Sunday, February 1, 2015

Affects of Low Gas Prices in the Oil Industry

I work in the oil industry.  As such I get questions all the time about the industry and economic effects of current trends.  Lately the most I get asked is how does the falling price of oil affect my end of the oil business.

To better frame an answer, a few terms about the oil industry need defining.  The petroleum industry is generally broken into three sectors: upstream, midstream and downstream.

Upstream is the exploration and recovery side of the oil industry.  Once exploration is complete, it also involves estimating a potential find and determining whether or not it is worth drilling.  After the initial evaluations are made, then the wells are drilled and the crude is moved to the refineries.

Midstream is a term I rarely hear used since I've been working in the oil industry.  Midstream involves transporting, storing and wholesale marketing of petroleum and getting the crude to the refineries.

Downstream is the final step of refining the crude into various products.  At the downstream section, the crude is turned into various products like gasoline, diesel, lubes, plastics and raw materials for other industrial uses.

So how exactly does the falling prices help and/or hurt the industry?

The upstream sector will take the brunt of the price fall.  It is basic economics.  There becomes a price point where looking for oil and drilling it out of the ground becomes unprofitable.  As oil prices continue to drop, exploration companies are calling off exploration and recovery operations.  Drilling operations that aren't complete will cease or slow down.  These companies will then lay off employees.  It then sets off a chain reaction of lay offs and shutdowns in support industries such as maintenance crews, drilling supplies, piping and other related crafts as well.  Communities, especially ones where fracking took off, will also suffer as people leave to find jobs else where and the money poured in from the workers dries up.

Tax revenues where exploration and test wells are drilled also dries up. 

In the midstream business, if no oil is flowing, there is no need for new pipelines to be built.  Nor are truck drivers needed to get the crude to storage or market.  As existing fields slow down and no new wells come online, those support industries wither up too.

Now is it all gloom and doom?  Not at all. 

Crude oil is a commodity and raw material for the downstream side. 

Refining crude is a capital intense business.  There are costs that vary some but do not affect operations drastically.  Wages and maintenance costs are among the "fixed" costs.  One of the costs that affect refining though is the price of energy.  With falling prices oil, energy prices fall too and thereby one of the costs of operating a refinery falls. 

Also the cheaper oil means refiners pay cheaper price for the main raw material.  One of the misconceptions of the oil industry is that companies make a huge profit on gas.  That simply is not true.  The real money is made further downstream.  Jet fuels, diesel and much further down the line on the chemical side is where the profits roll in. 

While the price of the final product comes down, they won't fall as much as the price of oil except for gasoline.  Notice that diesel hasn't fallen as much as gas prices.  Fixed prices stay the same but operating costs go down and final product price falls but not far.  Sounds like a good mixture for increased profits.

I'm not economist but that in a nutshell is why the oil industry will survive the latest down turn. 

I hate that good hardworking people will lose jobs in the other sectors of the oil industry but they will survive and our economy will keep churning.

Friday, January 16, 2015

Terror Strikes Home - Paris and Belgium

Last week brought home the terror Islamist terror attacks to the Western World's doorsteps.  Twelve people were killed in Paris because some small minded Islamists were insulted and offended by satirical cartoons drawn by Charlie Hebdo artists.

This whackadoo Islamist wish to bring their brand of Islam and terror to the world.  Because they are so up close and personal with Allah and Mohamed they know what God and the Prophet want and are offended by.  If Islamist want to rule by terror in their lands, so be it.  If the people they rule won't rise up against the slaughter and terror, so be it.

When the terror comes to our lands and our homes, we must continue to defend and fight for our way of life.  Islamist are adamant about insults to their religion and way of life.  We, as freedom loving people, must also be equally offended by their hatred of our way of life and acceptance of diversity. 

What do we do next? Again take the war to their lands?  An argument can be made for destruction of their whole society.  Do they really want to make it a war of West vs. Islamist?  If the West fully mobilized and aimed to root out the Islamist, the West wins.  When I say root out Islamists, I mean the whole destruction of society from top down.  Eliminate all fighters, men and potential fighters.  They want a blood bath on our shores, take the fight to their homes and destroy everything they hold dear.

Nazi Germany posed a real threat to the destruction of the free world and the free world armed up and fought back.  The price was  heavy on both sides but the threat has been eliminated.  Nazi Germany nor allies will ever threaten again.  Same with thing happened with Imperial Japan.  A total war of destruction without mercy stopped a society hell bent on domination.  In ending the Pacific theatre of operations, the United States resorted to the only wartime use of nuclear arms.  Again, total war, total destruction and total victory.

Does the rest of the world need to continuously keep vigilant against terror groups?  Yes.  Can the West entirely eliminate terror groups?  No.  Should the West mobilize to destroy and annihilate societies that support extremism?  Yes.  How?  Arm to the teeth, invade and destroy all strongholds of the enemy.  Completely destroy societies if it means massacre of the people.  This is no different than the World War II fire bombings of Dresden and Tokyo.  You don't just break and destroy the infrastructure, you break and destroy the will of the people.

And when the blood letting is done, we remind Muslims they are free to practice their religion in their countries and lands but they must police themselves against extremists.  If they don't the price will be heavy....all Muslims will pay with death and total annihilation of their religion.  And the first place the massacre will start will be the nuclear bombing of their holy sites.

Will it ever happen?  Of course not.  The West, including the United States, don't have the stomach or the will to take such extreme measures.  But it is a price we must pay if we wish not to live in constant fear.  Instead, the alternative, is much cleaner. No one wants to send their sons and daughters into battle.  Again, look at the price the West and Allies paid to destroy a global threat.  I doubt we'd pay such a heavy price again but one would be paid to achieve out goals. 

Instead our governments wish to adhere to our ideas of justice and not impose our will on our enemies.  We should instead, adhere to our enemies ideas of justice and impose it on them for the crimes the commit against our societies.