Petroleum Industry Perspectives at LeBow

Gasoline prices that shot above $3 a gallon following Hurricane Katrina have eased. But you still might want to think twice before running out to buy that SUV.

A global lack of spare capacity for both crude oil and refined products means that big price spikes are likely with any significant disruption to the petroleum supply chain. That is not likely to change in the short term, even though the industry is investing to increase its ability to bring fuel to market, Terry Delaney, a Sunoco vice president and alumnus of Drexel University’s LeBow College of Business, told 100 people who recently gathered at LeBow College for his lecture “Petroleum Industry Perspectives.”

“The whole [supply] complex is relatively tight right now and I think that puts us in a little bit of a susceptible position,” Delaney said.

A quarter century ago the petroleum industry miscalculated by over investing in production at the same time demand was falling due to factors like better fuel economy in vehicles and less reliance on oil in manufacturing. The result? Years of cheap and plentiful oil. Several factors have now tilted the supply-demand equation the other way. Demand has caught up with supply to such degree that there is too little spare capacity in the market to buffer the effects of war or natural disasters on prices.

Delaney ticked off several factors influencing the trend. The war in Iraq has kept that country from producing as much oil as it can; Venezuela is not producing as much as it has in the past; the developing world’s appetite for oil is steadily increasing. Then there are short- term disasters, like the Gulf hurricanes that knocked out 25 percent of U.S. refining capacity (10 percent of which was still offline at the time of Delaney’s appearance).

Largely ignored when prices are low, the oil industry has been the focus of front page headlines and Capitol Hill hearings now that the cost of fuel has become a major concern.

Delaney said current events had turned a spotlight on the refining industry to a degree he could not remember in 25 years of working in it. His company does not drill for oil. It buys crude, refines it and markets it. Sunoco also has investments in petrochemicals and other petroleum related businesses. Delaney said that, historically, oil price swings have been most affected by the price of crude. But as refining capacity has become tighter, that industry’s role in the price of fuel has been magnified, he said.

He predicted that both crude production and refining capacity would increase now that companies have enough price incentives to upgrade facilities or build new ones. “When we look out 20 or 25 years we’re going to need 40 or 50 percent more oil. Eighty-five million barrels a day is going to be 115 or 120 million barrels a day,” Delaney said.

But new refineries and oil wells take years to develop, so do not expect a quick fix to the current capacity crunch, he warned. Delaney also said that new oil infrastructure will be costly and companies will have to recoup that in the prices they charge. One reason that petroleum had been so cheap for so long, he said, is that many of the facilities used to produce it were built with decades-old dollars.

No oil refineries have been built in the United States since the Carter administration. Delaney did not foresee that changing. He said companies will want to put refineries near where oil is being found, and in areas where it can satisfy burgeoning demand. Likewise, he predicted that most new oil exploration will take place outside of the U.S. That will drive the trend of America becoming more dependent on foreign crude oil and refined products like gasoline or diesel.

The U.S. produces from 7 million to 8 million barrels of crude per day, refines about 16 million barrels per day and uses about 20 million barrels per day of refined products. To fill its need, the nation must import millions of barrels of both crude and refined products each day.

“While we might wish to be more self-sufficient and independent, it is hard to see that path,” Delaney said.

He said he was confident the industry could continue to meet demand for fuel, but he predicted that the global interdependence of the oil business will only increase. He pointed out that only 13 percent of crude comes from corporations like BP or ExxonMobile. A vast majority of it is state controlled, which means politics can have a dramatic effect on the market.

 “While oil is a globally and freely traded commodity,” Delaney said, “I think we cannot get away from the fact that the supply and the investment decisions are inextricably linked with global politics and the national interests of the countries that own this oil. So it’s not a simple equation. … By any measure, most of the oil that we consume is outside our control, and it has national interests for many of these [producing] countries.”

There are two schools of thought among investors who speculate on the price of oil: some think it is still overvalued and others think it could top $80 or event $100 a barrel, Delaney said. He said he thought prices would eventually stabilize at a lower level than they are now, but said the era of oil costing $10 to $15 a barrel is history.

Delaney’s appearance was part of the Mid-Atlantic Currents Series of Events at LeBow College of Business. The series is intended to bring students, professors, and the general public together with industry professionals to discuss topical issues in the business world. Information on upcoming events is updated regularly at www.lebow.drexel.edu/events.