Tuesday, April 3, 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

Study: EPA’s Tier III Proposal Would Increase Fuel-Making Costs

At a time when just everyone is understandably concerned about fuel prices, EPA apparently didn’t get the memo. Its latest thinking on a Tier III refinery rulemaking would add significant costs to the making of gasoline, according to a new analysis by Baker & O’Brien, Inc.

During a recent conference call with reporters, API’s Bob Greco, group director for downstream and industry operations, talked about the impacts on refiners of the proposed rule to further reduce sulfur levels in gasoline:

Nearly $10 billion in new capital costs to industry.Increase of between 6 cents and 9 cents per gallon to the cost of manufacturing gasoline, according to Baker & O’Brien.Increase of as much as 25 cents per gallon if a vapor pressure reduction requirement, which EPA considered, is included.

Greco:

“With the pump price of gasoline already above $4 a gallon in some parts of the country, this added burden clearly makes Tier III the wrong regulation at the wrong time. More importantly, EPA has yet to demonstrate any air quality benefits from reducing sulfur in the amount proposed. And, as the Baker & O’Brien analysis also shows, implementing the new requirements would increase refinery greenhouse gas emissions because of the use of energy-intensive hydrotreating equipment to remove sulfur from the gasoline.”

EPA claims the new rule wouldn’t be a hardship. But Greco said the agency cites a “low-ball cost estimate” that uses flawed modeling about what U.S. refineries would have to do to be in compliance. Although EPA has dropped the gasoline vapor pressure requirement, industry doesn’t believe the provision is off the table.

The Baker & O’Brien analysis found that while the sulfur requirement alone probably wouldn’t lead to refinery closures, Tier III in tandem with other potential EPA requirements could cause some refineries to close, resulting in diminished fuel manufacturing capacity and increased reliance on imported fuels – all for what Baker & O’Brien said would be modest environmental benefits. Greco:

“Refinery regulations clearly contribute to a cleaner environment and safer workplace, but, unnecessary, inefficient, and excessively costly requirements hamper our ability to provide and distribute fuels to America, while also employing hundreds of thousands of people and enhancing our national security. We have already seen some refineries close, at least in part due to the cumulative impact of environmental controls. We urge the administration to take a step back on Tier III and its other proposed rules. We must be sure that new regulatory proposals are necessary, properly crafted, practical, and fair to allow US refiners to remain competitive, preserve good paying refinery jobs, and ensure our energy security.”


View the original article here

Pew: Keystone XL Support at 66 Percent

The Pew Research Center is out with new polling on the Keystone XL pipeline that mirrors earlier, strongly favorable surveys by other public opinion surveys:

In terms of policy proposals currently under consideration in Washington, there is far more support than opposition for building the Keystone XL pipeline that would carry oil from Canada’s oil sands to refineries in Texas. … Among those who have heard at least a little about the Keystone XL pipeline, 66% say the government should approve the pipeline, while just 23% say it should not.

The poll’s splits show that Keystone XL support is broad:

Republicans are far more likely than Democrats or independents to have heard about the pipeline. Among those aware of this issue, 84% of Republicans say the government should build the pipeline, while just 9% say they should not. Independents, by greater than two-to-one (66% to 27%) approve of its construction. Democrats who have heard about the pipeline also are supportive – 49% approve of building the pipeline and 33% disapprove.

Again, Pew is finding what others already have found, that there’s a U.S. consensus for building the Keystone XL – to strengthen our energy relationship with Canada, make our energy future more secure and create jobs.

Earlier this month a Fox News poll found that 67 percent of respondents said the pipeline should be built, while just 25 percent opposed it. Last month a Rasmussen Reports poll put the Keystone XL’s support at 56 percent, while a United Technologies/National Journal Congressional Connection poll had favorability at 64 percent.

Certainly, the momentum of that kind of public support isn’t unnoticed. Montana Gov. Brian Schweitzer tells The Canadian Press the Keystone XL makes too much sense to be stopped by Washington politics:

“Blah, blah, blah, Washington, D.C., politics. If you want to get something a) not done and b) cussed and discussed, send it to Washington, D.C. It’s got to get built.”

We and a strong majority of Americans agree.


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Graphically Speaking: Access Matters

Normally, we don’t bother with blog posts from the Center for American Progress on oil issues because, to borrow from an old saying,...


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More on Moving Global Markets

The Marshall Institute’s William O’Keefe has a must-read on Fuel Fix for folks puzzled by the recent AP analysis that discounted the effect of domestic drilling on global crude pricing, which is the key component (76 percent) in fuel costs.


Remember, the AP said its statistical analysis of 36 years of monthly, inflation-adjusted, gasoline prices found no correlation between the level of production from U.S. wells and prices at the pump.


O’Keefe:



“The AP attempts to use a disconnected statistic, domestic production, to make an erroneous correlation to counter arguments in favor of more U.S. exploration and development. In doing so, the wire service offers the public a political statement in place of objective analysis.”


O’Keefe continues:



“To begin with, domestic oil production has been steadily declining since its peak in 1970 when it averaged 9.64 million barrels per day (MMbbl/d). From 1978 to 2010, domestic production reduced 37 percent. In that same period, the price of gasoline increased by nearly 60 percent—climbing from a national average of $1.61 to 2.56 per gallon. This data seems to suggest what many of us already learned in ‘Economics 101’; there’s an inverse relationship between supply and demand. That means that as the availability of a product/service (ie. oil, wheat, gold, etc.) declines, prices will rise.”


And:



“The AP even concedes this point mid-way through the story, noting ‘if drilling activity rises around the globe for a sustained period of time, gasoline prices can fall as that new supply eventually finds its way to market.’ Yet, it then implies that crude oil prices are insensitive to changes in supply as if it is a unique commodity. The story ignores what has happened to prices when for example a hurricane disrupted production and refining in the Gulf coast region, or when Nigerian or Libyan oil production has been disrupted. The price of crude goes up and then down when supplies come back on line. So when other factors are relatively stable, an increase in supply relative to demand will lower price. How much depends on the increase in supply.”


O’Keefe then moves to the lost energy opportunities resulting from current policies:



“… a policy of NO and a self imposed moratorium on increased exploration has probably resulted in hundreds of thousands of barrels or more not being produced. Adding those unproduced barrels to the current global supply would put downward pressure on crude oil prices which translate into to lower gasoline prices. Instead, there has been a policy of NO to the eastern Gulf of Mexico, NO to offshore drilling, NO to Alaska’s coastal plain, and NO to Keystone XL. With a more enlightened energy policy our oil production over the course of this decade could increase by a million barrels a day or more. That is not trivial.”


O’Keefe is certainly right on that, because, as noted here and by energy analyst Geoff Styles in a recent blog post, the key to the situation is the United States’ actual ability to impact global crude markets by affecting daily spare capacity – the amount of available crude above current demand. Styles writes:



“Traders have to think about how prices are really set, and they understand that it's the interaction of the last few million barrels per day of supply, demand and spare capacity that really count, along with inventories. An extra million or two barrels per day – a quantity of which North America is certainly capable – can make a huge difference in oil prices.”


Supply matters. Although the administration implies agreement by talking about releasing oil from the strategic reserve, the president seems only to believe that markets can be affected by lowering demand while saying, in effect, that current domestic oil production is good enough.


Most Americans disagree. Recent polling shows strong support for the Keystone XL pipeline and for greater oil and natural gas production here at home. They believe more of our own supply would make a difference with markets that are moved by expectations and strong leadership.


View the original article here