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Thursday, December 4, 2014

WHAT THE HECK IS HAPPENING TO THE PRICE OF OIL?

I've been traveling so much that I've ignored the primary purpose of this blog site, which is energy info.  Returning to my roots, I will today focus on petroleum.  I can hear most of my recent viewers saying, oh no.  However, bear with me and learn something.  How metastable is the price of oil?

In 1998, when Brent traded not far off $10 per barrel, forecasters were confident that gasoline would soon be given free with new cars. In 2007 a common view was that crude oil would soon trade up to $200 per barrel if not higher.

The right column, daily, provides the price of gasoline and WTI crude oil price.  Here below are the two historic prices of oil (BLUE--price, and RED--in 2011 dollars)
This morning a barrel of West Texas Intermediate (WTI) Crude Oil dropped to $66.50.  Remember that for the past four years oil bounced around in the range between $100 to $120/bbl:

There is also Brent Crude Oil, a European commodity, that today is around $4/bbl higher than the WTI.  To get the dimensions more understandable, $66.50/bbl is equal to $1.58/gallon.  By clicking on the state symbol (in the right column--How Much Does Gasoline Cost?) you can get the average gasoline price in the USA, which is now $2.75 for regular.  Hawaii is 40% higher, at $3.85.  In any case, between the average price of gasoline and cost of WTI crude, there is a difference of $1.17/gal, which goes into things like, shipping, refining....and, of course, profit, and this profit margin is constant, explaining why oil companies own little oil, but continue to make record profits.

Saudi Arabia sees Brent oil stabilizing at $60/bbl, which means that the WTI will drop below that number.  Why has the price of oil plummeted?  First, blame China.  It isn't using as much as was expected.  Second, the USA has become a factor with more than 5 million bbl/day of new fracked oil.  There is now a 700,000 bbl/day glut in the market.

Third, Saudi Arabia is afraid of U.S. fracked oil.   Keep in mind that the USA is the Saudi Arabia of shale oil. Just the Green River Formation has more oil  shale than the rest of the world combined. At $60/bbl, most of these American operations, plus Canadian tar sands (cost:  $74/bbl), will stop production.  The cost to produce a bbl of fracked American oil is as amorphous as an amoeba.  Production/exploration costs range from less than $25/bbl to more than $100/bb.  However, if you include the need for profit, etc., a range of $70-$95/bbl could well be reasonable.  The cost of exploration and production of Middle East oil is $16.88/bbl.

Liquid fossil fuel production in the USA peaked in 1970, but could well rise to the same level next year:


However, nothing grows forever:


Someone tell Saudi Arabia not to get so paranoid abut the USA.

Oh, politically, if prices remain below $70/bbl, there will be no big controversy over the Keystone Pipeline, previously expected to be a contrived Republican issue to embarrass President Obama and Democrats, for some Democrats are actually in favor of this global warming menace.  Magically enough, this pipe is expected to pass 700,000 bbl/day, the current glut.  I'm missing a point, as the pipe does not even enter Louisiana, but why was Senator Mary Landrieu of that state so involved with this legislation, as here is her visage after the Senate recently voted down the project by one vote:


Houston and Port Arthur are in Texas.  Oh, I get it, the oil would then be trucked or piped to Louisiana refineries.

In international politics, Russia especially will suffer, for its depressed ruble is already under threat, and 45% of the current national budget is drawn from oil taxes..  Ask any of your friends which county produces the most oil and you will not get this correct answer in bbl/day:

  #1  Russia                10,053,800
  #2  Saudia Arabia     9,693,200
  #3  USA                    7,442,200
  #4  China                  4,372,000

However, the USA is the #1 producer of oil PLUS natural gas liquids, at 11 million bbls/day.  In 2010 the U.S. passed Russia on natural gas production.

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Super Typhoon Hagupit is now merely Typhoon Hagupit at 145 MPH, and will weaken to a Category 1 before passing about midway between Manila and Tacloban (struck by that devastating Super Typhoon Haiyan last year):


Manila and Tacloban are a little more than 500 miles apart.

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