Andreoli on Oil & Fuel: Cognitive dissonance, high pump prices, and the growing domestic oil supply

Upon retiring, Pope Benedict XVI took up temporary residence at the spectacular Castel Gandolfo, which is also home to the Vatican Observatory Research Group recently headed by astrophysicist Father George Coyne, Ph.D.

I had the pleasure of attending a guest lecture delivered by Father Coyne some years ago, and I was struck with an odd sensation as he presented progressive scientific views on evolution and the big bang theory while wearing the traditional cassock and collar. I would later learn that the term for what I was experiencing is cognitive dissonance.

Cognitive dissonance describes the frustration that one feels when attempting to simultaneously hold two conflicting ideas. During Father Coyne’s presentation, I grappled with how it is that a priest could be giving a lecture on evolution when the scriptures clearly provide conflicting explanations for how the earth was created and how humans came to be.

As major consumers of transportation fuels and mainstream media, many shippers and carriers have likely experienced cognitive dissonance when attempting to reconcile persistently high diesel prices and news reports of booming domestic oil production. When, if ever, will the domestic oil boom bring some relief to the transportation sector and logistics and supply chain managers? Or is this collective sense of cognitive dissonance the new normal?

While I may never find a satisfactory way to attenuate the cognitive dissonance imparted by Father Coyne’s presentation, the cognitive dissonance that arises from the coincidence of booming domestic oil production and sustained high fuel prices can be easily resolved. Unfortunately, this explanation does not bode well for shippers or carriers—or consumers for that matter.

The recipe for energy independence combines one part declining consumption with one part rising production. In broad terms, these forces are at play, but the devil is in the details.

Rare is the news story that distinguishes liquid fuels from the larger energy basket, which includes coal, natural gas, nuclear, hydropower, and solar. And to the extent that liquid fuels are discussed, attention focuses primarily on the shale oil boom from the Bakken play in North Dakota and the Eagle Ford play in Texas. Such increases are very rarely considered against the incessant decline in production from Prudhoe Bay, which is among the largest oil fields ever discovered, and the composition of total liquids is brushed aside.

While consumption of liquid fuels is down 13 percent from the August 2005 peak of 21.7 million barrels per day, diesel consumption in 2012 was 13 percent higher than it was in 2005. On the opposite side of the equation, total liquids production has increased by nearly 30 percent, but much of this increase is due to the swift uptick in the production of natural gas plant liquids (propane, butane, and the like) and a rapid increase in the production of corn-based ethanol. Unfortunately, neither of these fuels are direct substitutes for diesel, and diesel production over this timeframe has increased at a much slower rate.

With domestic diesel consumption growing by 13 percent, and domestic diesel production growing at 14.8 percent, it would seem that the diesel market should have loosened some. But over this period diesel prices have doubled from roughly two dollars per gallon in early 2005 to over four dollars per gallon today.

The problem, of course, is that refiners sell diesel fuel to customers in Europe, South America, Asia, and elsewhere. Back in 2005, the U.S. imported an average of nearly 8 million gallons of diesel fuel per day, but the U.S. flipped to being a net diesel exporter in September 2007 and net exports have risen steadily since then. In 2012, net diesel exports averaged 37 million gallons per day, and for the first time ever net exports exceeded one million barrels (42 million gallons) per day in June 2012.

As I said, the devil is in the details, and the details reveal that any sense of cognitive dissonance resulting from simultaneously contemplating persistently high pump prices and optimistic news reports of U.S. energy independence is misplaced. Energy independence won’t bring down fuel prices because the market for diesel is global, yet talk of energy independence and booming oil production is national.

It is unlikely that the stars will align in such a way that fuel prices decline to any significant degree, and I think our astrophysicist friend Father Coyne would agree. Looking forward, the best advice is to prepare you transportation budget with high fuel prices top of mind.