Alaska Energy Prices: A Primer


North Pole Refinery, a/k/a Flint Hills

North Pole Refinery, a/k/a Flint Hills

Reader AKNRC wonders,

I’ve always wondered how these politicians can claim that drilling here in the U.S. will assuredly bring lower prices for gas & oil in the states. If this were true, why is it that Alaska has some of the highest gas prices in the country? Is there anything drilled for in AK that remains there for use by U.S. consumers or is it all shipped out to be sold on the international market? Thanks for any info you can provide. I’m not as familiar with the gas & oil industry as I’d like to be although I’m hoping in retirement to be able to become better informed with more time on my hands to read reputable sources.

Another way of asking this question is why jet fuel prices, back when Flint Hills Refinery was still in business, were higher at Fairbanks International than at Anchorage International, when Anchorage’s was shipped from North Pole by rail to Anchorage.

Your intuition would be that the cost is the same; only transport cost varies, and transport costs to Anchorage have to be higher than just to Fairbanks International.

Partly, it’s having a monopoly on product (or an oligopoly, a very small number of competitors). In Anchorage, there was competition with jet fuel shipped from the Tesoro Refinery in Nikiski. Competition holds prices down; the absence of competition tends to push prices higher.

Second, it has to do with the pricing structure in the refined crude oil market. This example is for illustration, not real world data, which is highly confidential:

Gallons Sold Price per Gallon
1 – 100,000 gallons $2.15
100,000 – 500,000 $2.00
500,000 – 1,000,000 $1.85

The refining cost declines with larger orders, so the refinery can lower its selling price for larger orders. Note the actual refining cost drops even faster than the delivered price. Refineries like larger orders. But the core principle is that the cost of goods sold declines with volume, and the lower cost gets passed along.

Third, there are bargaining issues. Delta Airlines, for example, deals with the Koch Brothers all across the country. That includes markets where the Koch Brothers have serious competition. So when Delta approaches Flint Hills, a Koch Brothers subsidiary, in North Pole it might get a better price as a part of a package deal than, say Ravn Air.

The second part of your question involves whether Alaska’s share in an international market can have any economic effect on the world price. In the case of an international commodity like crude oil, here Alaska’s share of world production is a little less than half of one percent, the answer is certainly that it cannot. Again, there are subtleties. If Alaska’s production were to vanish entirely, all at once, then in the regions where it was sold prices might rise. But if Alaska’s market supply went up or down by small increments, not triggering local shortages, then it’s not like to have a material effect on world oil prices. We’d like to be a Major Player. But Alaska’s not.

Since the pipeline started operating, about 95 million barrels have been sold overseas. That sounds like a lot, but the pipeline has shipped something like 3.5 billion barrels abroad, and prior to 1996 and since 2004, none at all. So about 2.7% has been sold overseas, almost entirely in Asia.

The prohibition on sales overseas isn’t likely to affect price. But Congress’s thinking is that it might affect supply, in the sense of product being available at all. If the Organization of Petroleum Exporting Countries – OPEC – cut off its members’ oil to the U.S., there might be some supply available.

Or maybe Rep. Don Young is right and Congress just wants to punish Alaska.

 

.

Advertisements

2 thoughts on “Alaska Energy Prices: A Primer

  1. You have already hit on what my guess is and that is volume. The Anchorage airport consumes a huge volume of Jet A-1 compared to Fairbanks.

    In addition, you mentioned “competition”. I’m not certain how much a competitive factor came into play in Alaska between refineries here if any. However, it makes sense to me that competition from refineries outside of Alaska must definitely influence price.

    For instance, we know that the world is “awash” in Natural Gas, so to speak, due hydraulic fracturing “shale gas” technology. Fortunately for consumers this new low cost energy is found near many oil refinery locations. Since it takes a lot of energy to refine petroleum into marketable products, that cost is integrated into the price. In Fairbanks the refineries used crude oil to provide that source of energy while refining crude oil. Since that oil was relatively expensive it drove the cost of Jet A production up. Now, in areas like Alberta, where natural gas is plentiful, cheap and easily accessible by their oil refineries, they use NG as the energy source to refine crude oil.

    Thus, Alberta enjoys a huge competitive advantage over refineries in Alaska since most of Alaska’s NG is still “stranded”. To the extent that Canadians can ship Jet A by tanker to Alaska and sell it cheaper than Alaska can refine and deliver it.

    • The use of crude to run a refinery certainly hurt Flint Hills. But Nikiski, WC believes, uses natural gas. So perhaps that is a factor.

      The crash in crude oil prices would have changed the economics at Flint Hills, but WC doesn’t expect the Kochtopus to re-open it. Might make it attractive to a new buyer. But crude prices are so volatile (sorry) that even that seems unlikely.

      /WC

Comments are closed.