Feb

8

 On Thursday, February 6th, at the Junto, Ivan Eland delivered a talk about the misplaced fears about oil shortages and how it has led to bad economic and political positions and interventions. He talked about 11 myths taken from his book "no war for oil".

1. no viable market exists for oil
2. Big oil colludes with OPEC to stick consumers with high prices.
3. Global oil production has peaked and the world is running out of oil
4. Oil is a special product of great strategic importance.
5. A strategic petroleum reserve is needed in case of emergency.
6. The us should become independent of oil, foreign oil or overseas energy
7. Oil price spikes cause economic catastrophes.
8. Us policy is to maintain the flow of oil at the lowest possible price.
9. Possession of oil means economic and political power.
10. The US must defend autocratic Saudi Arabia because of oil
11. Dependence of Europe on Russian energy is a threat to us security.

The gist of the argument was that high prices lead to increased supply and substitution of cheaper fuels and more drilling activity. And that oil producers were often the beneficiary of us policies which were designed to help them rather than the consumer. I believed that the talk was sadly needy of some scholars who knew something about oil that could have presented counter arguments or facts to the debunking of the myths that Eland presented. It was the kind of talk that needed some energy experts in the audience to present the opposite case if there was any. And I felt that the arguments made would not have persuaded anyone, except the vast majority that believed in the myths already. I wonder if any of the people knowledgeable about energy on this site could comment on the veracity and verisimilitude of these myths.

David Lillienfeld writes: 

Was any reference made to the West African oil fields or the Eastern Med fields (they may be as big as the Qatari natural gas fields) or even the new North Sea fields? (I won't get into the Brazilian or Mexican oil activities (Pemex is supposedly shedding some of the featherbedded/political spoils jobs it has), though they may be significant in the future.) Few analyses seem to factor these sources into the discussion, and while there are lots of geopolitical issues in play (Israel-Turkey-Cypress is but one potential flashpoint), the economic ones haven't been pushed to the side (witness some of the political stability emerging in West Africa (relatively speaking, of course)).

I don't know the book, but from these 11 points, it sounds remarkably US-centric. I gather no mention was made that the agreement between FDR and the Saudis was as much about the US-UK rivalry as it was about access to oil (which the US didn't need at that point–and didn't think it would need for some time to come. If I recall correctly, much if not most of the Allied effort in WW2 ran off of US oil. (One of Churchill's major accomplishments as First Lord of the Admiralty was moving the HRH Navy off of coal. The result was faster, more maneuverable ships able to stay at sea longer. But to do that change, the British needed a secure source of oil, which it had in the Persian Gulf. That's one of the reasons that Britain's 1970 decision to withdraw its troops from bases in Kuwait was significant.)

Stefan Jovanovich writes:

In 1904 - 7 and a half years before Churchill was appointed First Lord of the Admiralty - the Journal of the American Society of Naval Engineers was publishing the Report of the Liquid Fuel Board of the U.S. Navy. (You can find the Journal as an eBook in Google Books - search Journal of the American Society of Naval Engineers, Inc, Volume 16.) The conversion from coal to oil was already taken for granted. What people were struggling with were the very real technical challenges that had to be met in dealing with a liquid fuel that burned much hotter than coal - the shapes of the boilers themselves, the design and metallurgy of the boiler tubes, the advantages and problems of the super-heated steam that oil could produce, etc. What the same volume of the Naval Engineers journal also has a is a brief note detailing how many problems the British were having in their fleet exercises with the conversion and how many of those problems could be attributed to the inferiority of their metallurgical skills. The business about Churchill would be a bad joke if it were not representative of how much "history" has now become the endless copying of self-promoting gossip and rewritten press releases from the newspapers of the period. (It does, however, remind one of why it was around this time that Mencken decided he had had enough with newspapers and looked for somewhere else to write the truth.) .

This is not a rip on David. It is, however, another of Stefan's rants about the corruption of historical scholarship in modern academia. When a profession becomes nothing but an endless retelling of secondary sources, it develops the idiocy that medicine had when it was only practiced by reference to what Aristotle and Galen wrote. Churchill's taking and receiving credit for converting the British Navy from coal to oil is absolute nonsense. It is nonsense that is dutifully repeated in all the current discussions on the topic of oil, and it is a pure example of the peer-reviewed lie.

David Lilienfeld responds: 

Since the Royal Navy didn't function off of its subs and destroyers, I don't think one could use the use of oil in those ships as a proxy for the navy overall.

The problems the British were having with their metallurgy around 1920 (+/- 5 years or so) had impact beyond the Royal Navy. Wasn't there the suggestion that the brittleness of the rivets in the Titanic's hull when the Titanic struck the iceberg rather than a long gash in the hull that was responsible for its sinking?

Stefan Jovanovich replies: 

No Navy in the world had finished abandoning coal for oil before WW I because they had not worked out the problems. What I questioned was the assertion that Churchill or Fisher, for that matter, had somehow shaken the Admiralty out of its lethargy; that is part of the Churchill myth, and it is complete and utter crap.

The British submarines were not oil-fired; they ran on what the Brits called petrol (our name for it would be diesel). It was the same technology in basic design now used on every modern railroad locomotive -diesel to electricity to motive power.

It was not beyond the metallurgical skills of Harland and Wolff to have used different rivets. The alternatives were well-understood by them and by the Board of Trade. Tim Foecke's analysis is that "the builders used stronger steel rivets where they expected the greatest stress and weaker iron rivets for the stern and the bow, where they thought there would be less pressure, he said. But it was the ship's bow that struck the iceberg."

The questions about the rivets have nothing at all to do with the metallurgical problems everyone faced with the conversion from coal to oil.

Pitt T. Maner III writes: 

Taking on one of the myths.

On #3. Global oil production has peaked and the world is running out of oil

1)  from (a nice overview report) the BP Energy Outlook 2030 (January 2013)

"The world has ample proved reserves of oil and natural gas to meet expected future demand growth. At the end of 2011, global proved reserves of oil were sufficient to meet 54 years of current (2011) production; for natural gas that figure is 64 years."

2) The USGS has a good page on the latest publications related to ever changing assessments.

3) A slide presentation with interesting graphs showing how predictions were made and have varied over time. Basic idea:

"The conventional (or static) approach to exploration is rapidly changing to the dynamic (petroleum system) approach, and this transformation is the most profound shift in the petroleum business in a century. "

Henry Gifford writes:

I do know a little about oil and boilers. Some of what I've been hearing makes little sense, which could be one clue to how much to believe other things someone says on a topic.

I have never heard of a metallurgical challenge to burning oil vs. coal in a boiler. When heated they both (and natural gas and gasoline and wood) pyrolyse into a soup of Hydrogen and Carbon molecules, which then combine with Oxygen in the air. Same as any hydrocarbon. They also contain a little Sulfur, which produces Sulfuric acid which eats the boiler if it is cooled below the dewpoint temperature, which is about 400F. Same problem with modern fuels and modern boilers or furnaces or water heaters, as found in most basements today.

The story that oil burns hotter than coal is nonsense. All Hydrocarbons produce a soup of Hydrogen and Carbon which produce a fixed quantity of heat when burned. The temperature is a function of how quickly that process takes place in how small an area. You can today pay $15 at Home Depot for a propane torch or $60 for a propane torch. The $60 torch makes a hotter flame from the same fuel by mixing it with air better. Same fuel, very different temperature, same amount of heat of course from a given quantity of fuel. Ships burning oil make less smoke, and because the machinery and fuel and handling equipment take up less space, can go further and faster.

The story that oil is necessary to produce superheated steam is also not accurate. "Superheated" means heated to a temperature higher than the boiling temperature at that pressure. The Freon returning from the cold side of your air conditioner is "superheated," despite being very cold at that point. The old steam locomotives superheated the steam, as do steam engines powering turbines, this to prevent liquid steam impinging on the turbine blades.

As for oil being strategic, I think access to Middle Eastern oil had a lot to do with WW1. The German navy adopted oil sooner than the British did, both on the eve of WW1, both gradually with many dual-fueled ships built. The British had to import oil by tanker, the Germans started building a pipeline. A straight line on a map from Berlin to Baghdad goes through all the countries that fought on the German side, except one in the Balkans, where one day a prince was shot, soon there was an unbroken chain of allied or occupied countries stretching from Baghdad to Berlin.

As for WW2, Roosevelt was quoted on the cover of the NY Times as saying the US embargo of oil to Japan "was tantamount to a declaration of war" 6 months before the surprise at Pearl Harbor. The fighting in Burma was not over access to coconuts. The German invasion of Russia had a Southern thrust aimed at oilfields, and there were very heavy allied attacks on the German controlled oil fields in Romania. In the middle of the war US and German fighter pilots both went into battle with about 300 hours of training (except the Tuskegee Airmen, who were black, therefore considered mentally inferior, thus returned for additional training, twice, or maybe nobody wanted them to fight, and so they ended up the best trained pilots around, which helped very much with survival rates and proficiency), soon the German hours were dropping because of fuel shortages, and ended up well under 100
hours with the classroom ratio constantly increasing, while the US training
hours increased for the rest of the war. The Germans fought with the ME-262, a very real and very practical jet fighter, and reportedly towed it to the runway with horses to save fuel. But, I think the horse story is not true. I heard the air force used cows because the army had all the horses. The Japanese built the largest battleships in history, and sent them out without enough fuel for a return trip (but with thousands of young men on board).

Or parents' and grandparents' generation came to control the world through, in significant part, access to oil.

Do I think oil is a strategic material?

I don't think the US military is in the middle east for a shortage of falafels or for women's rights.

The reports that there is 50something or 60something years of supply so we don't have to worry sound to me like good reason to worry, if true. Toward the end, or even near the end, things will get very expensive, and probably scarce - those numbers are for today's production, with a constantly increasing population and with more and more people buying cars and air conditioners.

The US military runs on one fuel: diesel. Also called jet fuel or #2 fuel oil. The difference between diesel and #2 fuel oil is taxes, and a dye -thus the clear plastic fuel tube on every diesel car. The same stuff, or virtually the same stuff, drives all tanks, planes, jeeps, ships (other than large nuclear ships and subs), subs, trucks, etc. There are reasons for this.

Oil of one sort or another (gasoline or diesel) has a Watt-Density far in excess of anything else by either weight or volume. Compressed Hydrogen has only 1/5 the Watt-Density of diesel by volume even after being compressed to 300 atmospheres (4,400 PSI), which of course requires a spherical tank, which won't conveniently fit into an airplane wing or between the muffler and tailpipe of a car. Far in excess of batteries or anything else. Batteries can power a car for a while, but that volume and weight of gasoline or diesel would power a vehicle much, much further. And forget planes with batteries. And the military is not giving up planes. Nor tanks or other vehicles, and they want them to travel far and fast - they will burn diesel until or unless something with more power is discovered.

Is oil scarce? How much is left? I have no idea, but I don't think BP was drilling 5 miles deep in the gulf of mexico because it was easy.

The President of the Old Speculator's Club writes:

This thread reminded me of a book I read years and years ago and which became a classic of sorts. The book is "Delilah" and the author, Marcus Goodrich. It's a huge book, a lengthy and, at times, a difficult read as it goes into minute detail on the men and operations of a pre-WWI destroyer…coal devouring monsters that make some of Aubrey's accommodations look luxurious.

The book was published in 1941 and was the first of two that were to complete the story. Over the next 50 years (until his death in '91) Goodrich labored over the second book - sometimes spending an entire day "perfecting" a single sentence. The second manuscript, reportedly incomplete has never been made available to the public.

How big a deal was it back in '41. Goodrich became a minor celebrity, and good enough and popular enough to write the original "treatment" for "It's a Wonderful Life." He later married Olivia DeHavilland. Little was heard from him after that - he once stated that if he couldn't finish the second book he'd "probably burn it."

Carder Dimitroff writes: 

I'll give it a shot. You can write a book on any one of these statements

*1 no viable market exists for oil*

This is a partially true statement. There are several markets for oil. There are two major markets (WTI and Brent) and several dozen regional markets. Most are not pure markets. Some are manipulated markets.

Complicating the issue is the fact that crude oil is not a physically fungible commodity. There are attempts to address physical inconsistencies using normalizing techniques to achieve a financially fungible commodity.

The challenge is refineries. Refineries are designed to process specific types of crude oil. For example, many refineries cannot accept some of the heavier oils. As such, the refineries often set their own bid for a specific type of oil delivered to their facilities, but they will not bid other oils. This complicates markets' handling of basis differentials.

Under these circumstances, the so-called market price is only a broad indicator.

*2. Big oil colludes with OPEC to stick consumers with high prices.*

This is an inflammatory comment that misdirects issue. The comment assumes there is only one market for oil. It assumes producers are only interested in the public good. It also assumes OPEC producers have a lot of flexibility in setting prices. These are all incorrect assumptions

Of course, producers want higher prices. It's a business. But if OPEC and the majors collude (with other producers) and force significantly higher prices, demand will decline and revenues could be compromised.

*3. Global oil production has peaked and the world is running out of oil*

This is a tricky question. First, there has to be consensus on the definition of oil. It may surprise consumers to learn oil production figures often slip in production for ethanol and natural gas liquids. It's not a dirty trick. Petroleum is used primarily for transportation fuels. Ethanol is also used for transportation fuel. Some, but not all natural gas liquids are used for transportation (and that is why their price is often indexed to oil, not natural has).

It's a tricky because the question links two unrelated issues. The question suggests production has peaked because the world is running out of oil.

It's also a tricky question because it assumes production is currently limited by drilling constraints.

It is true new production can take time to respond to market signals. It is not true that the world is close to running out of oil.

*4. Oil is a special product of great strategic importance.*

In general, this statement appears to be true. But adding context would be helpful.

*5. A strategic petroleum reserve is needed in case of emergency.*

In general, this statement appears to be true.

*6. The US should become independent of oil, foreign oil or overseas energy*

Again, this statement is packed with three, mutually exclusive ideas. It is true, the US and all other nations should become independent of oil. So far, no practical substitute has been found.

It is true that the US should become independent of foreign [crude] oil. Assuming this independence includes Canada and Mexico, there is no practical option for the US to go it alone.

With respect to other primary fuels, the US is already energy independent, or almost energy independent. We are completely independent when it comes to renewable energy (hydroelectric, ethanol, biomass, wind, solar and others). We are energy independent when it comes to energy efficiency. We are net exporter of coal. We are virtually energy independent with respect to natural gas.

We import over 90 percent of our nuclear fuels. We can and should produce our own. But market forces favor international sourcing.

*7. Oil price spikes cause economic catastrophes.*

This may or may not be true. By definition, a spike is a short term event. As such, it may have greater political consequences than economic impact.

*8. US policy is to maintain the flow of oil at the lowest possible price.*

This is both true and false. US domestic policy is generally indifferent towards flow or price. Military policy is to assure unimpeded flow in vital areas (Middle East and Indonesia). Federal energy policy seems generally indifferent towards world crude oil prices.

From time to time, administrations do respond to political pressure to reduce prices. The fact is their options are limited.

*9. Possession of oil means economic and political power.*

Untrue

*10. The US must defend autocratic Saudi Arabia because of oil*

True. But it does not matter if they are autocratic or not.

*11. Dependence of Europe on Russian energy is a threat to US security.*
*
*

True

Finally, there is a fundamental element of the crude oil business that many cannot seem understand. Sometimes I think they don't want to understand.

The simple concept is that oil wells deplete. This idea seems elusive to many. Further, in order to replace depleting wells, market forces will motivate producers to (or should) seek the next marginal well. The next marginal well usually has higher production costs than the production costs associated with exiting wells. But decisions from sovereign producers are not always economic.

Production costs mean levelized costs, not lifting costs. It includes transportation costs to get product to market. It also includes market adjustments needed to financially normalize oil quality.

When you put it all together, the world is not running out of oil. The world is running out of cheap oil.

These are two important points:

Point 1: U.S. MILITARY PRESENCE IN THE PERSIAN GULF OR SAUDI ARABIA MERELY CONTRIBUTES TO ISLAMIST ANGER AT THE SAUDI GOVERNMENT FOR COLLUSION WITH THE U.S. AND ENDANGERS THE OIL.

Point 2: ALSO, ANY THREAT TO ANY OIL IN ANY ONE COUNTRY WILL MERELY RAISE THE WORLD OIL PRICE. INDUSTRIAL ECONOMIES, CONTRARY TO POPULAR BELIEF ARE RESILIENT TO OIL PRICE SPIKES (EVIDENCE IS PROVIDED IN THE BOOK).

With respect to Point 1, there has been significant volumes of credible work by intelligence analysts to confirm this statement. Yet politically, our leaders don't seem to believe the fact-based evidence. Most intelligence analysts will argue that that the Islamists don't hate us for who we are, they hate us for what we do. Yet you hear the opposite story on capital Hill.
 


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1 Comment so far

  1. HopeThisHelps on February 8, 2013 8:17 pm

    A cursory glance at US domestic oil production speaks to the efficacy of economics and technology at creating incentives:

    http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS2&f=M

    While this is sufficient to create significant domestic dislocations (ti/brent) and infrastructure stranded crude (bakken, midland, canadian), this is still a drop in the proverbial barrel in terms of the global market - which ultimately sets the price for the consumer.

    The US is not unique with regards to shale rock

    Now, how the global ‘players’ respond to this, I am sure some great tales are being written of palindrome sized bets with regards to the same.

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