Released: March 23, 2011
Next Release: March 30, 2011

Japan and Libya: Different Impacts on World Markets

The human suffering and dislocation caused by the recent events in Libya and Japan, whether due to violent conflict or natural disaster, is both broad and widely felt. While our thoughts focus mainly on prospects for bringing resolution and relief to those affected, both Libya and Japan, each in its own way, are vital links in the global energy supply chain. The disruption to normal economic and productive activities in both countries carries worldwide consequences.

While the events in both Libya and Japan represent a continuing thread of uncertainty, there is also a clear contrast stemming from the two countries' differing roles in the global energy system. Libya's importance to world oil markets derives primarily from its role as North Africa's second largest producer of crude oil and liquids (1.8 million barrels per day (bbl/d) in 2010), and as a net exporter of high quality crude oil, mostly -- though not exclusively -- to the European market. Japan looms large mostly as a consumer of crude oil and refined products and other energy inputs. Libya is a supply story, whereas Japan is mainly about demand.

The questions in Libya are how long the fighting will last, whether the production infrastructure will suffer any lasting damage, and what type of energy landscape will emerge from the confrontation. So far, buyers of Libyan oil - for the most part, European refiners - have been able to muddle through and do without. But it is becoming increasingly clear that this is more than a passing crisis, and the market will need to make adjustments for the longer term.

Japan is an industrial behemoth and the world's third largest oil consuming economy behind the United States and China, with 2010 estimated oil consumption averaging 4.4 million bbl/d. While the earthquakes and tsunami have spared its industrial heartland, the nation's entire economy has been affected - as have been, to an extent still unclear, the many economies that depend on it for inputs or as an outlet for their own production. Initial assessments suggest the market impact will likely be two-tiered. First, the disaster will cause a temporary reduction in Japanese oil demand, partly offsetting the Libyan supply shortfall. While market attention has been focused on the nuclear power generation infrastructure, the scope of the damage is broader and includes thermal power generation, refineries, factories, ports, roads, and other transport logistics that directly affect the use and movement of oil.

In the longer term, however, market expectations are that the Japanese disaster will cause oil demand to rebound in order to support reconstruction efforts when they get underway and make up for some part of the loss in nuclear power generation. What is less clear is the timing of the transition from phase one to phase two of the quake's aftermath - i.e., the expected bottom in Japanese oil demand.

The recent supply disruption in Libya and the subsequent near-term disruption of oil demand in Japan have sent crude oil prices on a roller coaster. On February 14, just before major demonstrations began in Libya, the spot price of Brent stood at $103 per barrel. In the wake of the Libyan uprising, by March 2, Brent increased almost $14 per barrel, before retreating almost $6 per barrel on the back of the Japanese earthquake and tsunami, only to regain some of the lost ground more recently as the Libyan confrontation intensified.

But the impact on U.S. retail product prices has been more subdued and nuanced. Gasoline prices generally reflect movements in crude oil prices, but over the last two weeks, national gasoline retail prices have remained relatively flat. This is because it takes some time for the full effect of crude oil price changes to be reflected in retail gasoline prices. Typically, a $10 increase in the price of a barrel of crude oil translates into an increase of about 24 cents in the retail price of a gallon of gasoline over the course of about eight weeks. About half of that increase generally takes place within two weeks. Thus, a portion of the sharp crude oil price increase that happened weeks ago in the wake of the first Middle East headlines is still working its way through retail prices.

Thanks to that lag, the remaining upward price effect of the Middle East news has been largely offset by the more recent downward impact of the Japanese disaster and expectations of reduced demand, resulting in flat retail prices. If there were no significant changes in current crude oil prices, our gasoline pricing pass-through analysis suggests that over the next several weeks, we would see no further pressure from crude oil prices. However, we would expect to see price increases due to seasonal changes such as the shift from winter to more expensive summer-grade gasoline.

Price pressures resulting from events in Libya and elsewhere are occurring in the context of a recent recovery in U.S. gasoline fundamentals. Monthly data show gasoline product supplied increased year-on-year in eight of the last nine months of 2010, averaging 93,600 barrels per day higher than 2009 over that period. While severe winter weather may have temporarily affected gasoline demand this winter (for additional discussion of this point, see the February 24 installment of Today in Energy), this may not signal a reversal of the recent trend.

The Short-Term Energy Outlook to be released on April 12 will present a detailed summer fuel outlook including an in-depth assessment of the U.S. gasoline market for the peak driving season.

Retail diesel price logs first decrease of 2011
The U.S. average retail price of regular gasoline decreased half of a cent versus last week, the first decline since January 31, 2011. At $3.56 per gallon, gasoline is $0.74 per gallon higher than last year at this time. The biggest decrease was on the Gulf Coast, where the gasoline price fell almost two cents. The gasoline average on the East Coast lost a penny on the week and the Midwest price was down just under a cent. Moving in the other direction, the West Coast average moved up about two cents. In the Rocky Mountains, the price was almost three cents higher than last week. Despite this increase, the gasoline price in the Rocky Mountains remained the lowest in the country at $3.39 per gallon. The most expensive gasoline among the major regions is on the West Coast, where the average retail price is $3.86 per gallon.

Diesel prices fell for the first time in sixteen weeks, albeit a small decrease, with the national average down just a tenth of a cent from last week. At $3.91 per gallon, the diesel price is $0.96 per gallon higher than last year at this time. Diesel prices were mixed across the country, with prices falling less than a penny on the East Coast, Gulf Coast, and in the Midwest. Prices in the Rocky Mountains were up almost four cents. The average on the West Coast was also up on the week, adding over a penny to last week's price.

Propane stocks draw down slightly
Total U.S. inventories of propane took a slight draw of inventories last week, falling 0.4 million barrels to end at 27.0 million barrels. The East Coast regional stocks dropped by 0.2 million barrels. The Midwest and Rocky Mountain/West Coast regional stocks were both down by 0.1 million barrels. The Gulf Coast regional inventories fell slightly. Propylene non-fuel use inventories represented 7.8 percent of total propane inventories.

Text from the previous editions of This Week In Petroleum is accessible through a link at the top right-hand corner of this page.

Released: March 2, 2011
Next Release: March 9, 2011

The ABCs of crude supply disruptions

For the people of Libya, with life, death, and the future of their country in the balance, the price of oil probably doesn't rank as a top concern at present. However, recent price movements suggest that the oil markets are closely following events in Libya and elsewhere in North Africa and the Middle East. Oil prices have risen from the first signs of disquiet in Tunisia to the fall of Egyptian President Mubarak to the violence and power shift in Libya, which has significantly disrupted that country's field production and exports. Libya produced about 1.65 million barrels per day (bbl/d) of crude oil in 2010, or approximately 2 percent of global supply, while net exports (including all liquids) were roughly 1.5 million bbl/d. The incomplete information coming from Libya has not spared the oil sector, and the market grasp of the scope of disruption has been less than precise, with estimates of production declines in the middle of last week ranging from 500,000 to 700,000 bbl/d to a near total shutdown. But even an exact measurement of the crude oil, product, and natural gas shortfall in Libya would, at best, provide a partial sense of its significance. The market impact of such a supply disruption goes beyond volumetric loss and entails many different factors, which we begin to sort out below.

Crude volume versus crude quality
Although oil is generally seen as a fungible, in fact, crude comes in many different grades of varying qualities and product yields. Libya's importance to the oil market stems not only from its substantial production, but also from the light, sweet quality of its crude grades. Es Sider, its largest stream, has a slightly lower gravity than benchmark grades Brent and West Texas Intermediate (WTI), (meaning that it is a slightly heavier grade of crude) but a slightly lower sulfur content (meaning that it is sweeter). Another Libyan grade, Sirtica, is lighter than Brent and WTI. Light crudes are, generally speaking, the easiest to process and can be run by relatively "simple" refineries that may not be able to handle heavier or sourer substitutes. A loss of light, sweet crude volumes is, as a rule of thumb, more difficult to deal with than a loss of heavier and sourer ones. This is not only because the refineries that run light, sweet grades have limited feedstock flexibility, but also because most of the spare crude production capacity tends to be at the heavy, sour end of the barrel. Fortunately, current utilization rates for U.S. refineries suggest that there is a significant margin of spare capacity at "complex" refineries that could be used to process heavy, sour crude oil.

Market outlet and destination
Although the majority of Libya's oil output and most of its natural gas production goes to Europe, its crude market reach is wider, extending all the way to China. But the ultimate impact of any crude disruption goes beyond the immediate buyers of that specific oil. As buyers find substitute supplies for the disrupted oil, those replacement barrels, in turn, are diverted from their original use or destination, causing secondary impacts. Should it be prolonged, a disruption in Libyan exports could have a larger effect on U.S. oil supply sources than the relatively small volumes of Libyan crude actually imported into the United States would suggest. Unlike Libyan production, more than a third of Algeria's light, sweet crude (a possible substitute from fields relatively close to Libya's) is shipped to U.S. refiners, which sometimes use it as a blending stock to lighten heavier crude grades. Should those volumes find a stronger market in Europe, U.S. end-users would have to look for alternate supplies. Light, sweet Nigerian crude, which depending on market conditions can wind up in the United States, Europe or Asia, is another case in point. Global crude oil flows will tend to adjust to best match demand needs with available supply sources.

Short haul versus long haul
Location is another important factor affecting the impact of a disruption. The closer the fields where a disruption is occurring are to their market outlet, the more immediate the disruption's impact on oil inventories and prices is likely to be, unless an alternate supply source equally close to market can be found. In December 2002 and early 2003, a worker strike that curtailed Venezuelan production was immediately felt in the United States, a short-haul destination. Substitute imports from distant Saudi Arabia took weeks to arrive. The rerouting of supplies increased shipping distances, tying up tankers for longer voyages and further tightening a shipping market that had already been firming even before the event. In contrast, while there can be indirect effects on long haul markets from localized substitution, those long haul effects would be comparatively subdued.

Crude versus products
Another way in which a disruption in one market sends ripples through others is via the product markets. Much of the Libyan crude oil refined in Mediterranean refineries is re-exported as product after processing by export-oriented refineries. Italy is Libya's top crude oil customer, with Libyan crude oil accounting for roughly a quarter of Italy's total crude imports. But the volume of its refined product exports exceeded that of its Libyan crude imports. Should the disruption force Italian and other refiners to decrease their runs, a sustained disruption in Libyan exports could result in decreased Italian product exports to other markets, tightening product markets well beyond the Mediterranean basin. At this time, however, Italian refinery runs have not been visibly affected by the current disruption.

Market conditions
The impact of a supply disruption is greatly affected by underlying market conditions, such as supply and demand balances, commercial and strategic stock inventory levels, and spare production, transportation and refining capacity. In 1973, the Arab oil embargo had an acute market impact because demand had been growing steeply and the market was already tight even before the event. But in 1967, an earlier Arab oil embargo ended in failure because the market was much more slack. The current disruption is occurring against a context of relatively comfortable spare capacity. Oil inventory levels are generally high by historical standards. But they are not evenly distributed throughout the world and are markedly tighter in Europe, the primary market for Libyan crude, than in North America. The European Brent market had been tightening before the start of unrest. In contrast, spare capacity in both transportation and refining remains abundant, which makes it possible to carry substitute barrels at a relatively low cost over long haul routes and to process barrels of a lesser quality than Libyan crude.

Seasonality
Because demand and supply are both subject to seasonal cycles, the time of year of a supply disruption affects its impact. The current disruption is occurring in a relatively low-demand season. Should it be prolonged, it could conflict with a seasonal ramp up in refinery production ahead of the peak summer driving season. Crude maintenance in the North Sea and elsewhere is also relatively low in the first quarter.

Strategic reserves
Countries with strategic reserves of crude oil and/or petroleum products must decide whether or not to release them in response to a disruption. The decision is a complex one whose potential benefits must be weighed against costs that include a reduction in pressure on suppliers with spare capacity to increase output, and a lower amount of reserves available for use in the future. Most of Europe's strategic oil reserves are held in products at refinery sites. The United States also holds its strategic reserves in both sweet and sour crudes which can meet a variety of market needs.

Transit corridors
A supply disruption does not necessarily come in the form of a loss at the wellhead, but can result from a transit blockage. Although Egypt is not a large exporting country, it is important to the oil markets as a transit corridor. Earlier this year, as unrest mounted in Egypt, the market grew concerned that oil traffic though the Suez Canal and the SUMED pipeline might be halted. A significant amount of internationally traded oil moves through a number of chokepoints, such as the Strait of Hormuz, the Strait of Aden, the Strait of Gibraltar, the Bosporus and the Malacca Strait, to name a few of the most well known, where it is vulnerable to bottleneck and transit risks. Unrest in Yemen might raise market worries about disruption in the Strait of Aden; although repeated attacks by Somali pirates have already taken a toll on local traffic, oil has continued to flow. In the past, Iran has occasionally raised the threat of retaliating by disrupting tanker traffic in the Persian Gulf if it came under attack. However, even during the Iran-Iraq war, oil continued to flow through Hormuz.

Domino effects
Unrest in one country can raise concerns about potential disruptions in another through a perceived risk of "contagion." Unrest and upheaval in economies that are non-critical to global oil supply might nevertheless rattle the markets by causing worries that they might spread to neighboring or politically- or culturally-related countries that may be of greater importance to energy market participants.

Market impact
Just as many factors may shape the market impact of a disruption, that impact may manifest itself through a variety of channels. Changes in prompt crude prices are just the most visible and immediate one. Other effects have to do with changes in the relative value of prompt oil supplies across the quality and grade spectrum, changes in the crack spread (the difference between crude prices and product prices) and in the time spreads, or shape of the futures curve. A loss of crude volumes with a high distillate yield will cause distillate prices, not just crude prices, to rise. A supply disruption can cause the price of prompt barrels to rise relative to that of barrels for later delivery - thus pushing the futures curve into backwardation, as opposed to contango (when futures prices are higher further into the future). Changes in the futures curve, in turn, carry implications for inventories and oil trade flows.

Retail gasoline and diesel prices surge
The U.S. average retail price of regular gasoline gained 19 cents versus last week, marking the second largest weekly increase since the EIA began tracking weekly retail price data in 1990. The only week posting a larger increase was in September 2005 when retail prices rose sharply due to Hurricane Katrina. At $3.38 per gallon, gasoline is now $0.68 per gallon higher than last year at this time. Prices in the Midwest jumped almost 23 cents, the biggest increase in the country. The Gulf Coast followed closely behind, with gasoline prices in the region gaining 22 cents on the week. The East Coast saw an increase of over 18 cents, while the West Coast gasoline price advanced 14 cents. The smallest increase this week was in the Rocky Mountain region, where the price rose 11 cents, making gasoline in the Rocky Mountains the lowest in the country at $3.18 per gallon. The most expensive gasoline among the major regions is on the West Coast, where the average retail price is $3.62 per gallon.

Diesel prices rose for the thirteenth consecutive week with the U.S. average retail price adding more than 14 cents to last week's price. At $3.72 per gallon, diesel is $0.86 per gallon higher than last year at this time. Diesel was up across the country, with the biggest increase coming on the West Coast where prices jumped 16 cents over last week. Diesel on the East Coast and Midwest increased more than 14 cents, in line with the national per gallon average increase. The Gulf Coast diesel price registered a gain of over 13 cents while the Rocky Mountains saw diesel increase an even 13 cents.

Residential heating oil prices increase sharply
Residential heating oil prices continued to rise during the period ending February 28, 2011. The average residential heating oil price increased to $3.76 per gallon, nearly a $0.14 per gallon over last week and $0.86 per gallon more than last year at this time. Wholesale heating oil prices increased by $0.21 per gallon last week, reaching a price shy of $3.05 per gallon. This is $0.93 per gallon higher than last year's price.

The average residential propane price increased by more than $0.04 per gallon to reach a price just under $2.86 per gallon. This was an increase of $0.18 per gallon compared to the $2.68 per gallon average from the same period last year. Wholesale propane prices jumped nearly $0.29 with the overall price at $1.69 per gallon. This was an increase of $0.34 per gallon compared to the March 1, 2010 price of $1.35 per gallon.

Propane stocks fall as heating season nears an end
Total U.S. inventories of propane declined 1.0 million barrels last week to end at 28.5 million as heating season in the U.S. winds down. The Midwest region had the largest stock draw of 1.3 million barrels of propane. The Rocky Mountain/West Coast region also had a draw of 0.1 million barrels. Meanwhile, the East Coast and Gulf Coast regions each added 0.2 million barrels of propane inventory. Propylene non-fuel use inventories represented 9.1 percent of total propane inventories.

Text from the previous editions of This Week In Petroleum is accessible through a link at the top right-hand corner of this page.

Massive oil field
found under Gulf
Reserves south of New Orleans could rival
North Slope, boosting U.S. supplies by 50%

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Posted: September 5, 2006
11:57 a.m. Eastern

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© 2006 WorldNetDaily.com

 

Oil-drilling platform in Gulf of Mexico

Chevron and two oil exploration companies announced the discovery of a giant oil reserve in the Gulf of Mexico that could boost the nation's supplies by as much as 50 percent and provide compelling evidence oil is a plentiful deep-earth product made naturally on a continuous basis.

Known as the Jack Field, the reserve – some 270 miles southwest of New Orleans – is estimated to hold as much as 15 billion barrels of oil.

Authors Jerome R. Corsi and Craig R. Smith say the giant find validates the key thesis of their book, "Black Gold Stranglehold: The Myth of Scarcity and the Politics of Oil," that oil did not come from the remains of ancient plant and animal life but is made naturally by the Earth.

"We have always rejected the theories that oil and natural gas are biological products," Corsi told WND. "Chevron's find in the Gulf of Mexico validates our argument that the Gulf is a huge resource for finding oil and natural gas."

The Wall Street Journal reports today the find could boost the nation's current reserves of 29.3 billion barrels by as much as 50 percent.

Chevron discovered the field by drilling the deepest to date in the Gulf of Mexico, down 28,175 feet in waters nearly 7,000 feet deep, some seven miles below the surface of the Earth.

The second biggest source of oil in the world is Mexico's giant Cantarell field in the Gulf of Mexico near the Yucatan Peninsula. It was discovered in 1976, supposedly after a fisherman named Cantarell reported an oil seep in Campeche Bay.

In March, Mexico announced the discovery of a field that could be larger than Cantarell, the Noxal field in the Gulf of Mexico off Veracruz.

In "Black Gold Stranglehold," Corsi and Smith argued the theory developed in the Soviet Union in the 1950s by Prof. Nikolai Kudryavtsev that oil is a deep-earth, abiotic product. The theory, the authors wrote, "rejected the contention that oil was formed from the remains of ancient plant and animal life that died millions of years ago. According to Kudryavtsev, oil had nothing to do with the unproved concept of a boggy primeval forest rotting into petroleum. The Soviet scientist ridiculed the idea that an ancient primeval morass of plant and animal remains was covered by sedimentary deposits over millions of years, compressed by millions of more years of heat and pressure."

Instead, the abiotic theory argued "oil should be seen as a primordial material that the earth forms and exudes on a continual basis."

Corsi and Smith directly challenge the "peak oil" theory advanced in 1956 by Shell Oil's M. King Hubbert.

In an interview with WND, Smith posed the following question: "If U.S. proven oil reserves can be increased by 50 percent with one deep-earth oil find in the Gulf of Mexico, who knows how much oil might be found as the technology of deep-water drilling advances and becomes even more economically feasible?"

In "Black Gold Stranglehold," Corsi and Smith note the importance of the abiotic theory:

 

The thought that oil might be naturally produced on a regular basis, that oil itself might be a renewable resource, is very threatening to those who have invested their minds into believing that oil is fossil fuel. The logical consequence of the fossil fuel theory of oil has always been that we will run out of oil. After all, there could only be a finite number of ancient forests available to rot into oil. Ancient forests, even if once plentiful, are a finite resource that by definition will become exhausted after they are fully explored and their oil harvested. The logic of the fossil fuel theory is that inevitably we will run out of oil.

Corsi and Smith note the power of the abiotic theory: "Could it be that oil is abundant, nearly an inexhaustible resource, if only we drill deep enough?"

Prior to the Jack Field discovery, the largest U.S. oil find in the Gulf of Mexico has been the Thunder Horse, about 125 miles southeast of New Orleans. British Petroleum holds a 75-percent interest with ExxonMobil to develop the Thunder Horse. This field, too, is deep-earth oil, with BP and ExxonMobil finding oil under one mile of water and five miles below the seabed.

Scientists believe Mexico's richest oil field complex was created when the prehistoric, massive Chicxulub meteor impacted the Earth.

"Could it be that the Chicxulub meteor deeply fractured the entire bedrock under the Gulf of Mexico?" Corsi asked in a WND interview. "If so, we might find abundant oil wherever we look as we begin to explore the deeper waters of the Gulf."

Earlier this year, Cuba announced plans to hire the communist Chinese to drill for oil some 45 miles off the shores of Florida. This move was made possible by the 1977 agreement under President Jimmy Carter that created for Cuba an "Exclusive Economic Zone" extending from the country's western tip to the north, virtually to Key West, Fla.

"If Cuba and communist China believe they too can find oil in the Gulf, we should pull out all stops," argues Smith. "We may be able to bring the price of gasoline down under two dollars a gallon if oil can be found in these huge quantities within our territorial waters. It's crazy to think we should be dependent on foreign oil when we've made Mexico our number two supplier of oil with the reserves Mexico has found in the Gulf."

"Thomas Gold should feel vindicated today," Corsi added, referring to the Cornell University astronomer who in 1998 published "The Deep Hot Biosphere: The Myth of Fossil Fuels," a book that also challenged the conventional wisdom on the origin of oil.

"As an astronomer reading spectrographs," Corsi noted, "Gold knew that hydrocarbon products such as methane are abundant in our solar system. Gold knew that the abundant methane on Titan, the giant moon of Saturn, did not get formed by little dinosaurs up on Titan, or by any other kind of biological material. So far as we know, nothing living has ever been found on Titan."

Posted: July 19, 2006
1:00 a.m. Eastern

Dr. Walter E. Williams is the John M. Olin Distinguished Professor of Economics at George Mason University in Fairfax, Va.