Wednesday, April 10, 2013

Why is widespread exploitation of shale oil having no downward effect on the cost of gas?

Alan: Growing demand - coupled with relatively inelastic supply - will continue to boost the price of gasoline. Yes, there will be occasional dips in this trendline, but the overall trajectory is steeply upward. On the other hand, the declining cost of solar energy is reminiscent of "Moore's Law" which says that, every 18 months, technical advances double computer memory while cutting cost in half. The declining price of solar energy seems limitless whereas India and China's next economic boom will catapult the price of gasoline to $8.00 a gallon and maybe to $10.00. (All winter long, and amidst serious economic slowdown, the price of gas has hovered around $4.00 a gallon.)

Where in the World Is Our Gasoline Disappearing to?

By Matt DiLallo | More Articles
April 9, 2013 | Comments (22)

Despite producing more oil than we have in decades, prices at the pump aren't budging. The culprit? We've been increasing the amount of our gasoline that is being exported. While this is great for the profit margins of refiners, it's not so wonderful for our wallets.

We've actually been a net exporter of gasoline since 2009. Overall, our exports of finished gasoline products have grown at a compound annual growth rate of 15.7% since 2000. However, as we've used less gas domestically over the last few years, our export growth has shifted into high gear and since 2010 that annual growth rate has jumped to 35.4%.

To put some numbers behind this trend, this past January we exported 16.981 million barrels of finished gasoline products. When you compare this to the 6.841 million barrels in January 2010, and the 3.936 million barrels in January 2000, you can see just how phenomenal our export growth has become.

One of the driving forces behind this export push is that gasoline demand has been dropping here in the U.S. We're simply not driving as much as we used to, which is creating what appears to be a structural shift in our demand. However, this has quickly been displaced by increased demand for gasoline outside our borders. The market is simply selling gas to the highest bidder, which you will see is an unlikely buyer.

Traditionally, a bulk of our finished gasoline products had been shipped to Mexico. Since January 2000, 66.8% of all finished gasoline exports went just south of the border. However, Mexico has been pulling back lately and now represents only 32% of exports as of January 2013.

Picking up the slack is none other than Venezuela. The OPEC country had been a virtual non-entity in our export market until December 2011. This January it accounted for 20.6% of all exported finished gasoline product exports, which is up from 15.9% in December 2012. It's also well above the 2% total it had been importing going back all the way to 2000.

Here's why this could make your blood begin to boil. The Venezuelan government subsidizes its citizens' gasoline so that that average price of gas is just $0.18 cents a gallon. I don't know about you, but I no longer give much thought when gasoline prices fluctuate that much in one day. Worse yet, our government, on average, taxes us at twice that rate per gallon.

Those exports are one of the reasons why, as you can see by the map below, you're still paying a pretty penny every time you fill up at the gas station.

It remains to be seen how long Venezuela will keep up its import pace. One of the main reasons for its increased demand is that the country is having problems keeping its refiners running at full capacity. While it's possible that Venezuelan demand will slack off as it gets its refiners back on line, the country's oil minister denies that it even imports gas, suggesting that the structural issues could run much deeper.

As the Venezuelan government subsidizes our continued pain at the pump, it has enabled several of our refiners to cash in, at least for now. Topping the list is Valero (NYSE: VLO ) which represents about 20%-25% of total U.S. petroleum product exports. Another big winner is Philips 66 (NYSE: PSX ) which boosted its exports by 50% in the fourth quarter. Meanwhile other refiners like Tesoro (NYSE: TSO ) and HollyFrontier (NYSE: HFC ) are both enjoying the highest margins they've seen in years.

However, those margins could be on the way down. The EPA recently proposed new rules that some view as a potential death sentence for refining profits and the elimination of any hope that we'll see gas prices drop. The new rules would significantly reduce the sulfur, nitrogen oxide, and benzene content in gasoline and bring it up to California and European standards. It would cost refiners billions to bring the gas up to those standards. That's why both California and Europe have much higher gas prices than the majority of the U.S., and it would undoubtedly mean even higher future prices as more of our gas disappears overseas in an effort to get around these new rules.

If there is one silver lining, it is that this could force us to finally allow natural gas to change the fuel industry. Clean Energy Fuels (NASDAQ: CLNE ) is already working hard to build out America's Natural Gas Highway. As gas prices stay elevated and new rules come into play it could entice more heavy users to switch to cleaner-burning natural gas. While we wouldn't be paying the mere pennies that Venezuelans pay to fill up, natural gas fuel is selling at a significant discount to gasoline which would still yield huge savings. Though, as the debate over natural gas exports heat up, even natural gas could begin to do its own disappearing act.

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