A Most Profitable War

So here's a thought, one that I've not seen pitched out in the bizjournals or propagated by the business-oblivious American Left.

As America starts dropping bombs on Iran, and Iran inevitably chooses to retaliate in the only way it can, there'll be disruptions to Persian Gulf shipping.  Iran's Houthi proxies will start lobbing antiship missiles at passing commerce.  Shia Iran will pitch ballistics at the wealthy Sunni petrostates, and we'll see burning refineries and damaged or sunk tankers.  

Even if we don't see that happen, the markets will price that potentiality into a barrel for a while.

So the cost of a barrel of oil will rise, as will the price at the pump.  That's not collateral damage.  I'm kinda sorta of the mind that this is a goal.  Meaning, somewhere, someone knows that war with Iran is in America's financial interest.

I mean, the primary goal is advancing the interests of Bibi and the Arab Petrostates, who are largely now aligned.  But as a secondary goal, rising oil prices are in the direct interest of American petroleum producers.  

Because right now, the United States of America is sitting on a huuuuuuge reserve of shale oil.  In Utah, Colorado, and Wyoming, we have the largest such reserve known to humankind.  It contains within it trillions of barrels, enough resource to keep us all burning carbon unabated for nearly a century.

But using that oil is very resource intensive.  It's a highly technical process, requiring substantial research and engineering, and thus has a far higher profit threshold than old-school oil drilling.  

If the price of oil, per barrel, is less than sixty five to seventy dollars?  Some production becomes unprofitable.  The farther below seventy bucks a barrel it falls, the more the business model for shale starts to collapse.  Below fifty bucks a barrel, it's time to shut down production.  You're spending more to get it out of the ground than you're making.

Three months ago, oil was running at $58 per barrel, meaning production was getting right near the edge of viability.

Now?

Now it's soared, up to nearly $75 a barrel, comfortably above the point at which domestic shale is commercially profitable.

For OPEC nations that traditionally drill, some losses and damage to production will be more than made up for by soaring profits.  For American production, this war could be a lifesaver.

Which is just such an odd, unpleasant business.

 

Over A Barrel

This was intended to be a short, vaguely smug post about just how awesomey awesome it is to be a Prius-owning/motorcycle-riding pastor type in this era of high gas prices.

I was also planning on noting that what really matters is "person-miles-to-the-gallon," my way of encouraging folks who have larger vehicles to take heart in the ability to carry more than one person at a time.  

Thinking in PMPG, for example, means my schweet eco-ficient motorbike gets on average 55 PMPG.  A Chevy Suburban with one passenger?  Only 13 PMPG.  But wait!  Before we get all self-righteous, let's add someone.  With two passengers, you're at 26.  That's subcompact efficiency.  With three, you're at 39.  That's hybrid efficiency.  Max it out at eight, and you're rocking it at 104 PMPG.   Of course, the Prius with four gets 220 PMPG, but still.  Sharing is efficient.  Those moms with their kid-transport-pools are doing their part, eh?  And carpooling with four in an Escalade is just as efficient as one in a Prius.

But as I got into thinking about gas prices, and looking at historical trends, I encountered something of a fuddler.  Back in 2008, as we all remember, gas prices soared to record highs, hitting 140 dollars for a barrel of light sweet crude and spiking at around $4.12 for refined go-juice at the pump.  At the end of last week, gas prices are at about $3.88 a gallon at the pump on average nationally, and just about $102 dollars a barrel on the market.

Take a look at these charts, side by side:

They're similar, but not identical.  A barrel on the market is 42 US Gallons.  In 2008 during the price-spike, $140 a barrel meant a market price of $3.33 per unrefined gallon, which means the differential between market and pump price was $0.79 per gallon.    In 2012, $102 a barrel translates into a price of around $2.42 per gallon of light sweet crude, which means the differential between crude market and refined pump price is $1.46 per gallon.

This is a very different margin.

Key cost factors for a gallon of gas are production, taxes, distribution and marketing, and station markup.  It's not taxes at the pump.  It's not less refining capacity, because refining capacity has not decreased.  It's not higher costs for drilling, because that would be reflected in the market cost of the crude.  It's not increased real-estate values over 2008 for gas station owners and franchisees.   It can't be distribution costs for transportation, because that would have been mirrored in the 2008 price surge.  Station markup remains low.  That's just not where your average service station franchisee or independent small business owner makes their money.

On some rather basic level, meaning that of addition and subtraction, this doesn't seem to work.  Somewhere in the system, transaction costs have gone substantially up.   Not so much that the graphs aren't similar.  But there's variance there.  It seems significant.  At 9 million barrels a day consumption in the US, that's around a $200,000,000 dollar drain from the economy.  Every single day.  Even by Washington standards, that's real money.

Huh.  Odd thing.  Anyone out there more informed than I about this?