gasoline prices hit all-time highs in
march 2022. in some places such as in
california drivers were paying more than
six dollars at the pump
diesel which fuels the freight industry
also hit an all-time high jet fuel has
also risen to startling highs affecting
the prices of airline tickets and air
freight
oil soared in late february after russia
invaded ukraine oil markets were already
dealing with low inventories and rising
demand as the world slowly emerged from
the coronavirus pandemic we've never
seen prices increase this quickly
we set a new record for the biggest jump
in one week russia is the world's third
largest producer of oil plus it is part
of the influential energy alliance known
as opec plus that includes many of the
world's biggest producers but the us
barely imports any oil from russia the
united states goes through almost 20
million barrels of oil per day the us
does import some petroleum products but
only about 8 of those come from russia
even so the u.s government banned all
imports of russian oil and petroleum
products in early march
and the us is the largest oil producer
in the world so why were fuel prices in
america pushed upward by events on the
other side of the planet the reality of
the situation is that
you've got a global market of supply and
demand
that is very very tight so any sort of
uncertainty about supply to the global
market sends the market into a dizzy and
that's what we're seeing
in 2021 the u.s produced an average of
about 11 million barrels of crude oil
per day
so can domestic oil producers like exxon
mobil and chevron just pump more oil
an oil well is by far most productive
right after it is drilled soon after
that the pressure forcing oil out of the
well drops considerably and the oil flow
slows to a trickle so the only way to
significantly boost production is to
drill new wells drawing oil out of
existing wells isn't efficient enough to
make up for the shortfall and there are
not many wells that haven't already been
tapped anyway
nothing happens overnight and it's a
slow process to go find the oil
go do the exploration
drill the valves and then produce so
nothing happens in a period of less than
60 days 60 to 90 days is the shortest
that you can think of but that is pretty
optimistic the last several years have
presented the industry with some serious
challenges the global pandemic and the
boom and bust cycles of the last decade
or so have pushed a lot of people out of
the industry there isn't very well
qualified personnel available many of
them have left the industry because the
pandemic and sort of the last seven
years have been really really hard on
the industry the troubles have also left
investors wary of making big capital
expenditures
nobody wants to give you money to
explore drill and produce oil because
the risk associated with it is too high
because of all the climate risks
associated with oil and gas there's been
a very strong pushback on the oil and
gas industry as not being a very safe
place to put money
the last couple of years have pushed oil
companies to shift strategies after the
pandemic they saw a fundamental shift in
their business models they are now
focused on paying down debt limiting
capital expenditures paying back
investors through dividends and buybacks
and basically not growing production
they've said that they're gonna grow
between zero and five percent so
essentially keeping it flat and
basically they were burned for a long
time by lower oil prices and the more
they pumped the lower oil prices
actually went and then the pandemic
served as this reset for them and they
don't want to return to that there are
also some concerns that investments made
now won't pay off there is a long lag
time between when you decide to pump
more and when that well is up and
running that can be between six and nine
months so even though prices are really
high right now producers are saying
we're not sure that's going to be the
case you know six months or a year from
now so we don't want to start producing
right now and then run the risk of when
our oil hits the market the russian
invasion of ukraine will be past news
and prices will be back down that does
not benefit them so they don't want to
open the taps foreign producers have
also been pulling back most notably the
opec plus alliance which of course
counts russia among its members
those countries lowered output after
they were burned by cratering demand in
2020 that sent oil prices into negative
territory for the first time in history
last thing they want to do
is put out more oil than the market can
handle and they've probably been too
disciplined
up until the beginning of this year
now we'll see what happens
petroleum is thought of as a commodity
but there is actually a great deal of
variation in the product depending on
where it comes from crude oil is kind of
like cabernet there's about
125 different varieties of it two
varieties serve as benchmarks for oil
prices
brent crude comes from oil fields in the
north sea of northwest europe between
the uk and norway it is the
international standard wti or west texas
intermediate comes mostly from oil
fields in the permian basin and is
priced in cushing oklahoma
it serves as a benchmark for other
crudes from the u.s and elsewhere in
north and south america wti and brent
crude typically trade within a few
dollars of each other per barrel both of
them soared above 130 dollars a barrel
when oil prices hit their peak after the
invasion
both wti and brent are light sweet
croods a light crude means the oil is
less viscous it flows at a faster rate
if a crude is called sweet the oil
contains lower levels of sulfur because
of this it is relatively cheap and easy
to refine into high-value products like
gasoline and diesel fuel
but there are many other crudes such as
the heavy sour crude that tends to come
from russia there is also venezuelan
heavy crude and so on these tend to
trade at a steep discount to brent and
wti they are generally cheaper because
their heavier grade and higher sulfur
content makes them more difficult and
expensive to refine
however a refinery can be designed to
process these heavier forms of crude oil
rather efficiently
jet fuel is heavier and generally higher
value than diesel and diesel is heavier
in higher value than gasoline
furthermore many u.s refineries
particularly along the gulf coast are
designed to run most efficiently
processing a heavier form of crude oil
not the lighter crudes the us has mostly
been producing that is largely because
most u.s fuel refineries are pretty old
and were built before the u.s started
pumping large amounts of light crude the
expectation was we would get into
producing heavier crudes heavier sour
crudes would be the norm until we hit
the shell revolution and the shale
revolution essentially suddenly said
that's not necessarily going to be the
place where we will see growth in fact
we will see growth with natural gas
liquids and the lighter sweet fruits
that come out of the or the shale place
because u.s refineries were designed and
built before the u.s oil boom some
amount of heavy sour crude has to be
imported from places like russia to run
u.s refineries most efficiently it will
likely be that way for a while the
united states has not built any new true
crude oil refineries of significant size
since 1977. the united states also
imports some refined petroleum products
such as gasoline from other countries
including russia that is often because
certain regions of the country don't
always have the refinery capacity to
meet local demand that can happen if say
a refinery shuts down due to a fire or a
natural disaster in cases like that
domestic producers might not be able to
pipe oil or gasoline from one region to
another there's also of course the jones
act which requires that any products
going between us ports be on a u.s flag
and built ship so that also limits how
much crude can be exported from the gulf
coast that often makes it more expensive
than simply shipping the oil from
another country
so it's a it's a complicated market
right
politicians have for years said the
country's oil output would push it
toward energy independence
but energy independence doesn't really
mean what it might sound like
but you still need some of the
feedstocks that make money or some of
the high octane components that you
import so we're always going to be
importing at importing and exporting but
i think the balance of trade is going to
work in our favor
particularly with crude oil so the u.s
is a net exporter of energy but the u.s
is still part of a global energy market
just like every other major oil producer
oil's a global commodity we can't fence
the us or take us out of that global
system just like we're seeing
computer chip shortages but we can't
remove ourselves from that situation
either even if we produce computer chips
here doesn't fix what's going on outside
our borders with drastic impacts to
supply and demand and so the price of
oil is affected events in just about any
oil producing country can and do shock
the global system saudi arabia back in
2019 saw a terrorist attack that knocked
out six million barrels of oil gas
prices surged now we're seeing russia
attack the west and sanctions which are
imperiling the flow of oil are causing
prices to skyrocket and we've seen
hurricanes here in the u.s that have
caused oil prices to jump on the fact
that the
hurricane has shut down oil production
in 1973 and 1974 the then members of the
organization of petroleum exporting
countries known as opec placed oil
embargoes on the united states in
retaliation for its support of israel in
the arab israeli war the u.s suffered
shortages of gasoline severe enough to
warrant the creation of the strategic
petroleum reserve that's a cluster of
storage facilities in underground salt
caverns along the gulf coast the spr is
authorized to hold up to about 700
million barrels of oil it amounts to
about a 30-day supply for the entire
country since oil prices started to rise
that's led to an increase in gas prices
and that is a headache for any official
and biden has said repeatedly that his
administration is working to bring
prices down so one of the tools at their
disposal is tapping the strategic
petroleum reserve the government tapped
the reserve to address rising prices
back in november 2021. 50 million
barrels of crude from the strategic
petroleum reserve and it had a kind of
short-term effect but it didn't really
do much in the long run
president biden committed to releasing
90 million barrels in 2022 to offset
potential market shocks
on march 16th president biden called on
oil and gas companies to roll back
prices gasoline prices tend not to fall
as quickly as oil prices in part because
retailers are trying to recoup losses
they suffer when prices rise the winners
have been the exploration of production
companies even with the setbacks
recently
the break-even price recruits about 25
barrels so everybody can do the math the
losers were probably the retailers and
there's 140 000 of them they get blamed
for the prices above four dollars but
the reality is they make a lot more
money when wholesale prices collapse or
crude oil prices collapse
and they really suffer on the way up
higher prices carry risks for oil
producers as well there's a point at
which oil simply becomes too high when
we see oil at 1 30 not only does the
administration then ask drillers you
know why aren't you drilling but it also
runs the risk of tipping us into a
recession and a recession is not good
for anyone because that means a global
growth slowdown which will of course
weigh on oil demand sooner or later
higher prices tend to motivate
competition which in turn tends to push
prices down but this situation brings
many questions obviously putin's done a
lot of damage to the russian economy and
even if even if he did sign a peace
treaty tomorrow there's a lot of
reluctance on the side of americans to
maybe get involved with putin and russia
again and that's going to have a
profound long-lasting impact
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