The Numbers, Please

by Cheryl Rofer

The $4 per gallon number has gotten people’s attention, but there’s more to petroleum than that. President Bush now wants to drill in lots of places that have been put aside within the United States, but that is a very long-range solution, if it’s a solution at all.

And one may wonder how much US influence on the Iraqi Oil Ministry has led to this. Certainly Iraq would like to take advantage of record oil prices, but more oil on the market would tend to lower those prices.

I’ve been wondering about a number of claims about petroleum prices. The only way to begin to resolve my questions is to look at some numbers, which I haven’t seen done anywhere in the media. Not surprising for a bunch that thinks water can be a fuel.

It’s not clear to me that any of the claims can really be verified. There are too many possible variables, and too much uncertainty in all of them. Qualitatively, I suspect that there is a war-fear premium on petroleum as long as Bush and Cheney are in office, which may amount to 25% of the current price. Speculation seems to be part of it too, but it is an easy excuse for the oil producers to use. And there does seem to be an increasing demand.

To start, I’d just like to get a sense of what the numbers are and how the various nations stack up. To that end, I’ve collected some of the numbers in a spreadsheet (Download petroleum_2008.xls), for those of you who want to look at or play with them. What I’ve collected is not exhaustive, and it may be somewhat incorrect, for various reasons. I don’t want to get into arguments just now about the accuracy of the data in detail. That comes later, if at all.

What I want to do is to see how the various nations stack up against each other. Sheet 1 is the raw data, except for refinery capacity, arranged the way the Department of Energy’s Energy Information Agency does, by continents. Sheet 2 is a simplified version, in the same order.

Sheet 3 is arranged by proved reserves. The first ten countries, in decreasing order of reserves, are
Saudi Arabia
Iran
Iraq
Kuwait
United Arab Emirates
Venezuela
Russia
Kazakhstan
Libya
Nigeria
The United States is number 11.

Sheet 4 is arranged by production. The first ten countries, in decreasing order of production, are
Saudi Arabia
Russia
United States
Iran
China
Mexico
Norway
Canada
Venezuela
United Arab Emirates
The difference in these two lists suggests that the famous peak oil hypothesis is not the whole story. In some countries, like the United States, production has peaked, due to what a colleague called the drain-America-first policy. He argued that it would have made more sense to keep our oil in the ground and use up other countries’ reserves first. We can see that President Bush belongs to the drain-America-first faction, urging that American production be increased, when it is already high in proportion to our proved reserves. Russia is following a similar policy of depredative nationalism.

Iraq, Kuwait, Kazakhstan, Libya and Nigeria appear on the first list but not the second. They have lots of oil, but it is not being produced for a variety of reasons, none of them technical or related to peak oil. War, inefficient national oil companies, and political difficulties are most of the reasons.

Sheet 5 is arranged by consumption. The first ten countries, in decreasing order of consumption, are
United States
China
Japan
Germany
Russia
India
Canada
South Korea
Brazil
Mexico
Several non-producing countries appear on this list: Japan, Germany, and South Korea. Other non-producing European countries, including France, Italy, Spain and the Netherlands are within the next ten.

Sheet 6 is arranged by per capita consumption, total consumption divided by population. This gives quite a different top ten:
Kuwait
United Arab Emirates
Qatar
Canada
United States
Saudi Arabia
Netherlands
Norway
Japan
South Korea

What this shows is that it takes energy to produce energy. Kuwait, the UAE, Qatar and Saudi Arabia all are thinly populated but big oil producers. Production is part of the usage for Canada, the US and Norway as well. The other three do a fair amount of refining, which also takes energy and is on sheet 7. Here are the top ten in refining capacity:
United States
Russia
Japan
India
Venezuela
South Korea
Canada
Germany
Saudi Arabia
France

And, oh yeah, great minds running in the same channel today: Sue OPEC! Hey, it’s better than going to war against them.

Comments

[Courtenay Barnett]

Cheryl: when you observe, " He argued that it would have made more sense to keep our oil in the ground and use up other countries’ reserves first. We can see that President Bush belongs to the drain-America-first faction, urging that American production be increased, when it is already high in proportion to our proved reserves." Isn't the true picture that the US domestic production peaked in the 1970s, just as King Hubbert had predicted, and then the oil price was driven up. Again, we are at that point, but this time - globally. Sorry to reduce the argument to the crux of the matter, but even if one factored in some price-fixing, market inefficiencies and such like the big picture is that we ( the world) are at the juncture of "global peak oil".

[Cheryl Rofer]

Courtenay, part of my point is that looking at our petroleum problems solely through the lens of peak oil will give you the wrong idea. Since the 1970s, the oil price has been up and down and up again several times.

People were convinced that the end of cheap oil had come in the late 1940s and then again in the 1970s. And oil was supposed to have peaked.

Will oil run out? Probably. Will demand grow? Probably.

But the US is still 11th in proved reserves, even after the drain-America-first policies of the last half-century or so. Several countries aren't producing at anything like their potential, for political reasons, not because of peak oil.

Yes, we should be looking to alternatives to petroleum. But we need to do that on the basis of facts. That's why I'm looking at numbers.

[James]

But it's also worth noting that there are other factors in play. There is an increasing amount of money being poured into commodities by investors, including pension funds. Make no mistake: speculators make money by buying things they hope will go up. When speculators have a lot of money lying around, or they are desperate for a quick payoff to cover other losses, they buy heavily into whatever they think is going to rise.

Like sharks, they have to keep swimming. They have to invest some money, somewhere, or else they aren't investors, are they? Because of margin rules, they don't actually have to have the money they're investing. They can borrow it. It's quite common for these funds to be leveraged at 30-to-1. And because they are desperate for a safe haven right now, they've become increasingly fixated on commodities. Commodities are real things that people really need or use. The speculators feel safe buying commodities, yet they never actually take delivery of the commodity in question, but keep rolling over the futures contracts, riding the wave up.

From Mish's Global Economic Analysis :

"Michael W. Masters of Masters Capital Management, LLC spoke of Commodities Speculation before the Committee on Homeland Security and Governmental Affairs:

Index Speculator demand is distinctly different from Traditional Speculator demand; it arises purely from portfolio allocation decisions. When an Institutional Investor decides to allocate 2% to commodities futures, for example, they come to the market with a set amount of money. They are not concerned with the price per unit; they will buy as many futures contracts as they need, at whatever price is necessary, until all of their money has been “put to work.” Their insensitivity to price multiplies their impact on commodity markets."

This aspect of rising commodities prices is, I think, being ignored. Prices often go up because of hoarding and speculation; everyone understands this. But the disarray in the financial markets has led many investors into the "safe" waters of the commodities markets, and I think this is leading to yet another bubble. The villain here, as in the 1920's, is leveraging, which enables insiders to buy far up far more assets than they can afford.

[Cheryl Rofer]

Exactly, James.

I mentioned speculation in my post, along with the bomb-Iran premium. I'm willing to guess that the bomb-Iran premium is something like 25% of the current price (look at Iran's ranks for reserves and production), but it takes a better economist than me to guess what speculators are doing to the market.

And I agree that the disarray in the financial markets makes this even more difficult.

And there are other factors, too, like the inefficiencies of national oil companies (but look at Venezuela's standing in refineries!), the games companies play with reserves, and the inefficiencies of private oil companies.

Alternative energy sources would provide some competition that might help straighten out some of the inefficiencies. Saudi Arabia has known that forever and has tried to keep oil prices where it's not economic to develop alternatives. That's undoubtedly part of the reason for their upcoming producer summit.