Friday, March 23, 2012

‘Markets Moved By Expectations’

Opponents of increased domestic production of oil and natural gas like to point out that oil is a world-wide market – which it is – then immediately try to support their case by looking only at U.S. production.  These folks jumped on an AP report this week that sought to prove that U.S. production has no bearing on prices.  Here’s the key paragraph:
"Politicians can’t do much to affect gasoline prices the market for oil is global. Allowing increased drilling in the U.S. would contribute only small amounts of oil to world supply, not nearly enough to affect prices. The Associated Press conducted a statistical analysis of 36 years of monthly inflation-adjusted gasoline prices and U.S. domestic oil production and found no statistical correlation between oil that comes out of U.S. wells and the price at the pump."
Again:
“… no statistical correlation between how much oil comes out of U.S. wells and the price at the pump.”
Let’s take this from the top.  The U.S. is the world’s third-largest producer of crude oil, providing 11.16 percent of the supply in 2010. Now ask yourself, if zero barrels came out of U.S. wells, would that affect the price of crude oil? Even the most determined anti-oil advocate would have a hard time saying that the loss of 11.16 percent of the world’s oil production wouldn’t mean anything to the global market. Is this an absurd example?  Yes.  But sometimes an absurd premise requires a little absurdity in response, and the idea that the U.S. has no impact on oil prices is an absurd premise.
So now that we’ve determined there is a correlation “between oil that comes out of U.S. wells and the price at the pump,” the question becomes amounts.  Earlier in the same AP piece the reporter acknowledges that:
"Oil prices have been high in recent months because global oil demand is expected to reach a record this year as the developing nations of Asia, Latin America and the Middle East increase their need for oil. There have also been minor supply disruptions in South Sudan, Syria and Nigeria. And oil prices have been pushed higher by traders worried that nuclear tensions with Iran could lead to more dramatic supply disruptions."
The Washington Post adds all this up:
"The international oil market has tightened … because a series of crises has shaved oil production or boosted demand worldwide. Together they add up to a difference of about 1 million barrels a day in the global oil balance."
The Wall Street Journal’s take [subscription required]:
"Global spare oil production capacity is running 'ridiculously thin' at less than 2% of demand, potentially offsetting the impact on overheating oil prices of any further increases in supplies, said Paul Horsnell, head of commodities research at Barclays. Perceptions in the market that the volume of spare capacity, or the amount of production that can be brought onstream within 30 days, has almost completely dwindled could even push oil prices higher if additional supplies are released on to the market, he added. The 2% figure represents around 1.6 million barrels a day to 1.7 million barrels a day. 'Below 5% it starts getting a little tight because there's no slack for anything to go wrong. I think the general theme right across the oil industry is that it is running very hot indeed at the moment,' Horsnell said."
OK, so the current spare global capacity, which Horsnell indicates is key to crude’s global price, is something like 1 million to 1.7 million barrels per day. The question: Can the U.S. do anything with North Americans sources to increase that?
Yes, we can:
Gulf of Mexico – We can restore exploration and development in the Gulf to pre-2010 levels. Right now the Energy Information Administration projects federal Gulf production will be down 21 percent this year from 2010. Production dropped from 1.55 million barrels per day in 2010 to 1.32 mb/d in 2011 and is estimated to be 1.23 mb/d this year. If Gulf production reached the 1.76 mb/d that EIA in 2010 projected for this year, that would be an additional 400,000 barrels per day over 2011.Keystone XL pipeline – Construction of the full Keystone XL would bring upwards of 800,000 additional barrels of oil per day from neighbor and ally Canada.Federal Lands – We can reverse the current downward trajectory in production on federal lands while opening up new areas in Alaska and offshore. The Arctic National Wildlife Refuge alone is estimated to hold 1 million barrels per day – domestic supply that would be affecting global markets right now if it hadn’t been blocked for more than a decade by opponents who dismissed ANWR because it would take seven to 10 years to come online. In all, the U.S. is believed to have 200 billion barrels of oil that’s technically recoverable but not counted with our “proven reserves.”
The point is supply matters. “Markets are moved by expectations,” correctly says API Executive Vice President Marty Durbin. The White House says otherwise, but the United States has ample resources of its own and stable resources from Canada to affect that global oil balance mentioned above. But it will take political leadership that’s both honest and bold, that you can affect global markets in more ways than just cutting demand, as the president seems to believe.  It will take more than simply saying, as the president did Thursday in Cushing, Okla., that “we’re drilling all over the place,” when the facts say otherwise. API President and CEO Jack Gerard, from earlier this week:
“Sending a clear message to people who buy and sell crude oil that the United States is committed to reasserting itself as one of the world’s major oil producers would immediately put downward pressure on gasoline and other fuel prices.”
View the original article here

EPA Needs to Fix Air Emissions Proposal

 

Howard Feldman, API director of scientific and regulatory affairs, spoke with reporters today about proposed rules for oil and natural gas air emissions.  This is what he had to say.


EPA's proposed rules for the oil and natural gas sector, which address sources of air emissions including those associated with hydraulic fracturing, are due to be finalized in the first week of April. The rules are important because they would over time affect hundreds of thousands of natural gas development operations.


A new study conducted by Advanced Resources International, which we are releasing today projects the rules as proposed would significantly slowdown drilling, resulting in less oil and natural gas production, lower royalties to the federal government, and lower tax payments to state governments.


Unless EPA makes changes to the proposal, the study found that between the time these rules are implemented and 2015:

Overall drilling for natural gas using hydraulic fracturing would be reduced by up to 52%, reducing drilling by as much as 21,400 wells;Natural gas production from hydraulically fractured wells would decline by up to 11% compared to what would otherwise have been developed;Oil production from hydraulically fractured wells would decline by up to 37% compared to what would have otherwise been developed;The federal government would not collect up to 8.5 billion dollars in royalties due to reduced drilling and production;State governments would not collect up to 2.3 billion dollars in severance taxes due to reduced drilling and production.

This analysis does not even attempt to estimate the lost jobs and decline in other economic benefits that would result from reduced drilling and reduced oil and gas supply services.


As we suggested in our comments on the proposal, EPA must make changes to this rule and allow for reduced emissions while not impeding the massive job creation and economic revitalization that we’ve seen in states like North Dakota and Pennsylvania due to the shale boom.


First, reduced emission completions requirements should be less prescriptive and limited to circumstances that are cost-effective and technically feasible. A one-size-fits-all approach will not work.


EPA should also allow more time to implement the requirements once they are final. The equipment prescribed to conduct reduced emission well completions will simply not be available in time to comply with the current final rule schedule.


Manufacturers and industry need two to three years to design, manufacture and certify a sufficient number of control devices and train personnel.


We also think the system of notifications, monitoring, recordkeeping, performance testing and reporting requirements for compliance assurance must be simplified. Taken as a whole, these requirements would be overly burdensome for the small and/or temporary facilities that EPA is regulating. They would waste time and resources for the industry and EPA.


The benefits of shale energy development are indisputable. Nationwide, shale gas development was supporting 600,000 jobs in 2010, according to a December IHS-Global Insight report. Natural gas prices have fallen by half from their level three years ago. That is benefiting families that heat their homes with natural gas, as well as businesses and consumers that buy their electricity from utilities that generate it with natural gas.


Low natural gas prices are also benefiting chemical manufacturers and other businesses that use natural gas as a raw material, and that is encouraging businesses to locate new facilities in America rather than overseas.


The president has called for his administration to reign in burdensome regulations. At a time when the government is desperate for revenue, and America’s gasoline prices are high, applying overly burdensome regulations would be bad public policy and could place an even bigger burden on Americans in the form of higher energy costs.


EPA can fix these rules so they reduce emissions yet are still compatible with oil and natural gas development that creates jobs, government revenue and improves our energy security. We ask them to keep these recommendations in mind as they finalize the rule.


View the original article here

The President’s Energy Statements: Myth and Fact

Fact-checking the president’s energy rhetoric: See API’s new point-by-point look at some of the energy assertions the president has made in his State of the Union address and other public statements. For example:


President: “I’m directing my administration to open more than 75 percent of our potential offshore oil and gas reserves.”


Fact: The administration is defining the status quo as progress. The resources identified are restricted to areas in the Gulf of Mexico and the Alaska OCS that have already been leased and where the industry is already active. In fact, the administration’s latest plan for offshore development scales back on the previous plan by removing the Eastern Gulf of Mexico and areas in the Atlantic. The 75 percent number is deceiving because it includes only the areas we have already explored.


More on that, here.


Here’s another one from the myth/fact guide, on U.S. oil reserves:


President: “But with only 2 percent of the world’s oil reserves, oil isn’t enough.”


Fact: This is wrong. The U.S. is home to three times the amount of reserves as Saudi Arabia. The “2 percent” number is misleading at best. “Reserves” is a technical term that refers to oil that drilling has proven to be available. According to a recent report by the Congressional Research Service, our “recoverable” conventional oil resources are nearly six times that. And our unconventional oil resources are close to six times larger than our conventional oil resources.


Nevertheless, the administration and opponents of domestic energy development continued to use the misleading “2 percent” number. Companies believe in the long-term potential of U.S. oil development. That’s why they are willing to invest many billions of dollars in new projects here at home.


More on reserves, here.


Other items in the guide include setting the record straight on current domestic oil and natural gas production, imports, natural gas development, the genesis of hydraulic fracturing and the administration’s energy tax hike proposals. Worth a read.


Energy Myths and Facts


View the original article here

Crude Prices and the Pump

API Chief Economist John Felmy, discussing gasoline prices and other issues in a conference call with reporters on Tuesday:



“By far, the single biggest factor in today’s higher gasoline prices is the rising cost of crude oil. It has driven virtually all of the rise in gasoline prices. Crude oil prices are up because of supply and demand. World demand for crude is increasing as the economies of the world begin to recover, and the world’s excess oil production capacity is shrinking. Buyers of crude oil also are clearly concerned about the instability of major oil producing nations in North Africa and the Middle East.”



Felmy described how the price of a gallon of gasoline is dominated by two factors: the cost of the crude oil used to make it and taxes levied on each gallon by government:



“The price of crude is the biggest factor behind rising gasoline prices because it is the biggest cost component in making gasoline. When crude is at $100 for a standard 42-gallon barrel – a little below where it is now – a refiner pays almost $2.40 for each gallon of that crude to make a gallon of gasoline. The next biggest component is taxes. They now average almost 49 cents a gallon, including federal, state and local taxes. Together, crude costs and taxes account for over $3.00 – or about 84 percent – of what people are paying at the pump today.”


Felmy called suggestions that refinery production levels and exports of refined products are affecting U.S. pump prices a “misleading distraction.” Felmy:



“U.S. refineries are pulling out all the stops to supply U.S. markets. They produced more gasoline last year than any year in history. …  As for exports of gasoline, this is a red herring. Exports are not causing gasoline prices to rise. Less than one-sixth of product exports have been gasoline, and only a tiny amount of this was the reformulated gasoline used in larger metropolitan areas.”


These exports are good for America, Felmy said:



“U.S. refiners produce fuels primarily for American markets and always have. Moreover, to the extent we export any products, that puts downward pressure on prices of the products we import. Exports also mean jobs for Americans, including good paying U.S. refinery jobs, and a lower trade deficit.”


The challenge is for Washington to adopt energy policies that will benefit consumers. Felmy said the Keystone XL pipeline should be given the go-ahead, and the administration should ease access to U.S. oil and natural gas resources.



“The administration has not stepped up to the plate on any of this. It has consistently held back more oil and natural gas development, especially on federally controlled lands and offshore areas. It has said no to the Keystone XL pipeline. All of this has weakened our energy security and contributed to higher prices. … We think most Americans understand that producing at home more oil and natural gas would create jobs, enhance energy security, increase revenue to government and help consumers.”


On a related note, API President and CEO Jack Gerard talked to Fox Business about energy policy and gasoline prices. Check the video below:



View the original article here