Sulfur, sulfur everywhere

A number of recent experiences have me thinking again about sulfur. More specifically, about how much sulfur we produce and whether we are headed toward an overabundance that could hamper oil production and gasoline refining. Typically, sulfur production is a good thing (as opposed to sulfur emissions, which are not a good thing). Sulfur is one of the most widely used industrial chemicals on earth. It is a key component in certain fertilizers and is used in many other applications. Increasing sulfur consumption is often thought of as an indicator of strong growth of an industrial economy. But the convergence of a few trends has me wondering if sulfur production may get too high to dispose of it all (or at a minimum, decrease its value so much that it becomes a liability).

The first trend is the increase of high-sulfur crude oils being produced in the world. The second trend is the significantly lower sulfur content standards for end-product fuels, specifically Ultra-Low-Sulfur-Diesel (ULSD). The third trend is the increasing production of Canadian Oil Sands bitumen and the sulfur produced from that activity, and the final trend is the increase in natural gas production from sour (high-sulfur) gas wells.

My first thought on the subject came on a trip to the Athabasca oil sands of Northern Alberta. Along the Athabasca River outside the city of Fort McMurray I took this photo of a gigantic pile of sulfur. Looks to be about the size of CAL's football stadium:

I asked where it would ultimately go but did not get any satisfactory answer…sort of a “we’re stockpiling it for now”. When I asked an executive at another major oil company where there sulfur goes, he merely replied that there is always a market for it, but he didn’t pay much attention to who the buyers were. The answer in Canada is that they export a lot of it to the U.S. The U.S. G.S. reports that of the roughly 4 million tons of sulfur and sulfuric acid imported into the U.S. each year, Canada supplies over 70% of it. The U.S. produces about 8 million tons per year and therefore uses a total of about 12 million tons per year with agricultural chemicals being the major user. The price of sulfur per ton has actually risen from about $12 in 2002 to $32 in 2004 and has trended back down to around $28 as of 2006.

Refiners have been upgrading to handle more high-sulfur crude oil inputs, which sell at an increasingly large discount to sweeter West Texas Intermediate. ULSD in the U.S. has now moved to a standard below 15 parts-per-million (PPM) from 500 PPM just a few years ago. With more coming in the front end and less going out the back, sulfur extraction will reach all-time highs at refineries and natural gas processing plants over the next few years. Maybe we won’t have any problem selling it into an expanding worldwide economy, but at the very least, price pressures should exist for a long time. My next stop is figuring out whether we will reach a point where the inability to dispose of sulfur could be a hindrance to refinery operations.

high gas prices? who's to blame?

Since Memorial Day is upon us and Americans tend to drive more than usual on this 3-day weekend, there is increased clamor about the high gas prices at the pump. Many politicians have seized this opportunity to go after big oil companies with accusations of price gouging. It is easy to take this position and point fingers at ExxonMobil and their ilk for taking advantage of us; unfortunately, the truth is a bit more complicated and inevitably leads right back to us, we who drive large inefficient vehicles and show no signs of changing. Simple economics applies. If you want lower gasoline prices, then get more efficient vehicles; drive less; use public transportation; walk more; in other words, lower the demand for gas and the price should follow. Until wholesale changes in our transportation habits happen, expect gasoline prices to keep rising. $4 a gallon might look pretty cheap in hindsight. Remember when $2.50/gal was expensive?

On the bright side of all this, higher gasoline prices will likely predicate greater incentive to fund alternative fuels which, as of yet, are still too expensive to fully adopt.

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Wall Street Journal
May 25, 2007

Pains at the Pump
Page A14

It's Memorial Day weekend and the start of the summer driving season, so naturally it's time for Congress to grandstand against $3-a-gallon gasoline. And right on cue, the House passed legislation this week to criminalize gasoline "price gouging," whatever that is. Perhaps this is all designed to distract the public from Congress's own role in raising gas prices.

Under the anti-gouging law, service station owners could face up to 10 years in prison if they dare to raise their prices too much when supplies are low. Representative Bart Stupak, the Michigan Democrat who sponsored this scheme, said the vote would determine whether Members "side with Big Oil" or "side with consumers who are being ripped off at the gas pump." Who elects these guys?

The inconvenient fact is that there's no evidence of price rigging by Big Oil or the tens of thousands of independent service station owners across America. The causes of higher gas prices include $65 per barrel oil caused by rising global demand and geopolitical tensions; a record high U.S. gasoline consumption of 380 million gallons a day; and refined gasoline shortages caused by Congressional rules and mandates. Far from withholding production to raise prices, U.S. gasoline production of 8.8 million barrels per day is higher than any time in history and refineries are getting more gas per barrel of oil than ever before.

This isn't the first time a spike in gas prices has prompted Congress to allege price fixing. It's not even the second, third or 10th time. Since the OPEC oil embargo some 34 years ago, Congress has requested more than 30 investigations into whether energy companies have conspired to inflate profits. In nearly every instance, the Federal Trade Commission or the Department of Energy have found no evidence of price fixing. Only last year, Congress ordered the FTC to investigate whether Big Oil had manipulated prices after Hurricane Katrina in 2005. The agency found "no instances of illegal market manipulation that led to higher prices."

What does "gouging" mean anyway? No one on Capitol Hill can answer that question. The House bill prohibits energy companies from charging a price that is "unconscionably excessive." There's a precise legal term. It further explains that it shall be a crime whenever "the seller is taking unfair advantage of unusual market conditions" or "the circumstances of an emergency to increase prices unreasonably."

Still confused? Perhaps this will help. Gouging occurs, says the bill, whenever "the amount charged represents a gross disparity between the price" sold at the pump "and the average price at which it was offered for sale by the seller during the preceding 30 days." That could cover any price spike for any reason. Or gouging may occur when "the amount charged grossly exceeds the price at which the same or similar crude oil, gasoline, or natural gas was readily obtainable by other purchasers in the same geographic area." So if your oil supplier charges more than a competitor's does and you then raise prices, you could be a felon.

In other words, we are all criminals now. No one seriously believes this law will lower prices for consumers, but you can bet that brigades of lawyers will earn fat fees sorting out what exactly is meant by "unreasonably," "gross disparity" and "excessive."

If Congress wants to locate genuine gas price villains, it should look in the mirror. Domestic refining capacity is stretched in part because environmental laws discourage the building of new refineries. Meanwhile, new mandates for ethanol and other "boutique" gasoline blends make it harder for the industry to meet refining shortfalls. The Lundberg Survey estimates that the ethanol mandate alone adds 10 cents to each gallon, and that 36 refinery snafus this year have cut U.S. gas supplies by about 8%. Refiners are also currently switching to mandated summer gasoline blends -- another contributor to the current price spike.

Congress's ethanol craze is a special problem because it further reduces the incentive to invest in new refining capacity. Gasoline refining is a low margin business in any event, and only a very brave, or very foolish, CEO would invest heavily to refine more gasoline when Congress is bent on replacing it with ethanol in the future.

If Congress wants really high prices, it should keep this up. After Hurricane Katrina, several states including Virginia strictly enforced price gouging laws, and many service stations simply ran out of gas altogether. Gas wasn't available at any price. Last year's FTC report pointedly advised Congress that "federal gasoline price gouging laws that have the effect of controlling prices likely will do consumers more harm than good." It added that, "Competitive market forces should be allowed to determine the price of gasoline drivers pay at the pump." Such a lesson in supply and demand seems beyond Congressional understanding.

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