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
Back to top
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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