Gas Lines Coming This Fall

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 |  Includes: DBO, USO
by: Bill James

Gas lines are not hard to find.  This fall, you will likely see them at your local gas station:

  • There were spot shortages during the 2007 harvest in North and South Dakota.
  • A home heating oil crisis will occur when cold weather forces empty tanks to be filled.
  • Increasing mortgage foreclosures illustrate that people are choosing between their cost of commuting to work and house payment.
  • Fuel and food riots occur where people that cannot borrow or buy oil (examples):
    • June 13, 2008, 2 people killed in fuel riots in Spain and Portugal.
    • July 12, 2008, 13 people killed in fuel riots in Yemen.

The purpose of this essay is to highlight petroleum inventory issues likely to cause shortages this fall.  Several events can create instant, grave shortages.  Following is an incomplete list of known risks.  There are still more unknown risks of unknown magnitude.  As explained below, gas lines will be accompanied by a price jump of about $1.50 per gallon, even if crude oil does not increase in price.

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Inventories

Inventories provide the cushion to buffer fuel deliveries snags.  So long as the inventories are sufficient, the snags that could halt delivery stay small, and there will be no gas lines. 

Inventories are depleting.  In the graph from EIA TWIP report from July 9, 2008, the blue background wave is the historic range of inventories.  The orange line and dots are weekly reports.  Summer inventories normally trend down.  This year the rate of depletion is more severe than usual.  Actual inventories can soon set historic lows.  As inventory dips below safety margins, spot shortages will occur as experienced last fall in the Dakotas.

 

Oil’s Long and Fragile Supply Chain

Oil has a long and fragile supply chain.  Inventory at each stage is required to provide a buffer against production variations.  As inventories shrink, the likelihood of shortages increase.  There were spot diesel shortages during the 2007 harvest in North and South Dakota.  There are spot shortages in weaker economies in the world.  Spot shortages are a the leading indicator of wider supply disruptions.

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Debt

The falling value of the dollar is an indicator of the risk due to borrowing to buy a consumable. The scale of uncertainty increases with debt and dependence.

We are borrowing from our children to buy oil; $302 billion in 2006, $331 billion in 2007 and about $700 billion in 2008.  Borrowing to buy a consumable is eroding the capital base. Poorly capitalized debt is a trap, as was recently illustrated by the evaporation of Bear Stearns (NYSE:BSC) and plummeting share value of Freddie Mac (FRE) and Fannie Mae (FNM), and IndyMac's (IMB) collapse. When there is a mortgage crisis at 4.8% unemployment, what will happen when vast numbers of people lose their jobs in energy outages?

Third world countries that cannot borrow to buy oil are facing gas lines and riots now.  It is difficult to conceive of how the US can continue to borrow and avoid the same consequences.  When that crisis arrives and if caused by debt, it is likely to happen very quickly and could cut supplies by 70%.

Weather

Uncertainty of supply from the Gulf of Mexico is especially high at this time.  Current imports from the region are at historic lows as noted in the downward blue line in the following EIA graph:

 

Imports from Mexico and Venezuela are especially important because shipping time from their oil fields is less than a week.  To get equivalent imports for Saudi Arabia takes more than 20 days and uses 4 to 8 times as many ships. 

The following graph indicates what will happen to oil imports if a major hurricane hits any of the significant oil regions between Venezuela and Louisiana.  A drop of 1 million barrels per day from current depleted inventories will shock the US supply chain.

We have allowed our entire economy to be at risk from a single weather event. 

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Politics

If you think politicians will not start a war because it would be stupid or unnecessary, then I have a bridge I would like to sell you.  Sequences of even small events can cascade out of control.  In the world today there are plenty of small and large risks that indicate we are not far from an avalanche.  The invasion of Iraq might yet cause a cascade.  Pulling out of Iraq may also create a cascade.  Uncertainty rules our time and will become more unstable as consequences of Peak Oil reveal themselves.

Politics can only cause oil prices to jump.  Lowering oil prices will result only from years of work to make most transportation independent of oil.  Policy makers can facilitate this transition with Advanced Renewable Tariffs (free market power generation) and Performance Governing (setting performance standards for infrastructure re-tooling).  Policy makers should make every effort to end food distribution's dependence on oil.

Mundane politics, such as a tax holiday, can momentarily influence the price of fuel and shortages.  Known risks can affect 40% of the world’s oil supply overnight. Following is an image taken from Iranian TV of a missile launch the week of July 7, 2008.  Oil prices jumped $10 within two days of releasing these missile photos.

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Available Exports

Oil is less available for purchase, World Oil Exports [WOE], peaked in 2005:

  • Exports in 2005 peaked at 46.342 mbpd (million barrels per day).
  • Exports in 2006 were 45.838 mbpd, down 1.10%, 504 mbpd or 184 million barrels below 2005.
  • Exports in 2007 were 44.832 mbpd, down 2.24%, 1,509.7 mbpd or 551 million barrels below 2005.
  • Exports in 2008 are down another million barrels per day below 2007, or about 4.5% below 2005.
  • The rate of decline in available oil exports is changing rapidly.  By 2011 world exports are likely to be a third of today’s.  The data on World Oil Exports is not directly reported but is available in EIA data.  Watching this number is the best indicator for predicting shortages and gas lines.  The scale of such shortages is uncertain.

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The Export Land Model [ELM] explains the rapid decline in exports.  Oil producing countries are building their internal economies, with attendant increasing domestic demand for oil.  Increasing domestic demand and depleting oil fields combine to sharply decrease exports. 

Indonesia is a good example of the Export Land Model.  Shown in the following graph, Indonesia consumption climbed (black line) and exports declined (green area) much faster than the oil fields deplete.  Red shows Indonesia changed from being an oil  exporter to an importer of oil in 2004.

 

Unknown Unknowns

New oil discoveries take 3-10 years to develop and then face depletion.  Electrical and hybrid vehicle fleet replacement takes 15-25 years.  Personal Rapid Transit takes 5-15 years to build.  The exploitation of every known energy source is needed to permit a couple more years breathing room.  Hopefully renewable energy sources will come on line fast enough to displace fossil fuel resources.

It would be advantageous to start on initiatives immediately; Advance Renewable Tariffs and Personal Rapid Transit.  Examples: Germany is leading with Advance Renewable Tariffs and Abu Dhabi, Heathrow and Morgantown with Personal Rapid Transit.

Gas Prices during Outages

Gas stations and refineries are not making a fair profit with the current markups.  Excess capacity at refineries is depressing gasoline margins. (Ref: http://www.theoildrum.com/node/4255).

Once shortages develop, excess refining capacity can no longer suppress wholesale and retail gasoline prices.  Prices will increase towards historical norms of twice the crude oil costs (see graph below).  Retail gas prices are currently about 125% of crude costs ($1.25 for each $1 of crude oil cost).  At a minimum, a healthy distribution industry needs gas prices to be about 160% of crude cost.  Current prices of about $4.12 per gallon should be $5.27 to provide sustainable margin.  Oil prices will also jump if there are outages.  It is conjecture, but in a shortage, gasoline prices this fall can be in the $6 to $8 a gallon range.  If shortages are caused by political actions, there is no upper limit on price.

Low refining and retail gas margins benefit large integrated oil companies. Profits from record crude prices protect the large integrated oil companies while low gasoline margins drives independent refiners and retailers towards bankruptcy. It has the effects of a gas war that is destabilizing and amplifying supply chain and depleting inventory risks.

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Food Distribution

EIA TWIP reports notes we have 19 days supply of crude oil on-hand.  Note this is 4 days less than 2007 (blue line).  The trend is down, and plunging.

 

From a logistician’s point of view, a good crisis plan should prioritize fuel to keep food distribution and water flowing.  Without prepared contingencies, famine is possible in a significant shortage, maybe likely.

Where to Invest

I would like discuss this topic of where to invest.  Please post your thoughts.

Base your thoughts upon the assumption that fuel will be prioritized to keep the food distribution system functional.  Note that there is no evidence that such a plan currently exists.  When gas lines form here are sectors that might do best (or maybe, least worse): 

In general, invest in companies:

  • with published plausible operations plans for how they will operate with fuel shortages.
  • that produce product verses services.
  • that preempt the need for oil; whose products support Advanced Renewable Tariffs and deployment of Personal Rapid Transit.

Specific sectors for investment are:

  • Self-reliance.  Plant a garden and store 300 pounds of rice, beans and wheat.  This is currently a cheap investment.  When transport falters, food will be an uncertainty.  If it is not needed, in a year give it to a food shelf bank.
  • Alcohol and tobacco companies.  People will seek an escape.
  • Guns and ammunition companies.  Peak Oil will destroy world peace and be hell on local peace.
  • Railroads can move goods very efficiently.  Food distribution should depend on railroads.
  • Personal Rapid Transit companies and their suppliers (disclosure, this author is the founder of JPods).  This industry is building urban ultra-light rail networks that provide the efficiency of rail transportation in cities.
  • John Deere (NYSE:DE), other farm implements, seed and gardening companies.  Victory gardens will be universal.
  • Companies whose products deal with food preservation.
  • Specific trucking companies that specialize in moving foodstuffs.
  • Food companies and grocery store chains with published plans for how they will deal with energy availability.
  • Real estate around railheads.
  • Scooter and bicycle companies.
  • Metal recyclers and natural resource companies.  There will be a crash program to build Personal Rapid Transit (ultra-light rail, Ref:  Article on investing in PRT).
  • Windmills, solar, hydro, natural gas, coal and nuke companies.
  • Electrical utilities that are hydro, nuke and/or with reliable access to coal.
  • Refineries that have domestic oil suppliers and can operate economically with diminished feed stocks.

 

Summary

Gas lines are coming this fall based on inventory depletion.  Watch World Oil Exports [WOE] and EIA’s TWIP report as leading indicators of when shortages will develop.  Debt, politics, weather and unknowns are wildcards, able to create instant and very large-scale outages.

On a personal level, self-reliance is a great investment.  Plant a garden.  Invest in an emergency food shelter.  Invest in your local community.

Permanent solutions must start immediately.  A leadership call to self-reliance and Victory Gardens can have an immediate effect.  Aggressively exploring alternatives will give more time to create and implement solutions.  Most solutions are local.  Like planting a garden, local action can create an economic lifeboat for each economic community.

We can re-tool transportation to operate with about 15% of current oil consumption.  We will have to work hard for the next 15 years to accomplish this.

Disclosure: None