Friday, November 17, 2006

Oil is oil, right? Wrong! All oil is NOT created equal.

There is considerable latitude for the average person to misunderstand the urgency in the peak oil message. Much of that centers on the obfuscation, misinformation, and disinformation by the different parties in the debate through disguising the statistics by lumping together apples and oranges (not to mention bananas, pears, pomegranates and kumquats) and not defining how many apples of each there are.

All oil, like all fruit, is not the same. There are, in fact, hundreds of different grades of oil ranging from the highest quality "light sweet" crudes to the poor quality heavy, high-sulfur crudes. And each grade of crude requires unique refining parameters and has its own individual price. Some cornucopean "energy analysts" lump into their definition of oil; tar sands, oil sands, oil shale, gas to liquid, coal to liquid and even bio-fuels.

The grades of crude you see reported in the news are known as 'marker' crudes. They are West Texas Intermediate (WTI) from the United States, Brent Blend from the UK North Sea and Dubai, or Fateh, crude from the United Arab Emirates. These are all intermediate to light-sweet crudes which are the most sought after grades. The problem is, however, that in recent years, the production levels of all marker crudes have fallen. Dubai, in fact, has fallen drastically. The proportion of heavier and sourer (higher sulfur) crudes changing hands in the oil spot and futures markets has grown relative to light sweet production. More than half the world's produced oil today is heavy and sour in quality and this proportion is expected to increase as new discoveries of light sweet crude continue to diminish and older wells get sucked dry of light sweet and are left with only the heavy sour crude on their production downslope.

The problem is that the world can't just switch from one to the other. "Heavy, sour" crude is more complex and costly to convert into useful products such as gasoline and heating oil. Tar sands, oil sands and oil shale are not oil at all but rather a bitumen precursor that is "mined" rather than pumped. And much of the world's refining capacity, particularly in Asia, simply can't process these poorer grades and precursors. "There's no shortage of crude oil today," says Thomas D. O'Malley, chairman of Premcor Inc., a refiner based in Old Greenwich, Conn. "There is a shortage of light sweet."

We do not yet have a crisis of oil supply. We have a crisis of quality. We have a growing crisis of refining capacity appropriate for the grade of crude increasingly available. Not all refineries are capable of handling heavy sour crude and very few can handle bitumen precursors. The shortage of refining capacity for current grades of crude is most acute in Asia, the very market where crude oil consumption is growing fastest. And throughout the world very little new refining capacity, relative to demand, is being built which will be able to handle the heavy sour crudes and bitumen that will soon effectively be all that is available. A clear bottleneck is emerging.

As the world is increasingly faced with having to make do with poorer grades of crude and product from tar sands and oil shale, the problem of satisfying world oil demand will no longer be the size of the remaining reserves. The extraction and processing problems, cost and time will become the bottleneck. Particularly when it comes to oil and tar sands and oil shale, you can't simply dig more wells in a field to increase production. As these are mining operations, the foot print for a single production site is measured in square miles, not square feet like with an oil well.

As you read various news items and reports, all I can suggest is you look very, very carefully at what is being defined as oil. What you think is Florida oranges may well be total global fruit production. Not very helpful if you want to produce orange juice.

Internet references

http://www.businessweek.com/magazine/content/04_46/b3908079.htmhttp://www.washtimes.com/business/20050313-114327-7447r.htm
http://www.econbrowser.com/archives/2005/08/sweet_and_sour.html
http://www.gasandoil.com/goc/news/ntn44964.htm
http://www.valero.com/Visit+Our+Refineries/Port+Arthur
http://www.financialsense.com/editorials/gue/2006/0407.html
http://www.platts.com/Oil/Resources/News%20Features/crudeanalysis/index.xml

2 comments:

ruski-canuk said...

With all due respect, I think you are way off the mark here. For example, oil reserves have increased from about 600 billion to 1.2 trillion barrels in the lasta 10 years when everyone thought they would decrease. They are getting more costly to mine - ultimatley it will be cost not physical exhaustion that will cause oil use to decline (or policy)

Richard Embleton said...

With all due respect, reserves are not the issue as regards peak oil. Production is the issue. Much of those reserve increases are paper increases, not new discovery. We are currently producing and consuming 4 barrels of oil for every new barrel discovered. Discovery peaked over three decades ago. When demand increases to the point that production can no longer keep pace then global economic growth will come to a standstill. It is interesting that OPEC countries still claim the same reserves that they artificially inflated over two decades ago despite having "produced" over 70 billion barrels from those reserves. It has taken over three decades to bring tar sands production to 3 million barrels a day and company after company is changing their tar sands plans because of increasing costs. It will be, IMHO, physical production constraints, not price, that will signal peak. Oil use will decline when production declines, period.