Monday, March 14, 2011

Japan Earthquake Could Test U.S. with $5 Gasoline Prices

The fallout on the fuel market will be severe following the 9.0 Japanese earthquake on Friday, March 11. 2011, since Japan will have to supplement their nuclear energy power production with coal, natural gas and oil-fired power plants.

Information is short and hard to obtain about the status of the nuclear power plants in Japan. Not being a nuclear physicist it is hard to sort the facts from the hysteria but going on past history we are being fed pap by official press officials of the Japanese government about the real situation in dealing with this cataclysmic event. These same officials withheld vital information after the 1995 Kobe earthquake, which killed more than 6,000 people.

We are now hearing and seeing different versions between watching the live feeds on T.V. and Twitter as events enfold and the reports from official press reports. Under the circumstances that may be understandable as the government does not want to cause a panic. But do we believe them or our lying eyes?

Japan is the third largest country in the world in terms of nuclear energy production, following France, and the U.S. which is in first place (see table above). The country gets about 30% of its power from nuclear sources. Reportedly, 11 nuclear reactors and 21 thermal power plants where shut down after the earthquake, and BBC News put the reduction in output at Japan's nuclear power generators at anything from 25% to 50%.

On top of the loss in the power generation capacity, the Wall Street Journal reported that about 1.2 million barrels per day refining capacity in Japan is also shut down after the earthquake disaster. With this much capacity off line, Japan needs to secure alternative means of generating power and petroleum products as well.

Meanwhile, diesel fuel and coal are readily available. Cargoes of diesel fuel can be shipped almost immediately from the U.S. West Coast refineries to meet up with this new found Japanese demand.

The following graph shows the world refining capacity and how much North America and Far East Asia use crude oil for fuel production:

More refineries will have to be brought into production with economics justifying their running at full capacity. It may not cause crude oil to spike up, but it will most likely test whether consumers are going to be willing to pay $5 per gallon for gasoline and diesel fuel in the U.S.

San Antonio-based refiner Valero Energy Corp. (VLO) closed their 235,000 barrels per day located on the island of Aruba in the Caribbean in July 2009, after the plant had been losing tens of millions of dollars a month.

Valero re-started their refinery near the end of 2010 because of improving economic conditions. Valero has since completed refinery wide maintenance at the plant and is ready to go at full capacity. It will be “just in time” to make up the anticipated shortfall in middle distillate demand expecting to increase after the powerful 9.0 earthquake in Japan.

Closer to Japan, one of China’s largest refineries, Sinopec, recently suspended refining operations in Maoming due to high crude oil prices. The 270,000 barrels a day plant stopped delivering fuel and petroleum products in March 2011, because the Chinese government establishes the price for fuels delivered to the market by their local refineries.

Those fuel prices are equivalent to crude oil prices at $85 a barrel versus today’s Brent ICE posting of $113 a barrel. The difference in the allowed fixed price for fuels and the cost of crude oil leaves privately owned refineries with a negative crack spread.

PetroChina Co Ltd, which is Asia’s largest oil and gas company, has been having similar difficulties. It has been losing money in their oil refining segment resulting from an increase in crude oil prices due to the unrest in North Africa and the Middle East.

Diesel fuel prices on the U.S. West Coast are already amongst the highest in the country, and will be impacted by the March 11th earthquake in Japan. The bulk of the price action will likely fall on diesel fuel, but crude oil could be affected as well.

In the end it will not be about the price of Brent or West Texas Intermediate (WTI) crude oil but refineries being geared up to keep up with new found demand from Japan for their fuel products.

About the author - Bob van der Valk is a Petroleum Industry Analyst with over 50 years of experience in the petroleum, gasoline and lubricants industry. He has been often quoted by news media, most recently by Los Angeles Times, and his opinions solicited by government entities, in addition to his daily business of managing large scale supply and marketing operations.

Saturday, March 5, 2011

Breaking up with OPEC

We are in the middle of world events that may result in the eventual break-up of the 'Organization of the Petroleum Exporting Countries' (OPEC), which is an intergovernmental organization of twelve developing countries, made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC is considered a cartel and all of their members are controlled by either Muslim or military dictator style governments.

The start of the break up may have been on September 10, 2008, when the Saudis walked out of OPEC negotiating session in Vienna where the organization voted to reduce production. Although Saudi Arabian OPEC delegates officially endorsed the new quotas, they stated anonymously that they would not observe them. One of their delegates was quoted as saying “Saudi Arabia will meet the market’s demand. We will see what the market requires and we will not leave a customer without oil. The policy has not changed.”The U.S. imports crude oil from other countries. OPEC is not even in the top five of countries from which we directly receive shipment of that precious commodity. Here is how they rank per the latest report from the EIA:December 2010 Import Highlights: Released February 25, 2011Monthly data on the origins of crude oil imports in December 2010 has been released and it shows that four countries exported more than 1 million barrels per day to the United States. The top five exporting countries accounted for 72 percent of United States crude oil imports in December while the top ten sources accounted for approximately 88 percent of all U.S. crude oil imports. The top five sources of US crude oil imports for December were Canada (2,1 million barrels per day), Mexico (1,2 million barrels per day), Saudi Arabia (1.1 million barrels per day), Nigeria (1 million barrels per day, and Venezuela (825,000 barrels per day). The rest of the top ten sources, in order, were Iraq (336,000 barrels per day), Angola (307,000 barrels per day), Brazil (271,000 barrels per day), Algeria (262,000 barrels per day), and Colombia (220,000 barrels per day). Total crude oil imports averaged 8,631,000 barrels per day in December, which is an increase of 23,000 barrels per day from November 2010.Canada remained the largest exporter of total petroleum in December, exporting 2.7 million barrels per day to the United States, which is an increase from last month (2.5 million thousand barrels per day). The second largest exporter of total petroleum was Mexico with 1.4 million barrels per day.

Breaking up with OPEC may be pulled that off without the Western nations having to fire one shot. That old Neil Sedaka song "Breaking up is hard to do" comes to mind when you realize our love-hate relationship may finally lead to a divorce that will relieve the U.S. from our dependency on imports from countries that really don't like us except for our greenbacks. That leads to the reason for this article on why OPEC's existence may be in its final throes and is coming to an end. “Ummah” means unity among Muslims - One nation and one people. Many people have tried to bring Ummah to the Muslim nations. Mohammed was no sooner dead when the Sunni and Shi’a began to fight each other. Then along came the third sect, “Khariji”.

They said Allah would reveal who was to be the successor of Mohammed on the battlefield. They began to slaughter each other. This hatred and killing went on until the 20th Century with 1.5 million Muslims killed by other Muslims in wars between Sunni and Shi’a Muslims reliving the Battle of Karbala in the 8th Century. Why is it that the only way it appears to a Westerner that Muslims can be united is if they have a common enemy? Because it seems unless they have a common enemy they will kill each other. The invasion of Kuwait by Saddam Hussein – raping, burning, and pillaging the inhabitants in the name of reclaiming land that he claimed was rightfully theirs - brought the United States and England into the region to liberate Kuwait. This cycle continues even today with vast crude oil reserves being the main incentive for continued Western involvement. T.E. Lawrence said “Muslims will continue to kill other Muslims”. He was more famously known as “Lawrence of Arabia” and led England’s involvement in helping the Muslims fight the Turks in the early 20th Century. The English were eventually rewarded by completely losing control of the region, which had been strategic to their colonial interest. Since then Muslims have killed each other far more than the Americans, the British, the West, or the Israelis ever killed. The West or the Israelis have never done to Muslims what they have done to each other with half a million killed in the six-year war between Iran and Iraq alone in the 1980’s. The Bahrain and Yemen conflicts are continuing with Egypt, Morocco and now Libya prominently in the news. Disruptions have spread across the Middle East and North Africa. Libya’s 1.6 million barrel crude oil exports are almost entirely halted and renewed unrest in Oman, Iran and Iraq have rattled crude oil traders. An interruption of shipments from any of those countries would further tighten oil supplies, even as Saudi Arabia has rushed to fill the vacuum of Libyan supplies by pumping more oil from its fields. Oman, which is a normally stable Persian Gulf country, ruled by a family dynasty and the largest non-OPEC oil producer in the Middle East, is now in trouble as well. Refiners around the world have been hoping that Iraq, as violence ebbed, would again become a major oil producer, with production stabilizing at 2.3 million barrels a day. But rebels bombed the country’s largest refinery, reducing the refinery’s capacity to refine petroleum products by 75,000 barrels a day. This was on top of a terrorist attack on a pipeline leading to a second refinery north of Baghdad. Saudi Arabia has a total production capacity of 12.5 million barrels a day, and currently produces nine million barrels after increasing its output by several hundred thousand since the beginning of 2011. Saudi Arabia said they are ready to pump what it takes to fill any supply gap, but much of its 3.5 million barrel excess capacity contains sour crudes, which does not easily replace the Libyan sweet crude European refineries in particular desire to produce diesel Donald Trump recently announced his intentions to explore running for President and responded to speculation that the turmoil in Egypt and other countries in the Middle East could push oil prices to as high as $200 a barrel.He said: “It also could go the other way. Frankly, the Middle East is a tinderbox. It’s going to explode. OPEC will probably be destroyed if it explodes, and oil prices could go the other way.“I understand economics. You break up what would normally be an illegal monopoly, OPEC, and break it up very strongly. The Middle East is exploding, and I’m saying that could have a positive impact on oil prices.“If you look at oil right now, it’s soon going to be $100 a barrel. Far too high. It’s set by OPEC. I think OPEC would explode with the Middle East and that wouldn’t be the worst thing in the world.”“I think it’s unfair. I think it’s illegal,” he declared. “If you have a store and I have a store and we collude and set prices, we go to jail”.“Here you have 12 men, in this case all men, they sit around a table and they set the price of oil.”“Abu Dhabi, which has plenty of oil, just went to all natural gas for transportation because they want to sell us the oil at exorbitant prices. When you tell me about Obama and what he’s doing in the Middle East, I don’t think he’s doing anything in the Middle East.” Donald Trump may just be correct that the current revolts and conflicts in the Middle East and North Africa will cause an upheaval in the world oil markets enough to bring about the end of OPEC.

We will have to change from humming that Neil Sedaka song to learning the lyrics to “O Canada” and “Himno Nacional Mexicano”.