R-Squared Energy Blog

Pure Energy

The 2009 EIA Energy Conference: Day 2

Energy and the Media

This was the panel I had been asked to participate in. My fellow panelists were Steven Mufson (one of my favorite mainstream energy reporters), from the Washington Post; Eric Pooley from Harvard, (the former managing editor of Fortune); and Barbara Hagenbaugh from USA Today. The panel was moderated by John Anderson of Resources for the Future.

I can only imagine that a number of people looked at the lineup, looked at my inclusion, and thought “What’s that guy doing up there?” So here’s the background on that. When I was working at the ConocoPhillips Refinery in Billings, Montana, we followed the weekly release of the EIA’s Weekly Petroleum Status Report very closely. We included this information in a weekly supply/demand report, and it helped us to make decisions on how to run the refinery for the upcoming week.

When I started my blog, I began to follow and report on the weekly inventory release, which happens on Wednesday mornings and is followed in the afternoon by This Week in Petroleum. Kyle Saunders (Professor Goose) at The Oil Drum liked the weekly reports and asked me to bring them over to The Oil Drum. This all helped drive more traffic to the EIA website, and helped more people come to appreciate the value of the EIA data.

Doug MacIntyre, at that time the primary author of This Week In Petroleum, started commenting occasionally on my blog, and was quick to answer any questions that readers had. Over time I corresponded with several people at the EIA, and they invited me up to the conference last year. The timing didn’t work out last year as I was in the Netherlands, but this year’s conference was doable. So that’s how I ended up on a panel with the mainstream media.

The panel consisted of use all sitting around a table and taking questions from John, and eventually the audience. I will mostly report on what I said, because it was pretty difficult to take notes while sitting around the table.

The first question was on the price run-up last summer, and whether the media coverage was adequate. We all had somewhat different answers on this, but I took the opportunity to point out that the weekly inventory data can be an important predictor of prices. The plunging gasoline inventory data was the basis of my predictions for $3 and $4 gasoline in the Spring of 2007 and 2008 respectively (which we did in fact see). The other thing I pointed out about this issue is that Google searches on “rising oil/gas prices” probably drive more first-time traffic to my blog than anything else. (Searches for the “water car” are also quite popular).

Next John asked about phony, or false balance in reporting. Before the panel, I had asked readers at my blog and at The Oil Drum for suggestions on topics to cover, and false balance was mentioned by several readers. An example one reader gave was “Scientists report that the earth is round – Flat Earth Institute objects…” So how much credibility do you afford different sides of the debate?

The others on the panel agreed that this was a problem. I made two observations. One, it isn’t always easy to figure out which side is the Flat Earth Institute. I spend a lot of time trying to figure that out at times, especially over newly announced technologies. Second, the good reporters do a lot of research when they are reporting on a story so they can determine who is credible. I noted that Steve Mufson had interviewed me by phone in 2005, and all that came from that hour-long interview was a partial quote in the story. At the time I was annoyed, but later on I came to understand that Mufson was just doing a lot of homework to get the story. Most of his questions were designed to figure out if I knew what I was talking about. The people you have to watch are the ones who call for just a quote.

As an example of false balance, I talked about Brazilian ethanol. Dan Rather and Frank Sesno have both been guilty on their Brazilian ethanol reporting. In hindsight, perhaps their reporting wasn’t false balance so much as completely unbalanced, and lacking any semblance of critical reporting. They both essentially reported the Brazilian ethanol story as “They did it. We can be just like them.” I went on to explain a bit more about the truth of Brazil’s energy independence miracle, which I will update in an upcoming essay (but is also covered in my ASPO presentation from last September (Biofuels: Facts and Fallacies).

There was more discussion about scale (e.g., biofuel versus petroleum usage) and the role bloggers are playing now with respect to reporting news (some specialist bloggers can provide a technical analysis that the mainstream media may lack; on the other hand they don’t always write to journalistic standards). I know I am forgetting some topics, but ultimately John started to take questions.

There were some good questions, but also some instances where the questioner simply wanted to make a point. Morgan Downey asked what energy books I liked. I told him that I was about 250 pages into his book, Oil 101, and that it was a fantastic book. I also mentioned Twilight in the Desert as an influential book on me. I noted that while I had some issues with Twilight, I thought it did a great job of driving home the importance of Saudi Arabia in the world oil picture, and just how important it is that we understand what’s going on there. Finally, I mentioned Gusher of Lies as a book I had really enjoyed.

I was asked about peak oil and the notion that we are running out of oil. I took the opportunity to clarify that peak oil does not mean we are running out of oil – but the media often misconstrues the issue in this manner. I said that we would still have oil in 100 years. Peak oil means that we can’t get it out of the ground fast enough to meet demand, and that if the production peak is near that we are facing some difficult years. (Other than this question and my answer, there was scarce mention of peak oil during the conference).

A representative from (I believe) the California Independent Petroleum Association got up and made a statement that he felt that despite the important role the industry plays, they are being demonized and singled out for punitive taxes. I responded that I could empathize; that one of my greatest concerns is that we will discourage domestic oil and gas production, and then biofuels fail to deliver per expectations. In that case I think we become even more dependent upon OPEC.

Fellow panelist Eric Pooley disagreed and said we need even stronger incentives for moving away from oil. That really misses the point I was making, though. You can have the strongest incentives in the world, but they can’t assure that technology breakthroughs will occur. So while you are promoting one industry at the expense of another, very successful industry that plays a critical role in the world, what is the contingency plan if the incentives don’t pay off?

I was asked about how I come up with ideas for what to write. I said that I browse the news headlines on energy every morning, and that I have Google news alerts on topics like “energy”, “oil prices”, and “peak oil.” If something strikes me as particularly interesting – or particularly wrong – then I may write something about it.

After the panel, a number of people came up and introduced themselves. Some thanked me for speaking up on behalf of the oil and gas industry. One audience member asked me why I don’t write more about “the global warming scam.” As I said to him “I am not touching that with a 10-foot pole.” He asked why, and I said 1). I am not an expert; 2). Discussions over the issue always seem to degenerate into name-calling. I will repeat my position on this. Coming from a science background, I have a healthy respect for scientific consensus in areas where I don’t have specific expertise. On the other hand, the issue has become so polarized that people who do try to discuss the science are frequently shouted down and called names. I don’t endorse those sorts of tactics, no matter how correct you think you might be.

Investing in Oil and Natural Gas – Opportunities and Barriers

Once again, there were two sessions going on simultaneously that I wanted to see. I had to miss Greenhouse Gas Emissions: What’s Next? But I have been a big fan of Deutsche Bank‘s Paul Sankey for several years, and I wasn’t about to miss his panel. Sankey has testified before Congress several times on the oil and gas markets, and I often feel like he is the only one there who knows what he is talking about. (I formerly summarized one of his appearances in Gouging is an Idiotic Explanation). Joining Sankey on the panel were Susan Farrell of PFC Energy, John Felmy of the American Petroleum Institute, and Michelle Foss of the University of Texas. The moderator was Bruce Bawks of the EIA.

The panel agreed that $50 was about the average break even price for oil production today, suggesting that prices are unlikely to fall below that level for long. Farrell commented that worldwide expenditures on exploration and production amounted to $500 billion in 2008. She also noted that oil companies have been unable to arrest the decline rate; that it is in fact increasing. I believe it was also Farrell who suggested that in 2010 the haves would acquire more of the ‘have-nots.’ Someone on the panel stated that the global supply crunch still exists.

I think it was Felmy who said that even if we make a large scale move to hybrids or electric vehicles, 50% of the world’s lithium reserves are in Bolivia. So we may end up trading Chavez for Evo Morales. I don’t know; I think I would make that trade.

As always, Sankey made a lot of interesting comments. He said that while the banks might make a lot of money in a cap and trade system, intellectually it didn’t seem like a good idea to him. He said he preferred a direct carbon tax. He said that we are setting up a slingshot for prices right now, but “2010 could be a bloodbath.” He also said that the overall policy imperative of the new administration seems to be “anything but oil”, but he believes that “attacking the oil and gas industry will be incredibly harmful to the U.S. economy.”

Other Sankey zingers:

“Alaska would rate as one of the ‘countries’ most hostile to the oil industry.”

“I am not sure there is any equity in any bank in the U.S.”

“If we stopped producing gold tomorrow, we have 100 years of supply in inventory. If we stopped producing oil tomorrow, we have 55 days in inventory.”

Finally, someone on the panel (I think it was Sankey) recommended the book Oil on the Brain as providing great insight into the industry. The author, Lisa Margonelli, had a pretty average view of the industry until she delved deeply into the supply chain, traveling to Iran, Nigeria, Chad, and Venezuela. I have not read the book, but will put it on my reading list.

Thus ends my recollections of the conference. As I said in the previous entry, this is not so much a detailed account of everything as it is just my own observations and things that stuck with me as interesting, odd, etc. If you spot something that you think is in error, please let me know. For me, this was an interesting experience, and one that I was glad to be a part of. In conclusion, I want to thank the good people at the EIA for inviting me.

Previous Entries

Energy Secretary Steven Chu’s comments

The 2009 EIA Energy Conference: Day 1

April 14, 2009 Posted by | American Petroleum Institute, api, ConocoPhillips, COP, EIA, Energy Information Administration, Paul Sankey, Peak Oil, twip | 62 Comments

The 2009 EIA Energy Conference: Day 2

Energy and the Media

This was the panel I had been asked to participate in. My fellow panelists were Steven Mufson (one of my favorite mainstream energy reporters), from the Washington Post; Eric Pooley from Harvard, (the former managing editor of Fortune); and Barbara Hagenbaugh from USA Today. The panel was moderated by John Anderson of Resources for the Future.

I can only imagine that a number of people looked at the lineup, looked at my inclusion, and thought “What’s that guy doing up there?” So here’s the background on that. When I was working at the ConocoPhillips Refinery in Billings, Montana, we followed the weekly release of the EIA’s Weekly Petroleum Status Report very closely. We included this information in a weekly supply/demand report, and it helped us to make decisions on how to run the refinery for the upcoming week.

When I started my blog, I began to follow and report on the weekly inventory release, which happens on Wednesday mornings and is followed in the afternoon by This Week in Petroleum. Kyle Saunders (Professor Goose) at The Oil Drum liked the weekly reports and asked me to bring them over to The Oil Drum. This all helped drive more traffic to the EIA website, and helped more people come to appreciate the value of the EIA data.

Doug MacIntyre, at that time the primary author of This Week In Petroleum, started commenting occasionally on my blog, and was quick to answer any questions that readers had. Over time I corresponded with several people at the EIA, and they invited me up to the conference last year. The timing didn’t work out last year as I was in the Netherlands, but this year’s conference was doable. So that’s how I ended up on a panel with the mainstream media.

The panel consisted of use all sitting around a table and taking questions from John, and eventually the audience. I will mostly report on what I said, because it was pretty difficult to take notes while sitting around the table.

The first question was on the price run-up last summer, and whether the media coverage was adequate. We all had somewhat different answers on this, but I took the opportunity to point out that the weekly inventory data can be an important predictor of prices. The plunging gasoline inventory data was the basis of my predictions for $3 and $4 gasoline in the Spring of 2007 and 2008 respectively (which we did in fact see). The other thing I pointed out about this issue is that Google searches on “rising oil/gas prices” probably drive more first-time traffic to my blog than anything else. (Searches for the “water car” are also quite popular).

Next John asked about phony, or false balance in reporting. Before the panel, I had asked readers at my blog and at The Oil Drum for suggestions on topics to cover, and false balance was mentioned by several readers. An example one reader gave was “Scientists report that the earth is round – Flat Earth Institute objects…” So how much credibility do you afford different sides of the debate?

The others on the panel agreed that this was a problem. I made two observations. One, it isn’t always easy to figure out which side is the Flat Earth Institute. I spend a lot of time trying to figure that out at times, especially over newly announced technologies. Second, the good reporters do a lot of research when they are reporting on a story so they can determine who is credible. I noted that Steve Mufson had interviewed me by phone in 2005, and all that came from that hour-long interview was a partial quote in the story. At the time I was annoyed, but later on I came to understand that Mufson was just doing a lot of homework to get the story. Most of his questions were designed to figure out if I knew what I was talking about. The people you have to watch are the ones who call for just a quote.

As an example of false balance, I talked about Brazilian ethanol. Dan Rather and Frank Sesno have both been guilty on their Brazilian ethanol reporting. In hindsight, perhaps their reporting wasn’t false balance so much as completely unbalanced, and lacking any semblance of critical reporting. They both essentially reported the Brazilian ethanol story as “They did it. We can be just like them.” I went on to explain a bit more about the truth of Brazil’s energy independence miracle, which I will update in an upcoming essay (but is also covered in my ASPO presentation from last September (Biofuels: Facts and Fallacies).

There was more discussion about scale (e.g., biofuel versus petroleum usage) and the role bloggers are playing now with respect to reporting news (some specialist bloggers can provide a technical analysis that the mainstream media may lack; on the other hand they don’t always write to journalistic standards). I know I am forgetting some topics, but ultimately John started to take questions.

There were some good questions, but also some instances where the questioner simply wanted to make a point. Morgan Downey asked what energy books I liked. I told him that I was about 250 pages into his book, Oil 101, and that it was a fantastic book. I also mentioned Twilight in the Desert as an influential book on me. I noted that while I had some issues with Twilight, I thought it did a great job of driving home the importance of Saudi Arabia in the world oil picture, and just how important it is that we understand what’s going on there. Finally, I mentioned Gusher of Lies as a book I had really enjoyed.

I was asked about peak oil and the notion that we are running out of oil. I took the opportunity to clarify that peak oil does not mean we are running out of oil – but the media often misconstrues the issue in this manner. I said that we would still have oil in 100 years. Peak oil means that we can’t get it out of the ground fast enough to meet demand, and that if the production peak is near that we are facing some difficult years. (Other than this question and my answer, there was scarce mention of peak oil during the conference).

A representative from (I believe) the California Independent Petroleum Association got up and made a statement that he felt that despite the important role the industry plays, they are being demonized and singled out for punitive taxes. I responded that I could empathize; that one of my greatest concerns is that we will discourage domestic oil and gas production, and then biofuels fail to deliver per expectations. In that case I think we become even more dependent upon OPEC.

Fellow panelist Eric Pooley disagreed and said we need even stronger incentives for moving away from oil. That really misses the point I was making, though. You can have the strongest incentives in the world, but they can’t assure that technology breakthroughs will occur. So while you are promoting one industry at the expense of another, very successful industry that plays a critical role in the world, what is the contingency plan if the incentives don’t pay off?

I was asked about how I come up with ideas for what to write. I said that I browse the news headlines on energy every morning, and that I have Google news alerts on topics like “energy”, “oil prices”, and “peak oil.” If something strikes me as particularly interesting – or particularly wrong – then I may write something about it.

After the panel, a number of people came up and introduced themselves. Some thanked me for speaking up on behalf of the oil and gas industry. One audience member asked me why I don’t write more about “the global warming scam.” As I said to him “I am not touching that with a 10-foot pole.” He asked why, and I said 1). I am not an expert; 2). Discussions over the issue always seem to degenerate into name-calling. I will repeat my position on this. Coming from a science background, I have a healthy respect for scientific consensus in areas where I don’t have specific expertise. On the other hand, the issue has become so polarized that people who do try to discuss the science are frequently shouted down and called names. I don’t endorse those sorts of tactics, no matter how correct you think you might be.

Investing in Oil and Natural Gas – Opportunities and Barriers

Once again, there were two sessions going on simultaneously that I wanted to see. I had to miss Greenhouse Gas Emissions: What’s Next? But I have been a big fan of Deutsche Bank‘s Paul Sankey for several years, and I wasn’t about to miss his panel. Sankey has testified before Congress several times on the oil and gas markets, and I often feel like he is the only one there who knows what he is talking about. (I formerly summarized one of his appearances in Gouging is an Idiotic Explanation). Joining Sankey on the panel were Susan Farrell of PFC Energy, John Felmy of the American Petroleum Institute, and Michelle Foss of the University of Texas. The moderator was Bruce Bawks of the EIA.

The panel agreed that $50 was about the average break even price for oil production today, suggesting that prices are unlikely to fall below that level for long. Farrell commented that worldwide expenditures on exploration and production amounted to $500 billion in 2008. She also noted that oil companies have been unable to arrest the decline rate; that it is in fact increasing. I believe it was also Farrell who suggested that in 2010 the haves would acquire more of the ‘have-nots.’ Someone on the panel stated that the global supply crunch still exists.

I think it was Felmy who said that even if we make a large scale move to hybrids or electric vehicles, 50% of the world’s lithium reserves are in Bolivia. So we may end up trading Chavez for Evo Morales. I don’t know; I think I would make that trade.

As always, Sankey made a lot of interesting comments. He said that while the banks might make a lot of money in a cap and trade system, intellectually it didn’t seem like a good idea to him. He said he preferred a direct carbon tax. He said that we are setting up a slingshot for prices right now, but “2010 could be a bloodbath.” He also said that the overall policy imperative of the new administration seems to be “anything but oil”, but he believes that “attacking the oil and gas industry will be incredibly harmful to the U.S. economy.”

Other Sankey zingers:

“Alaska would rate as one of the ‘countries’ most hostile to the oil industry.”

“I am not sure there is any equity in any bank in the U.S.”

“If we stopped producing gold tomorrow, we have 100 years of supply in inventory. If we stopped producing oil tomorrow, we have 55 days in inventory.”

Finally, someone on the panel (I think it was Sankey) recommended the book Oil on the Brain as providing great insight into the industry. The author, Lisa Margonelli, had a pretty average view of the industry until she delved deeply into the supply chain, traveling to Iran, Nigeria, Chad, and Venezuela. I have not read the book, but will put it on my reading list.

Thus ends my recollections of the conference. As I said in the previous entry, this is not so much a detailed account of everything as it is just my own observations and things that stuck with me as interesting, odd, etc. If you spot something that you think is in error, please let me know. For me, this was an interesting experience, and one that I was glad to be a part of. In conclusion, I want to thank the good people at the EIA for inviting me.

Previous Entries

Energy Secretary Steven Chu’s comments

The 2009 EIA Energy Conference: Day 1

April 14, 2009 Posted by | American Petroleum Institute, api, ConocoPhillips, COP, EIA, Energy Information Administration, Paul Sankey, Peak Oil, twip | 37 Comments

Gasoline Demand Has Recovered

It’s been taking place slowly, week after week, but low gas prices have brought gasoline demand back up. There has been anecdotal evidence that suggested demand might be heading higher, such as recovering sales of gas guzzling cars. But for watchers of This Week in Petroleum, the data confirm the anecdotes: Gasoline demand has recovered to the point that it is now higher in the U.S. than it was a year ago. This week’s Summary of Weekly Petroleum Data (off of which This Week in Petroleum is based) shows that the 4-week rolling average has for the first time in recent memory increased above (albeit slightly) the level of a year ago.

Another factor to keep an eye on as demand recovers is that refinery utilization is still quite low relative to what’s normal for this time of year. Percent utilization relative to the past 3 years is 3-5% lower for comparable weeks. This is starting to impact gasoline inventories. A typical January will see a healthy build of gasoline across the month, as refiners build stocks ahead of spring turarounds. This year, however, gasoline inventories have been flat across January, and this week in fact saw a drop of 2.6 million barrels. Inventories are still in decent shape, but they bear watching as we move toward spring.

Gasoline imports are also down marginally relative to the past two years, primarily a result of low gas prices. But the present trends of increasing demand, falling inventories, and low refinery utilization, suggest that prices will continue heading north.

February 11, 2009 Posted by | DOE, EIA, gas prices, oil refineries, refining, twip | 38 Comments

Why Gas Prices are Rising Again

Every time gas prices start to go up, my essay “Why Are Gas Prices Rising?” gets a lot of hits from Google searches by people looking for an explanation. Because the supply/demand dynamics have changed, that essay needs dusting off, especially in light of stories like this:

Pros puzzled by gas prices

Fuel industry pundits have been left scratching their heads at the recent jump in gas prices, which have increased despite plummeting crude prices.

“The nationwide average retail price of self-serve regular gasoline seems to be defying gravity this month,” according to American Automobile Association (AAA) Director of Public Relations, Geoff Sundtrom, “as it continued to rise in the face of sharply lower prices for crude oil and wholesale gasoline.”

Oil prices closed out at $34.78 per barrel last Friday, according to AAA, the lowest they’ve been since April 5, 2005, when the nationwide average retail gasoline price was $1.76 per gallon compared to Monday’s nationwide average of $1.842. Average nationwide prices jumped slightly to $1.848 on Wednesday. The statewide average is slightly higher at $1.851 per gallon. By this Friday, prices had risen to $46.47, according to The Associated Press.

First things first. Checking the EIA data, their numbers/trends don’t match up. Per the EIA, in April 2005 retail gas prices were $2.28 a gallon (Source) when West Texas Intermediate was trading at $52.98. In early 2009, retail gas prices (per the EIA) are at $1.84 with WTI hovering around $40. AAA is obviously using their own metrics, but a scan of the various EIA gas prices show a pretty consistent trend: Gas and oil prices both sharply down from 2005.

But, it shouldn’t surprise anyone that gas prices would be headed back up – even if oil prices are stagnant. Gasoline had over-corrected to the downside in relation to oil prices. In fact, crack spreads – a measure of the difference between the price of oil and the price of the products – did go negative in late 2008. That is unsustainable, and an indication that gas prices must correct to the upside (or refiners will start to cut production since they are losing money on every barrel). So why are gas prices rising? Because they fell too far. (Nobody ever seems to ask why gas prices fell so much in relation to crude oil; they only get excited when the opposite occurs).

There is another key factor to consider when comparing the behavior of gasoline and oil prices. I have seen them move in opposite directions on numerous occasions. Here is an example of when they might do that. Let’s presume that we have a glut of oil, but a refining bottleneck. In such a case, you would see little demand for oil, keeping the price low. But if refiners are having trouble keeping the gasoline market supplied, then gasoline prices will rise in relation to oil prices. This has taken place multiple times over the past few years, and can usually be understood if you watch the crude and finished product inventories reported each week in This Week in Petroleum.

Other factors that impact the price of gasoline include the strength of gasoline imports (primarily from Europe), and refinery utilization (both of which are reported weekly at the EIA). If gasoline demand is strong, and something happens to reduce the utilization number (e.g., hurricane), prices spike. If demand starts to slacken, you will see refiners start to dial back their utilization.

January 27, 2009 Posted by | EIA, gas inventories, gas prices, oil inventories, oil prices, twip | 54 Comments

Haven’t We Seen This Before?

At this year’s ASPO conference, I was twice asked about the gasoline supply situation – once at a panel session and once by a reporter. At the time, there were gas shortages throughout the southeast, and some of the speakers gave the impression that this was the beginning of the end: Gas shortages are here to stay, and we are on the verge of the entire country running out of gasoline. There were a number of predictions along the lines of “It’s going to get a lot worse before it gets better.”

While first discussing the source of the gas shortages – low inventories followed by a hurricane that sidelined a significant source of refining capacity – I answered the question as follows: “This is a temporary event. We will see imports start to pick up and fill the shortfall. We will see refining capacity start to come back online, and I predict that a month from now gasoline inventories will be higher than they are today.”

Of course that doesn’t mean that we won’t find ourselves right back in this position, nor that it won’t be worse next time. But I think failure to understand how the refinery/pipeline/import system works – sometimes by people in positions of authority – can cause premature predictions of imminent disaster. I think we have far too many people who can’t identify a wolf telling the villagers that the wolf is here. Many know that this is a pet peeve of mine.

So what has happened since ASPO? The ASPO conference took place 4 weeks ago. At the time, gasoline inventories stood at 178.7 million barrels. Imports at that time were at 1.2 million barrels a day. Since then, we have seen 3 consecutive weeks of inventory build, and inventories now stand at 193.8 million barrels, just 2 million barrels short of their position of a year ago. Why have inventories built? Three reasons. Imports, as I predicted, picked up and have been above the 1.2 million barrel level in each of the past 3 weeks. Demand remains historically low due to high prices. And refinery utilization has increased in each of the past 3 weeks.

However, there was one thing I didn’t predict, and that is the primary topic of this essay. If someone had asked me, I would have guessed that because of the inventory situation, gasoline prices would remain strong. That hasn’t happened. (I think the anti-gouging laws worked to keep prices in check, at the expense of worsening the shortages. See Rationing by Running Out).

As inventories have recovered, gasoline prices have plummented. Retail gasoline prices have fallen each of the past 3 weeks, and are now down by $0.50 since the conference. This is of course being driven by the collapse of oil prices, but doesn’t bode well for spring gasoline prices. Why? It seems that we have been here before.

In August of 2006, retail gasoline prices briefly touched $3.00/gal. Prices then plummented by more than $0.70/gal, and spent the late fall/early winter in the $2.20/gal range. The sudden arrival of lower prices had two primary impacts. First, imports dried up, as it wasn’t nearly as financially attractive for exporters to send gasoline to the U.S. Second, demand picked up sharply, eventually reaching winter levels of 9.5 million barrels/day – unprecedented for that time of year. As one might expect, this resulted in a steep decline in gasoline inventories, and we went into the spring of 2007 with historically low inventories.

I devoted a lot of time in the first half of 2007 toward discussing the plunging inventory situation – and predicted much higher gasoline prices as a result. In mid-April, I even got into a debate with Doug MacIntyre, who at that time was the author of This Week in Petroleum, about the direction of gasoline prices. He felt like prices were peaking in April of 2007, I thought they still had room to run. In fact gasoline prices ran up another $0.33/gal in the six weeks following our discussion, setting a national retail gasoline price record at that time of $3.26/gal.

So now we return to the fall of 2008. Because of record gasoline prices, demand this year has been much lower than last year. At times this year, gasoline demand has been half a million barrels a day lower than at this time last year (or in 2006). But gasoline prices – currently still much higher than in 2006 or 2007 – are on a downward trajectory that is certain to result in an increase in demand. In fact, demand last week reversed course and trended higher for the first time since late August. If prices continue to fall, keep a close eye on demand, imports, and ultimately inventories. This is all setting up to be similar to the situation we saw of much lower prices in late 2006, which led to record gasoline prices by the summer of 2007.

This all highlights the fact that we are playing with fire with our gasoline inventories. It was no surprise to inventory watchers that parts of the country quickly ran out of gasoline following Hurricane Ike. This is the risk we run when we maintain gasoline inventories at a low level: Events that disrupt gasoline supplies can very quickly cause havoc. The solution to the problem isn’t easy. Refiners have seen margins evaporate, and thus don’t want to maintain high inventories. A strategic gasoline reserve would seem to be an answer, but it would be difficult to maintain because of the seasonal variations in gasoline blends. The shelf life just wouldn’t be long enough.

So while I expect this trend of shortages to continue, you can give yourself an advantage by being educated about the inventory situation – especially in your particular part of the country. That won’t prevent entire cities from running short of gasoline in the event of a disruption, but it can prevent you personally from being one of the masses of people waiting in gasoline lines, wondering exactly what went wrong.

October 19, 2008 Posted by | EIA, gas inventories, gas prices, gas shortages, gasoline demand, twip | 627 Comments

Rationing by Running Out

This looks ominous:


Gasoline Inventories at Lowest Levels Since 1967. Source: This Week in Petroleum

Of course we used a lot less gasoline in 1967, so on a ‘days of supply’ basis, this is probably the lowest level ever.

I just got back to Dallas from the ASPO conference, and we are having shortages here as well. My cab driver said he had been to several stations that had no gas, and my wife told me that the Texaco near our house is out of premium.

Someone asked during a panel discussion at ASPO whether we were going to have rationing by price. I answered that we are having that now. But prices aren’t going up nearly as much as you would expect during these sorts of severe shortages. Why? I think it’s a fear that dealers have of being prosecuted for gouging. So, they keep prices where they are, and they simply run out of fuel when the deliveries don’t arrive on time. If they were allowed to raise prices sharply, people would cut back on their driving and supplies would be stretched further. This article explains it nicely, and is well-worth a read:

Instead of raising prices, in an attempt to reduce demand for gasoline, thereby allocating gasoline that was in short supply by means of price, station managers simply let people fill up their tanks until the pumps were empty. Anyone who wanted gasoline after that was out of luck.

This is rationing by lining up. It is the alternative to rationing by price. Rationing by lining up creates no financial incentive for suppliers of the item in short supply to allocate new supplies to the region of the country which is experiencing a shortage. Instead, delivery schedules remain the same as they did prior to the shortage. This continues the shortage.

Whenever there are complaints about price gouging during a period of a shortage, sellers get the message. The next time there is a shortage, they hesitate to raise prices. They shift to the other allocation system: first come, first served. This subsidizes people who have a low value on their time. People who place a high value on their time prefer to pay extra money in order to attain their goals. But this is made illegal by the state. So, the shortage lasts longer than it would otherwise have lasted.

The official goal of the government is to make certain that everyone has access to the item in short supply. The government says that raising prices during a shortage is unfair. So, the result is the opposite of what the government’s official justification was for holding prices down. There is an even greater shortage, because people buy more of the item than they need immediately. They have no incentive to reduce their consumption, thereby making available applies to those who were at the end of the line. There is no incentive for anyone at the front of the line to refrain from filling his gasoline tank. So, gasoline runs out before the line runs out.

Such are the unintended consequences of government intervention. Personally, I would rather at least have the option of paying twice as much for gas than to either wait in line for a long period of time, or have to drive all over town to find some.

I also said last night that I don’t believe we are entering an era of gasoline shortages. I predict that inventories a month from now are higher than they are today. But the recovery will take longer than if prices had risen sharply.

What is the status of the refineries that are down? This story has the details:

EXXON MOBIL

• Baytown refinery, the largest in the U.S., is restarting.

• Beaumont refinery remains offline.

VALERO

• Houston and Texas City refineries should be back to normal in several days.

• Port Arthur refinery remains shut in but should begin the restart process in several days.

SHELL

• Deer Park refinery, third- largest in the Houston- Galveston area, is restarting. Normal operating rates are expected by the weekend.

• The Shell-Motiva joint venture refinery in Port Arthur is still shut in. Power has been restored, and production of gasoline is expected to begin this week.

BP

• Texas City refinery, second- largest in the Houston- Galveston region, has not restarted.

SOURCES: Department of Energy, the companies

I don’t believe any of ConocoPhillips’ refineries are still down, so their branded stations are likely to have supplies. In fact, CNN reports:

A ConocoPhillips (COP) spokesman said the company “is not short crude and our system is generally balanced.”

Finally, I have just returned home after 3 weeks on the road. I have a massive backlog of e-mails to wade through, and if you have sent me an e-mail and I haven’t answered it, please be patient for a couple of days. I am going to limit my time on the computer for a few days.

September 24, 2008 Posted by | EIA, gas shortages, rationing, twip | 37 Comments

Rationing by Running Out

This looks ominous:


Gasoline Inventories at Lowest Levels Since 1967. Source: This Week in Petroleum

Of course we used a lot less gasoline in 1967, so on a ‘days of supply’ basis, this is probably the lowest level ever.

I just got back to Dallas from the ASPO conference, and we are having shortages here as well. My cab driver said he had been to several stations that had no gas, and my wife told me that the Texaco near our house is out of premium.

Someone asked during a panel discussion at ASPO whether we were going to have rationing by price. I answered that we are having that now. But prices aren’t going up nearly as much as you would expect during these sorts of severe shortages. Why? I think it’s a fear that dealers have of being prosecuted for gouging. So, they keep prices where they are, and they simply run out of fuel when the deliveries don’t arrive on time. If they were allowed to raise prices sharply, people would cut back on their driving and supplies would be stretched further. This article explains it nicely, and is well-worth a read:

Instead of raising prices, in an attempt to reduce demand for gasoline, thereby allocating gasoline that was in short supply by means of price, station managers simply let people fill up their tanks until the pumps were empty. Anyone who wanted gasoline after that was out of luck.

This is rationing by lining up. It is the alternative to rationing by price. Rationing by lining up creates no financial incentive for suppliers of the item in short supply to allocate new supplies to the region of the country which is experiencing a shortage. Instead, delivery schedules remain the same as they did prior to the shortage. This continues the shortage.

Whenever there are complaints about price gouging during a period of a shortage, sellers get the message. The next time there is a shortage, they hesitate to raise prices. They shift to the other allocation system: first come, first served. This subsidizes people who have a low value on their time. People who place a high value on their time prefer to pay extra money in order to attain their goals. But this is made illegal by the state. So, the shortage lasts longer than it would otherwise have lasted.

The official goal of the government is to make certain that everyone has access to the item in short supply. The government says that raising prices during a shortage is unfair. So, the result is the opposite of what the government’s official justification was for holding prices down. There is an even greater shortage, because people buy more of the item than they need immediately. They have no incentive to reduce their consumption, thereby making available applies to those who were at the end of the line. There is no incentive for anyone at the front of the line to refrain from filling his gasoline tank. So, gasoline runs out before the line runs out.

Such are the unintended consequences of government intervention. Personally, I would rather at least have the option of paying twice as much for gas than to either wait in line for a long period of time, or have to drive all over town to find some.

I also said last night that I don’t believe we are entering an era of gasoline shortages. I predict that inventories a month from now are higher than they are today. But the recovery will take longer than if prices had risen sharply.

What is the status of the refineries that are down? This story has the details:

EXXON MOBIL

• Baytown refinery, the largest in the U.S., is restarting.

• Beaumont refinery remains offline.

VALERO

• Houston and Texas City refineries should be back to normal in several days.

• Port Arthur refinery remains shut in but should begin the restart process in several days.

SHELL

• Deer Park refinery, third- largest in the Houston- Galveston area, is restarting. Normal operating rates are expected by the weekend.

• The Shell-Motiva joint venture refinery in Port Arthur is still shut in. Power has been restored, and production of gasoline is expected to begin this week.

BP

• Texas City refinery, second- largest in the Houston- Galveston region, has not restarted.

SOURCES: Department of Energy, the companies

I don’t believe any of ConocoPhillips’ refineries are still down, so their branded stations are likely to have supplies. In fact, CNN reports:

A ConocoPhillips (COP) spokesman said the company “is not short crude and our system is generally balanced.”

Finally, I have just returned home after 3 weeks on the road. I have a massive backlog of e-mails to wade through, and if you have sent me an e-mail and I haven’t answered it, please be patient for a couple of days. I am going to limit my time on the computer for a few days.

September 24, 2008 Posted by | EIA, gas shortages, rationing, twip | 258 Comments

A Mixed Bag of Oil Projections in the MSM

Update: One more noteworthy story from Newsweek:

The Coming Energy Wars

Oil drives so much of the global economy, it’s almost impossible to fully imagine the world of $200 oil. No question, the shock will force nations to go greener much faster than now, particularly by conserving energy and developing and adopting new non-fossil fuels. But none of this can happen full stop in six to 24 months. So the predictions tend to be gloomy: some analysts see a shift toward regional trade, and even a major reversal of globalization itself, as rising transport costs make it too expensive to ship many kinds of goods long distances.

A major acceleration in the transfer of wealth that has, in the past five years, shifted trillions of petrodollars from oil consumers to producers would alter the world balance of power—including a boost for the troublesome oil autocrats of Iran, Venezuela and Russia. At $200 a barrel the proven oil reserves of the six Gulf nations alone would rise in value to $95 trillion, about twice the size of public equity markets, according to Morgan Stanley managing director Stephen Jen. That would make the Sovereign Wealth Funds of oil states market kingmakers. Western efforts to press more openness on these funds, many controlled by royal courts, would surely grow.

———————-

As I browsed through recent energy headlines on my Sunday morning – which lately has been the only time slot that allows me to catch up – I saw two contrasting stories in the mainstream media. One is from CNN Money, warning of $6 gasoline if we have a bad hurricane season:

An ill wind for gas prices

NEW YORK (CNNMoney.com) — Batten down the hatches: hurricane season starts on June 1. It’s expected to be a rough one, threatening to upend refineries and disrupt pipelines in the southern United States.

“With the market the way it is now, a move in crude because of a hurricane could really be exacerbated,” said MF Global energy analyst Don Luke.

Peter Beutel, oil analyst at Cameron Hanover Beutel, said if a Katrina-like hurricane were to hit in July, gas prices could go as high as $5 or even $6.

“The last thing this market needs at this time is a hurricane, because we can’t afford to lose any of our refining capacity at this point,” said Beutel. “If anything bullish happens with the market in this state, it would make it go absolutely crazy.”

One thing that I haven’t covered lately is that gasoline stocks have now slid to the lower end of the normal range, which you can see at the lastest version of This Week in Petroleum:

As was discussed at length last season (also note my warnings in those archives of rising gas prices), that does put the pieces into place for a huge run-up in case of a disruption. Last year, we didn’t see any bad hurricanes than interrupted supplies, but we certainly take a risk in this situation.

The other MSM story comes from Newsweek:

What Goes Up Must Come Down

There are widespread signs that the surging oil price is leading to demand destruction in the largest consumer of oil—the United States. From reports of the sharpest ever year-over-year drop in miles driven, SUV sales falling off a cliff and cutbacks airlines are making to their flight operations, U.S. consumers are clearly coming under severe stress. Oil spending as a share of the global economy has risen to more than 7 percent, a level last seen in late 1979. What happened next is instructive: from 1980 to 1983, the consumption of oil fell by 10 percent, and it took another seven years for oil consumption to reach the 1979 peak level of consumption. The length of the cycles may vary, but in the end, oil, too, is a cyclical business.

Encouraging signs that we are reducing our consumption, but I think the author misses the mark with that last statement. Oil has historically been a cyclical business. This will change when supply growth can no longer outstrip demand. This is going to be the case when oil production peaks, and all signs indicate to me that the erosion of excess capacity is driving the current surge in prices. Unless we have enormous demand destruction (and how is that going to occur other than through very high prices?), or there are a couple of Saudi Arabia’s hiding in the Arctic and soon to be discovered, I can’t easily see supply getting far ahead of demand. That is what would be required to continue the cycles – an oversupply situation.

All price setbacks in oil over the past three decades have been demand- and not supply-led. Still, the oil bulls are willing to ignore evidence of demand destruction and are instead obsessed with supply issues. While there may be some merit in the increasingly fashionable “peak oil” theory, which essentially postulates that the world will have consumed most of its oil within a 300-year period, there is no evidence that world oil production is peaking today. The crude-oil market is currently well supplied, and production is expected to grow by 1.5 to 2 percent this year.

Peak oil is now “fashionable.” That’s a relief. Now I am going to try to promote this idea I have called “Peak Money” theory. It goes like this. If I inherit a bank account, and I draw money out of it – yet I make no deposits – eventually I will run out of money. If my spending is increasing over time, then I will need to make some big adjustments when I start to run out of money. In truth, this is no more theory than peak oil is a theory. It puzzles me to hear people refer to “so-called peak oil theory” or some other term that indicates that it is anything other than an observation.

There is no question that global oil production will peak. We have country after country in which this has already taken place. The key questions are “When?” and “What are the impacts?” I believe the answer to the timing is that it is soon. Even the most optimistic predictions mean that my children will have to deal with it. The more pessimistic suggest that it is upon us now. Personally, I think >90% probability of a global peak within 5 years – which is why I spend so much time pondering the impacts.

Regarding the question on the impacts, that debate continues to play out in my mind – and in this blog.

June 1, 2008 Posted by | EIA, Media coverage, Peak Oil, twip | Comments Off on A Mixed Bag of Oil Projections in the MSM

A Mixed Bag of Oil Projections in the MSM

Update: One more noteworthy story from Newsweek:

The Coming Energy Wars

Oil drives so much of the global economy, it’s almost impossible to fully imagine the world of $200 oil. No question, the shock will force nations to go greener much faster than now, particularly by conserving energy and developing and adopting new non-fossil fuels. But none of this can happen full stop in six to 24 months. So the predictions tend to be gloomy: some analysts see a shift toward regional trade, and even a major reversal of globalization itself, as rising transport costs make it too expensive to ship many kinds of goods long distances.

A major acceleration in the transfer of wealth that has, in the past five years, shifted trillions of petrodollars from oil consumers to producers would alter the world balance of power—including a boost for the troublesome oil autocrats of Iran, Venezuela and Russia. At $200 a barrel the proven oil reserves of the six Gulf nations alone would rise in value to $95 trillion, about twice the size of public equity markets, according to Morgan Stanley managing director Stephen Jen. That would make the Sovereign Wealth Funds of oil states market kingmakers. Western efforts to press more openness on these funds, many controlled by royal courts, would surely grow.

———————-

As I browsed through recent energy headlines on my Sunday morning – which lately has been the only time slot that allows me to catch up – I saw two contrasting stories in the mainstream media. One is from CNN Money, warning of $6 gasoline if we have a bad hurricane season:

An ill wind for gas prices

NEW YORK (CNNMoney.com) — Batten down the hatches: hurricane season starts on June 1. It’s expected to be a rough one, threatening to upend refineries and disrupt pipelines in the southern United States.

“With the market the way it is now, a move in crude because of a hurricane could really be exacerbated,” said MF Global energy analyst Don Luke.

Peter Beutel, oil analyst at Cameron Hanover Beutel, said if a Katrina-like hurricane were to hit in July, gas prices could go as high as $5 or even $6.

“The last thing this market needs at this time is a hurricane, because we can’t afford to lose any of our refining capacity at this point,” said Beutel. “If anything bullish happens with the market in this state, it would make it go absolutely crazy.”

One thing that I haven’t covered lately is that gasoline stocks have now slid to the lower end of the normal range, which you can see at the lastest version of This Week in Petroleum:

As was discussed at length last season (also note my warnings in those archives of rising gas prices), that does put the pieces into place for a huge run-up in case of a disruption. Last year, we didn’t see any bad hurricanes than interrupted supplies, but we certainly take a risk in this situation.

The other MSM story comes from Newsweek:

What Goes Up Must Come Down

There are widespread signs that the surging oil price is leading to demand destruction in the largest consumer of oil—the United States. From reports of the sharpest ever year-over-year drop in miles driven, SUV sales falling off a cliff and cutbacks airlines are making to their flight operations, U.S. consumers are clearly coming under severe stress. Oil spending as a share of the global economy has risen to more than 7 percent, a level last seen in late 1979. What happened next is instructive: from 1980 to 1983, the consumption of oil fell by 10 percent, and it took another seven years for oil consumption to reach the 1979 peak level of consumption. The length of the cycles may vary, but in the end, oil, too, is a cyclical business.

Encouraging signs that we are reducing our consumption, but I think the author misses the mark with that last statement. Oil has historically been a cyclical business. This will change when supply growth can no longer outstrip demand. This is going to be the case when oil production peaks, and all signs indicate to me that the erosion of excess capacity is driving the current surge in prices. Unless we have enormous demand destruction (and how is that going to occur other than through very high prices?), or there are a couple of Saudi Arabia’s hiding in the Arctic and soon to be discovered, I can’t easily see supply getting far ahead of demand. That is what would be required to continue the cycles – an oversupply situation.

All price setbacks in oil over the past three decades have been demand- and not supply-led. Still, the oil bulls are willing to ignore evidence of demand destruction and are instead obsessed with supply issues. While there may be some merit in the increasingly fashionable “peak oil” theory, which essentially postulates that the world will have consumed most of its oil within a 300-year period, there is no evidence that world oil production is peaking today. The crude-oil market is currently well supplied, and production is expected to grow by 1.5 to 2 percent this year.

Peak oil is now “fashionable.” That’s a relief. Now I am going to try to promote this idea I have called “Peak Money” theory. It goes like this. If I inherit a bank account, and I draw money out of it – yet I make no deposits – eventually I will run out of money. If my spending is increasing over time, then I will need to make some big adjustments when I start to run out of money. In truth, this is no more theory than peak oil is a theory. It puzzles me to hear people refer to “so-called peak oil theory” or some other term that indicates that it is anything other than an observation.

There is no question that global oil production will peak. We have country after country in which this has already taken place. The key questions are “When?” and “What are the impacts?” I believe the answer to the timing is that it is soon. Even the most optimistic predictions mean that my children will have to deal with it. The more pessimistic suggest that it is upon us now. Personally, I think >90% probability of a global peak within 5 years – which is why I spend so much time pondering the impacts.

Regarding the question on the impacts, that debate continues to play out in my mind – and in this blog.

June 1, 2008 Posted by | EIA, Media coverage, Peak Oil, twip | 31 Comments

A Mixed Bag of Oil Projections in the MSM

Update: One more noteworthy story from Newsweek:

The Coming Energy Wars

Oil drives so much of the global economy, it’s almost impossible to fully imagine the world of $200 oil. No question, the shock will force nations to go greener much faster than now, particularly by conserving energy and developing and adopting new non-fossil fuels. But none of this can happen full stop in six to 24 months. So the predictions tend to be gloomy: some analysts see a shift toward regional trade, and even a major reversal of globalization itself, as rising transport costs make it too expensive to ship many kinds of goods long distances.

A major acceleration in the transfer of wealth that has, in the past five years, shifted trillions of petrodollars from oil consumers to producers would alter the world balance of power—including a boost for the troublesome oil autocrats of Iran, Venezuela and Russia. At $200 a barrel the proven oil reserves of the six Gulf nations alone would rise in value to $95 trillion, about twice the size of public equity markets, according to Morgan Stanley managing director Stephen Jen. That would make the Sovereign Wealth Funds of oil states market kingmakers. Western efforts to press more openness on these funds, many controlled by royal courts, would surely grow.

———————-

As I browsed through recent energy headlines on my Sunday morning – which lately has been the only time slot that allows me to catch up – I saw two contrasting stories in the mainstream media. One is from CNN Money, warning of $6 gasoline if we have a bad hurricane season:

An ill wind for gas prices

NEW YORK (CNNMoney.com) — Batten down the hatches: hurricane season starts on June 1. It’s expected to be a rough one, threatening to upend refineries and disrupt pipelines in the southern United States.

“With the market the way it is now, a move in crude because of a hurricane could really be exacerbated,” said MF Global energy analyst Don Luke.

Peter Beutel, oil analyst at Cameron Hanover Beutel, said if a Katrina-like hurricane were to hit in July, gas prices could go as high as $5 or even $6.

“The last thing this market needs at this time is a hurricane, because we can’t afford to lose any of our refining capacity at this point,” said Beutel. “If anything bullish happens with the market in this state, it would make it go absolutely crazy.”

One thing that I haven’t covered lately is that gasoline stocks have now slid to the lower end of the normal range, which you can see at the lastest version of This Week in Petroleum:

As was discussed at length last season (also note my warnings in those archives of rising gas prices), that does put the pieces into place for a huge run-up in case of a disruption. Last year, we didn’t see any bad hurricanes than interrupted supplies, but we certainly take a risk in this situation.

The other MSM story comes from Newsweek:

What Goes Up Must Come Down

There are widespread signs that the surging oil price is leading to demand destruction in the largest consumer of oil—the United States. From reports of the sharpest ever year-over-year drop in miles driven, SUV sales falling off a cliff and cutbacks airlines are making to their flight operations, U.S. consumers are clearly coming under severe stress. Oil spending as a share of the global economy has risen to more than 7 percent, a level last seen in late 1979. What happened next is instructive: from 1980 to 1983, the consumption of oil fell by 10 percent, and it took another seven years for oil consumption to reach the 1979 peak level of consumption. The length of the cycles may vary, but in the end, oil, too, is a cyclical business.

Encouraging signs that we are reducing our consumption, but I think the author misses the mark with that last statement. Oil has historically been a cyclical business. This will change when supply growth can no longer outstrip demand. This is going to be the case when oil production peaks, and all signs indicate to me that the erosion of excess capacity is driving the current surge in prices. Unless we have enormous demand destruction (and how is that going to occur other than through very high prices?), or there are a couple of Saudi Arabia’s hiding in the Arctic and soon to be discovered, I can’t easily see supply getting far ahead of demand. That is what would be required to continue the cycles – an oversupply situation.

All price setbacks in oil over the past three decades have been demand- and not supply-led. Still, the oil bulls are willing to ignore evidence of demand destruction and are instead obsessed with supply issues. While there may be some merit in the increasingly fashionable “peak oil” theory, which essentially postulates that the world will have consumed most of its oil within a 300-year period, there is no evidence that world oil production is peaking today. The crude-oil market is currently well supplied, and production is expected to grow by 1.5 to 2 percent this year.

Peak oil is now “fashionable.” That’s a relief. Now I am going to try to promote this idea I have called “Peak Money” theory. It goes like this. If I inherit a bank account, and I draw money out of it – yet I make no deposits – eventually I will run out of money. If my spending is increasing over time, then I will need to make some big adjustments when I start to run out of money. In truth, this is no more theory than peak oil is a theory. It puzzles me to hear people refer to “so-called peak oil theory” or some other term that indicates that it is anything other than an observation.

There is no question that global oil production will peak. We have country after country in which this has already taken place. The key questions are “When?” and “What are the impacts?” I believe the answer to the timing is that it is soon. Even the most optimistic predictions mean that my children will have to deal with it. The more pessimistic suggest that it is upon us now. Personally, I think >90% probability of a global peak within 5 years – which is why I spend so much time pondering the impacts.

Regarding the question on the impacts, that debate continues to play out in my mind – and in this blog.

June 1, 2008 Posted by | EIA, Media coverage, Peak Oil, twip | 31 Comments