Wednesday, December 7, 2011

Oil Pricing And How Soon We Are Going To Run Out Of It

Oil refineryI heard a really interesting news story on the radio this morning. They were talking about oil pricing and why even though US demand is down overall the price at the pump remains high. Typically when demand goes down the price should be going down as well. For the time of year (gas is usually cheaper in the winter time) gasoline and diesel are are historically high national averages. 

Lower Demand

So it turns out that the demand for oil is down in the US because of two main factors. The first is that the economy is still bad and many folks are still unemployed. Because there are many fewer people driving back and forth to work every day we are buying less gas. Also because people have less money in their pocket because of the bad economy they are thinking twice about spending at the pump. The other main factor is that, on average, the cars on the road in the US are getting more and more fuel efficient. Pruis, Volt, and Leaf and others are major contributors to this reduced need for gas. But all newer cars in general are getting better and better gas mileage which is having a real effect on the amount of gas we are all buying.

Why is the price saying so high then?

Well it turns out that the oil refiners here in the states started to realize they were ending up with a surplus. They also realized that the emerging nations are needing more and more gas and diesel, so our refiners are actually exporting it to other nations. This is a time when the overall economy being so global is bad for us. Normally give the existing conditions and reduced demand we would see a nice drop in the price at the pump. But because US oil refiners have found a market to still be able to sell that surplus the price is staying as high as ever. Ouch.


So let's think about this. Oil is pumped out of the ground in the Middle East. It is them put in oil tankers and shipped across oceans to the US. US oil refiners in NJ, Louisiana, and other coastal states then refine this oil into it's elements (gasoline, diesel, etc). Most of that is then trucked in tanker trucks to the gas stations all over the US for us to buy. But increasingly some of that gasoline and diesel is being put back into oil tankers and shipped back over oceans to developing countries where demand for oil products is increasing rapidly. The inefficiency of that whole process just boggles my mind!! The energy that it takes to create oil which we use to create energy is staggering!

When are we going to run out?

So just in case you never thought about it before, oil is a finite resource. That means there is an exact amount of it underground on Earth and no more. Once it's gone it's gone. It's been so plentiful for so many years that for a long time nobody put any thought into running out of it. But it is indeed going to happen and really is all ready happening.

The key really isn't so much when we suck the last drop out of the ground, because we are never as a planet ever going to see the last drop extracted at all. The key is when it becomes too expensive to pull oil out of the ground to make it worth doing. This is oversimplified but basically once you take out half of the oil in a given reserve it becomes harder and therefore more expensive to get the remaining half (peak oil). It increases exponentially as you get past the halfway point. So each year past the midway point of removing oil from the ground you are going to end up getting less then the year before and it will cost you more. As we reach that midway point as a planet (which many argue we just recently did or are just about to) oil is going to become more and more expensive. This is why sites that were historically not worth bothering with are becoming financially viable, like oil tar sands. Many of these new sites seem to take more energy to get the oil then that oil can produce. But because oil is become scarce it is becoming financially viable so it's being done.

The trick is that yes it seems that because of some key factors (the economy and better fuel efficiency in automobiles) the US is reducing it's over all oil demand. However many emerging countries are just hitting their stride like we in the US did as we industrialized. These are countries like China and India which have much larger populations then we do here in the US. Because these countries have such large populations they have the potential to dwarf our oil demand in future years. So if we aren't all ready at the midpoint of oil then we are racing there VERY quickly!

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