oiler1930

Where Will Oil End 2009?

Any prediction for oilprices will be part of a shotgun pattern. ;; Lifting costs have to be exceeded or the marginal producers will drop out, and thereby reduce supply.

The Ghost of Crude Oil Futures (Part 2/2)

Remember that a futures contract is a wonderful two-edged sword. It is not a purchase, and the small margin requirement can be wiped out in a hurry. For a 1,000 bbl contract, a $1 change in price is $1,000; with $5 swings in daily trading, you can get wiped out in a trice if you can't meet a margin call. NYMEX margin is about $8,500 a contract.

The comment about fees for USO is germane, but there is no counterparty to devour your investment, only price action. buying now may be safer.

The Ghost of Crude Oil Futures (Part 1/2)

The runup in oil prices was funded by the big commodity index funds as a part of their portfolios. when the housing bubble broke, they were forced to sell everything to retrieve capital. The effect was comparable to a night club fire; everyone runs to the exit,and get caught. Like clock work, every month the nearby positions were rolled forward to future postions, which explains the contango. some money is flowing back in, where forward contracts nearby jump $2 above its predecessor, before getting less wild in the more distant futures.

I operate a small lease that raises four millionths of our domestic input (0.0004%). My lifting costs run $25/bbl; the new offshore oil is expected to cost $50-75 per bbl. The analysis above that shows lower costs neglects these facts.

Where Have All the Peak Oil Believers Gone?

when the first wells in Pennsylvania came in at 50feet, the main product was kerosene, which saved the sprem whales from extinction; the gasoline cut was a waste product that got dumped in creeks. development of internal combustion engines allowed trucks and cars to be feasible. we have had a wonderful century of mobility. soccer moms have used vans to move there kids to various activities,while the working guys rode alone to and from work. I always tried to use public transport or carpooling to cut commuting expense, but I would often count how many mulitle passenger cars in the rush hour had passengers, usually ther were two or three such in every hundred. carpooling may come back in favor, and if everyone only doubled up, a lot of congestion would vanish, and demand would be reduced.

trucking uses a lot of distillate (Diesel) fuel; there are engines being developed that can use liquefied natural gas, allowing a 50% reduction in hauling cost for fuel. big brown (UPS) now routes their trucks to all right turns to cut fuel costs from waiting to make left turns.

my yankee ancestors were frugal, and some of their traits were passed on to me.

problems with green power have caused dislocations in dispatching energy supply from ephemeral sources, particularly when there is an inadequate transmission capability, such as the west texas wind farm that needs a beefed up grid from a much more widely spread out generating source.

we are in love with our freedom of motion, but we go to extremes in its exercise. by the way, how many remember the gas lines in the seventies? you could get fueled up at 5 AM if you had business in the country side that required travel, but commuters spent lots of time hoping to get to the station before they ran out.

when it comes to bubbles, it is instructive to read "Extraordinary Popular Delusions and the Madness of Crowds"
by makay; the term bubble was applied to the South Sea and the Missippi, among others, but also Mackay addressed social madnesses such as witch hunts.

Economic Anomalies Explained

natural gas heat content is discounted about 42% to crude, 55% to gasoline, and 50% to diesel, all at the Nymex contract prices. at retail, the discountis higher due to taxes on motor fuels.

congress has the power of the purse, but congress can respond to presidential requests.

How Elastic Is the World's Oil Supply?

I watch the EIA weekly petroleum reports, and have been tracking them for over five years. One key that I use is the number of days' supply, the quotient of crude inventory over daily inputs to refineries. This value ranges from ~.17 to 24 days. In the last year, crude oil prices doubled, while the days dropped from 22 to 19. The reduction in inventory total cost was several billion dollars! Management usually has two discretionary costs, maintenance and inventory. The carrying cost of the current inventories can be tied to whatever return on money you wish, say 4% long bonds, or prime rate; doubled inventory cost carriage can be carried a little more easily by the lowering of inventory quantity by 15%. Reduction of maintenance costs brings piper paying time closer, but is often done to stay our of chapters 11 or 7.

As a corrolary, should prices drop the addition of cheaper inventory quantities lowers the average cost. With a twenty day nominal inventory, turnover is swift, and a larger inventory at a better comfort level is affordable.

The Volatility of Natural Gas

I purchase natural gas under forward contracts based on futures prices at the time of purchase. When there occur reasonable dips, I try to enter a portion of needs for contract, and currently am buying out to 2010 needs. In essence, this is a hedging program. The big spike to $15 was aggravated by Amaranth's action, but was impelled by the damages due to Hurricanes Katrina and Rita. It took a while for prices to recede.

My daily analysis is directed to the ratio of the prices of crude, heating oil, and gasoline to the price of natural gas for the three nearby contracts, but corrected to price the cost of the relative heat content of these fuels, the upshot is that natural gas is priced in a range of 47% to 53% of the fuels, prices. This ratio was reversed to about 129% during the panic. Looking only at the record highs, the liquids are about 120% of NG.

Natural gas heat is relatively cheaper because production costs are much lower, and so are gathering and transportation costs. Coal bed methane is now being produced, and is profitable despite somewhat higher extraction costs, including coproduced water.

NG is definitely a cleaner fuel, in part because it is mostly burned at atmospheric pressure. Internal combustion engines, reciprocating or turbine, operate at high enough temperatures that nitrogen oxides invariably are produced as co-products of the combustion. The NOx concentration is not high enough to cause direct toxic symptoms, but is a needed component for the production of ozone during daylight hours. Should our transportation fleets move to the use of NG as a fuel, air pollution will continue to be about what is now.

As an aside, T Boone Pickens hs been touting NG prices in parity with liquid fuels. This would imply a doubling of the price. Such an occurrence would impel a counterattack of increased NG production and distribution, so that demand would be brought to parity with supply, and prices revert to current levels.

The Benefits of Shifting to CNG for Fuel

Adam Smith argued that an enterprise requires a profit to stay in business. He also pointed out that when capacity to produce was less than demand, profits would increase to a point where more capacity got built above the demand required. Trade of excess product could be exported. A fairly recent example of excess capacity occurred a few years back in Singapore where an ice skating rink opened; business boomed and a competitor built a second rink; both went bust. the Wealth of nations is still a good read, if you skip over the statistics on the historical price of wheat in terms of shllings per bushel, and covering several centuries. Right now one ounce of silver buys two bushels; back then there were much greater swings.

Lawyers have been a plague since the days of the hanging gardens of Babylon. Irrigation kept that empire going until the necessity of maintaining the canals ceased to be recognized.

The big difference between a steam powered turbine and an internal combustion engine arises from the heat required to boil water, about half the total heat supplied in the boilers. The result is extraction of about 25 to 30% of the thermal energy as motive power; an internal combustion energy delivers about 40% with gasoline to about 55-60% with diesel fuel. The waste heat in the latter goes out the exhaust pipe.

I use the Energy Information Agency of Dept of Energy to follow crude usage. Refinery inputs are 15 million barrels a day (BOD), of which two thirds are imported, with most of the imports from the closest producers. Of the 5 MBOD produced domestically, about 20% comes from offshore oil in the Gulf.

LNG is a blend of natural gas that can be liquefied at moderate pressure. It does not require a super stout vessel for containment. Domestic gas, supplied by natural gas utilities tapping into the pipeline streams, is predominantly methane with a few percent of ethane and propane; it can only be liquified at cryogenic temperatures, or it can be compressed and held in stout vessels. Anyone familiar with oxygen systems may be aware of the ability to store liquid oxygen in a cryogenic container at nominal temperature. There are efforts being made to ship liquified methane from gas wells to existng pipelines, in cryogenic trailers, built like the liquid oxygen, nitrogen and hydrogen tankers, as opposed to building new gathering pipelines to the nearest major pipeline.

Upshot here is that cryogenic storage of liquid methane may be a practical solution for fueling a fleet of natural gas driven vehicles. I might add that methane from coal, with basically no ethane or larger molecules, could also be tapped as a source for liquid methane.

Oil Prices, Global GDP, and Net Oil Exports

rbblum

Desert Storm responding to the invasion of Kuwait and the current event in Iraq come to mind as economic wars, not to mention German occupation of Roumania and Japanese seizure of Indonesia, both for sources of oil

Stagflation and Peak Oil: How Related Are They? (Part II)

The article and comments address some of my own worries. Not mentioned above is finding a shelter for liquid funds when banks are hosting the vultures they let loose with excessive lending, too low capitalization, and making excessive loans to poor risks. I have set up an account with Treasury Direct Investment (go to Treasury.us and select TDI). I am currently pushing money in excess of FDIC limits of $100,000 into T-bills, and building up a rolling inventory of same, so there will be weekly rollovers. This does not give any long term rates, more like 2%, but for safe parking, it works; also, there are no fees imposed at this time, no brokers etc.

In addition to the two plays for oil, futures and equity ownership, there is a third, to buy your own leases or to invest with honest operators, who may still be in the majority. There are almost as many scams in the oil mining sector (it really is a mining activity) as there are in gold mining. I live in the Illinois basin, and raise 3/1,000,000ths of the daily refinery input nationally. It is a lot of fun when you learn the business; it has taken me 15+ years to get here.

I think that the housing uproar has a long way to go before prices, in real terms, rise. Suburbanization has made major commuters of most of us; in the 1930's, factory hands lived close to their work, and walked it both ways. In my time, I have car-pooled to work, and did not feel the need to be able to come and go as I pleased. When I rode a bus to work, I would wait in the morning and calculate the percentage of cars passing with more than one head showing; scores were one to three people.

Ownership of gold is attractive now, as it was in the 1920's; acquiring bullion is a nice idea, but about 1934, Americans were required to surrender all their gold, while for silver, that went out the same way around 1965. As compensation, we were allowed to own gold and silver as bullion or as coins.

What are the chances of confiscation again?

The thermodynamic comments were of interest. A variation on the three laws, 1) You can't win; 2) you can't break even; and 3) you can't get out of the game. When applied to wind and solar energy, both are ephemeral; solar weakens substantially at sunset, and weakens under dense cloud cover, requiring rechargeable batteries, while wind does not blow steadily. I have priced both sources, and currently cannot justify investing in either for the production of power at currently prevailing prices for electricity.

Oil Prices, Global GDP, and Net Oil Exports

Speculative booms invariably require some form of cash input. Our cash used to be gold and silver, while today we have fiat money with faith holding it up. When the money supply has a major increase with no offsetting increase in quantity of items of trade, prices are the quotient of money over quantity of goods.

When some folks rant about Arab Oil being the villains, and others say Saudi oil is in fourth of fifth place, with Canada and Mexico being first and second, and Venezuela, Nigeria and Saudi Arabia trailing, the fundamental factor in obtaining imports, for buyers, is to keep transport costs down. Costs on the margin spread to the totality of worldwide production, adjusted for grade of crude, and are pretty much based on landed prices of crude that can be piped to Cushing Oklahoma for delivery against crude contracts. Domestic consumption in producing nations reduces availability for export.

Liquid fuels are ideal for transportation energy, since very little weight is needed to contain the fuel, compared to coal or natural gas. During WW II, German vehicles were fueled with gasified coal or wood in a furnace mounted in the back of the vehicle; our EPA would not permit such a substitute here.

The economics of health care constitute a minefield to discuss. Typical company plans cover the first $2,000,000 net over deductables for the lifetime of employed individuals; I would not care to experience that much misery. Readily available statistics on health care costs are difficult to navigate and I have not taken the time to study same. Adam Smith would be able to make a quantitative assessment of the value added by restoring an individual to good health for the balance of such a one's life; Smith was scornful of the nobility who kept large retinues of servants in totally non-productive status. Trade is necessary to provide what is needed where not domestically available; if trade overall is not reciprocated, some folk have to do without.

Apologies for the parabolic comments.

Insiders Preparing for Major Drop in Oil Prices

The postulate that independent refineries will obtain a better crack spread, the difference between price of products (~10 bbl gasoline/15 bbl oil and ~5 bbl of heating oil/diesel fuel, when crude prices drop faces a structural flaw:
a crude producer gets 15% of sales tax exempt for a depletion allowance, in recognition of the oil pool being finite and not getting reproduced in situ. A converter, ie refinery, is liable for full net profits from production. An independent refiner is at the mercy of the integrated producer who gets 15 % of his sales exempted for production, and full tax liability for as much of the downstream activity that he chooses to own and operate.

The independent producer gets the tail end of the market when prices tumble to his cost or less; the independent refiner gets just enough margin to barely break even. Both activities may use commodity contracts to hedge their activities by selling forward production at a price estimated to guarantee some sort of profit, and for the refiner, buying forward crude and selling gasoline and heating oil contracts to protect a spread.

Direct ownership of production, carefully cost monitored, can pay an oilman a decent income. Direct ownership of an independent refinery seems to lead to bankruptcy.

With all that said, I believe that Valero is also a producer as well as a refiner, and qualifies as an integrated entity. They are not part of the seven sisters, such as the Siamese twins Exxon Mobil was once two of same, but are still a substantial world producer.