By Bob Cordes
The Price of Oil:
We’re all aware of the huge profits oil companies are making right
now. We have no concern about their profits at any other time.
Back in the 1980s, a barrel of oil was priced at about $15 per
barrel. Some low producing wells were shut down because it cost
more to operate them than the production was worth. Oil companies
were having a hard time of it and there were many mergers.
The price for oil has
crept steeply in the past five years. About three years ago, it
entered the $70/bbl range. And now, demand throughout the world is
very high. In recent years, China and India have become large users
of crude oil. But a barrel of oil still goes to the highest bidder,
whether it comes from Mexico, Libya, Canada, or Saudi Arabia.
That’s business. About half of what our country uses comes from
about five US states and some offshore areas. But we buy lots of
oil from other countries. And there is a shortage on the
Responsibility for the price of oil is found everywhere. It’s not
only the oil companies and their expenses to produce it. It’s you
and I, and also law-makers, environmentalists, world demand for oil,
lack of alternative-fuel power plants, large amounts of capital
needed for research and development of alternative energy sources,
restrictions on coal, wasting of energy, and so forth. We’re all
responsible for it.
There is very little
conservation of energy until money gets into the equation. If it
gets to be pricey, we’re suddenly interested. We don’t want to get
rid of our gasoline-powered lawn mower. And air-conditioning and a
nice warm place are cherished by us whether shopping in a store,
driving a vehicle, or at home. And we take those trips, all of us.
It wasn’t “necessary,” yet I went to a granddaughter’s spring band
concert 125 miles away, that’s a round-trip of 250 miles. You’ve
done the same.
How They Make
Gasoline: A barrel of oil has
been standardized as containing 42 US gallons since about 1866.
(Barrels of chemicals and food have 55 US gallons.) Let’s just say
a barrel of oil sold for $104. That’s $2.50 per gallon of oil, but
it is “crude.” It won’t work in your car’s engine until it has been
“refined.” But first, it has to be transported by ship or pipeline
to a refinery.
Transportation is no
simple matter. And you would be amazed at the distance crude oil is
sent across the country enroute to a refinery. Oil from Louisiana
and Wyoming is routinely shipped to places such as Chicago and
Michigan. Transportation and refining cost money.
At the refinery, the
oil companies burn gas (not gasoline), most of it produced by them,
in large Crude Unit heaters. Those furnaces heat the crude oil to
about 650-degrees Fahrenheit as it flows through pipes subjected to
flames from the gas burners. But that furnace does not provide the
finished product. It takes more pumps, towers, catalytic reactors,
heat exchangers, etc. to come up with a finished product of a
certain octane and cleanliness.
But, oil is not
like water (where everything vaporizes to steam at 212 degrees).
Crude oil contains products of different boiling points. The refiner
can not only produce gasoline. He has lots of
by-products and needs to sell them. He therefore needs large
processing equipment and uses temperature and pressure to produce
not only gasoline, but diesel, fuel oil, asphalt, propane, butane,
the Gasoline to You: The
gasoline is stored in large refinery storage tanks of 100,000 bbl.
capacity, and more, until it can be shipped. The eventual refinery
gasoline product is in most instances pumped through pipe lines,
probably across several states (which all have their fees) to a
terminal near you. Truck drivers will fill transport trucks with
the gasoline at the terminal. Each truck has a visible "flammable"
placard with the number 1203 (gasoline) indicating hazardous
materials. The gasoline is delivered to your service station.
A 42 gallon barrel
of oil provides only about 20 gallons of gasoline. Some other
barrel products are seven gallons of diesel, three gallons of fuel
oil, and four gallons of jet fuel.
hypothetical price of $2.50 for a gallon of crude oil. Now let’s
start adding on the cost of labor, operation and maintenance of
equipment, various taxes, complying with regulations, marketing,
some profit and other expenses. And remember $2.50 per gallon was
for oil at $104 per barrel. Gasoline doesn’t come cheap and likely
never will again.
It’s Really Not a
Surprise: True, gasoline
prices are up but so are prices for groceries, medical care,
insurance, restaurant meals, and many other items. Analysts call it
“inflation,” a sharp and sudden rise in prices from a too great
expansion in credit, paper money, and other items which affect us
financially. The domino effect sets in somewhere. The increase in
gasoline prices affects the farmer using gasoline in his truck. The
farmer raises his prices, etc., etc. The domino effect.
adjusted for inflation, crude oil is at the same price it was in
1980. Gasoline prices did eventually come down when inflation was
brought down to a lower number.
Part of inflation’s
cause is the materialism of our society which is reflected in the
expansion of credit. Many of us buy whatever appeals to us and put
the cost on a credit card. That is OK if you have the financial
means to pay the card off every month and control your purchases.
But, the number of people carrying charges from month to month on
credit cards has begun to bite many of them in the rear end. Yet,
banks and businesses continue to send us pre-approved credit cards.
If you haven’t had a credit card shoved at you that way, some
merchant has probably urged you to take out a credit card when you
get to the check-out counter.
will be a long road but only consumers, and it will take
many of them, can slow down the trend of price increases.
It takes conservation of energy (eventually leading to
reduced spending) and reduced spending itself to get lower
prices. It's still up to us.
Bob Cordes has a mechanical
engineering degree and 35 years experience in the oil
industry. He and his wife, JoAnn, live in London,
At Financial Trend Forecaster we
are not registered
investment advisors and do not provide any individualized advice. Past
performance is not necessarily indicative of future performance and
future accuracy and profitable results cannot be guaranteed.
Return to Articles Home Page