Feeding the Beast
Posted by Dave Cohen on July 18, 2006 - 6:34pm
On the sprawling trading-room floor at Valero Energy Corporations's headquarters, planners, traders and their bosses grapple every day with a task they call "feeding the beast."And today we learn that the US consumption beast is not the only thing Valero is feeding. DoD awards Valero contract to ship jet fuel to Israel.Valero's 18 refineries chew through 3.3 million barrels of crude oil a day, oil that the San Antonio-based company buys from around the world.
The Department of Defense has awarded Valero Energy Corp. a $36.8 million contract to supply military-grade jet fuel to the government of Israel -- the United States' key ally in the Middle East.How's Valero doing? Let's talk briefly about how this refining and retail company does business under the current oil and gasoline market conditions.
- Of the 3.3/mbd of crude oil processed, about 65% is bought under long term contracts. The remaining 35% is bought on the spot market.
- Valero buys 25% of its oil domestically. The rest is purchased from countries all over the world including Mexico, Saudi Arabia, Iraq, Kuwait, Venezuela, Ecuador and several nations in Africa.
- At any given time, Valero has about 200 million barrels of price exposure, so "risk management is very important". Also, about 40% of the crude they buy is from "politically unstable nations". So, they must keep abreast of geopolitical events. No doubt this has an impact on the risk management.
- The 3.3 million barrels Valero buys and processes each day represents almost 4% of world production.
Meanwhile for upstream producers and refiners [like Valero], these high prices have presented a different kind of dilemma in hedging terms; whether to [1] sell such apparently high prices in forward markets whilst they are available, and which may not be able to be achieved indefinitely, or [2] to adjust their expectations to a 'new paradigm' of permanently high oil prices. The condition and capacity of global refining and pipeline infrastructure may have to wait for funds released by collateral sales of forward energy before the necessary refinements and capacity can be undertaken and thus have any effect in adjusting supply better to continuing high demand.If the importer sells high prices (for oil or refined products like gasoline) as a hedge, they think that prices are abnormally high and will come down. But Valero is buying oil in the forward markets; I believe they have adopted strategy #2 in which there is a "new paradigm" of permanently high oil prices and demand remains strong. Common sense tells us that spot purchases leave Valero exposed to price variations. For example, they must manage the risk of a price spike due to an oil shock because they must keep sufficiently high margins to continue upstream purchases in such an event. In this case, the sudden spike is a detrimental price development. On the other hand, forward purchases (contracts) for oil leave Valero protected against rising prices (whatever the cause) but leave them exposed to detrimental lower prices. This strategy is reflected in their robust 2006 1st quarter earnings report (see below) and is in concert with the oil futures markets, which are in contango. As for their refined products, MyWestTexas says
Then there's the sell side. Valero's plants churn out more than 1.4 million barrels of gasoline a day and about 1.1 million gallons of products called distillates that include diesel and jet fuel. A significant amount of the product is sold on the spot market, [executive vice president of marketing and supply] Gorder said.Selling a significant amount of your product on the spot market is consistent with a strategy that views high gasoline prices as here to stay.
I would be remiss if I didn't mention the distinct possibility that should the Israeli conflicts with Hezbollah and Hamas escalate into a war involving Syria and Iran, there might be a spike sending oil prices over $100/barrel or the spike could be weaker. This in turn could dampen demand sharply even in the near term and reduce oil prices. I do not know how Valero is hedging against this possibility or if they are. The atmosphere may be tense on Valero's trading-room floor right about now. No one really knows how high prices must go before Americans cut their consumption significantly. In any case, to hurt Valero prices would have to drop somewhere below today's levels. This kind of price swing appears unlikely. The volatility will depend on the demand elasticity among other things. My view, and it could very well be Valero's as well, is that US transportation fuel demand has little elasticity. People who have some slack will forego other discretionary spending before they cut back on their vehicle miles traveled. Not the Cable TV though!
Using the forward purchase contracts is paying off for Valero as we see from this 1st quarter summary -- Valero Energy Corporation Reports First Quarter Earnings.
"The second quarter is off to an outstanding start. Gulf Coast gasoline and diesel margins are at record levels for April. The forward curve is showing these record margins continuing through the summer. Sour crude oil discounts also remain terrific with the heavy Maya crude oil discount averaging more than $14 per barrel for April and medium sour crude oils, such as Mars, averaging more than $6 per barrel discount. Given that 60 percent of our feedstocks are purchased at [forward] discounts to benchmark sweet crude oil prices, these discounts play a significant role in our earnings. With our leverage to these outstanding product margins and sour crude oil discounts, the second quarter is shaping up to be the highest earnings quarter in Valero's history.The discrepancy between 60% and 65% as quoted above may be significant but I don't know the reason for it. I'm not sure what "regulatory pressures on supply" means in this context. Regarding paying off debt and repurchasing their common stock, I need only point out that Valero is bullish on Valero."Looking at refining fundamentals for the rest of the year, we feel very confident that the refining environment will remain strong. The combination of growing refined product demand, despite higher price levels globally, and regulatory pressures on supply should support continued strength in refined product margins. Sour crude oil discounts should continue to be wide due to ample supplies of sour grades and higher demand for sweet crudes as refiners try to meet lower sulfur specifications and increase yields of high-value clean products," [Valero CEO Bill] Klesse said.
Regarding the company's cash flow, capital spending for the first quarter was approximately $975 million, of which $200 million was for turnaround expenditures. For the year, the company anticipates capital spending of approximately $3.5 billion. In addition, the company paid off $221 million of long-term debt and purchased 10.7 million shares of its common stock during the first quarter.
The point is simply this. Despite some volatility, prices continue to go up. US demand remains strong in the face of rising prices and heavy sour crude discounts are large. As Klesse says above, that is an economic environment in which Valero thrives. Since prices continue to rise and costs are passed on immediately, "gasoline and diesel margins are at record levels" as of April and forecast to stay strong all summer. Moreover, sour and medium sour discounts continue to be strong. Why? Because there is a glut (from MSN Money) of heavy sour crude on the market. This makes perfect sense.
Here's the crux of the problem for gasoline consumers and oil companies: There's just not enough light sweet crude to meet demand. And, while there's plenty of heavy sour crude, a barrel of heavy sour crude yields about a third less gasoline than does a barrel of sweet light crude. That's if you can refine it to begin with...This represents a profit opportunity for Valero since they can handle the heavy sour crude refining whereas some foreign refiners can not.How big a glut? A big, big one, judging by the price of light sweet and heavy sour crude. At the end of June, Nigerian Bonny Light, one of most sought-after grades of light sweet crude, was selling on the spot market for $71.65 a barrel, while Saudi Arabian Heavy sold for $58.70 a barrel, according to the U.S. Energy Information Administration. That's a spread of almost $13 a barrel, way above the $5 a barrel historical average for the spread between light sweet and heavy sour grades.
Refineries that can turn heavy sour crude into gasoline aren't evenly distributed around the world. Europe and the United States have more than their share. About 60% of the crude refined in 2005 by Valero Energy (VLO, news, msgs), for example, was heavy sour crude.The MSN Money analyst Jim Jubak lists Valero as his top stock pick, noting that "Valero swallowed Premcor, another specialist in refining heavy sour crude, in 2005 to become the leading heavy sour-oil pure play". Refining on Wall Street? Valero's current profits and rosy outlook is also consistent with investment in new capacity -- see Refinery bottleneck to ease (from the CS Monitor) in which we learn that
Among those who have announced expansions are Valero, adding an additional 400,000 barrels per day, and Chevron and ExxonMobil, each adding 75,000 barrels per day. Suncor, Motiva, and Citgo also have expansion plans.So, Valero continues to feed the beast and light sweet crude production has peaked for the time being, probably forever. Prices are volatile but continue to go up. American gasoline demand has not slackened much -- it is still growing.
From the EIA. See here
Selling jet fuel to Israel can't hurt prices any. Valero is prospering and bullish on future oil prices because the beast is never satiated.
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Even if the crude price drops back from current levels, two longer term factors would seem to weigh in VLO's favor (1) The long lead time for competitors to bring on additional heavy crude refining capacity, and (2) The increasing percentage of heavy crudes on offer as light crude deposits peak and drop off. Indeed some like JDH think light crude has peaked already, while reserving judgment on the timing of the overall oil peak.
I'm not convinced that light sweet oil is running out quicker than heavy sour (unless we count oil sands/tar as heavy sour).
I'm not disagreeing. However, this is contrary to conventional wisdom and the basic point is very important.
Claims that light oil has peaked and that refining capacity, particularly complex, is constrained would both lead to an increased spread. In the past, I have charted spreads fro EIA data and noted the increase, however I have not adjusted for price.
Spreads can be viewed as being created by refining configurations. If the spreads have not grown, it brings much of what is said about current refining into doubt.
I may try to chart this later, but won't have time for a few hours and don't have a website to post it on.
You can post anything you want on my site. I'll even post it for you here. Send me images or Excel spreadsheets. theoilceo@yahoo.com
I think you are right about the spread question. Since refinery configurations determine spread, I suppose an absolute figure could be viewed as more relevant than a relative figure.
By this I mean, if the refining industry expends an average of $5 more to refine a heavy crude, it should cost about $5 less. So a $15 dollar spread is telling us something, even though in terms of the base price it is unchanged.
I do think this is worth exploring as it is another useful clue to what is going on out there.
Thanks for the Jubak link. Not sure the guy should put his photo up there though.
Jubak's great. I'm glad Dave finally got turned on to him. Very smart guy and totally "with it" on energy issues. He follows the money. I can only hope he pays attention to environmental and moral issues with the same tenacity.
As far as his photo...what, you don't like large mustaches? I guess only AlphaMaleProphetOfDoom and his girlies would be impressed.
However, after further reflection, I think it is the absolute spread ($ terms)that matters, not the relative spread (% of crude price).
Spreads between crudes are basically determined by the cost differential between converting heavy crudes and light crudes to products. As I noted above, if the average cost of converting a Urals slate to a given product slate is $5 more than the cost of converting WTI, the spread should be about $5.
If the spread has gone up in proportion to the oil price, I do think it represents a lack of light crudes and/or complex refineries. Absent these constraints, I think the spread would have remained consistent in nominal terms and shrunk in relative terms.
Valero's refining margin is basically fixed. They, like other highly complex refineries, make money when the spread is large in absolute terms. The crude price itself and the value of the spread realtive to it are not important.
The fundamental spread tht determines profiablility is the price differential between cost per barrel of heavy sour crude and the price they get for the products produced from that barrel of oil.
Part of the reason for the discount for heavy sour crude is because it doesn't produce as much gasoline. If that is the dominant reason for the spread then it makes good sense that the spread betweeen heavy and light should remain constant on a percentage basis.
If on the other hand the spread is really there to compensate the refiner for the added cost of refining the stuff then it should remain constant on an absolute basis.
In the real world it would be a mixture of the two, it is probably best just to attempt to track the spread between their cost of materials(heavy crude) and the weighted average of the price they get for the products.
Such a deal!
(Couldn't resist that one --but let's not escalate this into a mini war again. Remember, you lobbed the first provocation here. Peace.)
Better yet, how about being a REAL good sport and pick up my share of the $3 billion+ that the US Congress bestows upon Israeli every year? It's in your interest; not mine.
(Couldn't resist that one --)
I would not be so sure of that. It may not be to your liking but it may be in your best interest and you might not know it...
Well let me see . . .
- Israel is an ally of the USA.
- They are a democracy, not a dictatorship or fanatical religious movement.
- They do not want to return to the 7th century A.D.
- Radical Islamic-Fanatics are better dead than alive.
a) They won't try killing me if they are dead.b) They won't continue making women 2nd class citizens.
c) They won't mutilate women, as they do in some cases.
d) They won't use nuclear bombs.
e) They might try translating a few more books from Chinese, Japanese and English into Arabic.
f) Do I really need to go on?
- I assume you all realize that SA, Jordan, and Egypt, and the Gulf States, are not unhappy with this entire play. They do not want Iran to jump ahead in world politics for a bunch of reasons.
- Don't forget we subsidize the defense of all of the above and send a lot of food/stuff to Egypt.
Frankly, I think Israel should nail Syria and get rid of the Assad family/Alawite dictatorship, OR, not have hammered fragile Lebanon. But they now have as of tonight Israeli soldiers in Lebanon.This will not end soon.
I was thinking it is nice for Joule to "know" this.
I should have known better than to instigate another round of feces flinging in our TOD monkey cage. Then again, I must subconsciously enjoy this ploy (because it leads to attention getting, entertainment, sense of control over others, ... and all those other psychotic human tendencies which I, like many human creatures, possess).
This kind of exhibition unfortunately reinforces the doomer-gloomer part of my brain because even we TODder's cannot restrain ourselves.
(A "self-restraint" clip from June 2003 Al Jazeerah cartoons, you'll find translation there and also a pictorial insight as to how "they" think.)
The next dream from today's AJ cartoons:
P.S. I do not wish death for anyone just because they have "bad thoughts". I've had many bad thoughts in my life which I now regret.
Those cartoons are clever and there's a great deal of truth in them.
Freedom of speech bugs you, huh?
Really Al-J prints some fine stuff. If you read the captions instead of making up your own, you can see that those horrible monkeys over there are humans beings who hurt and bleed too. Maybe your God has told you they all need to die, but not everyone believes in your God. That little weedy buy in sandals walking along the road, you know, the guy you had great fun splashing water on with your SUV, might just the the God who kicks your God's ass.
we sometimes agree (maids are people too).
and we sometimes seem to disagree.
you wrote (with apparent deep feelings):
I express my opinions on the wishing of death upon others and on extremist cult religions nearby this post (see my response to Jack Greene)
Clearly you have been inflamed into an angry & bitter mood.
I'm sorry.
I just wanted everyone to engage in some critical thinking about the fate of humanity (e.g. how do collapsing human organizations deal with increasing stresses?). I guess this provocation merely caused more anger and hurt and flaming. It did not get too many people to "step back" and see the bigger picture.
However what he found out when he lived with the Nyangaton was that they were not the devils they had been made out to be. They were just human beings getting on with a difficult life. They were stuck between a rock and a hard place, the Suri had all the best pasture land, meanwhile they were surrounded by other tribes pushing into their territory. They were struggling to survive. As humans have done since time immemorial they fought for their lives, they killed people and have a culture that encourages it; that is the only option they have left to survive.
I don't see that the western world has really become any better at dealing with an overcrowded planet. Diplomacy is easy when you can afford it, and we do not even manage that very well these days. And remember there is a lot of blood on our hands. We are in our position of comfort precisely because we have fought for it.
Israel, Lebanon: I don't see much difference, just a bunch of humans trying to make do with what they have and when the purse strings start getting a little tight. Just as we do. There are atrocities aplenty to go around. And no doubt unreported stories of self sacrifice and love.
This is the real problem that peak oil exposes. It removes the illusion of the western worlds `humanity' and shows us for the animals we really are. Not that there is anything wrong with being an animal.
For all our achievements and abilities, our suffering and love. We are still subject to a world of finite resources, and when they start to run out we will fight for our land and our right to live just as the Suri and the Nyangaton do. Just as Israel and Lebanon do.
It is easy to blame Hezbollah. Their interests are against ours. But remember they are humans, and largely humans who have suffered to the point that there `humanity' has eroded away. One of the interesting things about the Nyangaton was that even though their culture was all for killing the enemy. It was really hard for them to do it. They had to have ceremonies and prep talks from the elders and really psyche themselves up. The rest of the time they seemed gentle souls as most humans are; enjoying a friendly wrestle, spending time in the bush with their mates and time at home with family. I doubt that Hezbulla are much different. And what of the many civilians, the men, women and children who are simply trying to scratch out an existence.
It can also be easy to blame Isreal. The big bully. One of the biggest armies in the world using out of proportion force to tackle a far weaker foe and killing many innocent civilians in the process. Yet they also are just humans, living in a crowded corner and surrounded by people who at best dislike them and many who would like to see them removed from the earth. Their towns and cities are also being hit by rockets and civilians dying.
I say again. This is the real problem that peak oil exposes. It shows us to be the primitive human animals that we are. For all our compassion and ability to care for one another, when we find ourselves up the creek we fight for our corner.
My heart goes out to all those suffering to in Isreal and Liberea in the conflict and to those on this forum who are also suffering in our own ways.
Both well said.
I think this post exposes "The Beast" within us all.
In each country (be it Israel, Lebanon, Iran, etc.) the average person is merely trying to live his or her life, trying to meek out a living in trying circumstances where there are not too many options for how to survive.
The average person sees only what his or her eyes show them, what the ears speak of to them.
Unbeknownst to many of the average citizens, civilizations around them are collapsing. There are not enough jobs to keep everybody happily employed. So artificial industries of hate are built up. If only we kill and anhialate the people on the other side of the border, things will get better. Remember it's "us" against "them". They are the axis of evil and "we" are the good ones, the ones that our God has chosen to be victorious over "them". They are in their last throes and we are on a non-negotiable path towards paradise.
It is a scene almost copied from George Orwell's "1984".
How many of our government leaders (or religous leaders) are preaching something like this to us?
These are the bell tolls of collapse.
The elites do not have any new tricks to pull out of their rabbit hats. So they set one group of peons against the other. Let the fun and distractions begin! The monkey cages are rattling again.
Meanwhile, out in a dessert spot, an oil well is slowly running out of the lucor of life. At the edge of a forest, more trees are being felled. Underground in an aquifer, the water level invisibly drops. Up in the atmosphere, the CO2 concentration silently increases. But whose got time to pay attention? We are having too much fun killing each other.
My little "instigator" was newsworthy but I knew it would provoke some discussion. But that's a discussion we need to have.
Also, I didn't get into Valero government contracts, political action committees and where the money went. That is also worthy of discussion but I left it out of the main post. The jet fuel to Israel deal is one of many such contracts that Valero has "landed" in past years.
Dave, I agree.
When I first learned of Peak Oil, it started me on a journey.
I tried to tell everyone I knew about this impending disaster.
And yet, "their eyes glazed over".
That led to some tough questions:
- Why did their eyes glaze over?
- What kind of beings are they that they can ignore this?
The answers were not pretty.They are we.
They are irrational animals.
They run in herds, often with mindless abandon.
Each one of they (we) thinks he/she is better than the next one.
If the bad thing happens, it won't happen to me. It will happen to the "less deserving" other, to the "them", not to the "us".
Until we deal with The Beast that is us, we really will not be able to deal with problems like Peak Oil, Global Warming, Population explosion, etc. The true problem is The Beast that lies within. (Use "lies" with both meanings.)
First, many "Islamic-Fanatics" cannot help being what they are. They were taught this from birth just like you and I were taught from birth to make money and be part of the Smithian cult (--the Adam Smith cult that worships consumerism and specialization and the Invisible Hand).
Second, it is morally irresponsible to wish death upon any human being as long as there are viable alternatives at the moment for yourself. (Israel has no viable alternative at the moment for itself because they already tried diplomacy & cease fire agreements and yet the Hezbollah rockets keep coming, the Palestinian rockets keep coming.)
Third, because I was raised in a highly religious Jewish up bringing (and have since then gone heathen), I know that belittlement of women is not an Islam-only attribute. It is very much a part of Hassidic Jewish tradition as well. If you study extreme Jewish Hassidism versus extreme Muslim Fanaticism, you will find that there is very little that separates the two with regard to how they view women. Both religious sects are mind control cults. Perhaps Islam is a bit more mind controlling because they require muttering to yourself 5 times a day, whereas Judiasm only calls for 3 major mutterings per day.
(No disrespect meant for believers of either religion. They are human beings like me. It's just my personal opinion.)
You make some good points. The part on female mutiliation is pretty much spot on, but I would point out, and that is what I was thinking about, in Southern Somalia with the Islamic regime now in place, you will not see that practice going by the wayside. BUT, even in Puntland or other northern Somalia areas that do not support Bin Laden and Company, it may continue.
I always got a kick out of the two blocs trying to stop extending the right to vote to women in the USA was led by the clergy and saloon keepers.
No radical Muslim practices female circumcision. No-one at all does it for religious reasons. It's a traditional custom in some African societies, some of which are Muslim.
Also, "subsidize the defence of" is an interesting way of putting "install puppet tyrants to rule".
As to the rest of your nonsense, go on by all means. It's not as if those who believe it are accessible to argument.
For "Hezbollah base" read "child care center"
For "enemy fighters" read "grade school kids", "grandmothers", "walking wounded", etc.
For "bomb making facility" read "hospital"
You get the idea. The Israelis are taking the "nits will be lice" approach, for extra credit look that saying up.
------------------------------------
For extra-extra credit, go find a book called "Radical simplcity". It has a feather on the cover. Feathers are cool. The author was a nice little cog in the machine, and realized he didn't agree with what his tax money was being spent on, what his engineering ability was being used for, etc. He decided the only real means of protest was to stop being so damned useful to the machine. How he did this was to go to living on so little money, that he pays no taxes.
This solution is looking more and more viable to me every day. In fact I'm trying not to look at it more than necessary because the more I do, the more it looks mandatory.
Arabs/Palestinians/Hezbollah/Hamas/Terrorists.
And my statements would all be facts.
You are smarter than this. Cut the crap.
How would you respond if you were the Israelis? How would you respond?
Tell me what your expertise on the Mid-East exists of. Tell me. I want to know. I want to know where you get your history and your opinions on this matter.
How would you respond?
Extra Credit - Why are Israeli weapons designed to be the most effective against military targets while their enemies weapons are designed to inflict the most amount of damage to the largest amounts of civilians possible?
Why did the Israelis decide to strike one of Lebanon's largest dairy factories(in the Bekaa) at 3AM - when none of its 200 hundred employees would be working there? Why not strike at 9AM when they could have maimed everyone?
Don't even try to make light of the fact that a dairy-factory is not a military target. You would only be verifying you understand little of twentieth-century warfare.
Just answer the questions.
How would you respond?
Up here in San Francisco there have been protests by Jewish folks against what Israel is doing. At the rate things are going, they'll get larger. Others will join in too.
Meanwhile, you're getting a "warm fuzzy" over those photos of the Israeli kids writing their names and slogans on bombs in red ink, bombs slated to land on other, non-Jewish, kids tomorrow.
If you were the Israelis. That's what I said. I didn't say Jews. I said Israelis. That's why I threw in the instruction that you just answer the questions. I don't need editorials. That's what I have newspapers for.
Try again.
And Jack Greene, surely you realise that the Iran "nuclear crisis" is more to do with petrodollars than whether or not Iran intend to learn how to make nuclear weapons.
Oil CEO,
We are often on the same side in these "Us" versus "Them" games, but here I must respectfully disagree.
A Palestinian child who is born into one of these squalid settings has no choice, no free will. He or she begins to be programmed with the messages of hate and victimization from the moment they are born.
Of course Israel did not put them there, did not make the bed from which these Palestinian children/terrorists-to-be arise. It's a long (and hotly contested) history about how the "Palestinian" people got kicked out of one place and then the other (Jordan, Lebanon) because none of the Arab countries would have them. But now here they are, pressing against Israel's borders, their hearts filled with envy and hate; their abdomens strapped with ball bearings and gun powder.
Where does the hate come from?
(And more intrestingly where do the explosive plastics come from? --they don't grow on local fig trees you know.)
First and foremost it/they come from having an "ownership society".
All of Allah's children are equal,
but some are more equal than others.
Some get to become kings or shieks and get to control the black gold that flows from Allah's underground vaults of gold.
Others get to live in squalid camps without hope of any future.
The elite's of the Middle East must keep the downtrodden in check and under control.
But how to do it?
There must be an object of hate, a distraction, to keep the monkeys under control in their cages. There must be an "us" versus "them". And who better to pick on than to create the illusion of 7 million "Goliaths" versus 100 million "Davids" and to fill the minds of the uneducated Davids with ever-lasting hate and crazed desire for "vengence", for a taking back of the lands they were meant to "own" --because surely they are not going to get to "own" the black bubbling lucor meant for the leisure class.
In America, we have the "American Dream" for keeping the underclass in check. It works. The 250 million working slobs all think that one day they are going to move into Jed Calmpett's McMansion, if only they shoot their lottery ticket gun in the right direction.
In the Middle East they have the "Palestinian Dream" for keeping the underclass in check. It works. The 500 million unemployed/ underemployed slobs all think that one day they are going to move into Chaim Calmpettberger's McMansion, if only they shoot their suicide belt in the right direction.
So are "them" Palestinians all horrible, horrible people, or just more victims of a "Dream" plan for keeping "ownership" exclusively with those who deserve to be part of the ownership class?
Don't get me wrong. I'm not an old commie. That system is far worse than our current Smithian approach to life. But the Smithian approach is not working either. It is showing signs of collapse. Too many people are suffering for mindless reasons.
What to do? I wish I knew. I don't have a clue. This is one of the problems that I hope some of the smarter people out here in TOD land can come to solve.
The brain power is out here. But first we must stop flinging monkey feces amongst ourselves; keep the primitive parts of our brains in check, and focus the rational parts of our collective brains on rational understandings of the problems.
The only hate being spewed is coming from the terrorist fanatics, the Arab world, anti-Israeli elements, and bigots in general.
There is hate spewed by Israelis, massive suffering is inflicted upon the Palestinians (which again leads to further hate). There is loads of anti-Arab hate on this thread. US/UK invasions lead to even more hate.
I really don't understand how you can solely blame the hate on one side.
"Blame"
"Fault"
"Terror"
These are all noise concepts invented by the human brain. We monkeys fling "blame" and "fault" at each other.
Mother Nature does not hear these noises.
She is slowly lowering the monkey cage deeper into the waters of extinction.
I agree that petrodollars play a role with Iran and Nukes, but you do not think that the Gulf States and SA are not scared of a Shiite regime run by non-Arabs across the Persian Gulf, and that does not influence our/USA foreign policy?
What I am constantly amazed at is we get something like 13-15% of our oil from the Gulf and SA, but Europe and Asia will be hit much much harder.
When a nuke is used in anger we/planet will have moved up to a new level of violence. In the hands of an anti-semitic leadership as exists now in Iran, I would be very scared if I lived in Israel, or even SA.
Jack Greene,
Will the Iranian theocracy actually lob the bomb on Israel? I'm not sure. What will they do the day after that tomorrow for keeping their underclass in check?
Anti-semitism serves as the perfect vehicle for keeping the hords on the other sides of the palace walls. After Israel is gone and the Holy Lands are poisoned with radioactive waste, what will the Iranian theocracy do for an encore? They are not "stupid" you know. If a bomb is going to go anywhere, it is not going to get lobbed next door to the poor suffereing Palestinian brothers (see my response above to Oil CEO re these horrible horrible people).
One --but not the only-- "logical" target for an Iranian bomb is the far away cities of New York or Los Angeles because these are Jewish "enclaves". Once the 100 year war starts with the American unbelievers, who cares what happens in Israel? The American front will be entertainment enough.
But why start with America when the Iranian bomb can alternatively land in India, home of the even more despised worshippers of the pig and conveniently located in an expanisionist direction to the East? (See map below.) After that, Persia can arise in all her glory to take on the godless, commie Chinese. The game plan has to be much bigger than little ole' Israel. There is no oil there. There is no land there. There is nothing there. It is just a convenient distraction.
(Right click & "view image" to see bigger)
I live in the Bay area too.
Much as you might believe you know the Jewish community here, you are prejudicially mistaken.
There is no cabal.
We don't all get together and drink the blood of Muslim babies every night (have you seen the movie, The Little Vampire?).
The Jewish community in the Bay Area is very splintered and divided along almost every issue you can think of. We think for ourselves (some of us). There are reform temples, conservative synagouges and yes, even Hassidic ones. The Hassidics themselves are divided as to whether return to Israel at this time is the right thing to do. That is why you will find Hassidic communities in Israel who have made the "aleeyah" (the rising up) and those who remain in the Diaspora (the post-Rome dispersion of the Jewish from their homeland of 2000 years).
If you want to be open minded, you should read some middle of the road articles about the Jewish religion.
I try to read up on Islam and the Koran.
I even have friends who are Muslim.
I do not believe that all Muslims are evil and desrving of death or hurt, just as I expect you to understand that all Jews are not evil Passover-blood suckers who need to die. Most Jews are actually nice people: doctors, dentists, shrinks, college professors, garbage collectors ... every walk of life. Obviously you have been exposed to many blood libels and such. It's not your fault. It's just how you were raised up.
Now. Can you open your mind to other possibilities?
Just like the oil cannot go on forever,
maybe the hate should not go on forever?
You're not a dissident. You barely know what the word means. You're only what is commonly referred to as "opininionated." That's good, don't get me wrong. Maybe you smoke a little weed, whatever. That doesn't make you a dissident. Nor does it even make you a radical.
Warm and fuzzy. Yeah. You might be slightly out of touch. Slander. I haven't seen the photos. Let's try to stay fact based.
10 times the deaths have occured in Shia vs. Sunni violence in the Mid-East in the last 3 years than have occured with Israeli vs. Arab, Arab vs. US+"Coalition", or US vs. Insurgent violence(combined).
Does that mean anything to you? What are you "dissidenting" about? What exactly are you so opposed to? Do you fail to understand my position?
Again. And let me be clear. As a nation, if you were Israel what would you do? I'll give you 300 words. How would you respond?
If you were Lebanon, would you then attack Israel since they have now attacked your military (11 killed at an Army barracks bombed by Israel but no declaration of war against Lebanon to justify attacking its military and according to Bush the fight isn't with the Lebanese government).
I also have to ask about the dairy factory (I'll admit up front that I haven't seen the story so don't know the facts surrounding it). I'm ex-military, but I don't remember their teaching us at the Academy to target dairy factories. Are you saying this was really a military base, a terrorist training ground, a weapons cache, or other legitimate military target? Are you saying that destroying the factory was akin to the strategic bombing of Ploesti and the Romanian oil fields during WWII because clearly milk products are crucial to the Hezbollah military machine?
Camel dung!
Horse maneuvers!
Um. If the Israelis had found a way to specifically target "terrorists" you might have a "fact-based" argument going. Unfortunately you are perpetuating a misdirection. That is, talk about terrorists, and assume that's helped when someone bombs Lebanon.
Are you smarter than this?
What you have to defend, in a fact based argument, is that bombing Lebanon will help achieve long-term regional peace.
Once you let Saudi women have drivers licences, who knows what might happen next? They might even object to the open chattel slavery practiced in some Arab countries.
Gotta' keep people in their place. The ones who know their place, they never complain.
Of course it is all the fault of the Zionist-conspiracy plot that in cooperation with the Trilateral commission, the Rosicrucians and Freemason secret order dominates the world with black helicopters everywhere.
Really, it must be true: I read it on a website:-)
'Radical Islamic-Fanatics'.
How many 'Radical Islamic-Fanatics' have Israel killed in this latest operation?
BTW, Lebanon has a pro-US, democratically (flawed admittedly) elected government.
Cheers.
Not anywhere nearly enough. Probably more than the U.S. has in Iraq, because the Israelis are better at this business than the U.S.
In Lebanon's case, the numbers aren't out yet. But just look at the modi operandi. Hezbollah uses randomly aimed rockets packed with ball bearings. Israel is using NATO ammo, mostly for job creation among civil engineers (thus far).
It is a whole other level of immorality to target civilians, but it is the commitment (a real and visible commitment) to minimizing collateral damage that sets us apart.
I'm not sure where the line is, but sometimes I worry about it. Is rocketing a civilian home based on intelligence that a terrorist might be staying overnight "minimum" ... or have we allowed the minimum to shift?
Would everyone here be as comfortable if it was your granddaughter asleep in that home?
The rest, items 2-6, rest on the unstated premise that Israeli actions will reduce all the "bad stuff" in the middle east.
Can that be proven at this point, this week?
Remember, the question was not "who do you like", it was to someone who had declared these actions in our best interest.
Maybe it's just me, but I don't see this as very productive use of TOD. Remember, this was a thread about Valero and refining, yes?
Yes, any conflict in the Middle East has profound implications for oil and natural gas supply. Yes, any scenarios that could bring escalation or detente have an energy impact. But I'm not seeing much relevant, task-focused thinking here.
Personal opinions about who's the bad guy are mildly entertaining for about 30 seconds, then pretty repetitive and tedious. But I'm sure I'm wrong, and so's my old man, and don't even mention my mother ...
Let's hope we aren't talking in a year about how much the Iran strike was about oil:
http://thinkprogress.org/2006/07/19/kristol-iran/
- An apartheid gov at best
- They want their neighbors to return to 7th century.
- Zionist fanatics are better off on the south pole than in Washington. DC
- Remember the USS Liberty
a) They won't try killing me if they are dead.b) they won't continue making Palestinians 3rd class citizens.
c) They won't murder Canadians in Lebanon
d) If they won't use nukes, then hand them over
No you don't need to go on. Your taking points make no sense.
Also relevant to the post is this item.
When a company does this it often means they can't find anything better to do with the money, so they return it to shareholders. I'd be tempted to interpret that sort of action as Valero not seeing many cost-effective opportunities for expansion right now.
That may explain the following trend in the US imports:
Up to 2000, the US imports were composed of 10% of refined products and 90% of crude oil. Since 2000, the share of refined product imports has augmented by almost 10% every year to reach 20% in 2006. The trend seems exponential and the import of refined products could reach 50% of the total petroleum importations by 2015! In addition, refinery utilization is way below average:
This makes the import picture look even worse. If the US imports crude, at least it creates onshore jobs and investment in the refining process. If the US imports finished product: the refining jobs stay abroad, and the wages, capital costs and profit margins of foreign producers are paid by exporting even more dollars, widening the trade gap. It's hardly "energy independence."
On low refinery utilization, I'd bet that the sweet/sour availability and price spread explains part of it. Most refineries can't use the oil that is plentiful and cheaper.
So, if we can't use sour oil very well, why is the Strategic Petroleum Reserve 60% sour? SPR Inventory
SPR Inventory 14 July 2006:
273.6 million barrels sweet
414.3 mb sour
687.9 total mb
In my opinion this is a very big deal and probably will be the largest impact of depletion for the next few years. 1/3 is a huge number. This means depletion of light sweet oil over the comming years will have a direct impact on overall avialabilty. In addition the lack of refining capacity will also impact.
Asia in particular is in trouble here actually.
It may be the case that heavier crudes do produce as much as a third less gasoline, however this refers to the production of a given facility. More complex refining produces more gasoline as a percentage of outputs from either light or heavy. So, it is not clear that we need more refineries or bpd crude slate capcity, just more processing power.
The easiest way to look at refining is in two stages:
The first, distillation, is common across refineries and only separates out existing components in the crude. At this level, the product output from heavy and light can be very different.
The second stage covers a range of advanced refining, although cracking is the key feature. Cracking actually manaufactures products, that is it changes the molecular structure of heavier products to lighter products. So the same crude slate of heavy oil can still be made into gas and other light products. it is just more expensive in terms of capital expenses, operating expenses, and, yes, energy inputs.
Recent reports I have seem indicate that the sweet-sour spread is greater than the light-heavy spread, presumably because of higher costs in removing sulfur than converting heavy crudes.
However, it is important to realize that this difference really only exists after the first stage of refining: distillation. Heavy crudes produce a greater proportion of heavy products including fuel oil and, I believe, diesel. However, modern refineries can convert these to gasoline too.
At the end of the day the formula that determines output is crude slate + refining configuration, not just crude input.
This is exactly correct. More and more U.S. refiners are putting in units to handle heavy, sour crudes. If they are configured for the heavy stuff, the ultimate gasoline yield is not a third lower. In fact, it is almost as high as for the light oils, but with more processing steps required.
Cheers,
RR
Yeah, I meant to comment on that. I was glad to see your essay, because I think it helps everyone get up to speed on some important refining issues. These issues will become more vital to all of our lives going forward, so we should all try to become educated on the subject.
Cheers,
RR
If you ratio it back to the crude, it would be around 0.01 lbs per lb of crude. The hydrogen comes from natural gas, and you get almost 1/4 pound of hydrogen per pound of natural gas feed. So, figure 0.025 lbs of natural gas per lb of crude oil feed.
Cheers,
RR
Jim Jubak on Heavy/Sour Glut
And now this...
Jim Jubak on...well I actually haven't read article yet - you tell me.
Two articles on oil in one week from Jim. Hmmmm.
Jubak appears frequently on CNBC. They should have him interview Yergin the next time they have him on. Jubak has probably read 'Twilight.' I only guess this from a reference he once made to Simmons and the book.
There happens to be a Valero refinery in Delaware City, about 10 miles south of Wilmington. It is about 48 years old, and was formerly owned by Premcor, Star Enterprises, Texaco, and Getty. It has a long and absymal record of environmental regulatory violations and health and safety problems, including a number of fatalities. If this refinery were a car, it'd be something like a badly abused 1986 Yugo.
Valero has been in a protracted battle with the Delaware Department of Natural Resources and Environmental Control to get the conditions of its air permit modified to allow a greater product throughput. A cap on throughput was put in the permit to limit SOx emissions. There have been various proposals for improved sulfur recovery and improved sulfur emission controls. This has been going on for years, not just with Valero, but with its predecessor.
In perhaps a rather long-winded way, I just wanted to point out that increasing a refinery's ability to handle more sour crude is a very involved process involving many considerations, not the least of which is air emission controls. It is not something you decide on a Monday and have in place by Friday.
1/ what's it cost to build a refinery from scratch, and how much time does it take?
2/ ditto for upgrading an existing light crude facility
3/ where exactly in the world are the heavy crude-capable refineries located?
with light sweet past peak, these seem to become crucial questions
We may be unable to tell exactly how long it will really take to build new refineries. There were 24 US refinery closures between 1995 and 2001, but it has been approximately 30 years since any new refinery was built in the US. So, while we can calculate the time it takes to build new plant and equipment, there is no recent experience on how long it will take to get regulatory approval for a new facility, and to overcome NIMBY objections.
Where? From BBC "There are no firm expansions in refining capacity, not just in the US but in North America, South America and Europe. All of the expansions are in the Middle East and Asia." Barclays analyst Paul Horsnell
From memory, a typical 120,000 barrel per day refinery with hydrocracking would cost something close to two billion dollars and would take four years to build excluding planning considerations - which are vast.
The hydrocracker upgrade itself (i.e. converting a simple refinery to a complex one) would cost $250 million or so and could take 18 months. This would result in a facility being able to convert most of its fuel oil production into diesel of gasoline. Before the conversion a facility might produce 30% fuel oil and 30% diesel. After the ratio would be 40% to 10%.
There are probably not any simple refineries left in the US.
The comment is correct that we don't know how long it would take to build a new one and that there have been no greenfield refinery developments in 30 years in the US. However, this does not mean that refining has not developed greatly. It was just much easier to do it on old sites where permitting, etc. was not required.
Virtually all refinery development that I am aware of is occuring in Asia - with India leading on volume terms and China second. The Middle East has been discussing refining fuel products for export, but I don't believe developments on the ground have kept up with Asia. I may be wrong.
The US has the world's most sophisticated refining sector and can convert more low grade crudes to product than anywhere else. China, historically, has has a preponderance of simple facilities to are configured to produce vehicle fuel (called hydroskimmers). This is because their own oil is relatively light and sweet.
So what happens in China when they peak and have to deal with buying light sweet on the open market ????
Or even when as whats happening now chinese demand for gasoline outstrips supply.
The depletion of light sweet oil is all that matters for now.
For all you tea leaf readers out there, this should mean they are not expecting oil to peak or fall below current levels.
Could be the opposite-- they need the upgraded refineries for when they start outbidding the US for available supplies. Our US 25% share of total world supplies cannot be economically justified forever. I think in fifteen years it will shrink to match our 5% of total world population, assuming no full-on nuclear gift exchange.
Bob Shaw in Phx,Az Are Humans Smarter than Yeast?
It does seem that they would not want to face dimished supplies with a second rate refining infrastructure.
When peak oil becomes more obvious, the question of energy infrastructure will become a huge problem--why would anyone pay to build a new port, pipeline, refinery etc if it won't be used? And why maintain your aging infrastructure if there will be shrinking capacity utilization? There will have to be some old-style electric utility-type regulation put into place to guarantee a rate of return or the infrastructure will be left to rot. Hopefully, we're not close to this stage yet, but there have been some signs of this already, in the creeping decreptitude of the Alaskan pipeline, for example.
A corollary to this is why are companies in the USA idling synthetic oil plants? Because the Republican Congress could not pass the extension/modifications on subsidies.
From HO's "techie talk" series
Getting gas from Crude
And the more relevant one
Cracking oil is not a funny business.
Nice post.
Again this illustrates that the Peak Oil aware people need to take into consideration the economic effects of peaking of sweet light crude instead of just counting barrels. This is whats going to effect our economies for the next 2-5 years.
Following that of course is the magnitude greater effect of moving to resources like the oil sands and orinoco deposits.
Thus my understanding is for every barrel of light production lost it takes 1.5 barrels of heavy sour to replace it.
Canadian oil sands are at what 2:1 or higher.
Add in lack of refinery capacity ....
This swamps the effects of overall depletion.
I hate having to explain to the doom and gloom's that there to optimistic we have a real problem on our hands.
First, is Valero buying a larger amount of oil from Futures vs spot markets than they did in the past ? If they have traditionally used the same ratio as they currently do, it might suggest they do Not see permanently high prices and strong demand.
Below is a paper from ASPO 2005 on a "Signal" that the suggests a change in market perceptions:
Peak Oil and the NYMEX Futures Market: Do Investors Believe in Physical Realities? - Pedro Almeida
http://www.cge.uevora.pt/aspo2005/abstra...
Essentially, you plot Futures Prices vs Years and if the Price Curve is Flat or Down going into later years, it suggests the Future's Buyers are Not Yet anticipating Peak Oil.
But if the Contract Price Slopes UP into the future years it suggests The Market is Recognizing Peak Production.
If by purchasing a 5 year contract now for $75 he is in effect paying $110 for that oil doesn't this also imply that the seller is in effect recieving $110 for that oil? Does the money change hands when the contract is purchased or when the oil is delivered.
Futures provides for *daily* margin requirement settlement. In other words (roughly) as the price moves, the amount of money on deposit at the brokerage must meet a certain minimum percentage of the total value of the contract -- calculated at the close of each day for the life of the contract.
In the so-called delivery period (five years out in this case), the seller would initiate the delivery process and get paid the full amount then (originally "sold" for $75 per barrel).
What is my reasoning?
Economists advise.
Elected politicians make the laws.
There is a presidential election coming in 2008. I suspect but am not sure that our next president will be named neither Bush nor Cheney.
Can you pronounce, "President Hilarious Clinton"?
Do you gag?
"Of the people, for the people and against the greedy oil companies," that is the next big winning political platform. Energy companies because of a few bad apples such as Enron have a horribly bad reputation.
(BTW, I got all my friends out of Enron stock in mid 1999 when I spotted that their income statements were obviously fudged and faked and, indeed, outright fraud. It took me about three minutes to figure that out, though how they actually did it was pretty clever--fooled a ton of Harvard MBA security analysts, that's for sure.
If you read Graham and Dodd's 1934 SECURITY ANALYSIS the authors casually point out that if you ever see an income statement that shows increasing earnings in each and every quarter for year after year, you should run as fast as you can away from that company because of the unmistakable odor of fudge (aka "earnings smoothing" and other euphemisms for fraud).
Few profs at Harvard would be caught dead assigning Graham and Dodd to students. That old stuff . . . .)
Maybe, but it is used in practice by top analysts .
Why buy new books when old ones are often better? And much, much cheaper.
not sure what you mean by "no price exposure". the fact that they have long term contracts does not mean that they locked in a price of $20/bbl five years ago. they are going to pay spot or some modification of spot, as per terms of the contract, but the supply is secure for this portion (65%). the remaining 35% is what the VLO traders have to scramble for on a short-term basis.
The discrepancy between 60% and 65% as quoted above may be significant but I don't know the reason for it.
it's not a discrepancy. the 65% refers to the percentage of their oil supplied under long-term contract. the 60% refers to the percentage of feedstocks purchased at a discount to WTI. so their average price per barrel is significantly lower than the WTI ticker you see on CNBC, and is also why their total exposure is a lot less than the $15.23 billion you calculated (based on WTI).
I'm not sure what "regulatory pressures on supply" means in this context.
i think they're referring to all the regulatory issues refiners have to deal with which hamper their ability to ramp supply. if you listen to VLO's conference calls, they refer to issues such as MTBE phaseout and stricter environmental regulations as causing supply drops--they will sometimes give quite specific estimates of how much they think, e.g., MTBE phaseout will cause daily supply to drop in NA over the next year.
Regarding paying off debt and repurchasing their common stock, I need only point out that Valero is bullish on Valero.
well, somebody needs to be! VLO share price is up more than 10x from 2002 lows--in fact, VLO's annual earnings now exceed that 2002 low price on the stock. BUT: the entire rise since 2002 has been due to earnings growth--the forward PE is still ridiculously low (lower than is implied by trailing earnings since there has been such a rapid rampup, and also because VLO took a half-billion dollar hit last year on hedges, which they don't have this year so that's an extra half-bil hitting the bottom line.
VLO mgmt have complained often that they get no respect on WS. the PE is low, and so-called "analysts" have low-balled their estimates for years. so, i think it is well and prudent of VLO to buy in their stock--it's a damn good return on investment.
Have a good one, Dave
you said that VLO doesn't have "price exposure" on the portion (65%) under long-term contract: Presumably, Valero has no price exposure for oil bought under long term contracts while prices rise.
this is not true. what you wrote implies (to my mind at least) that you think VLO "locked in" some kind of low prices. this is not true. VLO has exposure across its entire spectrum of feedstock inputs.
%65 versus %60? I see what you mean, do you have any Valero internal numbers?
the meanings of 65% and 60% i just pulled from that article you were quoting from. their meanings are unrelated to each other. they are separate and unrelated categories, so there can be no discrepancy between them.
it's like an SAT question which starts out by saying that Joe buys 100 apples. 65% of his apples he buys under long-term contract from Walmart, and 60% of his apples are discounted apples. then the question, which is a trick question, is how many of the discounted apples came from Walmart. the answer is D. "Not enough information to answer the question." one can't assume that ALL the discounted apples came from Walmart under long-term contract.
as for VLO internal numbers, i only have the numbers they choose to share with the public on their CC's, investor presentations, etc. there's quite a bit available on their website but obviously a lot is confidential.