A Drop of Rain

The complete, total, and virtually complete, disconnect in the oil market and commentators continues to astound and amaze. Let’s keep in mind our econ 101. When demand is greater than supply, prices rise until the higher cost has killed enough demand to allow a deal to be made.

With this in mind, let’s look at today’s Bloomberg story:

OPEC’s daily shipments of crude oil declined by 4.3 percent in the four weeks ended May 4, according to Lloyd’s Marine Intelligence Unit.

Members of the Organization of Petroleum Exporting Countries, excluding Angola and Ecuador, exported 22.762 million barrels a day on tankers, according to data from the London- based tanker-tracking service. That compares with 23.786 million a day in the equivalent period to April 6.

“They seem to be trending downwards, but only by a marginal amount,” LMIU analyst Jacqueline Steele said in a telephone interview.

The decline in exports preceded plans by Saudi Arabia, OPEC’s largest producer, to raise output by 300,000 barrels a day in June, announced by Oil Minister Ali Al-Naimi on May 16.
OPEC Shipments Dropped 4.3% Last Month, May 23 2008

Couple this with declines in the other non-OPEC major producers, Russia and Mexico, and you end up with, surprise surprise, new record crude oil prices.

OPEC’s production is year over year down about 1 million barrels per day, that is. Now you know why oil futures hit $135 yesterday, and why more clear heads are pointing to supply problems in addition to speculation and the collapsing US dollar.
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See how it unravels? The industries that rely on the balance between what they can pay for fuel and what consumers can pay for the end product are going to feel the oil peak prices first, and will fail first. Trucking is probably one of these industries as well, by the way, only it is not as discretionary as air travel so it should survive for longer in a recognizable form.

The cost of protecting airline bonds from default soared and bond prices plunged as oil reached a record $135 a barrel, stoking concern that carriers will run out of cash as jet-fuel prices surge.
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A 94 percent increase in the price of jet fuel the past year may push some airlines into bankruptcy, Soleil Securities Corp. analyst James M. Higgins said yesterday.

“We now expect AMR [American Airlines] to have trouble avoiding bankruptcy by sometime in 2009,” Higgins wrote in a note to clients. “UAL [United Airlines] is too close to that possibility for our comfort,” and Continental is “close to our comfort threshold.”

Surging jet-fuel prices may help produce a record full-year loss for the largest U.S. airlines of $7.2 billion, JPMorgan Chase & Co. analyst Jamie Baker estimated this week. That estimate is 57 percent wider than Baker’s previous projection for the industry’s 2008 deficit.
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James May, president of the Air Transport Association, told reporters yesterday in Washington that major U.S. airlines face liquidation should capacity cuts and fare increases fail to cover rising fuel costs.
Bloomberg: Airline Default Risk Soars, Bonds Tumble on Record Oil Prices, May 22 2008

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Finally, the truth on peak oil is coming out, piece by piece. This one is on the front page of the Wall Street Journal. The words are starting to get used, which is the key. First you’ll read this in the Journal and the New York Times, then it trickles down to the rest of the newspapers, then finally it hits the television news. How they will decide to spin this basically all bad news is going to be interesting to watch, that’s for sure.

The world’s premier energy monitor is preparing a sharp downward revision of its oil-supply forecast, a shift that reflects deepening pessimism over whether oil companies can keep abreast of booming demand.

The Paris-based International Energy Agency is in the middle of its first attempt to comprehensively assess the condition of the world’s top 400 oil fields. Its findings won’t be released until November, but the bottom line is already clear: Future crude supplies could be far tighter than previously thought.

A pessimistic supply outlook from the IEA could further rattle an oil market that already has seen crude prices rocket over $130 a barrel, double what they were a year ago. U.S. benchmark crude broke a record for the fourth day in a row, rising 3.3% Wednesday to close at $133.17 a barrel on the New York Mercantile Exchange.

For several years, the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently. Now, the agency is worried that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day.
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But the direction of the IEA’s work echoes the gathering supply-side gloom articulated by some Big Oil executives in recent months. A growing number of people in the industry are endorsing a version of the “peak-oil” theory: that oil production will plateau in coming years, as suppliers fail to replace depleted fields with enough fresh ones to boost overall output. All of that has prompted numerous upward revisions to long-term oil-price forecasts on Wall Street.
Energy Watchdog Warns Of Oil-Production Crunch, Wall Street Journal, May 22, 2008

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You’ve probably been hearing various stories the last few weeks, like Saudi Arabia agreeing to “increase production by 300,000 barrels per day. What you’re not reading, however, is what type of crude oil this increase in production will be producing. These two stories should help you start to understand a bit more about how all this refining/crude production stuff actually works.

This first article helps explain. I just cut out the section headers to keep the quote short, but they make it fairly clear. Read the full article to get a better sense of how the global refining vs crude supply market really works, it’s interesting.

As medium sweet crude oil blends have strengthened in recent months, medium and heavier sour blends have fallen behind. In particular, Middle East heavy crudes have been unable to keep up with the growing appetite for low sulphur middle distillate products, with differentials between Saudi Super Light and Saudi Heavy crude blends widening to record levels.
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Medium sweet crudes are becoming a preferred blend
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Global refining bottlenecks are at the heart of the problem
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Middle distillate demand is pulling up medium sweet crudes
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Sulphur content in crude is again more important than gravity
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Due to refining constraints, heavier crudes are falling behind
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Despite strong demand, the global refining sector is disjointed
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Only diesel, jet are helping refining margins thus pushing up medium sweets
Thus, only diesel and jet fuel are really helping keep refining margins above water. The inability of refiners to turn more gasoline, naphtha or residual fuel oil into jet and diesel has now pushed the gasoil to fuel oil spread to record levels. Merrill Lynch said this spread is unlikely to contract much until a substantial amount of new cracking and coking capacity comes on line in 2009-2010. In turn, this situation will likely continue to provide support to medium sweet grades around the world in detriment of heavier, sourer grades.
Heavy crude can’t keep up, Business Intelligence - Middle East, 08-05-2008

These heavier, sour grades, are in fact the “excess capacity” Saudi Arabia keeps talking about. And you can rest assured that when more of this sour heavy crude hits the market, the market will not be able to absorb it, then Saudi Arabia will be able to say that it was not a supply problem, but some non-geological problem, like declining value of US dollar, speculating, etc.

You may also have heard that Iran is currently unable to sell all its crude oil. How can this be when the world is supposedly peaked, and demand is exceeding supply? Read on to learn more.
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Watch this one, Hirsh is the author of the Hirsh report, commissioned, then ignored, by the US federal government. Ignore the second guy they interview, who is just repeating the same tired non-solutions, drill more now… as if that’s a solution, use up everything now rather than saving some for the future.

And then check out the comments re Hirsh, peak oil, from the always entertaining T. Boone Pickens, legendary oil investor, and recent convert to alternative energy development.

Watch Part II of the Pickens interview here.

(click on images to go to actual viewing page, I couldn’t get the actual link to the flash files)

I highly recommend this interview, it’s quite long, about 25 minutes of the 55 minute recording, but it’s the first part of it. Bryce points out some very common fallacies about energy independence, bio-fuels, etc.

If you’re using Windows, you can stream it from this page, or just download the mp3 and listen to it like a podcast.

It’s a US Presidential election year and all the candidates are talking about energy independence. It’s a national security issue and very much part of the US climate change debate. But US author Robert Bryce says such talk, for any country in the world, is based on a dangerous delusion

Robert Bryce has little time for the ideology of either the Neocons or the Greens and as for the politics and economics of ethanol, he argues that something is very rotten in the state of Iowa.

His book: Gusher of lies: the dangerous delusions of “energy independence” (19 May 2008)
www.energybulletin.net

In the maze of crude oil production and refining, things are not done the way most people think they are. A good case in point is distillates. Distillates are a technical term for refined diesel and home heating oil.

petrodiesel, is produced from petroleum and is a hydrocarbon mixture, obtained in the fractional distillation of crude oil between 200 °C and 350 °C at atmospheric pressure.

The density of petroleum diesel is about 850 grams per litre whereas petrol (gasoline) has a density of about 720 g/L, about 15% less. When burnt, diesel typically releases about 39.8 megajoules (MJ) per litre, whereas gasoline releases 34.7 MJ/L, about 15% less. Diesel is generally simpler to refine from petroleum than gasoline. The price of diesel traditionally rises during colder months as demand for heating oil rises, which is refined in much the same way.
Diesel, wikidedia.org

But this isn’t the real problem with Distillates. The real problem is that they form only a certain percentage of what is refined from each barrel of crude oil. The ratio is I believe roughly 1/3, in other words, from 3 barrels of crude, you refine 2 of gasoline and 1 of distillates.

However, as you probably have heard, distillates like Diesel are rising in price, far more than gasoline currently. This is not an accident, and is going to have almost immediate affects on all trucking, and in some parts of the country, home heating. The latter is especially worrisome, because we are already seeing record prices for heating oil, but in the very near future, we may be getting actual supply shortages, ie, heating oil not available at all.

The reasons for this surge in distillate prices are easy to understand. Conventional oil production, from which distillates are made, has been flat for the last three years while demand from Asia and the Middle East has been increasing rapidly. The trend into higher-mileage diesel-powered cars in Europe and other places, which has been underway for many years, is having a major impact on the demand for diesel. In some European countries, diesels now account for over 70 percent of new car registrations.

Moreover, a worldwide mismatch is developing between the demand for distillates and for gasoline. A recent OPEC report claims that in the last seven years, the demand for distillates grew by 5.2 million b/d while the demand for gasoline increased by 2 million b/d. OPEC notes that during the same period, refiners added 1.2 million b/d of fluid catalytic cracking and coking capacity used to produce gasoline while adding only 700,000 b/d of hydrocracking capacity used to make more distillates.
Tom Whipple, ASPO, www.aspo-usa.com, 19 May 2008

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Incredible times we live in, I have to say. The Los Angeles Times just published an editorial that’s pretty much straight up peak everything:

Even for Americans — who are constitutionally convinced that there will always be a second act, and a third, and a do-over after that, and, if necessary, a little public repentance and forgiveness and a Brand New Start — even for us, the world looks a little terminal right now.

It’s not just the economy: We’ve gone through swoons before. It’s that gas at $4 a gallon means we’re running out, at least of the cheap stuff that built our sprawling society. It’s that when we try to turn corn into gas, it helps send the price of a loaf of bread shooting upward and helps ignite food riots on three continents. It’s that everything is so tied together. It’s that, all of a sudden, those grim Club of Rome types who, way back in the 1970s, went on and on about the “limits to growth” suddenly seem … how best to put it, right.

All of a sudden it isn’t morning in America, it’s dusk on planet Earth.

There’s a number — a new number — that makes this point most powerfully. It may now be the most important number on Earth: 350. As in parts per million of carbon dioxide in the atmosphere.

A few weeks ago, NASA’s chief climatologist, James Hansen, submitted a paper to Science magazine with several coauthors. The abstract attached to it argued — and I have never read stronger language in a scientific paper — that “if humanity wishes to preserve a planet similar to that on which civilization developed and to which life on Earth is adapted, paleoclimate evidence and ongoing climate change suggest that CO2 will need to be reduced from its current 385 ppm to at most 350 ppm.”
The Los Angeles Times, Opinion, May 11, 2008

Looks like reality is starting to penetrate even the densest of places, the mainstream corporate run media. Maybe there is hope. We’ll see.

Oil prices are of course directly related to the cost of their primary raw material, crude oil. And crude oil prices are hitting record high after record high (aproaching $126 bbl for June futures). The rise in crude oil prices has at least 3 separate causes:

1. The rapid devaluation of the US dollar. It has gone from about .85 to the Euro to up to 1.60 to the Euro, a collapse of about 45% in 10 years. So every barrel of oil now costs that much more to sell. That is the fault of the current debt hungry Republican administration, and republican admistrations going back to Ronald Reagan’s. So all you ‘personal responsibility loving republican’s out there, now you know where to start the blame game, right in your own house.
2. Global supplies peaking while demand is rising. All you free market loving people, this is what you wanted, a free commodity market, and this is what you get. When demand exceeds supply, prices rise.
3. And a bit added on the top, speculation in commodities, turning the right to buy commodities into a commodity itself, which is also in shorter supply, thus, again, the price rises to meet demand.

However, if you graph all of these, you’ll find that the primary driver is the supply/demand curve, not the ongoing collapse of the US dollar. Oil is currently at about 6-12 times 1998 prices, but the dollar lost less than half its value, so hopefully even the most math challenged among you can work out the difference, which is too much demand for too little supply.

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Last week James Howard Kunstler had a pretty insightful blog posting, highlighting the fast rising belief in the United States that Big Oil is responsible for the gasoline price rises:

A friend asked me how come the public apparently grasps the reality of climate change but can’t seem to wrap its collective brain around the unfolding oil crisis.

I’m not convinced that the public does grasp climate change. It’s perceived, perhaps, as a background story to daily life, which goes on regardless. Are you even sure Hollywood didn’t invent it — and maybe some boob at Time Magazine is selling it as though it were really happening?

Few have anything to gain by espousing denial of climate change. It’s hard for most people to tell if they have been affected by it. It doesn’t quite seem real. Those who actually make gestures in the face of it –- screwing in compact fluorescent lightbulbs, buying Prius cars — end up appearing ridiculous, like an old granny telling you to fetch your raincoat and rubbers because a force five hurricane is organizing iself offshore, beyond the horizon.

The public appears aggressively clueless about the peak oil story. They do not accept any threats to the motoring regime. The news media is surely not helping sort things out. I saw a remarkable display of ignorance on CNN last week when the new resident idiot-maniac Glenn Beck hosted Teamster Union boss James Hoffa and they agreed that the oil companies were to blame for high fuel prices. To put it as plainly as possible, Beck doesn’t know what the fuck he’s talking about, and it’s disgraceful that CNN gives free reign to this moron to misinform the public. It’s perhaps equally amazing that Hoffa doesn’t know we have entered a permanent global oil crisis based on demand having outrun supply. These two idiots think that if Exxon-Mobil built a new refinery down in Louisiana, everything would be fine, diesel fuel would go back down to 99 cents a gallon, and it would be Christmas every morning.
Kunstler, April 28, 2008

The misconception that private oil companies are behind the recent gasoline price spikes is important to look at more closely. I’ve been finding this mistaken view too when I talk to people who have not actually looked into the questions of gas prices as they relate to Peak Oil. Essentially, what we’re seeing is how complete the domination of the corporate media is when it comes to how people come to understand complex issues.
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