A Thousand Barrels a Second
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A Thousand Barrels a Content deciphers the myths and realities of today’s headlines about the energy industry. Peter’s job is to look into the future and provide advice based on dynamic variables to help those who are making multi-million dollar decisions. Understanding these dynamic variables including weather, environmental issues, social factors, policy and geopolitics allow for a holistic understanding of the energy industry today.


  • ANSWER
    Will drilling in the Arctic National Wildlife Refuge (ANWR) lower gasoline prices in the United States?


    • No, drilling in the ANWR won’t bring down gasoline prices any time soon. While there are potentially several billion barrels of oil in the rocks beneath the ANWR, getting that remote Arctic oil to local gas stations in the lower 48 states will take at least a decade.

      The main issues are logistical. Just formulating the decisions of where to drill can take several years, especially in such a remote and expensive location. Geologists and geophysicists have to first map the region before any drilling rigs are sent up. The first few wells will dictate where others should be drilled. By the time wells are producing oil, and pipelines are built, many years will have passed. At that time the United States and the rest of the world will be demanding even more oil.

      In addition, because ANWR is in the remote Arctic, and because extreme environmental sensitivity will be demanded, the oil will be expensive to find, develop, produce and bring to market. Such expensive oil from the "ends of the earth" does not yield cheap gasoline at the local pump.

      What drilling in the ANWR will do is help to ease growing U.S. dependency on foreign oil. By the time the first drop of ANWR oil is produced the United States will be 70 percent reliant on foreign oil (up from 60 percent today). ANWR oil, if ever developed, can help slow down this increasing dependency.


  • ANSWER
    Why are oil companies suddenly experiencing such record profits?


    • Crude oil and natural gas prices have doubled in the past couple of years, so it’s not surprising that profitability for companies that produce these commodities is up, along with the anger level of the public. In addition, petroleum products like gasoline and heating oil have been in greater demand, so those oil companies with refining operations – the processes that turn crude oil into consumer products like gasoline and heating oil – have been recording increasing profitability too.

      Hurricanes Rita and Katrina exacerbated an already tight situation by destroying the productive capacity of oil and natural gas wells in the Gulf of Mexico, along with pipelines and refining operations. Much as orange juice prices rise when frost hits Florida, so too gasoline prices rise when primary sources of supply are disrupted.

      Yet the nature of the accounting – the simple profit numbers recorded in the quarterly statements of the oil companies – does not reveal the real story here. Big oil companies today are highly profitable, because they are still producing a lot of "cheap oil" from giant oil fields discovered as far back as the 1950s and 60s. This cheap oil is like old inventory that is suddenly worth a lot more. So, here is where the orange juice analogy stops. A more appropriate metaphor is beachfront property in Hawaii. Forty years ago such property was plentiful and cheap. Today it’s harder to find, in much greater demand, and therefore worth multiples more. So too with oil.

      The real issue today is that finding "new oil" has become much more expensive. And the profitability on a new barrel of oil is not nearly as lucrative as that on previously-found, cheaper barrels.

      The biggest issue then is one of reinvestment, or recycling the profits derived from selling old cheap barrels into finding new, more expensive barrels. The public should be less concerned about the big profits, than why those big profits are not being aggressively reinvested back into the ground to satisfy new oil demand. Like cheap beachfront property, cheap oil has become very difficult to find.


  • ANSWER
    Will greater sales of hybrid automobiles make a big difference to US gasoline consumption?


    • First some context: There are 230 million registered light vehicles – cars, pickup trucks, minivans and SUVs – in the United States today. That fleet of vehicles consumes, on average, about 400 million gallons of gasoline every day. The average realized fuel economy of the U.S. fleet of vehicles is around 20.7 miles to the gallon. Finally, there are 17 million new light vehicles sold every year – only 44 percent of the sales are cars, the rest SUVs, pickup trucks and minivans.

      Hybrid vehicles, by virtue of their clever engineering, are at least 25 percent more fuel efficient than their equivalent non-hybrid models (bearing in mind the magnitude of the fuel economy gain is quite dependent on personal driving habits). There is no debate that such vehicles do a superior job of turning the energy in a gallon of gasoline into the work that we ultimately desire: getting people and cargo from A to B.

      But let’s put hybrid sales into the above context. Even if every one of the 17 million vehicles sold per year was a hybrid, it would still take over 13 years to convert all vehicles in the fleet. The reality is that 171,500 hybrid vehicles were sold in the first 10 months of 2005 in the US – only about 1.2 percent of all vehicles sold.

      The trend is promising as hybrid vehicle sales are double what they were last year, in 2004. But it’s going to take a lot more hybrid sales to cut down on the 400 million gallons of gasoline consumed every day. So far the trend is a mere drip in the barrel.


  • ANSWER
    Why hasn’t more been done to develop renewable energy sources, like wind and solar power?


    • Wind and solar power are promising alternatives to augment our other primary sources of electricity. Again context is important. About 50 percent of U.S. electrical power comes from coal-fired generation; 20 percent from nuclear; 17 percent from natural gas; 7 percent from hydroelectric dams; and less than 3 percent from renewable's like wind, solar, geothermal, biomass and wood.

      Solar and wind power have not garnered more market share in the generation of electrical power because of two related things: cost and scalability. Simply put, it is very difficult to beat the power generating cost of the backbone primary fuels: hydro, nuclear and coal (in that order). These primary power generating fuel sources supply large amounts of power at very low cost.

      To date, the economics of wind and solar power are such that they cannot be built without government incentives (i.e. taxpayer dollars) to subsidize the cost. Further, wind and solar power facilities are not easily scalable. For example, one nuclear power plant generates as much power as 500 average-sized, modern wind turbines. And even that’s not a fair comparison, because a nuclear power plant can generate electricity 92 percent of the year (some down time is required for maintenance). In contrast, at a good location, the wind blows only 35 percent of the time. And the sun isn’t up to power a solar panel 92 percent of the day either.

      In some European countries like Germany and Denmark the government has aggressively subsidized wind power such that they can be competitive with primary fuels. Such programs are taking hold in North America, but due to the scalability issue it will take quite a while to build enough capacity to take a noticeable portion of the nation’s market share. It will also take the will of the people to ultimately pay more for their electricity, and to put up with the eyesore of windmills on the pristine landscape, to adopt more renewable energy.


  • ANSWER
    If President Bush created legislation ordering energy companies to reinvest high profits back into refineries, would that lower energy prices?


    • Refineries are those mega-facilities of pipes, boilers and stacks that convert crude oil into the products that we consume every day like gasoline, diesel, jet fuel and heating oil.

      Yes, refinery capacity has been very tight lately and that in part has led to higher gasoline prices – especially after hurricanes Katrina and Rita temporarily knocked out the heartland of American refining capacity on the Gulf Coast.

      Theoretically, if oil companies were forced to re-invest more money into expanding refinery capacity at existing U.S. sites, and build new sites (bearing in mind that a new refinery in has not been built in the United States since the 1970s) it would help ease one bottleneck in the oil-to-final-products chain of supply. But this is not a full solution. Refineries – whether built in the U.S. or elsewhere in the world – don’t manufacture crude oil, they just process it into products. At the heart of the world’s biggest energy problem, not just the United States’ problem, is feeding all the global refineries with 85 million barrels per day of crude oil. By analogy, building more tractors and combines is not a solution for solving a famine – more crops are what are needed. So the reinvestment that is really necessary is in finding, developing and bringing to the refineries more crude oil. And that is becoming much more expensive to do; which is why oil and all the related products we consume in our day-to-day lives is becoming more expensive.


  • ANSWER
    Would public initiatives urging consumers and companies to turn off their lights and use mass transit thwart the coming oil break point?


    • These measures may not completely thwart the coming break point, but they would certainly soften it.

      Turning lights off would reduce electrical power consumption in the United States. But remember that only 3 percent of electricity consumed originates from oil. Coal, nuclear, hydro and natural gas are the backbone of power generation. So by turning your lights off you are saving those primary commodities without much impact on oil consumption.

      Using more mass transit, however, would have a far greater impact on reducing oil consumption and softening a break point. Over 50 percent of the nation’s oil consumption goes to moving cars, SUVs, pickup trucks and minivans. Each one of those vehicles travels an average 12,000 miles per year, consuming about 5,700 gallons of gasoline annually.

      The reality is that parking a car and switching to mass transit comprises a major lifestyle shift for most people. And it’s considerably harder over the past 15 years, since there has been a major demographic migration to the suburbs, where mass transit doesn’t even exist in many cases.

      So a proactive exodus to mass transit is not likely under the current circumstances. It will take much higher fuel prices and government policies for people to adopt such measures. That’s when you’ll know the break point has arrived.


  • ANSWER
    Where are the next hot spots for oil production?


    • Oil was first discovered in commercial quantities in Pennsylvania and southern Ontario in Canada, 145 years ago. Since then, there have been a handful of "gold rushes" or "hot spots" where prolific amounts of oil have been found to serve the growing needs of an energy hungry world.

      Texas and Oklahoma were hot spots in the early 1900s. Some of the really big episodes of discovery were: Iran, Iraq and southern Russia in the 1920s; Saudi Arabia and Kuwait in the 1930s; the shallow waters of the Gulf of Mexico in the 1940s; Prudhoe Bay and the North Sea in the 1970s; and the deep offshore waters of Brazil, west Africa and the Gulf of Mexico in the 1990s, to name a few.

      Today, the hot spots where the last of the world’s large oil fields are still to be found are mainly in deep offshore waters. One of the biggest projects today, $25 billion, is off Sakhalin Island in the frigid Arctic waters off eastern Russia. Offshore West Africa and Brazil are also promising areas. Though these hot spots have considerable potential, the task of finding more oil in such places is hugely expensive. As a society resolutely addicted to oil products, we are truly exploring the "ends of the earth" to find the last of the new barrels of conventional oil that we need to power our day-to-day lives.

      Finally, one of the biggest hot spots can be found in the northern wilderness of western Canada. This region holds the second largest reserves of oil after Saudi Arabia. The problem is that the Canadian oil sands do not represent "conventional" oil – in other words, oil that is recovered by simply drilling a well into the ground. The oil sands, as the name implies, are thick tarry bitumen that must be processed into a lighter grade of oil first, before it can be made into petroleum products like gasoline and jet fuel. It’s an intensive, costly process. And because there are over $90 billion dollars worth of projects announced in the Canadian oil sands, it should tell you that hot spots in conventional areas are becoming harder to find.


  • ANSWER
    Why are gasoline prices lower in the United States than in other parts of the industrialized world?


    • The reason is simple: taxation. In places like Europe and Japan the governments have long instituted a heavy layer of taxation on gasoline to influence people’s lifestyle choices. It’s worked. People in such nations drive smaller cars and make heavier use of mass transit. The medicine has been tough over the past 20 years, but today such nations are less dependent on oil and less affected by oil price movements.