Most of the energy currently used in fuel-powered transportation vehicles (for example, cars, trucks, buses, and airplanes) is in the form of liquid fuels derived from petroleum. Liquid fuels are uniquely suited for this service. They have a very high energy density on both a volumetric and weight basis. Vehicles can travel long distances between refueling on relatively small amounts of fuel. Liquid fuels are easy and cheap to transport. Vehicle refueling is fast and safe. The average person is capable of personally refueling his or her car in only a few minutes, with enough gasoline to travel over 250 miles. A commercial jet liner can take on enough fuel to fly halfway around the world in less time than it takes to unload and reload the passengers.
According to the U.S. Bureau of Economic Analysis, total personal consumption expenditures for gasoline, fuel oil, and other energy goods in 2008, when oil prices exceeded $140 per barrel, were only about 4 percent of all personal consumption expenditures, lower than they were for all years between 1950 and 1984 (Figure G-1). The U.S. economy and lifestyle have evolved around the availability of cheap, convenient, liquid transportation fuels.
Although petroleum has been used for thousands of years, the modern petroleum industry really began its rapid development during World War II. It has evolved into a very efficient industry for finding and converting a variety of crude oils into the high quality fuels the market and regulatory bodies demand. The industry has done this while meeting ever tightening emission limits for their production facilities and the fuels they produce.
Gasoline, diesel, and jet fuel are by far the largest volume petroleum-based products. Combined, they account for about 85 percent of consumed petroleum products in the United States. A number of steps are involved in getting these products from the well to the ultimate consumer, including
- Finding the oil-bearing deposits,
- Obtaining the rights to explore for and produce the oil,
- Drilling for the oil and installing facilities to recover the oil,
- Transporting the oil from the well to the refinery,
- Converting (refining) the crude oil into the desired products, and
- Transporting and delivering the products to the final consumer.
Each one of these steps has a monetary cost associated with it. There are also other costs, such as marketing, accounting, research and development, and environmental costs.
The oil industry is very competitive, and company-specific cost elements are closely guarded from competitors. Publicly owned companies are required to report some information to regulatory agencies and shareholders in filings required by the Securities and Exchange Commission and in their annual reports. This information, however, is usually not sufficient to fully define all of the various cost elements. There is even less information available for privately owned companies or companies owned by foreign governments. Searching through various oil company annual reports, and the information on the Energy Information Administration and other government and non-government websites allows many costs to be defined or at least bracketed.
Crude oil and petroleum product prices have been extremely volatile over the last 15 years. The benchmark West Texas Intermediate crude (WTI), traded on the New York Mercantile Exchange, has gone from less than $14 per barrel to over $140 per barrel while wholesale gasoline prices have gone from $0.32 per gallon to over $3.30 per gallon (Figure G-2).
As expected, there is a very close relationship between crude oil price and gasoline price. There are short-term disconnects, such as the high gasoline prices that occurred during and after Hurricane Katrina in the fall of 2005 and probable gasoline price speculation prior to the summer driving and hurricane seasons the following two years.
The largest single factor affecting the price of gasoline is the price of crude oil. It accounts for over 80 percent of the direct, pretax cost of gasoline and an even larger fraction when its impact on transportation and refining costs are considered.
Crude oil and product transportation costs are the easiest to define. Imported crude oil transportation costs can be defined by comparing free-on-board (FOB) and landed crude prices that are contained in the EIA database. These show average transportation costs of $0.04-$0.05 per gallon for crude coming from the Persian Gulf, but only $0.01-$0.02 per gallon for crude coming from Canada, Mexico, and Venezuela. The elements that make up these transportation costs are capital for the tankers that haul the crude, the manpower to load the crude and operate the tanker, and the fuel to move the tanker between the two ports. The disparity in costs between crude coming from the Persian Gulf and that originating closer to the United States indicates that fuel costs and operating costs are the dominant cost components. Domestic crude transportation costs tend to be lower because the transport distances are shorter and most domestic crude is transported by pipeline.
RELATIONSHIP BETWEEN CRUDE OIL AND PRODUCT PRICES
As shown in Figure G-2, gasoline wholesale spot price closely follows crude oil spot price, with price discontinuities due to natural events such as Hurricane Katrina, which
Figure G-3 clearly shows that a linear relationship (that is, a constant multiplier such as those frequently used in previous studies and the 2010 Annual Energy Outlook) between gasoline price and crude oil price is not valid as crude price rises above $80 per barrel. Using a linear relationship between gasoline price and crude oil price would over-predict the price of gasoline as crude price rises above $80 per barrel. Figure G-4 shows the relationship between crude price and diesel fuel price. A linear relationship fits the diesel price data better than a second-order relationship fits the gasoline price data.
There is more scatter in the gasoline price data at a given crude price than in the diesel price data. This is due to the annual variations in gasoline demand and gasoline price as shown in Figure G-5. Gasoline demand peaks between late June and early August each year, while the ratio of gasoline price to crude price usually peaks in April, in anticipation of higher summer demand. This cyclical price relationship causes much of the apparent scatter in the price relationship in Figure G-3.
The average price ratio is 0.0264, but the ratio varies from about 0.025 in the winter to 0.030 in the summer. Table G-1 shows the expected gasoline and diesel prices for several different crude prices and pricing relationships.
Table G-1 shows a rather large uncertainty in future gasoline price as crude price increases. This is due both to the seasonal price swings and to the nonlinearity in gasoline price as crude price increases.
TRUE COST OF CRUDE OIL
The EIA database gives an average U.S. crude acquisition cost of $67.94 per barrel ($1.62 per gallon) for 2007. The 2009 ExxonMobil annual report gives an average capital cost for reserve replacement as less than $23 per barrel for the period from 2005 to 2009. The 2008 ConocoPhillips annual report gives an average crude oil production cost from existing fields of less than $7 per barrel for a similar period. This gives a total crude oil production cost, including all exploration and production costs, of less than $30 per barrel for a major oil company. These costs include lease acquisition costs, but do not include production (severance) taxes, state and national royalty payments, or other income taxes. These tax and royalty payments vary from state to state and country to country. It is beyond the scope of this study to identify all of these government payments, but a few are listed below as examples.
Because of falling oil prices, the Canadian province of Alberta recently reduced its maximum production royalty from 50 percent to 40 percent of the sale price of oil produced in the province (Oil and Gas Jounal, 2010). At $60 per barrel crude, $24 per barrel goes to the province of Alberta. In 2008, ConocoPhillips paid the state of Alaska over $33 per barrel in taxes other than income taxes when their production costs were less than $10 per barrel. Government-owned oil companies, such as Aramco in Saudi Arabia or PDVSA in Venezuela, control the exploration and production of all oil in the country. The difference between oil sale price and exploration and production cost is effectively a tax. Most
|Crude Price, dollars per barrel||50||75||100||150|
|Product Price, dollars per gallon|
|Second Order Gasoline||1.37||1.98||2.55||3.56|
oil fields in the Middle East are well defined and rather shallow. Average exploration and production costs for new production from this region are below the world average. If they desire, OPEC countries can lower the price of oil below that, which justifies investment in alternate routes to liquid fuels, such as gas to liquid fuels, coal to liquid fuels, or biofuels.
In the absence of a carbon tax, production of alternative fuels from coal, natural gas, or shale set an upper bound on the future price of crude oil. The report Liquid Transportation Fuels from Coal and Biomass: Technological Status, Costs, and Environmental Impacts (NAS-NAE-NRC, 2009) indicated the cost of producing alternate transportation fuels from coal was about $60 per barrel. The 2010 Annual Energy Outlook (EIA, 2010) shows essentially no change (5-percent decline) in the price of coal between 2009 (the last full year of data) and 2022 (in 2008 dollars), while it shows a 78-percent increase in the crude price to over $100
per barrel over the same period and an even higher relative increase in natural gas price. At the same time it predicts only a 6-percent increase in the price of ethanol.
EIA (Energy Information Administration). 2010. Annual Energy Outlook 2010—With Projections to 2035. Washington, DC: U.S. Department of Energy.
NAS-NAE-NRC (National Academy of Sciences, National Academy of Engineering, National Research Council). 2009. Liquid Transportation Fuels from Coal and Biomass: Technological Status, Costs, and Environmental Impacts. Washington, DC: National Academies Press.
Oil and Gas Journal. 2010. Alberta’s royalty retreat. Available online at http://www.ogj.com/articles/print/volume-108/issue-11/General-Interest/editorial-alberta-s-royalty-retreat.html. Accessed March 22, 2010.
This page intentionally left blank.