2005-09-12

Why is it so expensive to fill up your car?

Here in Australia, one of the growing social and economic problems is the increase in petrol (gasoline) prices. A number of politicians and organisations are vowing to investigate what they see as "price gouging" and collusion between oil companies.

This appears to be all the more important when you compare bowser prices to the current price of oil - which according to the real time Nymex indicator, is just under US$64 per barrel as I write this. The price of the petrol/gasoline you buy to fill up your car normally follows the price of crude oil. This time, however, it is different. The price of oil has dropped from its Katrina high of $70 to what it is now, but the price of petrol continues to rise.

The problem is not confined to Australia, as anyone who peruses international news sites will discover. Petrol prices all over the world have risen, seemingly breaking its causal link to the price of crude oil. This is not about price gouging or collusion, it is something else entirely.

There are three major reasons why petrol prices have risen, and will continue to rise.

Hurricane Katrina
The first is that the damage wrought by Hurricane Katrina on oil production in the Gulf of Mexico is still being repaired. This is a short-term problem that will balance out within the next month or so. Crude oil is both produced and refined along the Gulf coast, and the Hurricane has damaged oil rigs, pipelines, storage sites and refineries. We need to remember that crude oil needs to be refined into petrol before it is shipped to your local Petrol Station/Gas Station. We also need to remember that oil which has been refined into petrol can then be re-shipped to other countries.

According to the Wikipedia article on the economic effects of Hurricane Katrina, 10% of America's petrol is produced from crude oil extracted from the gulf, while 50% of America's petrol is processed from refineries located in that same area. Moreover, many of the oil tankers that ship oil to the US deliver their product to various oil terminals located there.

With many Gulf refineries knocked out, there is a shortage of petrol/gasoline. Whenever the supply of a product fails to meet demand, its price rises to reflect that shortage. Since America can import petrol refined from overseas, this shortage is now being felt the world over. The problem at the moment is not a lack of oil, but a lack of petrol/gasoline caused by the damage to the oil infrastructure in the Gulf of Mexico from Hurricane Katrina.

Light Sweet Crude
Not all oil is the same. Oil differs from reservoir to reservoir and from country to country. The most desireable oil is called "Light Sweet Crude". "Light" means that the oil has a low viscosity (thickness) and so is easier to transport and recover. "Sweet" means that the oil has low levels of impurities like hydrogen sulfide and carbon dioxide.

Light Sweet Crude is thus the ideal oil because it is easier to refine and turn into various petroleum products. Chances are that the petrol/gasoline you pump into your car has been refined from light sweet crude.

The August 2005 Monthly Oil Market report from OPEC, however, had bad news regarding the availability of light sweet crude. While total oil production had increased over the past twelve months, the production of light sweet crude has actually declined. This means that the oil that has been shipped to various refineries has been of a lower quality.

When oil refineries are presented with lower quality oil, they are either unable to process it, or take a longer time to do so. Either way, the time that it takes to turn lower quality oil into petrol/gasoline for your car has begun to increase. This means that the supply of petrol/gasoline will decrease over the medium term.

One way for this to change is for an increased amount of light, sweet crude to be produced overall. But this is unlikely to occur. Oil reservoirs do not contain an homogenous type of oil - in many cases the reservoir produces light, sweet crude initially, but as time goes by and the reservoir begins to drain, heavier and more impure oil is extracted. Another solution would be to build more refineries - but no additional refineries have been built in the US for many years. Besides, they take time to build.

The bulk of the world's oil fields - especially those located in the Middle East - contain oil that is increasingly impure. Unless an exceptionally large new reservoir is discovered, the days of light, sweet crude are over.

Peak Oil
Oil prices have risen dramatically over the past two years. The Wikipedia article about the subject shows that oil prices have risen from US$25 per barrel in September 2003 to nearly US$71 in late August 2005.

As a result of this massive price increase, an influential theory has again been touted as a reason for this - it is the theory known as Peak Oil.

Basically the theory is that geological research has proven that oil extraction follows a "bell curve". This means that when an oil reservoir is tapped and the oil extracted, the speed of extraction increases accordingly. However, after a while, the rate of extraction reaches a peak, and then declines.

In terms of historical proof, many Peak Oil advocates (or "Peakniks" as they are known) point to the example of the US oil industry. According to ASPO (Association for the Study of Peak Oil and Gas), America's production of crude oil peaked in 1971 with around 10 million barrels per day. The CIA world factbook shows that in 2004, America produced 7.8 million barrels per day - a substantial decrease in production since 1971. Why such a decrease in production? It is because the American oil fields have passed the peak of the bell curve - they are producing less because the oil is harder and harder to extract. If oil could be extracted as simply as turning on a tap, why isn't America simply extracting their oil faster?

In terms of economics, the problem of peak oil is simple. It's not that oil has run out - it's just that oil can't be extracted fast enough to meet demand. When supply cannot match demand, the price rises. The "knock-on" effect should be world recession.

Many economists are unable to cope with the theory of peak oil. They cannot understand that oil producers cannot simply "produce more oil" on demand. The economists that have understood and accept the theory are predicting dire consequences for the world economy.

The only way for the effects of peak oil to be negated is for a large and plentiful oil supply to be discovered. This is very unlikely. Unconventional oil sources, such as oil shale or tar sands, are now likely to be taken seriously - the amount of oil that can be recovered from these sources in North and South America combined are more than double the conventional oil reserves that exist in the Middle East. The problem is that the infrastucture to produce such oil is expensive and time consuming to build, and will take at least a decade before production levels can make any major impact on world oil supplies.

As a "peaknik" myself, I was initially sceptical of the theory of Peak Oil. But after doing the research I was convinced. Please look into it for yourself - examine the logic, examine the science and you too will be convinced.

From the Osostrian School Department

© 2005 Neil McKenzie Cameron, http://one-salient-oversight.blogspot.com/


Creative Commons License

This work is licensed under a Creative Commons Attribution 2.5 License.

10 comments:

CraigS said...

I've done a bit of reading on peak oil and I'm not convinced.

I mean, I agree that oil production is going to decline, but I dont accept all this apocalyptic rubbish that they are espousing. Maybe thats just the lunatic fringe of the movement.

Reduced supply will lead to increased prices. People will modify their lifestyles accordingly and a new price point equilibrium will be found.

In the mean time alternative energy sources will continue to be developed. Hybrid cars are already commercially available. Increased demand will increase supply, and competition will push prices down.

Humanity are almost infinitely ingenious...

RandomDan said...

You might like to know that Shell may have cracked the oil shale problem and have it produce economically. It might be a bit before it's in widespread comercial production, but I think they figured it out.

One Salient Oversight said...

Craig,

You're right in assuming that there is a "Lunatic fringe" to Peak Oil advocates. I've managed to avoid any apocalyptic doomsaying - mainly because of my understanding of market economics.

And yes you are right that a new price point equilibrium will be found - the problem is that cheap energy is one of the foundations of modern life. Agriculture needs oil to produce fertilizers and pesticides - it's not just for cars.

Many peakniks dismiss hybrid cars - mainly because of the EROEI.

http://en.wikipedia.org/wiki/EROEI

Daniel,

The technology to extract oil from Tar sands and Oil shale have been around for over a decade. The technology isn't the problem - the price is. It's only now that oil prices are so high that these alternative sources of oil are viable.

The biggest problem, however, is the massive infrastructure required to extract enough oil to make an impact. It's going to take at least a decade of solid investment and massive building to create an effective oil industry out of this. And there is environmental concerns too. If the Tar sands in Alberta are to be accessed, it may require a large proportion of the state to become an oil swamp - the environmentalists won't like that!

CraigS said...

Heya OSO,

So have you started your permaculture farm in central NSW yet? ;-)

One initial point, what Daniel said was that they had figured out how to do it economically - thats the key difference.

I understand the EROEI argument, but the counter-argument is provided by increasing efficiencies of energy conversion.

For a start, there are renewable sources of electrical energy. These become more economically viable as the price of oil rises.

Also, some hybrid cars dont need an external source of electricity at all - they generate electrical energy through braking. They still need oil of course - but much less.

I think the increase in oil price is generally a good thing, as it will speed the production of alternative energy sources.

Things will be a bit uncomfortable for a while, but they will pan out in the long run.

I predict a hybrid car will be available in Oz for under $25,000 within 2 years. Hold me to that... ;-)

One Salient Oversight said...

Craig,

I can't fault anything you've said here. I agree - rising oil prices will force the world to conserve and that will be a good thing.

Some "Peakniks" have actually started their own "lifeboats" and have started permaculture farms out in Western NSW. They honestly think its TEOTWAWKI.

I don't - but I do think that the world is headed for a rather deep recession as a result.

CraigS said...

You are very probably right there. I own a fast food shop (amongst other things), and we have certainly been affected by the cost of petrol. It really eats into people's disposable income...

Anonymous said...

Hi all,
I'm a "Centralist" ... halfway between a Peaknik and a Doomer. I'm Neil's mate, and introduced Neil to peak oil.

I spend about an hour or 2 or 3 a day trying to raise awareness of peak oil, and trying to understand the thing.

I think Neil is far, far too optimistic and dismissive of the risks. He's a great mate, and has spent many hours on the phone to me about this subject — thanks Neil.

But I am honestly convinced that market economics are BUILT on oil, and as such can hardly respond to it in the normal fashion as with other commodities. Oil feeds and transports us, it provides our plastics and chemicals and medicines... it really is the basis for the modern world. There is no alternative.


I'd like to quote a few important sources that discuss just HOW nasty this could get... credible people with careers on the line... such as politicians!

1/ Conservative Republican Senator, Roscoe Bartlett.
He had a previous career in science and would not be quoting one of the foremost peaknik Doomers everywhere he went if there was a simple answer like "Hybrid cars"!
This is what Roscoe has quoted in the US Senate.

“Dear readers,
Civilization as we know it is coming to an end soon. This is not the wacky proclamation of a doomsday cult, apocalypse bible prophecy sect, or conspiracy theory society. Rather, it is the scientific conclusion of the best paid, most widely-respected geologists, physicists, and investment bankers in the world. These are rational, professional, conservative individuals who are absolutely terrified by a phenomenon known as global "Peak Oil."
http://www.rff.org/rff/Events/Energy2050/Renewables.cfm

http://www.energybulletin.net/4733.html


2/ The Hirsch report.

Robert Hirsch headed up a leading oil depletion report for the USA DOE. This is one of the most significant scientific reports ever submitted to the DOE. I emailed Robert and asked him what he thought the bottom line was. This is his answer.

"No one knows with certainty when the world production of conventional oil will peak, but a number of experts think it will happen in the next 5-15 years. Our work illustrates that the oil peaking problem can be mitigated with available technologies, but the time required for implementation is measured on a 15-20 year time line, at best.

The character of the oil peaking problem is like none other; without timely mitigation, the impacts will be dire, worldwide, and long-lasting. Prudent risk management dictates serious attention and massive action soon, which is difficult for most people and many decision-makers, who tend to wait until a problem is obvious before taking action.

Use this as you see fit.

Bob"

For more discussion about the Hirsch report please see the Sydney Morning Herald report here:-
http://webdiary.smh.com.au/archives/margo_kingston/001367.html

Download the 96 page Hirsch report Word file (534 KB) on my home page — www.eclipsenow.org

3/ Andrew McNamara the Labor Member for Hervey bay, Queensland.

He speaks to David Room of the Postcarbon Institute about the seriousness of peak oil for the modern economy. In this internet interview, he basically gives away one of the details of his “Oil Vulnerability Taskforce” (due to the Queensland Labor government mid October 2005). He states that there is no alternative technology to keep our airlines flying. With all the commercial airlines bankrupted I’m afraid, THAT’S IT! International tourism, the world’s largest employer, takes a catastrophic hit and we are thrown into the Greater Depression… one with no energy surplus to pull us back out again.

http://media.globalpublicmedia.com/RM/2005/08/McNamara.20050824.mp3

About 45 minutes audio.

4/ Australia’s celebrity scientist "Dr Karl" says peak oil is here

http://sydneypeakoil.com/downloads/abc_peak_oil.mp3

Dr Karl is an incurable optimist regarding science and technology for the future… however, this 30 minute JJJ show is worth listening to.

Steve Cannane interviews James Howard Kunstler, author of "The Long Emergency: Surviving the End of the Oil Age, Climate Change, and Other Converging Catastrophes of the Twenty-first Century".

Also present were Sonia Shah, Dr Karl, and Andrew McNamara — a Queensland Labor party member concerned about peak oil.

5/ Deputy Prime Minister of Australia.

Deputy Prime Minister John Anderson believes high fuel prices reflect the inevitable decline in the world's oil and gas reserves.
He expressed deep concern about the long-term future of oil and says fuel prices will have to be high enough to encourage more exploration.

Mr Anderson says the world could reach peak production of oil and gas far sooner than predicted because of the rapid increase in energy demands in China.

"We are using stored energy left over from ages gone by at an alarming rate and it isn't re-making," he said.

"While people talk about new technologies and they say as soon as oil reaches a certain price everybody will switch over to hydrogen and what have you.

"The reality is that it may not be as simple as that and you have to wonder whether over the next decade we won't start to get towards peak production and that could be a very interesting time and a very challenging time."

http://www.abc.net.au/news/newsitems/200505/s1373262.html


6/ David Suzuki

"The impact of [peak oil] is going to create enormous suffering, no doubt about it."

So there you have it. Others are sufficiently freaked out by the possibility that the peak will hit soon, and hard, and wreck our economies and collapse our crop yields...
this is not replacing a faulty iPod nano!

This is about retrofitting our entire civilization and changing almost every single human endeavour, from how we grow our food, what we do with our sewage, what we do with waste collection, how we adjust to life without airlines, how we downscale the global interdependency of the modern marketplace and become more self sufficient at home.

The main one for me is food. Google "Eating Fossil Fuels" and you'll see what I mean. And even if we do grow it, how does it get to a local corner store?

There is just far too much simplistic faith in market forces. The fact that the Hirsch report has already stated that market forces are inadequate for meeting the peak oil crisis should be enough — but you cannot argue with "faith". Besides, Gever, et al., 1991 already graphed the difference in outcomes if peak oil was just left to market forces, or had a massive government intervention.

http://www.dieoff.org/page143.htm

hint: Potential civilization crash if governments shirk their responsibility and leave peak oil up to market forces... as they are currently doing.

Peak oil is such a massive challenge that we need an emergency war time economy right now, but we are addicted to business as usual. Our economics degrees and theories tell us everything will be fine.

Credible, scientific people are telling us otherwise... but everyone is in the consensus trance. This is not a mere recession as we switch to Hybrids. This is not a Depression. This will go down in history as the "Greater Depression" — maybe lasting 30 or 40 years!

Just remember, in any contest between economic theory such as "the invisible hand" and the laws of thermodynamics, thermodynamics will win.

Reality rules OK?

Dave Lankshear
www.eclipsenow.org

Dave Lankshear said...

Hi again all,
Just in case some of my links did not work above, most of the major people I quoted are referenced on my home page.

Sorry about that, I don't know why the internet references stretched off the edge of the page but the normal text did not?

Is there some blogger netiquette I'm not aware of with regards to hyperlinks?

Dave Lankshear said...

Lastly, I thought you would appreciate this one Neil....

By Kathryn Casa | Vermont Guardian

posted October 7, 2005

BRATTLEBORO — Good news! The world is fast approaching the end of its oil supplies. Their depletion will lead to a Malthusian catastrophe as oil-driven economies crash, petroleum-linked world food supplies shrink, transportation costs skyrocket, and industrialized urbanization reverses itself, sending people fleeing their SUV-dependent suburbs for a rural lifestyle.

It takes a real optimist to see opportunity in such a dire scenario. But, a handful of Windham County activists see the end of oil dependence as the beginning of a better way of life.

Now for the URL....???
http://www.vermontguardian.com/local/092005/PeakOilGoLocal.shtml

Pancho Villa said...

'The ministry revealed that, according to International Monetary Fund data, Japan's reserves stood at $834.0 billion as of the end of June, while the combined reserves held by China and Hong Kong came to $837.9 billion.'
+ 'SAN FRANCISCO -- China's government-controlled CNOOC Ltd. withdrew its $18.4 billion bid for Unocal Corp. on Tuesday, ending a politically charged takeover battle that highlighted the United States' growing apprehension about the economic rise of the world's most populous country.' = ?