion always has consistently the best hurricane coverage – particularly as it relates to energy infrastructure:

Not only is it forcing the evacuation of lots of oil infrastructure (as did Katrina in 2005), but it is also projected to strike landfall in the same general vicinity.

One interesting note is that the IEA announced that they were prepared to release oil stocks if necessary:

IEA Ready to Release Oil Stocks if Gustav Hits GOM

The International Energy Agency IEA is ready to release strategic oil stocks if Tropical Storm Gustav hits the Gulf of Mexico oil hub early next week, the energy adviser to 27 rich nations said on Thursday.

“It’s too early to think of any implications yet but we are closely following this with the U.S. government,” Aad van Bohemen, head of the emergency planning and the preparation division at the IEA, told Reuters.

The agency, which co-ordinates emergency measures in times of oil supply disruption, released oil products stocks in 2005 when hurricanes crippled U.S. oil operations in the area.

That struck me as a little peculiar, because the IEA is an organization that provides information. I was a little surprised to hear them talking of energy stocks. So I dug a little bit:

Fact Sheet on IEA Oil Stocks and Emergency Response Potential

What is the level of IEA Member countries’ oil stocks?

• IEA Member countries are holding some 4.1 billion barrels of public and industry oilstocks, of which, roughly 1.4 billion barrels are government controlled for emergency purposes.

• IEA net oil importing countries have legal obligation to hold emergency oil reserves equivalent to at least 90 days of net oil imports of the previous year.

• IEA net exporting countries are at present: Canada, Denmark, Norway and the United Kingdom; they do not have stockholding obligations under the IEP. Denmark and the United Kingdom do hold stocks under consumption-based EU regulations, as do other EU Member countries.

There is a lot of good information on that fact sheet, including the fact that they made 2 million barrels a day available in the wake of Hurricane Katrina.

I probably don’t have to tell people this as they learned a hard lesson following Katrina, but keep your gas tanks full – even if you are hundreds of miles from the Gulf Coast.

August 29, 2008 Posted by | Hurricane Katrina, iea | 2 Comments

Hurricane Gustav Threatens

I have been so preoccupied lately, that I have barely noticed that there is a potentially very dangerous hurricane moving into the Gulf of Mexico. Furthermore, Tropical Storm Hanna is not far behind. Here are a couple of graphics I picked up from The Oil Drum, which in my opinion always has consistently the best hurricane coverage – particularly as it relates to energy infrastructure:

Not only is it forcing the evacuation of lots of oil infrastructure (as did Katrina in 2005), but it is also projected to strike landfall in the same general vicinity.

One interesting note is that the IEA announced that they were prepared to release oil stocks if necessary:

IEA Ready to Release Oil Stocks if Gustav Hits GOM

The International Energy Agency IEA is ready to release strategic oil stocks if Tropical Storm Gustav hits the Gulf of Mexico oil hub early next week, the energy adviser to 27 rich nations said on Thursday.

“It’s too early to think of any implications yet but we are closely following this with the U.S. government,” Aad van Bohemen, head of the emergency planning and the preparation division at the IEA, told Reuters.

The agency, which co-ordinates emergency measures in times of oil supply disruption, released oil products stocks in 2005 when hurricanes crippled U.S. oil operations in the area.

That struck me as a little peculiar, because the IEA is an organization that provides information. I was a little surprised to hear them talking of energy stocks. So I dug a little bit:

Fact Sheet on IEA Oil Stocks and Emergency Response Potential

What is the level of IEA Member countries’ oil stocks?

• IEA Member countries are holding some 4.1 billion barrels of public and industry oilstocks, of which, roughly 1.4 billion barrels are government controlled for emergency purposes.

• IEA net oil importing countries have legal obligation to hold emergency oil reserves equivalent to at least 90 days of net oil imports of the previous year.

• IEA net exporting countries are at present: Canada, Denmark, Norway and the United Kingdom; they do not have stockholding obligations under the IEP. Denmark and the United Kingdom do hold stocks under consumption-based EU regulations, as do other EU Member countries.

There is a lot of good information on that fact sheet, including the fact that they made 2 million barrels a day available in the wake of Hurricane Katrina.

I probably don’t have to tell people this as they learned a hard lesson following Katrina, but keep your gas tanks full – even if you are hundreds of miles from the Gulf Coast.

August 29, 2008 Posted by | Hurricane Katrina, iea | 10 Comments

$100 Oil This Week

It hasn’t gotten all that much media coverage yet, but it is looking more and more like Mexico has taken a Katrina-sized hit that has devastated Tabasco. I had to go to The Irish Times for this:

Government offers aid to Mexico

A week of heavy rains over Mexico caused rivers to overflow, drowning at least 80 per cent of the swampy, oil-rich state of Tabasco. Much of the state capital, Villahermosa, looked like New Orleans after Hurricane Katrina, with murky water reaching to second-storey rooftops and desperate people waiting to be rescued.

There has been some mainstream media coverage, but so far the MSM is largely asleep at the wheel. Another story that emphasizes how this disaster has impacted Mexico’s oil industry:

Mexican President Calderon: Floods Cripple Mexico’s Oil Industry

Villahermosa, Mexico (AHN) – Mexican President Felipe Calderon on Friday warned it would take time to rebuild what has been devastated by the non-stop flooding plaguing the country, including the oil industry, which was crippled by the catastrophe.

“The storms have forced the closure of three of Mexico’s main oil ports, preventing almost all exports and halting a fifth of the country’s oil production. It has a strong economic impact” Calderon said in an interview.

The storm did not spare the Bay of Campeche, Mexico’s main oil producing region and home to more than 100 oil platforms. Overall, the region normally exports about 1.7 million barrels of crude daily. Since, most of the production remains shut down, it would mean that Mexico’s output would drop by 2.6 million barrels a day.

Some 800,000 families were displaced as floods submerged Villahermosa, the capital of Tabasco. More than 300,000 people were also trapped in their homes and rescue operations are still underway.

One hundred percent of the crops were destroyed, on top of the multi million worth of properties and belongings of people that were swept away by floods.
“It’s not just the worst natural catastrophe in the state’s history but, I would venture to say, one of the worst in the country’s recent history,” the President said.

Devastating. Where is the press coverage? 100 percent of crops destroyed? It’s a minor issue in comparison to the human tragedy, but this will probably be the catalyst to push oil on past $100 this week. I estimate the probability of that happening now at 85%.

November 5, 2007 Posted by | Gulf of Mexico, Hurricane Katrina, Mexico, oil prices, oil production | 2 Comments

Peak Oil: End of the World?

I will have a new post up in a day or so (working with Vinod Khosla on something, and then I will finish that bio-butanol post), but until I get that finished, I will recycle this one (from 5/4/06) that details my views on Peak Oil.

——————-

Perhaps like many of you, I spend a lot of time trying to predict what the future holds with respect to Peak Oil. I want to know what the effects will be to the U.S., the world, the economy, my employer, but first and foremost I want to know how it will affect my immediate family and me.

I am not a “doomer”, but I do think we are facing a very serious challenge. I think the affects of Peak Oil will be unprecedented, but I don’t think it is going to throw us back into a pre-industrial existence. If the peak happened suddenly and with little warning, followed by a rapid oil depletion rate, then the scenario would be disastrous.

One of the things that I believe is going to “save us”, so to speak, is the supply/demand imbalance that is currently opening up ahead of Peak Oil. China and India are both increasing their consumption of oil, and it is providing steady upward pressure on the price of oil and gas. This is causing gasoline to become quite expensive, and over time should cause people to start making the necessary adjustments. If you are a “doomer”, you should embrace higher gasoline prices as something that will give us more time to prepare for the aftermath of the peak.

I view the aftermath of Hurricane Katrina as a preview of things to come. Around 25% of the refining capacity in the U.S. was knocked offline. Prices immediately reacted to this to prevent consumers from draining gasoline inventories. Gasoline became very expensive, and suddenly people started to cut back on unnecessary travel. I personally cut out unnecessary driving, as I am sure did most people. Demand for gasoline dropped, and is still down somewhat from historical levels.

Over a longer time frame, if gasoline remains expensive, people will start buying automobiles with higher fuel efficiency. People will begin to base their housing decisions on proximity to work. People who have never considered car pooling or public transportation will do so. Granted, changes in auto and housing markets will take time before the cumulative effects make a dent. But a prolonged period of very expensive gasoline prior to the peak, which is the scenario I expect, will help spur these changes.

Now, that is what I think will happen. But I have to consider the possibility that price will not stem demand as much as is necessary. I am making the implicit assumption that we can merely raise gasoline prices until supply and demand are balanced. But that is probably not a realistic option. Why? Because who will benefit from those higher prices? Oil companies. If you think the public is outraged now, wait until gas is $10 a gallon, people are suffering as a result, the economy is tanking, and ExxonMobil posts the first ever $100 billion annual profit. I will probably have to wade through protesters to get to work in the morning.

The vast majority of the country will blame Big Oil for their woes, and they will resent that Big Oil is profiting from it. How will the public react? How will the government react? No doubt there will be legislation designed to combat the problem, but of what form? Will the government institute rationing? Will they attempt to nationalize the oil companies? If they did, would it mitigate the problem in any way? Should I buy farmland so I can grow my own food if necessary? Should I store a few thousand MREs in my garage?

When Will We Peak?

I know a lot of people believe the peak is on top of us. Some are suggesting that it occurred in the 4th quarter of last year. At one time I had compiled a dozen different peak predictions based on rigorous studies. Nine of the twelve predicted a peak between now and 2016. Another (Shell, I believe) predicted a peak around 2025. The Energy Information Administration (EIA) predicted a peak around 2037, and one study essentially predicted we will never peak.

I monitor oil inventories and production pretty closely. I know that some of the curves look as if oil production is topping out. However, consider that we still have 300,000 barrels per day shut-in in the Gulf of Mexico as a result of last year’s hurricanes. Nigeria has taken more than 500,000 barrels per day off the market due to the unrest there. The war in Iraq has taken over a million of barrels off the market. Those are the factors driving the current flattening of the oil production curve. As one very knowledgeable insider recently told me “I believe that the peak oil theorists have been mistaking resource access and geopolitical issues for peak oil”.

I believe this person was largely correct. The oil is there for us to continue ramping up production for several years, provided the access issues can be negotiated. I see a decent probability that we will peak by 2016, as was predicted by 75% of the studies I had collected. I just don’t see it happening this year or next year. I see near zero probability that the peak will happen as late as 2037, as the EIA suggests.

A peak in the next year or so would be disastrous. A peak in 10 years will give us a fighting chance, provided gasoline costs stay high until it is clear that a peak has occurred. I view fear of a peak in the next year or two as largely a good thing, because it should mobilize some people to take the steps needed well in advance of the peak.

A significant challenge right now is education. I was in Walmart yesterday, and as I am apt to do I watched the faces of the people shopping. I wondered how many of them are aware of the problem facing us. How many of them know that their lives will be profoundly impacted by their ability (or inability) to acquire energy in the near future? Sadly, most of them were probably blissfully unaware, attributing high gasoline prices to the current political climate and just waiting for the relief they are sure is coming. These people are unaware that a storm is coming. Ten years of storm warnings may give some of them time to make the necessary changes to their lifestyles. If the peak hits in the next year or so, they may very well be like Galveston residents in 1900 who were unaware of the severity of the hurricane that was coming until it was on top of them. And if the vast majority of the population is unprepared, it really won’t matter that some of us saw this coming. We will all be in trouble together.

May 14, 2007 Posted by | Hurricane Katrina, Peak Oil | 26 Comments

Peak Oil: End of the World?

I will have a new post up in a day or so (working with Vinod Khosla on something, and then I will finish that bio-butanol post), but until I get that finished, I will recycle this one (from 5/4/06) that details my views on Peak Oil.

——————-

Perhaps like many of you, I spend a lot of time trying to predict what the future holds with respect to Peak Oil. I want to know what the effects will be to the U.S., the world, the economy, my employer, but first and foremost I want to know how it will affect my immediate family and me.

I am not a “doomer”, but I do think we are facing a very serious challenge. I think the affects of Peak Oil will be unprecedented, but I don’t think it is going to throw us back into a pre-industrial existence. If the peak happened suddenly and with little warning, followed by a rapid oil depletion rate, then the scenario would be disastrous.

One of the things that I believe is going to “save us”, so to speak, is the supply/demand imbalance that is currently opening up ahead of Peak Oil. China and India are both increasing their consumption of oil, and it is providing steady upward pressure on the price of oil and gas. This is causing gasoline to become quite expensive, and over time should cause people to start making the necessary adjustments. If you are a “doomer”, you should embrace higher gasoline prices as something that will give us more time to prepare for the aftermath of the peak.

I view the aftermath of Hurricane Katrina as a preview of things to come. Around 25% of the refining capacity in the U.S. was knocked offline. Prices immediately reacted to this to prevent consumers from draining gasoline inventories. Gasoline became very expensive, and suddenly people started to cut back on unnecessary travel. I personally cut out unnecessary driving, as I am sure did most people. Demand for gasoline dropped, and is still down somewhat from historical levels.

Over a longer time frame, if gasoline remains expensive, people will start buying automobiles with higher fuel efficiency. People will begin to base their housing decisions on proximity to work. People who have never considered car pooling or public transportation will do so. Granted, changes in auto and housing markets will take time before the cumulative effects make a dent. But a prolonged period of very expensive gasoline prior to the peak, which is the scenario I expect, will help spur these changes.

Now, that is what I think will happen. But I have to consider the possibility that price will not stem demand as much as is necessary. I am making the implicit assumption that we can merely raise gasoline prices until supply and demand are balanced. But that is probably not a realistic option. Why? Because who will benefit from those higher prices? Oil companies. If you think the public is outraged now, wait until gas is $10 a gallon, people are suffering as a result, the economy is tanking, and ExxonMobil posts the first ever $100 billion annual profit. I will probably have to wade through protesters to get to work in the morning.

The vast majority of the country will blame Big Oil for their woes, and they will resent that Big Oil is profiting from it. How will the public react? How will the government react? No doubt there will be legislation designed to combat the problem, but of what form? Will the government institute rationing? Will they attempt to nationalize the oil companies? If they did, would it mitigate the problem in any way? Should I buy farmland so I can grow my own food if necessary? Should I store a few thousand MREs in my garage?

When Will We Peak?

I know a lot of people believe the peak is on top of us. Some are suggesting that it occurred in the 4th quarter of last year. At one time I had compiled a dozen different peak predictions based on rigorous studies. Nine of the twelve predicted a peak between now and 2016. Another (Shell, I believe) predicted a peak around 2025. The Energy Information Administration (EIA) predicted a peak around 2037, and one study essentially predicted we will never peak.

I monitor oil inventories and production pretty closely. I know that some of the curves look as if oil production is topping out. However, consider that we still have 300,000 barrels per day shut-in in the Gulf of Mexico as a result of last year’s hurricanes. Nigeria has taken more than 500,000 barrels per day off the market due to the unrest there. The war in Iraq has taken over a million of barrels off the market. Those are the factors driving the current flattening of the oil production curve. As one very knowledgeable insider recently told me “I believe that the peak oil theorists have been mistaking resource access and geopolitical issues for peak oil”.

I believe this person was largely correct. The oil is there for us to continue ramping up production for several years, provided the access issues can be negotiated. I see a decent probability that we will peak by 2016, as was predicted by 75% of the studies I had collected. I just don’t see it happening this year or next year. I see near zero probability that the peak will happen as late as 2037, as the EIA suggests.

A peak in the next year or so would be disastrous. A peak in 10 years will give us a fighting chance, provided gasoline costs stay high until it is clear that a peak has occurred. I view fear of a peak in the next year or two as largely a good thing, because it should mobilize some people to take the steps needed well in advance of the peak.

A significant challenge right now is education. I was in Walmart yesterday, and as I am apt to do I watched the faces of the people shopping. I wondered how many of them are aware of the problem facing us. How many of them know that their lives will be profoundly impacted by their ability (or inability) to acquire energy in the near future? Sadly, most of them were probably blissfully unaware, attributing high gasoline prices to the current political climate and just waiting for the relief they are sure is coming. These people are unaware that a storm is coming. Ten years of storm warnings may give some of them time to make the necessary changes to their lifestyles. If the peak hits in the next year or so, they may very well be like Galveston residents in 1900 who were unaware of the severity of the hurricane that was coming until it was on top of them. And if the vast majority of the population is unprepared, it really won’t matter that some of us saw this coming. We will all be in trouble together.

May 14, 2007 Posted by | Hurricane Katrina, Peak Oil | 53 Comments

This Week in Petroleum 11-22-06

The weekly EIA report was released this morning:

Summary of Weekly Petroleum Data for the Week Ending November 17, 2006

Some excerpts:

U.S. crude oil refinery inputs averaged 15.0 million barrels per day during the week ending November 17, up 60,000 barrels per day from the previous week’s average. Refineries operated at 87.1 percent of their operable capacity last week. Gasoline production inched slightly higher last week compared to the previous week, averaging 8.7 million barrels per day, while distillate fuel production increased as well, averaging nearly 4.1 million barrels per day.

U.S. crude oil imports averaged 10.5 million barrels per day last week, up over 1.0 million barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged nearly 10.0 million barrels per day. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 1.2 million barrels per day. Distillate fuel imports averaged 205,000 barrels per day last week.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) jumped by 5.1 million barrels compared to the previous week. At 341.1 million barrels, U.S. crude oil inventories remain well above the upper end of the average range for this time of year. Total motor gasoline inventories increased by 1.4 million barrels last week, but remain in the lower half of the average range. Distillate fuel inventories fell by 1.2 million barrels, but remain in the upper half of the average range for this time of year. A decline in ultra-low-sulfur diesel fuel inventories more than compensated for a slight increase in low-sulfur diesel fuel (15 ppm to 500 ppm sulfur), while high-sulfur distillate fuel (heating oil) inventories inched slightly lower. Total commercial petroleum inventories rose by 3.8 million barrels last week, and remain above the upper end of the average range for this time of year.

So, oil imports and gasoline imports are up, refineries are coming out of their turnarounds, and gasoline inventories climbed a bit, but still remain low. This should take some pressure off of prices, which should stabilize or drop some if these trends continue.

One thing that amazed me was how much higher gasoline demand is over last year:


As you recall, Hurricane Katrina drove prices much higher at this time last year, which in turn reduced demand. You can see that there is quite a bit of elasticity in our gasoline demand even with moderate price swings.

November 22, 2006 Posted by | EIA, gas inventories, gas prices, Hurricane Katrina | 2 Comments

This Week in Petroleum 11-22-06

The weekly EIA report was released this morning:

Summary of Weekly Petroleum Data for the Week Ending November 17, 2006

Some excerpts:

U.S. crude oil refinery inputs averaged 15.0 million barrels per day during the week ending November 17, up 60,000 barrels per day from the previous week’s average. Refineries operated at 87.1 percent of their operable capacity last week. Gasoline production inched slightly higher last week compared to the previous week, averaging 8.7 million barrels per day, while distillate fuel production increased as well, averaging nearly 4.1 million barrels per day.

U.S. crude oil imports averaged 10.5 million barrels per day last week, up over 1.0 million barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged nearly 10.0 million barrels per day. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 1.2 million barrels per day. Distillate fuel imports averaged 205,000 barrels per day last week.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) jumped by 5.1 million barrels compared to the previous week. At 341.1 million barrels, U.S. crude oil inventories remain well above the upper end of the average range for this time of year. Total motor gasoline inventories increased by 1.4 million barrels last week, but remain in the lower half of the average range. Distillate fuel inventories fell by 1.2 million barrels, but remain in the upper half of the average range for this time of year. A decline in ultra-low-sulfur diesel fuel inventories more than compensated for a slight increase in low-sulfur diesel fuel (15 ppm to 500 ppm sulfur), while high-sulfur distillate fuel (heating oil) inventories inched slightly lower. Total commercial petroleum inventories rose by 3.8 million barrels last week, and remain above the upper end of the average range for this time of year.

So, oil imports and gasoline imports are up, refineries are coming out of their turnarounds, and gasoline inventories climbed a bit, but still remain low. This should take some pressure off of prices, which should stabilize or drop some if these trends continue.

One thing that amazed me was how much higher gasoline demand is over last year:


As you recall, Hurricane Katrina drove prices much higher at this time last year, which in turn reduced demand. You can see that there is quite a bit of elasticity in our gasoline demand even with moderate price swings.

November 22, 2006 Posted by | EIA, gas inventories, gas prices, Hurricane Katrina | Comments Off on This Week in Petroleum 11-22-06

This Week in Petroleum 11-22-06

The weekly EIA report was released this morning:

Summary of Weekly Petroleum Data for the Week Ending November 17, 2006

Some excerpts:

U.S. crude oil refinery inputs averaged 15.0 million barrels per day during the week ending November 17, up 60,000 barrels per day from the previous week’s average. Refineries operated at 87.1 percent of their operable capacity last week. Gasoline production inched slightly higher last week compared to the previous week, averaging 8.7 million barrels per day, while distillate fuel production increased as well, averaging nearly 4.1 million barrels per day.

U.S. crude oil imports averaged 10.5 million barrels per day last week, up over 1.0 million barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged nearly 10.0 million barrels per day. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 1.2 million barrels per day. Distillate fuel imports averaged 205,000 barrels per day last week.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) jumped by 5.1 million barrels compared to the previous week. At 341.1 million barrels, U.S. crude oil inventories remain well above the upper end of the average range for this time of year. Total motor gasoline inventories increased by 1.4 million barrels last week, but remain in the lower half of the average range. Distillate fuel inventories fell by 1.2 million barrels, but remain in the upper half of the average range for this time of year. A decline in ultra-low-sulfur diesel fuel inventories more than compensated for a slight increase in low-sulfur diesel fuel (15 ppm to 500 ppm sulfur), while high-sulfur distillate fuel (heating oil) inventories inched slightly lower. Total commercial petroleum inventories rose by 3.8 million barrels last week, and remain above the upper end of the average range for this time of year.

So, oil imports and gasoline imports are up, refineries are coming out of their turnarounds, and gasoline inventories climbed a bit, but still remain low. This should take some pressure off of prices, which should stabilize or drop some if these trends continue.

One thing that amazed me was how much higher gasoline demand is over last year:


As you recall, Hurricane Katrina drove prices much higher at this time last year, which in turn reduced demand. You can see that there is quite a bit of elasticity in our gasoline demand even with moderate price swings.

November 22, 2006 Posted by | EIA, gas inventories, gas prices, Hurricane Katrina | 1 Comment

A Case Study in Cluelessness

I saw a familiar name today in a news article, which I will get to in a bit. I was reading an article from the Sacramento Bee that said that gas prices may have bottomed out. (I won’t link to the article, since it requires registration). I have been saying that gas prices couldn’t fall much further based on weekly EIA inventory numbers, and were poised to rise. Gas pricing is pretty simple, really. You basically have to watch gasoline inventories, which are reported every week at:

This Week in Petroleum

If you want a very reliable indicator of which direction gas prices are headed, watch the gasoline inventories graph. When inventories are plunging, as they were in the first quarter of this year, gasoline prices are headed upward. They have to in order to bring supply and demand back into line. If prices did not rise, then we either run out of gas, or we have to count on European imports to make up the shortfall. But if prices don’t rise, there really isn’t much incentive for European refiners to ship their gasoline to the U.S. So, falling inventories usually mean rising prices, and vice-versa.

Gasoline inventories started to rise sharply in September, and prices fell in response. Conspiracy theorists everywhere started suggesting that oil companies were manipulating prices to influence the election. Ha! They simply don’t have that kind of stroke. ExxonMobil, which we think of as the behemoth of oil companies, controls about 3% of world oil production. They just can’t dictate pricing on global commodities like oil and gas.

So, what happened when prices fell? Demand picked up as personal budgets weren’t quite so constrained by gasoline prices. As demand picked up, gasoline inventories went into free-fall. The inventory draw started near the beginning of October, and up to this point has showed little indication of slowing. This has led me to comment at The Oil Drum (and a number of posters agreed) that gasoline prices would have to rise in response unless this trend reversed itself pretty quickly. This is simple supply and demand.

So, back to the familiar name. I was reading the Sacramento Bee article, and I came across this gem:

Some 42 percent of Americans believe the Bush administration somehow drove gas prices down to help Republicans in the elections, according to a Gallup Poll last month. Democrats were far more likely to believe the theory than Republicans, the poll said.

“There was a political motive to keep gasoline prices low,” said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “Now that the election’s over, we’re going to see prices going up. … Oil companies are going to go back to artificially shorting the market.”

Court’s cluelessness has been documented before in this blog. Twice:

Another Uninformed Consumer Watchdog

And

Inventory Management

First, we have the fact that Court believes that gasoline should be less than $2 a gallon for everyone. Yes, wouldn’t it be great if we could all use up our gasoline reserves just as quickly as we can, while producing loads of greenhouse gases in the process? Somehow I bet that Court wants cheap gas and a reduction in greenhouse gases.

But as I documented in one of the essays above, I am not alone in thinking Court is out of touch with reality. The California Energy Commission studied the pricing issue in California, and concluded:

The report, by the California Energy Commission, puts down refinery outages leading to a supply squeeze, coupled with a surge in exports, as the key factors behind record high prices in the state this year.

The lengthy report cites a stunning number of planned outage days at California refineries in the first six months of 2006 compared with same period last year – 175 vs. 58. Most of the unplanned outages, comparing the same periods, lasted twice as long this year.

Also, it found port congestion a factor, as well as high additives costs and the introduction of the new ultra-low-sulfur diesel fuel (ULSD).

It dismisses the notion held by some that pump prices dashed to $3.33/gal because refiners practiced price gouging (dubbed goug-onomics by some consumer groups).

The extended refinery outages in 2006 were a result of delayed maintenance in the fall of 2005, as refiners had to keep making gasoline when Hurricane Katrina knocked a lot of production offline. Of course Court wasn’t about to let something like facts get in the way of his preconceived notions:

The Foundation For Taxpayer & Consumer Rights, an industry watchdog, called the CEC’s findings a “whitewash.”

“Oil companies are ripping off Californians in exactly the same way electricity profiteers did by artificially shorting the market,” snapped FTCR President Jamie Court.

All I can say to that is that a basic understanding of economics is clearly not a prerequisite for the presidency of FTCR. If I had a watchdog that displayed such a stunning level on incompetency, I would drop him off at the animal shelter. I don’t know why anyone would ever take this guy seriously.

A closing caveat. I don’t mean to imply that pricing is entirely dictated by inventories. As I have written previously, the transition between summer and winter blends also has an impact, as do gasoline imports and some other assorted factors. But you will find the strongest correlation with gasoline inventories (and the price of oil, which is correlated with crude oil inventories).

November 14, 2006 Posted by | FTCR, gas prices, Hurricane Katrina, Jamie Court, price gouging | 18 Comments