Massive drop in oil prices; Yay! Massive drop in oil prices; Oh no!

The cost of gas is more than what we see at the pumps

By Morf Morford 
Tacoma Daily Index

There’s an old saying in politics – “Where you stand has a lot to do with where you sit”.

Our position, our livelihood, even our zip code has a lot to do with how we respond to change or public policy decisions.

This is true in areas as varied as zoning requirements, historic preservation or the placement of bus stops.

Or the price of oil.

I nominate oil as the strangest commodity on more levels than I could count.

First, the global price (and it is a commodity with a global price, no president or nation can control the world price – though many make the attempt) is fluid based on many variables from supply and demand to currency fluctuations to industrial use to political instability and weather extremes among many other factors.

I know many individual drivers who wish for lower fuel prices – their economic well-being, if not survival depends upon it.

I remind them to be careful what they wish for – a drop in oil prices is rarely – if ever – a good sign.

A drop in oil prices almost always means a collapse in the economy or some kind of major disruption somewhere.

In the same way, an extreme rise in oil prices almost always means a major disruption somewhere in the supply chain or the market.

What we all, producers and consumers, prefer, whether we acknowledge it or not, is stability. A gradual increase (or decrease) in prices is fairly easy for any of us to adapt to.

It’s the swings that make us all crazy.

Original art by Morf Morford
Original art by Morf Morford

A few facts about oil

The street price of oil has virtually nothing to do with its cost as a resource.

The price of oil is almost entirely based on the cost of extraction, processing and transportation.

In Saudi Arabia for example, the cost of extraction is about ten dollars a barrel (42 gallons)  (1*)

Hydraulic fracturing (fracking) and extraction from oil sands (also known as tar sands) primarily from the oil fields of the Athabasca region of Northern Alberta, Canada costs about sixty dollars a barrel.

You don’t need to be a math genius or an economics professor to realize that when the global price of oil drops below $35 dollars a barrel (as it did in the middle of this month) oil production, to use a phrase, “doesn’t pencil out”.

Even at ten dollars a barrel, the costs of refining and transporting all that oil becomes counterproductive – at least financially.

But some countries, like Saudi Arabia, continue, or even increase production.

It’s a precarious business model – but it can work.

Amazon, after all, operated at a loss for years. Its goal was not profit – it was market share. If it could survive the lean years, it would flourish long term. And it did.

And Saudi Arabia probably will too. They have cash reserves and a seemingly endless flow of oil.

The low price of oil will drive out the other competitors – like Russia and Canada (and the US).

Fracking will quickly become unprofitable. Electric vehicles will suddenly lose their cost effectiveness.

World markets (and currencies) will become even more unstable – some will thrive and some will shrivel, if not disappear entirely.

Besides the employment and income involved in the oil industry, entire nations, like Russia and Canada depend on oil for energy.  (2*)

Oil, as messy as it is, and as variable as its world price might be, impacts us all.

From major airlines to Uber drivers, the daily purchase of oil literally defines our bottom line. The price at the gas pumps is only one way to look at it.

It is difficult to get a man to understand something, when his salary depends on his not understanding it. – Upton Sinclair

When the price of oil hovers between sixty to a hundred dollars a barrel (as it has for decades) employment balloons and fortunes are made.

When the price drops (or even rises) precipitously, all bets are off when it comes to economic repercussions.

Will oil dependent economies (like Japan) wither into insignificance? Will oil-rich nations suddenly surge  into power and prominence? And will some nations (like Venezuela) get caught in the whiplash of global price swings?

The USA has become an oil exporter the past several years (thanks to hydraulic fracturing) and has taken advantage of stable – and high – global oil prices.

The drop in oil prices will cut into those profit margins – and will cost us jobs and future production.

As I mentioned at the beginning, I nominate oil as the world’s strangest commodity. Few, if any of us, would want to touch it, see it, smell it or have it on our hands, yet it dominates virtually every aspect of our lives from transportation to heating.

As I pump gas, and get it at the lowest price that I have seen for many years, I’ll be glad to save money, but I know all too well that the true cost is far different from what I see posted.


(1*)     According to the California Energy Commission, each barrel of crude oil yields products as follows:
Finished Motor Gasoline (51.4% – a bit more than the national average)
Distillate Fuel Oil (15.3%)
Jet Fuel (12.3%)
Still Gas (5.4%)
Marketable Coke (5.0%)
Residual Fuel Oil (3.3%)
Liquid Refinery Gas (2.8%)
Asphalt and Road Oil (1.7%)
Other Refined Products (1.5%)
Lubricants (0.9%)

(2*)    Oil from Alberta is the number one source of foreign revenue for Canada – and the USA imports most of its “foreign oil” from Canada.

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