Two Hundred Dollar Oil - $200/Barrel Oil

By Charles Moffat - June 2008.

According to oil industry insiders it is only a matter of years before gasoline prices reach $15 US per gallon. People are complaining right now about $4/gallon gas, but that is barely the beginning. Some analysts are expecting the price of a barrel of oil to skyrocket to $400 per barrel by 2012.

Why? Contributing factors, including the possibility of nuclear war with Iran in the Middle East. Just the threat of nuclear war will be enough to shoot prices straight up.

There are also conspiracy theorists who believe the oil industry is deliberately inflating prices worldwide in order to gouge consumers. A combination of market tension, greed and economic dependence practically guarantees that prices will continue to skyrocket.

Then there is also the Green trend. Motorists are buying more and more hybrid cars (and those who aren't are learning how to hypermile). The theory here is that oil executives have noticed the trend towards hybrid cars (which use half as much gasoline) and are deliberately trying to double gasoline prices. The result is a cash cow for both the automotive industry and the oil industry.

If you were Mel Gibson you'd probably be blaming the Jews for high oil prices, but lets not go there. There are many theories why oil prices are going up, but the biggest reason is the simplest:

Supply and Demand

The oil industry is scraping the bottom of the barrel and searching for new sources of oil. China for example is so desperate for oil that they are building a huge complex in Inner Mongolia to convert coal into gasoline and diesel. The idea is both expensive and environmentally unsound, but China's booming economy needs more oil and billions of barrels of it and since China has no shortage of coal its cheaper than importing it.

China and India collectively are seeing their economies boom and oil products are the grease and fuel that is pushing their economies faster than ever imagined. With a combined population of 2.5 billion and a GDP growth rate of 7% to 10% every year for the last decade that means there are a lot of Chinese and Indians who can now afford to buy cars and want to travel.

China's domestic gasoline prices have doubled since 2003, but that hasn't stopped their thirst for more cars and more oil. The Japanese automaker Honda sold 410,000 cars in China in 2007 and is expecting to sell another 490,000 more Hondas in 2008. High fuel efficiency vehicles are the most popular according to Zhu Linjie, spokesman of Honda Motor Company in China.

In India car sales overall reached 1.2 million in 2007 are expected to rise to 1.5 million in 2008. Expansion is growing so fast that the Ford Motor Co. has announced they are investing $500 million in building new factories in India and introducing a new smaller hybrid specifically for the Indian market.

In 2005 India and China consumed 9.4 million barrels of oil/day. In 2006 this rose to 10.9 million barrels. Analysts calculate that demand will grow to 12.6 million barrels during 2008, 14.5 million in 2009, 16.6 million in 2010, 19.1 million in 2011 and 22.1 million by 2012. Some analysts suggest demand could grow even faster as economic conditions continue to grow in both countries and since both countries have barely tapped their huge populations for car purchasing.

It should be noted that the entire world has 1.2 trillion barrels of proven oil reserves and we globally consume 30.3 billion barrels per year. At current consumption levels we should run out of oil by 2050, but this estimate ignores several factors:

1. It ignores the fact that we keep finding more oil reserves, particularly in Canada and Russia.

2. It ignores the fact that it is using "proven oil reserves", which is actually a 90% accurate estimate of what is thought to be in a particular oil field (this method is sometimes referred to as P90). According to industry insiders there is often two to three times more in an oil field than what the estimate suggests.

The industry uses much more accurate ways of predicting how much oil is actually left. The P90 method is essentially an estimate of the minimum amount left in the ground. In reality there could be enough oil for another hundred or two hundred years depending on our rate of consumption. The oil industry on the whole however doesn't really care and has playfully gone along for the ride with the idea that all the oil reserves might just disappear by 2050. After all the idea of scarcity helps to raise prices.

Some analysts are already predicting that oil prices will reach $200/barrel sometime in 2008 or 2009, due to the combination of demand in Asia, threat of nuclear war in the Middle East, the Green effect, and whatever other theories you may subscribe to. But will it happen?

To answer that question we should look at where prices have already gone. On January 2nd 2008 prices reached $100 and since then has reached $139.89 on June 17th 2008. A 40% rise in 6 months and double the price it was a year earlier. Some analysts are even predicting $200/barrel by as early as August 2008, but this seems unrealistic as it mean an additional 50% increase over current existing prices and would be roughly triple what prices were a year earlier.

I personally have no doubt prices will continue to skyrocket and that political and economic events will play a part in that. Another terrorist attack on the United States for example would be all it would take to send prices soaring.

Do we have more oil reserves than we think?

June 21st 2008 - Dr. Richard Pike claims the world has enough oil and gas to last well into the next century. Pike was an engineer for British Petroleum for 25 years, he is now the chief executive of England's Royal Society of Chemistry.

Pike can maintain his sunny optimism because he believes that a simple mathematical error the sort made by first-year university statistics students is causing much of our panic over a worldwide oil shortage.

It's a math error that oil companies, riding high on skyrocketing crude prices, are happy to let you to believe.

"This might be hard for some of your readers to take," he warns. 1.2 trillion barrels is the world's proven oil reserves, but he likely the world likely has double the amount of recoverable oil that we think we have in the ground, and perhaps even more.

His argument is attracting attention at a time when many governments are looking for new sources of oil: China is building a facility to turn coal into gasoline and diesel; President George W. Bush recently reversed his long-held position against offshore drilling.

Skeptics say Dr. Pike is just recycling an old argument: That companies underestimate reserves on purpose to keep prices up by making it appear oil is becoming scarce. Dr. Pike claims the problem is more systemic than a few corporations messing with the stats however.

Calculating the amount of oil in an oil field is notoriously difficult so companies issue a probability figure called their proven reserves or P90. It represents the amount of oil that has a 90% chance of being met or exceeded by the field's actual production.

Meanwhile oil companies have long been generating an entirely different number for their own internal use. Not happy with the hard certainty of P90, which in practice is almost always exceeded by an oil field's output, oil companies use more sophisticated measurements to yield numbers often two or even three times as high, which helps them decide things like how many wells they should drill. The higher estimates are much more accurate to actual amount that will be found. These more accurate estimates are rarely shared publicly.

So when calculating oil reserves international organizations often simply add up the conservative P90 estimates for every field in the world.

"Because it's a probability-based set of numbers, you can't add them like that," says Dr. Pike. "That's completely wrong."

Think of estimating oil fields like rolling a pair of dice, Pike says. If you throw just one die, the probability that you will roll higher than a one is five out of six. So for oil fields the chances that there is more oil than expected is nine out of ten times.

But if you throw two dice, the probability that you will roll higher than two snake eyes is not five out of six, it's 35 out of 36, since there are 36 different possible outcomes of a single throw of two dice. With two dice you have a five-out-of-six chance of rolling not a two, but a four.

Oil companies are turning a blind eye to the public's math error because lets face it, shortage of supply equals high oil prices.

"There are some very interesting mind games going on," Dr. Pike says. Oil companies, particularly those in the Middle East, are happy to let people's shoddy math stand because it helps push crude oil prices ever higher.

Regardless of how much is actually in the ground all signs point to a genuine oil shortage however because countries and oil companies can't find and pump the oil fast enough to meet worldwide demand. The fact that companies are increasingly investing in alternative petroleum sources like natural gas is a sign that we're scraping the bottom of the barrel.

If oil companies knew they could simply drill a few more wells to get more oil, there would be no reason to flock to expensive sources like the Canadian oil sands, points out William Marsden, author of "Stupid to the Last Drop: How Alberta is Bringing Environmental Armageddon to Canada".

Dr. Pike agrees that the amount of oil reserves we have won't have a direct impact on peak oil, and may only have an indirect effect on oil prices. He argues that correcting our picture of how much oil we have left is important in other ways, however.

"If you're working on figures that are out by a factor of two, any planning you do in the oil and gas industry are bound to be wrong," he says. "If oil and gas is going to last twice as long, you really need to think about things like carbon capture and storage more vigorously."

So its not that the oil industry is misleading us with faulty numbers. The general public just doesn't understand the meaning of "proven reserves".

China to convert coal into gasoline and diesel

June 4th 2008 - Thanks to oil prices at historic highs, China is moving full steam ahead with a controversial process to turn its vast coal reserves into barrels of oil. Known as coal-to-liquid (CTL), the process is reviled by environmentalists who say it causes excessive greenhouse gases and uses a lot of water.

Yet the possibility of obtaining oil from coal and being fuel self-sufficient is enticing to coal-rich countries seeking to secure their energy supply in an age of increased debate about how long the world's oil reserves can continue to meet demand.

The United States, Australia and India are among those countries looking at CTL technology but are constrained by environmental concerns associated with the process which releases excessive amounts of carbon gases into the atmosphere and consumes huge amounts of water.

But China, which lacks the powerful environmental lobbyists that might stymie any widescale initiative elsewhere, is building a major complex on the grasslands of Inner Mongolia.

"Those countries with large coal reserves, like South Africa, China or the United States, are very keen on CTL as it helps ensure energy security," said Yuichiro Shimura at Mitsubishi Research Institute Inc (MRI) in Tokyo.

"However, the problem is that it creates a lot of carbon dioxide. Also you need a huge amount of energy for liquefaction, which means you end up wasting quite a lot of energy," the chief consultant at MRI in charge of energy told Reuters.

In Erdos, Inner Mongolia, about 10,000 workers are putting the final touches to a CTL plant that will be run by state-owned Shenhua Group, China's biggest coal mine.

The plant will be the biggest outside of South Africa, which adopted CTL technology due to international embargoes on fuel during the apartheid years.

"We cannot fail," Zhang Jiming, deputy general manager at Shenhua Coal Liquefaction, told Reuters. "If things go smoothly, we will start with the expansion next year," he said.

The plant will start operating later this year and is expected to convert 3.5 million tonnes of coal per year into 1 million tonnes of oil products such as diesel for cars.

That's the equivalent of about 20,000 barrels a day, a tiny percentage of China's oil needs as oil consumption in China is around 7.2 million barrels a day.

If all goes well, then Inner Mongolia will push on with an ambitious plan to turn half of its coal output into liquid fuel or chemicals by 2010. This would be around 135 million tonnes, or about 40 percent of Australia's annual coal output.

The region, as big as France, Germany and England put together, hopes CTL will propel development while contributing to Beijing's plan to have CTL capacity of 50 million tonnes by 2020.

That would be about 286,000 barrels a day, or about four per cent of China's energy needs based on current consumption.

CTL is also being considered by a number of coal-rich countries such as the United States, which has the world's largest coal reserves.

The relatively low cost of CTL produced oil given current oil prices, plus the chance to be more energy self-sufficient is a powerful incentive.

The technology is being seen in some quarters as offering an opportunity for the U.S. to reduce its dependency on other countries for oil and a small U.S. CTL industry is emerging.

DRKW Advanced Fuels plans to start construction on a plant in Wyoming next year in partnership with Arch Coal Inc and with technologies licenced by General Electric and Exxon Mobil. The defense department is experimenting with CTL in an effort to cut reliance on fuel from countries unfriendly to the United States.

But CTL is highly controversial. Experts say the whole lifecycle releases about twice as much carbon dioxide, the most common greeenhouse gas, as fossil fuel. Liquefying coal also requires large amounts of energy and drains water supplies.

The fuel produced through this method has a shelf life of up to 15 years, unlike other motor fuels which is attractive to the military and to governments keen to ensure fuel security.

Though CTL technology was developed about 100 years ago, it has been little used, except in Nazi Germany and apartheid South Africa, which had difficulty accessing then-inexpensive oil.

Oil prices, which have more than quadrupled this decade to above $130 a barrel, have reignited interest in CTL.

The Oil and Gas Journal in April suggested it costs $67 to $82 a barrel to produce CTL fuel, based on the experiences of South Africa's Sansol. Exact prices would depend on a range of factors including coal and water prices and of course it is very expensive to build CTL plants.

Shenhua will be the first to use direct CTL technology on a large scale. It is different from indirect CTL, proven in Nazi Germany and by South Africa's Sasol, and converts coal directly into liquid fuel, skipping gasifying coal into syngas.

"CTL happened only twice in world history, and both times it's been in nations facing some kind of state of emergency with respect to energy. It should sound an alarm bell," said Gary Kendall, from the WWF conservation group.

"There are two defining issues in the 21st century: one is carbon dioxide and one is water ... And the (CTL) process is horrifically carbon intensive. It is also very water intensive."

The "holy grail" for CTL enthusiasts is to find a way to turn coal into liquid without releasing carbons into the air. The idea is that the carbon dioxide, the main global warming gas, would be captured and stored deep under ground.

Carbon capture and storage, which is still the subject of much research, would alleviate the environmental impact of carbon dioxide being released into the environment, the main argument against CTL by critics. This could spur CTL development in the United States and other western countries.

Coal lobbyists in the U.S. have been clamouring for more research into CTL but they have failed to override environmental concerns due to the carbon emissions of the process. Pro-CTL amendments were dropped from the 2007 U.S. energy bill.

"If there is no good solution for CO2, the (CTL) industry will not flourish," Chen Linming, executive vice president at Sasol China, told a conference last month, urging the government to support carbon capture and storage technology.

Shenhua and Sasol are conducting a feasibility study to build two more CTL plants in the provinces of Shaanxi and Ningxia.

Whether CTL technology could ever be used on a large-scale will depend on how coal companies deal with the massive amount of water used in the process.

China faces serious water shortages and the Gobi desert, which spans across Inner Mongolia, is expanding rapidly. There are drinking water shortages in northwest China and ground water levels are sinking every year.

Shenhua plans to use ground water and recycled water from coal mines to supply the 8 million tonnes it will need a year.

Yet Zhang said it would need to tap other sources, such as the Yellow River, in the second phase. He would not disclose how much the company spent to build the complex, or how much carbon dioxide it is expected to emit.

"There's no doubt with oil at over $100 a barrel, CTL is very economic ... However the constraint is the availability of water," said Michael Komesarroff from Urandaline Investments.

"The Yellow River often dries up ... In some parts of China, 30 years ago, the water table was 5 metres below the ground. Today it is 35-40 metres below the ground because they take the ground water in an unsustainable way."

Environmentalists say that rather than invest in a process that will probably never be environmentally sound, China and other countries should move towards running cars on batteries rather than liquid fuel.

"If China's primary concern is energy security, then I think you would want to take the most efficient way of using the resources," said WWF's Kendall.

"If you turn coal into electricity at high efficiency, and charge electric vehicles, you can get three times as many kilometres per unit of coal."

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