Saturday, July 21, 2012

"The changing definition of Oil"

I have a fairly simple strategy for trading Oil:

  1. Oil is going to have a massive spike that I will endeavor to be long for.
  2. Somewhere in the middle of all of this the world is likely to experience another Lehman Brothers type event coming, most likely, out of Europe. That will be the moment to get long.

Of course, the spike could come BEFORE that Lehman type event… 

There has been a great deal of propaganda in the Media. Let me show you some hardcore data that will put this all in perspective.

Here is a link to the PDF from the U.S. Office of Highway Policy Information. Please skip all of the myriad data and go straight to the graph on Page 9. That chart is the graphical representation of Total Vehicle Miles Travels (“VMT”) in the U.S. and as you can see, VMT peaked in 2007 – RIGHT ON SCHEDULE.

Total VMT takes into consideration EVERYTHING: Milage improvement, electric cars, hybrid technology, hydrogen power, bio fuels, Nat Gas, Shale Oil, Tight Oil, Oil Sands, magnets, the tooth fairy - everything. If technology/fuel replacement/efficiency overcome the decline in Oil supply then total VMT will continue to increase. If they don't, it won't. It is a simple as that.

In fact, the ONLY metric that matters to the U.S. as far as energy/Peak Oil is concerned is Total Vehicle Miles Traveled.


How changing the definition of oil has deceived both policymakers and the public

Everyone knows that world oil production has been running between 88 and 89 million barrels per day (mbpd) this year because government, industry and media sources tell us so. As it turns out, what everyone knows is wrong.

It's wrong not because the range quoted above can't be found in official sources.  It's wrong because the numbers include things which are not oil such as natural gas plant liquids and biofuels. If you strip these other things out, then world oil production has been running around 75 mbpd this year. The main thing you need to know about the worldwide rate of production of crude oil alone is that it has been stuck between 71 and 75 mbpd since 2005 (calculated on a monthly basis). And, that has already had huge negative effects on the world economy and world society through high energy prices that are partly responsible for our current economic stagnation.
But because natural gas plant liquids production has been growing rather rapidly due to recent intensive drilling for natural gas and because those liquids are misleadingly lumped in with oil supplies, people have been mistakenly given the impression that world oil production continues to grow. Not true! What's growing is a category called "total liquids" which encompasses oil, natural gas plant liquids, biofuels and some other minor fuels. Total liquids are growing only because of large gains in natural gas plant liquids and minor gains in biofuels. And, this is why it is so important to understand what natural gas plant liquids are.


Production of Crude and Condensate, the stuff that can be refined into transportation fuels, has not increased in over 6 years despite massive price incentive to do so. Natural Gas Plant Liquids are doing wonders for the Petro-Chemical feedstock industries, but are, for the vast most part, unavailable as transportation fuels.

The Industrial West’s economies of the U.S. and Europe have hit Peak Oil. Yes, the U.S. increased its production of LTO or “Tight Oil” by about 600k bpd (to put that in perspective, the U.S. consumes over 18 million bpd, down from over 22 million bpd) and ethanol by about 900k bpd. And over the next 20 years LTO might hit 1.2mm BPD. Unfortunately, imports declined by 2.5 million bpd and we can see the net impact in the VMT data listed above. Ethanol is constrained by the Corn crop and since ethanol already consumes half the crop, unless we are willing to give up eating our corn-derived diet I don’t see much increase from that area (and I am not taking the drought into consideration here as hopefully it is a one-off. I shudder to think of the consequences should this be the beginning of a multi year drought.)

The U.S. now has 16% real unemployment (U6) and 1 in 7 Americans are on Food Assistance from the Federal Government and this has been pretty much the case since the VMT data peaked in 2007. Coincidence? I think not.

The U.S. economy is automobile centric. Growing the economy in real terms with an ongoing decline in total VMT is not going to be possible. Oh, we might increase sick care, or death care, of government services to goose GDP, but real demand? The U.S. has been running $1Trillion + deficits in order to stimulate demand for 4 years now and it hasn’t worked – and it won’t work in an environment of declining VMT.

Lest you believe the hype on Natural Gas:

The U.S. has brought Nat Gas production BACK to where we where in 1970 by increasing average daily production about 20% from average lows. About 1/3 of the U.S. energy BTU’s are provided by Nat Gas. And that 1/3 experienced a 20% growth in production. Oil provides a little over 1/3 of U.S. energy BTU’s, and Oil BTU’s declined by about 14% or so since 2007.

In short, Nat Gas might be instrumental in preventing a national Trucking Crisis (and it might not. T. Boone Pickens and his folks are working on that as I write this, but they are a long way from being a force to be reckoned with) and Nat Gas will be helpful in diverting petroleum from Fleets uses to Nat Gas but Nat Gas production is never going to replace Oil BTU’s for transportation fuels. NOT NOW, NOT EVER.

The world’s Oil exporters (Saudi Arabia, Russia, Iran, Kuwait, Norway, Mexico, the U.A.E., et al) exported an average of 40.2 million bpd in 2005. In 2010, that number fell to 35.2 million bpd (Source: Jeffrey Brown, Energy Bulletin, this is a link worth reviewing - the graph says it all). Exports are back to their 2000-2002 volumes. Importers (the U.S., Europe, China, India, et al) cannot import more Oil than the exporters are exporting. While world production of Crude & Condensate has plateaued, there is little doubt that Oil imports for the U.S., et al has certainly peaked.

I tell you this to share with you why it is that I think that a move to $200+ for a barrel of Oil (Brent and WTI) is inevitable. I reject the propaganda.  I do not think Oil imports will go to zero. Canada, for example, will be exporting to the U.S. for quite some time. But Oil imports WILL continue their inexorable decline in my opinion (though Iraq could goose total exports and change the equation in the short term. Iraq remains the $64 question). Confirmation will be found in the VMT data, not in the unaudited reports from OPEC. I also believe that the European story is loose and fluid with significant potential for a serious economic disturbance. 

1 comment:

tweell said...

Iraq wants to pump more, they need the money. I don't think they will be able to do so, Iran will continue to back RIF's to blow up pipelines and it only takes one bomb to destroy months of work.