Hello friends and neighbors,
I am writing to you today to help clarify a very complex issue that appears to be causing a lot of misinformation. This topic is oil prices. Today, I am going to discuss certain elements of this topic and point to some sources that hopefully will help clarify this issue for us all. I will then show how this impacts each of us in various ways.
First, let’s understand where we really are:
Based upon data from the US Energy Information Administration, in 2020 (latest information in the graphic, see https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php) the US produced more petroleum than it consumed. For the sake of trying to keep this simple, I am focusing on petroleum, not on oil. A barrel of oil can be processed into many products, including petroleum. Here is the data:
Consumption – 18.12 million barrels per day
Production – 18.40 million barrels per day
Imports – 7.86 million barrels per day
Exports – 8.51 million barrels per day
Here are the top five sources of our imported petroleum in 2020:
Canada – 52%
Mexico – 11%
Russia – 7%
Saudi Arabia – 7%
Colombia – 4%
Here are the top five destinations of US petroleum in 2020:
Mexico -12%
Canada – 11%
China – 8%
Japan – 6%
India – 6%
This information should cause you to ask some questions, such as:
I heard the press report that we export up to 10 million barrels a day. Is that not true?
It is interesting, getting at the accurate data is not an easy task as I have found out. The fact is that although we exported up 8.51 million barrels of petroleum in 2020, we imported almost that amount.
If we are producing more petroleum in the US than we consume, why are we importing oil? There are several reasons:
Based on a Wall Street Journal article today, (https://www.wsj.com/articles/why-does-the-u-s-still-buy-russian-oil-11646151935) the oil in the US mainly comes from the Gulf of Mexico region of the country and is shipped out in trucks, rail, and primarily in tanker ships. The ships that are used are large to keep the transportation costs at a reasonable level. The size of these ships prevents them from entering ports in New England and the West Coast. Since we can’t get the US based petroleum to these regions at an acceptable cost, we rely on imports from other countries.
Also based on the WSJ article, we import oil and oil-based products to feed our refineries. We require certain characteristics of the oil, such as oil that is low in sulfur. To get oil with the required characteristics to create the various products we want (gasoline, diesel, heating oil, tar products, chemicals for plastics, paint, etc.) we frequently need to import oil.
Additionally, although I have not seen this discussed yet, I know that we have trade agreements with countries around the world. We agree to buy certain products from them and they agree to buy certain products from us, including oil. We can’t simply stop sending them oil without violating these agreements.
Can’t we just pump more oil?
At our current rate, we are producing more oil than we have ever before. If we produce more, we need to make sure that we have the refining capacity to process it and the transportation to move it, not a simple task these days with all the supply chain problems.
Why don’t we open up reserves on public land?
I just heard that the oil companies have untapped oil reserves on private land that they have already received permits for. Until they tap those, the current administration will not issue permits that allow for drilling on public land.
With this information as a backdrop, why are oil prices so high? There are many reasons:
During the Covid epidemic, supply chains were disrupted all over the world. Drivers and crew members of ships, trains, and airplanes couldn’t move freely around the globe causing many bottlenecks. Additionally, ports were disrupted and ships were held out at sea, increasing the time and cost to move product between countries.
The current administration, partly in an attempt to get the economy moving, initiated massive government programs that are releasing trillions of dollars into the economy. This large influx of money creates a demand for products and services. With more demand, than supply of the products and services, prices rise, and we have inflation. Inflation impacts everything we buy from food and clothes to the gas we need to power our vehicles.
Additionally, we are now coming off of about two years of self-isolation cause from Covid. Fortunate individuals who have been able to continue working, likely from home, have built up a nest egg of funds and are hungry to go have a good time and start living again. This releases more money into the economy and further drives inflation.
Now comes war, and not just any war. This war has massive and very serious consequences since it pits Russia, one of the largest nuclear powers in the world, against not only Ukraine, but the West as a whole. Uncertainty and risk, drive oil prices. Recently, large shipping companies have reported that they will be increasing their prices, likely to offset costs due to Covid, but also due to the risk of moving ships around a dangerous globe. We are seeing, and will continue to see large increases at the pumps as result of this.
Today, March 8th, President Biden announced that the US will now ban Russian oil in attempt to further isolate and weaken Russia. The impact this decision will have on gas prices has been discussed by economist throughout the country.
Only a couple months ago, gas prices were about $2.21 per gallon.
Just before Biden made the announcement, oil prices were about $120/barrel with gas prices between $4.50 and $5.00 per gallon.
A business analyst from Yahoo News stated earlier this week that gas could quickly hit $150/barrel driving gas prices to $6.50 to $7.00 per gallon.
An analyst from JP Morgan had stated over the weekend that a barrel of crude could hit $185.00 per barrel. This may drive gas prices to $9.00 to $10.00 per gallon. Just this afternoon, JP Morgan has upped that estimate to $200 per barrel.
Today, CBS News reported on a graphic that Oil Prices may hit $300 per barrel, but the reporter stated $200.00 per barrel.
These scenarios depend in part on how much the rest of the world follow the US’s lead and ban Russian Oil.
Regardless of which of these scenarios may come true, it is clear that the price of gasoline is going to hurt for the foreseeable future.
What does this mean for us, individually, at the gas pump?
If you have a large SUV that gets 17 MPG, here is what it means:
The average American drives 15,000 miles per year
If you continue to drive that, your cost will be as follows:
15,000 miles /17 MPG = 882 gallons
882 gallons x $7.00 = $6,174.00
882 gallons x $9.00 = $7,938.00
This compares to a pre-inflation annual cost (as of1/21) of:
882 gallons x $2.21 = $1,949.22
This represents an annual increase of $4,224.78 to $5,988.78
If you have a smaller gas car that gets 30 MPG, here is what it means:
The average American drives 15,000 miles per year
If you continue to drive that, your cost will be as follows:
15,000 miles /30 MPG = 500 gallons
500 gallons x $7.00 = $3,500.00
500 gallons x $9.00 = $4,500.00
This compares to a pre-inflation annual cost (as of 1/21) of:
500 gallons x $2.21 = $1,105.00
This represents an annual increase of $2,395.00 to $3,395.00
If you have a hybrid car that gets 43 MPG, here is what it means:
The average American drives 15,000 miles per year
If you continue to drive that, your cost will be as follows:
15,000 miles /43 MPG = 349 gallons
349 gallons x $7.00 = $2,443.00
349 gallons x $9.00 = $3,141.00
This compares to a pre-inflation annual cost (as of1/21) of:
349 gallons x $2.21 = $771.29
This represents an annual increase of $1,671,71 to $2,369.71
Many of you know that a team of colleagues and I have started a company called Zapify LLC. The purpose of this company is to connect homeowners who have an electric vehicle charging station in their driveway with drivers of electric vehicles in need of a charge. I have given a number of presentations on the company and here are the primary reasons why owning an electric vehicle makes sense:
Driving Enjoyment – I must confess that I have been a car enthusiast and gear head for most of my life. One of the big reasons for why I want to drive a car is because I enjoy it. For many years, I would travel to clients around the world, be driven in cabs and sedans to and from airports and businesses and would not get behind the wheel of a car in weeks. When I finally did get behind the wheel, I felt at home and happy. As a car enthusiast and a gear head, I can report that EV’s are fun to drive!
Lower Repair Costs – Since they have fewer mechanical parts, there are less components to break. There are no oil changes, no tune ups, etc.
Environmental Pressure – As climate change continues, there is mounting pressure to reduce carbon emissions, EV’s help do that.
Government Regulations and Policies – Because of the mounting pressure to reduce carbon emissions, governments around the globe are pushing car companies to produce more carbon neutral cars. EV's fill that need.
Better Platform for Autonomous Vehicles – The EV makes a logical platform for the next step in mobility, the autonomous vehicle.
Global Political Stability – I have saved the remaining two for last on purpose and made the titles bold to stand out. As we discussed above, the prime reason for this article is the global instability we are experiencing. Imagine for a moment if the numbers presented above from the government agency, EIA were different. Imagine if the EV movement was further along and we had lots of excess capacity to create oil and oil products. We wouldn’t be consuming anywhere near the amount of petroleum that we are , nor would we be paying thousands of extra dollars at the pump per year, not to mention the oil and fuel’s impact on everything else we purchase. In a traditional model of acquiring goods, the transportation cost of a typical product is 6-8% of the price of that product. Fuel represents 5-15% of the cost of transportation. Now that we have moved to an ecommerce model where we have everything delivered to our homes, the amount of gasoline and diesel we consume is even higher. With gas prices expect to possibly triple, just the fuel cost alone will drive additional inflation. If we were using EV’s, this wouldn’t be so dire as we would have plenty of additional capacity to cover all our needs.
Stability of Fuel Prices – Throughout this document, we have discussed the impact of current events on fuel prices. If our vehicles were powered by non-fossil fuel sources, the prices would be much more stable. I will leave you with one final analysis and that is the cost of “fueling or charging” an EV that has a 300-mile range per charge.
If you have a fully electric car that has a 300-mile range, here is what it means:
The average American drives 15,000 miles per year
If you continue to drive that, your cost will be as follows:
15,000 miles /300 miles per charge = 50 charges per year
50 charges x $6.00/charge = $300.00
Assume that electric costs triple due to economic factors
50 charges x $18.00/charge = $900.00
Compare this with even a hybrid car and you are saving thousands per year
I hope this helps clarify things a bit. If there is anything you would like to discuss, please contact me.
Sincerely,
Paul MacKinnon
Founder & CEO of Zapify LLC