May 8, 2008...6:38 pm
Big petrol price jump imminent
When Shell, Mobil and Caltex followed BP on April 29 and raised their pump prices by 3c a litre, world oil prices were around $US 115 a barrel, $US 3 more than when BP raised its prices a week earlier. Nine days on and oil is trading around $US 123 a barrel. The New Zealand dollar has fallen too, by about 2c.
What this means, motorists, is pump prices are about to go up, probably quite sharply, by at least 6c a litre. Sorry. And I hope to be proved wrong.
The standard theory is that prices this high will quickly bring new oilfields into production and drive prices down, but there is no real shortage of oil. The shortage at present is in refining. Not enough new refineries have been opened to meet the growing demand from China and India. Additionally, the banking crisis seems to have prompted speculators to turn their attention to oil futures, which is also affecting prices. Then we have the perennial jitters over events in Iraq, Iran and Nigeria, which of course are major oil producers.
What it all means, probably, is a year or more of very high prices, until increased refining capacity and the global economic slowdown have a counter-effect.
7 Comments
May 8, 2008 at 7:22 pm
It doesn’t help that refiners in the US (at least) are something of a cartel and they shut refineries down for maintenance…..driving prices up. I posted about this on my own blog as week or so ago.
May 8, 2008 at 10:32 pm
New oilfields will become economic but will produce oil that is only profitable at $120 per barrel. Any further hiccups and the price will go up again. Dare I say this but the symptoms match those predicted by the peak oil theorists. There have been no new cheap large oil deposits discovered for many years. Consumption is going up, fuelled by existing sources which every day get closer to exhaustion.
Dare I say it but the more windmills and priuses we have the better…
May 9, 2008 at 9:20 am
mickysavage, windmills -yes, priuses - no.
70% of a car’s energy is ‘embodied energy’ i.e the energy it takes to produce and ship the car around the world. This only leaves a variable of 30% ‘energy running costs’. The Prius really isn’t that much better than an ordinary (similiarly powered and engined car). Hence why the Greenies (Fitzsimmons et.al) drive around in the Honda Jazz. Much better for the environment.
We don’t even want to talk about the cadmium in the batteries in Priuses either…. that’s another topic.
However people who drive Priuses do feel good about themselves and what they are doing for the environment, and sometimes it’s about ‘being seen’ to be doing good…..
[Poneke says: There was a fabulous South Park story about this, in which everyone started driving about in hybrids ("Pious" in the story), and the town was consumed by a cloud of smug.]
May 9, 2008 at 11:30 am
Mr. mickeysavage makes a good point. The new oil fields opening up are generally not new discoveries; they’ve merely crossed the profitability threshold. This was the case with the tar sands in northern Alberta (close to home for me). The threshold for mass extraction was around $60/barrel, for a dollar in the late-80’s. If the price of oil were to drop below that level, production would be shut down. This guarantees a minimum price level, based on a mean extraction cost for available sources. Since the “easy” oil exists in the hot-bed regions of the world, which messes with production and generally makes investors nervous, the mean shifts up.
Reasonably, the only way to have the price of oil come down again is to either settle the political issues surrounding the current easy reserves or find new reserves. With the new discovery rate dropping and political tensions increasing, this seems pretty unlikely. (I really should provide references for this, but I’m incredibly lazy at the moment.)
Personally, I’m not overly bothered by the weekly increases. My life is on the bus, which shelters me to an extent. I’ve noticed the cost of food changing, though. There’s not much to do about it. The grocers have shipping costs, and they’re all shipping by truck at the moment. Could rail be more affordable? Would it help isolate the food industry from petrol increases? Dunno. We may be about to test out that theory. Rail is more efficient per kg, per km, but the equation is much more than that.
I’ve been meaning to follow up on the battery issue for a little while, but it’s still on hold. I’d been talking to a chap at work about research going on in China, producing (I think he said) a lithium based, non-cobalt, non-cadmium battery for use in small electric-only vehicles. I need to track down more info on this, but if it proves true, it would be a big step in the right direction.
May 9, 2008 at 12:57 pm
1) I think poneke is right on prices - looks like 4-6cpl in the wind today or early next week (they might hold off hoping prices come back a bit over the weekend)
2) The whole reserves and production area is very complex. I think oil companies are quite conservative because they have been burned very badly in recent memory with huge drops in oil prices - $10bbl in the 90s - therefore they will take a lot of convincing to invest in new projects, even at today’s prices, because there may be a lingering doubt that they are sustainable given they invest over a long period and expect returns over time. You don’t invest on a price spike.
Also the opportunitiy for large projects is limited due to the domination of resources by national oil companies who don’t want to share. There has been a fundamental shift in the power base technologically and economically. ExxonMobil had another decline in production partly because they can’t get access to new regions. Both BP and Shell have had issues in Russia over asset confiscations so don’t expect much to happen there in the future. You have to wonder if these national oilcos are as interested in growth as private ones and utilising their resources as effectively because they are driven more by politics - Venezuela and Iran are good examples.
But the resource base is huge and a small percentage increase in performance can be very significant in terms of the supply it delivers, and there is a lot of scope for that at current prices. But it takes time. These are not taps you can turn on an off and there is limited capital and expertise available.
3) on refineries, what has happened is that there has been ongoing consolidation in the US - it’s certainly not a cartel as the ownership is diverse and changing. Refineries have been getting bigger in the US and producing more and operating closer to capacity a lot more, but there are fewer of them which means the loss of one has a much higher impact as there is less fat in the system. That’s what leads to price volatility. It is also complicated by US fuel regulations which change from city to city, state to state, making the market less fungible. It’s a classic strategy to try and get regulations formed around your refining strengths as that gives you a huge commercial advantage to rent seek. BP were very successful in Western Australia doing that.
May 9, 2008 at 7:17 pm
I would have thought that oil companies could be reasonably confident that prices would hold given the insatiable demand from China, India etc?
May 12, 2008 at 10:46 am
Talkback ZB Christchurch at 10.43 am said BP petrol up by 5 cents.
Leave a Reply