Why Gas Got So Expensive (It’s Not the War)

remember this remember that moment in april of 2020 when the oil market made headlines when the value of west texas intermediate futures plummeted 300 when the cost of a barrel hit zero dollars it went below zero then closed the day at negative 37. cents maybe you don't it was a never-before-seen moment nestled between countless never-before-seen moments but this moment created this one oil futures trading at the highest levels in a decade gas prices at an all-time high the worst day in the oil market's history is responsible for ushering in a new era of record industry profits in the wake of a singular crash and looking down the barrel of the industry's most existential threat to date oil and gas has found a new way to extract more money than ever from the earth the era of scarcity is here and oil's old ways are over three decades ago azerbaijan found itself in front of opportunity with the end of august 1991 came the start of the independent republic of azerbaijan as the soviet union shed yet another one of its states in the iron curtain rose to reveal a massive reservoir of oil laying beneath the caspian was one of the biggest opportunities ever presented to the western oil and gas industry for decades up until that point the ussr had been the world's largest oil producer but of increasing ire to the private western producers was opec a cartel of major middle eastern african and south american oil producing countries collectively market power swayed increasingly away from washington but the caspian had the potential to put power of the world's most valuable commodity back into what was considered more trusted hands but simultaneously if managed poorly it had the same potential to cement the power of opec or the new russian state so the starter pistol had sounded and the scramble of the century began azerbaijan has a history as an oil economy in fact in the earliest days of the industry the country's exports accounted for more than half of the world's supply but lack of focus and investment by their soviet rulers had transformed the former power player into a dilapidated insignificant producer to change that the nation would need investment and a lot of it baku street soon hosted a rotating cast of oil executives and diplomats all there to court the government into signing a contract with them rather than their competitor a conclusion came in 1994 when 10 companies gathered together to sign what was described as the contract of the century they would jointly invest develop and operate one of the most valuable oil fields the world had ever produced the supply was set so now all they needed was a way to sell it despite its name and stature the caspian sea is not truly a sea it's an indoric basin meaning water flows in but only evaporates out therefore crucially unlike its neighbor the black sea the caspian has no connection to the ocean simply loading crude into a tanker and sending it to markets was impossible the consortium needed another route to market for the longest time azerbaijan exported oil by loading into rail cars routed west to the black sea where it would be transferred to tanker ships but both rail and tanker took substantial cuts out of the profits while rails provide an excellent stop gap during pipeline construction or production booms travel along already established infrastructure and can flexibly ship oil to where the market's the hottest they don't come cheap using present-day rates from the us rail transport adds between 5 and 10 a barrel in cost making it two to three times more expensive than by pipeline trains were more accident prone too and considering that the outbound oil from the caspian had a predetermined origin and destination the only benefit the consortium gained by transporting oil from the caspian to the black sea via rail was that it didn't have to front the cost of building a pipeline like the railways shipping oil out of the black sea on tankers proved workable but inefficient while connected to the mediterranean and the world beyond navigating the 12th treacherously tight and winding turns the bosporus straight linking the black sea to the wider world through the very heart of istanbul was less than ideal the strait proved too narrow for the increasingly common very large crude carriers capable of transporting 2 million barrels while the ever-present risk of a single miscalculation closing the straight for months and stopping azerbaijani oil in its tracks loomed over the precarious operation that left one good option pipeline the safest most efficient method of shipping crude oil with minimal operating costs and maintenance requirements shipping a barrel by pipeline in the us today only adds about three to five dollars in cost varying slightly based on quality of product and distance traveled but while pipelines are incredibly cost effective once in use to the extent that the us and canada are crossed by a hundred thousand miles or 160 000 kilometers of them getting such systems online represents a major upfront investment in a 2016 study economists estimated that building a modest regional pipeline 12 inches or 30 centimeters wide and approximately 200 miles or 320 kilometers in length across mostly flat land would cost a staggering 1.5 million dollars per mile or 960 thousand dollars per kilometer connecting the caspian sea to the outside world via pipeline would be anything but a modest endeavor the simplest project for instance would have been to reverse an existing pipeline previously used to supply azerbaijan to route oil northward into russia's extensive network but the us vehemently opposed this that would give russia even greater influence over azerbaijan's economy another option routing through iran was briefly floated but this was quickly shot down due to geopolitical factors as well therefore that left the western option which two was undesirable georgia was a geopolitically unstable country composed almost exclusively of rough mountainous terrain so building a pipeline through it would be risky and expensive but it was also the only option left so construction started on one of the costliest pipelines in history then as it became clear that the boss prius strait wasn't viable long term they started building another to provide a stable route to market to get that crucial mediterranean sea access the consortium would have to build one of the longest oil pipelines in the world over some of the harshest terrain ever spanned by a pipeline the 41 inch 104 centimeter pipe would have to cross three countries the towering peaks of the caucasus 1500 streams and rivers and 3 000 roads railways and utility lines therefore it came with a stratospheric price tag inflation adjusted 5.5 billion dollars but the consortium was willing to write this check as it was what was necessary to capture the massive profit potential of caspian oil but for every 1990s caspian sea boom there's a 2021 permian basin bust for reliant nation states this volatility is dangerous volatility though has been largely countered by cooperation beginning at a baghdad conference in 1960 attended by officials from iran iraq kuwait saudi arabia and venezuela major middle eastern african and south american oil producers have sought to limit overproduction and price fluctuation by controlling global supply made up of these 13 countries today opec sets oil production quotas to maintain the organization's position of power and to the extent they can set a barrel's price the organization does this by relying on each member state's ability to ramp or cut crude production and the organization's sheer scale then its members produce forty percent of the world's supply and account for nearly 80 percent of the world's proven reserves while western producers rely on private companies to navigate the massive booms and bust of the free market with comparatively limited state influence opec functions as an international cartel whose structure and geological advantages have proved difficult to circumvent undermine or unseat in this context opec introduces a crucial component of oil economics that the price per barrel is not exactly dependent on the cost of producing that barrel take 2016 for example in a year when west texas intermediate crude prices plummeted below 40 a mark so low that opec broke convention by welcoming russia into opec plus and vowing to make explicit production cuts producing a barrel in opec's three largest producers saudi arabia iran and iraq cost at most in the case of iraq a poultry 10 dollars and 57 cents in the u.s the average price of production was over 20 while in the uk 44 at base oil prices are simply a natural function of supply and demands but thanks to a tangled web of nation states cartels technical and geological constraints investor confidence geopolitical rivalries and political negotiations the supply side is anything but natural furthering the convolution as to what actually influences what you pay at the pump and why it's skyrocketed in 2022 is the fact that cars don't run on crude oil they run on gasoline turning oil into gas requires a whole list of additional steps and each step in turn accrues additional costs let's say some thousands of barrels have navigated the pumping pricing and shipping process and have made their way from kuwait to valero's marine terminal here at the port of los angeles is birth 164. from there it's transported here to valero's wilmington refinery after spending some time in storage the oil is sent through distilling towers where it's heated until boiling then depending on its boiling point divide it off the crude which boiled off at the lowest temperature after treatment will become propane with the oil with the highest boiling point will end up as asphalt well the exact traits of the oil and the exact configuration of the refinery lead to discrepancies from plant to plant on average each barrel of oil produces about 19 gallons or 72 liters of car grade gasoline in other words about 45 of the crude sent through valero's wilmington towers will become gas refining oil into gas isn't cheap in fact 18 of gas's price emanates from this step alone after valero's distilling towers separate the gasoline it is then treated and blended with additional ingredients like butane and ethanol depending on the season and state environmental regulations before being transported by rail pipeline and trucks to gas stations considering southern california's rampant demand there's a good chance that the gasoline process just up from the port of los angeles goes on to get consumed within 100 mile radius nationally this step distribution and marketing accounts for another 12 of gas's price at the pump and as any californian will tell you nearby refinement doesn't come with any sort of local discounts in fact the state of california is home to the most expensive gas in the u.s while favorable geography explains its critical ports it's also geography that explains why it's tankers and practically only tankers they're supplying the state in the first place separated from many american suppliers by the towering rockies and sierras california is effectively an energy island with rail shipping from areas as far away as the bakken prohibitively expensive and pipeline projects both impractical and highly unpopular california is nearly entirely reliant on importing oil by ship but california's isolation isn't strictly geographical the state's gas is more expensive than even hawaii's because the gas itself is physically different as california's uniquely strict environmental laws require additives like methyl tert-butyl ether or ethanol mixed in to ensure a cleaner burn additionally state fees for greenhouse gas initiatives and a higher state tax push california gas prices higher than national averages and whether in california or not taxes on gasoline contribute another major influence on price making up on national average 11 of consumer gas prices but as eye-popping as the state's prices may be they represent a proportional climb relative to the eye-popping california prices of yesteryear that's because while there are situational factors from state to state or country to country that influence prices those are often used as straw men to point fingers at state or national politicians these factors hardly change in the short term so it truly informs the swings what makes up 59 of the price at the pump is the price of the underlying commodity the price of oil itself this is a graph of 24 years of the world's total liquid fuels production well this represents 24 years of the world's total liquid fuels consumption by and large the two lines match up quite closely the world makes about as much fuel as it consumes at any given moment however it's the minor mismatches that matter here back in 07 a number of supply shocks occurred all at once venezuela cut off sales to exxon mobil scottish oil workers went on strike iraqi pipelines were destroyed by saboteurs nigerian production was hampered by strikes and militant attacks slowly and unintentionally the supply line slipped beneath the demand line prices skyrocketed while only some of the spike can be attributed directly to supply and not to ensuing speculation and other market-based factors the period demonstrated the sheer power of the law of supply and demand in oil and gas due to the inflexibility of consumption with most unable to dramatically change their use of fossil fuels in the short term small changes in supply lead to huge changes in price for cartels such as opec with its unique ability to turn off the taps this was hugely valuable knowledge 2008's rally was soon reversed by 2008's financial crisis but prices steadily crept up to a comfortably high level for oil companies as the world economy heated up in the early 2010s in north america however innovators were brewing up one of the most dramatic revolutions in the oil industry's history shale is a dense rock unlike the sand or limestone that typically hosts the oil that ends up at the pump this rock just isn't permeable enough for its hydrocarbons to flow out freely this fact long informed the mindset of oil and gas executives who considered the countless unexploited reservoirs of oil embedded within shale and accessible at least while turning a profit but then came fracking by injecting a fluid at high pressures and bore holes dug deep through the ground one could create fissures in the rock out of which oil and natural gas flow freely ignoring the countless externalities this brought the cost of producing shale oil to a competitive level and thus began the shale revolution two of the world's most significant shale deposits sit in the u.s west texas permian basin and montana north dakota's bakken formation conveniently unlike with much of the rest of the world oil and gas deposits beneath the ground in the u.s are generally the property of the owner of said land making the process of requiring rights to drill far less centralized and state controlled than with the rest of the world therefore in the early 2010s as fracking propagated each of these areas experienced a boom of gold rush proportions but was the quiet 14 000 person agricultural community of williston north dakota doubled in population across just four years oil workers flew in from around the country to claim six figure starting salaries but they had to deal with rent prices higher than those in manhattan or san francisco two thousand dollars a month for a one bedroom and far more for a nice one everyone from waiters to bartenders to cashiers to land-owning farmers was making incredible amounts of money as the industry refused to stop growing while the break-even price for shale oil was far higher than that of more traditional production methods the upfront investment was relatively low it was far cheaper to construct a fracking rig than an offshore oil rig for example so the boom was shepherded in not by shell or chevron but by small independent operators these independent operators were too small to individually influence oil prices but in net they flooded the market with supply indicative of a boom time operators were operating regardless of profitability they were willing to lose in the short term to secure market share in the long term because they believed in the long term potential that long term hardly shaped up as expected this supply glut was the major factor behind 2015's crash and prices hardly recovered opec and western super majors had simply lost control of the market oil was abundant and no matter how much they cut production buyers found supply elsewhere observers everywhere started to question whether this was the end of opec the cartel is only as good as the faith of its members and its effectiveness and across much of the 2010s it was hardly looking effective but then came the before and after moments then came negative oil prices out of the most dramatic crash the industry had ever seen emerged an opportunity operators everywhere cut back including the independent american shale companies after slashing production faster and more deeply than ever before opec brought back supply slowly crucially slower than demands and therefore the industry entered the longest sustained period of supply and demand mismatch since 2008. indicatively prices climbed at a far faster pace than demand's recovery and opec once again held control of the market they once again became the entity that the world pointed to as the culprit behind the prices at the pump but while broadly accurate that would be an oversimplification western producers too have been tepid in building production back up and it shows in the numbers u.s shale oil producers reinvestment rates as in the share of cash flow going back into the business rather than out to investors is at an all-time low whereas last time oil prices sat at a comparable level the reinvestment rate was quite literally off the charts today less than half of their money is being put back into the business this investment is typically what would go into developing new rigs but today it's just getting paid out as profit companies have the ability to produce more the us bureau of land management has exactly 9 000 approved but unused drilling permits on record but companies just don't have the appetite to drill industry-wide it's the same situation exxon mobil shell chevron and bp's capital expenditures are each at or near all-time lows simply put oil companies are not investing in the future anymore they're investing in now this is not a misinformed strategy out of the s p 500 indexes 11 distinct sectors the energy sector made up almost exclusively of oil and gas companies has been by far the lowest performer since 2007. the sector only gained 41.7 in value across that era which means it was actually flat with inflation the oil and gas industry simply is not a good investment anymore and so it's no surprise that it's not getting investment from outside or in while it's up to debate whether we've reached peak oil it'd be much easier to argue that we've reached peak oil investment because of the temporary finite nature of any oil supply a relatively high level of investment is needed just to keep production capacity stable when the world looked like this when climbing oil demand was all we knew the logic behind investing 5.5 billion dollars in a single pipeline was sound now with the world looking like this with the future of demand looking less confident than ever even investing a couple tens of millions in a single fracking rig is risky oil going negative appeared to spur a fundamental mindset change among oil executives and investors after having spent the past decades watching both the power of scarcity and the ruin of abundance supplies become the enemy oil's under more pressure than ever to deliver profits now because confidence in the future has been lost exxon mobil shell chevron and bp each successfully posted record profits in 2021 and this can continue the end of oil is near the momentum is already too strong renewables are taking over but the orchestra can keep playing as the ship goes down in an era where there is no future industry growth to capture scarcity is the name of the game if oil companies keep supply tight they'll keep prices high and capture consistent profits even as they add to the incentives of renewables this appears to be the dominant strategy the alternative would be to keep prices low to slow down the switch but considering the driving force behind the transition is the prevention of the destruction of the planet rather than the search for a more cost effective source of energy the profit focused approach appears the most intuitive astonishingly this means that the oil industry is seeding the market they've lost they're shepherding in renewables but they're not going down without a fight moving to a carbon-less world will take time and the oil industry can shrink faster than renewables can grow therefore short of a fundamental strategy shift by one of the world's largest industries the era of high fuel prices is here to stay for those unable or unwilling to transition early the weight will cost them for those who held onto ownership in the sector they're starting to experience one last great rally because the oil industry's party at the end of the world just started as you may or may not have noticed this video is really secretly a persuasive essay in fact pretty much every video of mine is a persuasive essay no matter if i'm arguing that cyber warfare is already a major threat or that russian military logistics failed in ukraine or that the fine art market is a scam i'm almost always arguing something and i'd also argue that a big reason behind the success of this channel is my ability to do that effectively there are a lot of techniques that are objectively useful in trying to persuade someone of a point so i've gathered everything i've learned both by studying persuasive theory in college and doing this for the past six years and made a class about the theories and techniques of persuasion and not only did i make a class i made an online classes platform myself my co-founders and the incredible management production and engineering teams behind nebula have been working for much of the past year to bring you the platform's biggest expansion to date nebula classes we know that many of you want to learn more and in more detail from the educational creators you already watch so this is the platform for that in addition to mine there are already other courses by volksgeist amy nolte low spec gamer georgia dow thomas frank and others and there will be new ones every single week each is fantastically produced with creators having flown out to a dedicated studio to assure consistent quality classes is available for just 10 a month or 100 a year and that includes the over 10 000 videos and originals created by the curated list of 150 nebula creators already however for the tens of thousands of wendover viewers that have already signed up for nebula including through curiosity stream it's just five dollars a month or 50 a year to upgrade click the button on screen or head to the link in the description to sign up and you'll be supporting wendover and loads of other independent creators while you're at it

Channel: Wendover Productions

Views: 3,541,894

Keywords:

Id: AQbmpecxS2w

Length: 22min 23sec (1343 seconds)

Published: Tue May 03 2022

Reddit Comments

[u/RavenMFD]

Fun fact: Azerbaijan once announced election results before the voting had taken place. npr source

They rank at the bottom of pretty much every human rights, freedom and democracy index in existence.

[u/barrinmw]

So high oil prices are because oil companies realize there is no future in oil so have no incentive to get more of it out of the ground than absolutely necessary.

[u/taylor_]

this video does a great job at covering the why about oil prices, but he misses the mark a bit when it comes to current investment into more development by oil and gas companies today. that's being driven by shareholder demands, who got burned during the boom periods when companies were absolutely dumping money into expanding their footprint as much as possible. the publicly traded companies are now being forced into holding back their development to focus on lowering debt and increasing free cash flow if they don't want their stock prices to crater.

[u/Stav73]

When coronavirus and lockdows began, you might remember the price of fuel dropped. That was the Russians flooding the market with their oil to lower the price globally, with the intent to damage or destroy competing oil supplies like the Saudis and increase Russia's global supply. Commentators and analysts were calling it a war at the time, and with the world locked down and cheaper fuel, nobody complained. With Russia ultimately supplying the world more oil afterwards, it would appear now that it was just part of their Ukraine invasion plan, that Russia really believed that the west would never dare to interrupt there own fuel supply and give Russia the green light to invade whatever countries they fancy in return for cheaper fuel. They never expected sanctions, and never thought the Germans would cut of their almost 100% reliance on Russian fuel. Plus, because of sanctions, most foreign companies have left Russia, taking all their skilled staff, and Russia itself does not have the skill or expertise to drill or extract oil.

[u/Devistator]

Oil price futures just need to stop. That metric seems to be a self-serving mechanism for the oil companies. If crude oil prices look like they are going to tank, then they raise the prices. If they go up, they... um... raise the prices.

Then there is the discussion of subsidies given to oil and coal companies. These fat cats get paid when they thrive and when they fail.

[u/NKLASHORT]

Absolutely INCREDIBLE video from wendover. One of his best.

[u/unlitskintight]

I'm sure Americans could save a lot of money if the top 3 selling cars in 2021 weren't huge obnoxious pickups that 95% of them don't need. The top selling car in 2021 in the US was a Ford F-series with a MPG of 25 - that is 10km/L. Absolutely disgusting fuel economy.

[u/WizWorldLive]

The shortest correct answer is: the oil companies wanted to make more money, so they did.

[u/SendingAFaxToBerlin]

There should be a QR code to this video that can be used to cover the "I Did That" stickers