Sammy Reiser fills his vehicle up with gas in a county where some grades of gasoline have already surpassed the $4 mark on February 21, 2012 in Miami, Florida. Fears of $5 per gallon gasoline are being heard as summer approaches and some feel that would hurt the economy just as an economic recovery appears to be getting traction.
The oil business is generally seen as monolithic by consumers, but parts of the industry can suffer even as rising prices boost results in other sectors.
These days, it is hard work owning a refinery. Despite heroic increases in capacity utilization in recent years reflecting a constant efficiency drive, demand for refined products has declined or failed to grow in most cases as economic recession has continued to weigh on the US.
At the same time, international oil markets have rebounded significantly since a short-lived, recession-sparked decline in 2008 and have climbed sharply in recent weeks as traders ponder the outcome of a potentially long-lasting or unpredictable cutoff of Iranian crude oil exports. Forecasters disagree on the degree to which prices could rise, and climbing US shale oil production has underpinned a slight decline in US oil dependence on foreign markets, but there is little question that a sustained crisis in Iran would feed into increased oil prices and shocks for the US economy.
The compressing returns for the “midstream” part of the oil business – the refiners – is part of why regional refineries are starting to close despite slowly rising prices for their end products, including gasoline.
“By far, the single biggest factor in today’s higher gasoline prices is the rising cost of crude oil,” American Petroleum Institute Chief Economist John Felmy said during a call with reporters on February 22. “It has driven virtually all the rise in gasoline prices.”
Roughly 84% of what end consumers are paying at the pump for gasoline is attributable to current world oil prices and taxes, Felmy said. He answered criticisms that US refiners were shipping to export markets and thereby limiting supply availability in the US by dividing up the product slate, or types of products that refineries produce. Of those, while diesel and some reformulated gasoline exports have risen, less than one-sixth of exported refined products have been gasoline, Felmy said.
“Exports are not causing gasoline prices to rise,” Felmy said, adding that high prices provide further motivation for approval of the troubled Keystone XL pipeline project (read more about Keystone’s tortured permitting journey here) and for expanded access to US domestic reserves.
Alternative fuels have become part of the scene, Felmy said, although actual usage remains comparatively small. Only 3% of the transport sector is fueled by compressed natural gas, although efforts to expand that number are growing significantly on the supply side of the market.
Read more about a partnership between Chesapeake Energy and technology firm 3M to develop compressed natural gas fueling stations and boost demand here. Read about a new transportation corridor in the Western US that now offers natural gas as an alternative fuel here.
Options Abound, But Choices Remain Hard
Natural gas prices are at decade lows as production has soared on the back of widespread drilling of shale gas while consumption has stagnated due to mild winter weather and sluggish economic conditions, prompting US producers to cut back their exposure to dry natural gas and attempt to boost oil and other liquid product slates.
The US is also facing down the potential of an enormous amount of advanced biofuel for transport use hitting markets in the next few years. Federal mandates for advanced biofuel, including cellulosic ethanol, have prompted significant investment in new production capacity and efforts by the industry to defend their technology. The degree to which biofuels can limit the exposure of US transportation costs to international oil markets remains extremely opaque, but sustained high gasoline prices would prompt renewed interest in the alternatives.
Meanwhile, electric vehicles that could be fueled by any number of generation types, ranging from widely available natural gas to increasingly popular wind and solar additions, remain a controversial but potentially important way for US consumers to avoid the impact of higher oil prices.
Electric cars could be the biggest thing to happen to the energy business “since air conditioning,” NRG Energy CEO David Crane told Breaking Energy.
“Green consumer products are overwhelmingly typecast as being too expensive, too limited and boring,” Crane said. “EVs have the ability to change that because they’re fun, they’re exciting. Their sticker price might be more expensive but when gas is $4-$5 a gallon, the operating costs are so dramatically lower that it’s an appealing package.”