National Commentary

Peak Oil Crisis: Minimum Operating Levels Redux

Last spring, when U.S. gasoline stockpiles were falling like a brick, there was much concern about shortages during the summer driving season. The average price for gasoline in the U.S. rose to $3.22 per gallon and in some parts of the country over $4. Our aged refineries were huffing and puffing to increase gasoline output enough to meet demand which was approaching record highs.

But then something wonderful happened. Great ships appeared on the horizon, attracted by the record high U.S. gasoline prices, and soon there was enough gasoline so that we could all have a mobile summer. Those of us who worry about the possibility of oil and gasoline shortages forgot about U.S. stockpiles for awhile and went back to puzzling over OPEC pronouncements, Venezuela, Nigeria, Mexico and a dozen other topics that affect our oil supplies.

Late in May, however, before the gasoline bearing tankers started arriving in larger numbers, I wrote a column about the minimum operating level (MOL) for gasoline in the U.S. You may recall that the MOL is the amount of gasoline we have in inventory that is in transit and not readily available. It may be in a pipeline coming up from Louisiana, on a barge being towed along the coast or still at the refinery waiting to be shipped.

You may even recall that the U.S. Department of Energy used to publish a number for the minimum operating level, but then stopped on the grounds they were not sure exactly what the correct number was. There certainly was no need to scare people by suggesting we were getting close to the bottom of our national gasoline tank. Last May, however, an inveterate researcher discovered the number in a musty old DOE publication from 2004 and it turned out to be 185 million barrels.

Now this number is probably not exactly right. Others have placed it at 170 million, but the size is not really relevant; it is the general magnitude that counts. Why bring this up again? Well last May there was much excitement when the government reported that our national gasoline inventory had shrunk from 228 million barrels in January to 195 million in late May.

Now for the disturbing news: during June our national gasoline stockpile climbed to about 205 million barrels and held there through July. Then as prices fell throughout the summer, fewer and fewer great gasoline ships visited our shores and our stockpiles started dropping again. The last report from nearly two weeks ago places our gasoline inventory at 192.6 million barrels.

This may sound like a lot unless you that know as a nation we are burning in excess of 9.6 million barrels a day. If our minimum operating level really is somewhere in the vicinity of 185 million barrels, then we have about 18 hours of reserves left should there be a serious supply interruption – like from a hurricane.

Even if the MOL is 170 million barrels or less, we only have a few days of useable reserves left and these are not evenly distributed across the country.

Currently gasoline stocks in the Midwest are down to 45 million barrels – some 10 million less than last winter’s high and shortages have already developed in states that are at the end of the distribution pipelines. There have been spot shortages in North and South Dakota, Nebraska, Iowa and Minnesota. North Dakota has been given permission to import gasoline from Canada that does not meet U.S. environmental standards. Nebraskan tanker drivers have been allowed to extend their driving hours so they can range further afield in search of supplies

So what is going to happen? The summer driving season is now over. Normally U.S. gasoline consumption drops by about 2 million barrels per week after Labor Day. This is the good news, and if there were no other considerations, a two million or so barrel per week drop in consumption might to enough to prevent spot shortages from spreading.

Consumption, however, is only half of the story. Wholesale gasoline prices currently are about 40 cents a gallon less than they were last May and do not reflect how tight the supply situation really is. In more normal times, with so little gasoline in stock and giant hurricanes forecast to come hurtling out of the Atlantic for another two months, one would expect to see gasoline traders in a bidding frenzy. But these are not normal times. A credit crisis is engulfing us. While some see a minor “re-pricing of assets”, others see a recession that will drive down world demand for oil.

The returns from the summer driving season won’t be in for another week. Surveys of traders forecast that our national gasoline stockpile dropped by another million or so barrels last week. If they are wrong and the drop is reported as being two or more million barrels we are starting to get into dangerous territory. If stockpiles continue dropping in September we are going to be testing just where the minimum operating level is — the hard way.

Gasoline prices are temporarily lost in the angst of the credit crisis. But this too will end. Sometime in the next few months, some event is likely to set off a spike in gasoline prices. Be it a hurricane, terrorist attack, adverse geopolitical crisis or some credit crisis development, the realization will dawn that we are extremely short of gasoline and have little hope of remedying the situation over the short term. Then the troubles will begin.

Don’t overlook the possibility that someday soon there will be a run on the gas stations. A tank of gas is so important in America today that at the first reports of an impending gasoline shortage many of us will rush to fill our tanks. If we all did this at once, the national reserve would be drained by something on the order of 50 million barrels. A lot of us are sure to be disappointed because there simply is not enough gasoline in the system for this to happen.