Bob van der Valk

The Real Price of Crude Oil

I follow the logic in your article as well as the plotting on your graphs and they are very impressive. But where in this article does it mention that supply and demand at the pump is what has been driving crude oil prices first down then up since last a year ago?

From an insider's to the petroleum industry perspective that is exactly what is happening now and will continue to happen in the absence of rampant market speculation in crude oil futures.

In a study published earlier this month Dr. Phil Verleger predicted that crude oil will get down to $20 a barrel by the end of this year. I am a little more optimistic and have posted an article on Seeking Alpha predicting $40 a barrel for WTI crude oil and under $2 per gallon pump price for gas by Thanksgiving.

Who's Kidding Whom on Gas Prices?

The price charged for gas in each part of the country is tied to the supplies available from the refineries in that area. Some areas are supplied by pipeline and identify with pricing from the origination point from which the fuel is shipped.

Las Vegas is a good example of those pricing dynamics at work today. They receive some of their gasoline via the rubber pipeline (tanker trucks) from Salt Lake City where rack prices are about 25 cents per gallon lower than what they are in Los Angeles right now. The Los Angeles refineries supply the majority of the gambling mecca's gas by pipeline. The LA unbranded independent rack price currently is about $1.50 per gallon for regular unleaded gas (before applicable taxes). The average pump price per gasbuddy.com for regular unleaded gas in LV is about 10 cents lower than the LA price, which is at $2.079 per gallon today. Howver, at that price dealers in LA and Vegas are still only making about 8 cents per gallon.

The branded major oil company stations receiving gasoline from those same racks are charged a Dealer Tank Wagon (DTW) price by their suppliers. But those prices do not necessarily follow the unbranded independent prices. In fact they are inverted today with the major oil dealers having an about 4 cents per gallon advantage. That number is usually about the same amount the other way around.

I have already outlined the method with which the major oil companies control their DTW prices in one of my earlier comments.

Hope this helps explain the different prices charged at your favorite gas station in the country today. Thanks for all your constructive comments on my article. You can find my previous articles on my personal web page at 4vqp.com

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.

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