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Gasoline Prices – Part I: Immediate Causes
Robert Rapier, The Oil Drum
As of this writing in late May 2007, gasoline prices have increased by over $0.70 per gallon since March. This is great news if you bought gasoline futures in March, but bad news for most consumers, and the politicians that answer to them. If you knew where to look, there were early indications of trouble brewing last winter. By February to early March there were definite signs pointing toward an impending problem – over 2 months before this became a “crisis” in the view of the public. On March 9, 2007 I warned that gasoline supplies “could pose problems in the coming weeks” and “higher gasoline prices will be the norm rather than the exception in upcoming years.” So, how did this situation happen?
In Part I, I will discuss the short term causes that have resulted in the current supply crunch, and explain what factors potentially signal higher prices. In Part II, I will address longer term factors and policy decisions that have contributed to the problem.
…Summary
Gasoline prices have risen for a number of factors. The cost of crude has gone up sharply in the past few years, adding about $1/gallon to the base cost of gasoline. In the fall of 2006, gasoline prices fell to their lowest levels in a year. This spurred record demand in the fall and winter of 2006, and discouraged gasoline imports (which were also discouraged by a weaker dollar). Those factors combined to draw down gasoline inventories in the spring of 2007 at the fastest rate in EIA history. When an inventory draw is that steep and persistent, gasoline prices must rise sharply to reign in demand and balance it with available supply.
Looking ahead, the supply/demand picture will likely remain very tight for years, although there will be occasional relief depending on the season. But it looks to be the rule, rather than the exception, that higher gasoline prices are here to stay. A return to sub-$2/gal gasoline appears highly unlikely (again, some seasonal exceptions are possible).
(4 June 2007)
WEC Survey: Energy Execs See Oil in $60-80 Range for 5 Years
James Herron, Dow Jones Newswires via Rigzone
Senior energy executives don’t expect oil and gas prices to increase dramatically in the next five years, but the political risk attached to them means coal and nuclear power will become an ever more important part of the global energy mix, a survey from the World Energy Council published Monday showed.
Out of a survey of 50 senior executives from major global energy companies and their strategic suppliers conducted over the last 18 months, more than 65% of those surveyed expected the oil price to remain in the $60-80-a-barrel range for the next five years.
Respondents saw some stability within this range. Just 5% believed oil prices would rise above $80 a barrel, and less than 30% said it would fall below $60 a barrel.
Growth in demand from the developing world was seen as the principal factor supporting the oil price. “Global demand is directly linked to China’s growth. China shows no sign of a slowdown, and in an interconnected market, we will all feel the impact,” said one executive. Energy consumption in western countries is expected to grow more conservatively.
Ninety percent of those interview expected the global geopolitical situation to remain tense in the next five years. Instability in the Middle East, Russia and the nuclear stand-off with Iran were seen as the greatest risks to energy supplies and prices.
Seventy percent of executives saw no resolution to the conflict in Iraq in the next five years. A fifth still worried about the stability of Saudi Arabia. The reliability of Russian gas supplies to Europe was a common concern.
With oil and gas reserves politically uncertain, the majority of executives saw coal as a major growth fuel in the medium term and a stabilizing factor in energy prices.
(5 June 2007)
Riled by the rising cost of gas? Just wait for the royalty review report
Sheila Pratt, The Edmonton Journal
Oberg is already saying Albertans won’t be getting any increase in their share
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..But if you really want to get riled about gas prices, take a closer look at Big Oil’s pitch to Premier Ed Stelmach’s task force examining Alberta’s royalty rates. While you’re paying the highest price ever at the pumps and Canadian oil companies are making the highest profits ever ($12.2 billion in 2006), they’re still asking the province to keep the low royalty rates set in 1996 for oilsands production.
Shell Canada was first to argue that the royalty rates shouldn’t be raised. Because the costs of the oilsands projects have escalated so dramatically, companies can’t afford to pay more to Albertans, the owners of the resource. Well, that’s indeed true, costs are soaring. Shell’s Athabasca oilsands plant went from $5.5 billion to $13 billion.
The reason for the high costs, however, is Big Oil’s rush — more accurately, mad dash — to get into the oilsands in the last five years to take advantage of the low royalty rate combined with the highest oil prices ever — in the process distorting the economy so badly now they claim they’re having a hard time.
The results, as we all know, in this overheated economy are labour shortages and soaring construction inflation that hits everyone. Cities can’t afford to fix potholes and the average Albertan can’t afford to buy a house.
Oil companies aren’t bothering to remind Albertans that the 1996 royalty regime was brought in when oil prices were at $12 a barrel to kick-start oilsands development. ..
(27 May 2007)
GAO: U.S. gives oil firms good deals
H. Josef Hebert, Associated Press
When it comes to taking oil and natural gas from government land and waters, the oil companies are getting a good deal, says a congressional report.
The Government Accountability Office said Friday that the U.S. government gets less for letting private companies take oil and gas from its land and coastal waters than a half dozen states and many foreign countries.
The GAO said five studies it examined showed the U.S. government consistently is near the bottom when compared with other countries and energy-producing states such as Alaska and Louisiana in the revenue cut it gets from oil or gas pumped under government leases.
…The GAO acknowledged there is a “potential trade-off” between trying to collect more revenue and seeing a drop in oil and gas production. It said the challenge will be “striking a balance between meeting the nation’s increasing energy needs and ensuring a fair rate of return for the American people from oil production on federally leased lands and waters.”
(1 June 2007)
