By Larry F. Johnson
Oil and gasoline prices have been in the news since the surge in prices after the U.S. and Israel attacked Iran in late February, followed by the Iranians, then the U.S., blocking the Strait of Hormuz.
Over the past few weeks gasoline prices began slowly dropping on optimism over a possible agreement between the U.S. and Iran, but began rising again as talks broke down.
To get an overview of the current situation, on June 29 the Cobb County Courier spoke with Dr. Tom Seng, Assistant Professor of Professional Practice in Energy Finance at Texas Christian University in Fort Worth.
The conversation was arranged by SciLine, an organization that puts journalists in touch with scientists and other expert sources.
Courier: Can you give a brief overview of how changes in oil price translate to what people pay for gasoline locally?
Seng: We have to start at the macro level.
We are participants at a global oil market, both oil and refined products.
If you go back to December of 2015, Congress had lifted the ban on exporting. We had a ban on exportation going back to the oil embargoes of the ’70s. And so we’re both a buyer and a seller of oil.
We have this interesting dynamic in the United States.
As an example, right now we’re at about summer peak demand for gasoline, diesel, aviation, fuel, pretty much everything.
The refineries are using about 17 million barrels a day. Well, we produce just under 14 million barrels a day.
So immediately we have to cover that deficit with imports. And our imports, they’re priced at the global market.
It’s not the price for West Texas intermediate that we have here in the United States. But even more interesting, or I guess a bigger part of the dynamic is about 70% of the oil we produce in the United States is this lighter shale oil.
And so that lighter oil, you cannot refine as many products out of that as you can heavier oils. So what ends up happening is we import heavy oil from places like Canada primarily. We’re now getting some from Venezuela and we blend it with our light oil. Well, that leaves us with some excess in terms of the light oil. So we do export that.
It’s a really weird dynamic where we are importing and exporting. But unfortunately, again, our price of the pump does get impacted by global oil prices and therefore this conflict with US and Iran.
Courier: It isn’t really clear whether the Strait of Hormuz traffic issue has been resolved as far as I can tell, but I’ve heard that even if it opens unimpeded, it could take a while before the world oil supply gets back to normal. Could you address that? How long does it take to get things back to normal assuming you can get the Strait open altogether?
Seng: That’s the million dollar question right now.
As soon as the Strait was literally closed by the Iranians, everyone sort of went, “Oops, wait a minute, what do you mean?” And we looked at the Persian Gulf and we looked at the number of countries that were producing oil and exporting in that area. And there were estimates of about 20% of the global oil supply flowed through the Strait of Hormuz.
So conservatively, we are thinking between 13 and 15 million barrels a day was interrupted.
There are in the neighborhood of 20 to 30 ships going through the Strait of Hormuz currently. (Tracking companies like Kpler) think that maybe as much as 13 million barrels has come through in the past week. So it’s kind of like the faucet’s being turned a little bit.
But to your point, a couple of things have to happen. Number one, we have to stop attacking.
In other words, the attacks are still going on under a supposed ceasefire. We have to have calm first and then what we need is a detailed on the ground assessment.
We’ve not really been getting a clear picture of information coming out of that region for the past several months. What do the oil fields look like? Has there been damage? What about the actual export terminals? We know that the Iranians had hit Qatar’s LNG facility. So in other words, damage assessment, what’s the cost?
And to your point, how long until everything is back up to where we can say those countries are producing and exporting at the same levels that they did prior to the invasion of Iran.
Courier: I’ve read in the past that local gasoline sales a loss leader under the way gasoline’s distributed now, through convenience stores, and that gasoline isn’t the big money maker, it’s the other stuff that they sell. How does the rise or fall in oil prices affect local retailers?
Seng: So again, if you think about the more expensive the feedstock, meaning the more expensive the price of oil to the refineries, then obviously that impacts the price that they sell to the retail outlets at.
I will tell you this, I will dispute the notion that those are loss leaders. I think years ago that was the case. You set up a convenience store and gasoline was just something to draw people in. But with these fluctuations in prices that we’ve seen for several decades now, I don’t believe that that’s the case anymore.
So I mean, I use kind of Bucky’s as an example. Bucky’s doesn’t post the price of gasoline. And so if you pull in there, you really are going there to get the Bucky’s experience, right? You may see sticker shock when you pull in relative to the actual price of gasoline.
And I don’t mean to target Bucky’s necessarily, but no, I would say your mom and pop shops, they have to have a margin.
The bigger corporations that have hundreds, if not thousands of outlets throughout the country, they’ve still got a margin in there.
So I just don’t see that anymore as, “Hey, come buy the gasoline, but we want you to really come in and buy the stuff in our store.”
I think they make a pretty decent profit because as we both have seen, that price will jump up when oil jumps up and that price of oil hasn’t even hit the refineries yet. And then it takes a little while to see that price come back down. So I just think they take advantage of the volatility in the marketplace to increase their margins.
Courier: In your best estimate, how’s the uncertainty in the Gulf likely to affect the short to medium term prices at the pump? I know you can’t have a crystal ball, but what do you think is going to happen in the next few months?
Seng: Right now we’re $70 for West Texas intermediate, the U.S. grade for the month of August. I think as we do see more and more tankers coming through, that’s easing the supply up, but I still think we’re going to see ourselves in a $65 to $70 range for oil. I think gasoline prices do have a little level to go further down. We’re still about 60 cents above last month. And so I think there’s room there, but once again, the wildcard is, are we ever going to get to a true ceasefire and some type of agreement that guarantees the Strait of Hormuz will be open?
Then the next part is once the assessments are made of damage in the area, okay, that’s one thing. But we’ve been drawing down global strategic oil reserves for at least 60 days and at some point in time, those have to be filled. So it’s the old, rob Peter to pay Paul.
We’ve drawn down our reserves. Well, at some point in time, the various countries are going to have to buy back oil in the marketplace to fill those back up. That’s going to be a piece of demand that currently doesn’t exist and it will keep somewhat the prices somewhat elevated and you’ll get kind of almost like a floor to oil prices because those buyers are going to jump in at some level and say, “All right, now’s the time to fill up our reserves again.”
The SPR (Strategic Petroleum Reserves) in the United States is at a 40-year low.
And so we’re going to have to replenish that. And it’s kind of this paradox where, oh, wait a minute, we need to replenish it because what if this happens again? Well, we hope it doesn’t happen again, but you can’t bet against it and leave your reserves drastically short.
Courier: This is a question that readers ask me a lot and I never really know the answer to it. Adjacent counties here will have a significant different average price of the pump for gasoline. Do you have any insights into how and why that happens?
Seng: So first is supply chain and logistics. Where is the source of the gasoline coming from? Essentially, how close are they to a refinery?
Because there’s a transport cost involved. Then there’s the demand area. You see higher prices in larger cities based on demand, whereas some smaller rural communities, again, if they’re close enough to a supply source, you’ll see sometimes that the gasoline prices there are actually lower. It’s just a low demand environment.
And then of course, as I said, in major cities, you have major retailers and they tend to market up more, let’s say, than in a rural community. But yeah, well, even within the cities, you can see from one block to three blocks over, you see a different gasoline prices. I mean, they have become that much more detailed in terms of the demographics and the consumption on almost a neighborhood by neighborhood basis.
Courier: Are there any other things that I did not cover with those questions that you think the public or my readers might be interested in knowing about the current gasoline or oil situation?
Seng: I’m a consumer as well. We would love to get some sense of confidence that, okay, prices are going to come down and hey, they’re going to stabilize. Unfortunately, there’s still a lot of questions that have to be answered about this situation.
So me, I would still be conservative. I would still be as efficient as possible with the gasoline that I do purchase, do the standard things that we’re told to do, the oil changes, inflate your tires, don’t race down the street, don’t let it idle too much because until we really truly, until this situation is cleared up and we’re back to a stable global oil marketplace, anything could happen.