We’re in a predicament… spiraling downward
2 comments Friday, 07-11-08 | Posted By Patrick | Commentary
Oil is $146 a barrel today.
Want to know why U.S. supplies are OVER 50 million barrels below where they were last year? Want to know why oil prices keep rising? The two are directly connected, and its going to keep getting worse unless the dollar strengthens.
As I said, today oil hit $146- a new record. Why? Supply. OPEC wants you to think they’re supplying the market- and they are. But you see, why would oil companies want to pay $146/barrel to BUILD their inventories and risk getting stuck with a lot of expensive oil OR spend a HUGE amount of money stockpiling oil at these prices?
To get oil stockpiles where they were last year at this time… lets do the math… 53 million barrels is what it would take, multiply by today’s price- $146 and you get $7,738,000,000. It’d cost oil companies $7.7 BILLION dollars to buy 50 million barrels of oil to get stockpiles to last year’s levels. You may say “eh, that’s not that much money for them”… and perhaps you’re right. However, would you rather have oil companies spend the money on buying oil to sit around or spend it on refinery expansions? Its a waste and a HUGE risk for oil companies. If oil prices fell to $73, they’d lose HALF of what they spent on the oil.
Its a huge risk and they’d need the cash flow to be able to buy it. Then we ask WHY would they do this? It’d lower the profit from oil if supply was cushy, lowering their bottom line.
Now we come to OPEC who says supply isn’t the problem. They’re right… to an extent. While they claim they have oil ready for customers, there are no customers willing to buy at such high prices… especially for just the purpose of building oil stockpiles.
Let me just say- the only reason refiners are still producing gasoline is because refining that oil also produces heating oil/diesel, which is making a decent amount of margin for them. If diesel demand drops or if Europe’s demand lowers the refining margin, there will be TWO products that refiners make that are yielding LITTLE TO NO money. Thus refiners will shut part of their refineries resulting in… you guessed it… shorter supplies meaning higher gasoline and diesel prices.
So… we need oil! OPEC has it, but no company wants to buy it and risk storing it and losing value. We’re in a predicament… oil is there, no one wants it, prices are rising because inventories are falling!
Does that make sense?
Patrick
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what would a logical solution be? a greater domestic supply would seem wise…aside from lessening the usage…but we will never eliminate the usage of oil.
That summed it up pretty good. The oil companies are extremely motivated to refine oil out of their own wells at these higher prices, but there is little motivation to refine oil from someone else’s wells. The problem with being a publicily traded company is that your stockholders are going to be pissed if you make a huge mistake, like buying tons of crude oil at the peak of the market.
The oil companies have another strange deliema with their stockholders. They are all divded up into different divisions for the different stages of supply; exploration, refining, marketing (wholesale), and retail (for the few companies that still own stores). The problem is that their profit is constantally shifting between the different divisions. For the last few years they have been making huge profits in 1 or more of the first 3 divisions depending how fast and how much crude prices change, some quarters even make retail look good (if wholesale prices drop quickly). For the last couple quarters exploration has been huge and refining, marketing, and retail margins have been tight (because not all of the increased crude price is being passed through the refining process, and they are selling less product). So, the oil companies are all trying to get out of retail, and they are looking at cutting people from marketing; just so those divisions don’t look bad to stockholders (even if the company made a good profit).
15-20 years ago they barely made any profit from the refineries, and most of the profit came from retail. Does it really matter which part of the supply chain made the profit last quarter, if a different one will make it next quarter? The companies that are really having problems right now are the refiners like Sunoco that don’t own any wells. So, they are stuck buying all their crude at these high prices, without the offset of profiting from their own crude. I think I read that Sunoco has lost money for 2 or 3 quarters in a row.