Gasoline prices are at historic high, at least in absolute terms. Here on Gather there are many thoughtful articles about the situation, from some who are quite knowledgeable on the subject. However, there are also comments by some who clearly have no clue. The fossil fuel supply chain is like a poker game - the rules are simple, but the playing is complex. The following is an attempt to at least explain the links in the supply chain. As in poker, there are many ways to game the system. Please forgive the office memo style - it's my inner engineer emerging.
Oil wells are very complex holes in the ground, lined with steel pipe, from which comes crude oil, a mixture of many hydrocarbon compounds. A producing oil field typically has many wells whose product is collected at a shipping terminal in large, expensive storage tanks. The rate at which any well produces oil can be varied to some extent - up or down - and some wells can be shut in completely. However, producers must make changes in the production rate from a field very carefully and slowly, otherwise the field can be damaged. If such damage occurs, it is hard, sometimes impossible, to restore the original rate. Producers only reluctantly make large or rapid changes in rate.
Oil from wells is collected in a treatment plant where water, sand and some gases are removed. It then goes to a shipping terminal where it is held while it awaits transportation to a receiving terminal, either by pipeline or by crude oil tankers. Because the fields produce continuously and tankers load intermittently, inventory is constantly changing. Having the right amount of storage capacity is important --build too much and you waste investors' money. Build too little and you risk having tanks constantly full (requiring production cuts at the field) or empty (requiring tankers to wait for loading - at lease rates of thousand of dollar a day).
Oil tankers carry crude oil to a receiving terminal, usually but not necessarily, associated with a refinery.
Refineries DO NOT produce oil. They merely separate oil into its components, and, via chemical reactions, reform or combine these components into usable fuels. This may sound obvious, but we often hear complaints in America that gas prices are high because we haven't built a new refinery here in 20 years. (1)
Domestic refineries ship fuels to distribution centers. These centers sell to wholesale distributors, which sell retail outlets - gas stations and heating oil distributors.
(1) However, in the meantime existing refineries have all been expanded, so that our total refining capacity has increased substantially over that period. In addition, many international oil companies are partners in refineries around the world. They refine crude in places where environmental controls are lax and ship the products to America.
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Comments: 21
My attorney daughter who has worked on some deals involving sale/purchase of gas stations has told me that when we buy gas from a station, such as BP, we don't necessarily get gas that BP has drilled and refined. Individually owned gas stations contract with a supplier, which may or may not be BP gasoline. The supplier could be Shell, Exxon Mobil, Chevron, etc., and the next contract could be with another supplier.
There are always regional differences in price - who knows why? Transportation has something to do with it, but certainly doesn't make all the difference. Even if the refineries in CA had plenty of capacity, they'd still have to import crude oil. So you're either importing crude or refined fuels.
The answer is I don't know, but I doubt it.
Light sweet crude which is in short supply which is being sold from the US to go from West Texas to China Yeah, probably.
We don't have a monopoly on refining technology. What we have done is apply computer technology to refinery controls, making them much more efficient. That's what has allowed us to increase capacity without adding new equipment. One of the reasons refiners have opted to upgrade old refineries instead of building new ones is they have to include the best pollution technology in new refineries, whereas upgrading old ones can be done under grandfathered pollution laws.
That's what they tell us here.
Such as our oil supply is at the mercy of the OPEC cartel in the middle east as if those folks over there were completely in charge of it all ... as if the multinational Oil companies had no say or control in what goes on over there.
As if there was not a relatively small number of filthy rich folks who actually control most of the worlds financial empire that is required to fund and operate such vast systems ... as if there were no such things as secret deals and conspiracies taking place on scales beyond our ability to even imagine ... as if all such was on the up and up just like "they" would have us all believe ... just a bunch of great companies and nice corporations competing for business just like everyone else at the normal levels of society ... truth be known they would make Enron look like child's play ... which it was in comparison ...
I am not saying these things to disrespect anyone, only to suggest that we all NOT be so naive as to just go along with the system ... it is highly corrupted and all we get is some trickle-downs ... but then it is they who have convinced we/us that we should never ask for more ... trust us they say.
We have little chance of changing the situation when we all deny that it exists ... business as usual otherwise. But that is more comfortable for many who fear to consider the truth ... it is so much easier to deny that and stay comfortable in the safety zone, the box of reality we have built for ourselves. Shoot the messengers.
One way that it works is a company discovers oil in an undeveloped country under a deal that allows them to recover all their exploration and development costs at the begining of the project. Most of the cost of oil is in finding it and drilling production wells. Actual operating costs are relatively small - less than $10 per barrel. In the case of Saudi Arabia, it's closer to $1.
They sell the oil to their refining arm at a high price, charging much of the "profit" off as expenses in the undeveloped country. If they operate their own tankers, they will be registered and do business in a tax haven, but will charge their refining division a high transportation rate on the oil. The refining operation has higher operating expense, and if it has to pay the production arm a high price for the oil, the refining arm (in America) can show very low profit. Likewise the retail outlets. This way oil companies can direct profits to wherever the deal is the taxes are lowest.