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Friday, May 30, 2008

Following The Money

Lets do the math. There are 42 US gallons of crude oil in each barrel. The cracking or distillation process that turns crude into usable produce is pretty straight forward. The least valuable of the distillates, save perhaps the tar, asphalt and sand is the gasoline. Different crudes yield different proportions of product, with Brent North Sea being the Chateau La-Fete of black gold. Crude can be up to 10% natural gas by volume. Some crudes virtually bubble like Coke when fresh out of the well. If we take $120.00 as a given price of a barrel, that breaks down to $2.86 a gallon for the raw material. The natural gas and tars have a value, but they are hard to realize. Many freighters run on "bunker oil", the bottom of the usable fuel distillates. The stuff that won't run a truck, car or airplane is at best about 80% of the original raw material. Less for oil sands. That 80% still uses about 5% in the cracking process. That leaves about 33 gallons for the pump, or brings the cost per gallon for retail ready fuel up to $3.63, or 40¢ for the retailer, refiner and truckers. Building new refineries isn't going to change this figure. Obviously the big run up in price is in the hands of the crude producers and speculators, generally the same people. In North America and Britain we have the only private oil production in the world. This is reflected in the obscene profits of the domestic oil companies. Russia, Venezuela, Nigeria, Saudi Arabia, Iran and Indonesia are all state owned producers, and represent over 90% of world petroleum production.

The oil users have control over only one thing. Demand. The suppliers have developed a taste for the huge windfall, and would be loathe to lose the cash cow. Iran and Venezuela are the most fragile in their dependency on the new found wealth because of their political systems. Iran is not as corrupt as Nigeria, but it's not for want of trying. Saudi Arabia is, for want of a better word, a bribeocracy. The Royals collect the money and then bribe the populace not to kill them with a ritualized laying of bribes on the community leaders, who in turn trickle it down to their underlings. If your tribal leader is on the outs wit the Royals, you get screwed.

The cheapest crude production in the world is from Saudi Arabia. It's a "sweet", light crude loved by refiners. It costs about three dollars a barrel to deliver the oil to tankers, which leaves them over $110/Bbl to play with. They still have a lot of flexibility in their production numbers, and a lot of competition is coming on line. So is demand.

I have said before that there is an upside to expensive petroleum. Reduced demand for stupidly huge cars. Urban sprawl suddenly has a real cost to the sprawlers. Demand for non-petroleum using transport has found new traction. Shopping local becomes a real advantage and fewer Chilean watermelons will be on the shelves in January.

Anyone who gets pissed off at the kid behind the counter at the local Gas-N-Go because it costs a hundred bucks to fill up his F350 is an ignorant ass. As an ignorant ass, I know.

Also, as a footnote: "Peak Oil" is as bogus a concept as there is. At $500/bbl there is all the oil in the world to them that wants to buy it. "Peak cheap oil" is very real.

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