The Truth About $6 Gas, $200 Oil and the Quest for Energy Independence

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No one needs to tell the average American about the impact of oil and gas prices. If they don't feel it in their wallets every day, they hear about it on the news every night.

But surprisingly, amid all the rhetoric, there have been no real answers to some of the key questions driving the energy debate… until now.

Is President Obama truly responsible for high gas prices, and can his opponents really bring them back down?

What role has Federal Reserve Chairman Ben Bernanke's loose monetary policy played in soaring energy costs?

Is more domestic drilling the answer?

Renowned energy expert Dr. Kent Moors answers all of these questions – and more – below.

Dr. Moors, an adviser to six of the world's top 10 oil companies and a consultant to governments around the world, also talks about the effect political turmoil in the Middle East could have on energy prices in the immediate term and how North America will gain energy independence in 15-20 years.

Here's what else Moors – a bona-fide energy expert – had to say…

Dr. Moors on Gas Prices

Can a U.S. President actually impact gas prices- at least enough to get gasoline back to $2.50 a gallon? Or is this just talk? I don't know whom to believe anymore…

Presidents have limited ability to affect the gas prices. They can, of course, release crude oil from the Strategic Petroleum Reserves and that has an impact for short-term problems (such as the heating fuel shortage in the Northeastern U.S. a few years ago).

However, that would not offset more endemic problems (such as the one we have been moving into). And frankly, gas at $2.50 a gallon is a pipe dream – unless there is a major recession or worse.

A collapse in demand is the only factor that could drive down prices that far and that is hardly the outside element we would prefer to deal with the rising prices.

How is the U.S. Federal Reserve's zero interest rate policy affecting oil and gasoline prices? What's going to happen when the Fed starts to raise rates in late 2014 and after?

This has only a very indirect effect. Increasing productivity and economic recovery generates a greater demand for energy. To the extent that the Fed policy improves employment and business investment that is the extent to which it will affect demand, and increasing demand increases energy prices.

How much of U.S. refining capacity is there available even if we do up U.S. oil production? Couldn't this be a serious bottleneck, helping to keep gas prices high?

Yes. We currently have about 8% surplus capacity, providing there are not unscheduled major interruptions in processing. One approach we will see more of is tolling. American crude, especially heavy oil and discounted grades, will be exported for refining and the oil products will then be brought back into the country.

Is there a formula that translates the price of crude (WTI and Brent) into the price of gas at the pump? And is there a profit margin component we can look at to compare the potential profit of integrated oil companies vs. refiners?

A $1.00 rise in crude price per barrel on average produces a 3.6-cent a gallon rise at the pump (for regular). The primary cost to a refiner is still the crude oil as raw material, but their primary profit comes from the refinery margin (the difference between cost of processing and wholesale price obtained).

Refinery margins are considered proprietary secrets and are not released by refineries. General levels discussed in the media are estimates (and usually not very good ones). However, those margins can be recreated, with the most detailed study done being mine. Check out my book "The Vega Factor," p.128ff and related footnotes, as well as the appendices on pages 209-303.

Dr. Moors on Oil

How much relief from high oil prices could we get by domestic drilling, fracking, building pipelines, and freeing up the permitting process, and how quickly? Wouldn't we be better off if Uncle Sam got out of the way?

The relief we'd gain from domestic resources would be limited at best. Domestic drilling will improve the national security issue, but unconventional oil and remaining traditional oil are more expensive to extract, process, and transmit. We will have sufficient volume but at a higher overall price.

How would you evaluate China's strategy of perusing the globe and doing all it can to lock up long-term energy sources?

I see it as essential for its domestic needs and further industrial expansion. The strategy of acquiring upstream assets abroad combined with expanded pipeline capacity is thus far working.

Exploitation of its own internal unconventional gas resources (shale and coal bed methane) remains a very high new priority.

Do you believe in Peak Oil? If so, how much time do we have before the "cheap oil" economy blows up?

No, not as originally formulated. With the rise of unconventional oil (shale, tight, heavy oil; bitumen, oil sands), we do not have a lack of reserves into the foreseeable future. However, we have lost light sweet crude – i.e. cheaper oil.

The "cheap oil" economy was over by 2008. The only reason we had a decline in prices between August 2008 and September 2009 was because of the subprime mortgage blowup, credit crunch and recession.

In other words, without exogenous factors depressing demand, "cheap" becomes a very relative term.

What's the geopolitical risk premium on a barrel of oil? If world peace broke out tomorrow what would the cost be?

This, of course, depends upon the current crisis du jour and the risk premium resulting. At the moment, Iran probably costs about $10 a barrel (but will be rising). Arab Spring if it flares up again will add another $10.

Here's an interesting result several weeks ago from our sessions at Windsor Castle.

The GCC (Gulf Cooperation Council – Persian Gulf minus Iran) ambassadors told us the following:

The Arab Spring has required that they dramatically increase expenditures for social programs and added expenses have been incurred via the unofficial support for various groups (such as the opposition in Syria).

The high price of crude oil assures their economies will remain undiversified – always a dangerous situation with effective unemployment reaching 40% or more in these countries and the average age below 25. The ambassadors said that to maintain the current drain on their budgets, average crude prices must exceed $85 a barrel (which they are). But that level will need to be about $120 by 2014 and more than $130 by 2016.

In other words, prices will be going up because of what the producers need, regardless of demand considerations in the consuming countries.

Dr. Moors on Natural Gas

With the glut of natural gas available, how realistic is it that we will see a large migration to natural gas powered vehicles, and how long would it take to build the infrastructure to support that? Will the Pickens Plan work?

Considerable additional demand will be coming on line for gas over the next several years:

  1. significant increase in the use of gas for electricity generation;
  2. continued increasing industrial use;
  3. accelerated use over crude oil as feeder stock for petrochemicals;
  4. dramatic additions in liquefied natural gas (LNG) exports beginning in 2014; and
  5. vehicle fuel.

Now on this last one, the move takes place first in high-end truck traffic, replacing even higher priced diesel.

The retrofitting of entire fleets is taking place in Canada and to a more limited extent in the United States. Compressed natural gas (CNG) and LNG fueling terminals are already appearing, with increasing proprietary locations being established near interstate highways by companies to fuel their own vehicles.

A number of municipalities are moving buses to natural gas. New York City has passed an ordinance preventing any new taxis from being registered in the city that are not either natural gas driven or hybrids.

Passenger vehicle usage will take longer and require a more detailed infrastructure. Still, we did a study two years ago concluding that the average service station would need to spend only $84,000 to provide upwards to 20% of its fueling capacity as CNG or LNG.

The Pickens Plan is self-serving to Mr. Pickens' assets and acquisitions. It cannot provide pricing that make sense without significant government subsidies, a somewhat paradoxical position from where he started with this two years ago.

What will it take for natural gas prices to find their footing?

Three years, as the new demand segments mentioned below come on line.

How mired in politics is the Keystone Pipeline and it is a viable oil initiative for the future of America?

The Keystone XL will be built. Already, the section between Cushing, OK and the Gulf is moving forward. It does not need approval from Washington.

The addition crossing the Canadian-U.S. border does, however. The pipeline will be redirected out of the environmentally sensitive area in Nebraska (the previous route had it stretching over the primary aquifer for the Midwest).

Republicans tried to turn this into a campaign issue by forcing an Environmental Impact Assessment (EIA) in six months. But since you can't legally do it that quickly, they gave Obama a political way out.

Virtually the only U.S. oil imports in 15-20 years will be from Canada, so the pipeline is central.

Dr. Moors on Energy Independence

Is energy independence a myth or a real possibility?

It's a real possibility, achievable in 15-20 years.

First, the national security argument can be settled. At our meeting at Windsor, the international consensus was unanimous that North America will be energy independent within two decades, given the largess of unconventional oil and gas. According to the projections, by the time we reach this level, we will still need about 30% of our daily supply of oil from imports, but that will all be coming from Canada.

However, the second issue is price. A full Keystone pipeline system and related pipelines south from Canada will actually add an average of 4-8 cents a gallon at the pump. More to the point, however, the emphasis of more expensive unconventional production will actually raise the price since it is more expensive to extract, process, upgrade and deliver.

We may, therefore, finally meet our hydrocarbon needs but will find the price rising nonetheless. Alternative sources will not cut the price. And remember, the energy segment remains "driven" by the cost of vehicle fuel.

To get the full benefit of Dr. Moors' expertise, you can sign up for his free newsletter, the Oil & Energy Investor, by clicking here.

Kent also discusses energy-related investment opportunities in-depth in his ever-popular Energy Advantage newsletter.

You can learn more about his Energy Advantage newsletter and the coming oil supply constriction by clicking here.

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Join the conversation. Click here to jump to comments…

  1. Stanley Weinberg | March 29, 2012

    Dr Moors excellent presentation was strongly absent in not addressing why the price should not decline significantly once natural gas becomes the primary fuel for automotive and home heating.
    People heating their homes with oil (not me) are taking a huge beating especially in the colder
    regions of the United States. The cost of home heating by oil begs for this sector to be addressed
    quickly be the natural gas sector of the Industry. This cost which exceeds the cost of gasoline
    substantially, followed by a state sales tax, (uncosiousable) at least in CT, is a killer
    Having worked in the Industry I can recall when home heating oil (#2) was .10 per gallon and
    Diesel which required less refining at the time, was even less.
    cc: The President of the United States
    Governor Daniel Malloy, State of Connecticut
    The only reason I can see for this not occurring, that I can see, is Industry profitabiility. Can Dr.
    Moors comment on this?

  2. John | March 29, 2012

    Re: Natural Gas vehicles infrastructure. There is or was a program in Ontario Canada, run by the gas company, if you converted your vehicle to NG, the gas company would come out to your house and set up the ability for you to fill your vehicle at home. Unfortunately the cost to convert a vehicle didn't make sense. So the program fell by the wayside.

    Re: Can the President effect the price of oil? If Agmadinajad can cause the price of oil to go up, just by saying he is going to close the Strait of Hormuz e. not by actually closing the strait, but just by saying he will. Then Obamadinajad can lower the price of oil just by saying he is going to drill baby drill. Not that he ever would say that. The proof that this would work is when president Bush opened drilling when the gas price went to $4 The oil speculators brought the price back down within 6 weeks, from $4 to $1.70

    • Esteban | March 29, 2012

      Production is at an 8 year high, and demand has softened, so drill baby drill would have next to no impact.

  3. jamese | March 29, 2012

    As long as Obama continues to jump in front of a microphone and tries to take credit everytime something good happens (with some success among the ill informed) he will also be percived as responsible for the bad.

  4. Jack O'Brien | March 29, 2012

    It is certainly surprising that among the questions addressed to Dr.Moore, no one thought to ask about the current cost of producing oil in the US. In fact, although it varies wildly about the mean, it worls out at about $50/bbl. which, allowing for distribution costs, makes $100/bbl. oil at least 40% too high. The fact is that the oil price has absolutely nothing to do with production and distribution cost or supply versus demand, and everything to do with the price established by the commodity markets, which in turn is determined by the investment community. There is nothing mysterious about this; the WSJ has already published the list of major investors in oil futures, including all the major investment houses, the largest pension funds, the hedge funds and individual major investors. Ask yourself how the TIC price could have risen to $174/bbl. and then declined to $34/bbl. since 2008 if the price was related to cost or supply and demand.
    There is nothing illegal about buying oil futures, but until something occurs to frighten the
    investment community into selling, the price will increase without any natural limit indefinitely.
    My own solution is legislation thast will make it illegal to purchase oil futures (the presenty caps on holdings are routinely ignored), but that is probably a pipe dream. Meanwhile, instead of asking oil industry experts to give their biassed opinions, I suggest you publish the list of commodity market investors and recommend shorting the market as a way to make money.

  5. Alex | March 29, 2012

    US could be energy independent twenty or thirty years ago. Lobbyism of oil companies is one of the main obstacles and lack of political will is number two. Both parties politicians get election-reelection donations practically from the same sources. Serious development of alternative energy is death verdict for oil companies – sooner or later it will happen, otherwise the world is doomed.

  6. Jack Faulk | March 29, 2012

    I think you do a good job of presenting the facts on oil and Natural gas. I think that the government should offer huge awards to companies or individuals to make engines that run on our countries oil and energy supplies. We should make sure that the international oil companies and foreign oil producers do not buy up these new high mile per gallon engines, and by engines I mean 100 mpg engines or more. The technology is here now to make this possible. Most of our oil use is for transportation, and the more mpg our vehicles get the less oil we use. So get the high mpg cars and trucks on the road as soon as possible.

  7. John Beck | March 29, 2012

    I'm sorry but this article is wrong! wrong! wrong!

    If we had a president who would embrace fossil fuels & all forms of energy – Coal & Nuclear for Electriciy, Natural Gas for cars & especially trucks and transport vehicles, and open leases for oil on Federal lands for the short term, we would see $2.50/gallon gasoline very fast.

    Yes, it would take time to make these other things happen, but investors would not believe that $5 or $6/gallon gasoline was even possible if we had a Federal energy policy that wasn't throwing billions of dollars down the tubes on failed solar companies, but subsidized smart alternative energy.

  8. Dusty | March 29, 2012

    Something that never seems to be mentioned about natural gas (in any form) as vehicle fuel is that whether it is or is not called "Pressurized Gas" or "LNG" or "CNG" it is all a high-pressure high-volatility gas that is highly flammable to the point of semi-explosive. Fueling a vehicle is not something that can be done as carelessly, casually, and in disregard of the 'rules' as fueling with gasoline is generally done.

    The laws of physics and chemistry are not subject to "politically correct" or winking at compliance for social or cultural reasons. I have driven a delivery truck and a city bus that were fueled with natural gas. In my state it is required that the person doing the fueling have a state license to do so.

    Standing clear of the action (as required) and watching a vehicle being fueled is a lesson in and of itself. At start and finish there is a big white cloud of gas evaporating into the atmosphere. That cloud is very flammable and is explosive at some points in this action. I can imagine the consequences when people are required to stand out in the rain while someone qualified fuels their vehicle. Or when they decide to light a cigarette– casually and without any real thought– and blow up the station. Liability lawsuits and problems will be extreme. Gasoline is safe and stable by comparison, and we all know how dangerous gasoline can be sometimes.

    Fueling in the rain will not actually be a problem because of lightning. [[There everyone is, in a usual hurry, waiting half a day for fueling on a wonderful day with great weather, nothing going on because there is a little thunderstorm five miles away. Explain that to the Judge when you miss the court session, whether as a plaintiff or a lawyer? Or to your boss when you miss half a day at work because your car was out of gas (LNG).]]

    Beyond all that, the heat energy of natural gas is barely over half that of gasoline so with the same gallon-capacity fuel tank it will be necessary to fuel twice as often to travel the same distance.

    Using natural gas as vehicle fuel sounds so easy. It is not and it never will be because of the realities of the stuff.

  9. Ross McIntee | March 29, 2012

    A few years ago when gas was 4 bucks a gallon, it was supposed to be because of $140 a barrel oil. Now we 4 bucks a gallon at only $105 a barrel. What's the excuse this time for the great discrepancy? Thanks for your publication. It is much enjoyed.

  10. A J Tummillo | March 29, 2012

    In reading all of Dr Moor's disertation on how expensive oil will be,he makes no mention of the impact the oil from Iraq will have on the price of oil.We know how plentiful oil is in Iraq so why not add it into his equation?There are oil companies from the US and China exploring so it is obvious we will be buying oil from them.This has to have an effect on the price of oil coming out of Saudia Arabia.The Arab Nations are meeting this week and I'm sure that oil will be on the agenda.This competition will certainly impact the price of Arab oil.

  11. Walter Rodenburg | March 29, 2012

    Gas today is cheaper than it was 50 years ago. Back then a silver dollar would buy four gallons of gas.
    With silver at $32/ounce, 0.72 ounces per silver dollar and gas at $4 per gallon. One silver dollar is worth 5.76 gallons of gas. Or 17.4 cents a gallon!

    Minimum wage was a dollar an hour. Image being able to buy 5.76 gallons of gas for every hour worked! In today dollars that is $23 per hour, after taxes.

    If reducing the price of gas is really a priority, we only need to reduce the size of the federal government by 50%to 75%.

  12. dp | March 29, 2012

    Unfortunately I don't get paid in 1962 Silver Dollars, I get paid in 2012 paper money.

    The following numbers are based on California
    In 1962 the avg price of gas was $0.31 and minimum wage was $1.60
    In 2012 the avg price of gas is $4.30 and minimum wage is $8.00.

    That means in 1962 I could buy 5.16 gallons of gas for an hour of minimum wage work.
    In 2012 I can buy 1.86 gallons of gas for an hour of minimum wage work.

  13. W.G.Staley | March 29, 2012

    I am retired, and in fairly good financial shape for an uneducated individual. (no collage degree)' but when the common person can see what is happening in this country, and not a thing he can do about it as an individual, what is the answer????? Spent 7 years in the military, Nuc. navy, got out and worked hard and accomplished just about everything I set out to do and I look at what the next couple of generations have to look forward to and I sure don't envy them. I wish them all the luck, and I do believe they are going to need it.
    W.G.

  14. DD | March 29, 2012

    Gas per gallon is VERY CHEAP here compared to Europe, AUS. NZ, HK, Sing and several other places around the world.

    I just wish the US would STOP whining about how (in)expensive the gas is compared to other countries. It's so tiresome!

  15. Perry | March 29, 2012

    I am always amazed at the number of brilliant folks who surf the net just so they can correct any and all articles and comments which don't fit into their dream world.
    In the meantrime please keep the tales of reality coming Dr. Moors. Thanks.

  16. BodiJohn | March 31, 2012

    Great article and site. We do not have a national energy policy because we don't have a government that can collaborate on the big issues like health care and energy…and it doesn't look like anything positive will happen in the near future. Further, we will not have an energy policy in the future because: read this article (and other sober treatments) and match that with what the average (I watch TV and listen to talk radio) American hears and sees each day…There is no way to understand these very complex issues without spending some serious time reading…and THAT is just not going to happen in this country any time soon. If the next generation suffers, it will be for the same reasons this generation is failing: stupidity fueled by ignorance. If it can't fit on a bumper sticker…it's too much to read.

  17. Dean Phillips | April 1, 2012

    Re incrg supply-More we produce less we have to import? Lower imports/more exports helps bal of payments. Should help strengthen the $. Pipeline from Canada-rather pay canadians for their oil than to mideast, venezula, etc. Technology advances(fracking, extraction from old oil fields, new oil fields, etc.) WILL help improve production of oil in US. Had we started 10 yrs ago, like I use to hear, the excuse was 2% of worlds crude reserves. India, fairly backward country, has MMs of vehecles on nat gas?? Seems like they can OVERCOME the HUGE technical pronlem YOU specify!! Your whole article seem stasis, incomplete, supporting of obama, and self-serving. Very disappointing.

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