Though record high gasoline prices in Hawaii may reflect the rising global costs of oil, it certainly is no help to Hawaii’s tourism industry or the state’s cost of living. Higher oil and gas prices are increasing the cost of airline tickets at a time when tourists have less available money to vacation in Hawaii. It makes everything more expensive in Hawaii because of the increased cost of transportation of goods and rising utility rates. The question for those of us living in Hawaii, or hoping to visit, is “will the cost of oil keep going up or is there some miracle on the horizon that will lower the ever rising rates in the future?”. We have reason to believe in a miracle that will significantly lower the cost of oil and gasoline.
We have previously mentioned new technologies used to extract natural gas that started being used about 4 years ago. Since that time, production of natural gas using horizontal wells, widely known as “fracking”, has doubled the production of natural gas in the US. As a result the price of natural gas has dropped 78%, from $8.80 per thousand cubic feet to $1.98 per thousand cubic feet. These same technologies are now being used to extract oil from areas of the US that have not been producing oil. The Bakken shale formation in North Dakota, for example, has seen a 600% increase in oil production using this technique.
If these new technologies in producing oil result in a similar increase in production and price drop as they did for natural gas, it could mean a drop in the price of oil from $105 a barrel today to $23 a barrel over the next four years.
Some noteworthy changes that have already occurred and add to the probability of the price of oil going down significantly are:
- There are more oil rigs drilling in the US now than in the rest of the world combined (about 1275 rigs). A geological formation of shale in Eastern Colorado (Niobrara) is now producing over 200,000 barrels a day. A new area called the Tuscaloosa Marine Shale on the border of Louisiana and Mississippi initially projected production levels of 25,000 barrels of oil a day has revised it to upwards of 125,000 barrels a day. The Bakken formation, called by some the “new Saudi Arabia”, produced 600,000 barrels a day at the end 2011 and is expected to produce more oil than California or Alaska by the end of 2012. If US production continues to increase at this level, our country will have energy independence within 48 months.
- Traditionally pipelines have pumped oil imported on tankers from Houston to the central US to refine it into gasoline at oil refineries in the Midwest. Oil production has increased so much using the new techniques on shale fields in the US that several major oil pipelines are now reversing the direction they pump oil in order to deal with the huge surplus. A pipeline that pumped oil from Houston to Oklahoma and a pipeline that pumped oil from Houston to El Paso have both reversed the flow of oil to send over 500,000 barrels of newly produced shale oil each day to Houston for refining.
- The huge new supply of US oil has already lowered the price of oil in the US to 20% less than oil prices in the rest of the world. Recently, a barrel of US produced oil cost $105, whereas a barrel of imported oil costs $125.
- The largest refinery in the world is about open in Port Arthur, Texas and will refine over a million barrels of oil a day. This is a remarkable development as elsewhere in the world, large oil refineries have been closing. A refinery in St. Croix that processed over 450,000 barrels a day and several in Europe of similar size closed recently because they were losing money with every barrel they refined.
- The low cost of natural gas is making it cheaper to refine oil in the US than anywhere in the world. The transportation costs are less and the availability of low-cost natural gas can be used to refine the oil instead of expensive oil products. Oil producers are saving even more money by powering the oil rigs with natural gas produced at the same site and converting supply trucks to using natural gas. The use of localized energy to extract, transport and refine oil continues to reduce the overall cost of gasoline and oil products for customers in the US.
If the US replaces the 6 million barrels of oil that it imports every day, that would keep $600 million dollars a day within the economy of the US and add jobs and infrastructure investment in the US. In addition to reducing the cost of oil for Hawaii, the $219 billion a year remaining in the US economy would pay for many, many vacations to Hawaii.
Disclaimer: we are investors in companies that produce materials used in “fracking” as well as those that produce oil and natural gas in the US.