Why gas prices are so high

[Librarian]

Interesting article:
https://www.nytimes.com/interactive/2022/06/14/business/gas-prices.html

So basically, oil companies cut production & staffing during COVID with less demand.

And now for a variety of reasons--one being their concern that electric cars are becoming more prevalent so their profits will begin to plummet --they have not ramped up production to pre-COVID levels.

So oil companies COULD increase drilling/production & increase supply.

But that would lower prices.

And most of us NEED gasoline to some extent.

More incentive to go electric, I guess.

I had been WANTING to go there...but I have a 2012 Nissan Altima with only 67K miles. Well cared for. Cheap to insure & gets pretty good gas mileage.

We also just bought our Mazda lease. Got it 3 years ago with a $17K buy out 2020 Mazda 6--currently valued at 32-35K--OMG! (but WHAT would we buy??!

Our DS just bought a 2013 Subaru Outback with 30K miles for $18K (yep, little old lady who drove to church on Sunday).

I took a look at electric/hybrid cars--OUCH!
I guess cars in general are extremely expensive...

SO...since I retired in May & cut out my 30 min commute each way...I'll keep driving my gas powered car...ugh.

 

[audreyh1]

I think geopolitical upset - the invasion of Ukraine had a lot to do with it. That has also disrupted numerous supply chains.

 

[Chuckanut]

I think geopolitical upset - the invasion of Ukraine had a lot to do with it.that has also disrupted numerous supply chains.

The same reason the price dropped when Covid first hit - Supply and Demand.

 

[Mr. Tightwad]

Wait till some refineries are offline due to hurricanes.

 

[aja8888]

The world is currently short about 2 million BPD of crude production. Seems like some OPEC+ members can't make their production commitments for a variety of reasons. Also, the U.S. is currently producing 11.9 million BPD of crude and that is less than pre-pandemic volumes.

There are roughly 150 different daily quoted crude oil prices. Oil is commodity, with pricing generally set through OPEC and supply/demand constraints.

It's complicated.....

And pricing is for future deliveries of crude oil, not a daily production unit.

 

[USGrant1962]

I think geopolitical upset - the invasion of Ukraine had a lot to do with it. That has also disrupted numerous supply chains.

Oil went from around $60 before and after the Covid crash to about $100 before Ukraine. The trend has continued up to $120, but it is not obvious that Ukraine specifically changed the trend for better or worse.

https://www.macrotrends.net/1369/crude-oil-price-history-chart

 

[Irishgirlyc58]

It’s my fault. I retired at the end of 2021 so obviously gas prices had to increase and the stock market had to tank. [emoji2356][emoji3525]

 

[audreyh1]

Oil went from around $60 before and after the Covid crash to about $100 before Ukraine. The trend has continued up to $120, but it is not obvious that Ukraine specifically changed the trend for better or worse.

https://www.macrotrends.net/1369/crude-oil-price-history-chart

Yes, oil had crept back up to $90 by Feb 2022, but there was a sudden jump up to $120 beginning of March, then dropping some but returning near that high since.

 

[Turbo29]

Interesting article:
https://www.nytimes.com/interactive/2022/06/14/business/gas-prices.html

So basically, oil companies cut production & staffing during COVID with less demand.

And now for a variety of reasons--one being their concern that electric cars are becoming more prevalent so their profits will begin to plummet --they have not ramped up production to pre-COVID levels.

So oil companies COULD increase drilling/production & increase supply.

If you ran a business and made a product that politicians were threatening to legislate against the sale and use of, would you invest in increasing your production?

 

[Scuba]

If you ran a business and made a product that politicians were threatening to legislate against the sale and use of, would you invest in increasing your production?

And herein lies a big part of the problem.

 

[Ronstar]

If you ran a business and made a product that politicians were threatening to legislate against the sale and use of, would you invest in increasing your production?

And herein lies a big part of the problem.

+1. Too big of a risk to invest in more production. And I suspect that the red tape and permitting costs to drill new wells is significant. Better to wait on increasing production when there is a more favorable political climate in which to operate

 

[frayne]

Throw into the equation CAPEX in the hydrocarbon industry has been reduced by 50% of what it was in 2014 due to less demand and changing over to greener sources. Oil stock returns have been dismal over the last ten years. Now they are going to get, while the getting is good.

 

[mathjak107]

you cannot restart a well with a mouse-click and because not all wells are profitable all the time.


Oil and natural gas companies own fields or the rights to fields.

That is normally all they own. They outsource everything else. They outsource oil exploration to oil exploration companies and they outsource field operations to oil service companies.

When you drill a well, it takes about 5-7 years production running flat out 100% 24/7 to recoup the costs of drilling the well, which isn't the only cost.

The oil service company drills the well, operates the well, connects the feeder lines into the subsidiary and main oil pipelines, installs and maintains all the pumps and all the related machinery.

When you pump oil out of the ground, you pump water back into the well. If you're California, Texas, Louisiana or a Middle Eastern country you'll pump salt-water back into the well.

Why? To maintain static pressure for pumping and to protect and preserve the geologic structure.

A 40 square mile sink hole in Texas or anywhere else is not cool and it's even less cool if your home is within that 40 square miles.

At some point, and this usually 10 to 20 years later, water starts impacting your costs and the text-book case for this is Illinois Intermediate.

That field is in southern Illinois and they've been draining it since the 1840s. A barrel of Illinois Intermediate is 25% oil and 75% water.

If it costs you $25/barrel, then you need 4 barrels to give you 1 barrel of oil and 3 barrels of water, which is contaminated and has a value $0, so you just send that to your reclamation plant and pump it back into the field.

But, here's the thing, you just spent $100 to pump 4 barrels of oil and you only got 1 barrel to sell, so unless oil prices are $100/barrel, you just lost a butt-load of money.

So, the last time Illinois Intermediate was pumping was way back when oil was $120/barrel.

Fraking has a relatively higher cost, so oil has to sell for at least $60/barrel just to break even, but that's very simplistic.

OPEC does not now nor have they ever set oil prices. Oil prices are determined by benchmark oils.

West Texas Intermediate (WTI)) is both a global benchmark oil and regional benchmark oil (for the North/South American Region.)

What does that mean?

It means all oils are price against the benchmark.

High quality oils sell for higher than the benchmark and that would be nearly all OPEC oils.

Low quality useless garbage oils like crappy Canadian Tar Sands sell for less.

June 25, 2021 had WTI at $72 and change per barrel and the best of the 5 crappy Canadian Tar Sands only sold for $60/barrel.

If you used crappy Canadian Tar Sands for gasoline, then expect to pay $11-$15/gallon every day all the time for the rest of your lives.

You only get 3-5 gallons of gasoline out of a 42-gallon barrel of Canadian Tar Sands. By comparison, Illinois Intermediate is 13 gallons, WTI is 19 gallons, Saudi Light is 26 Gallons and Murban is 29 gallons.

Because of Covid 19, you had slack Demand for oils and natural gas, so production came to a crawl.

Since no one knew when any positive change would come, oil service companies shut down oil and natural gas wells.

Oil service crews worked 8-12/hours per day for 6-10 days to cap the oil wells, blow out the feeder lines, and drain the coolants and fluids from the machinery to set it up for long-term storage.

I don't know much about natural gas wells, except that you have to blow the feeder lines even for short-term shut-down unlike oil wells where you can just camp the well and leave the oil in the feeder lines if you're gonna be shut down for a few weeks or a month or two.


Which brings us to this:

Forty-six exploration and production companies and 61 oil-field service companies filed for Chapter 11 bankruptcy last year, according to Haynes and Boone, a Dallas law firm tracking bankruptcies. The 107 oil and gas bankruptcies in 2020 were the most since 142 bankruptcies were filed during the last oil bust in 2016.

https://www.ogv.energy/news-item/ove...nkrupt-in-2020


You have a serious freaking shortage of oil service companies and oil service crews.


The Saudis just own the fields. They don't actually make them go.



10s of 1,000s of oil and natural gas wells were shut down around the world and it wasn't done with a mouse-click. It took 6-8 months to shut those wells down. Now you gotta restart them, and you ain't even got enough workers to do that.

Remember, when you're in bankruptcy, you ain't running the show because you have a court-appointed receiver running the show for you, so it ain't like you can go hire 100 people just because you wanna.

It's gonna take another 6-12 months get enough wells back on-line to make a difference

 

[marko]

Mathjak, your explanation would’ve made a much better NYTimes article.

 

[mathjak107]

My buddy is a famous oil analyst

 

[EastWest Gal]

My oil stocks have amazing returns. Highest price ever and the dividends are ever increasing. The dividend growth has averaged over 5% per year for 35 years. Which oil stocks are you referring to?

 

[Badger]

Mathjak, your explanation would’ve made a much better NYTimes article.

+1

Cheers!

 

[Winemaker]

And some ESG investor firms are urging banks not to loan money to oil, gas and coal producing companies to move us to green. BlackRock is one of them.

 

[CRLLS]

Mathjak, your explanation would’ve made a much better NYTimes article.

Oh yeah! Thank you for your insight Mathjak.

 

[Montecfo]

Yes. And demonizing oil companies while using the power of government to erect hurdles in the way of increased production certainly does not help matters.

 

[mathjak107]

My oil stocks have amazing returns. Highest price ever and the dividends are ever increasing. The dividend growth has averaged over 5% per year for 35 years. Which oil stocks are you referring to?

Including all dividends xom has returned an average of a mere 3% a year the last 15 years and about 4.50% the last 10 years …that’s an awful return.

The S&P averaged 29% a Year without individual company risk including the recent drop

 

[Turbo29]

This will incentivize the oil companies to invest more.


CNBC -- Biden tells oil companies in letter ‘well above normal’ refinery profit margins are ‘not acceptable’

 

[Aerides]

Maybe let's back off the political aspects in this discussion, there are plenty of other reasons to dive into of interest to all members.

 

[Beststash]

I'm sure there are at least a dozen reasons that gas prices are so high. If they remain that way for a long period then I suspect it will incentivize the move to EV and Hybrid vehicles and more fuel efficient transportation in general. I know around 2008 it happened and then as gas got cheap it seemed to shift again. It seems to be a constant cycle of up and down and I doubt that will go away.

I can't see a downside to moving away from gas as we move forward and what better way for it to happen than "pain at the pump"? When I fill up I try to keep that in mind!

 

[aja8888]

35 years in the oil & gas industry here....

Whats causing the high gasoline and diesel prices are the very high "crack spread" prices that refiners are experiencing?

https://www.hydrocarbonengineering....rive-elevated-refinery-utilisation-in-the-us/

In the EIA's May 2022 Short-Term Energy Outlook (STEO), it was forecasted that US refinery utilisation will reach as high as 95% on a monthly average basis this summer in response to high product prices and crack spreads for gasoline, distillate fuel oil, and jet fuel.

Crack spreads are the difference between the price of crude oil and the wholesale price of a refined petroleum product, and industry participants use them to estimate refining margins. It is expected that prices for gasoline, distillate fuel oil, and jet fuel will begin decreasing after May as refinery maintenance from April comes to an end, increasing production and reducing some of the pressure on prices in the current market. Even with increased refinery operations and declining prices this summer, wholesale fuel prices and crack spreads are expected to remain well above historical levels through the summer.

Also, the world is short about 2 million BBL/day of crude due to OPEC+ countries not being able to maintain their quotas and the U.S. is behind also, primarily due to pandemic reasons and lack of new investment. This has put pressure on crude futures, which exist for about 150 different grades of crude that are produced.

IT's COMPLICATED!