Thursday, March 27, 2014

SPR: Oil Subsidy & Weapon

The International Energy Agency (IEA) was formed by large net oil consuming nations in response to oil supply shocks of the early 1970s.  The IEA has required member nations, including the US, to have 90 days oil import coverage stored in a Strategic Petroleum Reserve (SPR).

The original mission of the SPR was to shelter oil consuming economies against unexpected oil supply shocks.  However, this mission expanded to become a free insurance policy for the oil industry as well as, most recently, an economic weapon. Releases are also occurring much more frequently just prior to national elections in net oil consuming nations.

Most countries require their oil industry to fund the 90 days of SPR. The US is different. In the US, taxpayers, via the Department of Energy (DOE), pay to store SPR oil.  The taxpayer funded US SPR currently holds 696 million barrels of crude oil (the red line below).

Free Insurance for the Oil Industry
This taxpayer funded storage failed to increase storage per oil consumer. It had the opposite effect.  As the US government (funded by taxpayers) began storing more and more oil in order to provide a buffer against supply shocks, it provided the US oil industry encouragement to do exactly the opposite - store less.  Storing oil is expensive, and so industry is happy to allow taxpayers to subsidize storage.

Running inventories so low is risky for private industry.  However, if industry runs short, due to a hurricane or storm, it now simply taps taxpayer funded storage without any penalty - effectively free insurance.  The frequency of these loans have increased dramatically since 2000.

New Economic Weapon
In addition to being a taxpayer-funded free insurance policy for the oil industry, the SPR has now become an offensive, rather than defensive, economic weapon.  The most recent volley from this weapon was a test release of 5 million barrels of oil from the SPR announced a few weeks ago coinciding with a hugely oil dependent Russia invading Ukraine's Crimea.

Today, a number of economic commentators are calling for use of this new economic weapon to be expanded.

Wednesday, November 20, 2013

Haymaker: The Origin of Big Natural Gas

Natural gas, so called as it is naturally occurring rather than being man-made, has been piped in small volumes over short distances in the US for street lighting since the 1820s.  Manufactured gas, produced by processing coal in gas works, was carried out a few years earlier.  Both natural and manufactured gas were used on small scale street lighting.

It took a massive discovery on November 3, 1878 in Murrysville, near Pittsburgh, Pennsylvania to bring natural gas to widespread industrial and home use.  The well was drilled by the Haymaker brothers.

Obediah ("Obe") Haymaker was murdered for the discovery. His brother, Michael, lived to tell the tale.  The well is now forgotten, almost.

(click photo to enlarge - The plaque placed on a boulder at the well site in 1961 incorrectly refers to Michael Haymaker as Matthew.  The name Michael is confirmed from multiple published sources, including the 1880s New York Times.)

Obe and Michael had been looking for oil.  They had seen a neighbor using gas emerging naturally from a creek (usually a good indicator of oil) as a fuel to boil down maple syrup.  To the Haymakers' disappointment they stumbled upon natural gas alone, which is more difficult to transport than oil and thus to this day trades at a discount.

Natural gas emerged uncontrolled from the Haymaker well for three years.  As the capital-starved brothers were trying to finance, and later sell the well, it caught fire and burned for a further year.

Visitors from all over the US, including President Grover Cleveland, came to see the fire.  Finally, after four years, the well was tamed. Pipes were constructed to bring natural gas the 18 miles to steel producing city, Pittsburgh, Pennsylvania.  Most steel plants at that time used coal. This was the first industrial scale use of natural gas in the US. Air quality in Pittsburgh improved dramatically.

Apart from a boulder covered by a tree (see the photos above and below I took on a recent visit) in the backyard of a house (the precise location is oddly incorrect on both Google and Bing maps - the correct location is here), there is little marking the place: the site of riots; the murder of one of the wells discoverers; and the fuel that to this day powers a large portion of US and global electricity generation as well as cooking stoves, home heating, and a large part of the future of transportation.

(click photo to enlarge)

Below the fold is a detailed recounting of the discovery, published in a 1936 edition of Sun Oil Company's 'Our Oil'.  Sun Oil Company later became Sunoco Inc.  The article below was written by Michael Haymaker, 90 years old in 1936.

Thursday, August 29, 2013

Do Wars Cause Higher Oil Prices? Not Generally

Military intervention by the US in Syria is looking increasingly likely. Here is a quick cheat sheet.

Many are calling for a rally in oil prices from its current $107 per barrel to $150 or $200 on the initiation of action.  Others are calling for a price spike higher which will quickly reverse.

Syria is a relatively small oil producer, with trivial production globally.   It's  the potential disruption from spillover into larger regional oil producing nations, including Iraq and Iran, that concerns oil consumers.

Predicting the reaction of the oil market in such situations is not straightforward and it's always worth considering a range of scenarios. It is precisely this uncertainty that has caused an abundance of caution historically, and caused supply-side over-reaction, with lower prices after Western forces finally act.

Over the past 30 years, military interventions involving external, US or UN, forces against Arab nations or Iran have generally resulted in lower oil prices.  It is only regionally internal, Arab vs Arab or Arab vs Persian, warfares that resulted in higher prices (charts below, click to enlarge). 

Perhaps this is because by the time Western military operations begin the market has already priced in the event due to a more free press. Traders monitor Western political sentiment, military jet fuel purchase requisitions, and fleet movements, ahead of time.  Or maybe it is the actual, or threatened, impact of an IEA global release of strategic petroleum reserves, along with the willingness of US ally Saudi Arabia to increase production from its spare capacity during disruptions.


Tuesday, June 18, 2013

Coming Soon...

Great to be back. So much to discuss... Follow along on Twitter: @CommodityMD

Sunday, January 31, 2010

Oil 101 Alternative Store

Amazon in the US often runs out of inventory of Oil 101 (as it appears to have over the past 2 days).  As an alternative, one can order from Barnes & Noble US.

Thursday, January 28, 2010

Panama to Reduce US Oil Consumption

Today when a consumer on the US east coast buys a Chinese manufactured product it is highly likely it was shipped across the Pacific to Long Beach, California and then trucked using diesel fuel via road or rail across the US. 

Bloomberg has an interesting story on the effect the expansion of the Panama Canal could have on US railways.  The canal expansion may be among the largest fuel savers for US consumers over the next 15 years.

Monday, January 25, 2010

Regular Car, Premium Gasoline

An increasing number of regular looking vehicles in the US are requiring high octane premium gasoline.  These vehicles include the tiny Smart fortwo and a variation of the Volkswagen Jetta.

Is this premium fuel requirement a stealth move for some auto manufacturers to gain market share?  Has this increased sales of high octane gasoline relative to regular octane gasoline in the US?

Octane Ratings Explained
Octane ratings are the numbers printed on a gasoline pump often labeled regular, midgrade and premium.  In the US regular gasoline is greater than 85 and less than 88 octane, midgrade is equal to or greater than 88 and less than 90, and premium is equal to or greater than 90. In Europe and Asia the number on the pump for equivalent fuel is usually 5 points higher.  In other words 87 on a pump in the US is equivalent to 92 on a pump in the UK.

Octane rating has little to do with the energy content of the gasoline.  It has all to do with how much volume of the gasoline can be squeezed, or compressed, into an engine cylinder without the gasoline igniting before the spark plug fires.  Gases heat up when compressed and gasoline engines are tuned to compress the gasoline as much as possible without compressing it so much the fuel burns without a spark plug.  The goal is for the timed and synchronized spark plug to ignite the fuel when a piston reaches the top of the combustion chamber.  If ignition due to compression (rather than the spark plug) occurs then an engine can be damaged. 

Many new cars requiring high octane fuel can tolerate slightly lower octane because their computers adjust for the less compression ignition resistant fuel, but there is typically a lower power output and one should only do this if a vehicle manufacturer says it is ok for your engine.

As gasoline with higher octane ratings resists compression more than regular can be added to the combustion chamber on each stroke of the engine.  This higher compression tolerance allows more more gasoline to be burned and more power on each stroke.  This is why racing cars use high octane gasoline.

Why don't all cars use high octane gasoline? There is a substantial incremental cost for a refinery/gasoline blender to raise the octane of gasoline.  Higher octane requires expensive gasoline blendstocks and consumers are sensitive to increased gasoline prices. 

The additional fuel cost to a driver for high octane gasoline compared to regular is around US$100-US$200 each year (based on 10,000 miles per year in a 25MPG vehicle).

Should one fill up with higher octane than a vehicle manual suggests?  No.  It will likely be a waste of money without any improvement in performance.  If your vehicle manual recommends regular octane then just use regular. 

Use high octane gasoline if you have a vehicle with a high compression engine and your vehicle manual recommends it.  However, as mentioned above, some vehicle manufacturers say their engine computers can adjust to handle lower octane rated gasoline.

High Octane Gasoline No Longer just for Sports Cars
In the past high compression gasoline engines were primarily used in sports cars and luxury high performance vehicles.  Now more vehicle manufacturers are putting high compression engines into what would not generally be perceived as being a sports car.

One reason vehicle makers are doing this because it improves the statistics consumers look at when purchasing a vehicle.  A high compression engine running on premium will accelerate a vehicle from 0 to 60 MPH faster than a low compression engine.  Consumers rarely ask a car dealer which octane rating of gasoline a vehicle burns.  They do ask how quick the vehicle acceleration is from a standing stop and on a test drive will notice the peppiness and responsiveness of a high compression engine. 

Has Demand for Premium Gasoline Changed?
In summary, the number of vehicles requiring premium (high octane) gasoline (rather than midgrade or regular) has been increasing in the US because vehicle manufacturers have realized that high compression engines can increase vehicle sales by enhancing the statistics consumers look at and the test drive experience.  One could surmise, therefore, that the percentage share of premium gasoline being sold in the US has been steadily increasing as these new vehicle owners dutifully follow vehicle manufacturers' recommendations. 

The data shows that most of these high octane requiring vehicles are being filled with lower octane fuels.  The percentage of premium relative to total gasoline sales has been steadily falling (see chart below): 

(click chart to enlarge)

It is likely the nod from some vehicle manufacturers that onboard computers can adjust newer high compression engines to handle lower octane gasoline that gives comfort to some owners.  Another way of looking at the data is that these new, often unsuspecting, high compression engine owners are attempting to save at the pump having hastily splurged on a sprightly engine.

(Why is "octane" the name used for the compression resistance of gasoline?  Read Oil 101, Chpt. 9)

Sunday, January 24, 2010

USGS Finds New Saudi Arabia! Oh, wait...

The BBC over the weekend had the headline: Venezuela oil 'may double Saudi Arabia'.  The headline was based on the just released assessment of Venezuela’s hydrocarbon deposits by the US Geological Survey (USGS).  Venezuelan oil is described as: "the largest accumulation ever assessed by the USGS".  The USGS mean estimate of recoverable Venezuelan oil is 513 billion barrels.

The USGS number is over five times 'Oil and Gas Journal's' estimate of 99 billion barrels for Venezuelan proven oil reserves.

To put all these billion barrel numbers in perspective, global consumption is currently around 30 billion barrels per year.  Saudi Arabia's oddly static (see Oil 101, Chpt.14) stated proven reserves are around 260 billion barrels. One could almost drive two Saudi Arabias between the 513 billion and 99 billion barrel estimates for Venezuela.  Which number is closer to the truth?

It comes down to the types of reserves being defined.  The USGS number refers to hydrocarbons technically recoverable if one completely ignores costs.  The 'Oil and Gas Journal' number factors in technical feasibility just like the USGS but additionally the economic cost of extracting heavy Venezuelan oil using similar processes to Canadian oil sands production.

The USGS has no mention of the fact that the costs to extract much of the hydrocarbons from the Venezuelan accumulation could be over US$200, US$300 or even US$1000 per barrel and would thus be unlikely to ever be produced.

Only in the very last paragraph (pdf) of the USGS report is there any attempt to put some perspective on their headline grabbing number: "No attempt was made in this study to estimate either economically recoverable resources or reserves within the Orinoco Oil Belt AU. Most important, these results do not imply anything about rates of heavy oil production or about the likelihood of heavy oil recovery. Also, no time frame is implied other than the use of reasonably foreseeable recovery technology." 

This sort of key disclaimer would be more appropriate in an opening paragraph.
The USGS say that their report is "critical to our understanding of the global petroleum potential and informing policy and decision makers."  How many policy and decision makers will read past the headline and opening paragraphs to understand that economics played no part in the analysis?

(HT/Terry G. for sending related link)

Friday, January 22, 2010

Oil Creates Decennis Horribilis for Airlines

How long can an entire industry operate at a loss?  For the airline industry it is ten years and counting.  The primary reason for airline woes has been high oil prices.

Airlines globally will spend close to US$150 billion on jet fuel this year.  The global airline industry is expected to lose US$5.6 billion during 2010 if oil prices average US$75 per barrel (basis ICE Brent crude).  This follows an industry loss of US$11 billion in 2009 capping a decade of losses:
"Between 2000 and 2009, airlines lost US$49.1 billion, which is an average of US$5.0 billion per year,” said Giovanni Bisignani, IATA’s Director General. (source)
The jet fuel share of total costs spent running global airlines has roughly doubled since the early part of the decade:
2000  14%
2001  13%
2002  13%
2003  14%
2004  17%
2005  22%
2006  24%
2007  28%
2008  32%
2009  26%
2010  26%*
*IATA Forecast

US Taxpayers to Increase Backing for Compressed Natural Gas Vehicles

There now appears to be an increasing chance legislation will be enacted in the US by May 2010 increasing support for natural gas as an alternative to oil in transportation.  This could be the most significant energy policy change in the US since the controversial decision a few years ago to provide taxpayer subsidies for crop based fuels.

In the videos attached to the Bloomberg news story US oilman Boone Pickens is quite optimistic about the probability legislation will pass very soon.
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