Aug
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Planning for Buying and Investing in Oil and Fuels
August 2, 2007 | Leave a Comment
Short term prospects for energy and fuel.
Most emails are about what can be expected for the short term about energy and fuel in their costs and what might be the investment concerns and opportunities. I’m thankful for the questions and humbled that my thoughts could be helpful.
Today, for most of us, the main budget items are going to about gasoline, diesel, and jet fuel. To keep this posting at a size that will not overwhelm the main page I’ll cover the short, or near term, meaning now to out a few months but not more than a few years.
Oil has become a much more global commodity over the past decade. By that I mean the customer base has enlarged to include hundreds of millions of people who are wealthy enough that some oil products have entered into their standard of living. A good thing, as they are also buying and selling with all the rest of us, yet the per capita increase of the new customers isn’t all that much so far. It will grow. But keep in mind that their expectations were based on the same experiences as those of us in the more developed economies, which tend for now in a high priced market to slow down the total growth, while there remains pent up demand for the future.
On any given day only so much oil gets pumped into crude storage, only so much crude gets sold and committed to refining and only so much refined product is available to sell. When watching the market there are these three points to consider along the way. They can be seen first on the crude spot market, which is used to sell excess crude or buy to fill unmet needs. The spot market also is used to establish and set contract prices where a refiner agrees or broker will agree to take so much crude and spread it around to a group of refining customers. Next is the crude inventory that is a means to identify how much oil is between the well’s storage tanks and the refinery. As this crude amount goes up and down there is a signal to the crude oil market for higher or lower prices. Last are the refined products inventory and their market prices. These are affected by refinery utilization, accidents, EPA regulations, maintenance, etc. It’s a messy market, but it works really, really well. There haven’t been any gas lines since the late 1970s.
Right now we’re in a plateau of pricing. We customers have yet to fully digest the last run up in prices into our economy so the growth has slowed for now. Growth is also mitigated by ethanol, hybrid cars, parking the SUV or pickup truck, and other ways people adopt to keep the costs in check. On the other side OPEC, the “Organization of Petroleum Exporting Countries” is back in the drivers seat for the peak pumping capacity each day. And they have “invited” Russia and other non-members to “observe” which allows them to meet together and set quotas that keep the daily pumped oil to the minimum. It looks like it’s going their way for now and for a long while to come. Backing that up is the endless civil strife in Nigeria that keeps oil production suppressed, the dictatorship of “socialism” on the Cuban model killing the democracy in Venezuela, and the “managed” democracy of Russia disappearing with government control of that country’s petroleum assets. Even Mexico has problems with antiquated laws that govern its government “oil company” in a way that it can’t replace oil production even when they know where to get it. Added together these problems hold back any real growth in crude supply.
OPEC and the other government “oil companies” control about 77% of the daily production worldwide. It’s little better where real oil companies are at work. In Europe the North Sea oil field is looking to be more towards it end. Much of America’s production is in decline and politics, special interests, and tax issues slow and usually stops the development of new supplies. To read the media reports it would all be to the blame of the oil companies, but its just not factual and misses the necessary point. There needs to be a “cushion” of pumpable oil to mitigate the inevitable problems of pumping oil. We’re on a knife’s edge of pumped oil and refined products right now, so any disruption has dramatic and immediate effects.
As a consumer the future holds a likely ever-increasing cost for transportation fuels. There is a bona fide nut running Venezuela, the “government” of Russia will continue to swipe the national assets of the country for their private use, OPEC is 35 years old and shows no sign of disappearing. Better to strive for an average unit cost for fuel by consistent buying and trying to use the “inventory in your tank” as a buffer to navigate to a lower average cost. Or fill on a down price and wait as best you can during a price rise.
What can we expect in the near term? Oil shale and oil tar sands in the US, Canada and Venezuela are in development now. The oil will be coming on line from Canada over the next few years. US oil shale is embattled by economics, environmentalists, and technological challenges as its much more costly for the processing needed to get it to market. Venezuela can’t get contracts filled to simply drill oil wells as the nut has expropriated billions of dollars worth of oil production and oil tar investment from companies all over the world, thus that oil is just out of reach until he’s gone. As for OPEC growth, remember these are “governments” running “oil companies.” Or people like people everywhere who will try to do the minimum to get the maximum, which turns out to be the minimum investment, maintenance and production to get the most money. That works great when the market is on a knife’s edge.
How do we get off the knife’s edge? Right now its conservation, using Jim Chiodo’s suggestions, choosing to buy a high mileage car, not admiring the big SUV or pickup, and being well, conscious of what is going on.
Over time we will get off the edge. These high prices promote competitive investments into other ways to energize our economy and standard of living. America’s ethanol adventure does move the needed fuel in part from an oil import, to a substituted use of American natural gas. That seemingly small thing of 5% of the US gasoline market is no small thing because it about equals 1% of world production, which when on a knife’s edge feels a lot better.
Four more percent would really push back oil prices. It’s how to get it that matters because there are serious interests opposed to your personal, family or business budget. Fuel gets used everyday and needs replenished everyday. The people who can afford oil in their standard of living have a fight with special interests that believe oil use is a global “problem” which in the long term is most likely a hugely expensive waste of time and resources. Oil’s peak as an economic foundation is slowly eroding away anyway, and nothing anyone does will stop it.
But that is a topic for another day. For now, please try to buy fuel on a lowering price, and wait a bit on a rising price. If investing short-term ethanol is ramping up, but remember, it’s a short-term device, not a long-term solution. Oil companies are making money now but can we expect them to find opportunities in alternative ways to fuel our cars, trucks, trains and planes? That’s the key question about an “energy company” you investigate as an investment. Stay tuned! More to come.
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