Friday, June 06, 2008

The Sky is Falling

Acrtic National Wildlife Refuge

“. . . this last American living wilderness must remain sacrosanct.”

Justice William O. Douglas

The price of oil appears to have no bounds, apparently on the specter of rising demand and thinning reserves. Rising fuel prices has the U.S. equity markets running scared. It is always important to get perspective when it appears the sky is falling.

Most Americans already know the gas and oil math - where it comes from, where it goes. The U.S. burns up about 20.7 million barrels of oil per day. In a bit of magic only the oil and gas industry could conjure up, U.S. refiners managed to produce 44.64 gallons of refined products for every 42 gallons of crude oil input. It is called “refinery gain” and has averaged about 6% over the last decade.

In the U.S. a decline in consumption by 190,000 barrels per day is expected in 2008. Increased use of ethanol should lead to a reduction of another 140,000 barrels per day. Anyone thinking this represents the beginning of a new positive trend should temper their enthusiasm. Analysts at the U.S. Energy Information Administration estimate consumption will increase by 210,000 barrels per day in 2009.

Motor gasoline tops the list of oil products - 47% of U.S. production. Heating and diesel fuel runs a distant second with 22% of production. Third place goes to jet fuel at 8% of production. All the rest, asphalt and road oil, petrochemicals, and propane among other uses, together account for 23% of production.

As motorists stand at the pumps this summer, staring at record gas prices, it is OPEC that is the object of their wrath. U.S. refiners import about 47% of crude oil inputs from OPEC member countries. On a country basis Saudi Arabia is the most significant OPEC member, supplying 14% of U.S. oil demand. Maybe we should be complaining to the neighbors instead. The Canadians and Mexicans supply 18% and 16% of U.S. demand, respectively.

Indeed, the major driver behind higher gas prices is not in the U.S. It is in developing countries. Americans have cut back on consumption so-far in 2008, but worldwide consumption is expected to grow by 1.2 million barrels in 2008. Most of the growth is expected in China, Russia, Brazil, India and yes, the Middle East oil producing countries.

If demand exceeds supply, the solution seems like a no-brainer. Drill for and refine more oil! Unfortunately, augmentation of supplies takes time, money and resolve. The U.S. Congress has consistently voted down plans to drill for oil in sensitive habitats like Gulf of Mexico, Alaska and national park areas on the mainland. Apparently, politicians bought the argument that temporary relief in oil prices with small increments of supply was not sufficient to justify the long-term loss of irreplaceable wildlife habitat. For example, oil supply from the Arctic National Wildlife Refuge would add about 875,000 barrels per day to U.S. supplies for about ten to twelve years. Enough to soak up some of the increases in U.S. demand but not enough to meaningfully impact global oil prices given the rates of increase in world consumption.

Since adequate supply appears to be such a difficult nut to crack, it seems more intelligent to address the imbalance from the demand side. After all, demand is an element over which we should considerable control - at least theoretically. In the next few posts we look at a few small cap companies that offer products and technologies could impact the demand side of the oil dilemma. We will look at how good an umbrella these companies offer to an economy on which “the sky is falling.”

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