We Will Never See Cheap Oil Again

Doesn't $2.50 per gallon for gasoline sound just dandy? During the 2012 presidential race, a couple candidates used that number as a way of showing how increased American production would lead to lower prices and higher energy security. The problem is, though, that despite the increase in production in the U.S., cheap gas and cheap oil will more than likely remain a pipe dream. 

Let's look at why oil prices will remain high despite our best efforts.

Drilling costs just aren't what they used to be
The boom in U.S. energy has been made possible by several factors: development of advanced drilling technology, a large distribution network already in place, and a favorable regulatory framework. One element that is commonly overlooked, though, is the price of oil production. Accessing shale deposits requires not only deeper wells, but also much more energy for extraction. Today, wells are drilled for miles underground and cracked open with high pressure pumps and lots of water. Chesapeake Energy (NYSE: CHK  ) estimates that each new well requires 5 million gallons of water. Despite the best efforts of exploration and production companies to reduce costs, these new drilling techniques have break-even wellhead prices for most U.S. shale plays at $55-$80 per barrel.

The U.S. is not the only country that needs expensive oil prices. Both Russia and Saudi Arabia, the two largest global oil producers, need high oil prices for economic sustainability. For Saudi Arabia, its $630 billion economic development program is funded on the back of its national oil company, Saudi Aramco. In order for the country to meet its budgetary obligations, it needs current production levels priced at about $90. The same can be said for Russia; its government's largest revenue source is oil royalties. For the country to balance its budget, oil export prices need to be north of  $120. For both of these countries, it is imperative that oil prices remain high enough to prop up government spending. 

Saudi Arabia, Russia, and the U.S. are the three largest oil producers in the world and are responsible for more than 35% of global production. If all three require higher oil prices to sustain production and financial stability, they will all produce oil accordingly to meet their needs.

Price is set by the most expensive markets
For many years, the U.S. has been the largest consumer of oil in the world. Despite our large import bills, we have had a modestly robust oil and gas industry that at its lowest point was still supplying 40% of demand. When compared to some of the other top oil consumers, our production looks pretty impressive.

Country Daily Consumption in Mbpd (World Rank) % Produced Domestically
U.S.A 18,949 (1) 59.9%
China   9,810 (2) 44.3%
Japan   4,464 (3)  2.8%
India   3,360 (4) 29.4%
Germany   2,400 (8)  6.8%
S. Korea   2,230 (10)  2.6%
France   1,792 (11)  4.3%
Italy   1,454 (15) 10.4%

Source: U.S. Energy Information Administration, authors calculations

The countries with little domestic production pay a much higher premium for oil, and companies located all over the world will flock to capture those markets, even ones in the U.S. At the end of 2012, Valero (NYSE: VLO  ) , Phillips 66 (NYSE: PSX  ) and Marathon Petroleum (NYSE: MPC  ) combined to export 531,000 barrels of refined petroleum products from American refiners to premium markets around the world. Furthermore, all three of these companies have stated that they intend to significantly expand export capacity in the upcoming years.

This is a trend we will have to get used to in the U.S. Overall gasoline consumption has gone down by 16% since its peak in 2005, yet we have seen prices climb 57% since then. This is all because overseas demand has grown, and will continue to grow by one-fifth between now and 2035. As long as these premium markets around the world will pay top dollar for oil, then there is little chance that the U.S. will see any price relief.

What a Fool believes
The idea of energy independence and lower oil prices do not go hand in hand. Whether it be the high cost of our newfound resources, or the high prices others are willing to pay for them, it is highly unlikely that U.S. production will lead to a sustained drop in oil prices. Consumers who want to lower their energy costs should look toward other fuels to meet their energy needs. Clean Energy Fuels (NASDAQ: CLNE  ) boasts that a gallon equivalent of natural gas is $1.50 less than diesel, and this 40% cost reduction is causing the U.S. trucking industry to take a hard look at converting long distance fleets to natural gas.

Alternative fuel consumption in the U.S. is rising, and fast. While it will take a long time before any other fuel puts a big dent in oil's market share, there are plenty of growth opportunities in this space that could mean large gains for long-term investors who want to get in early. To help you get started on investing in this fast-growing industry, check out The Motley Fool's premium research report on Clean Energy Fuels. By clicking here, you will gain access to an invaluable resource that will help you better understand the impact this natural gas supplier could have on the U.S. trucking industry.


Read/Post Comments (41) | Recommend This Article (69)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 17, 2013, at 11:35 AM, jackcrow wrote:

    I still haven't bought into the Picken's over the road trucking should convert to NG. The quickest and easiest transition for fleet conversion is local routes. Fuel up at the barn in the morning, run all day, come home; rinse and repeat. No need to shop highway signs hoping that a truck stop has NG pumps.

  • Report this Comment On April 18, 2013, at 5:54 PM, Snertie wrote:

    No, it's because oil is traded internationally in dollars, and like it has been for the better part of the last 10 years, the Fed is committed to printing money until unemployment falls below 6.5%. Since most of our unemployment has transitioned from "cyclical" to "structural", that now basically means "forever".

  • Report this Comment On April 18, 2013, at 6:02 PM, HappyJen100 wrote:

    Take the hedgefund traders and speculation traders out of the crude oil trading and you could probably see a substantial decrease in the price of fuel.

  • Report this Comment On April 18, 2013, at 8:26 PM, beastofbodmin wrote:

    @Tyler: does the USA really use 1.8 billion barrels per day? Cornucopian dream! :)

  • Report this Comment On April 18, 2013, at 8:30 PM, beastofbodmin wrote:

    Shale gas well head depletion rates are quite abrupt after a couple of years of production. I wonder if anyone has looked into the cost of building out a road fleet with methane burners? Payback time versus using petrol?

  • Report this Comment On April 18, 2013, at 8:45 PM, James59 wrote:

    The price of a barrel of oil is not dependent upon the Saudi economic development budget - nor the debt of the Russian government ... the price of oil is set by market forces. It surely is more complicated than "supply and demand" - but when the driving world runs on NatGas, hydrogen - or electric batteries - only the Vaseline Company will be buying crude oil ... why? Well because after all, isn't it pretty "crude" to drive on million-year-old dinosaur bones when better technologies exist - well, isn't it?

  • Report this Comment On April 18, 2013, at 11:56 PM, Melaschasm wrote:

    Jackcrow, many major retailers are already converting their regional trucking to NG (natural gas). To achieve the breathtaking reductions in oil usage envisioned in the Pickens Plan, long haul truckers will also need to convert.

    While I am generally supportive of this aspect of the Pickens Plan, I share your concerns about the next step. The massive infrastructure investments needs could result in a crushing economic blow should the price differential stop favoring NG.

    From all the science and technology research that I have done, it appears that the price differential should become even more favorable for NG over the next few decades. Unfortunately, even the greatest minds in the industry can not state with certainty that I am correct.

  • Report this Comment On April 19, 2013, at 12:37 AM, snapperreef wrote:

    Don't depend on nat gas to give us the desired relief from high prices either. The author's article of 3/20/13. "3 lessons from the Natural Gas Revolution" informs us that, " So while a standard thousand cubic feet of natural gas in the U.S. trades at a ratio of about 33 to one barrel of Brent crude, many European and Asian nations have gas fixed at a six-to-one barrel-of-oil ratio."

    This has jacked up the desire of European countries to import our LNG in quantities which will make it feasible to build facilities on our Gulf Coast and ship any excess to them, See Cheniere Energy (LNG), instead of it lowering the price of fuel for our road use.

    http://www.fool.com/investing/general/2013/03/20/what-have-w...

  • Report this Comment On April 19, 2013, at 9:31 AM, TMFDirtyBird wrote:

    @beastofbodmin

    The US consumes about 18 million barrels of oil per day. The term Mbpd means thousand barrels per day, I apologize for using technical jargon and not explaining it more thoroughly.

    << I wonder if anyone has looked into the cost of building out a road fleet with methane burners>>

    Yes there has, both Waste Management and Republic Services have been converting their trash collection vehicles to run on excess methane from landfills.

    http://abclocal.go.com/kgo/story?section=news/environment&am...

    Hope this helps.

    Cheers,

    Tyler

  • Report this Comment On April 19, 2013, at 10:28 AM, driller101 wrote:

    The US oil companies need higher prices, not necessarily the US. If some huge discovery resulted in $5/bbl oil and $0.50/gal gasoline, most US citizens would be much better off. The author seems confused about that.

    The same goes for the rest of the world.

  • Report this Comment On April 19, 2013, at 10:57 AM, KyleSanDiego wrote:

    A significant reason why US prices are "cheaper" is that we tax less. Obama wants to tax more. SO relative to the market, we will have "cheaper" gas as long as we keep tax and spenders like him in check.

  • Report this Comment On April 19, 2013, at 12:13 PM, PuddinHead42 wrote:

    So, I officially call this the peak of Gas prices thanks to your article. If Newsweek was still around I would wait for their cover story.

    Mexico is dedicated to greatly improving their oil production. They are horribly inefficient right now.

    Same for Venezuela, Chavez ruined the their oil industry, sucked it dry.

    We are finding tons of oil and Gas with fracking in the US. Do you think Russia and China won't start fracking as well?

    With natrual gas flooding the market, trucks in US, China and Europe will start to convert, freeing up Diesel refineries to convert to gas, thus increasing gas supplies.

    But yes CLNE and WPRT will benefit.

  • Report this Comment On April 19, 2013, at 2:42 PM, woodNfish wrote:

    "and a favorable regulatory framework."

    Wow Tyler, whatever yo have been smoking, you need to stop. The increase in US oil & gas production is IN SPITE OF government regulations. The government is the enemy of economic prosperity and the friend of crony capitalism and socialism.

  • Report this Comment On April 19, 2013, at 3:01 PM, XMFAimeeD wrote:

    @ woodNfish, oil industry executives across the world beg to differ. The US is by far the best place for oil and gas investment dollars right now. The "favorable regulatory framework" is not relative to the way you think it ought to be, but rather to other locations worldwide that compete for investment.

    Beyond Tyler's link, you can find more info here:

    http://www.fraserinstitute.org/uploadedFiles/fraser-ca/Conte...

    Aimee

  • Report this Comment On April 19, 2013, at 3:08 PM, dividendgrowth wrote:

    I don't think a return to $1 gas is necessary. As long as gas doesn't spike beyond $4, the economy will do fine.

  • Report this Comment On April 19, 2013, at 3:30 PM, mikecart1 wrote:

    There was a time when I heard we would never see $400/share again for Apple or $1400/oz for gold.

    "never" is the worst word to ever use and you should never use it.

    :)

  • Report this Comment On April 19, 2013, at 3:59 PM, Mattoil wrote:

    @james59

    You are wrong. The price is in deed, by a large extent set by Saudi-Arabia through OPEC. Saudi-Arabia is the only country with significant surplus capacity. Its simple, prices jumps "too high" in a way that is not sustainable, they produce more. Prices go to low (about $100 for Brent) they cut supply. This is a quite well known fact, yet I am surprised how few people actually understand the workings of this.

    And since was a cartel an essential part of a "free market"? Just food for thought..

  • Report this Comment On April 20, 2013, at 1:41 PM, hemifan426 wrote:

    Until oil drops, the denial depression will continue. There never has been and never will be a situation where high oil drives a recovery. Oil and its derivatives are in every product you buy. Oil is an inflation mega-driver. Big oil and the speculators started this depression in 08 and it continues to today. There are approximately 2 bucks is every gallon of gas that could be going to the economy. Until it does, the depression will continue. QE is killing the economy and as long as it continues, will drive more decline. The current economic situation will last decades at best. If our government survives (unlikely), they will have to eventually come to their collective sences or face the music. Either get an economic clue or watch the death spiral. Fact.

  • Report this Comment On April 21, 2013, at 12:57 AM, GuzziFool wrote:

    In 1960 my Dad would take me to pump gas at his gas station on Sunday mornings. Attendants had to pump your gas in those days, because automatic shut-off devices were not available, and a "expert" needed to listen for the sound of gas coming up the filler neck. He had to listen very closely, usually with a lit cigarette in his mouth. Since I was only 8 years old, one of these smoking experts would be next to me.

    Gas was 19.9 cents at that time. The two silver Roosevelt dimes that could buy a gallon of gas then, are worth $3.38 melted today. Other than California, Alaska, and Hawaii gas ranges from $3.23 to $3.78 today. Oil is as cheap as it was 50 years ago. The dollar is merely worth less due to decades of fools of both parties mismanaging our affairs in Washington.

  • Report this Comment On April 21, 2013, at 8:45 AM, cupocoffee wrote:

    I was just thinking the other day what a huge and rapid change we have lived through. In the era you (GuzziFool) speak of my older sister always had to "put some gas in the car" from her own money whenever she was allowed to take our 1 family vehicle. My dad always made sure there was gas in the car at the beginning of the weekend because most businesses were closed on Sundays, at least in the AM. Sun was a family day with many attending church services together. Many teenagers now drive their own vehicles to high school while both parents work 24/7 to accommodate a life style that seems as artificial as our QE economy.......big shift in priorities and values.

  • Report this Comment On April 21, 2013, at 8:45 PM, IndeFool wrote:

    The reason for a currently low price on Natural Gas is due to excess production compared with consumption in the US and the lack of current ability to export the product. Once export terminals are further built out there will be more exports of natural gas and the price in the US will rise up to the world market. I believe that at this time there is only one export capable terminal for Nat Gas in the US.

  • Report this Comment On April 22, 2013, at 11:46 AM, observerbob2013 wrote:

    People have been writing scholarly articles on the future price of oil for the past 40 years. The only problem is that whenever all the experts agree you can be assured that the opposite is just around the corner

  • Report this Comment On April 26, 2013, at 10:39 AM, marxwj wrote:

    Gee whiz, you mean I will never see $0.05 soda pops, or $0.10 movie tickets either? I am so disillusioned. I guess that inflation thing is real after all. What ever will I do.

  • Report this Comment On April 26, 2013, at 10:52 AM, pappawtom wrote:

    In this country it is illegal to have monopolies yet we deal with one, OPEC, that is trying to control the price of oil. We as a nation should stop this and demand that we deal with each nation individually in purchasing oil so that we have a true market controlled price.

    Second, those who drive up the price of oil are the very people who took a big hit in the market crash of 2008 and have been destroying the economic system in the process and have been trying to blame it on others like the FED. The FED is not doing a good job either and is making the matter worse with all the printing of new worthless money.

    You may think that making prices higher will force people to buy new ways to propel their cars but you forget that most people fall well below the average income of people in this nation. When we are forced to make big changes we can not really afford to do then we make big changes in the way we spend which means there is less money available for those wishing increase their wealth by investing.

    Let us change it from a spiral to a circle where everyone knows their place around the circle and works to make sure everyone is not affected seriously by actions we each take. You can not continue to climb on the backs of others without realizing that you are adding more weight to the foundation and when the foundation crumbles the whole structure comes down.

  • Report this Comment On April 26, 2013, at 11:04 AM, XMFAimeeD wrote:

    counter argument for those that think OPEC is too powerful and/or cheap oil is out of the question:

    http://www.fool.com/investing/general/2013/04/20/cheap-oil-m...

    Aimee

  • Report this Comment On April 26, 2013, at 11:16 AM, HurricaneJohnson wrote:

    OK, gasoline is high and the price is set by the world market. Got it.

    Let's produce it domestically and take advantage of that high price and provide our over-bloated government more of the tax revenue from domestic sales they keep whining about.

  • Report this Comment On April 26, 2013, at 11:30 AM, NOTvuffett wrote:

    OPEC is, of course, a cartel that tries to influence the price of oil. However, it is beyond the jurisdiction of the USA. It tries to do this with mechanisms like production limits (wow, they understand supply and demand). Not all net exporters of oil are members of OPEC. Oil is a fungible commodity and OPEC's actions probably have a small effect in the market.

  • Report this Comment On April 26, 2013, at 11:32 AM, linmarman wrote:

    I take issue with 'Obama want to tax [gasoline] more.' While bashing the current administration seems to always be in style on these MF message boards, these taxes go to build and repair roads. We've peaked in gallons of fuel purchased in 2007, and as fleet mpg goes up, we have less money for new roads and repairs. The local papers (Houston) report that we are spending it on car maintenance anyway, although I haven't. But I've certainly noticed that damage to roads and highways are worse than ever. I support taxing fuel enough to keep up with building and maintaining roads. I've got a hybrid.

  • Report this Comment On April 26, 2013, at 11:55 AM, petehanse wrote:

    Let's make a speedy exit from Iraq, and Afghanistan, 2 worthless wars, pass the Keystone Pipeline , open wide Fracking and the price of oil will drop!

  • Report this Comment On April 26, 2013, at 11:56 AM, petehanse wrote:

    The only person putting the brakes on "True Energy Independence, is the current occupant of the White House1

  • Report this Comment On April 26, 2013, at 12:07 PM, ccrown4 wrote:

    What is the true cost of gasoline to the American taxpayer when corn is subsidized and ethanol quotas keep increasing? The Lords and Ladies of congress continue their self-serving ways without regard to the American public. Refiners will increase their exports of gas in response to high ethanol credit prices. If the gasoline is exported, it does not have to meet the American ethanol requirement.

    Gas prices will never come down.

  • Report this Comment On April 26, 2013, at 12:24 PM, janlarmil wrote:

    One can buy this article only if one ignores the basic law of supply and demand. Long term I am betting oil below $50/bbl.

  • Report this Comment On April 26, 2013, at 12:32 PM, newAmerica wrote:

    Great article, reminds me that supply and demand no longer means anything. Supply is manipulated to keep profit margins high. It's a global business decision. Do you really think that NG prices won't jump when there is an opportunity to make mountains of money? If not, it seems biodiesel would be a more viable, available option. BTW, hasn't biodiesel technology been around for- oh, I don't know- seventy years?

  • Report this Comment On April 26, 2013, at 1:34 PM, lm1b2 wrote:

    Tell the truth,the reason we will never have cheap gas again is because there selling it overseas. Speculators our still unregulated in the Commodity Exchange,and the biggest reason of all,the Oil Lobby has Congress bought,and paid for,this is the price we pay for having a corrupt Government !

  • Report this Comment On April 26, 2013, at 1:39 PM, Loran182 wrote:

    Travel to Williston ND and see what is going on. Oil wells being drilled everywhere. No unemployment. If we would do this across the US then supply would increase and price would decrease. According to Econ 101. For now we do not need "Alternative Sources" that we have to subsidize. When they can compete in the open market we will have an alternative to oil. How about building the Keystone Pipeline to also increase supply. That is one "Alternative" I am for.

  • Report this Comment On April 26, 2013, at 2:28 PM, rashworth wrote:

    Seems logical, except you take away the action of human beings to change the future. Have you forgotten the crash of Oil on Denver, CO in the 1980's? Review it and write about it. The increase you call for in NG is happening and it not only pulls down N Gas prices but also seems to have added oil production new sources.

    The high cost of oil extraction is affordable in this high price oil market period. Remember it is the new method of extraction coming from fracking that has dropped the NG market.

    Ok , go and buy NG stocks. We get the message. But don't imagine you have figured the future out for oil. For every wall erected in the path of progress there is incentive to knock the wall down.

    Check out the progress stopping O.2 gas emissions in CA over the years. It is tech. knowledge applied to a wall in the way of auto travel. The future of oil is yet to be determined.

  • Report this Comment On April 26, 2013, at 3:39 PM, dunce1239 wrote:

    High prices are not caused "solely" by increased demand as the article states. It is "foolish" to leave out production costs. The Saudis have very low costs, but we do not and lumping all sources together is very misleading.

  • Report this Comment On April 26, 2013, at 7:43 PM, spiritpen wrote:

    The true price of oil is a dead planet.

    drivingthefuturedotcom

  • Report this Comment On April 26, 2013, at 9:28 PM, GaryR40 wrote:

    Let's demand that the Congress ends all subsidies and tax breaks for all sources of energy, oil, gas, coal, nuclear, solar, wind, etc.. so that they will have a level playing field. Let the market and investors decide which sources are viable. No more favoritism for oil and coal from Republicans and green energy from Democrats! No more protection from liability for nuclear power!

  • Report this Comment On April 27, 2013, at 10:03 AM, rosym wrote:

    Spiritpen, bravo. Had to read all the way to bottom to find one person here who has heard about climate change. Fossil fuel prices are kept artificially low by our willingness to allow them to dump their waste into the atmosphere free of charge. Add the cost of medical care for poisoned people, military cost of keeping oil lanes open, devastation from increasing storms, draught, fires, and floods, and renewable energy becomes the bargain of the century. See 350.org, or climaterealityproject.org/ and read the science before you scoff. This is not a partisan issue. Every business is at risk.

  • Report this Comment On April 27, 2013, at 6:30 PM, Darnedifino wrote:

    Oil may not be cheap, but U.S. gasoline prices are still among the lowest in the world (except for countries where governments artificially insulate domestic consumers from world prices), even taking into account state and local taxes. See http://large.stanford.edu/courses/2010/ph240/bui1/ for an interesting essay on this subject. And for current country-by-country comparison see http://www.mytravelcost.com/petrol-prices/

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2364171, ~/Articles/ArticleHandler.aspx, 10/25/2014 10:15:57 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement