Tuesday, July 28, 2009

New cars, miles travelled, crude oil and Charles Gibson

Over the past three weeks we have driven to Maine and back, putting 3,000 miles on the new Fusion Hybrid and, in the process averaging some 39 mpg, with times where we got over 41. I think that it is just a little better in that regard than the Camry Hybrid we drove out in last year. And, since it calculates the distance you can travel on a tank of gas based on the average achieved, seeing a 650 mile reserve after a fill-up is quite nice. As I mentioned earlier the trunk space in the Ford is a little smaller than the Camry, and the GPS system is not quite in the Magellan or Garmin class though generally effective.

But that gets me back into my consideration as to where things are going, and a continuation of the thoughts I posted recently on the future of crude prices. I remain somewhat optimistic about where the economy is going to go. There is some evidence that house prices are starting back up a little according to the S&P/Case-Shiller index. This holds true not only in the USA but also in the UK. The numbers are sufficiently small that perhaps we should only recognize the halt in declines, rather than the hope of a continuous upturn, yet it is a start.

On the other hand the upturn in vehicle miles driven that started in April has continued with a y-o-y increase of 0.1% in May. Looking at the 12-month rolling total there is even the hint of an upturn there.

Moving 12-month total of travel on all roads (FHWA)

So what will that do to gas prices? Demand isn’t really changing that much overall for gasoline in the USA, and I really didn’t think that Charles Gibson’s “Over a Barrel – the Truth about Oil”, last Friday, was that obviously enlightening in trying to answer that question. (But if you read between the lines . . . .)

He found that gas stations make more money from their convenience store products than from gas; that all gas regardless of brand usually comes from the same pipeline, in the same truck to all the local dealers; he found that there had been no new refineries in the past 30-years, though smaller ones had closed and others had grown larger;
There are 149 refineries in the United States, 26 fewer than there were in 1995. And the top 10 oil companies control close to 80% of the country’s refining capacity.

But oil industry leaders say that was a necessary business decision in a competitive market. “The smaller, less efficient refineries really couldn’t compete in that environment. They did shut down, so we had a lot of falloff in the industry,” said Rayolda Dougher, a spokesperson for the American Petroleum Institute. “And you are right. If you had overcapacity and you are not able to sell your product at a profit. You are going to have to cut back on that capacity. But look over time, and look at the record and you will see that capacity has grown.”
The ABC report noted that while demand for gasoline has risen 15%, refinery capacity has only grown 14%. But it also pointed out that a major driver on price of product coming out of the refinery is tied to the cost of the crude going into it. And so the story moved to look at both domestic supply (the “drill, baby, drill” argument) and that available from overseas. It quoted Vijay Vaitheeswaran of the Economist, that most of the remaining world reserves of oil lie in Saudi Arabia, Iran, Iraq, Kuwait and the UAE. And the Secretary of Energy was then recorded saying that this condition promised us a “train wreck.”

To see whether this dependence on foreign oil (70% of U.S. supply) could be switched around, the crew visited the Chevron platform in the Blind Faith field 160 miles out in the Gulf. The platform is producing 65,000 bd of crude and 55 mcf of natural gas. But while this individual effort is an indication of where future supply must come from, it will not be enough to satisfy demand.

The report concluded with a remark by T. Boone Pickens suggesting that if all the areas that could be drilled around the nation were drilled and started production, that the total gain in production would only be about 2 mbd. He then pointed out that the US imports 13 mbd. We cannot break our addiction to oil by trying to drill our way of the shortfall in domestic supply.

And so the report ended with the note that gasoline, given all its travels, processing and other costs, is still a relative bargain at $2.50, because there is no recognition of the hidden costs. It really did not draw the logical conclusion that the future strength of the US economy is tied to the benevolence of those five Middle Eastern countries, nor how rapidly that dependence will become evident again. But if you wanted to read between the lines, that message was there, hidden behind the realization that domestic supply alone cannot rescue us from our situation.

Now the actual broadcast covered more ground than is given in the write-up. The good Dr Yergin made an appearance at Cushing, OK talking about the pipelines and the basis for the common established price for crude at that place. And there was some discussion of the role of speculators in driving up the price, but the underlying message remained as the written report notes, that we are heading into trouble – pity it was so well concealed.


  1. I'm less optimistic than some that recovery of the US economy is just around the corner. First, unemployment is still rising. Second, a popular Credit Suisse graph on the reset dates for various types of mortgage suggests that foreclosures will accelerate through the remainder of this year and generally into 2011.

    I had a conversation last week with a western US bank worker whose job is making car loans. He said that, even if an applicant has lost a house, his bank will still approve a subprime car loan provided the applicant has a job. It does make one wonder about lessons learned, or not.

  2. Even after the economy bottoms unemployment will continue to rise, probably into the beginning of next year. My rather weak tea-leaf reading is that there are indications that things have stopped getting worse for the economy in general, which is a necessary precursor to things starting to get better.

    I sense that the panic about a likely Depression is over, and now it is a resigned waiting for the end of the recession.

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