Thursday, December 11, 2014

Low Cost Gasoline Will Accelerate The Demise Of Gasoline As A Fuel -- Bloomberg -- December 11, 2014; US Refineries Boost Oil To Record As Prices Plunge

US refineries boost oil to record as oil prices plunge. Think about that. We can't export oil (some exceptions) but we can export refined products, and the US is doing that, as my dad used to say, "in spades."

This is an incredible story, and all the more significant because regular readers are well aware of this. The US is a formidable power in global energy -- and US energy includes "all of the above" -- except coal if President Obama gets his way. Bloomberg is reporting
Refiners in the U.S. used the most oil ever last week, taking advantage of crude prices tumbling to a five-year low.
Plants processed 16.6 million barrels a day of crude in the week ended Dec. 5, the most in Energy Information Administration data going back to 1989. The rise occurred as futures tumbled to the lowest in more than five years after the Organization of Petroleum Exporting Countries decided Nov. 27 to maintain output levels and as U.S. production climbed to the highest level in three decades.
The access to cheaper domestic crude and natural gas has enabled U.S. refiners to increase operating rates to above 95 percent for the first time since 2005, increasing gasoline supply and driving down prices at the pump to the lowest level in more than four years. Refineries have used more crude in each of the past six weeks as seasonal turnarounds wound down. 
The article doesn't mention, I don't think, but the refining tsunami also extends to ethylene and polyethylene.

But the Bloomberg story is a great segue to that silly story I mentioned earlier today.

That Silly Story

The Bloomberg link

This was the conclusion that Lynn Doan (San Francisco) and Dan Murtaugh (Houston) came to with regard to the drop in the price of oil:
"Consumers are doing their best to get themselves out of buying petroleum products," Verleger said. "The fall in oil prices is going to accelerate the fuel's own demise."  
Okay. Think about. These guys are arguing that as the price of gasoline, diesel, and jet fuel drop in price, we will see an acceleration in the fuel's own demise.

Oh, boy, let me count the ways. LOL.

First of all, the Bakken will be producing through at least 2100. And the Permian may be even bigger, and it will produce even longer. I don't see oil, gasoline, diesel, or jet fuel going away any time soon.

Second, did the writers even look at the government's statistics on demand for gasoline over the past few months? At that link, it's the graph at the very bottom of the page.

Third, the article is incredibly parochial, only looking at the US. The real growth in the use of transportation fuel over the next century is going to be in China and India.

Fourth, the writers, and this is perhaps the most incredible conclusion, folks will use the extra savings in their pockets due to cheaper gasoline to buy new, more fuel-efficient automobiles. And airlines wil buy more fuel-efficient jet engines to take advantage of this cheap fuel. LOL. Let me count the ways.
  • first, 12,000 miles/year x 24 mpg x $3.99/gallon = $1,995/year vs 12,000 miles/year x 24 mpg x $2.29/gallon = $1,145. Yeah, I suppose someone is going to use their $850/year or $70/month to purchase a new car. Are they kidding 
  • second, as gasoline decreases in price, people will drive more miles. So, 14,000 x 24 mpg x $2.29 = $1,335, thus narrowing the delta. And, regardless of the cost, the consumers will actually be using more gasoline.
  • third, if folks actually do go out and buy a new automobile because gasoline is less expensive, they will feel more comfortable buying a SUV at 26 mpg vs a Ford hybrid at 45 mpg
  • fourth, auto manufacturers and airlines will always work to improve their fuel efficiency, regardless of the price of fuel (but if the price of fuel was guaranteed to be low for the next 25 years, I doubt they would work as hard, unless mandated by the government)
Fifth, after three decades of federal and state governments pushing EVs with tax credits and other perks, EVs make up 1% of all auto sales, and I don't think any truck sales. And if we get to 5% -- which won't happen in my investing lifetime -- it would take more coal than we have ever used in the US to produce all that electricity, plus GE would become more valuable than Apple, Inc (market capitalization) just putting all those new transformers in every neighborhood in NYC, LA, and SF.

Yeah, it was a very, very silly article. Again, the conclusion:
"Consumers are doing their best to get themselves out of buying petroleum products," Verleger said. "The fall in oil prices is going to accelerate the fuel's own demise." 
I see absolutely no evidence of that.

Oh, most ridiculous: the writers completely forget all about all the other reasons consumers will never be able to do without oil. I think less than half of oil is refined for transportation purposes. More than half is used for other purposes: fertilizer, plastics, asphalt.

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