Guest Post: US #1 in Oil: So Why Isn’t Gasoline $0.80 Per Gallon?

Tyler Durden's picture




 

Submitted by Marin Katusa via Casey Research,

While the White House spied on Frau Merkel and Obamacare developed into a slow-moving train wreck, while Syria was saved from all-out war by the Russian bell and the Republicrats fought bitterly about the debt ceiling… something monumental happened that went unnoticed by most of the globe.

The US quietly surpassed Saudi Arabia as the biggest oil producer in the world.

You read that correctly: "The jump in output from shale plays has led to the second biggest oil boom in history," stated Reuters on October 15. "U.S. output, which includes natural gas liquids and biofuels, has swelled 3.2 million barrels per day (bpd) since 2009, the fastest expansion in production over a four-year period since a surge in Saudi Arabia's output from 1970-1974."

After the initial moment of awe, pragmatic readers will surely wonder: Then why isn't gasoline dirt-cheap in the US?

There's indeed a good explanation why most Americans don't drive up to the gas pump whistling a happy tune (and it has nothing to do with evil speculators). Let's start with the demand side of this equation.

Crude oil consists of very long chains of carbon atoms. The refineries take the crude and essentially "crack" those long chains of carbon atoms into shorter chains of carbon atoms to make various petroleum products. Some of the products that are made from petroleum may surprise you.

Top 10 Things You Didn't Know
Use Compounds Made from Crude Oil
  1. Golf balls
  2. Toothpaste
  3. Soap
  4. Aspirin
  5. Life jackets
  6. Louis Vuitton knock-offs
  7. Guitar strings
  8. Shoes
  9. Soccer balls
  10. Pantyhose

The United States has the largest refining capacity in the world and is still by far the largest consumer of oil in the world (though China is beginning to catch up), and its refineries require 15 million barrels of oil a day. That means even though, due to the shale revolution, domestic production has dramatically increased to about 8 million barrels, the US still has to import between 7 and 8 million barrels of expensive foreign oil a day.

Let's take a look at who the US buys the imported oil from. (Now that I finally figured out my way around the new Windows 8—which, by the way, really sucks—I can even add some color to my tables.)

Country
Millions of barrels
exported to US per day
Canada
2.5–3
Saudi Arabia
1.2–1.5
Mexico
0.8–1.0
Venezuela
0.8
Kuwait
0.3–0.5

Canada is blue because it is not only friendly with the US, but also has the ability to increase oil production. The other countries are red because they either have decreasing oil production, or the country is not on good terms with the US government, or the production may be at risk for various reasons. The "red countries" all sell oil to the US at higher prices than does Canada.

As I said, the US imports about 7 million barrels of oil a day, and our top 5 exporters make up between 5.6 and 6.8 million barrels while the rest is split among other countries.

This means that even though the US has significantly increased its oil production in the past five years, a good chunk of oil has to be imported at much higher prices. And higher crude oil prices for refineries means higher prices at the gas pump.

But that's not the only issue: The "new oil" produced from the shale oil fields in the Bakken and Eagle Ford formations isn't cheap. Both the Bakken and Eagle Ford have been hugely successful, and an average well in either region can produce over 400 barrels of oil per day.

That may sound like a lot, but drilling thousands of meters into the ground (both vertically and horizontally), then casing and fracking the well, costs millions of dollars. And the trouble doesn't end once the well has been drilled: oil and gas production can drop as much as 50% in the first year.

Think of it as running on a treadmill—but the incline gets steeper and steeper the longer you run. That's the current reality of America's oil production.

Now, these areas also have to deal with declining legacy oil production ("legacy" meaning older oil wells that produced before fracking became popular) due to depletion rates. Freeze-offs, and even hurricane season can affect the legacy oil wells' production decline.

As the old wells begin to deplete, they need to be replaced by unconventional wells with horizontal drilling and hydraulic fracturing. Even though these new wells provide an initial burst of production, they decline very quickly. That means you need to drill even more wells just to keep up—and the vicious cycle continues.

The costs, as you can imagine, are forbiddingly high. Even in known oil-rich regions like the Bakken and Eagle Ford, the all-in cost of extracting a barrel of oil from the ground can cost as much as US$75 per barrel (for comparison, Saudi Arabia can produce oil for as low as US$1 per barrel). To put it in simple terms: cheap oil in North America is a thing of the past.

So, the US produces expensive oil and relies on imports of even more expensive oil. And since the refiners need to make money as well, this means higher prices at the pumps. Who loses? The US consumer, of course.

What would help lower gas prices? Building more pipelines to deliver cheaper Canadian oil to refineries in the US and decreasing the refineries' dependence on expensive foreign oil. Until these new and much safer pipelines are built, rail has to pick up the slack. Almost 400,000 railcars full of oil are expected to be shipped in 2013, compared with just 9,500 railcars in 2008, a whopping 41-fold increase.

But rail is not the answer. In fact, transporting oil by rail is much more dangerous than transporting it by pipeline. Just last week, we wrote about two recent accidents, one of which claimed 47 lives.

Federal and state taxes at every step of the gasoline-making progress make the pain at the pump even worse. The US government already takes more than 60% of the divisible income from every barrel of oil produced… and another 50 cents per gallon at the pump.

Then there's the matter of Obama's supposed "Green Revolution" and how America would be saved through the use of alternative energies. Obama wrote massive checks to different renewable energy firms that went belly-up, the most famous of them all being solar panel manufacturer Solyndra, whose bankruptcy cost American taxpayers more than $500 million. Obama is also a heavy supporter of ethanol (his home state of Illinois, after all, is the third-largest ethanol-producing state) and has increased the targets for the use of ethanol in transportation.

Someone has to pay for all of these subsidies, so why not get the dirty, evil oil companies to pay for them? Keep in mind, though, that the oil companies have enough lobbyists and lawyers to keep the government at bay—so the higher prices will be passed on to the consumers.

To sum up why the price of gasoline is so high even though the US is producing so much more oil than before:

  1. The high cost of American oil production
  2. Even higher costs due to imported (non-Canadian) oil
  3. Obama not allowing cheaper Canadian oil to flow to the refineries via pipelines such as the Keystone XL
  4. The taxes on crude are used to fund Obama's green dream—his green-energy "legacy"—and his love for ethanol and the taxes at the pump will not decrease

 

Doug Casey and I are convinced that new technologies applied in the Old World will bring huge New World profits. But don't take my word for it—I challenge you to try out my research. Click here to take me up on my 100% money-back guarantee.

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Wed, 10/30/2013 - 19:17 | 4106840 goose3
goose3's picture

Oil (and gasoline) aren't cheaper because Oil is a global commodity, not a US commodity.  The easy oil has mostly been developed, and harder and harder oil is more expensive to develop.

Wed, 10/30/2013 - 19:29 | 4106870 knukles
knukles's picture

Because the government's involved, FFS
Any further questions?

 

look mommy a pony!
oh thats no pony honey, that's a government promise
but the sign says its free, all we have to do is take it away
thats because its a dead promise, dear

Wed, 10/30/2013 - 19:32 | 4106890 mofreedom
mofreedom's picture

Funny money raises the price of all commodities, duh.

Wed, 10/30/2013 - 19:35 | 4106901 Popo
Popo's picture

This whole article is hopelessly ignorant. The premise is that because we make it, it should be cheap. But that premise totally ignores the extraction costs of shale oil.

Wed, 10/30/2013 - 19:39 | 4106909 Ahmeexnal
Ahmeexnal's picture

Oil's well that ends well.

"You didn't build that!" Mabus Yomomma

Thu, 10/31/2013 - 06:22 | 4107897 falak pema
falak pema's picture

well said and referenced both of you. Food for thought.

Thu, 10/31/2013 - 16:52 | 4109679 Sparkey
Sparkey's picture

Scarlet is on to something, I thought Doug Casey was an alright guy, for a while, until he became a shill for the Frackers, as I see it; Fracking serves two purposes, It ropes in the suckers, with articles like this, and it destroys the land for human habitation, population reduction isn't going to be pretty! Is Venezuela slated for Fracking? If not, perhaps we could move down there and get a little place next to Doug!

Wed, 10/30/2013 - 19:40 | 4106914 DaveyJones
DaveyJones's picture

actually...it's hopefully ignorant

Wed, 10/30/2013 - 19:47 | 4106933 knukles
knukles's picture

then they can change it for the better...  :)

 

You all realize do you not that they were originally talking about free health care about 6 years ago?  And bringing the price of gas way way down.  And extricating our asses from wars.  And having an open transparent administration and oh never the fuck mind

Wed, 10/30/2013 - 19:53 | 4106957 DaveyJones
DaveyJones's picture

don't remind me

I'll have to take another anger management class

Wed, 10/30/2013 - 20:15 | 4107016 smlbizman
smlbizman's picture

gas is cheap in the us...relatively speaking...

http://www.statista.com/statistics/221368/gas-prices-around-the-world/

Wed, 10/30/2013 - 20:21 | 4107024 Stackers
Stackers's picture

and adjusted for inflation gasoline is cheap. Gas is only up about 100% over the last 20 years - vs. everything else up about 200% and things like college up 1000%

Wed, 10/30/2013 - 20:24 | 4107032 DaveyJones
DaveyJones's picture

remember the trick. You have to average the cost of a worldwide military machine that "assists" our friendly petro-dollar. I wonder what the brings the average gallon to. 

Wed, 10/30/2013 - 20:30 | 4107050 venturen
venturen's picture

How else can a Giant Squid eat and get fat? J ARON

Wed, 10/30/2013 - 21:11 | 4107176 CrashisOptimistic
CrashisOptimistic's picture

Wow! Look at the end of the article.

That guy is offering a money back guarantee!

Imagine that!

 

 

Thu, 10/31/2013 - 00:48 | 4107260 g'kar
g'kar's picture

One of O'Dicktator's executive orders and it is 20 cents a gallon until there is no more gasoline on the market. Similar to when there will be no more doctors on the market when O'DicktatorCare goes full tilt.

Wed, 10/30/2013 - 20:59 | 4107134 Hooter Shaker
Hooter Shaker's picture

In 1964, a silver dollar would buy about 4 gallons of gas.  Today, that same silver dollar will buy about 4 gallons of gas after you convert it to bennybux.  Looks to me like the fiat has lost value, not the price of gas has risen.

Wed, 10/30/2013 - 21:07 | 4107158 Jumbotron
Jumbotron's picture

Ok....think about this.  Let's say Bennybux goes bye bye.  Then the price of EVERYTHING would collapse.  It's all about ratios.  The percentage one would pay for gas would be about the same or more if EVERYTHING collapsed in price.....including the price of your labor (ie. income.....that is....if you still have a job in this deflationary dystopia I'm painting here)

The cost of extraction for everything has gone up.......oil, minerals, lumber, rare earths, fish, meat, etc. etc......because we have extracted all of the cheap and easy to extract stuff.  In terms of fish.....the good stuff is rare....now we're eating hagfish in our McFish sandwiches.  Pork, chicken and cow meat are plentiful....but not cheap.....because it takes shitloads of water and fuel to raise and transport that meat. 

Peak cheap anything.....except for Benny Bux is the rule of the day.

Oh yeah......life is still cheap......and brutish and short.

Wed, 10/30/2013 - 21:46 | 4107275 Harry Dong
Harry Dong's picture

Lamprey pie. Umm umm good. I think the mc filets are better now.

Edit. Srsly, the overfishing is truly heartbreaking. And the acidification of the ocean makes Fukushima look trite. Hope there is some self regulating mechanism science doesn't know about yet to stop this extinction event.

Wed, 10/30/2013 - 23:03 | 4107451 Jumbotron
Jumbotron's picture

A few years back, Harry, I worked for a video editing and duplication shop.  And this guy came in with some old black and white and silent 16mm film from the sixties he wanted transfered to DVD.  It was him as a young man with a bunch of his buddies on a fairly large boat.  If memory serves me it had about 6 guys on either side with enough room to swing these LARGE rods.  And they were hauling in tuna as fast as they could throw the line back out into the water after shaking the fish off the line.

Here's the kicker.......there was NO BAIT on the hooks.  I asked the guy when he came back did I see some bad edits in the film or was I just missing something.  And he told me no....they would initially bait the hooks in the beginning...but after a while just the hook hitting the water would initiate the strike.  They would make several trips back and forth to shore to offload the fish and go back for more.....all day long.

He told me now.....the only thing the commercial fisherman are catching a lot of off the coast of Georgia is Cannonball Jellyfish because of the acidification you spoke of.  They are a delicacy in China.  Go figure.

I'll never forget that film.

Wed, 10/30/2013 - 23:22 | 4107500 DaveyJones
DaveyJones's picture

sounds like soon, they'll be a delicacy everywhere

Wed, 10/30/2013 - 23:31 | 4107526 Jumbotron
Jumbotron's picture

I don't think so.  I think they're the new McFish sandwich.  LOL.

Wed, 10/30/2013 - 21:08 | 4107163 quasimodo
quasimodo's picture

Winner !

Now go and tell that fact to 6 people you know, the odds are they will look at you like you have a third head. Then go and tell them to put some fiat into metals, that gives them an instant migraine and causes knashing of teeth.

Thu, 10/31/2013 - 07:33 | 4108009 earnulf
earnulf's picture

We all know that metals have maintained thier value in regards to the US dollar and all other fiat currencies.   Anyone who doesn't have a stash by this point is just playing a version of roulette from that cold place across the artic circle.

Wed, 10/30/2013 - 21:39 | 4106965 Harry Dong
Harry Dong's picture

down arrows for jumping to conclusions. Now go back and read it. (and yeah, the article has plenty other shortcomings to pick at).

Edit. Changed to green. I get your point now.

Wed, 10/30/2013 - 20:00 | 4106977 Zero Point
Zero Point's picture

Few people understand what oil shale really is. That's because the media consistently call it "shale oil", so people can picture some kind of liquid.

See how easy this is?

Oil shale, a kind of rock, which needs to be super heated so usable oil can be harvested from the resulting gases, becomes Shale oil... A mental image of liquid bubbling around in aquifers.

How interesting language is, when such simple lies can be told so easily.

Wed, 10/30/2013 - 20:07 | 4106997 DaveyJones
DaveyJones's picture

and don't forget all that pretty water

Wed, 10/30/2013 - 21:05 | 4107151 Incubus
Incubus's picture

Awesome isn't it?

 

We have plenty of oil for everyone else to use but us: and we destroy our water reserves in the process.

 

It's ok... We can just go into space and harvest ice planets when the EROI for water renders civilization moot.

 

Remember, the upper crust never has to worry about resource scarcity.  They will have enough to use even after the world ends.  It's about whether or not you and I do.

Wed, 10/30/2013 - 21:21 | 4107215 GMadScientist
GMadScientist's picture

Guess again...after "the world ends", production stops, trade stops, sales stop, and that upper crust is just a bunch of corpses waiting to happen; there'll be no toddling down to the mall to buy iPads for the grandchildren or Mtv Cribs. At some point, it's not worth running the trains, even if they do happen to occasionally catch on fire and improve resource scarcity.

Wed, 10/30/2013 - 21:25 | 4107228 Incubus
Incubus's picture

they'll still get resources, just on a smaller scale, because there's never a shortage of sycophants willing to do whatever it takes for the table scraps.

 

side note: (why did I use EROI for water?)  I guess if we had hydrogen fuel infrastructure, it would matter.

Wed, 10/30/2013 - 21:12 | 4107180 duo
duo's picture

It's like punching 50 holes in your tube of toothpaste and wondering why nothing comes out where it's supposed to when you squeeze it.

Wed, 10/30/2013 - 22:03 | 4107332 TheFourthStooge-ing
TheFourthStooge-ing's picture

.

Few people understand what oil shale really is.

So very true.

That's because the media consistently call it "shale oil", so people can picture some kind of liquid.

There's a bit of confusion between shale oil extracted from oil shale, and "shale oil", more accurately called tight oil, produced from drilling and fracking in shale formations such as the Bakken Shale.

Oil shale, a kind of rock, which needs to be super heated so usable oil can be harvested from the resulting gases, becomes Shale oil...

That's the process of using pyrolysis to extract the kerogen from the oil shale. It can be referred to as shale oil, although calling it kerogen or kerogen oil is probably more useful so as to distinguish it from the tight oil ("shale oil") obtained from fracking in shale formations.

Just to be clear, what is being obtained via fracking is oil, not kerogen, does not involve pyrolysis, and, despite the high costs and horrendous depletion rates of wells, is being produced on a commercial scale. As for kerogen from oil shale, there is currently no economically viable way to extract and process it at a commercial level.

Thu, 10/31/2013 - 00:41 | 4107668 AGuy
AGuy's picture

"This whole article is hopelessly ignorant. "

No Popo, you just failed to read it:

"Even in known oil-rich regions like the Bakken and Eagle Ford, the all-in cost of extracting a barrel of oil from the ground can cost as much as US$75 per barrel"

 

Wed, 10/30/2013 - 23:50 | 4107565 Dingleberry
Dingleberry's picture

maybe printing 85 large every month has something to do with it.

Thu, 10/31/2013 - 00:36 | 4107657 Freddie
Freddie's picture

How many children must die from libturd Warner Buffert oil railroads?  F him!

Wed, 10/30/2013 - 19:20 | 4106846 Hohum
Hohum's picture

Because US oil is much more expensive to produce, that's why, silly.  US has more than half the rigs in the world.  And, oh yeah, we consume about 19 million barrels per day.  Plus what goose3 said.

Wed, 10/30/2013 - 19:50 | 4106947 Hedgetard55
Hedgetard55's picture

Bullshit.

 

It is because Ben's QE is going not just into stocks and bonds but oil futures.

Wed, 10/30/2013 - 19:55 | 4106968 mofreedom
mofreedom's picture

every commodity-centric company would only pre-tax $100.09 in total if the Fed tapers ever...but I do believe gas would be well under $2.00 per gallon.

Thu, 10/31/2013 - 01:03 | 4107698 AGuy
AGuy's picture

"And, oh yeah, we consume about 19 million barrels per day."

Unfortunately its no where near 19 mbbd because the US now exports a lot of finished oil products. I don't think the EIA figures subtract finished oil product exports. You need to dig up a chart on consumption of finished oil products to get a real estimate. US consumption is now probably down in the 15 to 14 mbbd range, and heading lower as americans drive less, drive smaller fuel efficient vehicles, and demand for shipping goods is also declining.

US Net Exports of refined Oil products:

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja...

 

 

Wed, 10/30/2013 - 19:23 | 4106855 Gumbum
Gumbum's picture

Was about to say the same that goose3 and Hohum said. Look up ERoEI. Despite what the propagande media is telling you, shale and fracking is crap...

Wed, 10/30/2013 - 20:06 | 4106993 Running On Bing...
Running On Bingo Fuel's picture

Let's talk about trade deficits with all this USA oil.

What's up?

Over.

Wed, 10/30/2013 - 19:24 | 4106859 Quinvarius
Quinvarius's picture

Why does everyone have to shit on ethanol?  For fks sake, it is an additive that replaced a massively dangerous chemical called MTBE to make gasoline burner cleaner.  No one is billing it as a complete gasoline replacement in America.  The refiners own ethanol plants.  The corn they use for starch is still used as cattlefeed after the process of making ethanol.

I blame CNBC for this travesty.  Ethanol is fine.  Move on with your lives. 

Wed, 10/30/2013 - 19:33 | 4106892 OwnSilverPlayMusic
OwnSilverPlayMusic's picture

Yeah it's perfectly rational for people to starve to death so soccer mommy's can drive their suv's.

Wed, 10/30/2013 - 19:43 | 4106924 Quinvarius
Quinvarius's picture

Dude, the corn used in ethanol making is still used as cattlefeed:

http://www.youtube.com/watch?v=LxbsLioiXKs

It is like ethanol hating trolls don't have the ability to learn.  I don't get it.  Let the farmers make their value added extra money providng another useful product in peace.  It makes money so it will always be around.

 

Wed, 10/30/2013 - 19:49 | 4106943 Totentänzerlied
Totentänzerlied's picture

1. Stop feeding corn to beef cattle
2. Stop eating beef

Wed, 10/30/2013 - 19:51 | 4106953 DaveyJones
DaveyJones's picture

we are feeding gmo soy and gmo corn to animals whose very health (read ours) depends on eating grass

 

Wed, 10/30/2013 - 20:15 | 4107013 Running On Bing...
Running On Bingo Fuel's picture

Ever been to Coors Brewing in Golden CO.? After the brew is finished a Purina truck pulls up and collects all of the grains used in creating the beer.

The problem with this for your pet; all the grains used don't have ANY nutritional value left in them.

Beer is food. Ever hear that statement?

Over.

Wed, 10/30/2013 - 21:27 | 4107232 Harry Dong
Harry Dong's picture

Bread in a bottle. Cheers!

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