Saturday, December 5, 2009

The Song Of The Coal Mine Canaries

The Association for the Study of Peak Oil has just released two new videos addressing the present reality of constrained global oil supply. One video is titled, “Acknowledging the Reality of Peak Oil.” Another is titled, “Peak Oil Reality - Production & Depletion Issues.” These videos feature interviews with oil industry experts Chris Skrebowski, Jeremy Leggett, Jeremy Gilbert, and Sadad al-Husseini. Mr. Skrebowski's credentials are impressive, as he is a fellow of the British Energy Institute and an advisor to the British All Party Parliamentary Group on Peak Oil and Gas. Mr. al-Husseini is the recently retired executive vice president for exploration and production for Saudi Aramco, Saudi Arabia's national oil company. Mr. Gilbert is the former chief engineer of British Petroleum. Jeremy Leggett's career began with a background as a geologist.

These people know what they are talking about. In these videos, they don't speak in wildly emotional, intentionally alarmist tones. Yet the things they say should alarm every rational hearer of their words. Their message is basically that world oil supply will likely not grow any further, and is due very shortly to start declining. This decline will be due in part to geology (the exhaustion of existing productive fields), and partly due to the inability of the global financial system to provide capital needed to develop new, extremely challenging reserves (such as ultra-deep water and polar fields, shale and tar sands). Chris Skrebowski estimates that the yearly decline in production from existing fields amounts to 4 million barrels per day. Jeremy Gilbert states that, “...Peak Oil is happening as we speak, or...has happened...”

Meanwhile, the problem of continued American access to refined petroleum products is growing. Over the last few years, an increasing number of American refineries have been shut down due to inadequate profit margins for their owners. What happened initially is that there was a spike in the price of refined petroleum products that began in 2005 due to constrained oil supply. This spike was initially tolerated by American consumers. But as gasoline prices stayed consistently above $3.00 per gallon, the ability of the American consumer to bear this cost was eroded. The spikes and general steady rise in refined petroleum prices from 2005 to 2008 led to the general economic collapse we are seeing today.

That collapse has made it very hard for refiners to charge prices for their products that would lead to acceptable profit margins for them, as a large number of American consumers are no longer willing or even able to pay such prices. This is why industries that depended on cheap motor fuel, from airlines to automakers, and even to drive-in coffee shops and restaurants, all took a substantial hit from 2007 to the end of 2008, and it is why exurban housing developments built far from places of work in 2006 and onward began to wither.

But it is also why refiners based in the United States began losing some serious profits from the latter half of 2007 onward, due to their inability or unwillingness to charge enough for their products to maintain the sort of profit margins they had enjoyed in the years just prior to 2007. To illustrate my point, let's take a price of $3.25 a gallon, typical of the price of unleaded regular gas in the Los Angeles area around say, April 2007. In April of 2007, crude oil cost around $65 a barrel. Now $3.25 a gallon represented the price needed to return a certain percentage of profit to the refiner of the gasoline, after expenses such as plant operations, worker salaries, and the cost of the crude itself were paid. (Independent refiners are required to buy their crude before they can refine it.) If any of these operating costs rose, this would require the refiner to raise his price in order to maintain his profit margins.

Now in July 2008, the cost of crude oil was $147 a barrel. If refiners had felt the liberty to raise their prices to cover the full impact of this increase in cost of their raw material, the price of regular unleaded gasoline should have been around $7 a gallon. What happened instead is that gas prices rose to less than $4.50 a gallon in most of the United States. This meant that refiners were subsidizing American mobility by sacrificing their profit margins.

This sort of thing could not go on forever. The predictable result has been the shrinkage of American refining capacity, as smaller independent refiners have been driven out of business and larger refiners have begun to consolidate, selling off or closing plants in order to reduce excess capacity and cut operating costs. It has also led to an increase in American imports, not only of oil, but of refined products such as gasoline, diesel fuel and aviation fuel.

And it has led to a tightening of refined product supply and an increased likelihood of shortages in the near future. Gail Tverberg, an actuary and oil industry analyst, recently posted an online article titled, “As Refineries Close, New Stresses are Added to the System.” In her article, she describes how refinery shutdowns in the Northeast are causing one of the major pipelines on the eastern seaboard to be used at maximum capacity in order to maintain adequate flows of gasoline from Gulf Coast refineries. She notes that while there seems to be adequate gasoline supply at present, the system does appear to be nearly at its limit, and thus extremely vulnerable to disruption.

So it appears that the US (or at least parts of it) could be in a major bind at some time in the near future, and that this is due not only to our reliance on imports from a falling global oil supply, but to the outsourcing and shutdown of an increasing portion of our own refining capacity. What has been the U.S. response to this? “Cash for clunkers” and the bailout of GM and Chrysler, who have rewarded us for our involuntary generosity, not by building rail rolling stock or reviving our passenger rail system, but by continuing to build gargantuan monster trucks ans SUV's, and muscle cars like the new Chevy Camaro – a car that will easily do 0 to 60 in a few days once the oil runs out and you have to get a crew of young, strong bucks to push it up to the top of a hill to get it rolling. Sometimes I think we'd be better off if we had chimpanzees running the Federal government.

Meanwhile, if you live on the East Coast and you are reading this, I'd like to ask a favor. It seems that disruptions in petroleum supply are not widely reported in the mainstream media. This became apparent during Hurricanes Gustave and Ike, and I expect that it will be the same story if there are future petroleum supply disruptions. Since you all live in areas whose delivery systems may be nearly overstressed right now, you may find yourselves facing gasoline shortages again. If that happens, please let the rest of us know so that we can have an informed assessment of our national petroleum supply situation. Feel free to leave a comment on my blog, if you'd like. If on the West Coast or elsewhere I notice similar shortages unfolding, I will be sure to publicize them on this blog.

For Further Reading

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