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Wednesday, July 01, 2009

On Oil

I realize that the average person would prefer not to wade through the BP Statistical Review of World Energy. That is a pretty big pdf full of very nice tables but it is still only 48 pages.

However, if you are going to invest in energy you should read this thing each year, and spend some time with the related spreadsheet which can be downloaded from this page.

And there is one fact about oil that everyone should evaluate (see the tables on page 11/13). US oil consumption in 2008 dropped 6.4%. Total consumption rolled back to about 100,000 barrels per day LESS THAN 1999 consumption. Oil consumption in the US is still dropping in 2009. This is from this morning's report:
Over the last four weeks, crude oil imports have averaged nearly 9.2 million barrels per day, 790 thousand barrels per day below the same four-week period last year.
The YoY difference is holding. On a YTD basis, total domestic product supplied is down 6.1% compared to 2008. And there is PLENTY.

And since I know Oil Drum propagandized true believers won't bother to read this report before losing their asses, here is a short table by region of consumption:
NA (US, Canada & Mexico): Change for 2008: -5.4%; Share of World Consumption: 27.4%
SA (South & Central America): Change for 2008: +3.4%; Share of World Consumption: 6.9%
Eurasia (Old USSR/Europe): Change for 2008: +0.6%; Share of World Consumption: 24.3%
Middle East (includes Iran): Change for 2008: +5.5%; Share of World Consumption: 7.8%
Africa (excluding ME ): Change for 2008: +3.8%; Share of World Consumption: 3.4%
Asia Pacific (Australia): Change for 2008: +0.2%; Share of World Consumption: 30.1%
Total world usage dropped 0.6% last year (and production increased 0.4%). China ended up using 3.3% more than in 2007, which upped its share to 9.6%. India ended up using 4.8% more, which upped its share to 3.4%.

Japan, which used 5.6% of the world consumption, dropped its consumption by 3.5%. The European Union increased its usage by 0.1%, but the emerging countries upped their usage by 3.1%.

It is a fallacy to believe that high oil prices won't suppress consumption. Countries which produce oil are using more, and countries which heavily subsidize oil for end users used more. But the subsidies are long term budget problems that will take care of themselves. How many more oil bonds can India print? China just increased its oil prices because it doesn't want to run its oil companies at a loss.

The theory that Chinese (with an average 2008 URBAN gross wage, as reported by Xinhua of less than 5K USD a year) were going to somehow pay $200 USD for a barrel of oil was always deranged. Clearly the oil analysts got into the structured income analysts' ganja supply. We recognize the fevered optimism and inability to assess risk. Rural wages in China were failing to keep pace with urban wages anyway.

In India, it is closer. The Indian power infrastructure is so poor that living in one of those apartment buildings in most cities pretty much requires a generator. But most of those people won't be running them when oil gets high - and Indian consumer usage was fueled in part by subsidies. I saw an article about Indians sleeping in their cars to get the AC overnight. Sections of India are having a heat wave because the monsoon is not moving in on schedule, which, btw, could become a serious situation for crops and India's economy.

Eventually, India will ramp up its electricity production and those generators will drop out. The per capita annual Indian wage rose to 37,490 rupees in 2008. In USD that is (let's be kind and just divide by 40) under 1K. Needless to say, there are very meaningful price constraints on usage. There are many people earning upwards of $100,000 USD, but there are an awful lot more living on extremely small incomes. India subsidizes basic energy such as kerosene for the really poor, and always will. But India's ability to subsidize those generators is failing.

India and China contain about 1/3rd of the world population. Their consumers can't on average hack these prices. Because China is so dependent upon exports, raising their incomes so they can consume at higher prices implies that their exports to the EU and the US would have to drop no more than 5%. HOWEVER, at oil prices of $100 a barrel, guess what? Consumption of oil and consumer products fall in the western world.

The EU can't hack it, the emerging countries can't hack it, Japan can't hack it, the US can't hack it, the world economy can't hack it. Not at $100 a barrel and not at $70 a barrel. Maybe we could stabilize at $55 or $60, but the production switch appears to be lower - between $45-$50. That implies that higher prices will push up production more quickly than consumption can increase at those prices.

Also, gold is a very interesting thing. It can go up for 20 years and fall for 20 years. But it is a lot easier to store gold and carry it around than to deal with oil. There is probably a glut of oil out there right now, and if there isn't there will be in just a month or two. US heating oil winter contracts wouldn't be offered at $2.29 unless the US refiners were pushing the stuff at low prices, which means they can't sell the glut for higher prices on the world market. You can store oil in a hole in the ground for a few months, but if you let it sit around exposed to the air for too long, algae grows in it. It's microbe munchie material.

So far US petroleum production is listed as being up 2.9% this year and gross imports are listed as being down 3.9%. Net imports have dropped 5.8%. This would imply that if all other countries maintained their usage at year ago levels, total world oil consumption would drop about 1.3% in 2009. (The domestic crude production stats include lease condensate, which is this sort of heavier compound of hydrocarbons that is a liquid instead of a gas and is a byproduct of natural gas production. It can be used in refining.)

Now personally, I doubt the rest of the world is maintaining their oil consumption. If you believe so, fine. But don't for a moment think that a two year swivel of over 2% favoring the supply side isn't going to have a lot to do with oil prices.

Along with its cousin, heating oil, diesel is now cheaper than gasoline.

I bought my first American car in twenty five years, a 2005 Jeep Liberty, to get a diesel engine. Mileage is about 50% better than the Pathfinder it replaced.

Things like that can put us on the diminishing consumption side of Hubbert's peak without costs being disruptive. I still believe that the Oil Age will last about three hundred years, it just doesn't have to end badly.
Aren't there some restrictions on imports of those high-mileage diesel commuter vehicles you can get in Europe?

I think it has something to do with air quality standards, but the very low fuel consumption would seem to make that a bogus concern.

Yes, the reason you can't buy the small Euro diesels is emissions standards. They are higher in the U.S. than in Europe, and yes, standard diesels have more NOx and SOx emissions per mile, even though they have better mileage.

Some of the newer engine designs meet U.S. standards, but they aren't as efficient and are quite expensive things to put in a small car.
Regarding fboness' Jeep Liberty, I should point out that diesel trucks are legal because the emissions standards for trucks are more lenient.

And new "green" diesel engines are showing up in BMWs and Audis first, precisely because of the expense of the new engine designs. They ought to get cheaper, but for now they're expensive.
My 2005 Liberty pre dates the recent extraordinary standards for Diesels.

It looks like the EPA set out to reduce Diesel emmissions to zero either by reducing emmissions to zero or by reducing the number of Diesels to zero.

Manufacturers have made truly heroic efforts to meet the EPA standards.
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