Saudi Crude Oil Production -- Summer -- Part 2 -- June 30, 2018

Updates

July 2, 2018: let's see what Ms Tsvetana has to say -- I suggested ($107 - $90 = $17/month or $204 -- see below; Ms Tsvetana says $440:

• the increased pump prices are now eating into the disposable income of the average American household that will have a total of $440 less to spend this year on other goods and services because this money is expected to go for buying higher-priced gasoline.
• $440 / 365 = $1.21 / day or plastic bottle of water from local 7/11 per day
• that $440? from Bloomberg; enough to derail the economy; maybe

My hunch: separating children from their parents is a more consequential story for most Americans, regardless of whether it's true.

Original Post 

Yesterday I mentioned that we were going to start seeing a lot of stories on increased crude oil production by Saudi Arabia. In anticipation of that, I posted part 1 of a 2-part series on this subject. This is part 2.

I'm not in the mood to blog quite yet, so I'm going to cut to the chase -- post a few data points/observations and then a few links, and then move on.

Observations / data points:

• there's a huge difference between production and exports
• right now, both President Trump and Saudi Arabia are talking about production, not exports
• US refiners are operating flat out, as fast as they can, operating at 97%+ capacity
• there's already a 65-day global supply of crude oil; compare to about 23 days for the US; how much more oil does the world need
• right now there are four BP supertankers floating off the shore of China; oilprice opines that China teapots are unable to come up with the cash for these 8 million bbls of oil
• many years ago, on the blog, I clearly stated that I doubted the Saudis could significantly increase crude oil exports
• Saudi always increases production in the summer: they use crude oil to generate electricity for air conditioning and the hottest Arabian days are yet to come; see this post from June, 2015; 
• we're not quite there yet, but since 2015, there has been a huge course correction in Saudi's strategic plan; Prince Salman will increase domestic consumption by huge amounts for new petrochemical operations and refineries -- see the Prince Salman plan linked at the sidebar at the right;
• the Saudi Aramco IPO continues to be delayed, probably for any number of reasons, not least of which Prince Salman said he needed $100-oil to launch that IPO; that was two years ago; we're still nowhere close to $100-oil, though we are moving in that direction
• Saudi Arabia got burned the last time around (2015 - 2017); a trillion-dollar mistake when they flooded the global markets hoping to crush US shale operators; it's hard for me to believe that Saudi will take that chance again (by the way, I don't hear anyone talking about the good old days -- 2015 - 2017 -- when gasoline was cheap because Saudi flooded the markets; I'm not sure gasoline went below $2.00/gallon then, and in my area of the country, one can easily buy gasoline for about $2.58/gallon; in my immediate, relatively high cost neighborhood, $2.85/gallon

Now for some links.

Production: another great example. The writer talks about production but actually addresses the issue of domestic consumption. The writer does not address how domestic consumption will change under Prince Salman.

Although Saudi production typically rises in the summer due to higher domestic crude oil demand for power plants, OPEC’s leader has also been boosting exports this month, according to the Reuters survey. Saudi Arabia’s crude oil exports rose to around 8 million bpd in June, according to a Reuters industry source. This export volume compares to 7.3 million bpd for April, the latest month for which official figures are available.

Lost in translation: all we know for sure is that President Trump called Prince Salman, and that Prince Salman took the call. Trump's version: we have a commitment from Saudi Arabia that they will increase production by 2 million bbls of oil/day. Saudi's version: we will do what we can to meet global demand, and oh, by the way, our same story that hasn't changed for years: we have spare capacity of 2 million bopd; Reuters has their take on the story.

Spare capacity or BS? Reuters has this story also.

Either way, the kingdom, OPEC’s biggest member, can barely raise output by 1 million bpd to 11 million bpd and even that would be difficult, according to industry analysts who forecast a further oil price rally due to a lack of new supply. 

Reuters then has quotes from a seemingly endless number of analysts who suggest Saudi will have trouble coming close to any significant sustained increase in production, and it won't happen overnight.

Black swan? One successful missile launch from Yemen on any part of the Saudi crude oil supply chain will change things overnight.


Price of gasoline: President Trump says gasoline prices are too high.

EIA gasoline and diesel prices, historical

From statista.com, not inflation-adjusted:

Inflation-adjusted (to 2015 dollars); from energy.gov, but only through 2015:

Historical fuel economy, from Pew Trusts:

1974: 14 miles per gallon (egads!)
2004: 29 miles per gallon (twice that of 1974)
2011: 34 miles per gallon

That is an average. Amazing. For those most price sensitive, they can find automobiles with better mpg ratings; for those not price sensitive, the current price of gasoline is not high on their list of concerns.

1974:

• 10,000 miles per year; 14 miles per gallon; 715 gallons of gasoline at $1.50/gallon = $90/month

2004 (and 2015):

• 15,000 miles per year; 29 miles per gallon; 517 gallons of gasoline at $2.50/gallon = $107/month

other:

• typical cable TV - internet bundle monthly charge: $110 / month
• typical cell phone costs for family of three: $150 / month
• Starbucks coffee, $4.00 / day x 20 days = $80 / month

Monthly pass for mass transportation in Boston:

So, for about $100/month, I can pretty much drive anywhere I want, whenever I want (this is just gasoline costs; does not cover maintenance and insurance; or cost of vehicle) or I can take mass transportation (if if even exists in my area) for prices that are likely to be in the same range as above.

Wow, I have gotten far afield.

Back to the original subject: whether Saudi Arabia can follow through on increased production; whether increased production will lead to increased exports; whether increased exports will include the US; whether this can all happen before the driving season is over; whether US refineries operating at 97%+ capacity can absorb much more oil -- we will know Monday when "speculators" start trading oil again.