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.

Monday, January 18, 2010

Oil Efficiency Falls in Importance, Perhaps

Oil market participants are curious to know whether oil efficiency is becoming more important to consumers buying new vehicles. Consumers say no. In fact, they say its importance is diminishing.

Consumer Reports' 2010 Car Brand Perception Survey has just been released.  The US survey was conducted in December 2009.  Safety, quality, value and performance remain the primary factors of interest to consumers according to the 2010 survey.  Efficiency, called the 'environmentally friendly/green' factor in the survey, fell 8 percentage points from 40% in 2009 to 32% in 2010.  As Consumer Reports says:
"In a troubled economy, with gas prices relatively low, green in the wallet trumps environmental concerns."
In short, the Consumer Reports' Survey indicates that the greater than two year efficiency drive which occurred in the early 1980s is not being repeated at present. Instead, 2008-2009 oil demand destruction may be more like the 1973-1974 efficiency drive which quickly evaporated.

The oil market is now receiving conflicting data from US oil consumers.  The percentage of newly purchased vehicles being cars is increasing versus SUVs and light trucks, but according to the Consumer Reports' survey consumers are saying that efficiency is less important.  Perhaps it is the wording of the Consumer Reports survey which is creating the conflict with actual US vehicle purchase data?  Perhaps we should watch what consumers do rather than what they say?

(See Oil 101 for more on prior oil demand destruction periods.)

Thursday, January 14, 2010

WTI Benchmark Effectiveness Study

Over the past few years some have incorrectly blamed oil price volatility on "broken" oil price benchmarks.

Oil price volatility has been necessary to match inadequate supply to burgeoning demand since the early 2000s.

An interesting study by Craig Pirrong of the University of Houston is reviewed here by Greg Meyer of the FT.  The study findings, which I agree with, show that WTI crude futures contracts accurately reflect underlying physical market fundamentals.

Monday, January 11, 2010

A Car Story

Whither the future of oil demand?  A major component in forecasting future oil consumption involves analysis of the number of installed devices (cars, trucks, aircraft and ships) capable of burning oil.  Following the recession the pace of US auto sales recovery is outpacing many analysts' expectations (chart 1):

(click to enlarge)

US consumers are continuing their trend toward purchasing more efficient vehicles.  The percentage of cars sold is increasing instead of light trucks and SUVs (chart 2):

(click to enlarge)

US auto makers also seem to be gaining ground in relation to foreign auto makers (chart 3).  As I mentioned a few months ago, there are firm reports that US consumers perceive there to have been large quality gains from US auto makers.

(click to enlarge)

The US is not alone in having increased auto sales.  Chinese consumers have been purchasing more vehicles than US consumers on a monthly basis since September 2009 (chart 4). 

(click to enlarge)

The installed base of existing vehicles in the US means that the US still consumes more than twice the amount of oil as China (chart 5).  If the Chinese economy sustains an annual compound growth rate of 8% in vehicles sales then it will be 12 years from now in 2021 that China will consume roughly the same amount of oil as the US does today.  To put the US and Chinese numbers in perspective, global consumption of oil is currently around 85 million barrels per day.

(click to enlarge)

Monday, January 4, 2010

Cold Weather Heats Up the Oil Market

Heating oil demand is a key seasonal factor influencing oil prices.  Large markets for heating oil exist in Western Europe, the Northeast and Midwest US, and Northeast Asia (Korea and Japan particularly). 

The northern hemisphere Winter heating season runs from November through March with demand peaking in January.

The 2009/2010 heating oil season started out relatively mild.  The following three charts are the temperature deviations from historical norms for each of the significant heating regions for the three month period September 2009 through November 2009 (click on the charts to enlarge).

Since the beginning of December 2009 temperatures deviated from normal to become much colder in Europe and Northeast Asia (click to enlarge):

Temperatures in the US deviated quite strongly to colder than normal over the past week which lent support to oil prices and pushed the market above US$80 per barrel (click to enlarge):

The US National Weather Service (NWS) is also predicting the next 6 to 10 days (January 4 through January 10-14, 2010) to be colder than normal in the US Northeast and Midwest (click chart to enlarge):

(source of charts used in this post: US National Weather Service)

Oil 101 Price Reduction

The price of Oil 101 has been reduced from US$34.95 to US$29.95.
Follow @CommodityMD