Business & Investing
Sponsored by

Can someone please explain gas prices to me like I'm a 5 YO?

3,778 Views | 32 Replies | Last: 2 yr ago by Sully Dog
Bocephus
How long do you want to ignore this user?
AG
Biden says that freedom for Ukraine will mean we are going to see higher gas prices so we must suffer at the pump. Ignore the fact that I don't believe anything he says and think he has dementia. I do not understand the reasoning.

We currently get 13 percent of our oil from Russia. We have not stopped getting 13 percent of our oil from Russia. We mainly import our oil from Canada and Mexico, not Russia. The supply has remained the same, the demand has not gone up, so why are we seeing higher prices at the pump when we have not cut off Russian oil?

I do not have an issue with price gouging bc in the end I believe it is economically healthy. If that is what is going on, it is what it is. Is this a case of oil futures going up bc of the war and that is increasing the price at the pump?
TAMU ‘98 Ole Miss ‘21
aggie_fan13
How long do you want to ignore this user?
AG
OPEC
Ulrich
How long do you want to ignore this user?
If by "we" you mean the world, then yes Russia is ~13% of world production. 13% can be very impactful. For example, Russia produces particular grades of crude due to the characteristics of their reservoirs. Certain refineries are set up to efficiently turn that oil into useful products. If Russian oil goes away, we can't necessarily just turn the taps on high in the Permian to make it up. And if the countries that have those refineries that efficiently refine Russian crude sanction Russia, then the fact that someone else is theoretically willing to buy it doesn't mean they can use it.

There are legal ways around those sorts of problems like blending or refinery modifications, but they can take years and many millions of dollars, which companies generally aren't willing to spend until they are confident the situation won't change and render their investments worthless or even counterproductive. Iranian oil production cratered under sanctions.
Ulrich
How long do you want to ignore this user?
Also important to remember that all this is on the margin - in a highly capital intensive, globally linked network, losing a couple percent of global production can have a dramatic impact on prices. This is because we may need 100 million barrels a day but only have an extra 1% of immediately available slack at each step in the system. In that case, losing 2% of some piece of the system, whether refining capacity or crude oil production, has to be compared to 1% rather than 100%. In that context it's a difficult thing to contend with. Crude oil demand is not as elastic as people tend to think.
Ulrich
How long do you want to ignore this user?
Third, world oil demand is still increasing due to growing populations and improving standards of living in many of the largest population countries. This is often ignored as a factor and/or masked by temporarily reduced demand during COVID, but if demand is growing at 1% per year so we need another million barrels per day but instead lose a million barrels, we fall much farther behind.

In conjunction with that, consider that it is getting a lot harder to obtain capital for drilling and that US producers have become much more disciplined and unwilling to speculate/grow on debt. Additionally, NOCs and countries that depend on NOCs are now thinking about getting the best NPV for their remaining reserves and worked on getting their budgets within existing cash flow. Translation: everyone is happy to keep producing the same amount and watch the prices go way up. No one is eager to turn on the taps to fill a shortfall like they were in the past, when everyone was overlevered and overextended, and therefore had to produce as much as possible as fast as possible.
Ulrich
How long do you want to ignore this user?
All of this is why I thought there was a better than 10% chance oil would run up over $180 a barrel sometime in 2022 - and that was before the Ukraine stuff happened. Now, I figured we needed some kind of geopolitical disturbance to get there, and Russia/Ukraine may be it.
double aught
How long do you want to ignore this user?
AG
Quote:

In conjunction with that, consider that it is getting a lot harder to obtain capital for drilling and that US producers have become much more disciplined and unwilling to speculate/grow on debt. Additionally, NOCs and countries that depend on NOCs are now thinking about getting the best NPV for their remaining reserves and worked on getting their budgets within existing cash flow. Translation: everyone is happy to keep producing the same amount and watch the prices go way up. No one is eager to turn on the taps to fill a shortfall like they were in the past, when everyone was overlevered and overextended, and therefore had to produce as much as possible as fast as possible.


I don't think a five year old knows what NOCs and NPV mean.
Ulrich
How long do you want to ignore this user?
Went back and re-read your post. Another factor is that risk gets priced in. When Iran and Iraq start barking at each other, prices go up. Everyone starts trying to secure future production and build inventory BEFORE war breaks out, it's not purely reactive. And keep in mind that these traders, who invest billions of dollars a year, keep a much closer eye on these things than we do and have much better sources for information. The traders and bankers know the politicians and diplomats, so even without explicit insider trading they are going to know how those people think and be able to observe their behavior in a way that we can't.
Ulrich
How long do you want to ignore this user?
double aught said:

Quote:

In conjunction with that, consider that it is getting a lot harder to obtain capital for drilling and that US producers have become much more disciplined and unwilling to speculate/grow on debt. Additionally, NOCs and countries that depend on NOCs are now thinking about getting the best NPV for their remaining reserves and worked on getting their budgets within existing cash flow. Translation: everyone is happy to keep producing the same amount and watch the prices go way up. No one is eager to turn on the taps to fill a shortfall like they were in the past, when everyone was overlevered and overextended, and therefore had to produce as much as possible as fast as possible.


I don't think a five year old knows what NOCs and NPV mean.

Oops. Rephrase: countries who make most of their money from oil want to make the most money over the next 20 to 50 years, not just today.

NOC = national oil company, a state-owned company that produces the oil and sends some of the revenue back to fund the government

NPV = a measure of the total cash received over a period of time, adjusting for the fact that most people would rather have a dollar today than a dollar a year from now
Ulrich
How long do you want to ignore this user?
Texags just ate another post. I sum up:

US refining capacity has decreased as refineries are converted to renewable diesel production. If oil production and gas demand stay the same, oil will get cheaper (because refineries can use less of it) and gas will get more expensive (because refineries can't fulfill as much demand). Each existing refinery will make tons of money, but it takes years and billions (not to mention the difficulty and expense of obtaining permits) to add significant refining capacity.

This basic problem, that infrastructure necessarily changes much more slowly than demand and risk, is why oil and gas pricing is so volatile and don't always move together.

We're coming out of COVID-suppressed demand with more geographically constrained production and less local refining capacity and less world oil production and more global oil demand than we had before.
Dan Scott
How long do you want to ignore this user?
AG
Oil prices drive gasoline prices. Oil has gone up to $115/barrel. There are 42 gallons in a barrel. So $115/42 = $2.70/gallon of the gas price just from the crude oil.

Then you have the add about $0.60/gallon for the refiner to turn the oil into gasoline. Already we're at $3.30/gallon. About $0.10/gallon to transport the gas to terminal and gas station. So that gets us to $3.40/gallon. Add in $0.40/gallon in state and federal taxes that's 3.80/gallon. And $0.10/Gallon for profit and gas prices should be about $3.90/gallon right now.

A gas station operator needs to manage his cash flow. A week ago he bought a ton of gas before taxes $3.00/gallon and selling it today for $3.50/gallon. He's not trying to rip us off, it's because he knows that this weeks gas inventory is going to cost him $3.40/gallon so he needs to have the cash to purchase.

Oil is traded on global market. The same speculation that made oil go negative is also driving up the cost. There is fear of near-term supply shortage. But if you look at the futures curve out into next year, prices are lower so near term fear supply disruption is driving up oil price which translate to higher gas price.
Stive
How long do you want to ignore this user?
AG
Wait….so Biden and Kamala aren't sitting around telling them to keep raising prices?!?! That's not what my crazy uncle said.
Bocephus
How long do you want to ignore this user?
AG
Learning a lot so thanks for that. I said 13 percent meaning 13 percent of the oil that Americans use is imported from Russia. Not 13 percent of the world.
TAMU ‘98 Ole Miss ‘21
htxag09
How long do you want to ignore this user?
AG
Bocephus said:

Learning a lot so thanks for that. I said 13 percent meaning 13 percent of the oil that Americans use is imported from Russia. Not 13 percent of the world.

The global supply chain is linked, though. If Europe is getting less from Russia they are going to want to supplement from somewhere. So the other oil we get now has more demand. So prices increase.

So sure, if the US put in place our own sanctions we'd probably see a more immediate and drastic increase. But that doesn't mean prices won't increase if we don't.
$30,000 Millionaire
How long do you want to ignore this user?
AG
Russians are meanies and got put in time out

Saudis are greedy and want all the money

America is making less oil and gas

That makes gas cost more

Your mommy has to pay more for gas
Bocephus
How long do you want to ignore this user?
AG
$30,000 Millionaire said:

Russians are meanies and got put in time out

Saudis are greedy and want all the money

America is making less oil and gas

That makes gas cost more

Your mommy has to pay more for gas


IE we should pump more out of the ground here in the US
TAMU ‘98 Ole Miss ‘21
$30,000 Millionaire
How long do you want to ignore this user?
AG
Yes
jagvocate
How long do you want to ignore this user?
AG
Also, something about Continental USA oil supply isn't meeting base petro chemical demands. See the continuous draws from the nation's Strategic Petroleum Reserve. If demand goes up or world wide supply stumbles more, expect $165 WTIC.

gvine07
How long do you want to ignore this user?
AG
OPEC is producing the same amount of oil as they did in July. I don't think they're to blame for the recent run up.

https://www.nytimes.com/2022/03/02/business/oil-prices-opec.html
Ragoo
How long do you want to ignore this user?
AG
Speculators are bidding up futures contracts driving commodity prices higher
Bocephus
How long do you want to ignore this user?
AG
jagvocate said:

Also, something about Continental USA oil supply isn't meeting base petro chemical demands. See the continuous draws from the nation's Strategic Petroleum Reserve. If demand goes up or world wide supply stumbles more, expect $165 WTIC.


I thought that over $60 per barrel, it was profitable to drill in Texas. Why don't we simply drill more?
TAMU ‘98 Ole Miss ‘21
Ulrich
How long do you want to ignore this user?
Bocephus said:

Learning a lot so thanks for that. I said 13 percent meaning 13 percent of the oil that Americans use is imported from Russia. Not 13 percent of the world.

I'm not sure what the exact numbers are, but I think Russian crude is less than 1% of what we use in the United States. We mostly use what is produced here, and then the largest sources of foreign crude are Canada, Mexico, South America, and Middle East.

Edit: but because of how the market is global, it has more than a 1% impact on our ability to get crude.
jagvocate
How long do you want to ignore this user?
AG
Those might be pre-2022 inflation and Biden administration numbers. Regulatory risk is real and will need to be compensated.

Ulrich
How long do you want to ignore this user?
jagvocate said:

Also, something about Continental USA oil supply isn't meeting base petro chemical demands. See the continuous draws from the nation's Strategic Petroleum Reserve. If demand goes up or world wide supply stumbles more, expect $165 WTIC.

The SPR draws are generally PR for whatever administration is in charge, not meaningful contributions to the supply and demand balance. The best that could be said for it is that advertising the draws may convince a few people that they don't need to fill rubbermaids with gasoline just in case.

The SPR holds 700 million barrels and it can send out 4 million barrels per day. If we drained the SPR, we could make up 4% of world oil for less than six months, shorter than most sanctions last, and then we would not have a strategic reserve. You would also have to find a bunch of tankers to send it to where it's needed, which is no mean feat. Russia produces 12-13 million a day.

The SPR is meant for fueling our jets, ships, and tanks in a war situation, so you wouldn't want to draw it down in a meaningful way just to manipulate consumer pricing, ESPECIALLY when the cause is armed conflict involving a world power i.e. a warning sign that we're a lot more likely than usual to need it for it's true purpose.


I have a real problem with using the SPR the way presidents tend to.
htxag09
How long do you want to ignore this user?
AG
Ulrich
How long do you want to ignore this user?
Bocephus said:

jagvocate said:

Also, something about Continental USA oil supply isn't meeting base petro chemical demands. See the continuous draws from the nation's Strategic Petroleum Reserve. If demand goes up or world wide supply stumbles more, expect $165 WTIC.


I thought that over $60 per barrel, it was profitable to drill in Texas. Why don't we simply drill more?

1. Capital cost. It's much harder to get that money to drill new wells now than it was in 2010 or 2014. That is mitigated by the massive cash flows from wells at $90 oil and $4 gas

2. Drilling crew/service availability. The oil patch always has a hard time getting enough labor in boom times, and back to back crashes in recent memory along with whatever is going on with labor shortages generally have gutted the supply of labor.

3. Building materials. We have a global shortage of all kinds of physical goods, including steel, which is needed in large quantities for well casings, gathering lines, and all sorts of other stuff.

4. Infrastructure. More wells are useless without more pipelines to get it to market. It takes 1-3 billion to build a major pipeline plus years to acquire rights to the land and then build the thing. I don't think that's a huge deal right now in most basins because there was some overbuilding in the 2014-2019 timeframe, but it's a massive part of the general answer to that question. Trucks aren't a viable alternative in most situations. Trains can be, but not always and you still run into infrastructure and labor issues.
jagvocate
How long do you want to ignore this user?
AG

mazag08
How long do you want to ignore this user?
AG
Dan Scott said:

Oil prices drive gasoline prices. Oil has gone up to $115/barrel. There are 42 gallons in a barrel. So $115/42 = $2.70/gallon of the gas price just from the crude oil.

Then you have the add about $0.60/gallon for the refiner to turn the oil into gasoline. Already we're at $3.30/gallon. About $0.10/gallon to transport the gas to terminal and gas station. So that gets us to $3.40/gallon. Add in $0.40/gallon in state and federal taxes that's 3.80/gallon. And $0.10/Gallon for profit and gas prices should be about $3.90/gallon right now.

A gas station operator needs to manage his cash flow. A week ago he bought a ton of gas before taxes $3.00/gallon and selling it today for $3.50/gallon. He's not trying to rip us off, it's because he knows that this weeks gas inventory is going to cost him $3.40/gallon so he needs to have the cash to purchase.

Oil is traded on global market. The same speculation that made oil go negative is also driving up the cost. There is fear of near-term supply shortage. But if you look at the futures curve out into next year, prices are lower so near term fear supply disruption is driving up oil price which translate to higher gas price.


Well posted breakdown. Thanks.
malenurse
How long do you want to ignore this user?
AG
To piggy back on this thread, increase in fuel prices affect EVERYTHING! I was booking flights on Southwest yesterday and, in front of me eyes, rates from Houston to Charlotte nearly doubled.

Groceries already going up. All commodities will be affected.
Bocephus
How long do you want to ignore this user?
AG
LGB
TAMU ‘98 Ole Miss ‘21
monarch
How long do you want to ignore this user?
S
To support Joey B's knowledge of the economy, "People are paying $5.00/# for hamburger now!"
Peace for Ukraine!
slammerag
How long do you want to ignore this user?
AG
Depreciation and local taxes have caused a bunch of rig contactors to "cut up" rigs. There are not enough super-spec rigs available and limited capex is keeping more from being built.
Sully Dog
How long do you want to ignore this user?
Stive said:

Wait….so Biden and Kamala aren't sitting around telling them to keep raising prices?!?! That's not what my crazy uncle said.
I mean, jacking around leases, auctions, and promoting ESGs ain't exactly helping.
Deplorable Neanderthal Clinger
Refresh
Page 1 of 1
 
×
subscribe Verify your student status
See Subscription Benefits
Trial only available to users who have never subscribed or participated in a previous trial.