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Dr. Frank Moseley offers an economic perspective on oil and gas

October 19, 2012

“The Bismarck Tribune” featured University of Colorado Denver professor Dr. Frank Moseley in this May 2012 article titled: “The Economics of Oil and Gas Markets.”

Moseley has numerous years of international business experience with multi-national energy companies in many areas of the world including the North Sea, Saudi Arabia, Kuwait, and Australia. He has specialized in the areas of management, finance, and economics in these positions.  Moseley managed offshore and onshore projects within the energy markets. He was the president and founder of a private international oil service company and served as a Board of Director for three petroleum companies.

Moseley earned a Ph.D. in Mineral Economics with a major in Business Strategy and Finance from the Colorado School of Mines. Frank also earned an MBA and M.S. in Petroleum Engineering from Texas Tech and the University of Houston respectfully. Dr. Moseley graduated from the Advanced Management Program at Wharton. He also attended a Real Options Program at Stanford.

The Economics of Oil and Gas Markets

The Bismarck Tribune

May 2012

Sweet versus sour: When it comes to oil, sweet crude wins easily in terms of value.

Sweet crude contains less sulfur (0.5 percent), described Minot State University’s Director of Energy Economics and Finance Program Dr. Frank Moseley.  Sour crude oil contains more than 1% sulfur.

Light, sweet crude oil commands the highest price because of its properties, and it requires less processing to make gasoline, the oil product Americans consume the most. However because sour crude oil is cheaper, many larger refineries are now designed to process sour crude, Moseley added.

“The Bakken crude is what I’d call a ‘beautiful crude’ … it’s a very high-quality crude,” he said. Normally, such a high-end crude oil would command premium price. However, North Dakota’s lack of infrastructure to move crude out of the state results in it being discounted – currently $7.50 per barrel – on the world market.

Improving infrastructure has lessened the discount, though, as more railroad facilities and pipelines come into place to move Bakken crude to the world’s largest oil storage facility in Cushing, Okla.

Presently, delivery capacity of about 150,000 barrels are moving out of North Dakota daily via rail; 450,000 barrels via pipeline; and a small amount via truck, Moseley said.

North Dakota’s oil wells currently produce about 600,000 barrels daily of oil and approximately 550,000 cubic feet of natural gas. The state had 204 active drilling rigs as of mid-April. The North Dakota Department of Mineral Resources Oil and Gas Division estimated about 33,000 new wells would be needed to fully develop the Bakken oil play, which may include oil within the Three Forks Formation located below the Bakken Formation.

Transportation accounts for 65 to 70 percent of the oil used in the United States, Moseley said. Americans use more gasoline while European countries use more diesel fuel for automobiles.

The U.S. consumes more than 18 million barrels of oil daily, followed by China, 8.2 million; Japan, 4.3 million – all of which is imported – India, 3 million; and Russia, 2.7 million barrels daily. However, oil demand is steadily increasing in Asian countries, especially China as it becomes increasingly industrialized. Even though U.S. gas consumption is decreasing, increasing demands worldwide raise oil prices.

Environmental Protection Agency requirements for gasoline blends are another factor in rising gasoline prices, Moseley said. Gasoline has several different types of blends across the U.S., he described. Blends can very even within a particular state depending on air quality issues in various locations.

The cost of producing gasoline blends increases its production cost. With about 15 to 18 different blends required during summer months when U.S. consumption is highest, prices typically increase in the summer.

Moseley breaks down factors entering into the price of a gallon of gasoline:

65 percent: Crude oil price.

10 percent: Distribution costs and retail markup.

6 percent: Refining process.

15 percent: Federal gasoline taxes (18.4 cents per gallon) and state gasoline taxes.

State gasoline taxes vary Mosley said. The American Petroleum Institute compiled state gasoline taxes data, and North Caroline leads the way at $0.389 per gallon. North Dakota’s state gas tax is $0.23 per gallon compared to Minnesota’s $0.28, Montana’s $0.27, South Dakota’s $0.22 and Wyoming’s $0.13 cents per gallon.

Unlike natural gas, which is priced regionally, oil is priced on a global basis in U.S. dollars, Moseley explained. In addition to increased gasoline prices with the use of summer blends and increased consumption, current federal reserve policies resulting in lower U.S. dollar valuations increase the cost of a barrel of oil in order to make the same amount of money, he said. As the U.S. dollar improves, Moseley anticipates the price of oil could decrease.

Geo-political issues, especially in Middle Eastern countries, also factor into oil prices.

Oil companies fit into two categories, Moseley explained: IOC, International Oil Company or NOC, National Oil Company. Worldwide production of oil is about 86 million barrels daily with OPEC (Organization of Petroleum Exporting Countries) countries producing about 30 to 31 million of that amount. NOCs control 85 percent of the word’s proven oil reserves, Moseley said.

The U.S. doesn’t have any NOC companies.

“Exxon Mobil Corp. doesn’t control the price of oil; they’re too small … BP, Shell, Exxon, their big but not in the terms of reserves,” he said.

U.S. oil production increased for the first time in more than a decade because of unconventional drilling tapping into new reserves. The U.S. currently produces 6 million barrels daily. The Gulf of Mexico accounts for about 30 percent of domestic oil and gas production, which could increase as drilling moratoriums slowly lift, Moseley said.

Canada is the leading supplier of oil into the U.S., followed by Saudi Arabia, Mexico, Venezuela and Nigeria.

With increasing domestic production through unconventional drilling exploitation and potential construction of a trans-Canada pipeline, Moseley feels the U.S. could be energy independent within a decade.

Existing refineries are also be expanded to increase production, he said.

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