Friday, June 20, 2008

Guest Post - Oink, Oink for Oil

By Swampcracker

[Long time reader and commenter Swampcracker sends in a guest post on oil that we're reproducing here unedited.]

I am willing to say what no politician or pundit is willing to say: Higher prices force consumers into energy conservation, which is the only immediate remedy on the horizon. Lets look at some facts:

American oil companies have at present 68 million acres under lease. Have the oil companies done any drilling lately? No! Since American oil companies are not producing oil from already leased land, why should we lease them more acreage?

American oil refineries are operating at 100% capacity. If there were a sudden increase in oil supplies, how will more crude be refined into more marketable energy? Have the oil companies built new refining capacity lately? No! Have they announced plans to increase capacity? No!

The USA consumes 40% of world energy supplies, yet has only 5% of the world's population and less than 3% of world energy reserves. By every definition, we are a nation of energy pigs.

In contrast, European consumers pay triple for gas at the pump (i.e., $12 per gallon or more), yet consume less than half of what the average American consumes. Why should we enable an already outrageous addiction?

In contrast, conservation confers immediate benefits. If the average American driver were to increase fuel efficiency by one mile per gallon, it would be equivalent to a major oil field discovery yielding 1 million barrels per day. Saving two miles per gallon … you get the picture. These benefits are immediate, not 5 to 10 years later compared with a drilling strategy.

What is the logic in driving a military vehicle (i.e., a Hummer that gets 10 mpg) to a shopping mall for the purpose of buying a loaf of bread?

Suburban sprawl: Can there be anything more stupid and wasteful than sitting in traffic, burning gas, and not going anywhere? How about moving commuters into mass transit? How about staggering work hours to reduce gridlock? How about moving office workers into home offices and eliminate commuting altogether?

Last month, sales of motor scooters rose 25%. Europeans have been driving scooters for decades. Riding a bicycle reduces energy obesity even more!!

But let's face it: No politician will tell the truth anymore because lazy, fat, and inconvenienced Americans will bellow in protest.

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Blogger rockync said...

All too true, Swampcracker. It is time to simplify, conserve and renew, not only because of rising gas prices but because we, as a nation, have become fat and lazy and things like riding a bike or walking around the block will save our lives. I have been in Denver and Atlanta over the last few years and was so impressed with their light rail systems. Charlotte,NC has one now - a step in the right direction, but we need to make a whole lot more steps and some of your ideas are timely and viable.

11:13:00 AM  
Blogger Swampcracker said...

Thanks, Rockync. There is an inherent contradiction infusing this debate right now. Awareness of global climate change is rising among the electorate, but when it comes to pocketbook issues, that hard-won awareness goes out the window all too quickly. Continuing our reliance on oil does nothing to address the carbon footprint that is at the root of global climate change. For more reasons than simply cost or economy, we must move to non-carbon based supplies of energy. One cannot advocate more drilling while addressing global climate change; they are mutually exclusive.

Another fact ignored by our politicians: There is less than a 40 year supply of oil left in the world at projected consumption rates. Without a technological breakthrough, the world will simply return to the pre-industrial economies of the early 1800s. Those who argue otherwise are engaging in denial.

2:38:00 PM  
Blogger Capt. Fogg said...

The standard answer to the refinery problem is that's it's the "Enviros" who are forbidding the building of new capacity, although I read that in 30 years there has only been one application to build a refinery and there have been none built on land that's already approved.

I don't know where the truth lies, but I can't see them doing anything that would lower the price at this time.

In a way, sustained high prices may be more effective in getting people to drive more sensible vehicles and to get them to stop balking at public transportation. It will be painful but that's mostly because we've had our heads in the sand for so long.

2:42:00 PM  
Blogger Libby Spencer said...

I've been flogging this over at DetNews for several days and the wingnuts are in high gear in the comment section over there. I love when they accuse me of lying, when all I'm doing is reporting the facts I read elsewhere.

It's such an obvious scam, it's hard to believe anybody buys it.

By the way, speaking of wingnuts, I don't know if you've noticed, but they're dissing you over at Protein Wisdom SC.

7:25:00 PM  
Blogger SF said...

Looks like y'all have stumbled onto the dark secret of the great oil conspiracy. Now the big question is what to do with this discovery.

Well if higher gas prices bring about "demand destruction", why not push for a big increase in the federal gas tax? Start with, say, two bucks a gallon, with an automatic increase of, say, 50 cents a year for the next 8 years. That should drive the price of gas here in the U.S. to about ten bucks a gallon, and I think we can all agree that would have a pretty amazing effect on consumption. Not to mention the substantial reduction in the pace of human-caused Global Warming!

Of course you'll have to jack up the tax on diesel too, or else those crafty, obese drivy-pigs will just shift to buying diesel-powered cars, which would ruin the whole idea.

Of course if you hike the price of diesel the cost of trucking stuff will go way up, but surely savvy consumers like y'all buy nearly everything from within 25 miles or so from where you live, so that shouldn't be a problem.

Another clever approach would be to slap a two-buck-per-gallon tax on jet fuel. That'd hit them corporate fat-cats hard. Of course it'll be a lot easier to get that tax *passed* if you include an exemption for air travel by politicians--including former pols.

Here's wishing you all the best in getting these taxes passed into law ASAP so we can start some serious energy conservation.

3:43:00 AM  
Anonymous Anonymous said...

Uh oh. I feel an asskickin' comin on...

6:44:00 PM  
Blogger Pillage Idiot said...

Swampcracker is absolutely wrong on almost every single "fact".

"Have the oil companies done any drilling lately?" Yes, the number of rigs drilling in the U.S. has increased more than 350% from the lows nine years ago.

"American oil refineries are operating at 100% capacity." No, the data for last week published by the EIA report the refinery operating rate is 89.3%.

"Since American oil companies are not producing oil from already leased lands ..." I don't know what to say to this one, there are millions of barrels of oil produced every day from federal and state leases.

Even the conservation numbers are clearly wrong. "If the average driver increased their fuel efficiency by 1 mpg we would save one million barrels/day. (paraphrased)" The average gasoline demand over the last four weeks was 9.3 million barrels/day. According to Swampcracker's math, if everyone went up 10 mpg on their cars we would not use any gasoline.

I run a very small oil exploration company. If anyone has serious questions about the oil business I will do my best to answer. I could even give a stab at "oil conspiracy" questions. I am a scientist, so I will try to be clear as to which answers are facts and which are informed speculation.

9:28:00 PM  
Blogger Swampcracker said...

Rod: The average gasoline demand over the last four weeks was 9.3 million barrels/day

For an oil executive, your knowledge of microeconomics is quite off: Current USA oil consumption is 20,687,000 barrels per day.

About my background: MEcon, London School of Economics, 1987; former documentary film maker from NYC. My first film, A Consumers' Guide to the Energy Crisis, a co-production of Prentice-Hall and the New York Daily News, won numerous national awards. In addition, I have made documentaries for the Rural Electrification Administration, a division of the USDA. I have made films about energy for over 25 years.

11:52:00 PM  
Blogger Capt. Fogg said...

I don't have to be Jacques Cousteau to know I'm in way over my head here, but if it is true that refineries aren't operating at capacity, why then would they be motivated to build more capacity and if they're not motivated, why are we hearing that it's the environmentalists who are keeping the refineries from building it?

I have no figures, but to say drilling is up 350% means little without knowing the actual numbers. Did it increase from 2 to 7?

Rod, I think the point is that there are leased lands not being exploited, not that no leased lands are being exploited.

8:41:00 AM  
Blogger Pillage Idiot said...

Ecophotos, we are both correct. Consumption of "Total Petroleum Products" is 20.4 million barrels/day from the most recent data. This is a decrease of 1.3% from the previous year, indicating high prices are having an effect on demand.

The largest component of total products is gasoline at 9.4 million barrels/day. Distillates (diesel and heating oil) are next at 4.1 million barrels/day. The remainder is jet fuel, propane, lubricating oils and minor items.

11:10:00 AM  
Blogger Pillage Idiot said...

Captain, good questions. The easiest is the rig count. We were down to around 500 in the U.S. The current rig count is 1846. Of course not all rigs are created equal. A gigantic offshore drilling platform in the Gulf of Mexico is discovering much more oil than a rig drilling wells to 600 feet in old fields in eastern Kansas.

The refinery question is more murky. To reveal my bias, I am strongly for more refineries in the U.S. I will give you my reasons and you can determine if my bias is coloring my answers.

The refinery operating rate cannot effectively be 100%. Refining oil is complex in that there is a very delicate balance of inputs and outputs of various intermediate products during the process. The process is always degrading your piping, catalysts, etc. One or two refineries will always be down for normal maintenance. Typically, another one or two are down for emergency maintenance due to leaks.

Are companies motivated to build more refineries? Yes and no. The refining companies are currently making pretty good profits. Normally, the companies would like to add capacity to make even more profits. However, the up-front capital costs are huge. The airline industry is a good analogy. When everyone adds capacity it is possible that no one makes a profit. In my opinion (informed speculation) the current refining companies probably do not want to add capacity. They would add to their total profit, but severely cut their profit margins.

However, in this economic situation, new start-up companies should be building refineries to capture these profits. Unfortunately, there are huge barriers to entry to building a refinery. Economic theory clearly shows that barriers to entry always decrease competition.

This leads to the oil industry talking point that environmentalists are blocking increases in capacity. In my opinion this is partially true and partially false. California is a good example. The state used to export refined products to other states. However, no refineries have been built since the environmental movement began. California, is now a net importer of products. It has gotten so bad that California does not have the capacity to take all of the oil from Alaska, so part of this oil is exported out of the U.S. This is a huge economic waste (and I am all for economic efficiency).

Your mileage may vary on the effect of environmentalists in the current situation in California. Oil refineries have in the past (1800s to 1970s) been huge polluters. Typically as process equipment leaked, the refinery company just built a dike and captured the leak. As the dike got full, it was pumped to a pit. Part of the sludge leaked into the groundwater, the lighter components evaporated into the air. When the pit got full, they covered it and dug a new one. Saltwater was an even more abundant "waste" product. It leaked from the evaporation pits in great quantity, polluting the groundwater. There were also massive emissions of pollutants into the atmosphere.

The industry obviously needed environmental regulations. These were passed by both the state and federal governments. The industry has massively changed its operating practices. A modern oil refinery still creates some pollution. (Almost every industrial process does, it is the price we pay for an industrial economy.) For this reason, no refinery can be built in California. Almost every large building project I have seen in California meets with environmental opposition, including lawsuits. An oil refinery would be an order of magnitude worse. The California oil exploration industry has been severely crippled by environmental requirements, even though the modern industry is near zero pollution. In my opinion it would be impossible to get approval of an oil refinery through the California legislature. The "environmental" constituents would not allow it.

However, this is mis-guided environmentalism in my opinion. Blocking a refinery in California actually hurts the environment. The refinery will not be built in the U.S., but it will be built in Qatar, Saudi Arabia, or China. The one in Qatar will be about to our 80's standards. The one in Saudi Arabia will be about to our 70's standards. The one in China could have standards almost equivalent to our atrocious past.

A California refinery would be a huge win in almost every aspect that I can see. We could require extremely high environmental standards. A start-up company could afford these controls because the artificial restriction on CA refineries is actually suppressing crude oil prices (locally). The construction of the refinery results in years of high-paying specialized construction jobs. The refinery operation will also be high-paying jobs. The state government would get a huge increase in the property tax base. The federal government would get tax revenues on their refining profits. The consumers would get marginally lower product prices.

12:29:00 PM  
Blogger Pillage Idiot said...

Captain, I have heard the leased lands not being exploited talking point from many venues. From my perspective, it is absolutely untrue. My perspective is somewhat limited. My company is tiny, and other oil companies hold their plans confidential as much as possible.

There are several possible reasons this myth may exist. First, nine years ago the oil exploration industry was in very bad shape. Lease bonuses (the upfront payment) were very low on the auctions for federal leases in the Gulf of Mexico. I believe many small companies actually won some bids purely for speculation. They did not have the means to spend $100 million dollars to explore their lease, but they hoped Exxon would have a huge discovery on an adjacent lease. The small company could then turn a deal to Exxon or another large company. There are certainly many acres that fall into this category. However, there is no conspiracy and no flaw in the process in my opinion. These leases have only a small prognosis for production. The federal government raked in a little money for the bonus, and the leases will return to the federal inventory shortly upon expiration.

Another type of lease that is not being exploited is when several companies develop a new "play" concept. Seismic imaging shows some interesting geologic features. The oil company geologists work up the probable environment. The companies typically bid up very high bonuses to lease all eight blocks covering the geologic anomalies. As one or two companies drill dry holes on their lease it tends to disprove the geologic concept. The other companies will probably then choose not to drill their lease blocks. After the lease term expires, these leases go back into the federal inventory. Someone may come back later with a new idea for a different geologic horizon and discover oil on these blocks.

There is a third situation that has occurred frequently in the North Sea off the UK and Norway. A company has spent $100 million to drill an oil discovery well and a confirmation well. The estimated recovery is $1 billion of oil. They can install a platform and drill the development wells for $800 million, leaving a nice profit of $100 million. Unfortunately, it will cost $500 million to build a pipeline to shore along with the onshore processing facilities. I think this situation leads to the most conspiracy theorizing. "The oil company is just sitting on a billion dollars worth of oil!"

However, this oil typically eventually makes it to market. Usually a second company makes another discovery of similar size in the area. They split the costs of the pipeline, and both projects then become profitable.

The change in oil prices is also a huge factor. Look at the numbers in my previous example. If oil prices double, the company is now sitting on $2 billion worth of oil. The project is now profitable to proceed to the next step. This is happening all over the world at the present time, and these oil companies are frantic to produce this oil. However, this requires very specialized equipment and personnel. There is simply not enough to go around at any price. The shipyards in Korea and Japan and Norway are working at full capacity, but some of these platforms take years to build.

In my opinion (this is my most speculative wild-ass guess) oil prices will fall again in the future to some degree. The oil exploration and oil refining industries are up against severe capacity constraints. The extremely high current profits will eventually lead to expansions.

I hope I have helped with some oil industry "facts". Now you guys can get back to the more interesting debate about the trade-offs between increasing taxes on hydrocarbons to reduce demand versus the regressive burden on poor people and the braking effect on the already teetering economy.

1:21:00 PM  
Blogger Capt. Fogg said...

No matter many facts I'm presented with - and you aren't the only guy in the business I know, I still feel that even if we were suddenly to have double the refining capacity and some big, new oil fields, the overall trend of oil prices would be upward.

There are new hogs at the world trough every day - lots of them - and their currency isn't shrinking or their economy stagnating. The idea of dealing with a finite resource by using it up faster doesn't make sense to me.

The only way the US could ensure an oil supply free of market forces is to nationalize the oil fields. Somehow I don't think that would be a good idea and I'll bet you don't either.

1:34:00 PM  
Blogger eeks said...

Capt. Fogg said...
No matter many facts I'm presented with -

And therein lies a sad problem.

Capt. Fogg said...
I still feel that even if we were suddenly to have double the refining capacity and some big, new oil fields, the overall trend of oil prices would be upward.

Possibly - if worldwide demand outstrips supply. However, without the new fields, prices would trend upward even faster. Basic econ - supply vs. demand is not just a capitalist construct, it's a law of human behaviour.

Capt. Fogg said...
The idea of dealing with a finite resource by using it up faster doesn't make sense to me.

Good observation, at first blush. But then I ask why not? It just hastens the day when the market price goes up, which in turn will cause the adoption of substitutes. Again, basic econ.

2:49:00 PM  
Blogger Capt. Fogg said...

Nothing like a smug generality, but then basic economics tends to be that - a whitewash of a political position rather than a close look at real situations. Certainly it's nothing to base certainties on as you do.

The adoption of "substitutes" does not mean a smooth transition to other fuels, nor does it mean a transition to an equal or even adequate source of convenient and cheap energy. It does not mean there will be no massive and painful readjustment, but most of all, it does not mean there will be no disaster for billions of people who cannot afford either new technology at whatever prices may present themselves or old energy sources at escalated prices. Or are you telling us you don't give a damn as long as you've got your gas?

Worldwide demand will outstrip supply because the supply is finite and there is little to make anyone believe that population will stop growing geometrically unless it's through a global catastrophe caused by running out of oil.

Yes, a larger supply will retard shortages, thanks for your smug condescension, but untapped reserves are still finite. New producing fields will be sold on the world market which will do nothing to make the US energy independent unless you're suggesting that we go to war and nationalize the multinational oil companies.

The only thing uncertain is how fast prices will grow, not whether they will, in the long term, go up.

The question of price also has to do with variables you assume but do not discuss, such as the size and location of worldwide reserves. If population increases and prosperity increases, the trend will be up. Even if they don't, the trend will be up, but more slowly. Claiming that if we use up irreplaceable reserves more rapidly, new technologies will arise more rapidly is a further unwarranted assumption of convenience, which is my was of saying bullshit more politely.

How would you know? Got a cold fusion reactor in your garage?

Odds are that an abrupt decline in supply will trigger war, famine and economic collapse in proportion to how soon it happens and how abruptly, which is an argument for my case - do something now - and against your laissez faire fantasy.

Irreplaceable is a key word here, as Oil is used for far more essential things than gas for your peripatetic lifestyle. Fertilizers, plastics and many other things will have to appear like magic and without them, the world is going to be a worse place than it is or would otherwise be if we took it a little slower and built up a transportation system that is more efficient.

Your whole argument for using it up faster really is based on self-important snarkiness, isn't it? But that's just basic politics, isn't it? Self interest disguised as economics.

4:27:00 PM  

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