The Cheap Gas Dilemma

By Guest Author: Robert Williams, PhD, P.E.

Are gasoline prices headed higher? It’s very probable if you consider the previous 2008 history, the fact that OPEC is announcing that they are cutting crude oil production and refiners have to start producing the summer months' gasoline inventories.

When will unleaded gasoline prices increase further is an educated guess based on the UGA ETF chart shown below. UGA prices appear to have tested the resistance level a number of times. A UGA quote at time of writing is $23.10 up 3% with almost twice the daily volume. Could this be the chart breakout that will lead to higher prices? Time will tell.

This is the unleaded gasoline price dilemma – if we buy UGA on the breakout and the price keeps going up then you will have a good return on your investment. But, you will also be paying much more at your local gas station to fill up your gas guzzling SUV which you still have not exchanged for a hybrid (or have you?).

Depending on how much you are willing to invest in UGA and how much gasoline you consume, this could be a break even investment for you, i.e. you could hedge your gasoline purchasing. My personal preference is that we do not get to experience the 2008 gasoline price escalation.

However, as I am employed in the oil & gas industry, it would be beneficial in the long term for an increase in the current crude oil prices since major refiners have cut back on major project investments or delayed current projects due to the drastic cutback in their cash flow. Projects well advanced in their engineering, design and construction phase have not been impacted but other projects have had their schedules extended or put on the back burner indefinitely. However, if crude prices come anywhere close to 2008 levels, the global economic impact could be substantial. Therefore, it’s wrong to wish for that. That is the dilemma.

In order to process heavy crude oil from Canada there are a number of current refinery projects to add coker and sulfur plants to existing refineries, both in Northern and Southern States. Coker plants process the heavy oils and produce coke allowing for expanded refinery gasoline production. Sulfur plants remove the sulfur pollutants and produce raw sulfur which is also marketed. Such major projects are 4 to 6 years in duration and some are currently installed, others are in construction and still others are in the detailed engineering / planning phase. The latter projects are suffering project schedule delays due to the large drop in the 2008 crude oil prices causing revised refinery cash flow projections.

The following StockCharts comparison of major refiners’ 9-month chart shows that they all have followed a similar pattern. With a detailed review of individual daily charts you may consider that breakouts are imminent in one or more of these major oil companies. Earnings are also displayed for your perusal and evaluation as to which to potentially invest in.

Click to enlarge

Major Refiners Earnings Estimates

Author Bio:

Robert Williams' 40 plus years' experience includes oil / gas engineering in crude oil / petroleum products / natural gas, refining, processing and pipelines on all continents, except South America and Antarctica, from Alaska and Australia pipelines to S.E. Asia offshore, from UK North Sea to Los Angeles fuel truck racks and from Romanian pipelines to West Africa FPSO.

Disclosure: None

Comments

[epeon:]

Any cutback on oil projects now, just means that down the road we will have a big spike in crude. I would buy oil and wait. You will be handsomely rewarded for doing so.

Feb 02 08:26 AM

[oh-so-close:]

Agreed. However, one might also consider if you are drilling or negotiating domestically (US) for drilling rights the economics are equally as good. Proving up oil or gas reserves today does not mean one needs to pump it all out today. Proving up reserves and banking them is money in the bank.


On Feb 02 08:26 AM epeon wrote:

> Any cutback on oil projects now, just means that down the road we
> will have a big spike in crude. I would buy oil and wait. You will
> be handsomely rewarded for doing so.

Feb 02 08:50 AM

[Chris B:]

Before we accept simple explanatory narratives about why oil or oil stocks are going up, we should ask ourselves the following question:

Was this not also the case in the 1980's and 1990's?

Populations were rising. Finite oil was being used up. Refining capacity was said to be too low. OPEC was making threats. Religious wars were going on in the middle east. All the good narratives for why a person should invest in oil were there. Yet, oil underperformed.

Feb 02 09:34 AM

[yaj strebor:]

Wouldn't it make sense to have a minimum price for crude oil ( for the sake of argument $2.50 per Bbl)? If the market price is below $2.50, the difference could be put in a trust fund for bridge and roads infrastructure or even to grow the NPR. If mkt price goes above the benchmark, of course the market price would prevail. The petroleum industry would be able to fund long term projects without the fear of low prices during the the buildout and payout periods and the auto industry would have a better grasp of what models to make and how many to produce.

Feb 02 11:04 AM

[Carlos Lam:]

After the spring/summer 2008 debacle that was $4+ per gallon gas prices, I came up with a hedge when gas prices collapsed:

1. I purchased a few tote tanks off of craigslist
2. I filled them with gasoline and added enough Sta-Bil to keep the gas good for two years or more
3. I placed them in remote parts of a few buddies' acres in exchange for doing some extra work for them

When the cost of the tote tanks, gasoline, and Sta-Bil was added together, my net cost per gallon was about $1.70. The carrying costs are practically nil, as I check them out on my way home from work a few times a month. When gas prices go above $3 in the next year or two, I'll use gas from my own "strategic reserve." Unlike buying UGA, I need not worry about transaction costs, capital gains, or timing the market perfectly. Moreover, the gasoline is conveniently and readily at hand. I realize that this is akin to taking actual delivery on futures contracts, but I have to drive 50+ miles a day for my work, so gasoline is a rather large expense for me. The only downside: I've only got enough gas for about 1 year or so.

Feb 02 12:57 PM

[Carlos Lam:]

A minimum price (i.e. price support) for any industry (whether it be agriculture or petroleum) only serves to misallocate capital. More importantly, isn't it immoral to force consumers via coercion (I assume the price support you speak of would be imposed by the government) to pay a certain amount greater than the true supply-demand price of a commodity? If a price floor can be dictated for oil, then why not demand it for computers, cellphones, and consumer electronics, all of which have decreased in price over the years?


On Feb 02 11:04 AM yaj strebor wrote:

> Wouldn't it make sense to have a minimum price for crude oil ( for
> the sake of argument $2.50 per Bbl)? If the market price is below
> $2.50, the difference could be put in a trust fund for bridge and
> roads infrastructure or even to grow the NPR. If mkt price goes above
> the benchmark, of course the market price would prevail. The petroleum
> industry would be able to fund long term projects without the fear
> of low prices during the the buildout and payout periods and the
> auto industry would have a better grasp of what models to make and
> how many to produce.

Feb 02 01:01 PM

[Marcap:]

"Any cutback on oil projects now, just means that down the road we will have a big spike in crude. I would buy oil and wait. You will be handsomely rewarded for doing so."

I do not agree.

If everyone would get off their butts, and seriously start exploring oil-alternatives, the price of oil will not go up. In fact, if the rest of the world would wise up and take the steps necessary now to find alternatives, it would not be very long before OPEC oil would have little more value than the sand in their deserts.

I'm quite sure that many have noticed that as soon as we even start talking about alternatives to oil, oil prices start dropping faster than a brick in a swimming pool, but then as the talk dies down, oil prices start to creep up again. Really! A 'real' oil shortage however down the road? Not in the least. Only the oil companies and others with a vested interest in oil-price fluctuation will claim otherwise.

The bottom line is that we must take the steps necessary to end our dependence on oil, and do it now, no matter how painful that may appear to be in the short run. In the long run, such steps will pay off substantially in many ways. We owe it to ourselves. We owe it to our kids. We owe it to our planet.

Feb 02 07:22 PM

[auto44:]

m


On Feb 02 12:57 PM clam75 wrote:

> After the spring/summer 2008 debacle that was $4+ per gallon gas
> prices, I came up with a hedge when gas prices collapsed:
>
> 1. I purchased a few tote tanks off of craigslist
> 2. I filled them with gasoline and added enough Sta-Bil to keep the
> gas good for two years or more
> 3. I placed them in remote parts of a few buddies' acres in exchange
> for doing some extra work for them
>
> When the cost of the tote tanks, gasoline, and Sta-Bil was added
> together, my net cost per gallon was about $1.70. The carrying costs
> are practically nil, as I check them out on my way home from work
> a few times a month. When gas prices go above $3 in the next year
> or two, I'll use gas from my own "strategic reserve." Unlike buying
> UGA, I need not worry about transaction costs, capital gains, or
> timing the market perfectly. Moreover, the gasoline is conveniently
> and readily at hand. I realize that this is akin to taking actual
> delivery on futures contracts, but I have to drive 50+ miles a day
> for my work, so gasoline is a rather large expense for me. The only
> downside: I've only got enough gas for about 1 year or so.

Feb 02 09:31 PM

[auto44:]

claim 75, Make sure you use a water trapping filter. Small engine repair shops in my area tell me that the ethenol segment now part of most gasoline is attracting moisture and bringing them a lot of carb. repairs. I know auto engines don''t use carbs. any more but I don't think water will do your fuel injection much good either. Good Luck.

Feb 02 09:39 PM

[Mmarrkk:]

Oh-so: "banking" proved reserves is not quite that easy in the U.S. Much of the onshore production in the U.S. comes from land where mineral rights are leased. These leases have time-clocks that are ticking. Generally, these are 3-5 year leases whereby an oil/gas company has to drill a well or wells and establish production. If they don't, they lose the lease and the owner has the right to lease the oil and gas rights to someone else. Also, just making a discovery isn't enough to hold the lease. You have to have continuous production to hold the lease beyond its primary term. So, drilling a well, making a discovery but not developing/producing it still puts a company in a situation where they can lose their lease.

One alternative is to produce from a minimal number of wells at reduced rates. Again, this may work but many mineral owners who the companies leased from don't like that idea. These owners sue the O&G company for failure to develop their minerals quickly.

So its not that easy....

On Feb 02 08:50 AM oh-so-close wrote:

> Agreed. However, one might also consider if you are drilling or negotiating
> domestically (seekingalpha.com/symbo...) for drilling rights
> the economics are equally as good. Proving up oil or gas reserves
> today does not mean one needs to pump it all out today. Proving up
> reserves and banking them is money in the bank.

Feb 04 08:52 AM