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The Truth About $6 Gas, $200 Crude Oil, the Quest for Energy Independence

Commodities / Crude Oil Mar 29, 2012 - 09:00 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleJason Simpkins writes: No one needs to tell the average American about the impact of oil and gas prices. If they don't feel it in their wallets every day, they hear about it on the news every night.

But surprisingly, amid all the rhetoric, there have been no real answers to some of the key questions driving the energy debate... until now.


Is President Obama truly responsible for high gas prices, and can his opponents really bring them back down?

What role has Federal Reserve Chairman Ben Bernanke's loose monetary policy played in soaring energy costs?

Is more domestic drilling the answer?

Renowned energy expert Dr. Kent Moors answers all of these questions - and more - below.

Dr. Moors, an adviser to six of the world's top 10 oil companies and a consultant to governments around the world, also talks about the effect political turmoil in the Middle East could have on energy prices in the immediate term and how North America will gain energy independence in 15-20 years.

Here's what else Moors - a bona-fide energy expert - had to say...

Dr. Moors on Gas Prices
Can a U.S. President actually impact gas prices- at least enough to get gasoline back to $2.50 a gallon? Or is this just talk? I don't know whom to believe anymore...

Presidents have limited ability to affect the gas prices. They can, of course, release crude oil from the Strategic Petroleum Reserves and that has an impact for short-term problems (such as the heating fuel shortage in the Northeastern U.S. a few years ago).

However, that would not offset more endemic problems (such as the one we have been moving into). And frankly, gas at $2.50 a gallon is a pipe dream - unless there is a major recession or worse.

A collapse in demand is the only factor that could drive down prices that far and that is hardly the outside element we would prefer to deal with the rising prices.

How is the U.S. Federal Reserve's zero interest rate policy affecting oil and gasoline prices? What's going to happen when the Fed starts to raise rates in late 2014 and after?

This has only a very indirect effect. Increasing productivity and economic recovery generates a greater demand for energy. To the extent that the Fed policy improves employment and business investment that is the extent to which it will affect demand, and increasing demand increases energy prices.

How much of U.S. refining capacity is there available even if we do up U.S. oil production? Couldn't this be a serious bottleneck, helping to keep gas prices high?

Yes. We currently have about 8% surplus capacity, providing there are not unscheduled major interruptions in processing. One approach we will see more of is tolling. American crude, especially heavy oil and discounted grades, will be exported for refining and the oil products will then be brought back into the country.

Is there a formula that translates the price of crude (WTI and Brent) into the price of gas at the pump? And is there a profit margin component we can look at to compare the potential profit of integrated oil companies vs. refiners?

A $1.00 rise in crude price per barrel on average produces a 3.6-cent a gallon rise at the pump (for regular). The primary cost to a refiner is still the crude oil as raw material, but their primary profit comes from the refinery margin (the difference between cost of processing and wholesale price obtained).

Refinery margins are considered proprietary secrets and are not released by refineries. General levels discussed in the media are estimates (and usually not very good ones). However, those margins can be recreated, with the most detailed study done being mine. Check out my book "The Vega Factor," p.128ff and related footnotes, as well as the appendices on pages 209-303.

Dr. Moors on Oil
How much relief from high oil prices could we get by domestic drilling, fracking, building pipelines, and freeing up the permitting process, and how quickly? Wouldn't we be better off if Uncle Sam got out of the way?

The relief we'd gain from domestic resources would be limited at best. Domestic drilling will improve the national security issue, but unconventional oil and remaining traditional oil are more expensive to extract, process, and transmit. We will have sufficient volume but at a higher overall price.

How would you evaluate China's strategy of perusing the globe and doing all it can to lock up long-term energy sources?

I see it as essential for its domestic needs and further industrial expansion. The strategy of acquiring upstream assets abroad combined with expanded pipeline capacity is thus far working.

Exploitation of its own internal unconventional gas resources (shale and coal bed methane) remains a very high new priority.

Do you believe in Peak Oil? If so, how much time do we have before the "cheap oil" economy blows up?

No, not as originally formulated. With the rise of unconventional oil (shale, tight, heavy oil; bitumen, oil sands), we do not have a lack of reserves into the foreseeable future. However, we have lost light sweet crude - i.e. cheaper oil.

The "cheap oil" economy was over by 2008. The only reason we had a decline in prices between August 2008 and September 2009 was because of the subprime mortgage blowup, credit crunch and recession.

In other words, without exogenous factors depressing demand, "cheap" becomes a very relative term.

What's the geopolitical risk premium on a barrel of oil? If world peace broke out tomorrow what would the cost be?

This, of course, depends upon the current crisis du jour and the risk premium resulting. At the moment, Iran probably costs about $10 a barrel (but will be rising). Arab Spring if it flares up again will add another $10.

Here's an interesting result several weeks ago from our sessions at Windsor Castle.

The GCC (Gulf Cooperation Council - Persian Gulf minus Iran) ambassadors told us the following:

The Arab Spring has required that they dramatically increase expenditures for social programs and added expenses have been incurred via the unofficial support for various groups (such as the opposition in Syria).

The high price of crude oil assures their economies will remain undiversified - always a dangerous situation with effective unemployment reaching 40% or more in these countries and the average age below 25. The ambassadors said that to maintain the current drain on their budgets, average crude prices must exceed $85 a barrel (which they are). But that level will need to be about $120 by 2014 and more than $130 by 2016.

In other words, prices will be going up because of what the producers need, regardless of demand considerations in the consuming countries.

Dr. Moors on Natural Gas
With the glut of natural gas available, how realistic is it that we will see a large migration to natural gas powered vehicles, and how long would it take to build the infrastructure to support that? Will the Pickens Plan work?

Considerable additional demand will be coming on line for gas over the next several years:

1.significant increase in the use of gas for electricity generation;
2.continued increasing industrial use;
3.accelerated use over crude oil as feeder stock for petrochemicals;
4.dramatic additions in liquefied natural gas (LNG) exports beginning in 2014; and
5.vehicle fuel.
Now on this last one, the move takes place first in high-end truck traffic, replacing even higher priced diesel.

The retrofitting of entire fleets is taking place in Canada and to a more limited extent in the United States. Compressed natural gas (CNG) and LNG fueling terminals are already appearing, with increasing proprietary locations being established near interstate highways by companies to fuel their own vehicles.

A number of municipalities are moving buses to natural gas. New York City has passed an ordinance preventing any new taxis from being registered in the city that are not either natural gas driven or hybrids.

Passenger vehicle usage will take longer and require a more detailed infrastructure. Still, we did a study two years ago concluding that the average service station would need to spend only $84,000 to provide upwards to 20% of its fueling capacity as CNG or LNG.

The Pickens Plan is self-serving to Mr. Pickens' assets and acquisitions. It cannot provide pricing that make sense without significant government subsidies, a somewhat paradoxical position from where he started with this two years ago.

What will it take for natural gas prices to find their footing?

Three years, as the new demand segments mentioned below come on line.

How mired in politics is the Keystone Pipeline and it is a viable oil initiative for the future of America?

The Keystone XL will be built. Already, the section between Cushing, OK and the Gulf is moving forward. It does not need approval from Washington.

The addition crossing the Canadian-U.S. border does, however. The pipeline will be redirected out of the environmentally sensitive area in Nebraska (the previous route had it stretching over the primary aquifer for the Midwest).

Republicans tried to turn this into a campaign issue by forcing an Environmental Impact Assessment (EIA) in six months. But since you can't legally do it that quickly, they gave Obama a political way out.

Virtually the only U.S. oil imports in 15-20 years will be from Canada, so the pipeline is central.

Dr. Moors on Energy Independence
Is energy independence a myth or a real possibility?

It's a real possibility, achievable in 15-20 years.

First, the national security argument can be settled. At our meeting at Windsor, the international consensus was unanimous that North America will be energy independent within two decades, given the largess of unconventional oil and gas. According to the projections, by the time we reach this level, we will still need about 30% of our daily supply of oil from imports, but that will all be coming from Canada.

However, the second issue is price. A full Keystone pipeline system and related pipelines south from Canada will actually add an average of 4-8 cents a gallon at the pump. More to the point, however, the emphasis of more expensive unconventional production will actually raise the price since it is more expensive to extract, process, upgrade and deliver.

We may, therefore, finally meet our hydrocarbon needs but will find the price rising nonetheless. Alternative sources will not cut the price. And remember, the energy segment remains "driven" by the cost of vehicle fuel.

To get the full benefit of Dr. Moors' expertise, you can sign up for his free newsletter, the Oil & Energy Investor, by clicking here.

Kent also discusses energy-related investment opportunities in-depth in his ever-popular Energy Advantage newsletter.

You can learn more about his Energy Advantage newsletter and the coming oil supply constriction by clicking here.

Source :http://moneymorning.com/2012/03/29/truth-about-6-gas-200-oil-and-quest-for-energy-independence/

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