The Cost of Oil
by Craig Swanson, Senior Asset Manager, Investment Committee Member
An exciting aspect of managing investments is the need to stay current with macroeconomic events and trends. The condition of the global economy affects corporate profits, which in turn affect the holdings of our investment portfolios. If we can align a portfolio for certain conditions, the portfolio should reward us if those conditions come to light.
An event currently unfolding, and the subject of much discussion, is the price of oil. Important political and environmental issues aside, the logic for being concerned about the price of oil is straightforward: if the consumer spends a larger share of income on fuel, there is an equivalent reduction in spending in other areas. In this month's article we are taking a general look at the petroleum industry, especially where we stand as a country related to the rest of the world. This will provide some background to help us understand the critically important and dynamic business.
When most people think of oil they think of gasoline. On average, however, a 42-gallon barrel of oil is used to produce just a bit over 19 gallons of gasoline. Other byproducts of the refining process include about 10 gallons of diesel fuel, 4 gallons of jet fuel, 1¾ gallons of liquefied petroleum gases, some heavy fuel oil, heating oil and an additional 7 gallons of "other products." Interestingly, oil and its byproducts expand during the refining process, so a 42-gallon barrel of crude actually produces around 45 gallons of total supplies.
How much oil do we use and where does it come from? In 2009, the United States consumed about 18.8 million barrels of oil each day, or about 22% of global production. Unfortunately for us, the domestic production was a bit less than half of our total consumption, putting the nation in a position of great reliance on imported oil. The primary foreign sources of crude oil imports as of December 2010 are:
- Canada (24% of total U.S. crude imports)
- Mexico (14%)
- Saudi Arabia (12%)
- Nigeria (12%)
- Venezuela (10%)
It is also interesting to note that Libya, dominant in recent headlines, supplies roughly 1% of crude imported by the United States.
With the recent rise in oil and gasoline prices, you may have heard talk of tapping the U.S. Strategic Petroleum Reserves to increase supply and thus drive down price. An important factor to consider with this idea is that the reserves, although the largest in the world, are only about 725 million barrels of crude. At current consumption rates, this is a mere 38 days worth of oil. While it may have an impact on price, it seems that the impact would be short-lived.
General production and consumption statistics are summarized in the tables below. The data is from 2009 and measured in thousands of barrels per day.
There are many sound reasons to work toward the reduction of oil demand. In the meantime we will have to live with the unfortunate position of considerable dependence on foreign sources. At Wealth Enhancement Group, we continue to monitor global economics and adjust portfolios according to conditions.
The source of data used in this article was the United States Department of Energy.
Craig Swanson is responsible for economic analysis, portfolio management, and the composition and allocation of portfolios at Wealth Enhancement Group. He is a member of the Investment Committee, which conducts rigorous due diligence on investment products in order to provide the most appropriate solutions to clients. Craig brings more than 15 year of financial services experience to Wealth Enhancement Group; he received his Bachelor of Arts from the University of Minnesota and his Master of Business Administration (MBA) from Columbia University in New York.
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