Tuesday, May 03, 2005

Gasoline Prices? Blame the logistics...

During his April 28 press conference, President Bush spoke on the current high gasoline prices and their impact on the economy. Afterwards, of course, the "talking heads" spoke about how the President's honest answer (in essence "Can't do much about it in the short term...") will be unsatisfactory to the public as a whole.

Even with increased production there are still problems with the logistics train that will not help with prices, especially a shortage of tankers to transport the world's oil>. The headline reads, "Tanker shortage, profits up" here:
To supply all of the world’s crude-oil needs today, there are only about 3,500 tankers steaming out on the open seas or anchored at ports. Demand for their services far exceeds this supply, and, as a result, tanker rates have soared in the past year much faster than the price of crude oil itself. According to a report by McQuilling Services, an ocean-transport consultant, the world will be 26% short of big oil tankers, known as “very large crude carriers,” or VLCCs, through the end of this year. (A VLCC is a crude-oil tanker of at least 200,000 tons deadweight. It is big, larger than an aircraft carrier.) When you consider not just the number of tankers afloat but also the extent to which they are actually available due to port congestion, the supertanker industry appears even more tonnage deficient, according to a Bloomberg report on the McQuilling finding.

As a result of the shortage, the oil-shipping business has been exceedingly profitable. Rates on the big bruisers that haul 2 million barrels of oil from the Persian Gulf to Japan hit as much as $250,000 per day last fall and are not too far off that pace today. That's a rate said to be 10 times the break-even point for tanker owners.

Even as crude oil prices appear to have topped this month, it’s important to realize that these high rates are being locked in for half a decade. A great many tankers are owned by the big oil companies like Saudi Aramco and ConocoPhillips (COP, news, msgs). Increasingly, however, more are leased on one- to five-year charters or picked up on the spot market for one-way or round-trip runs. That gets a big capital expense off the oil companies’ books, not to mention liability in the event of a spill. The folks behind the leasing are typically powerful private trading firms like Glencore International of Switzerland or Vitol of the Netherlands -- which might each have 175 ships under lease at any given time -- or major oil companies like Exxon Mobil (XOM, news, msgs) or ChevronTexaco (CVX, news, msgs)...They earn that much cash because there just aren’t enough boats to meet the requirements of the world’s energy needs even though new tankers are finally being built. It takes a long time to construct enough ships to meet spikes in interest, and, at today’s steel prices, many potential builders continue to hold off.

The name of the game these days therefore is for fleet owners to buy used ships at good prices from less successful operators, refurbish them quickly and put them on long-term charters at today’s high prices. It takes a certain amount of savvy to find the right ships and make those deals, and that is what distinguishes the better tanker companies from competitors.

A pretty good short summary of what is involved in refinery economics from our friends at Chevron here at
Refinery Economics
The ultimate operating variable is, of course, the price of crude oil. Crude oil quality is another key variable. Heavy, high-sulfur crudes can cost up to one-third less than lighter, better crudes. However, because high-sulfur crudes require more processing, refineries that buy primarily cheap crudes incur more fixed expenses for equipment and labor.
Processing high-sulfur crudes also requires greater expenditures for energy. In fact, energy accounts for roughly half the cost of running a refinery, which is the main reason Chevron has cogeneration plants at most of its facilities. Cogeneration uses gases from refinery processing units to generate electricity and steam.

Refinery location is yet another variable. The closer a refinery is to both crude oil sources and a high demand market, the lower transportation costs are. Chevron's large and modern refinery in Pascagoula, Miss., on the other hand, is not as close to major gasoline-buying markets. Thus, Chevron must factor in the added cost of getting Pascagoula's products to market. Nevertheless, the refinery has posted excellent profits, largely because it is well-equipped to run some of the heaviest, cheapest crudes in the world.

Running a refinery is never simple, and Chevron works hard to keep its facilities safe, flexible and compatible with the environment.

More from another source at Refinery economics
Refinery economics are largely a function of supply and demand. Product prices are determined by a variety of factors such as the economy, weather and competition between retailers and from other fuels. Feedstock prices (crude oil) are influenced by the above demand factors, actions by OPEC and governmental regulations.

Refinery margins (the difference between raw material costs and product revenues expressed on a per barrel of crude basis) can vary depending on the complexity of the refinery. The more complicated the refinery, the higher the operating costs, but the greater the ability to make higher-valued products like gasoline.

Operating margins for high complexity or cracking refineries (refineries with catalytic cracking units) are found on the Oil & Gas Journal Cracking Spread chart.

Cracking margins here

Energy prices fall as crude stocks increase:
Energy prices plunged Apr. 27 as US crude inventories rebounded with a large weekly build and President George W. Bush called on oil producers around the world to increase production.

However, in his Apr. 27 speech to the National Small Business Conference in Washington, DC, Bush promised no immediate relief from high energy prices that have "been years in the making" (OGJ Online, Apr. 27, 2005)
And there are good reasons why there will be no immediate effect, as you now know.

More interesting refinery stuff: What is a refinery?


Update: 3,500 tankers shared by the world carrying a huge percentage of the world's fuel supply - talk about a matter of strategic importance! Need more information of the vital sea lanes through which these ships travel? See here

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