The Real Cost of the Louisiana Oil Slick

The real cost will be in terms of "second thoughts"....

Say you are planning a project. It's risky enough, leasing one of these giant platforms, it costs you hundreds of thousands per day. You drill a hole in deep water, as much as 10,000 feet, and then downward into the geology from that. Costs money. You might or might not get as much product out of it as you originally planned.

The calculation you do is pretty simple: Cost of drilling versus expected payback, given the price you think you can get some years in the future for the crude oil, and the amount of crude oil is only an estimate.

Now, add to this calculation the possibility that you are found responsible for the biggest oil slick since the Exxon Valdez. Cleanup, fines, lawsuits.... It took Exxon a decade or more of legal fees to fight the fines they had for defiling Prince William Sound.

The boss might be a geologist, but the bean counters that are advising him are saying: "this business is stupidly risky. Let's just drill the least risky projects we have and leave this to Exxon"....

A further point: At this point, are you going to drill offshore South Beach in Florida? What about off the Florida Gulf Coast where all of the millionaire mansions are? Cape Cod? This did more to kill off "drill baby drill" than a years' worth of protests. The images in the next few weeks will start to come in: Oily water birds, dead alligators along all of that swampland, all of those docked shrimp boats..... it is going to be worse than Katrina for some of these communities.

Do you know what will turn a Republican into a Democrat? A big oil slick washing up in front of his beach house.

So the real cost will be: Second thoughts. People will rethink the projects they have and discount them based on the risk. People will see the extent of the catastrophe and rethink the wisdom of some of these other drilling projects.

What won't get rethought, for awhile yet, is the idea that we are dependent on this toxic mess for the lifeblood of our economy and our society. That's the real root cause. Maybe that is around the corner... if the Peak Oilers are right.

Spring Refinery Utilization and Import Model

I am in a graphing mood this morning. Note the above graph of unleaded products supplied, a.k.a "unleaded demand" for the last few years. The pattern was pretty consistent from 2005-2008 but in 2009 something really interesting happened: Everyone went out of town for Easter (April 15) and Memorial day, but aside from that, they parked the Family Truckster and stayed home.

You can see a really similar blip happening this year, since Easter was April 5th, it's offset by a couple of weeks, but we can sort of envision demand being more like last year than the previous two years. I am thinking unleaded products supplied will be about 9 this week, and eventually, in some trajectory, end up somewhere between 9.2 and 9.3 by the 4th of July. Maybe there will be a blip for Memorial Day like there was last year, with less traffic the weeks before and after....In another week or two we will have a lot better idea.

So to meet this demand, the refiners are going to scale up, because that is what they do, and people do what they do. They could probably satisfy any additional demand without running the refineries by increasing the imports around May 1, and that is indeed a possibility, but it seems pretty likely, based on our little observation, that the refinery utilization will be pretty close to what it was last year. The scale-up period this year happened a bit different than in 2008-2009, but I do not think they will be crazy enough to run at the same rate as the pre-Recession level.

So, if we make the educated guess that they are going to scale up from where they are now, which is 85.9% utilization to around 89, being a little generous because of the slightly higher demand this year, and this will happen in some sort of nearly linear trajectory, there will have to be some level of crude oil imports to support the increase. At the level of 9.3 mbpd, you can see that the overall crude oil inventory will decrease, at 9.8 a bit of a decrease, and at 10.3 a pretty substantial increase, assuming 5.4 mbpd domestic production, and inputs to refineries in about the same ratio as it is right now.

So, based on what we see here, what do you think imports will be over the next few weeks? Well, I think our friend the refinery manager went into the cubicle of his crude oil buyer sometime in the last month, and said the following: "I want you to order enough crude oil every month to keep our tank full. The reason for this is that the contango situation is telling us that crude oil will be more expensive in 2011 than it is in 2010. The way to minimize your cost over the next year is keep crude oil in storage. Here is our scale-up schedule. Make it happen. If the tank is not full, I want you to order a little extra every month and we will worry about finding a place for it later.".....

So, the third graph is three inventory scenarios, using different levels of crude oil imports, given the above assumptions about demand, refinery utilization, and inventory strategy....I did do the "goal seek" on this to determine that an import rate of 9.96 mbpd will be needed to keep the inventory of crude oil stable between now and the beginning of July, and I think that is exactly what is going to happen,

So, based on this, you turn the crank and get the forecast that we have posted in

http://usoilinventories.com/forecasts/default.html

The unleaded and distilate products supplied are running just about what our original model said, maybe a bit of fudging for Easter, but pretty close. The refiners are going to increase by about 0.3% per week, to get to 89% by July. Domestic production will be down a bit because of the platform disaster still unfolding out in the Gulf. Imports will have to increase to 10.0 at some point to keep the inventory stable, and I am guessing that this will happen sooner rather than later. We will continue to tilt the finished product ratio toward unleaded and away from distillates, because there are too many distillates around, with demand the way it is..... and summer around the corner.

So, I am seeing builds in all three of the categories this week. The post-Easter demand blip will hit unleaded and we will see a little build in that, and the rest is self-explanatory.

We science guys think like this. We can be like the meteorologists and come up with a theory about what is going to happen, and test it out by observation over the next couple of months. It will be interesting to see what happens.

Here is the validation of the demand model that we produced in early March. The unleaded demand is consistently running slightly over the model, and the distillate demand, with the exception of the week-to-week variability that we noticed in this data because of the variability in weather that causes some fluctuation in the five year averages, is pretty close to on-track.

Since these two models were developed based strictly on the seasonality, I think we can deduce from this that the demand for unleaded is actually about 91 tbpd greater than the seasonality suggests, so maybe the economy is a little stronger than we suspect. I have also adjusted my distillate model to smooth out some of the variability and assume that the demand will decrease roughly linearly between now and June....

So I agree with Geithner, that the economy is improving a little bit, but the depression conditions in the trucking industry are still continuing..... as evidenced by weak distillates demand.

Oil Price Back Over 87

So many questions:

If you are China and see Bernanke and Geithner pouring a trillion dollars into the economy based on nothing but the faith in the US government, do you not want to get out of dollars and into something that has some value?
http://news.yahoo.com/s/ap/20100409/ap_on_bi_ge/oil_prices#mwpphu-container

Oil prices rose above $86 a barrel Friday on a weaker dollar and after robust U.S. retail sales in March pointed to growing consumer demand in the world's biggest energy market.

By early afternoon in Europe, benchmark crude for May delivery was up 84 cents to $86.23 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 49 cents to settle at $85.39 on Thursday.

If you are OPEC, and you know that it is likely that your kids will be riding camels in a few years because you cannot pump any more oil, would you not want to control the rate of your pumping so that you can have some kind of a future?

If you are the US oil industry, that literally collapsed 18 months ago, putting a screeching halt to exploration activities and refiner modernization, do you not need the higher prices so that you can reinvest in your capital intense, risky business?

Why are the same people that whine about government intervention into the medical system also the ones complaining about the price of oil, which is as close to an open market as we now have? Given the system we now have, it's a market, not an entitlement. If you want it more than the Chinese millionaires, you're going to have to pay for it, as long as we have something that approaches a capitalistic system.

Tesoro Refinery Fire

HOUSTON (Reuters) – A deadly Friday fire at Tesoro Corp's Anacortes, Washington, refinery was due to a catastrophic failure of a heat exchanger, sources familiar with the investigation said on Monday.

The heat exchanger that failed was in operation and was not the exchanger seven workers were working on when they were caught in the near instantaneous eruption of the blaze, the sources said.

A Tesoro spokesman said it was too early to determine causes of the fire.

http://news.yahoo.com/s/nm/20100405/us_nm/us_refinery_fire_tesoro_anacortes_1

For those who have never been around them, these refineries are controlled explosions anyway. They need to be shut down periodically and rebuilt to keep them from blowing up.

The current depression conditions in the refining industry, driven by low margins and the collapse of the jet fuel and diesel markets are forcing some of these companies to defer this stuff up until the absolute last minute. I do not happen to believe that these people would deliberately endanger the lives of themselves and their employees, but if the survival of the company is at stake, which in the case of Valero and Tesoro might be true, there is a terrible decision to have to make. Is it immoral? Of course it is. It's taking a known risk that one of these explosions will happen. Is it done anyway? Of course it is.

If you do not want these situations to happen, then re-regulate this industry. Require the companies to adhere to maintenance standards, and enforce a fixed refining margin to assure them of a reasonable rate of return so there is a safe, stable refinery system with much reduced risk of failure and so that the nation has a secure energy supply. Yes, that means you will have to pay more for gasoline, and the government will be inspecting every nook and cranny of these places. Is that what you want? It's socialism, of course, and I am sure that 90% of the readers of this would have no stomach for it.

So the situation is going to continue