Drilling advances

	Vol. 229 No.9
LES SKINNER, PE, CONTRIBUTING EDITOR, LSKINNER@SBCGLOBAL.NET

High fuel prices

Increasing fuel price in the US and other countries has been the hot button topic for the last several months. Emotions have been inflamed by continued reports of folks having to forego driving to buy food, pay utility bills and purchase prescription medications. Everyone has an opinion, with most of them being negative toward “Big Oil,” even though the crude price increase has been experienced by all oil companies, big, small and national.

Interestingly, through all the investigations and grilling of Big Oil executives, there has been no evidence of collusion, price fixing or price gouging. The phenomenon has been caused by a perceived supply gap (surprise!). High prices caused a demand drop and a subsequent crude oil price drop (another surprise). Perhaps this free market stuff really works!

Fueling the controversy (no pun intended) is that retail prices increase faster along with rising crude prices than they fall with declining crude price. A Canadian research team has figured out why.

During the 100+-day survey in Canada, the researchers found that prices were increased 17-23 times. Once the prices peaked, all the retailers began to lower the prices slowly, as many as 162 times in the same time frame. With every new load, the retailer had to increase his price again to pay for the new load. Plotting fuel prices produced a sawtooth pattern.

The result was that the retailers were making only 1-2¢/gal of gasoline, making fuel sales an even smaller portion of their total sales income.

I did some research on my own in Houston and can confirm their results. Most people shop around to find the best fuel price. Large signs at retail outlets help in the search, and those retailers that drop their price a cent or two normally have all the business they can handle. Their neighbor across the road must drop his price to compete. Before long, prices have fallen close to the wholesale fuel price. As the worldwide crude price goes up, wholesale fuel prices rise accordingly. Each retailer then raises his price by some amount to cover the wholesale price increase.

I found that retailers would never allow their price to fall below the wholesale price for their next load of fuel, even if the fuel in the retailer’s tank was purchased at a lower price. They constantly anticipate payment for the next shipment, and retail fuel prices are always prospective rather than reactive. The reason, according to one retailer, is that they are billed for the new fuel load at delivery. Without anticipating the higher wholesaler cost and passing that increase along to the consumer, the retailer falls behind and must catch up out of sales from the new load. In short, he has to continually pay his wholesale fuel bill. He is still required to remain competitive, however.

Most retailers’ income in Houston comes from the sale of tobacco products and beer. Some of the local retailers told me they just tried to break even on fuel sales. They considered their business successful in a rising fuel market if they just didn’t lose any money. Of course, one never hears that from the talking heads on the evening news.

Fuel prices skyrocketed after Hurricanes Katrina and Rita in the US GOM three years ago. At that time, I recall a fuel-price investigation that showed refiners only made 3-4¢/gal on fuel provided to wholesalers. Refinery margins have fallen considerably over the last two years. Now, the margin is 1-2¢/gal. So the refiners, like the retailers, are barely breaking even.

Wholesalers must be the culprits then, right? Well, not really. The wholesalers are required to operate a fleet of tanker trucks to deliver fuel to retail outlets in the US, Canada and most other countries. In some places, like Kuwait, fuel is delivered to some outlets near the refinery by pipeline. For those employing tanker trucks, there is an ever-increasing cost of doing business-fuel costs. Those big tankers have to burn something, don’t they?

Here’s another problem-drilling rig fuel cost increases. Diesel has increased in price more than gasoline in most areas. The reason, from what I understand, is that refineries adjusted their processes to produce more gasoline to satisfy an increased market demand. This created a higher demand for diesel relative to reduced stocks. Add to that the increased cost of delivering the fuel to the rig. It seems that the fuel price crunch is hitting everyone.

How about aviation fuel? Those helicopters still need fuel, and delivering that fuel to the platform is not cheap. Calling to the shorebase and having them send out some widget on a special flight along with a newspaper won’t be justified. Full loads are the only flights that will occur.

The public doesn’t understand that we buy our fuel just like they do. We may have some wholesale fuel contracts, but the crunch in availability versus requirement, stocks versus demand and all the other market factors affect rig operations, just like they do the family automobile. Add to that increased costs for food, clothing, supplies and materials caused by an increase in shipping and transportation costs of all types. This has the drillers scratching their heads on how to reduce fuel consumption and total cost.

This has created an unusual situation where maintenance is more important than ever. Nobody is keeping old fuel filters on the engines. Filters are being changed out so frequently that it is creating a waste problem. Engines are lubricated frequently, oil is changed on schedule (not a week later) and all rig equipment is operated very efficiently.

Fuel prices, along with crude prices, are dropping as demand drops, the logical outcome of high prices. Diesel prices are falling, and there is renewed hope that they will continue to drop. Who would have thought that we would be happy to see $4/gal diesel prices!

One wonders if rig maintenance will also drop, since saving a few gallons a day becomes less important with falling prices. Also, as crude prices drop, rig contract prices are bound to follow. Maintenance is generally the first thing to get cut followed closely by safety programs.

From an operational standpoint, I hope that crude and fuel prices stabilize soon and increase some. That probably sounds blasphemous to many folks, but oil feeds my family and I don’t mind paying a little more for fuel at the pump. Actually, $4/gal doesn’t sound bad to me at all.