Why are Pump Prices not Falling

[par_putt]

If Oil Production is Growing Why are Pump Prices not Falling?

By James Hamilton | Mon, 11 February 2013 23:16 | 1
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Those who have been told that oil production is booming may be wondering why the prices of oil and gasoline are climbing again.

According to the EIA, world petroleum production in the first 10 months of 2012 averaged 88.8 million barrels a day. That's 2 mb/d, or 2.3%, higher than in 2010. The IMF estimates that world GDP grew by 7.1% between 2010 and 2012. If we used a global income-elasticity for petroleum demand of 0.75, we might have anticipated that a 5.3% increase in petroleum production over the last two years would have been necessary to keep the price of oil from rising. Ongoing conservation, for example, in the form of continued improvement in fuel economy, has been a key factor keeping the oil price from rising more in the face of world income growing much faster than world oil production.

China likely consumed nearly half of the global 2 mb/d increase. The EIA reports that China increased its petroleum consumption by almost 500,000 b/d in 2011, and preliminary estimates are that China added another 420,000 barrels to its daily consumption in 2012.

Moreover, about a quarter of the 2 mb/d supply increase reported by the EIA over the last two years came in the form of natural gas liquids. These hydrocarbons are in gas form at ambient pressure and temperature, but become liquid with less pressure than is required to liquefy single-carbon methane.


About 80% of natural gas plant liquids are in the form of 2-carbon ethane or 3-carbon propane. Ethane is primarily used to make ethylene for petrochemicals and manufacturing, while propane has a variety of uses. But neither ethane nor propane is used to make gasoline. That's why the boom in production of NGL's has meant rapidly dropping prices for ethane and propane but not for the price of gasoline.


It's obvious that it makes no economic sense to add gallons of ethane or propane to gallons of crude oil to try to summarize global oil supply. But growth of natural gas liquids has been a key factor in the reported increases in "world oil supply" over the last few years and is also a key component of recent optimistic assessments of future oil production by Leonardo Maugeri and the IEA.

There is no question that the boom in production of natural gas liquids is providing a great benefit to industrial users of ethylene. But if you're waiting for it to lower the price you pay for gasoline at the pump, you may have to wait a while longer.

[dan_s]

Good Post: It is very important that investors understand that all liquids are not the same. "Black Oil" like WTI and Brent is very valuable. The other stuff, not so much now that so much is coming from the shale plays. All boe's are not the same. You need to focus on the breakdown, which I show at the bottom of my forecast models. - Dan

EIA and OPEC Raise Forecasts for Global Oil Demand in 2013
Five Star Equities Provides Stock Research on Goodrich Petroleum and Halcon Resources 02/15 07:20 AM

NEW YORK, NY -- (MARKETWIRE) -- 02/15/13 -- The Oil & Gas Industry has experienced a good start to 2013 as improvements in the global economy has seen both the U.S. Energy Information Administration (EIA) and OPEC raise their forecasts for global oil demand in 2013. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has gained over 10 percent year-to-date.

The EIA has raised its 2013 growth forecasts by 110,000 barrels per day (bpd) to 1.05 million bpd in 2013. Global oil demand is now expected to total 90.2 million bpd this year. The increase follows a report from OPEC earlier in the week projecting oil demand to increase by 840,000 bpd, 80,000 bpd higher than its previous estimate. Prices for Brent Crude have gained approximately 10 percent year-to-date hitting a 10-month high of over $118 a barrel.

"Market fundamentals and expectations strengthened in January 2013 because of earlier than-expected cutbacks in Saudi Arabian oil production and greater optimism about economic growth, particularly in China," the EIA said in its report.