Thursday, November 5, 2009

Eight Things About the Oil Business

I wrote a thesis in this subject. So this is not a rant for any side of the question. It's my public service--trying to make educated voters.

1. There is upstream oil, that’s the well. Midstream oil is the pipeline or tanker. Downstream oil is the refinery and distribution thereafter. You mostly hear about upstream, but you have to think about each aspect if you’re considering the market.

2. It takes four years from the time of discovery/speculation to drill down to oil on land and seven to ten or longer to drill for it offshore. That does not include a time allowance for war, politics, glaciers, alligators or boa constrictors on-site. So if an oil exploration company finds crude in outer Whazoo, we’re still not getting it right away. And during the drilling process, wars, politics, glaciers, and boa constrictors don’t go away.

3. You can’t just pump oil at any rate you like. Each well has a different pump rate. And when oil wells get old, you have to baby them. Oil wells in Eastern Iraq (and Mexico’s Cantarella Field) have been compromised through over-pumping. Repair takes a lot longer than proper maintenance. As with anything else, it costs plenty to fix what’s ruined. And sometimes repair doesn’t work.

4. Distribution has been worked out by the oil companies to minimize costs. Therefore, most of the United States’ oil supply comes from non-Arab states. That would be 1. Canada and 2. Latin America and 3. Western Africa. Europe and Japan get most of their oil from the Persian Gulf and from Russia or other former Soviet states.

5. Because we get our oil from Latin America and West Africa, we should pay more attention to what goes on there politically, economically, and for that matter, weather-wise. To do this, you have to read British Broadcasting Corporation news articles. The U.S. news is about starlets with love problems.

6. Just because we aren’t in direct line to the Persian Gulf for oil, doesn’t mean those events don’t affect us—because—they do. (Ask anyone military.) West Africa’s crude, for instance, could easily ship to Europe for a premium price if the Arab states could not ship. Russia’s price would go up. The supply is a world supply, and a knock in one place reverberates everywhere else. As of 1973. That’s just the way it is.

7. Worldwide distribution (tankers/pipelines) is pretty stable overall, by which I mean it corrects quickly to meet those knocks. But any local distribution is precarious: inside Iraq as it traverses ethnic divides, across Azerbaijan or Georgia when Russia is on its way in. Past poor people in hovels on its way to developed countries. This is a fact, and we need to consider it when thinking about deferred costs in our life with oil.

8. U.S. distribution is a lot more precarious than you guess. Most refineries are on the Gulf Coast. So is the nation’s Strategic Reserve. My proof is Hurricane Katrina. The issue with gasoline prices and other oil-related supply for the nation had far more to do with refineries out of production than Oil Platforms getting blown about the Gulf of Mexico. Then there is the U.S. pipeline network, also concentrated on the Gulf--and the less-networked pipelines from Western Canada to the North Central States. In the event of shortage, the further you are from the Gulf, the longer the wait for relief.

And I have at least two more posts planned on U.S. oil. I’ll do this again, inbetween other philosophies and memoirs and tales . . . .


Capt. Schmoe said...

Good post Ann T. A couple things concern me, one has to do with midstream transportation, specfically the vulnerability of Very Large Crude Carriers in the Moluccan Strait to pirates and terrorists. Although little if any of that crude gets to us, as you mentioned, a disruption would reverberorate throughout the world.

As you mentioned, the refining capacity in the U.S. is barely sufficient. I think we were at about 98% refining capacity a few years ago with no new refineries being built. No one wants one in their back yard and the environmental restricitions for a new refinery are tremendous.

Eventually, we are going to have to either build more capacity or start importing reifned product.

I say build, more stability for us.

Thanks for the post.

Ann T. said...

Dear Capt. Schmoe,
You are very right about the Moluccan Straits. As far as oil terrorism goes, Saudi Arabia has also had some incidents of oil terrorism, barely averted.

It's not generally known, but the oil companies felt that the Iraq war has been a liability--(oh, I know--how bizarre can you get? Everyone assumed they were for it, and they didn't come out and say one way or the other. I think waiting to see how it shook out while not alienating the administration). One reason is that our navy could be deterring such piracy but instead have been at least partially diverted to other military goals.

As for refining, the oil companies have closed some out in California where I think you are. Post-Katrina, they were asked to open them back up and create jobs. About the only definite no that came out of that hearing was for that idea, and there were many stupid ideas floated by our elected representatives.

Refiners have instead maximized the efficiency of the locations they have, pretty much quadrupling it. However you are still right. With the NIMBY attitude, they aren't practicing good location strategies for the nation as a whole. And refining capacity is not as flexible as it should be.

Wow, I had no expectation of getting such a great comment. How reassuring! Thank you!

Ann T.

Christopher said...

I eat this information up. Please keep it coming.