Oil booms and busts - we never learn

[74-911]

Six months ago it was "drill baby drill".

Today local refineries are cutting back gasoline production, rigs are starting to go idle and the oil field supply firms are starting to layoff workers. If oil prices stay down for long many of the oil producing nations are going to be in for some rather serious political unrest.

Enjoy the cheap gasoline but hang on to your wallets and keep your tank full, when oil and gas start back up it will probably be with a vengeance.

[Porsche-O-Phile]

Volatility is a speculator's friend.

[artplumber]

"Cheap" gas? I suppose that if you considered the prices in '04 too cheap. then this might be a time of cheap gas. $2/gal is quite approp (maybe even too much) inflation adjusted vs 2004. The ridiculous prices of the last 2 years (at their all time highs inflation adjusted) are not what one should compare current prices against.

$.02

[Porsche-O-Phile]

My gut feeling is that oil should be about $75 a barrel right now and gasoline should be about $2.60 or so. That's just based on kinda' gut feeling though, not anything quantitative.

[Christien]

I think Jack's right. Oil is underpriced right now, though most experts agree $150 a barrel was overpriced.

Don't forget that what Americans consider expensive ($2/gal) is piss cheap to the rest of the world. Here we're paying $0.65/L x 3.8 = $2.47/gal (not incl. exchange) which is the cheapest we've seen in over a decade. Europe is even more expensive than Canada.

[Tim Polzin]

What I found interesting was the impacts of a relatively modest drop in consumption on crude oil prices. To date, oil prices seems to have generally been driven by consumption and refining capability.

Peak Oil theorists have talked about oil production peaking around year 2010 with world production beginning to drop after that. When oil production becomes less than oil demand, I wonder how high the price will go?

Tim

[sammyg2]

One lesson learned is that the big bad oil companies do not control the prices as so many have suggested.
If they did, they would not have allowed gas to get this cheap.
They have been losing money on every gallon produced lately. In So Cal that is starting to turn around because of a few breakdowns and because the BP refinery shut down it's fluid catalytic cracking unit for it's scheduled overhaul (usually about every 5 years).
Hopefully gas will climb back above $2 a gallon. If it doesn't refineries will start dieing.
Flying J filed for bankruptcy last week.
http://www.sltrib.com/ci_11288757

If many more follow, there won't be enough capacity left when the economy turns around and we'll really be in trouble.

[74-911]

Originally Posted by Porsche-O-Phile

My gut feeling is that oil should be about $75 a barrel right now and gasoline should be about $2.60 or so. That's just based on kinda' gut feeling though, not anything quantitative.

I've read that $75 - $90 per barrel is what oil needs to be to keep the industry going. As SammyG said, $40 per barrel oil will kill the oil business in this country and cause lots of problems with oil producers world-wide.

[legion]

Originally Posted by 74-911

I've read that $75 - $90 per barrel is what oil needs to be to keep the industry going. As SammyG said, $40 per barrel oil will kill the oil business in this country and cause lots of problems with oil producers world-wide.

Not that that is a bad thing. I'd love to see Russia, Iran, and Venezuela bankrupted.

[artplumber]

Originally Posted by sammyg2

One lesson learned is that the big bad oil companies do not control the prices as so many have suggested.
If they did, they would not have allowed gas to get this cheap.
They have been losing money on every gallon produced lately. In So Cal that is starting to turn around because of a few breakdowns and because the BP refinery shut down it's fluid catalytic cracking unit for it's scheduled overhaul (usually about every 5 years).
Hopefully gas will climb back above $2 a gallon. If it doesn't refineries will start dieing.
Flying J filed for bankruptcy last week.
http://www.sltrib.com/ci_11288757

If many more follow, there won't be enough capacity left when the economy turns around and we'll really be in trouble.

So how did they make money in 2004 and early 2005 at these (or less) prices?

It's nice when an industry sees not being able to produce its product as a positive since it will jack up prices.

[sammyg2]

Originally Posted by artplumber

So how did they make money in 2004 and early 2005 at these (or less) prices?

It's nice when an industry sees not being able to produce its product as a positive since it will jack up prices.

If you had any clue about what you were talking about you would not be rolling your eyes. Here's a lesson:

Refiners use a benchmark called a crack spread. Typically it's the 3-2-1- crack spread. That basically takes into account the price of crude oil and compares it to the sale price of an equal volume of finished product made up of 3 parts gasoline, two parts diesel and one part jet or fuel oil. Here's an example:
http://www.bloomberg.com/apps/cbuilder?ticker1=CRK321M1%3AIND

Typically a break even crack spread is around $7 depending on how efficient and modern a refinery is. That is how much it costs to make the fuel not counting the raw material.
That cost has risen over the years due to higher energy costs (electricity, natural gas etc) higher labor costs, higher materials costs like piping and valves etc.

In 2004 it was probably a dollar or two per barrel cheaper than it is now so the break even point was around $5 to $6 then.
If you look at that chart I provided the link for, the crack spread in the first quarter of 2004 was averaging about $7.50 which was profitable. In May it jumped up to about $12 and then settled back to $7 in September and stayed there until around march 2005. $2 per barrel gross profit is nothing to sneeze at in the refining business, that's almost 5 cents per gallon. After everything is added up, that's still probably around 2 cents per gallon net profit. Not bad at all.

See, refining works on small profit margins and large volume. But if the profit drops 10 cents per gallon, they go deep into the red. The volume starts worknig against them. they live off their cash reserves and maximize cash flow at the expense of profits, hoping they can keep their heads above water until the market turns around and they start being profitable again. That's what they are doing now.

Around May of 2005 the crack spread jumped big time and they were making good money.

Notice that the 3-2-1 crack spread is just over $5 today.
With expenses of $7 per barrel, that's a negative $1.75 per barrel or a 4 cent per gallon loss. Now if you figure that the average refinery processes about 5.2 million gallons per day, that's a net loss of $210,000 per day per refinery. Many oil companies have over a dozen refineries. Cant keep that up forever.

[kycarguy 935]

I believe the Saudi oil minister said they break even at $60.00 a barrel during an interview on 60 minutes a couple weeks ago.

Our country is investing money in all these bailouts, why couldn't we buy more oil for our nation's reserves while the price is down. Then we have some bargaining chips next time the prices go to $150.00 a barrel. Just a thought.

I'm interested to hear your thoughts why this would or wouldn't work.

[artplumber]

Originally Posted by sammyg2

If you had any clue about what you were talking about you would not be rolling your eyes.

Yes, I'm no insider to the costs of oil production.

I would remind you :http://money.cnn.com/2008/02/01/news/companies/exxon_earnings/ Exxon shatters profit records
Oil giant makes corporate history by booking $11.7 billion in quarterly profit That was in a quarter. At a loss of $210K/day it's something over 150 years before that quarterly profit would be used up

As to wage increases and pipe costs etc, somehow one wonders if finding cost improvements won't be easier, when it is harder to pass on the costs to the customer.

[DavidB911]

i guess its a good thing i didn't get the job with that oil company i interviewed with 3,4 months ago. i went to an exxon station today and 93 was $2.35, with 89 being $1.69 and 91 was $1.79. so i got in the car and went on down the road where 92 was $1.79.

[red-beard]

Originally Posted by 74-911

Six months ago it was "drill baby drill".

Today local refineries are cutting back gasoline production, rigs are starting to go idle and the oil field supply firms are starting to layoff workers. If oil prices stay down for long many of the oil producing nations are going to be in for some rather serious political unrest.

Enjoy the cheap gasoline but hang on to your wallets and keep your tank full, when oil and gas start back up it will probably be with a vengeance.

Going to be? Kuwait just cancelled a huge deal with Dow, 8 Billion dollars.

[jrdavid68]

So if one believes that Oil will most likely return to $75 - $100 per barrel, what are some ways that a small investor could profit from that? I've been searching around a bit and it seems that NOV and OIL might be a couple options. However, OIL is unsecured Exchange Traded Notes and NOV supplies equipment which could be an issue too if production and growth are put on hold.

Any advice for where a small investor (say $5000 or less) could take a chance on oil?

[competentone]

Originally Posted by jrdavid68

Any advice for where a small investor (say $5000 or less) could take a chance on oil?

USO

http://finance.yahoo.com/q?s=USO

The investment seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil. The fund is nondiversified.

[dmcummins]

I bought some USO today. Oil will now go down to $20. You can thank me later.

[azasadny]

Nobody is buying the Prius now that oil/gas prices have dropped from high levels this past summer...

[Jim Sims]

"Nobody is buying the Prius now that oil/gas prices have dropped from high levels this past summer..."

Actually, it appears few vehicles of any kind are being bought. Vehicles last much longer now and when the fashion of wanting the latest thing in styling wanes (in time of reduced consumer confidence) there is less reason to buy. Automotive manufacturing capacity was based on artificial demand, not real need. IMO demand is now at the "real need level" but will decline even further for a while as people who would normally be getting a new vehicle defer the purchase until better times by making do with what they have. Then there is also the growing deflationary expectations and the knowledge that better products may be available in the future. It will be interesting to see if the experiences of the past year in terms of fuel costs and vehicle choices and use "stick"; those experiences followed immediately by the recession may effect a more permanent change in consumer behavior.