BALTIMORE, MD, May 18, 2022 – New audio is available for media use featuring Bill Klimack. He is a professor in the School of Industrial and Systems Engineering at the University of Oklahoma. He has more than 35 years of experience analyzing and solving tough problems. Most recently he was the Chevron Oil Company Decision Analysis Job Family Manager. This content is made available by INFORMS, the largest association for the decision and data sciences. All sound should be attributed to Bill Klimack. What follows are four questions and responses. These responses were provided on May 17, 2022.
Question 1: What are the factors presently driving up the cost of gasoline and oil?
Time Cue: 0:42, Soundbite Duration: 2:22
“Well, it's frankly just basic supply and demand. So, crude oil is a global market and so every barrel that's produced somewhere has some effect that's on that's on the market and supply is constrained. So, you can see that in the United States specifically because the West Texas intermediate WTI is the standard crude oil price quoted in the U.S. Brent is the global standard that's a North Sea oil, and there's a spread typically between those two. But that's really narrowed, so WTI cost has almost caught up to Brent.
It was only about a dollar difference typically historically it's typically $2.50-plus per barrel, so that really just shows that the supply is not keeping up with demand. And about 60% of gasoline cost at the pump is due to the cost of crude oil so that that drives it. The reason the supply is constrained is just OPEC-plus sets oil production targets. And by the way not oil companies - you know sometimes you hear people ask questions about that - but oil companies just respond to the market. They sell into that market.
But OPEC-plus, because they are nation states, you know are not constrained by the rules and laws that affect companies, and so they set targets. Venezuela has been offline for years. Venezuela has the second-largest crude oil reserves of any country in the world. Russian sales have been reduced because of what goes on in Ukraine. So, crude seems to be isolated. I just say that from watching the news. So, crude oil exports I think are greatly down from Russia. Natural gas, which doesn't necessarily drive gasoline price at the pump, but natural gas is still flowing out of Russia at least to some degree into Europe, so they're a big supplier of natural gas into Europe. And we know that the EIA, the U.S. government agency predicts that demand is just going to keep increasing anyway. So, it all just comes back to supply and demand. We haven't been able to keep up supplying the demand that we've seen. You know there's has been demand growth coming out of some of the Covid pandemic effects. And so supply is just greatly constrained.”
Question 2: What short-term measures can policymakers in government and oil & gas companies take to alleviate the impact on the marketplace and consumers?
Time Cue: 03:01, Soundbite Duration: 5:04
”Well, this is being recorded in May, and three offshore drilling lease sales were just canceled by the federal government, and a new leasing plan has to be put into effect. And that's normally the leasing plans cover a five-year period. And there's of course a period of review, and so on. So, the government is very far behind putting one in place. So, critics argue that this is making a policy by not making a policy and not having a debate and preventing the public debate about the policy. But because of this we're not seeing offshore oil leases being opened up. So, that constrains future development, including step-outs from existing offshore facilities. So, if someone - if a company doesn't have a particular lease block and they're interested in expanding, they can't do that. And of course, they’re interested in making maximal use of their capital investments offshore. So again, that's just another example of a constraint on what they do. Some other short-term policies, governments could declare a tax holiday. So, according to Statistica about None of gasoline prices at the pump are from taxes and as of February, that varies depending on of course what we're paying per gallon. But it's probably still pretty close currently. So, governments could declare a tax holiday to provide relief to consumers and immediately probably reduce prices by about 10% per gallon, and that could happen immediately if they decided to do that.
It could also restore the original amount of federal land that's open for drilling. Originally under the Biden administration president Biden's policy was no drilling or development on federal land, period. They reversed that to a degree but still 80% of the federal lands are still closed to drilling and exploration and production of crude. So, that's obviously a big restriction on those companies that operate within the United States. There's been some criticism recently of companies for having stock buybacks and dividend payments. But they went through a big period, if you look at the last decade, where they didn't do that. And that was done so they would have money for capital investment for exploration and production and facilities, and a lot of that those investments didn't pan out as well as Wall Street wanted.
So, if you listen to old investor calls you know that's going to be a point of criticism that comes up. They responded to that and so they have been having stock buybacks and increasing their dividend payments to return money to their owners, their shareholders. And so that means less money that's available for development and capital investment. So, there's probably something - if the government wants to encourage development - there's probably something there that could be done to just encourage companies to do that. But they're responding to what their owners are saying, so the question is how to add incentives to get the outcome that that they want.
Sometimes you hear people mention the idea of restricting crude oil sales from the United States. You know, for many years you could not sell crude oil from - that was produced in the United States. It was only refined products, and that's just not a good policy to restrict that. The reason is refineries are tuned to refine certain types of crude. Not all crude oil is the same even though it's a global market.
There are different qualities of crude and different characteristics. It can be total acid content or the amount of sulfur in the crude for example, and crudes come in different viscosities different thicknesses, if you will. And so, refineries are typically tuned to take certain types of crude oils. And so, in the United States we tend to have light crude, but most of our refineries especially on the Gulf Coast are tuned for heavier crudes.
So, it's really better the sense of selling crude oil out of the us and bringing in heavier crudes to refine in the U.S. because that makes more sense and the net effect of that is economically good, but it also results in lower greenhouse gases because the refineries are able to be more productive given the input that they have. And then lately you've heard people talk about windfall tax profits on oil companies. And I have worked for an oil company - full disclosure I don't now, I'm a professor - but the idea of windfall tax is that they are making money because prices are high. That's strictly driven by the market. It's not controlled by the oil companies and if you do remove money from the oil companies through increased taxation that's less money that's available for development in the future by those companies. And on the flip side, just to be fair, oil companies are not helped when prices are low. In fact, I'm personally a victim of that because I got laid off by an oil company. So, nobody was around helping the oil companies when oil prices were low. So, I think it's just fair to let the market effects work their effects on the oil companies and let them make profits when they can, and they have to suffer when they can't.”
Question 3: What long-term measures can policymakers in government and oil & gas companies take to alleviate the impact on the marketplace and consumers?
Time Cue: 08:18, Soundbite Duration: 4:52
“Well, the U.S. has the fifth-largest natural gas reserves in the world behind Russia, Iran, Qatar and Saudi Arabia. And so, this doesn't affect prices at the pump, but it certainly affects what we pay for electricity.
And also, how much greenhouse gas we generate when we generate electricity so natural gas for the large part United States is still not in a position where we can well develop it. And the reason is you need really good infrastructure for natural gas.
It's a gas so you either have to have pipelines to immediately put it in from the wellhead to pipe it to destinations, or you have to have a way to get it to a liquification facility and then have somebody at the other end have a de-liquification facility. So, it's very infrastructure-intensive, unlike crude oil which - it's a liquid so you could - there's a lot of different ways - a lot more options to ship oil.
The United States is 10th in oil reserves in the world. Until relatively recently we were energy independent and so we did produce enough oil just for ourselves here in the United States. So, the best thing for long-term improvement is just have policies and encourage development - sensible development the right way. I think every oil company I've ever had contact with and I've worked directly and then been a consultant to several, and they're all very safety conscious all and very environmentally concerned. And so, we produce much cleaner hydrocarbons in the United States - in the sense of less pollution and producing them – than happens elsewhere in the world. So, just encouraging development of those energy reserves I think is very sensible.
A key point in that, is just the infrastructure pipelines. Pipelines are especially important for natural gas development. But for instance, New York state doesn't allow any drilling and won't allow any new pipelines to cross the state. And this is even more important as we want to develop green energy sources. Because coal plants used to typically keep at least a 30-day reserve of coal on hand. But normally energy plants that burn natural gas, which is a cleaner burn, but they don't have the ability to store anything like the supply that a coal plant could on site and so they're very reliant on having good pipeline infrastructure to continue to deliver that natural gas to them.
And we even saw in the Marcellus and to some extent the Utica shale plays, they're really not well connected. So, the Marcellus shale gas field is one of the largest gas fields in the world, and yet it's really not being developed very well because of the lack of pipelines.
An example of the effect of that. So, the Boston region actually bought LNG - liquid natural gas - was brought in from Russia on ships across the Atlantic Ocean, rather than bring it in from Pennsylvania or New York State, and that's because of the lack of pipelines.
So, that certainly generates far more greenhouse gas to have a tanker cross the ocean and deliver it, when instead you could just deliver it through a pipeline system in the United States. The other things we can do is just improve the review times of LNG export facility construction permits that are requested. It just takes a very long time to get anything permitted - and so not that we shouldn't do due diligence in a permitting process - but it should just be restricted to whatever those particular needs are for environmental review and then accomplished quickly. So, that certainly prevents us from building infrastructure in a timely manner, and so I encourage that.
Canada has tremendous reserves too and global oil. They're 4th the world in terms of global oil. Canada is a great trading partner. We're their main consumer in purchasing hydrocarbons, and so just encouraging that that coupling between the two economies of our nation and Canada I think would be helpful.
Something I think that would be really helpful that I haven't heard anybody to discuss would be if the United States would encourage LNG import facility construction in Europe. You know until very recently the fed rates were extremely low. I could see the United States offering companies that wanted to build LNG import facilities in Europe with some percentage of U.S. ownership. So, there's some benefit for U.S. taxpayers, but offer interest-free loans for instance for construction. I haven't heard anything along that line proposed. And if we could get Europe to build LNG imports, that would help free them up from these Russian export pipelines that have made them vulnerable as well.
So besides working in the energy sector just as a retired military officer, I certainly look at national defense issues, or use that lens to look at issues, and it would be I think it would help Europe quite a bit to be able to shop on the world market, rather than being coupled to Russian gas pipelines. They're a very large purchaser of Russian natural gas. And then also just supporting the Leviathan Field, I understand just from reading the news, the United States discouraged development of a pipeline from the Mediterranean to Europe from the Leviathan Field. It's a large gas field in the Eastern Mediterranean. And again, I think diversifying their sources of natural gas would be helpful and allow better market forces. So, natural gas unlike oil is not a unique, or it's not a single global market so helping develop those markets I think will help consumers. A lot of that is more tied to electricity. But certainly as we go greener, we're going to rely more and more on electricity it’s important to keep the supply of fuel to generate electricity flowing.”
Question 4: What consumers expect in terms of gas prices for the remainder of this year?
Time Cue: 14:17, Soundbite Duration: 1:29
“Well, you know predicting the future is challenging. So, I don't have a crystal ball for consumers for gasoline prices. Market forces drive those prices. Covid effects and other effects on demand will certainly I think continue to have some effects. I think many people are I think driving more this summer than we you know had because of covid in the recent past.
So, that's going to increase a demand. Supply is going to remain constrained, so I don't see any radical shifts in in supply. Probably the biggest single shift in supply might be if the conflict in Ukraine was resolved and clearly that's not in our hands as consumers. So, that that probably is the single biggest effect that could happen. But I really don't see much relief. I know that I just saw recently airlines were predicting spending $20 billion - that's billion with a B - dollars more on fuel this year alone, and that's why air ticket prices are up around 30% or so. So, the trend is still continuing upward. I don't know where the top is. I think that probably we're going to continue to see some more growth in price at the pump. I think that probably you know, maybe 10% more cost at the pump this summer I think this is very reasonable. So, in terms of trends I don't see a short-term solution.”
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