Posts Tagged ‘oil’

BCFS

Just ignore anything thing that comes out of a politician’s mouth when discussing oil prices, whether that politician may be President Obama or Denny “I do believe I fell off my horse” Rehberg.  For that matter you can also ignore Faux News’ claim that financial speculation is the key culprit of high oil prices because the reality is that the main driver behind oil prices is a lack of sufficient supply.

The Oil Drum has a great analysis (which continues in the comments) up at their site that comes to this very conclusion.  It’s a long, and a very technical post, but well worth the read.

The basic problem the world is facing in the short-term is that the great oil exporters aren’t so great anymore.  You see, the major exporters have been massively developing their countries over the last 20 years trying to diversify their economies away from a dependence on oil exports.  This has strangely had the reverse effect of making their economies more reliant on oil.

In 2005 total world exports were 40.8 million barrels per day (mbpd) as compared with 35.7 mbpd in 2009, a  12.5% decline in only a matter of 4 years.  While data might not be available for 2010, the news only gets worse.  Both Russia and China have instituted export restrictions so as to support their domestic economies.  This will lead to a further reduction in total oil exports.  The news out of Russia, being the world’s second largest oil producer, does not bode well for the oil importing countries of the world.  Add in the fact that Saudi Arabian oil production peaked in 2005 and Russia peaked in 2007.  No country can replace these two producers and so the decline in world exports will continue and with it prices at the gas station here in America will continue to rise.

Two additional variables complicate the situation.  The first is political.  Already the Arab Spring is effecting oil exports coming out of the Middle East.  But on-top of the unrest directly leading to reductions in oil production regimes that are desperate to hold on to their power are already starting to spend oil revenue on social programs with the aim to buy the silence of their populace.  That leaves less money to invest in future oil production and will lead to an otherwise faster decline in production.

The second, is the economic principle of diminishing returns on investment.  This is an economic fact that was drilled into my head in economics class.  Usually, this principle is couched in the terms of labor vs. capital.  Each additional laborer produces a certain amount of profit, add too many workers and that rate of return decrease and will eventually go negative.  Same with capital.

Energy markets are subject to the same principle but in a slightly different manner.  The principle here is “energy returned on energy invested” (EROEI).  Back in the day when oil was first discovered, the EROEI was in the range of 30-50, meaning for every unit of energy expended in production, 30-50 units of energy were actually produced.  Now however, we are down to the point of extracting oil at an EROEI under 10, with tar sands right about 5.  So we are reaching the point of having to expend a lot more energy and money to get just a little bit of energy in return.

Now, You can take this principle and expand it a bit further.  Lets take for example infrastructure investment, in this case our national highway network.  Because this type of investment is public, the return on investment would be the total economic activity spurred by said investment, ranging from the construction jobs created directly from the investment to the development of real estate on former farmland and the sale of cars that fill up said highways.

Between 2004 and 2008 23,300 miles of additional roadway were built in America.  Now the first 23,300 miles that were built in the system way back under Truman contributed much more to the economic prosperity of our country than the last 23,300 miles.  Why is that?  It’s because of all that previous investment.  Not only is that last 23,300 miles a marginal amount at this point compared with all that previous investment,  but all those thousands of miles already built require a lot of investment each and every year just to maintain.  All the maintenance required to keep up that old investment takes away from the ability of a nation to invest in new infrastructure.

This same phenomenon is occurring in places like Saudi Arabia.  Once you’ve gotten to all the easy oil, you have to spend an increasing amount of money just to tread water.  From The Oil Drum:  Saudi Arabian oil officials met with Halliburton to discuss plans to boost their oil-directed rig count by roughly 30%.

According to a Saudi oil official interviewed by Reuters, the investment in new drilling rigs “is not to expand capacity. It’s to sustain current capacity on new fields and old fields that have been bottled up.” (1) This news on its own should be troubling as it infers that the Kingdom is facing significant declines on currently producing fields. Even more troubling is the recent statement by another senior Saudi oil official that the Kingdom “expects oil production to hold steady at an average of 8.7 million barrels per day to 2015.”

Increasing investment by 30% just to stay barely above water.

Drill-Baby-Drill!

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BCFS

So… My better half is contemplating purchasing a new vehicle, which means that I get to have some fun doing internet research and reading car magazines on possible options.  She decided that she wanted better gas mileage than her current Subaru provides (28 mpg), and I convinced her that she if she wanted a significant improvement that she should go with a diesel, specifically a Jetta TDI (used or new).  The only problem it seems is that you can’t find a diesel car within 500 miles of Missoula: of course you can find hundreds of diesel Chevy Silverado 3500s.  The dealers seem to think that they wouldn’t sell which means that the closest diesel cars are embargoed in Seattle, Denver, or Salt Lake City.

This isn’t the only barrier that crops up when you want to get your right foot on the gas pedal of a diesel.  Prices of diesels in the used car market have significantly risen in the last half decade as fuel economy suddenly became important to people.  Used Jetta TDIs routinely go for several thousand dollars above their suggested blue book value making a slightly used TDI almost as expensive as a brand new one.  A diesel Jetta is the “cheap” option as many of the other diesels available in America are European luxury models.

And that gets me to my question of the day… Where the fuck are the American diesels?  Half of all cars sold in Europe are diesel.  If you want to buy an American made diesel vehicle in this country you have a lot of option that look like this:

Other than that you have to go with a European manufacturer if you want a car and not a truck.  Audi has 4 diesel models available in the US; BMW 3; Mercedes 7; Volkswagen 7; GM 0, Ford 0; Chrysler 0.  And Audi, BMW, and Mercedes cars aren’t exactly cheap and so aren’t feasible for most Americans to purchase.

Petrol prices are once again averaging $4/gallon and are nearing the record high reached in 2008 and yet the mix of cars available in America has changed very little even in the face of rising prices spanning the last decade.  As of 2008, the average passenger vehicle in America got 25.6 mpg compared to 25.1 mpg in 2001.  That’s American innovation for you.

But this being America, we like big sweeping plans to solve issues, the simple solutions are just plain boring.  T. Boon Pickens has his idea for converting the American passenger vehicle fleet to natural gas and Obama wants us to believe that plug-in hybrids and electric vehicles (EVs) are the technological answers to our commuting nightmares.  Both of those options might be viable long-term solutions to our dependence on oil to drive our economy, but in the short-term neither really makes all that much sense.

The problem with both EVs and NGVs is that they both require whole new systems of distribution and manufacture to develop.  We are talking about investments in the trillions of dollars here to undertake the necessary research, develop new, scalable manufacturing techniques, convert factories, and build the distribution system that will allow Americans to plug-in or fill up their car with natural gas.

Diesel doesn’t require any of that.  The distribution system is already in place.  American car makers might have to spend $50,000 grand buying an advanced diesel car from Europe and reverse-engineering the engine but that’s about all the research they would have to undertake to catchup with European manufacturers.  And diesel cars could show an immediate impact on fuel efficiency, often providing two or three times the fuel efficiency than gas engines currently in use in America.

In the end, diesel isn’t the answer to our oil-dependence (and talk of our energy addiction would make this post too long) as we are going to run out of crude anyway.  What diesel can provide is a bridge between today and whatever system comes along in the future… whether that may be flying cars or living in termite mounds.




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