Bob van der Valk

Who's Kidding Whom on Gas Prices?

Oil companies did profit from the "Crudomania" that existed in crude oil prices. The reasons for the current price run up in pump prices, in face of declining crude oil prices, were stated in my current article. Another factor at work is that the refineries typically start switching over to making summer gasoline by the middle of February each year. Some of the major oil companies including BP and Tesoro have already taken down some units at their Carson, CA and Anacortes, WA refineries for the Spring turn-a-round.. This was mainly due to lower demand for their finished products. In addition the Big West refinery, owned by bankrupt Flying J, is now dead in the water without having a crude stream to run the plant. This all adds up to lower supplies of gasoline and diesel at least on the West Coast. The sorting out process in the petroleum industry will continue with more mergers in the works to consolidate them. The last thing we need is for government intervention by either instituting price controls or draconian tax measures.

Who's Kidding Whom on Gas Prices?

"Curious" - I obtained the per gallon breakdown of cost and profit margins for regular unleaded gasoline in California at the following California Energey Commission web site:

energyalmanac.ca.gov/g...

I used them only as an example since the CEC is they only governmental agency in the U.S. sanctioned by regulation to obtain the dealer tank wagon and rack prices direct from California refiners and major oil companies. The major oil companies obtain information on each other's competitive pricing from The Lundberg Survey, who gathers the pricing data and other statistics from dealers and other sources willing to submit that information to them. Lundberg the sells this information back to the major oil companies who in turn price their gasoline according to what to market will bear. They continuously monitor their market share and competitive stance in the market very carefully.

I am of the same opinion as yours that fuel drove crude oil prices down assisted by demand destruction in the last four months of 2008.

Crudomania Is Over

What I found interesting that the CBS' 60 Minutes segment entitled "Did Speculation Fuel Oil Price Swings" basically agreed with my premise outlined in the "Crudomania" article. For the record I consider myself an insider of the petroleum industry and have worked in the refining and marketing end of our business for over 49 years.

Watch for Yourself: 60 Minutes Oil Story Was Spot On

I read the transcript of the 60 Minutes segment and Allen Phatimer's review along with all the other blogs hitting the investment blogs. I agree with Allen's viewpoint and he makes excellent points about how crude oil price speculation took on a life of its own and created a bubble.

But "Crudomania" will not be continuing in 2009 and let's make that call by officially declaring: “It’s over and thank goodness for that!” Now crude oil prices will be allowed to float between $40 and $75 per barrel in 2009 depending on the pace for the recovery of the world and U.S. economies.

The natural world of supply and demand in the petroleum industry will once again rule along with being effected by geopolitical events.

Oil Price Economics the 60 Minutes Way

In response to Eddy Elfenstein's statement to talk to the to the wiped out speculators The big boys in the person of the big fund manages got out early of their crude oil positions They act like lemmings when it comes to making investments going to crude oil after the mortgage market fell apart. It's eventually the little guy, sucked in with promises of big returns for a small investment , who was left holding the bag. Just for the record I hold or have held any positions in energy related investments for the last ten years.

Crudomania Is Over

Searcher - The complete quote I chose not to use for my article was: "Crude oil forecasting is like trying to drive a car blindfolded and following directions given by a person who is looking out of the back window."

I used the tulip bulb bubble reference due to my Dutch heritage. if the Dutch have learned anything is that history tends to repeat itself. The question is which commodity or investment will be the next darling of the investment community on which to create an specalutive bubble, which is defined by Wikipedia as: "Trade in high volumes at prices that are considerably at variance with intrinsic values”.

Crudomania Is Over

To respond to the comments by the readers of my article I only projected crude oil prices to "float" between $40 and $75 per barrel for the year 2009, which for petroleum industry purposes does not qualify for long term planning.

Also in doing the research for my "Crudomania" article I found the following item in "Off the sauce -Gas prices plunge but driving habits stay curbed"written by Jennifer Waters, on MarketWatch dated 12-31-08:

"Even though prices at the pump are now about 45% lower than they were a year ago and significantly below $2 a gallon, 52% of Americans told Gallup that they have not gone back to their old gas-guzzling ways.
Gallup found that middle- to lower-income consumers -- those who earn less than $75,000 a year -- were most likely to consolidate trips and drive less overall, primarily because gas prices at the pump eat up a larger percentage of their incomes.

Of those who made less than $30,000 a year, 69% said they changed their habits while 68% of those in the $30,000 to $74,000 annual income range did. Fifty-six percent of those whose annual paychecks exceeded $75,000 did.

There is not much difference in behaviors among age groups when it comes to young adults and those who are older. Sixty-one percent of consumers 18 years old to 34 years old shifted their driving habits, while 62% of those 55 years and older did.

Of those who are 35 years old to 54 years old, 67% altered how often they got behind the wheel. "Of course, this seems logical because at this stage of the life cycle, as these Americans are more likely to have to commute and to have children involved in many after-school activities," Gallup Chief Economist Dennis Jacobe said."

This was the most elaborate outline I could find explaining the reasons why a majority of American consumers have now permanently changed their driving habits.

Stock Picks for Under-a-Buck a Gallon Gas

The $1 per gallon gasoline scenario is highly unlikely since that would equate to $10 per barrrel market value for crude oil. Refineries and oil well would have to be shut down before that happens.

So what happened to analysts’ predictions that crude oil would be $200 per barrel by the end of this year? Goldman-Sachs and Morgan Stanley have already taken that number down it down a notch or two. They are now forecasting crude oil to go back to a $75 per barrel average for 2009 with the average for 2008 coming in at around $100 per barrel.

The "true cost" of crude oil is determined by how much effort has to be put into getting it out of the ground. Each of the oil production companies have come up with methods to value their proven reserves. Sir John Browne, BP's former CEO, said that their figure was about $30 per barrel for deep well crude oil production in the Gulf of Mexico in an interview for "60 Minutes" just before resigning his chairmanship about two years ago.

The price of crude oil will eventually be determined by market conditions. The world in general, and the US in particular, is now learning to consume less oil on a daily basis, even though the global economy can be expected to continue consuming fossil fuels for many decades to come.

There are only three ways to reduce oil consumption:

Ø Improved fuel efficiency and conservation
Ø Introduction of substitute energy technology
Ø Economic contraction

It now looks like we are now heading that way on all three fronts.

Bob van der Valk is a petroleum industry and fuel-pricing analyst residing in Issaquah, Washington

Stock Picks for Under-a-Buck a Gallon Gas

So what happened to analysts’ predictions that crude oil would be $200 per barrel by the end of this year? Goldman-Sachs and Morgan Stanley have already taken that number down it down a notch or two. They are now forecasting crude oil to go back to a $75 per barrel average for 2009 with the average for 2008 coming in at around $100 per barrel.

The "true cost" of crude oil is determined by how much effort has to be put into getting it out of the ground. Each of the oil production companies have come up with methods to value their proven reserves. Sir John Browne, BP's former CEO, said that their figure was about $30 per barrel for new deep well crude oil production in the Gulf of Mexico in an interview for "60 Minutes" just before resigning his chairmanship about two years ago.

The price of crude oil will eventually be determined by market conditions. The world in general, and the US in particular, is now learning to consume less oil on a daily basis, even though the global economy can be expected to continue consuming fossil fuels for many decades to come.

There are only three ways to reduce oil consumption:

Ø Improved fuel efficiency and conservation
Ø Introduction of substitute energy technology
Ø Economic contraction

It now looks like we are now heading that way on all three fronts. $1 per gallon gasoline would equate to $10 per barrel market value for crude oil. Refineries would have to shut down and new oil drilliing come to a halt before that happens. I don't think so!

Bob van der Valk is a petroleum industry and fuel-pricing analyst residing in Issaquah, Washington