Offshore oil rigs like this one are becoming more prevalent in oil drilling, meaning higher costs for explorers. Source: ExxonMobil.
Posted on 05/14/2014 7:51:31 PM PDT by ckilmer
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May 14, 2014 | Comments (0)
U.S. stock markets are in a gradual decline today, with the Dow Jones Industrial Average (DJINDICES: ^DJI ) down 0.6% in late trading as traders sold equities and bought gold and oil. The shiny metal was up $10 in afternoon trading to $1,305 per ounce and oil was up to $102.19 per barrel.
You may think higher oil prices would have Big Oil cheering today, but Dow components ExxonMobil (NYSE: XOM ) and Chevron (NYSE: CVX ) are respectively down slightly and up 0.6%. There's good reason why they aren't terribly happy about the price of oil.
Offshore oil rigs like this one are becoming more prevalent in oil drilling, meaning higher costs for explorers. Source: ExxonMobil.
Big challenges facing Big Oil
For drillers that simply extract oil and sell it to the energy markets, higher oil prices are great. But ExxonMobil and Chevron are more integrated vertically, with operations including refining and marketing oil.
Higher oil prices mean higher margins in their massive upstream operations, but if gas prices don't also rise it means lower margins in refining and marketing oil. It's like taking money from one pocket and putting it in the other.
The chart below shows that over the past decade the trend has been for higher oil prices with gasoline not keeping pace. Recently, the problem has been made worse by falling demand for gasoline domestically, a new phenomenon in American energy.
WTI Crude Oil Spot Price data by YCharts.
The long-term challenge is that oil is becoming harder to find and more expensive to extract every year. Half of the new reserves found last year were in ultra-deepwater, and much of the other oil was in shale that's also expensive to drill.
On the demand side, consumers have shown the capacity to reduce gasoline demand as prices have gone up. More efficient vehicles reduce demand, public transportation is more prevalent, and people take fewer vacations.
Long term, these trends result in lower margins for Big Oil. That's why you're not seeing investors jump for joy today as oil climbs. They know that higher oil doesn't necessarily mean higher profit, and that's not good for Big Oil stocks.
Big Oil has to be getting worried. I’m seeing more and more hybrids on the road. Those F150’s with Ecoboost are popular even in the southeast US. And you’ll be able to get a Mustang GT this fall with a turbo 4-banger. I never thought I’d see it again, but people are starting to pass on the largest engine available to get the one with the most practical balance of economy and hp. (Not me, mind you...I have a Mustang GT with the 5.0!)
fyi
fyi
I am of the opinion that 95% of the cars on the road are being driven by people who are absolutely incapable of even starting to take advantage of the power and handling that they have.
I am of the opinion that 95% of the cars on the road are being driven by people who are absolutely incapable of even starting to take advantage of the power and handling that they have.
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the percentages increase the closer you get to any large city.
Big Oil has to be getting worried.
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World wide demand for oil is big and growing. 1 million barrel @ year US oil production increases for the next couple of years will only keep oil prices from going through the roof.
That said its inevitable that natural gas trains trucks and buses and electric cars, hybrids, even hydrogen fuel cell cars will eventually take ever bigger bites out of demand.
5-15 years from now it will be a very different story. Demand for oil will peak and start to shrink because of the take up of non oil based transportation vehicles.
I’ve seen a Chevron map of demand. They expect demand for oil to peak in 2030.
Given the acceleration of events in time—that may put the true peak in demand at 2025. That’s just my wag. Hard to say really.
I’ve been in this business for over 40 years and one thing I’ve learned is you can’t predict the future of the oil business.
Just because you can write the check, doesn't mean you know how to drive it. Saw a lot of that with motorcycles, too.
You have about 5 more years in than I do, but that was my observation as well.
>>I am of the opinion that 95% of the cars on the road are being driven by people who are absolutely incapable of even starting to take advantage of the power and handling that they have.
I’m certain of it, and so are the auto companies. Just look at how much technology is in those cars to “help” people drive their cars. I love to turn off the “assist” gadgets in my Mustang and feel the 420 hp for real. It’s a totally different car and not for the person who drives with one hand on a cell phone and the other wrapped around a Starbucks.
I filled up yesterday. $4.27 9/10. I am not driving as much as I used to and I actually looked at a 4 cylinder turbo recently. I would have never even considered a 4 cylinder before.
you can’t predict the future of the oil business
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BTTT
Even that doesn't stay true.
Sure a price spike will drive higher margins. But any stay in that price means a drive for more supply. And every step of the process for more supply has limited ability to expand quickly. Every contractor, material and piece of equipment jumps in price to try and meet demand.
Typically the major oil operators end up with nearly the same margin while the subs bring in more dollars. And the worker pay rate will climb like it has been lately.
The majors, and most the minors, are now in a push for replacement of reserves. If you are not finding a new barrel of oil for every barrel you pump out, you are not so much in the oil business but rather going out of the oil business.
>>I filled up yesterday. $4.27 9/10. I am not driving as much as I used to and I actually looked at a 4 cylinder turbo recently. I would have never even considered a 4 cylinder before.
I’m glad that my wife has a 4 cylinder Camry so I can drive my Mustang a little and her Camry a lot. I am warming up to the idea of my next GT being a 4 cylinder turbo though.
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