pman6

heat wave is over already. temps have been much cooler now.

bring on the winter blend and stop making us pay 15-20% more.
A few weeks of winter blend won't burn a hole in the ozone layer.

california has stupid laws and stupid governor and congressmen.
they need to make an exception this time. It only hurts the consumer.

i wonder how many people have already complained to their representatives and senators

geko29

Ok, THE most profitable company in the world is a natural gas company. It makes 10% more net profit (in actual dollars) than Exxon, but is only 1/3 the size. Where's the outrage? It's not "popular" to hate on other utilities, so they get ignored.

Och

iTrader: (3)

The profit marging on refining, transporting, etc might have stayed the same. But when oil went from $25 per barrel to $100 per barrel, its pure profit right there. If its costs them say $10 to pump a barrel of oil out of the ground, then $90 is profit, and I think you can calculate the margin in percentage.

And that extra profit goes to the oil companies that produce and sell the oil, and most of them are controlled by the West, not the countries where the oil is produced.

Infra

iTrader: (1)

Until you stop focusing on absolute value and instead talk about percentages, nothing you say about this matters. Should we punish corporations because they are large? Are you aware that US oil companies must compete internationally with state-owned oil companies that pay 0% taxes?

spwolf

there is a lot of rage against state-controlled Gazprom that is holding half of Europe hostage.

I dont see any difference between it and any other oil company.

Och

iTrader: (3)

Corporate profit is nearly meaningless. If you have a company that had 100B in revenue, out of which 10B were legitimate expenses, and the CEO took $89B in salary/bonuses - then the company profit is 1%, but if the CEO only took $1B in salary/bonuses, then company profit is 89%.

Not saying this is what Exxon does, but I'm sure they cook their books.

Och

iTrader: (3)

Well, Europe never misses the chance to back stab Russia, and then they are outraged that Gazprom wont give them gas for free? Good thing Russia has nukes, otherwise NATO would've long ago violently exported some democracy in exchange for Russian resources.

spwolf

nothing about free gas, but rather Russia trying to muscle out their neighbours to close down even the possibility of non-russian pipes going to Europe over their ex-states. I think you are confusing the situation with Ukraine, which is something else.

4TehNguyen

iTrader: (1)

so the oil price quadrupled but the margin only doubled. Thats not pure profit. You forgot to add that due to this inflation operating and raw material costs go up so its not 4x profit.

toy4two

Had to raise oil prices after the Arab Spring to keep some countries citizens in line and not protesting:

http://www.npr.org/blogs/money/2012/...sts-4-a-gallon

Lil4X

I've had an opportunity to work in and around the oil industry most of my adult life - my Dad and many of our neighbors did as well. It was sort of the local business here in Houston, and as kids we were "sitting wells" with other neighborhood kids whose fathers' jobs often required they spend time on the rigs at critical points in the operation. Of course as kids, we weren't even allowed out of the car at that point, but we enjoyed watching the operation much as kids might watch construction sites of skyscrapers in the big city.

Let me take your on a journey through the oil patch as I've witnessed it first-hand for sixty years plus. Maybe some background material will help clarify the issue of gas pricing and the profits made by "big oil". Grab a cup of coffee, you'll need it.

Oil is a rather different animal. As a business it is probably one of the riskiest in the world. An oil company will sign a lease for a certain amount of money for a fixed period of time. If the prospect produces oil, there's lots of money to go around, most of which will go to paying off the debts from the last prospect they drilled that proved to be a dry hole. If it does not, and NINE out of TEN wildcat or exploration wells do NOT strike oil, the multimillion-dollar cost of drilling another 3-mile post hole is a total loss. Even if you sit on your hands you can lose. If you manage to fool around and let the lease expire before you reach oil, sorry pal, you've lost your chance. Your lease cost is gone. If you snooze, you lose.

Now a company doesn't just go out and start punching holes at random, they work with their own geologists, geophysicists and reservoir engineers to select the most likely structure in the formations two to five miles down where oil in commercial quantities might be found. They bring in seismic crews to thump on the ground with heavy pressure plates or shallow wells loaded with explosives and computer process the reflected seismic waves to determine what the structure looks like several miles down. The big question is, "Is there oil there?" It's as much art as science, with maybe a little Ouija board thrown in.

The real gamblers of the business are the small oil companies that put everything on one roll of the dice - they're called the "wildcatters", and for over 90 years, there's been nothing like them on earth. Most are either stinking rich or flat-broke, and all have made the trip between the two several times. Those that are more successful than not become the names you know, the Gettys, the Hunts, and the Rockefellers, some are a bit more circumspect with their notoriety, like the Halboutys, the Wyatts, or a half-dozen others who would prefer not to be neamed, and most of the rest are too broke to pay attention.

When they get a good lease on a promising prospect, the oil company hires a drilling contractor to drill the well, much like you might hire a contractor to build your home. One way or the other that contractor is going to be paid, usually to the tune of several thousand to several hundred thousand dollars per day - depending on the location to be drilled and the target depth of the well. At that point a dozen or so service companies get involved, hired by the oil company to perform specialties - like the plumbers, electricians, framing carpenters, roofers, etc. on your home, each performing their own special task. It's these guys that inspect the drillpipe, run the logs, check the cuttings coming back up the well, operate the directional equipment, test the well, run casing in the hole and cement it in place. Logging companies reappear to locate the production zones and work with the oil company experts to select where and over what length to perforate the casing and tubing in the well to produce the oil they've discovered behind all that iron and cement they've put in the hole to seal off the "pay" zone.

After the well is completed, the oil company brings in another group of specialists to flow the well to determine how much production they can expect from it and over what period of time. Gas wells usually produce for years and are the most lucrative ventures thanks to a simple fact of physics - gas compresses. A cubic foot of natural gas four miles down is under thousands of pounds of pressure. As it comes up the production string, it is choked down to a manageable rate and volume of flow - where at the surface under, say the pressure of just a few ounces you see at your gas meter, the volume of that one cubic foot has now expanded to fill an indoor football stadium.

Oil is pretty much the same at the bottom of the well (a rule of thumb says oil is found above 14K feet, gas below), because as a liquid it is incompressible. What comes out of the formation two miles down is what you will flow to the gathering system and send on to the pipeline. It's at this point that both oil and gas are given a rough cleaning, water and most other contaminants that might harm the pipeline are extracted, and the resulting product is measured for volume as it is "sold" to the refinery before it leaves the lease. This is known as the “wellhead price”, and is the basis for all of the so-many-dollars per barrel price for crude oil you hear about in the news.

The grade of crude oil sent to the refinery determines its value. Sticky, stinky, sulfur-laden oil, or the light, sweet crude typical of West Texas that comes out of the ground with the appearance of used motor oil. Some heavy, highly sulfurous "sour" oil and gas contains sulfur and hydrogen sulfide and flows with the consistency of taffy. This stuff is usable, but turning much of it into gasoline is unlikely. This is where we get tar and asphalt, but all grades require cleaning and separation into their various fractions.

When you hear about the “benchmark price of oil”, generally what the figure referred to is for WTI, or West Texas Intermediate, a top grade of light (viscosity), sweet (does not contain sulfur or H2S) crude oil that is easily refined into motor fuel and other most profitable “light ends”. It doesn’t necessarily come from Texas’ Permian Basin where the highest grades of oil have been produced (and fortunes made) for well over 80 years, but the term refers to the high-quality, high-profit grade of oil that was first discovered there.

You will often hear about Brent Crude, which is a mix of grades from the North Sea, which is a heavier blend, or Dubai, OPEC blend. Other benchmarks may include lesser-known blends, Tapis Crude (Singapore), Bonny Light (Nigeria), or Isthmus (Mexico) – part of some 195 major crude blends that function like an S&P index to express a blend of products that tend to average out the extremes of oil viscosity and sulfur content from a region.
_____________________________

At this point we've reached the end of the drilling and production phase of the oil business, so let's look at the scorecard. For an intermediate grade of medium-viscosity oil, the costs thus far break out something like this, according to the DOE:

Lifting Costs Finding Costs Total Upstream Costs
United States – Avg. $12.18 $21.58 $33.76
Onshore $12.73 $18.65 $31.38
Offshore $10.09 $41.51 $51.60

Other Countries – Avg. $9.95 $15.13 $25.08
Canada $12.69 $12.07 $24.76
Africa $10.31 $35.01 $45.32
Middle East $9.89 $6.99 $16.88
Latin America $6.21 $20.43 $26.64

Note that these costs reflect the ease with which oil may be discovered. While in Saudi Arabia we know precisely where the oil is located and recovery technology is well known, so finding costs are minimal, discovering oil in Africa is decidedly more difficult – and expensive.

Another factor that is not often considered is the “off-the-books” cost of discovery and production. This includes “protection” costs that usually include the mordida or baksheesh associated with the oil business overseas where kickbacks or “gifts” are the norm.

Thus far we’ve looked at the “upstream” costs concerned with locating, drilling and extracting commercial amounts of oil. You can see that upstream costs are a bit higher in the US, primarily because of taxation and regulation of the industry, but also due to the fact that we have to recover hydrocarbon from increasingly difficult locations, primarily because we can't currently drill on federal land which represents most of our current prospects. That pinches two ways: the leases on federal land could go to debt service on our borrowed money from other nations, and even our own shortfalls, and the availability of domestic crude produced would return us to energy independence and cost stabilization. We're currently cutting our national throats to save a few snail darters in a couple of remote Western brooks.

But there’s another consideration here. Despite fifty years of advances in environmental protection, we often get stories like BP’s Macondo spill in the Gulf that captures headlines for weeks and blow the actual damage far out of proportion. After all, there are vested interests here vying for “recovery” payments, and a variety of lawsuits that stand to benefit from a “disaster”. A realistic approach might well consider all the millions of barrels of crude recovered every day around the world without incident. Certainly we need to regulate and respond to accidents, but by making recovery of hydrocarbon more difficult and expensive, we condemn ourselves to paying that significant additional cost at the pump.
______________________

After that intermission, let's look at refining costs. Premium crude is less difficult to refine – so the money saved at the wellhead is usually spent in extracting commercial products from lesser grades. Breaking down and separating long-chain hydrocarbons requires energy, and some pretty sophisticated organic chemistry to arrive at the products we use every day. From the propane from your grill, to alcohols, plastics, motor fuel, jet fuel, heating oil and asphalt for the road you drive on, all come from that barrel of crude oil. Natural gas becomes plastics and pharmaceuticals, low-end crude becomes shingles and roadbeds, while other distillates that come off the heater-treaters and cat-crackers become everything from carpet to animal feed, to the shirt on your back.

The economics of this process are incredibly delicate. I’ve seen a six-month old chemical processing unit that covered a couple of acres and worth tens of millions of dollars cut up for scrap because someone had just discovered a “cheaper” way to produce the product. How much cheaper? 2¢ per hundred pounds. That two cents made the current process uneconomic to the tune of hundreds of thousands of dollars every month. That’s the knife edge that balances typical refining and petrochemical costs.

I live in Houston, and with the cities on Galveston Bay, we produce most of the gasoline and petrochemical products America uses every day. Some plants refine gasoline and pass by-products along to neighboring plants that turn them into other commodities. One reason that refineries and petro-chem plants seem to cluster together is that they exchange more than products, they share heat and even electricity. We said that rearranging chemical bonds requires energy, but once the job is complete, where does that “waste heat” go? Well today, rather than cooling superheated water and steam down to release into the environment in massive cooling towers, heat is being treated as a commodity that can be sold to a neighboring plant where it is re-used in other processes.

A new term, cogeneration, became popular about 30 years ago, and now some plants are using their waste heat to turn steam turbines to produce electricity. That electrical power can be distributed throughout a plant to make it self-sufficient – and even sold as another product to neighboring plants and industries to provide profit from what had been a waste product. That’s a quantum leap in efficiency for the plant, and for all of us who buy its products. Successful? Even in a market in which feedstock and labor costs are rising, and legislation is making compliance more difficult, refineries have been able to maintain a pretty constant cost of operation, thanks to efficiencies gained in small areas, if not in plant layout and design.

Often these companies, the larger portion of which belong to the oil companies nowadays, are accused of manipulating the market to their own benefit, shutting down production to create pent-up demand and driving prices upward. That’s a convenient boogeyman, but these plants don’t throttle back or shut down for any reason at all, short of desperately required maintenance. They can’t, you can’t turn off raging chemical reactions at tremendous heat and pressures, they have to be slowly throttled down before the pilot lights are blown out and the plant goes “cold iron”. They don’t start up very easily either, often taking weeks to come back on line at 100% production.

The truth is, we have not built a single new refinery or chemical plant in the US since 1975. Why? NIMBY . . . Not In My Back Yard – it’s the prevailing concern among voters (and thus our politicians) who respond to a perceived threat of air and water pollution by withholding construction permits for new facilities. The quickest way out of power in Washington is to support the construction of a new chemical plant or refinery. NOBODY wants a stinking, noisy industrial plant next door . . . or even within miles of them. So we build them in Saudi Arabia, Venezuela, Quatar, Indonesia, and places that may not have our best interests in mind. We make money for them by building a refinery, say in Daharan, having them nationalize it, and then purchase increased-value products, notably gasoline, from it.

Meanwhile at home, we have condemned ourselves to patching up old, worn out refining and processing facilities to keep them competitive and within the bounds of increasingly tighter environmental restrictions. Can you imagine the improvements we could make in efficiency and environmental protection – not to mention safety – of our petrochemical industry if we were allowed to build plants from scratch rather than put patches on technology born during the disco era?

When I was in high school, back in 1960, the town to our East, Pasadena, was known as “Stinkadena”, the odiferous properties of refining and petrochemical production were immediately obvious to everyone in Houston when the wind swung into the East. It was “Pasadena, where the air is greena”, and it was common in our neighborhood to say “I smell Pasadena.” when we had an East wind that usually indicated rain was on the way.

Since the mid-seventies, and the application of environmental controls to the industry, that situation has improved drastically. The air is clear; the smell of oil is gone. The City of Pasadena, as well as Channelview, Deer Park, Baytown, and other communities by the Bay are now thriving bedroom communities rather than barren huddles of cheap houses where no one would consider living if they had the money to move. Where once hissing and screeching scenes out of Blade Runner lit by flarestacks by night that lent a orangy-smokey glow to their surrounding neighborhoods, quiet golf courses nestle between white and silver tanks and pipelines among belts of trees and green lawns. NIMBY? You don’t hear it here. Good, stable jobs and family-friendly communities have replaced the smoking hellholes of generations past. Friday Night Lights plays out in high school stadiums, and kids hang out at the malls in the shadow of the towers of the world’s largest refineries.

As well as we have done, we could do a great deal better. It’s not well publicized, but most of our processing facilities are reaching a dangerous point. Every month we have a fire or explosion in one of our local plants that could have been prevented if they were permitted to use the knowledge we already have to build a processing infrastructure that met today’s needs. All considered though, we’ve done pretty well with what we have. The accidents we have today usually don’t result in major releases of nasty chemicals, the fires are quickly controlled, but with proper supervision and control, these plants can be made to work. They just aren’t as efficient or safe as they could be.

What does this have to do with the cost of gas? Well, these refineries represent a fair amount of the price of gas at the pump. It generally breaks out this way:

• 74% - Cost of crude oil
• 11% - Taxes
• 10% - Refining costs
• 5% - Distribution and marketing

Obviously a spike in crude costs translates pretty directly to the pump price for gasoline. Refiners have done an incredible job, working with one hand tied behind their backs, unable to deploy the latest grassroots technology to the process, patchworking as best they can, to hold refining costs of an increasingly intricate product to only 10% of consumer cost. Distribution and marketing of gasoline falls pretty largely in line with the costs for any product you will find on the shelves at Walmart. Taxes vary from state to state, but California extracts by far the largest portion from their citizens’ pockets with every gallon they pump. Concerned with the price of gas? Don’t complain to your gas retailer, talk to your state legislators.

Meanwhile, when people decry the “profits” of “big oil”, we have to remember the risks involved in exploration. If your bank offered you an opportunity to invest your money at 5% interest with a one in ten chance you’d actually collect it, let alone even see it again, you’d run away as fast as you could. What level of ROI is required to make people take chances on discovering new oil? What about the wildcatters who throw down everything they have on a new prospect, or the drilling contractors who build and maintain drilling rigs that may cost from $7 million for a new land rig to hundreds of millions for an offshore semisubmersible with the technology capable of reaching the increasingly hard to find hydrocarbon gambling that they can rent these rigs in a fluctuating market? Service companies don’t run massive think tanks of engineers to come up with new ways to locate and exploit reservoirs five miles beneath the surface, nor do refiners have an incentive to replace facilities that were old when their grandfathers took charge based on the vagaries of the next piece of legislation coming from Washington.

In oil, as in most businesses, “profit” is a slippery term. Profits aren’t sliced up and handed out to executives as those who seek to promote class envy would have us believe. Profits are re-invested. They are invested in new facilities, new technologies, and new jobs for all of us. Businesses and individuals who are heavily taxed have to divert a huge portion of this potential re-investment to Washington. Where it goes from there is subject to your own vision of the shenanigans on Capitol Hill, but you can rest assured it’s not creating energy or jobs for the rest of us.

GSteg

iTrader: (15)

Cliffnote?

Lil4X

BS in Petroleum Engineering reduced to 3K words. Those are the Cliff Notes.

mmarshall

You are correct, 4TehNyugen. Much (though not all) of the blame can be put on CARB's idiotic refinement-policies and CA's notoriously high taxes. The CARB rules simply don't make CA-spec fuel cost-effective.

mmarshall

In the U.S.? We've been hearing those doomsday predictions for years. While I agree that it can't be entirely counted out, I wouldn't bet the monthly rent on it. Even after Katrina's massive refinery/supply disruptions and subsequent local spot-price-gouging, it rarely went much above $6.00...even in CA. Nevertheless, I can see some major increases (but necesarily to $10) if we get into a war with Iran and the Persian Gulf/ Hormuz Straight gets shut down to tankers.