Where’s my Cheap Gas Dude?


Interesting question.  I have more below.

Those who have been told that oil production is booming may be wondering why the prices of oil and gasoline are climbing again.

Price of Brent crude oil, dollars per barrel, daily, Jan 4, 2005 to Feb 5, 2013. Data source: Quandl.
brent_feb_13.gif

 

…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.

Components of total world oil supply, monthly, January 2000 to March 2012, in millions of barrels per day. Blue: crude oil including lease condensates; purple: refinery processing gain; brick: natural gas plant liquids; yellow: other liquids. Data source: EIA.
 

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.

Source: Growth Stock Wire.
ethane_feb_13.png
Source: IndexMundi.
propane_feb_13.jpg

 
 
New Jersey Historical Gas Price Charts Provided by GasBuddy.com

It’s obvious from the above price charts 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.

In addition to the effect of propane or ‘God’s Gas.

image

While US supply is increasing (the amount of product US producers will deliver to market at a given price);  world demand for oil is also increasing keeping price stable as supply and demand move together.

Let unpack this a bit.  Here’s the US oil market in a simply supply and demand chart:

US Market: Increase Supply reduces US import but the price fixed in the world Market at the bold light blue line.

                                               

Increased supply reduced imports, but the price set in a world market and changes little

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

clip_image007

The increase in US supply of course means world supply has increased too, and world price of oil stuck.

image

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s