Crude Oil's Coming Price Ceiling - By Energy Fuel Competition

| About: The United (USO)

Summary

Combinations of present fuel supply sources and developing energy cost competition in the biggest crude oil demand category are likely to limit crude’s eventual price recovery.

By how much? How soon? To what level? Only WTI in the US? Or Brent too, as a worldwide price base?

No precise answers possible now, but it’s advisable to think about ranges of likely probabilities by examining both supply costs and capacities, and demand proportions and shifts.

The big question is: How much NatGas-generated-electricity will displace crude-oil-refined-gasoline to power land-based motive demands, and at what pace of conversion?

Not “if”, but “by how much”, and “how soon”?

Can we use Seeking Alpha's crowd-source approach for exploration?

Emotional and (in)vested interest pro and con commentaries are not needed. What is really required (since my information is largely dated) needs to come from those with currently up-to-date technology, cost, and engineering data.

There is a sound base to start from and a reasonable approach to pursue.

The approach is to figure out what the likely cost per mile traveled can be for the same vehicle types when their energy source is crude oil, or when the source is natural gas. And the sound base to start from is knowing what the heat content is for each fuel, and the well-head costs are, at least as represented by present exchange basing-point prices.

The presumption is that ICE vehicles already are at an advanced technological stage of fuel-use economy and their present road-side fuel delivery systems are efficient. EV vehicles will have to compete from existing technologies in batteries and motive power, using energy delivery through existing residential distribution systems.

Many undefined variables exist between well-head or commodity exchange prices and foot-pounds of torque on an axle. But the heat-content price of the fuels can be rather closely defined in today's terms. NatGas is priced per million BTUs, which is a convenient yardstick, leaving only the crude oil to be converted to that measure. Crude contains (at WTI specs) about 5.8 million BTUs per barrel, so at $50 per barrel that is $8.62 per million BTU. With NatGas at $2.50, crude is priced at 3.4x the heat content of NatGas, to give a rough approximation

So at present rough market prices, if NatGas and Crude could each be consumed by motors with equal investment costs and operating efficiencies, it looks like crude would have a tough time competing with a convenient, ecologically more attractive energy source. But it ain't that simple.

Not by a long shot. Each fuel's path between well-head and axle torque has different conversion costs that can be calibrated in $ per BTU. Adding up all those costs, plus the well-head or exchange prices, can suggest what might be a reasonable upper sustainable price for WTI crude here in the US. Price limits elsewhere is content for another article.

What are the conversion stages?

Let's start with crude, because its stages are more readily determinable (by SA engineer contributors who are more up-to-date than I am):

These may not include all of the relevant BTU-loss costs of conversion and transportation that should be considered in the competitive fuel-fight. I welcome contributions from those whose experience in the competing or involved fields can make valid contributions leading to a more complete and valuable comparison.

With more knowledgeable and impartial contributions we ought to be able to draw up some reasonable rubber-at-the-road comparisons.

Where I'm coming from

My expertise in the energy fuel field is pre-fracking-dated and excludes any grounding (pun intended) in electricity services.

But it seems likely that there is more conversion loss and cost likely in the process from crude to ICE torque than in NatGas to EV torque. Even if those paths are a dead heat, I believe the average US driver will readily embrace additional automobile debt, convenience, and satisfaction of ecological furtherance in the process of cutting his/her commuting~shopping~vacation travel costs to less than half of what they have been.

If that be the case, while NatGas continues to displace coal as electricity-source fuel at $4 per million BTUs or less, then a current-day ratio of 3.4 to 1 (on $8.62) makes a crude price in the area of $25 to $30 per barrel very likely as a WTI norm here in the US, in a few years.

There appears to be very extensive, adequate, economically exploitable NatGas resources conveniently located to major demand centers. Extraction technology advances are likely to increase the competitive pressure. Present major conventional producers of crude like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) are in for serious competition from strong E&P companies that have never been in the big-boy club before imho.

Conclusion

Anyone willing to pick up this line of analysis for their own article's further pursuit is encouraged to do so. Comments to this article offering more expert conversion costs will be assembled into an early-stage set of comparisons for subsequent SA publication and comments in reaction. I hope to have some help.

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information (earlier) helping professional and [now] individual investors discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations. We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for their guidance what the arguably best-informed professional investors, through their own self-protective hedging actions, believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, blockdesk.com has further information.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.