Rising Oil Prices: What We Have to Do ASAP

Look, you guys know that I am very optimistic about recovery generally. You also know that I worry about oil prices. I don’t really know how else to say this, but oil prices are about to kill our chances at recovery dead. That’s all there is to it.

In the past month, the price of a barrel of oil has risen $15; it now stands at $72 per barrel. Prices have moved upward more or less steadily since hitting a bottom in February. Average gasoline prices have already risen $1 per gallon off lows hit in December. The average retail price is back above $2.60 and rising; it’s gone up about 20 cents per gallon in the past two weeks. And gas prices are on a lag; even if oil prices froze this very minute, the national average would probably get close to $3 per gallon.

This isn’t difficult to understand. If prices behave as they have for the past four months for the next month, then that’s it; recovery is cooked. If oil crosses $100 per barrel, then we’ll be lucky to see a positive growth rate in 2010.

What should the government do? I’ll tell you what they shouldn’t do — pass some bullshit cash for clunkers bill that isn’t going to make any difference, at all, in how these prices affect American households. No reason to start drilling, either; that will have approximately zero effect on current prices. Here’s what I’d do:

- Beg OPEC for more production.

- Authorize the release of substantial amounts of oil from the strategic petroleum reserve.

- Provide immediate funding to transit systems nationwide to increase service wherever possible.

- Announce an initiative to expand bus service nationwide, particularly along congested highway corridors used by commuters. Also add circulators in non-walkable business districts. Provide dedicated lanes for the service where possible.

- Announce an immediate program of substantial increases in the gas tax, to begin in 2011.

- Request economic analyses of other proposals, like salary subsidies to workers at firms which encourage telecommuting, or a temporary four-day work week.

There’s just only so much you can do in a short amount of time to minimize the impact of rising oil prices. We should have been preparing for this for some time now. Oh well.

Comments

[Bob van der...:]

We are back to having the first "normal" year in the last three for the petroleum industry. Summer blend gasolines typically reduce refinery output and along with crude oil price increases are the cause of the recent price spikes at the pump.

All will be well again by the fall of this year and prices will ebb back down along with crude oil prices. One will lead the other down just as they have in the past. We just started this year out at a lower level than normal.

We can equate the "real" value of crude oil on what it actually costs to get it out of the ground as is a reality check whenever paper barrels get too far out of line as they did last year. Today even the most hard to drill for oil does not cost more than $50 a barrel to produce i.e. shale oil from the Bakken oil formation or the deep ocean drilling in the Gulf of Mexico. The lowest cost is in Saudi Arabia where one well's output can equal one hundred oil wells drilled somewhere else. And the Iraqi crude oil production has not been fully explored and has vast reserves ready to be tapped.

The media hypes up the market with articles on crude oil being a scarce resource. The fact of the matter is that we have enough crude oil in the ground right here in the US to keep us going for at least another 100 years.

We just have to decide on how to explore and produce the crude oil in the most environmentally safe method possible.

The numbers from the U.S. Geological Survey speak for themselves. The world has 7 trillion barrels of conventional oil and 4 trillion barrels of un-conventional oil i.e. shale oil, tar sands in the ground. We have only used up about 710 billion barrels to date.

That means we have at least another 1000 years of oil left in the ground.

Jun 13 09:13 AM

[davesilb:]

Fred. you were pretty much right on most of your comments but for the one on bio fuels and ethanol. The production of both of them use so much regular fuel to produce that it really is not economically reasonable to produce them. Not only that but they are inferior fuels and do not produce the BTU's of the conventional fuels and in the case of ethanol does do damage to some engines and fuel systems


On Jun 12 01:34 PM Fred Linn wrote:

> --------"Look, you guys know that I am very optimistic about recovery
> generally. You also know that I worry about oil prices. I don’t really
> know how else to say this, but oil prices are about to kill our chances
> at recovery dead. That’s all there is to it"-----------
>
> That is pretty much a given, considering that the skyrocketing price
> of fuel is one of the main precipitating factors that got us into
> this mess in the first place.
>
> --------"This isn’t difficult to understand. If prices behave as
> they have for the past four months for the next month, then that’s
> it; recovery is cooked. If oil crosses $100 per barrel, then we’ll
> be lucky to see a positive growth rate in 2010."------------
>
> Is there any reason to believe that they WON'T continue to rise just
> as they have for the last 4 months?
>
> --------" Here’s what I’d do:
>
> - Beg OPEC for more production."--------
>
> George Bush already tried that. He licked boots and kissed nether
> regions in Saudi Arabia to try to get them to increase production.
> There was a lot of smiling and handshaking, but it had no effect
> on the supply or price of crude. He offered to build nuclear
> reactors for them. In the country that was home to 11 of 19 terrorists
> involved in 9/11. In Osama bin Laden's home country. In
> the place where, more than anywhere else on earth, the ruling elite
> benefit enormously from even the smallest uptick in crude oil prices.
> I think we can say that begging OPEC for more oil won't help----high
> oil prices are in their own best interest. The same with any
> other OPEC country, Canada included.
>
> -------"Authorize the release of substantial amounts of oil from
> the strategic petroleum reserve."---------
>
> This asset is misnamed. It should be Emergency Oil Reserve.
> If we take oil out so everybody can go on a summer vacation, what
> happens if we have an emergency? Murphy's law----Anything that
> can possibly go wrong will, and at the worst possible time.
>
> --------" Provide immediate funding to transit systems nationwide
> to increase service wherever possible."----------
>
> If the price of fuel increases rapidly, transit systems will have
> to use the increased funding just to maintain the services they now
> have, let alone provide any increases to services. Would you
> want to work for a company that was only hiring you as long as the
> price of crude oil remains above $100 a barrel?
>
> ---------"Announce an immediate program of substantial increases
> in the gas tax, to begin in 2011."---------
>
> Increase taxes, always a popular move. How will increasing taxes
> in 2011 increase production in 2009?
>
> --------"Request economic analyses of other proposals, like salary
> subsidies to workers at firms which encourage telecommuting, or a
> temporary four-day work week."----------
>
> More studies and investigations. Now there's a proposal that is
> sure to help. [not---sorry, don't take the sarcasm personally]
> LOL!
>
> The only thing that will help is biofuel production. Every gallon
> of biodiesel produced will offset the need for petrodiesel by one
> gallon. And it can be used immediately----biodiesel can be blended
> and used in any diesel engine with no modification at all.
>
> Increase production of ethanol and increase the blend requirement
> to E20. All conventional cars can run a blend of up to E30----E20
> has been used in Europe in the past to restrict the need for imported
> oil. We should do it again.
>
> Mandate that all new cars sold in the US be Flex Fuel capable.
> Flex Fuel vehicles can use either petroleum gasoline or E85(85% ethanol)
> in any combination, just fill up with whatever is available.
> Flex Fuel vehicles are in manufacture now, and have been for about
> 20 years. Flex Fuel costs the same or only minimally more than
> conventional gas only. If we are going to be riding an oil price
> roller coaster, it only makes sense to me for drivers to have a choice
> that will flatten the hills and straighten the curves. The cost
> of this option would be negligible.
>
> ------" There’s just only so much you can do in a short amount of
> time to minimize the impact of rising oil prices. We should have
> been preparing for this for some time now. Oh well"---------
>
> That is true. We should have been doing more for a long time.
> OPEC has us over a barrel and they know it. And they are laughing
> all the way to the bank.
>
> However, if we bring in a different barrel, it could change the game
> entirely. It think it is very possible that you would see a complete
> change of attitude when it becomes apparent that petroleum is no
> longer the only game in town. That's alright, a psychological
> effect is still an effect. And I think once we put ourselves
> on the road to replacing petroleum, we'll find that there are a lot
> of reasons to just stay on that road.
>
> Besides, biofuels can be made right here, using raw materials from
> right here, paying workers right here. Good for the economy---we
> aren't throwing away money shipping it overseas to buy a commodity
> we are just going to burn.
>
>
>
>

Jun 13 10:07 AM

[Old Trader:]

drini,

The part of your comment about offshore oil storage is correct, but somewhat misleading. A couple of days ago, in an article about oil and oil prices, Bloomberg mentioned that there was 100 MILLION barrels floating in tankers off the European coasts. Sounds like a pretty impressive number, right? Except, in the next breath, it was pointed out that this represented 5 days of supply for Europe...makes it MUCH less impressive.

I'd like to commend both Alan von Altendorf and Homer II on their comments. Both of these individuals have done their "homework" in regard to the oil sector. I highly recommend "Twilight in the Desert" by Simmons as a very readable source of information on oil production.

Jun 13 10:24 AM

[Catfish:]

Author!! Author!!! Go stick your head in the sand!!!!

Jun 13 10:53 AM

[Catfish:]

The increase in gas prices will look like small potatos if and when the Obamba bullies hit you with cap and trade, and health care for everyone including the illegals here now and the 18 mill more he wants to let in. This country is going into the toilet and you're worried about $3.00 per gallon of gas????????

Jun 13 11:10 AM

[La Marque:]

Raising fuel taxes should be done right now. It would again get people's attention, aid conservation and most importantly, fund the highway trust fund. The downside is the 'poor' will also have to pay; but, what the heck, congress will write in refundable credits as they always seem to do.

freya:
After Katrina, there were widespread power outages to the pipeline pumps; notice that after Ike, there were no widespread pipeline outages. The pipeline operators installed emergency gensets on their facilities.

Jun 13 11:34 AM

[Ferdinand E...:]

A really good article and good comments, especially by Alan von Altendorf. I've got a brilliant paper in the works Mr A., and I would really like to see the contribution you allude to.

And I've got a wonderful idea. Empty the executive suite in the Department of Energy and replace those people with the persons who wrote the above. I certainly don't agree with all of those comments, nor with all of the article, but this is the kind of discussion that should be taking place in Washington.

Jun 13 12:28 PM

[change is t...:]

The price of oil will fluctuate with the rule many may be familar with - what the market will bear. Few things are better sources of easy money than a producing oil well.

Jun 13 01:13 PM

[Jimbo:]

I know conspiracy theories are not welcome most times, but I believe Ken Salazar is vetoing domestic oil and gas permits to cause a squeeze on oil prices, the purpose is to pressure the economy into "alternatives". The problem is, these alternatives are not available (1) for years or decades(2) economically damaging: think the economic and social cost of ethanol (3) if implemented on a large scale (electric vehicles) would severely stress the grid. The most sensible thing would be to exploit known oil and gas in the U.S. to transition to the rainbow future but the "greenies" are too impatient for that.

Jun 13 01:25 PM

[The Greates...:]

Remember all the reasons for the ridiculous run on crude last summer? It was all because demand was running ahead of supply, now that the worlds full of crude, they are squeezing the consumer at the pump trying to make another man made shortage. Also, all the oil companies trying to show loses for the first quarters are basing these loses on last years numbers. And we all know that was bogus, so please no more news about how big oil is going through loses this year. Oil companies as a whole have generated around $476 Billion in net profit over the last 6 years. Look for a repeat of the summer of 08 in 09 as the oil companies raise the price by manipulating the energy commodities market once again. And your Congress turns a blind eye to this as they reach their hand out behind their back for their cut of the oil revenue pie.
Greed is ugly.

Jun 13 02:44 PM

[The Greates...:]

Oil and gas were manipulated by the future traders last year and now the refineries are cutting back to reduce gas at the pump and drive up the price. I think the summer driving season will be driving to the back yard and playing in the kiddies swimming pool.
They are an estimated 10 million Americans out of a job today, Americans are driving less then they have since the 1950's.
Fluctuations and hyperactive are words being used for manipulation and control in the oil industry. Plenty of crude today, around a 19 year high, and yet the price of gas is on the rise.
We can all thank Phil Graham for that.
So how about something original lets regulate the futures energy commodities market? Or better yet, free us from the use of oil altogether? The oil industry as a whole made around $476 Billion in net profit over the last 6 years, the pulse of the worlds economy is under the thumb of 13 OPEC nations and 5 major oil companies. Is this the legacy we want to leave our children and grand children?

Jun 13 02:45 PM

[The Greates...:]

Americans, if you’re surprised at the current world economy, don’t be. We live in a global economy. What affects the whole world affects us as well. 13 OPEC countries and 5 major oil companies have their finger on the pulse of the worlds economy. It is called a monopoly, we need to restructure the commodities market regulations ASAP. Call, write, email and fax your representative and tell them today. Keep your eye on the gas pump, they have sucked the living life out of the whole worlds economy and will do it again giving the first opportunity. We need TERM LIMITS in Congress, no exceptions. 85 % of our government representatives are millionaires, they do not see the economy through the same eyes as most Americans do.

Jun 13 02:49 PM

[MudEngineer:]

The only commenter that seemed to have a grasp of the situation is Alan von Altendorf. The only comment that I question is that the Strategic Oil Reserve is leaking? If it were properly created as designed by dissolving out huge caverns inside of very large salt deposits, it cannot leak as crude oil cannot dissolve salt. The reserve is indeed for emergency use only and that means supplies being cut off and a slightly higher price does not meet that criteria.

I am a drilling fluids engineer and the current oil price maybe just barely covers the cost of developing and producing from a new field in deepwater (greater than 3000 feet deep) in the Gulf of Mexico. Many projects have been delayed or canceled because of the price drop down to $35 when the price overshot to the downside just as it had overshot to the upside last year. With a current depletion rate on the worlds wells at 9% per year, you had better hope that somebody starts drilling again very, very soon. If the economy picks up at all, it will not take much for demand to surpass the current supply.

If you think that just the possibility of future production does not effect price, then why did the oil price fall precipitously right after Bush got the rest of the Gulf of Mexico opened up for drilling? And then after Obama wrote an executive order canceling that Bush order, the price started to rise again quite rapidly. Thank your new so called President ( he has thus far spent tens of millions in legal fees to not have to produce a real birth certificate) for the price increases in oil and also in pretty much everything else due to his tripling the rate of Government spending in just 5 short months. The deficits he is putting into place just to this point will TRIPLE OUR NATIONAL DEBT IN JUST 10 YEARS!

Jun 13 02:58 PM

[Alan von Al...:]

On Jun 13 09:13 AM Bob van der Valk wrote:
> the most hard to drill for oil does not cost more than $50 a barrel
> to produce i.e. shale oil from the Bakken oil formation or the deep
> ocean drilling in the Gulf of Mexico.

Wrong. $5 million per horiz frac well + lifting for Bakken, and many of the good producers are in steep decline. $70 for deepwater GOM.

> The world has 7 trillion barrels of conventional oil and 4 trillion
> barrels of un-conventional oil i.e. shale oil, tar sands in the ground.

1 trillion proved, 3.5 trillion total global conventional 'endowment' including tar sands, of which you might be able to produce about half, assuming all legislative lockups, executive moratoria, and overseas corruption and expropriation disappeared.

Jun 13 08:09 PM

[Fred Linn:]

davesilb--------"Not only that but they are inferior fuels and do not produce the BTU's of the conventional fuels and in the case of ethanol does do damage to some engines and fuel systems"--------

Your comment about inferior fuels that damage car engines would come as quite a suprise to the top racing teams in the world.
The octane rating measures the resistance of a fuel to preignition, exploding during the compression cycle before the power cycle begins----knock. Knock will destroy an engine. The octane of ethanol is about 115, the octane of regular gas is 85 to 87. The higher the octane rating, the higher the compression ratio the engine can use. With ethanol, you can run compression ratios of 18 to 24 : 1, with gasoline you can only get 9 to 10 : 1
before you start to get

Jun 13 09:40 PM

[Fred Linn:]

preignition. (oops, miskey) The higher the compression ratio, the greater the thermal efficiency of an engine. This means you get more energy out at the wheels as work compared to what you put into the tank as BTUs. Gasoline engines get around 20% thermal efficiency----dedicated ethanol engines run about 45% efficiency. That is why the Indy Racing League Circuit uses only 100% ethanol. Greater thermal efficiency wins races. The fastest, most advanced race cars in the world use only ethanol----they would blow up with gasoline. Greater thermal efficiency means that even though ethanol contains about 70% of the BTUs of gasoline volume per volume, one gallon of ethanol gets about 40% more actual work out at the wheels than gasoline. Small ethanol engines do big things. Indy race cars typically develop 1200 to 1600 horsepower from 3L V8 engines---smaller than most passenger cars on the road in the US, yet produce more horsepower than 3 18 wheel diesel trucks.

Biodiesel and petrodiesel are roughly equivalent in BTUs per gallon.

Jun 13 09:53 PM

[Alan von Al...:]

On Jun 13 02:58 PM MudEngineer wrote:
> Strategic Oil Reserve is leaking? If it were properly created as
> designed by dissolving out huge caverns inside of very large salt
> deposits, it cannot leak as crude oil cannot dissolve salt.

The problem with salt is subsidence. Salt is plastic. It can fracture.

Beginning in 1995, the Clinton Administration with congressional approval conducted three sales of crude oil from the SPR primarily to finance the $200 million annual operating costs of the reserve and the one-time cost of transferring oil from the Weeks Island, Louisiana reserve site, which had sprung a leak.

www.agiweb.org/gap/leg...
www.osti.gov/bridge/se...

Arguello, Jr., J., J. Rath, J. Bean, and B. Ehgartner. 2006. Results of Geomechanical Analysis of SPR Field at LOOP Clovelly Dome. (Business Confidential) Sandia National Laboratories, Albuquerque, NM.

Bauer, S. J. 1997. "Analysis of subsidence data for the West Hackberry Site, Louisiana." (SAND97-2036). Sandina National Laboratories. Albuquerque, NM.

Magorian, T.R., J.T. Neal, S. Perkins, Q.J. Xiao, and K.O. Byrne. 1991. “Strategic Petroleum Reserve—Additional Geologic Site Characterization Studies, West Hackberry Salt Dome, Louisiana.” Sandia National Laboratories. (SAND90-0224). Albuquerque, NM.

Neal, J.T. 1991a. "Prediction of subsidence resulting from creep closure of solution-mined caverns in salt domes." (SAND90-0191C) Appendix G. Draft preprint, 4th International Symposium on Land Subsidence, May 12-18, 1991. International Association of Hydrolocail Sciences. Houston, TX.

Neal, J.T., T.R. Magorian, K.O. Byrne, and S. Denzler. 1993. “Strategic Petroleum Reserve—Additional Geologic Site Characterization Studies, Bayou Choctaw Salt Dome, Louisiana.” (SAND92-2284). Sandia National Laboratories. Albuquerque, NM.

Jun 15 12:00 AM

[Mmarrkk:]

"I suspect the oil price rise reflects the dollar's fall from too many greenbacks chasing to few goods and buyers"

There was an article posted on SA last week that showed a graph of oil prices in Euro's instead of dollars and the price of oil was still screaming upward while priced in Euro's . That debunks the theory that oil prices are rising due to the dollar falling. Similar plot of oil prices as a function of gold...similar results.


On Jun 12 11:43 PM User 430675 wrote:

> I suspect the oil price rise reflects the dollar's fall from too
> many greenbacks chasing to few goods and buyers; oil demand has not
> increased since oil prices crashed because of deleveraging, and the
> worlds oceans are virtually full of floating full oil tankers. Want
> to keep oil prices down? Increase the margin/costs to hedge oil contracts
> by 70 percent. Drill, baby, drill. Bring five nukes on line each
> year for the next twenty years, and knock off the nonsense about
> returning to circa Civil War levels of carbon consumption but with
> ten times the population.

Jun 15 09:22 AM

[Mad Hedge F...:]

All a great start. Since energy is going to be the dominant factor in making our investment decisions for the next decade, I thought it would be a good time to sit down with Carl Pope, Executive Director of the Sierra Club. Carl is as sharp as a tack, with the fervor of an evangelist, always a dangerous combination. In the spirit of full disclosure, I have to tell you that I was a member of the Sierra Club back in the sixties when they were mostly interested in identifying mountain wildflowers and bird calls. They changed a little after that. Carl says that the “Earth has a fever,” with temperatures rising, glaciers melting, forests burning, oceans rising and acidifying, and the overwhelming cause is hydrocarbon burning. The US needs to cut CO2 emissions to 2 tons per person, per year, by 2050, or down 90% from today’s levels. To do this we need to ban the burning of coal by 2030, unless it is sequestered, and stop all petroleum consumption by 2040. We can accomplish this by converting all cars to electric and moving freight via an electrified rail system. Petroleum needs to be classified as toxic waste, and a cleanup superfund needs to be set up, funded by 10% of the earnings of the oil companies for the next ten years. If we eliminate oil consumption, our trade deficit will improve by $100 billion/year, that money can be invested in the US to create 10 million jobs, and we will all be a lot healthier. The biggest and quickest way to cut CO2 emissions is to convert all coal fired power plants to natural gas immediately, and Carl likes the Pickens plan (see madhedgefundtrader.com... ). Carl is not shy about using his 40 man Washington DC office to twist the arms of recalcitrant Senators and Congressmen to achieve these ambitious goals. I had to pinch myself. The Sierra Club has backed off from its earlier, more radical positions, and that much of what they are saying makes good economic sense. No more going back to a bicycle based economy. While 40 years is not exactly tomorrow, look how fast the last 40 have gone by. Remember pedal pushers, thin ties, fins on Chevy’s, and the Bay of Pigs? When contemplating your risk positions, you always have to consider all views. Who knew that $147/barrel would turn us all into environmentalists?

Jun 15 11:16 AM

[Fred Linn:]

Homer------"Because, it costs more money to bring oil to market than it did 10, 20 30 years ago. Once upon a time, there was lots of "easy" oil in large pools underground. By "easy", I mean it was 1) relatively shallow to drill down to, 2) it had lots of pressure which means it gushes out with any pumps or secondary recovery techniques needed, 3) it was cheap to purchase from third world countries. Other factors were at work helping keep the prices down."----------

That is what Peak Oil is, and what Peak Oil means. From here on out it just gets worse and worse.

We need to replace oil as a fuel. Biofuels are the only technology that can do that at reasonable cost and time frame.

Jun 18 03:26 PM