May 15th Senate Hearings on Oil and Gas: We May Have A Problem
Posted by Robert Rapier on May 21, 2007 - 9:42am
Topic: Policy/Politics
Tags: Craig Thomas, energy policy, gas prices, politics, Robert Menendez, Ron Wyden [list all tags]
On May 15th, the Senate Committee on Energy and Natural Resources conducted a hearing entitled Short-Term Energy Outlook Summer 2007: Oil and Gasoline. You can watch the web cast here. I have done so, and this essay will be about my impressions of the hearing.
You can find the testimony of the various witnesses at the links below:
Mr. Guy Caruso - EIA Administrator
Paul Sankey
Geoff Sundstrom
Kevin Lindemer
Mr. Sankey is an analyst with Deutsche Bank, Mr. Sundstrom represents AAA, and Mr. Lindemer is an analyst with Global Insight. The witnesses really knew their material, although Mr. Sundstrom seemed terrified and Mr. Caruso had to make sure some of his answers were "politically correct." On one occasion Mr. Caruso stated that the EIA does not foresee that cellulosic ethanol is going to scale up to even a billion gallons by 2030, and one senator said "Isn't that in direct contrast to what the president thinks?" Then some pretty nifty tap-dancing ensued.
The Q&A, in my opinion, was an embarrassing display of partisan politics, and revealed serious deficiencies in some of the senators' understanding of energy issues. Some Republican senators took the opportunity to push for coal-to-liquids and drilling in ANWR, and some Democrats did a bit of grandstanding over windfall profits - directly ignoring the answers the witnesses were giving them.
For example, Paul Sankey had explained that oil companies lost a lot of money in the 80's and 90's, and therefore investments fell off. A couple of different senators kept asking the same question again and again: "Yeah, but why aren't they investing today, with record profits?" Sankey's answer to this question was that they are investing today. His answer - delivered numerous times - was merely ignored.
Sankey didn't mince words at all, and at one point told the committee to keep in mind that these record high prices are less than half the level of the prices in Europe.
Anyway, here were some of the more interesting exchanges which I transcribed myself. Senator Craig Thomas was the first to demonstrate that he didn't understand the answer to a question:
Senator Craig Thomas: Most any time that you have great markets and so on, you also have investment, like in the refineries. When the market is there, and the price is high, I don't understand the lack of incentive to invest.
Paul Sankey: The incentive is there, and the companies are now investing, it's just not an issue that you can expect that 4 years after companies are making losses, that suddenly there is an exponential increase in investments in refining capacity. It's just not that simple. It's a very tough market out there for any kind of infrastructure investment, as I mentioned you have competition from the Canadian heavy oil sands, you have competition from Asia, in Europe; but these companies are increasing their investments. The fact is that the companies are deploying capital to the best of their ability. One disincentive for investment is brought about by uncertainties in regulation and government interference. One concern they have is that regulations will cause them to lose money if they invest now. In my opinion it's in your interest to maintain a stable regulatory environment to encourage investment.
Senator Craig Thomas: I agree with that. But if lack of infrastructure is causing the price to go up, and the companies are not investing in infrastructure then it seems to be a bit of a contradiction."
So, right after Sankey says they are investing, Senator Thomas can't understand why they aren't investing. I lost count of how many times Sankey went through this routine. You would think eventually his answer might sink in.
Immediately after the above exchange, Senator Ron Wyden from Oregon apparently awoke from a slumber, because he asked the same question:
Senator Wyden: Mr. Sankey, quick question. You stated that in the 80's and 90's, there were poor returns for the companies, and that contributed to their problems. But now we also have the problem of starving investment in refineries, but we have record profits. Certainly that's been the case for the last 5 or 6 years. Why wouldn't the companies have invested in refineries and in the infrastructure - the things that were missing in the 80's and 90's - in the last 5 or 6 years?
Paul Sankey: This goes to the same point. You had losses as recently as 2002, and there have been changes in regulations - potential threats to gasoline as the fuel you want to make in this country. If you are talking about an investment of 2 or 3 billion dollars, it's immensely expensive now to add refineries, and there are huge amounts of uncertainties over how much it will ultimately cost you because of all the other challenges that there are out there with global energy infrastructure competing away the staff and materials to do the job. But even amongst all that, we have some fairly significant investment going on right now. One of the subtleties here is that we may not be adding a tremendous amount of capacity, but in terms or our ability to upgrade more complex heavy, sour crude there is very definitely a surge of investment going on.
Senator Wyden: I can see the argument, and you make it eloquently in your paper for not going forward with investments in the 80's and 90's; it just doesn't make sense given these record profits.
You have to wonder whether he heard a word that Sankey said. Is he just posturing? Or is he not paying attention? Or does he not understand that investments are actually being made (as I show in later)? Yes, these are the people formulating our energy policy.
The other exchange that I watched in disbelief happened between Senator Robert Menendez and Sankey:
Senator Menendez: Over the past few years, it seems that bracing for the onslaught of record high prices at the gas pump has become as common as planning for the summer vacation. And we see prices rise and fall, we understand the concept of a changing supply and demand chain, that's not foreign to us, but when we see no singular event, no visible cause for the increase in prices, consumers scratch their heads and try to figure out what's happening. This is the 3rd year in a row in which consumers are facing gasoline prices above the $3/gallon mark. Yet there's no devastating hurricane this year; there's no single event at a refinery or in an OPEC country that explains why, in the first half of May, consumers are already experiencing sticker shock. Mr. Sankey, when you say there is no price manipulation through the whole supply chain, then why do prices seem to spike during times of greatest motorist activities such as the summer, and Memorial Day weekend? Now, I am sure that demand is part of the answer, but it seems that we find that it is in these time periods that the prices spike. Is that just convenience, that it just conveniently happens that way? Is it just a pure coincidence?
Now remember, Senator Menendez just said that he understands all about supply and demand, and now is asking if it's a coincidence that prices increase at the times of highest demand. If I had been a witness, it would have been hard for me to hide my disbelief at this question from another member of the Senate who happens to be formulating energy policy.
Paul Sankey: I would highlight once again, that BP has 2 of the 5 largest refineries in the U.S. effectively running at half capacity right now because of the safety issues. What happens in times of such tight capacity is that you have an extremely seasonal market. What happens is that at times of demand run-up, you begin to exceed available supply and prices rise exponentially, attempting to price out demand or encourage more supply. What you will find in such a tight market is that in winter you will suddenly get tightness in natural gas and heating oil, because there isn't that available spare capacity to address the sudden seasonal rise in demand, and when you get to driving season - because everyone loves to go to the beach on Memorial Day - what you find is that you exceed available supply and then prices rise exponentially.
Then Senator Menendez gets his facts completely wrong:
Senator Menendez: Isn't there a reality that we are paying for some industry decisions that actually reduced refining capacity in this country? I mean there was a time that we had greater refining capacity, and the industry reduced that refining capacity, and as a result of making that decision, consumers today find themselves with exactly the consequences that you have described in your testimony before.
Sankey then tried to explain something about the cycle, but did not correct Senator Menendez on the key point: Refining capacity has not been reduced; it is at an all time high. Some refineries have been closed down, but the expansion of the existing ones far surpasses the lost capacity from those that were shut down. See my essay addressing this.
But Senator Menendez continued:
Senator Menendez: My point is that the reduction in refining capacity helped drive up the cost.
Your point is incorrect, and you misinformed a lot of people when you made it. Perhaps this kind of misinformation explains some of your anger at the oil industry?
But don't take my word for it. Visit the EIA and see the numbers for yourself. Refining capacity has increased by 2 million barrels per day in the past 10 years. And in the past 5 years? The years that the senators complained that no investments were being made? Refining capacity has increased since 2002 by 700,000 barrels a day - 250 million barrels a year. To put this in perspective, that amount is equal to 10.7 billion gallons, or about double the entire ethanol production in the U.S. That's the amount of refinery expansion that a number of senators on the committee pretended never happened because they believe no investments have been made (and this on top of the investments to upgrade heavy, sour crudes and to produce ULSD and ULSG).
Final Thoughts
I don't know if the committee members are really so uninformed, or whether they were just playing politics. You got the impression watching the web cast that they were making some statements just to make sure those were picked up by the media, regardless of whether they were accurate. Senator's Wyden's comments are a perfect example. It was clearly explained to him that investments are being made, and then he turned around and asked why they weren't investing.
The comments from Senator Menendez may be another matter. He may actually believe that refining capacity has been reduced. But he is on the energy committee. He should understand the overall picture. This is important stuff, and we can't have energy policy being formulated by people who are either proceeding with half-baked ideas, or are just interested in scoring political points.
There is also one thing that all politicians must come to grips with. Let me make it crystal clear that I firmly support tough environmental regulations. I support the move to ultra-low sulfur diesel (ULSD) and gasoline. I support phasing out benzene in gasoline. I would also point out that Senator Wyden has been actively involved in this issue. But the politicians have to understand that these regulations do have consequences. If you tell refiners they must install equipment to produce ULSD, there are four things to keep in mind.
First, this necessarily redirects capital that might have gone into expanding refining facilities. Second, it increases the costs of producing the fuel. Third, this additional level of processing reduces the overall product yield. Fourth, and perhaps of greatest importance, it increases the complexity of the refinery. Those are the consequences. The more complex the refineries are, the more unreliable they are going to be. So, when you formulate these sorts of rules, don't sit around and scratch your heads and ask "Gosh, I wonder why gasoline prices are going up?" Part of the reason gasoline prices are going up is because of the policies you have enacted. Many of which - as in the case of the aforementioned environmental regulations - I believe were the correct policies to adopt. Nonetheless, these are issues that helped to bottleneck the refineries and crimp supplies - driving up prices.
But I have to tell you that I am sick of the way these hearings are being conducted. I want you guys to put your heads together and formulate a coherent energy policy. Stop playing politics with this. It is far too serious a matter. The committee members also need to get up to speed ASAP on energy issues. We don't need members on the energy committee who have a tenuous grasp of these issues. Finally, listen to what your experts are telling you. If you are going to call expert witnesses to testify, don't completely ignore their testimony just so you can quote your canned sound bites. START SOLVING SOME FLIPPING PROBLEMS!
When Sankey said
"One of the subtleties here is that we may not be adding a tremendous amount of capacity, but in terms or our ability to upgrade more complex heavy, sour crude there is very definitely a surge of investment going on."
Instead of completely not listening and questioning the lack of investment, an intelligent person paying attention might have probed the type of investments rather than keep asking why there is no investments (when it was clearly stated that there were).
You assume these politicians are not intelligent. I assure you that they are but their focus is on their own personal power and on getting re-elected, not on solving problems. Now you may say that is not intelligent but from their perspective they are bombarded every year with supposed threats to civilization and most of them have not blown up in their faces yet. So they feel fully justified in ignoring such dire cries and instead in believing that things will continue exactly as they have continued. In other words, these politicians are intelligent, very literate, but completely innumerate. See my sig. ;)
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
The presence of the television cameras changes the debate. Suddenly it becomes an infomercial aimed at the American couch potato. Reasoned analysis is neither desired nor useful.
Later on they will read the report or have one of their staffers do so and (hopefully) that, along with the ususal political concerns, will guide policy.
I think you are correct, the staffers have a lot to do with matters. I know many politicians. Some are extremely intelligent, some are not at all. Their effectiveness almost always depends in no small part to the skill of staff and operatives working on their behalf.
All politicians I've met (bar one) have been very intelligent or at least very cunning when lacking in hard IQ.
What all politicians who run for more than one election term understand: You need to get re-elected. All else stems from that.
The longer versions goes something like this:
1) Change is slow
2) To be able to fuel change, you must keep working at it
3) Due to 1+2, you need to be at it for a long time
4) To be at it for a long time, you need to get re-elected
5) To get re-elected you need to be popular
6) To be popular, you need to echo the sentiments of the voting masses (not minorities)
7) To really compete against others, who are also popular, you need to have a lot of funding to get coverage
8) To get lot on funding, you need to echo the sentiments of those who can fund you
9) Often the sentiments of masses and funders are in direct conflict and you have to betray one or the other
10) When in doubt, betray the masses, because priority no. 1 is to get re-elected and funders have longer memory than voters and in this day and age coverage means more than being popular due to your opinions.
Q.E.D.
And once you do the loop 1-10 plenty of times, it becomes an automaton. It runs by and feeds itself. Pretty soon, it becomes the major goal, not just the sub-goal to help you get things done.
Thus, everything is for sale, except the ability to get re-elected.
There are of course the select few who have strong principles, but they don't usually last for very long in this game, unless their principles happen to be miraculously in-line with both the voters and the funders.
exactement. For those interested, I would direct you to Richard Fenno's Homestyle or David Mayhew's The Electoral Connection.
This is pretty correct. Most local politicians that i know personally are intelligent and highly principled.
When it comes to advancing an agenda (say putting more of the budget into transit rather than road widening) they rely on their staff to tell them how far they can push it without getting thrown out of office, or what aspects of issues are really important to voters so compromises can be struck etc.
At the federal level its probably all too easy to become divorced from reality.
Presumably at higher levels the game becomes much harder as well, so to survive one has to throw those principles away (if one had them to begin with).
10 sums it up, the rest is chaff.
OH my GOSH!
BRAVO to You! This sums it all up. I'll drink to that, and I'll buy the house a round, heck, make mine a double with that!
You have just officially summed it up for all career politicians. It's all about re-election. It's all sad but true. (Metallica song ring a bell?) It all boils down to re-election. Tell them what they want to hear, must get re-elected. The means justifies the end!
I had thought about running for politics in my younger days, but on reflection, i just couldn't sleep comfortably!
sheisters
Why would the refiners want to add capacity when there will not be any more oil available to refine!!!!!!!!!!!!!!!!!!!!!!!!!! This is so simple even a congressman could understand it if they knew the facts!!!!!! We need to add more capacity to other forms of energy not gasoline because the capacity will not be used long enough to pay for the large investment.
Nowhere is Now Here!
I just got raked over the coals about this statement in particular, and my partner informed me of:
Spectacular finds in Bohai Bay
Nine billion barrels of crude in open pools in Iraq
Giant discoveries off the Gulf Coast
Russian expansion in crude output
All I did was opine that perhaps refinery construction was low priority because the oil experts already knew that there wasn't all that much to refine.
Am I crazy?
No, you absolutely correct. Unfortunately, the correct view is held by a very small minority at this time. But, give it time.....
As with most people, including so called experts, she's completely missing the point ... there's loads of fossil fuels around ... we just can't get at it quickly enough to supply the desires of 6.7 billion people.
Xeroid.
I agree with your assessment of this hearing and the way that these experts testimony was ignored. Given the apparent density of the mindset of some of these senators, it's not suprising that nothing seems to be accomplished.
Having tried to spend time with my representative on this issue, one thing becomes abundantly clear...they are distracted by other concerns and "bad news" delivered to the public is generally not seen as a good thing, particularly by the Congressional staffers.
As for Caruso, given the recent past track record of the EIA in their predictions, it seems the "happy talk" about supplies and prices is wearing a little thin.
Caruso looks like an idiot and talks like an idiot. He is a man who should have been demoted or let go years ago. Worthless. Not surprising that EIA's predictions are not worth anything.
Nice Summary Robert!
I think we will see this same psychology in various forms as we enter this era of expensive energy.
There will be an expectation of a "fast food" solution, ready just-in-time, and when people see/realize the problem.
And, the blame game when there isn't a short term solution.
I'm sorry to keep harping on this Robert, but I keep seeing this mindset in the refining industry. They are investing, but mostly in upgrading to refine heavier crude. Is this the only area worth investing in the future? Isn't this an admission that we have at least peaked on light, sweet crude? This fact alone is cause for HUGE concern and I am surprised you have not highlighted it more.
Robert has already stated that light sweet peaked. The general agreement on light sweet was a 2004 peak. That peak date is agreed upon from Campbell to some cornucopians. There is very little dispute of that peak. The focus is now on heavier crudes, hence the focus on refining heavier crudes.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
Yes, but this does not jive with what Robert has said about the crude runs going through refineries lately. He has stated that the grade of crude has not changed in 10 years. My point has been that some of the refinery problems we have been experiencing as of late have been due to heavier grades of crude going through the system. If there is more availability of heavier crude (and cheaper) then those plants designed to run heavy are being worked harder than usual. Those that run only lighter grades are not being run at capacity.
That's not what I said. Crudes have heavied up in the past 10 years. But they have been stable now for several years. However, if you look at the data:
http://tonto.eia.doe.gov/dnav/pet/hist/mcrapus2m.htm
You will see that the most recent statistics show a very recent trend back toward lighter crudes. You are almost certainly seeing the BP effect there. The crude runs from January and February were lighter than at any time in 2006.
If you look at 2006, though, the gravity was the same as in 2002. If you go back a few more years, though, you will see that the crude today is heavier than it was in the late 90's.
But what about those refineries running ONLY heavier grades? Is there any way to see what kind of capacity they've been trying to operate? There is probably nothing out there that breaks this out.
But what about those refineries running ONLY heavier grades? Is there any way to see what kind of capacity they've been trying to operate? There is probably nothing out there that breaks this out.
Those numbers are for oil "input to refineries". Does that necessarily tell us the gravity and sulfur content of the US oil stockpiles?
Those "stockpiles" are primarily the refinery tanks that are feeding the crude units.
Following is a link to a 2005 Econbrowser article on light/sweet versus heavy/sour crude. The second link, from the article, shows the declining gravity (getting heavier) and increasing sulphur content of non-Opec oil production.
http://www.econbrowser.com/archives/2005/08/sweet_and_sour.html
http://www.econbrowser.com/archives/2005/08/sour_production.gif
Note that the chart is mislabeled. The bar graph is API Gravity.
Interesting comment from the article:
I just think in light of all the work Stuart et al. has put together and the fact that we KNOW light crude has peaked worldwide, it is really a no-brainer that we are oversupplied in sour crude, but DO NOT have the refining capacity to turn it into enough finished product to meet demand.
Therefore, we try to import more finished product to make up for the shorfall in domestic manufacture of the product.
Therefore, we have more refinery problems for those sour crude-capable refineries running nonstop.
Is this out in left field somewhere?
As long as you treat it simply as a working hypothesis and then look for data, you are ok. Just don't take the hypothesis as gospel unless/until data verifies it. Could the heavier crude units be down more often because of being run harder? It sounds plausible. However, as I noted elsewhere, I have read at least one article that pointed out that two west coast refineries were down for upgrades to handle more heavy crude so in at least those 2 cases the outage was planned and intentional with the end result being more flexibility.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
Im with Dragonfly on this point about lack of supply vs too much demand.
Having read all the posts below at this time stamp no one on this site states the obvious point that until very recently there was always excess refining capacity for the U.S. market. Always. Always. Always for 75 years there has been enough capacity to prevent shortages. Or at least so close that a tanker or so could cover a shut down.
Now all of a sudden there is not enough capacity. How did this reality come about. CERA and others have been predicting increasing demand every year until 2020. Of course we will need more refining capacity. But we don't have it. No one built it. Either in the U.S or over seas. Why not?
If everyone of importance is forecasting increased demand for 20 years out (back in 2000) and crude will not be scarce for 20 years (back in 2000) then building more refining capacity should have been a no brainer. You could forecast demand and supply and see a shortfall of supply of refined products.
Apparantly most refining people were not really convinced that demand would go up significantly and/or oil would stay plentiful and cheap through that time frame. Therefore no investment. Too much risk.
So I am watching what some people in the oil industry actually did vs what other people in the oil industry actually said and the two realities are not the same.
One last point for Robert. If all the investment in refineries is to convert current capacity of light sweet to the same capacity of heavy sour than capcity has not increased. This is where the investment has been, getting ready for heavy crude replacing light sweet. Lots of investment by the industry. But to say that investment is increasing capacity is a bit misleading.
20 years ago the same investment would have increased capacity. Today investment just maintains capacity. We have talked about this on TOD and it is another piece of why it is becoming harder and harder to increase supply, independent of a geological peak.
If everyone of importance is forecasting increased demand for 20 years out (back in 2000) and crude will not be scarce for 20 years (back in 2000) then building more refining capacity should have been a no brainer. You could forecast demand and supply and see a shortfall of supply of refined products.
See Sankey's comments about losses in 2002. If you are losing money, you aren't investing a great deal in capacity. Also, BP has a lot of capacity out of commission right now. Don't overlook the significance of that.
One last point for Robert. If all the investment in refineries is to convert current capacity of light sweet to the same capacity of heavy sour than capcity has not increased. This is where the investment has been, getting ready for heavy crude replacing light sweet. Lots of investment by the industry. But to say that investment is increasing capacity is a bit misleading.
Well, your point is inaccurate. All of those investments weren't merely to convert capacity. Total capacity has actually increased, which is the point I made in the essay.
"Well, your point is inaccurate. All of those investments weren't merely to convert capacity. Total capacity has actually increased, which is the point I made in the essay."
Robert,
I get your point. I still maintain that capacity has not increased nearly enough to meet the FORECAST Demand. My understanding is that the high prices of the past 2 years have slowed demand from the Forecast level of 2007 from 5+ years ago. If demand destruction, worldwide, had not occured recently than demand & prices would be even higher than they are today.
So either increased capacity didn't happen fast enough to keep prices moderated or demand increased faster than forecast. I do not see evidence that supply has increased more in the last 2 years than forecast 5 years ago. Correct me if I am wrong.
I really dislike talking about supply vs. demand in the present because by definition they must equal. They key is where people thought demand would go with prices in the $2.00/gallon range. I submit we are way under capacity for $2.00 gas which is what people expect and $30/barrel crude would give us. And where is that $30/barrel crude we have been promised for 2 years?
The public doesn't get the nuanced debate (I just had one with co-workers taking your position) they just blame OIL COMPANIES for not maintaining supply. The OIL COMPANIES (Exxon, Shell, CERA, etc) are to blame here because they always say prices will go back down WITHOUT demand having to go down. Obviously that is not happening now.
20 years ago the same investment would have increased capacity. Today investment just maintains capacity. We have talked about this on TOD and it is another piece of why it is becoming harder and harder to increase supply, independent of a geological peak.
But as Robert has shown, refinery capacity has increased significantly over the past decade. That's what the EIA numbers show (vs just a switch from light to heavy). It's just that demand has risen even faster and, due to a tight world market, imports of gas are down.
Well, I would not doubt that because we haven't run out of light crude. It's still out there, so we built more capacity to sell to the demand, but somewhere along this timeline, companies have started to make the decision that they had better get ready to refine some heavier crudes.
So sure, we have built in more capacity at the same time trying to upgrade for heavy. Transition points are not abrupt, they are a mixture over time.
Whose job would it be to fund, build, and maintain unused capacity for the expressed purpose of keeping it around as EXTRA? In order to create unused capacity in the electricity markets, the US had a system wherein the state regulators guaranteed a minimum rate of return and a full cost recovery for building unused capacity. With deregulation, we have since moved pretty far from that model, and I wouldn't expect to see it soon in petroleum refining. If gasoline is a public utility, it should be regulated as such. It is not.
Good point, lago.
Can someone give the exact details of which state/county/municipality that has volunteered to have a massive new heavy oil refinery in their back yard?
In the Democratic debate, John Edwards said that we have a demand problem when asked why prices are so high. The irony is that one of the commentators on MSNBC "corrected" him after the debate to say that we had a refinery problem. See, it is not just Senators who are ignorant, willfully or otherwise.
John Edwards was almost uniquely honest in his answer. The blind spot which prohibits other Senators from understanding or telling the truth has to do with demand. Once you take on demand, you have to implicitly admit that it is your constituents who are a major driver of the problem. Once you do that, you introduce an element of risk --- the risk being that you may not be reelected. With the possible exception of Wyden, these are not stupid men and did not get to where they are by being stupid.
What you did not mention is that Sankey said that one of the oil companies greatest fears is that demand will be reduced. If demand is reduced, their investments will turn to shit. But he was sending a message to the Senators. They have the power to influence demand, hint hint. But they would rather rail againt the refiners and the oil companies. Much more popular. It is fun to rail against the oil companies. To rail against the consumer not so much.
What you did not mention is that Sankey said that one of the oil companies greatest fears is that demand will be reduced.
This was in fact an important point. On the one hand, the senators were saying "You need to be investing." On the other, they are supporting a 20% cut in gasoline demand in the next 10 years. Now, I don't think that's going to happen just because policies are passed to make it happen, but if you can see that the political tide is strongly against the product you are churning out, why invest billions?