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Energy & Resources
Oil Pricing in the Hot Seat
Mineral of the Month: Cement


Oil Pricing in the Hot Seat

In the early fall, Americans were facing painful prices at the gasoline pump and on their home heating fuel bills, while major oil companies were seeing record profits. In the third quarter of 2005, ExxonMobil, for example, netted nearly $10 billion, and the big five oil companies (ExxonMobil, Chevron, Shell, BP America and ConocoPhillips) together netted more than $25 billion. The need to understand this timing led Congress to summon the chief executive officers of the five energy companies to testify in November.

There is a “growing suspicion that oil companies are taking unfair advantage of the current market conditions to line their coffers,” said Sen. Pete Domenici (R-N.M.), in a Nov. 9 joint hearing of the Senate Commerce and Energy committees. “The oil companies owe the American people an explanation.” Domenici then suggested that part of the reason that many people think price gouging is occurring is that they may not understand the process.

How the price of crude oil is set is “an extraordinarily complex question,” testified Lee Raymond, CEO and chairman of ExxonMobil. In fact, few can answer the question due to the complexities of the commodities markets on which oil is traded, says John Felmy, an economist with the American Petroleum Institute (API), an industry trade group in Washington, D.C.

Oil companies do not set the price of crude oil, Felmy says. Fundamental economics of supply and demand set the initial prices, and currently, the balance between the world’s supply and demand for crude oil is razor-thin. Because supply is tight and demand is high, prices are high.

“Perceived fundamentals of supply and demand” further influence the price of a barrel of oil, Felmy says, as it is bought and sold on the international commodities markets, such as the London Stock Exchange or the New York Mercantile Exchange. Whether a barrel of oil is produced in Texas or Iraq, it is sold on the world market, and its price reflects the global market conditions on a day-to-day basis.

“When supply is constrained, speculators bid up the prices,” says Mohammad-Ali Zainy, an energy economist and analyst with the Centre for Global Energy Studies in London. Thus, the futures markets greatly affect the prices consumers face. Any political unrest, economic uncertainty or unusual weather conditions — current or forecasted — can lead to increased bidding.

The U.S. Energy Information Administration predicts demand to rise faster than supply in 2006 and prices to remain high. But while many of the same factors that drove world oil markets in 2005 will remain in play in 2006, Zainy says that his company predicts that relative supply will be higher than it was in 2005, leading to flatter prices.

In the last few months of 2005, prices dropped from a high that topped $70 a barrel in the wake of Hurricane Katrina, to between $50 and $60 a barrel. The fact that prices have fallen so much, “even under the most extraordinary circumstances,” referencing hurricanes Katrina and Rita’s impacts on the Gulf Coast, shows that the markets are working, said ExxonMobil’s Raymond at the hearing.

Part of the reason oil companies’ profits are so high this year, Felmy says, is that these are large companies with large revenue streams. The companies also have major costs, including the finding and producing of new oil and gas sources, and the costs of refining, distributing and marketing the hydrocarbons.

API says that in earnings in the third quarter of 2005, oil companies made around 7.7 cents per dollar, while banks brought in 19.6 cents per dollar and pharmaceutical companies made around 18.6 cents per dollar. Thus, the oil industry’s profits are in line with, if not lower than, those of other industries, according to API.

The need for constant investment in new projects also affects oil companies’ bottom lines, whether the prices per barrel are high or low. In 1998, when the price of a barrel of oil held around $11, petroleum companies still invested tens of billions of dollars in new fields — and most of them lost a lot of money that year, Felmy says. In 2005, the companies invested $66 billion in exploration and production projects, and another $20 billion in refineries and other “downstream” components.

“There’s no question that higher per-barrel prices affect investment positively,” he says, but to some degree, regardless of prices, companies will continue to invest. Investment in new fields and projects, such as ExxonMobil’s Sakhalin-1 project in Russia, which began 10 years ago and just pumped its first oil in October, is why “we need to let markets work,” Felmy says.

There are no quick fixes or short-term solutions for energy prices, Raymond said at the hearing. “In politics, time is measured in increments of two, four and six years,” based on the length of terms in office, but “in the energy industry, time is measured in decades, based on the life cycles of our projects.”

Still, the debate over oil and gas prices is not likely to end soon. Following the November Senate hearings, Wisconsin Gov. Jim Doyle (D) subpoenaed the executives of the big five oil companies to appear at a Dec. 1 hearing. Doyle alleged that Wisconsin consumers had overpaid for gasoline by as much as $113 million in three months, while the companies recorded record profits, according to the Associated Press.

At the same time, oil executives came under further fire after The Washington Post published an article saying that the oil executives had not testified truthfully during the November hearings about their involvement in Vice President Dick Cheney’s energy task force in 2001. In late November, several members asked Domenici to recall the executives and require them to testify under oath about their involvement.

Megan Sever

Links:

American Petroleum Institute
U.S. Energy Information Administration Short-Term Energy Outlook
"Katrina blows in higher gas prices," Geotimes, October 2005

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Mineral of the Month: Cement

Hendrik G. van Oss, the cement commodity specialist for the U.S. Geological Survey, has compiled the following information on cement, an important material in construction.

Hydraulic cement is a virtually ubiquitous construction material that, when mixed with water, serves as the binder in concrete and most mortars. Only about 13 percent of concrete by weight is cement (the rest being water and aggregates), but the cement contributes all of the concrete’s compressional strength. The term “hydraulic” refers to the cement’s ability to set and harden underwater through the hydration of the cement’s components.

The use of hydraulic cements dates back to ancient Roman times. Cements closer in composition to what is now commonly used were first discovered in England during the mid-18th century. In 1824, Joseph Aspdin, an English brickmaker, obtained a patent for an artificial hydraulic cement called portland cement, which was named after a dimension stone quarried on the Isle of Portland. The new cement proved to be superior to natural cements. In the United States, portland cement was not manufactured until 1871, in Coplay, Pa.

Because of many improvements in its manufacture, modern portland cement has only superficial similarity to portland cements of the 19th century. Portland cement may be mixed with other cement materials, such as fly ash and ground granulated blast furnace slag, to make blended cements, and with plasticizing agents, such as ground limestone and lime, to make masonry cements.

Limestone and, if needed for the chemistry, lesser amounts of clays and silica sand are the primary raw materials used to make portland cement. The mix of raw materials goes into a rotary kiln for pyroprocessing to form an intermediate product called clinker. The energy required to achieve the kiln reactions is enormous (typically, 3 million to 6 million British thermal units per metric ton of clinker). After cooling, gypsum is added to the clinker, and the mixture is very finely ground into portland cement. Gypsum prevents the cement (concrete) from setting too quickly.

World output of hydraulic cement has risen steadily in recent years. In 2004, world output was about 2.1 billion metric tons — enough to make about 2.5 tons of concrete per person on the planet. Of the approximately 150 producing countries, China’s output was by far the largest, at about 934 million metric tons, followed by India, at about 125 million metric tons, and the United States, at about 99 million metric tons (from 115 plants in 37 states and Puerto Rico). U.S. cement consumption, primarily portland cement, in 2004 totaled about 122.5 million metric tons. The United States is dependent on imports to meet 20 to 25 percent of its consumption requirements.

The major environmental issue associated with cement manufacturing is the emission of carbon dioxide (nearly 1 ton of carbon dioxide is generated per ton of portland cement). After powerplants and motor vehicles, the cement industry and the iron and steel industry are more or less tied as the top two industrial emitters of this greenhouse gas.

Visit minerals.usgs.gov/minerals for more information on cement.

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