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Oil and Gas FAQs

Table of Contents

�1. What are the steps required to produce oil and gas?

�2. What are crude oil and natural gas?

�3. Why does gasoline cost so much?

�4. What is the maximum amount of gasoline that a refinery can produce?
���� Is it easy to adjust the amount of gasoline a refinery produces?

�5. Will my heating bills increase this winter?

�6. What is OPEC and does it really control world oil prices?

�7. Are we running out of oil and gas?

�8. How will oil and gas supply and demand change over the next twenty years?

�9. Where can I locate historic oil and gas data?

10. What books would you recommend?

11. How high will gasoline prices go in 2012?

12. Why do oil prices increase as soon as there is war in a country?

13. What is fracking and how does the process produce more oil and gas?

�1. What are the steps required to produce oil and gas?

� Please see the Learning Center - Oil and Gas Value Chains for an explanation

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2. What are crude oil and natural gas?

� Please see the Learning Center - Oil and Gas Basics for an explanation.�

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3. Why does gasoline cost so much?

According to the American Automobile Association's 2014 transportation cost study, the average annual cost of owning a car is 59.2 cents per mile if you drive 15,000 miles per year or $8,876. The cost of gasoline is 13 cents per mile.� Please see "Your Driving Costs" for the full report.

Gasoline is made by processing or refining crude oil.� The cost of gasoline is shown in the following table:��

The two largest cost components are crude oil and taxes which comprise about 73% of gasoline price.� In the United States taxes include both a Federal and State tax.� Both of these taxes are levied as cents/gallon rather than as a percent of price.� State taxes can vary considerably depending on the need and philosophy of the local government. The price of crude oil, which is 46% of pump price in our example, is a large factor in determining pump prices and in causing prices to fluctuate.

Please click on the following link to see a graph of the relationship between crude oil and gasoline prices: Crude Oil and Gasoline Pump Prices.

Although many consumers believe that oil companies are gouging the public, the reality is that profits in refining and marketing have been pretty bad as illustrated in the following plot:�

[Use control + click to view full-size image]

� Please check the following sites for more information on gasoline prices:

	EIA's Primer on Gasoline Prices
	EIA's A Year of Volatility Oil Markets and Gasoline
	US Weekly Retail Gasoline Prices - Compilation of current regional gasoline prices
	Estimated 2011 Gasoline Price Breakdown & Margin Details - prepared by the California Energy Commission

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4. What is the maximum amount of gasoline that a refinery can produce?
��� Is it easy to adjust the amount of gasoline a refinery produces?

The average yield of gasoline from a US refinery in 2008 was 44.2%. Therefore a 100,000 B/D refinery would yield between 44,000 to 45,000 B/D of gasoline.

Please see Refinery Yield for historic information.�

Refinery yields will vary during the year as operations shift from maximum distillate output to maximum gasoline production.� Yields can vary =/- 5% based on API refinery data.� In 2008, yields ranged from a low of 42% in June to 46.9% in January.� The amount of gasoline in storage will impact how much gasoline the refinery produces.

Please see Monthly Yield of Finished Motor Gasoline for data from 1993 to 2009.

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5. Will my heating bills increase this winter?

Winter heating bills are expected to decrease 14% this winter from an average of $1,101 to $945 according to the Energy Information Administration (EIA).

� Please see Residential Natural Gas Prices: What Consumers Should Know on the EIA web site for more information.

� Please see the following graphs for trends in those factors that affect natural gas prices:

	Natural Gas Futures Prices
	Natural Gas and Residual Fuel Price Comparison
	Natural Gas Storage
	Natural Gas Wells and Prices

� Please check the following sites for additional information on winter natural gas prices:

	EIA's Natural Gas Update - for the latest statistics
	EIA's Winter Distillate and Natural Gas Outlook
	EIA's Residential Natural Gas Prices: What Consumers Should Know
	EIA's Weekly Working Gas in Underground Storage
	EIA's Natural Gas Basics 101 - primer on the basics of the natural gas industry

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6. What is OPEC and does it really control world oil prices?

OPEC is the acronym for the Organization of Petroleum Exporting Countries.�

The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, with the signing of an agreement in September 1960 by five countries namely Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to become the Founder Members of the Organization.

These countries were later joined by Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975) and Angola (2007).

From December 1992 until October 2007, Ecuador suspended its membership. Gabon terminated its membership in 1995. Indonesia suspended its membership effective January 2009.

The current members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.

The demographics of member countries are similar yet, in some ways, very different.

	Members are from around the world - Algeria, Angola, Libya and Nigeria (Africa); Ecuador and Venezuela (South America); and Iran, Iraq, Kuwait, Qatar, Saudi Arabia and United Arab Emirates (Middle East)
	The Moslem belief is the dominant religion and Arabic is the principle language
	Population ranges from 700 thousand (Qatar) to 160 million (Nigeria)
	Oil reserves range from 0.4% (Qatar) to 25.5% (Saudi Arabia) of world reserves
	Gas reserves range from 0.9% (Libya) to 15.7% (Iran) of world reserves

OPEC holds 78% of oil and provide 41% of supply or 60% of internationally traded oil.� OPEC holds more than 43% of world�s natural gas and produces 16% of supply.� OPEC members seek prices that would provide for a healthy world economy, minimal incentives for alternative fuels, and sufficient cash flow to invest in new production facilities.�

[Use control + click to view full-size image]

OPEC seeks to control world oil prices, but this is a very difficult undertaking.� Even though OPEC provides 41% of the world's oil, it is subject to variables that it cannot control which will influence prices.� These variables include economic growth, weather, political situations and new technologies.� OPEC attempts to influence prices by adjusting the production of individual members through output quotas.� OPEC's mission "is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry."�

� Please click on the following link to see a graph of the current OPEC�Basket Crude Oil Prices.

If demand exceeds their forecasts, prices can rise resulting in lower economic growth and protests from consuming country governments.� If demand is less than anticipated, prices can drop resulting in lower incentives to find oil resources, reduced interests in energy conservation and increased use of fossil fuels contributing to global climate change.� While it might seem strange, oil producers and environmentalists would both favor higher prices --- producers obtain profits to help find more oil and grow their companies and environmentalists achieve incentives to reduce fossil fuel consumption and invest in alternate energy.

It is also naive to view OPEC as a homogeneous family where all countries share the same goals and strategies.� Although the role of the oil industry in each member country varies, OPEC members depend on oil exports to provide for income for the overall economy.� That means that these countries use oil income to build roads, hospitals and schools.� This money is also used to develop other businesses and industries.� Some of this money is also used to support internal and external political agendas and the lifestyles of governing officials and families. These member companies debate these production changes at periodic meetings and arrive at production quotas.� These quotas are only targets and OPEC has no methodology to force member countries to comply with them.� Overproduction and creative accounting have often been used to allow member countries to raise production.� In an effort to control prices, OPEC sets production allocations for each member country.

OPEC's desire to control prices is also driven by a desire to have a stable income for their country.� How would you like to have your income change up and down each month.� What if your income was halved one year and then doubled the next.� It would be hard to plan on new purchases and if it got too low meet basic expenses like food and shelter.� That is OPEC's problem and reason that it wants to control prices.

[Use control + click to view full-size image]

(Source: Energy Information Administration, OPEC Revenues Fact Sheet)

In OPEC's fifty years of existence they�have generally not been able to control prices.� They abandoned the OPEC basket as a price setting mechanism in 2005.

� Please check the following sites to learn more about OPEC:

	International Situation
	Organization of Petroleum Exporting Countries
	EIA's OPEC Brief
	Energy Information Administration�

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�7. Are we running out of oil and gas?

� Please see the Learning Center - Are We Running Out of Oil & Gas? for an explanation.

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�8. How will oil and gas supply and demand change over the next twenty years?

� Please see the Learning Center - Energy Forecasts for information.

� �Return to Table of Contents

9. Where can I locate historic oil and gas data?

There are several good sources of oil and gas data.� The Energy Information Administration web site is an excellent source of current weekly and monthly statistics.� The site provides both U.S. and international data.� The BP Statistical Review of World Energy is very good for annual international data.� The International Energy Agency has a great deal of data on Europe, but some of the information is only available for a fee. Oil and gas industry financial data is available from EIA's Performance Profiles of Major Energy Producers.

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10. What books would you recommend?

Please see the Learning Center - Oil and Gas Library for a list of oil and gas books.

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11. How high will gasoline prices go in 2012?

Good question.� Unfortunately, there is no easy answer.� With current oil prices around $88/B the average price of gasoline is $3.07/gallon.� The spot market gasoline price can range from $2.85/gal. in Denver to $3.38/gal. in Los Angeles.

Please see Gasoline Pump Prices for a sampling of U.S. prices

The following table forecasts gasoline prices based on possible crude oil prices.

Use the chart below to calculate average gasoline spot prices. The average difference between the highest price and lowest price is 49.1 cents/gallon. That means that if crude oil prices reach $146/B gasoline could hit the $5/gallon level in some parts of the country.

Could West Texas Intermediate increase that much?� Prices went from $91.51 on January 21, 2008 to $142.52/B on July 7, 2008.�

The dashed lines above and below are plus and minus the standard error of the estimate.�

Please see The Energy Information Administration's latest Short-Term Energy Outlook for the latest crude oil and gasoline price projections.

For the week of 4/25/11 when crude oil prices were $109/B, gasoline prices averaged $3.93/gallon. This is considerably higher than we predicted based on the historical relationship between crude oil and gasoline prices.� Using our correlation, prices should have only been from $3.65 to $3.83/gallon.� So why the difference?� Historically, the difference between cracking margins using spot prices and future prices for one month forward has been around 7 cents/barrel.� Since December 2010, this difference has jumped to an average of $11.27/B (cracking margins for one month future prices compared to cracking margins for spot prices).� This margin implies a price difference of 27 cents/gallon.� If we add this to our projection of $3.65/gallon we obtain $3.92/gallon.� Therefore gasoline prices don't reflect current market conditions, but those that speculators estimate will exist in one month.� Therefore, not only do we have higher pump prices based on crude oil speculators, we also have higher prices due to gasoline speculators.��

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12. Why do oil prices increase as soon as there is war in a country?

Oil prices increase with problems that threaten supply.� The current world problems in Libya and the Middle East could impact oil production and shipments from both of these areas.

The Center for Strategic & International Studies (CSIS) reported on March 9, 2011 reported that "estimates of current shut in production vary from a low of 500,000 barrels/day (b/d) to over 1 million, from a total production of 1.6 million barrels/day (mmb/d). Company withdrawal of expatriate production workers appears to be a major contributing cause of the production decline, not damage to producing fields, although other factors are in play."� J.P. Morgan said that �U.N. sanctions have effectively imposed an embargo on Libyan exports. Based on the experience in Iraq, we continue to emphasize Libyan production will remain low and volatile for many years.�

The situation in the rest of the Middle East has also created unrest.� The Middle east supplies more than 30% of the world's oil and contains 57% of global oil reserves. The Straits of Hormuz connecting the Persian Gulf to the Arabian Sea, saw an oil flow of 15.5 million barrels per day (b/d) in 2009 when flows through this Strait accounted for roughly a third of all seaborne traded oil, or 17% of oil traded worldwide.� Unrest in those countries in the Persian Gulf (Kuwait, Iran, Iraq, Bahrain, Saudi Arabia, United Arab Emirates, Oman, and Qatar) raise concerns about supply interruptions. This unease causes investors (speculators) to bid up the price for oil.� Also insurance costs for tankers in the area increase which adds to higher prices.

Learn more at the following links:

	Center for Strategic & International Studies
	Libya oil faces steep hurdles before return to global markets
	Libya is a major exporter, especially to Europe
	Maritime Choke Points

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13. What is fracking and how does the process produce more oil and gas?

Please see Learning Center - Fracturing Operations for more information.

� �Return to Table of Contents

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