Update: Oil smashes $86 for the first time

This week’s inventory report will be very interesting. If there is a significant build, the price could unravel quickly. If there is another surprise on the downside, we may crack $90 by the end of the week. But as long as oil prices stay at these levels, Saudi is going to be under pressure to increase production by more than the already announced 500,000 bbl/day. If they truly have spare capacity, they have been playing Russian roulette with the economy. They may have let it go a little too far.

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The price of oil continues to climb:

Oil tops $85 for the first time

SINGAPORE (AP) — Oil prices kept rising Monday after closing at a new record in the previous session on worries that supplies are insufficient to meet coming winter demand and concerns over the conflict between Turkey and Kurds in northern Iraq.

Recent reports have indicated that crude inventories are falling. Last week, the U.S. Energy Department reported that U.S. oil supplies declined in the week ended Oct. 5, while the International Energy Agency said that oil inventories held by the world’s largest industrialized countries have fallen below a five-year average.

Some analysts think the supply shortfall in last week’s U.S. Energy Department inventory report is an anomaly. They doubt demand is as strong as recent forecasts by the department and the IEA suggest. These analysts expect oil prices will soon begin a seasonal decline to $70 a barrel, or lower.

Count me among those in the anomaly camp. No way would I be a buyer at these prices; I think your downside risk is great, and your upside potential is small. Longer term I think oil prices are going to stay high, and I won’t be surprised to see it crack $100 next year, but I think prices have gotten a bit ahead of themselves at the moment.

I was doing some research over the weekend on predictions that have been made by oil industry analysts. I thought this one was interesting. From September 2006:

$1.15 a Gallon? Leading Oil Industry Analyst Says Prices Could Plummet

A leading oil industry analyst, Philip Verleger, believes we are going to see continued reductions in the price of oil and at the pump, perhaps to as low as $1.15 per gallon for regular gasoline.

Philip Verleger was one of the few oil industry analysts to predict dramatic price increases in the cost of oil a few years ago, but his estimates proved accurate as the price per barrel soared to nearly $80 this year. With the increase came significant upward pressure on transportation costs, heavy fuel surcharges by carriers, rising costs for petroleum-based raw materials.

But Verleger is now predicting the current reduction in oil prices is no temporary aberration. According to a story in The Seattle Times, Verleger believes a combination of financial market twists and fundamental supply and demand forces will keep driving oil lower – much lower. Verleger said it’s not unthinkable that oil prices could return to $15 or less a barrel, at least temporarily. That could mean gasoline prices as low as $1.15 per gallon.

Oops. A year later oil prices are over 400% higher than his prediction.

Update: This was a story originally posted in August of 2006 (Wow, that’s been the fastest year of my life), but E3 Biofuels has come up in discussion quite a few times lately. I am going to be traveling over the next 5 days with intermittent Internet access, so I thought I would bump this up top. Note that this story was prior to their plant startup.

Ah, and that solves a long-term mystery for me. I wondered why some people refer to me as an “oil industry analyst.” This must have been where that originated.

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Last night I noticed some traffic being directed here from National Geographic. Being a curious sort, of course I followed the link back and found this story:

New Ethanol Plants to Be Fueled by Cow Manure

The story talks about the E3 Biofuels process that I blogged on previously.

This blog is mentioned in the article, and is listed under “SOURCES AND RELATED WEB SITES”. The Oil Drum is also mentioned in the article, as well as Vinod Khosla. Some relevant quotes from the article:

…With gas prices high and the future of world oil production uncertain, interest in alternative fuels is surging.

But ethanol, a fuel now widely used in Brazil, has been the subject of an often polarized debate in the U.S.

The controversy has been playing out recently both in science journals and on energy blog sites such as The Oil Drum.

Proponents like Silicon Valley venture capitalist Vinod Khosla argue that ethanol can replace gasoline, while opponents counter that not enough agricultural land exists to meet more than a fraction of the country’s energy needs.

…But another outspoken ethanol critic, oil industry analyst and blogger Robert Rapier, has endorsed the E3 Biofuels approach, calling it “responsible ethanol.”

National Geographic. How flippin’ sweet is that? Maybe CNN will come calling next.

OK, maybe that’s an exaggeration. But they did just chip in close a billion dollars to the government coffers that are propping up AIG:

US Central Gulf Lease Sale Bids Total $703 Million

HOUSTON -(Dow Jones)- U.S. Interior Secretary Ken Salazar said the Central Gulf of Mexico Oil and Gas Lease Sale 208, held Wednesday in New Orleans, attracted more than $703 million in high bids.

The sale was conducted by Interior’s Minerals Management Service, or MMS, and had 70 companies submitting 476 bids on 348 tracts comprising over 1.9 million acres offshore Louisiana, Mississippi and Alabama.

However, that amount was lower than last year’s take (also a small fraction of the size of the AIG bailout):

The total amount of money that MMS would collect from this Central Gulf Lease sale is lower than last year, which attracted 78 companies and collected a record $3.7 billion, amid booming prices for oil and gas.

Given that we are now into AIG for $170 billion, another 242 successful auctions like the one yesterday and the AIG debt will be covered. Of course that’s assuming we aren’t soon out another $170 billion, and the oil industry hasn’t been taxed out of existence.

The familiar dog and pony show of calling oil company executives to Washington to testify before a pandering congress begins today:

Congress has big questions for Big Oil

WASHINGTON – Big Oil is once again being called on the carpet. Senior executives of the five largest U.S. oil companies were to appear before a congressional committee Tuesday where they were likely to find frustrated lawmakers in no mood for small talk.

Oh, that sounds serious. I wonder if those lawmakers have some solutions in mind? Let’s see, the last two times this happened – following Hurricane Katrina (oil prices were at $60) and then again in May 2006 (oil prices had risen to $75) – what exactly was accomplished? Well, a lot of fuel was wasted by flying all of these guys to Washington at taxpayer expense. Time was wasted. And oil prices have risen to over $100. Sooner or later congress is going to figure out that prices are rising for reasons other than a Big Oil conspiracy.

“These companies are defending billions of federal subsidies … while reaping over a hundred billion dollars in profits in just the last year alone,” complained Rep. Edward Markey, D-Mass., in previewing the hearing.

The lawmakers were scheduled to hear from top executives of Exxon Mobil Corp., Shell Oil Co., BP America Inc., Chevron Corp. and ConocoPhillips, which together earned about $123 billion last year because of soaring oil and gasoline prices.

Markey, chairman of the Select Committee on Energy Independence and Global Warming, said he wants to know why, with such profits, the oil industry is steadfastly fighting to keep $18 billion in tax breaks, stretched over 10 years.

Leave it to demagogue Markey to characterize a tax deduction as a subsidy. When you pay your taxes, but get deductions for your mortgage interest, for instance, do you consider this a subsidy? You are paying taxes, and get a break equivalent to a small fraction of your tax bill, but that’s a subsidy. It’s the same concept. And contrary to popular belief that this is an “oil industry tax break”, it is actually a tax deduction that was made available to all manufacturers. These manufacturers include industries with much higher profit margins than the oil industry sees.

What Markey and the panderers want to do is to insert language that says something like “Tax deduction for manufacturers – unless you happen to be an oil company.” They wish to single out one industry for punishment – and I think their reasons are clear: This will be popular with a public whose energy IQ is in the single digits.

I don’t see this as all that different from the moves Chavez has made. Rules were put in place. Projects in the oil industry take many years to complete. Projects were begun based on the rules that were in place, and now there is the threat of a rule change that would impact upon project economics. That’s what Chavez did: He changed the rules in the middle of a game that takes years to complete.

What kind of message does it send when we change our energy policy every couple of years? And I don’t say that only with respect to oil companies. Wind and solar companies see credits expire and then they are renewed. The credit for hybrids expires, and then is renewed on a whim. Long-range planning becomes very difficult if you have frequent, unanticipated rule changes. The only constant seems to be that we will subsidize ethanol consistently, as we have been doing now for almost 30 years. That is one tax credit that has never lapsed, and in my opinion will be in place for the next 30 years.

I have come across a couple of articles in the past few days that really left me shaking my head. One praises Hugo Chavez as a hero, and the other blasts oil companies for their multi-million dollar gifts to higher education. These people definitely see the world through a very different set of lenses than I do.

Hugo Chavez: Hero of the People

There are extremists on both ends of the political spectrum. For every Ann Coulter on the Right, there is a Wayne Madsen on the Left: Both are just as out of touch as they can possibly be. I have found that I can’t communicate with either sort of extremist, because they are generally entrenched in their views and impervious to any reasoning that challenges them. First up we have Madsen praising Hugo Chavez:

Better Than Bush’s Let-Them-Eat-Cake

Source: The Augusta Chronicle
Publication date: 2007-03-19

By Wayne Madsen

WASHINGTON – Venezuela’s President Hugo Chavez and American President Bush could not be further opposites. While Bush, an oil family scion, incoherently blathers on about the problems of highly priced gasoline and heating oil, his oil industry friends rack up obscene profits.

Meanwhile, Chavez, the champion of his country’s poor, delivers on his promises by providing deeply discounted home-heating oil, through Venezuela’s state-owned Citgo, to low-income Americans.

It should be clear to all thinking Americans that Chavez delivers and Bush does not.

Take that, Chavez critics. You aren’t “thinking Americans.”

THE BUSH-CHENEY oil cartel finds it reprehensible that poor people receive a 40 percent discount on their heating oil. For them, it is outrageous that such a program might eat into the grotesque profits of their oil industry pals.

What is monstrous is that Bush and Dick Cheney would sit idly by as America’s poor and elderly freeze to death in their homes because they cannot pay for luxuriously-priced home-heating oil.

Yes, “luxuriously-priced home-heating oil.” The current spot price is $1.67 a gallon, much lower than the apparently even more “luxuriously-priced” items like milk and bottled water. This is the problem with extremism. In his rabid state, Madsen takes complete leave of his senses and makes these preposterous claims.

Words can’t describe the level of cluelessness exhibited here. First, why can Chavez even provide deeply discounted heating oil? Because his country invited oil companies in to do business, they invested billions of dollars developing Venezuela’s oil fields, and now Chavez is saying “I’ll take that.” What Chavez hasn’t figured out yet – or maybe he is starting to as oil production continues to decline in his country – is that regardless of whether your oil industry is being run by private companies, or by the government, it takes major capital expenditures to keep it going.

So, can Chavez under-invest in the industry while diverting money to his pet causes? He can for a while, but you can see the results. Despite having enormous oil reserves, he and his cronies are running Venezuela’s oil industry right into the ground. His generosity to the poor has only been possible because he had a goose that laid golden eggs because they constantly reinvested money back into the business. Once he kills the goose, where is he going to get the money to continue his programs? I guess he could invite the oil companies back in and try to repeat the cycle, but I think they will be a bit more cautious next time around.

Big Oil’s Reprehensible Philanthropy

Next, the FTCR is in the news again. I could probably do a regular column on them. As far as I can tell, their mission statement seems to be “Slam oil companies and issue a press release every time we do.” I honestly can’t see that they serve any function besides self-promotion. They put out one misinformed press release after another, but now they have come up with perhaps the most disturbing Big Oil story ever:

ConocoPhillips Tries To Buy Into “Big Oil U” In Greenwash Campaign

SANTA MONICA, Calif., March 20 /PRNewswire-USNewswire/ — ConocoPhillips, with a $6 million gift to the University of Oklahoma’s School of Geology and Geophysics, is the latest oil giant seeking to buy respectability by capitalizing on the name of a well-known university, the Foundation for Taxpayer and Consumer Rights (FTCR) said today.

Why that’s disgusting! An oil company with Oklahoma roots giving money to an Oklahoma institution of higher learning! Despicable. Of course if the FTCR wasn’t quite so clueless, they might recognize that oil companies have a long history of giving to higher education, and in fact most oil companies have a dedicated budget for philanthropic causes. But I don’t expect the FTCR to know that, nor to mention it if they did, since it doesn’t support their mission statement. It seems that this is all new news to the FTCR, and they felt compelled to spin it as bad news by claiming that Big Oil is suddenly trying to buy respectability.

“Big Oil, an industry that has made billions at the expense of the environment, is trying to clean up its deservedly dirty image by associating with well-known universities,” said John M. Simpson, consumer advocate with FTCR. “Independent academic activities are too important to let them be sold to Big Oil companies that want to greenwash their image.”

Just to show the rank hypocrisy within the FTCR, remember that these are the guys calling for sub-$2.00 gasoline. Let’s see, guys. Will cheap gas make environmental problems better or worse? If they had their way and got what they wanted, we would consume much more gasoline than we currently consume. Would that be good or bad, fellows? Take your time.

If you don’t like oil companies and think they are polluting the environment, then what do you think you are doing when you drive a car or fly on an airplane? Are they doing the polluting, or are you? Don’t be a hypocrite. Make a stand against pollution by giving up your petroleum-based fuels, plastics, paints, medicines, fertilizers, clothing, etc.

“For a paltry $6 million, Conoco gets naming rights to the school and an industry friendly professor to spout their warped view of the world in an academic environment. We call on the regents to reject this deal,” said Simpson.

So, these companies have a “deservedly dirty image” and a “warped view of the world”, they have “made billions at the expense of the environment” and are now “seeking to buy respectability” with their “paltry $6 million.” Gosh, at least these guys aren’t biased in their viewpoints. I wonder how many of them drive cars and fly on airlines?

Stanford University’s Global Climate and Energy Program receives $100 million from ExxonMobil. The oil giant has recently launched an advertising campaign touting its involvement with the university. Movie producer Steve Bing, a Stanford alumnus, was so appalled by the campaign that he canceled a $2 million pledge to the school.

So Stanford netted $98 million dollars after Bing pouted and went home. I think Stanford can live with that deal.

Meanwhile, UC Berkeley is negotiating a $500 million deal with BP to create the Energy Biosciences Institute on campus.

No way! I also heard that when they aren’t destroying the world by funding higher education, they spend their time torturing puppies.

“Big Oil has an image problem,” said Simpson. “We simply cannot allow them to fix it by turning our respected colleges and universities into ‘Big Oil U’.”

Now isn’t this what you really meant? “Big Oil has an image problem. We simply cannot allow them to fix it because our mission is to perpetuate it.”

Perhaps if the FTCR had done their homework, they might have come across this article:

Okla. Univ. Receives $6M Gift From ConocoPhillips

Source:Journal Record – Oklahoma City
Publication date: 2007-03-16

Frank Phillips of Bartlesville and E.W. Marland of Ponca City – two Oklahoma oil industry pioneers – were among the first private donors to the University of Oklahoma.

Phillips and his brother started Phillips Petroleum and Marland founded Marland Oil, which merged with Continental Oil Co. – Conoco – in 1929. Phillips Petroleum and Conoco merged in 2002.

On Thursday, the company now known as ConocoPhillips and based in Houston continued the tradition of providing financial support to OU with a $6 million contribution allocated to the School of Geology and Geophysics.

Total gifts and pledges to OU from ConocoPhillips now total $33 million, said David L. Boren, OU president.

The FTCR press release closes with this whopper:

The nonpartisan, nonprofit Foundation for Taxpayer and Consumer Rights (FTCR) is a leading consumer watchdog group.

Non-partisan? Non-partisan?!! I wonder what definition of non-partisan they are using? When every article that they write about oil companies is riddled with adjectives like “deservedly dirty image” and a “warped view of the world”, they show how much credibility they have by claiming that they are “non-partisan.”

And if that story wasn’t bad enough, this one will really make the FTCR’s blood boil:

ConocoPhillips Contributes $1 Million To Memorial Hermann Life Flight

HOUSTON, Mar. 20, 2007 – ConocoPhillips announced today its contribution of $1 million to Memorial Hermann Life Flight to help with the purchase of six new helicopters that will provide enhanced emergency care to the community.

“Since its inception in 1976, Memorial Hermann’s Life Flight has brought hope to thousands of patients who have required emergency medical care and transportation,” said Phil Frederickson, executive vice president, ConocoPhillips. “By replacing the existing four helicopters and adding two new helicopters, Life Flight will be able to reach many more people who have life-threatening medical conditions.”

They should set up a hotline for consumers to call in and turn in oil companies every time they commit philanthropy. If they like, I can get them a hundred more stories like these. They can issue a scathing press release in response to each story.

Over the weekend, I watched the documentary King Corn. It was released in October 2007, but I just now got around to watching it online at Netflix. The premise is that a pair of college friends from the East Coast wanted to learn more about where our food comes from. When they learn about the importance of corn in our food supply, they move to Iowa and decide to grow an acre of corn over a growing season in order to better understand its role in the food chain.

As the movie progresses, U.S. farm policy with respect to corn is explored. It struck me during the movie that U.S. farm policy has many parallels to U.S. energy policy. Both systems have been set up with the goal of providing the cheapest prices to consumers. Both Big Oil and Big Ag work within the systems that have been created, but there are many negative consequences of these systems. I am grappling with the trade-offs.

On the one hand, the movie made a point that I often hear in relation to the oil industry: Consumers are now spending less of their disposable income on food (or energy) than they have in decades. So the consumer benefits from having extra money to spend on other things. But that also means that less money is flowing to the farmers, which drives vicious cost-cutting and has decreased the viability of the small family farm.

Cheap food and cheap energy also lower the financial penalty to consumers for over-consumption. Cheap, subsidized corn has led to cheap corn sweeteners, which can be found today in many of our foods. The rise of obesity and diabetes in the U.S. has been linked to the rise of high fructose corn syrup (HFCS) in our diets, which can be traced back to a farm policy that encourages over-production of certain crops. (I have to admit, if the choice is high fructose corn syrup or ethanol, I will choose ethanol).

King Corn implicates former President Nixon’s Secretary of Agriculture Earl Butz as the man responsible for sending us down this path of industrialized agriculture with a radical rewriting of U.S. farm policy in the early 1970’s. (For more details on Butz’s legacy, see A reflection on the lasting legacy of 1970s USDA Secretary Earl Butz by Tom Philpott).

Of course people are responsible for the choices they make. The government can’t be everyone’s mother. But they do put policies in place that influence choices. It is easy for me to choose not to over-consume if I can’t afford to do so. There is a reason most of us don’t eat lobster twice a week, and it isn’t because we don’t like lobster. But the calories from HFCS are much cheaper, so food dollars of those whose incomes are stretched gravitate in that direction.

Thus, I grapple with the dilemma of whether it is better that consumers spend more disposable income on food and energy in order to limit consumption. I don’t want to see people starving, but I also don’t want to see people dying from diabetes. The annual costs attributed to obesity in America have been estimated to be $100 billion, and the cost of diabetes at over $200 billion. That is $1,000 per year for every man, woman, and child in the country – and a loss of the quality of life for those afflicted. Those costs are at least partially attributable to the policies that have led to over-production of food.

I am both the product of an American farm, and a former employee of Big Oil. These experiences have shaped my views on and my interest in our respective agriculture and energy policies. I think these policies over the past few decades have led us to an unfortunate place: Fat, diabetic, and with a level of dependence of foreign oil that threatens to bankrupt the country. Further, there are entrenched lobbies that spend lots of money to maintain the status quo.

I certainly don’t blame the farmer for this. As one man said during the movie “I will produce what consumers demand. If they demand (leaner) grass-fed beef over corn-fed beef, that’s what I will produce.” That’s the same reason oil companies produce gasoline and car companies have produce SUVs.

But somehow we have to change what consumers demand before it kills us all.

As the previous post indicated, we in the U.S. have a pretty low energy IQ. One of the reasons is that energy stories are often reported in a very biased or uninformed manner, which tends to distort public viewpoints. For instance, you may think those evil oil companies are wrecking the world. You are entitled to your opinion, and admittedly the oil industry has done plenty to help forge those sorts of views.

However, in the U.S. we take an especially negative view of the oil industry relative to the rest of the world. Why? Odds are that your opinion has been shaped by stories like the examples in this essay. Make no mistake: Your views are carefully nurtured and cultured by various groups with agendas, often by publishing stories full of misinformation. (Full disclosure: I am attempting to influence your viewpoint here, but I am going to do so by pointing out shenanigans).

Here is a perfect example of a story in which words and examples were carefully chosen to convey a very specific (negative) viewpoint:

Big oil companies, little investment in renewable energy

The Center for American Progress released a new report analyzing 2008 oil company profits and lack of investment in renewable energy, even while the companies spend millions of dollars on ad campaigns touting their emphasis on renewable energy.

Note the wording. There was a “lack of investment” in renewable energy, while they spent “millions of dollars” on ad campaigns. The problem with that line – as you will see – is that the “lack of investment” is in the billions, which dwarfs the millions spent on the ad campaigns. But I suppose “billions spent on renewable energy and millions spent on ad campaigns” doesn’t convey the desired negative impression as does “4% spent on renewable energy and millions on ad campaigns.” The first phrase would likely elicit a response of “Uh, OK.” The second one on the other hand? “Why that’s outrageous! Those misers!”

These kinds of stories also inevitably fail to note that the ‘miserly’ oil companies paid several hundred billion dollars in taxes as a result of those profits (if the stories mention taxes at all, it’s that the oil companies aren’t paying their ‘fair share’). According to the Tax Foundation, oil companies have paid out some $2.2 trillion in taxes over the past 25 years – far more than they earned over that time period. But such a misleading picture tends to get painted, that many may think this MoveOn.org petition is rational:

Stop subsidies for Big Oil

Think oil companies should pay their fair share of taxes? So does President Obama. In his budget, the President has proposed cutting billions of dollars in special subsidies and tax loopholes for oil and gas companies.

Just what is a fair share? Will it only be a fair share when oil companies are funding the entire U.S. government? But back to the initial article:

It should come as no surprise that last year’s record high oil prices also led to near record profits for big oil companies.

No, we were bombarded with headlines about it all the time. It should come as no surprise at all. So someone should tell this guy, who thinks it is a secret:

Obama braces for big oil backlash

Little known fact: While most every other industry was falling to pieces last year, the oil industry posted record profits. ExxonMobil alone made $45 billion. So Obama, in his attempt to bolster the sinking U.S. economy, is likely not feeling too much sympathy for the industry as he goes after the clearly unnecessary tax credits the industry currently enjoys.

Another example of a highly misleading article (which actually led me to the MoveOn.org petition). Important to note once again that while other industries were falling to pieces and requiring multi-billion dollar bailouts, the oil industry was making big profits and paying big taxes; taxes in part which enabled those bailouts. But let’s continue to dissect the initial article:

Despite their soaring earnings, the big five companies were very stingy with investments in renewable and low-carbon energy technologies and fuels that would reduce oil dependence.

Media tracking group TNS Media Intelligence reported that $52.5 million was spent in the first quarter of 2008 along by the oil industry on greenwashing advertisements that boast about investments in wind and solar power or efficiency.

In fact, a CAP analysis of their investments reveals that the big five oil companies invested just an average of 4 percent of their total 2008 profits in renewable and alternative energy ventures.

So, let’s have fun with math. According to the story, 4 percent of total 2008 profits was spent on renewable and alternative energy. That amounts to $4 billion, which the writer considers “very stingy.” $52.5 million spent on advertising – which is only 0.0525% of 2008 profits – amounts to a “smokescreen PR campaign.” Just once I would like to see one of these articles stick in a line like “In fairness, spending on their tax bills amounted to 250% of total 2008 profits.”

What planet do these people live on? Oh, right. The planet where oil companies are run by psychotic madmen and profits go to a select few executives and insiders who conspire in smoke-filled rooms. The planet where novices ‘know’ that the industry should invest their profits into ventures that aren’t their core business, and which would likely cause their profits to vanish (potentially leading to a bailout scenario!) These people live in a cartoon world, but the problem is that most of the population lives there.

Voters have been conditioned to hate Big Oil, as Robert Bryce points out in:

Exxon, Big Oil Profits Evil Only Until You Weigh Their Tax Bills

Bryce notes:

While it’s unlikely that the general public’s attitude toward Big Oil will ever be changed, the public should recognize that Exxon’s profits have come along with an enormous tax bill and that those tax payments are helping governments all over the world stay solvent. According to the company’s income statement, the amount of taxes it paid in 2008 was 2.5 times as much as its net profit.

In 2008, Exxon’s tax bill averaged about $318 million per day. And it paid those taxes at the very same time that the whiz kids on Wall Street, the geniuses at AIG, and the mavens at Freddie Mac and Fannie Mae, were begging Uncle Sam for multibillion-dollar life preservers in order to prevent financial chaos. Exxon made huge profits—and paid record taxes—at the very same time that the U.S. financial system was undergoing near-fatal convulsions brought about by excessive speculation, uncontained greed, and a basic failure to provide goods and services needed by the overall economy. How many Americans really need credit default swaps or collateralized debt obligations? Now compare that number with the tens of millions of Americans who absolutely must have gasoline every day.

What about the original article at the Center for American Progress (CAP)? Funny story on CAP. I was invited to D.C. a few years ago for an energy conference, and I happened to be acquainted with the Director of Environmental Policy at CAP (which is a liberal think tank). I was invited to drop by and talk to CAP about the oil industry. Even though I expected a hostile audience, I was looking forward to it, because I thought I might be able to address some gross misconceptions. But at the last moment, my company decided that it wasn’t a good idea for me to make the trip as oil prices were at all time highs and they were worried that I might find myself in an awkward situation with the media. But, back to the original CAP article:

Big Oil Misers

That certainly looks like a balanced title from an organization that describes itself as “non-partisan.” The strategy in the article is the same as the earlier article: Use a percentage to downplay the multi-billion dollar investments in renewable energy, and then quote the advertising money in “millions” to make it appear that more was spent on advertising than on renewable energy. But why must a truly non-partisan organization spin like this? Shouldn’t a balanced article mention the monumental tax bill that has been used in part to bail out other industries?

Worse, there are blatant falsehoods in the article itself. After noting that the American Petroleum Institute claimed that “most people support putting more of America’s oil and natural gas to work”, the CAP article claims:

And API’s assertion that “most people” support more oil and gas drilling is misleading at best. An NBC/Wall Street Journal poll asked “When it comes to addressing our energy problems, which one of the following do you think should receive the most emphasis?” (italics used for emphasis). Six of 10 respondents favored “developing alternative energy sources.”

Misleading at best? Hmm. Let’s have a look at the poll, shall we? On Page 26, we see Question 35:

I’m going to read you several steps that could be taken to ease America’s energy problems. For each one, tell me whether you think this is a step in the right direction, a step in the wrong direction, or if you do not have an opinion either way. And do you think this will accomplish a great deal or just a little in dealing with America’s energy needs?

How did people answer? While 92% felt that developing alternative energy sources would either accomplish a great deal or at least a little, 63% said the same about expanding areas for drilling for oil off the coast of the United States. Where I come from, 63% is “most people” and there is nothing misleading about the API making that claim. It is quite disingenuous, though, for CAP to suggest that API’s statement was misleading. CAP is either spinning or they didn’t read the survey very carefully. They have interpreted the question “Do you support this?” – which is the question API commented upon – as “Do you support this as your number 1 priority?” The ‘misleading at best’ charge aptly applies to CAP in this case.

I wish there wasn’t such an antagonistic relationship between the oil industry and Democrats. There is too much at stake. Historically, Republicans are more supportive of the oil industry, and in turn the oil industry overwhelmingly supports Republican candidates. (Or it may be the other way around; the oil industry supports Republicans who in turn support the industry). On the other hand Democrats (except for those in oil-producing areas) are generally hostile to the oil industry, which ensures that not much money from the oil industry will go to support the Democratic party (although Diane Feinstein has reportedly received $100,000 from the oil industry in the past decade).

My view that Big Oil and Democrats should find common ground has nothing to do with wanting to make nice with a new administration. My views are based on the belief that any intermediate success at achieving some level of energy independence must involve a large contribution from oil and gas. I think it goes without saying that oil and gas provide the overwhelming majority of our transportation fuel, and that they are forecast to provide the overwhelming majority for decades to come.

The problem is of course that some naively think they can marginalize the oil industry with punitive taxes, and alternatives will step up and fill the void. (To be clear, I also don’t subscribe to Newt Gingrich’s viewpoint that encouraging the development of shale oil will lead to energy independence). What will happen in reality is that punitive measures will discourage domestic production, which will quicken the pace of shifting our supply to imports. It is ironic that Steven Chu doesn’t seem to feel the need to work with our domestic oil industry, but warns OPEC not to cut production, and then is pleased when they don’t. I believe the blind spot in the present administration over the need to support our domestic producers will simply mean that future energy secretaries are even more beholden to OPEC.

This might change if we could have a more balanced discussion on our energy policy. However, I am keeping expectations pretty low. I have learned to do this when the topic is energy.

Update: My wife informed me this morning that lead actor Daniel Day-Lewis won the Oscar last night for best actor for his performance in this movie. While I don’t know who he was up against, he certainly did an outstanding acting job in this movie.

This being my last weekend here in Scotland, I decided to take a break from working 7 days a week and go see There Will Be Blood, the “oil movie” I have heard so much about. Yes, I know this movie has been out for a while. But it just came to Aberdeen.

Spoiler Alert

Don’t read this section if you haven’t seen the movie. Just go see it.

First off, I have been misled about this movie. I had heard it was the story of an oil man and his rise from poverty to wealth and power. I saw it differently. I saw it as the story of a cruel psycopath, who happened to be an oil man. I can tell you that some oil men are actually not psychopaths. I can just see some who watched this movie and could picture this playing out in various parts of the globe: The ruthless oil man moves in and runs roughshod over everyone. Now, I know that those kinds of things have happened, but this is not normal. And it certainly isn’t normal in this day and age (although exceptions can always be found). Your typical oil man also doesn’t shoot people in the head, nor do they bludgeon people to death with bowling pins, as did the main character Daniel Plainview, played by Daniel Day-Lewis (who did some very fine acting). His character was described in a recent news story as “a raging, conniving, acquisitive petroleum pioneer caught up in California’s oil boom of the early 20th century.” Plainview’s psychotic behavior had me tense during the entire movie. You never knew when he was going to go off on someone unpredictably, and he held grudges for a long, long time.

What I did like about the movie is that it gave a good historical perspective on the early years of the oil industry. This is an inherently dangerous industry, and you saw that in the movie. You have guys out there trying to provide a living for their family – and bringing something to the market that the world depends upon – and dying in the process. And despite the fact that we have come a long, long way since then, people still die each year in this industry. This is a major reason that we have safety beaten into our heads constantly. (It can be quite a shock to go into another industry and contrast the safety precautions with those in the oil industry. In the oil industry, for instance, besides the “big stuff”, we have things drilled into us like how many people die falling out of chairs or falling down stairs each year – therefore don’t lean back in your chair and always hold the hand rail. I get several safety alerts like that every week).

Back to the movie (for a second), I constantly felt like something bad was going to happen to Plainview’s young son. I try to avoid movies where kids get hurt or killed, because I have a hard time shaking those things off. And of course something bad did happen to him, and I spent the rest of the movie thinking about tragedies involving children. I am still trying to shake off last week’s Minnesota school bus crash in which 4 kids died.

Not to get completely off topic, but is anyone else here wired like that? I noticed that once I had kids, I really had to be careful watching the news, as I found myself again and again strongly empathizing with victims and their families. It’s especially bad when I am separated from my family as I am now. The first time I really noticed this was when my daughter (first born) was only about a year old, and the Oklahoma City bombing occurred. I kept imagining the heartache everyone was going through (made worse because I am from Oklahoma and had a daughter almost exactly the same age as Baylee Almon, killed in the bombing), and it affected my sleep for a long time. After that I was always really affected by bad news involving kids – and I can rattle off one story after another. (And the reason for this digression, is these are the places my mind went after the scene in which Plainview’s son was hurt).

Conclusion

Anyway, after that depressing digression, I recommend the movie. See how this industry started. It is disturbing, and the psycopath angle aside, is probably an accurate reflection of the selfish and monopolistic behavior of the time (some of which carries on to the present). Of course I don’t even know if the movie is still playing widely in the U.S. It can be a while before movies from the U.S. spread around the globe. Next up, I am hoping to see Citizen Kane, followed by Gone With the Wind. Heard they are also pretty good, and looking forward to them making their way across the pond.

Back in Aberdeen after some very interesting meetings in London, some of which I hope to be able to discuss in the not too distant future. I started working my way through the list of questions while I was in London and had some spare time. Some of the questions really warrant a stand-alone post.

Instead of posting one very long blog, I am going to break this up into at least 2 parts. I have been working my way through the questions in the order they were posted. Click on each answer link below the question and it will take you to the answer in the essay.

Tad asked: Where do you see the oil industry in 20 years? Answer

Fat Man asked: You said you were going to cut back on blogging in order to spend more time with your family. You seem to be a blogging as much, or more, as you were before that promise. Are you doing what you said you would, or are you shorting your family? Answer

Anonymous asked: Oil production has been flattish over the last couple years, and consumption is up in many places (with China receiving the most attention in this regard). Is there a source that I can access that shows who has been getting by with less oil? Answer

Anonymous asked: What’s your favourite Aberdeen pub? I’ll be making a stop there in November and always appreciate a local tip. Answer

Anonymous asked: Would ethanol make more sense if it was simply burned at the production facility to make electricity vs trying to build infrastructure to transport it? Or is the EROI still to low even in that case? Answer

Rice Farmer asked: …can ethanol be produced by powering the farm machinery and trucks on ethanol and still come out ahead? I think not. So it seems to me that ultimately, the large-scale biofuel industry will collapse and that biofuels will just be produced locally and on a small scale for local needs. Powering the current huge fleet of cars and trucks on biofuels is just a pipe dream.

So what’s your take? Answer

Anonymous asked: Then would the EROI of using biomass for electrical generation actually work out to be favorable from an realistic economic standpoint (i.e., not completely propped-up by subsidies)? Or is it still a big enough sink as far as energy consumed per unit created that it would still be unfeasible to use for energy production? Answer

scp222 asked: Refining margins are quite low now after been about $30 a while back. What do you think the future holds for crack spreads and the refining business in general? Answer

Answer

I think the oil industry is going to evolve quite a bit over the next 20 years. There will still be a lot of oil in 20 years. I don’t believe supplies can possibly meet the demand growth projections I have seen, which of course means continued high prices.

I see a fairly high probability that the U.S. government will pass punitive measures as the public continues to be outraged at the cash flowing out of their pockets into oil company coffers. It won’t matter. I have yet to see a punitive measure that I truly believe will result in lower prices for consumers.

Now, while there will be oil in 20 years, I don’t think there will be enough oil. So, oil companies are going to be tuned to developments in alternative energy. A number are already involved in these areas. Even the pure oil companies like ExxonMobil will find themselves moving into this space. And because of continued high oil prices, they will find themselves with the cash to get into any field that looks promising.

The apparent widespread perception that oil companies will sit around twiddling their thumbs while alternative energy companies put them out of business is ludicrous. I have said before that if they wanted, the oil industry could own the ethanol industry. The entire ethanol production of the U.S. only amounts to the output of 1 mid-sized oil refinery. So, why don’t they own the ethanol industry? Because they see that their capital is better employed elsewhere at the moment. But if that changes – or if a significant breakthrough occurs in butanol, for instance – the oil companies have the infrastructure and the expertise to capitalize.

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Answer

You are correct that I am blogging about as much as I did before. However, I realized that it wasn’t the blogging that was taking time away from the family. I write very fast. I can knock out an essay very quickly, and I usually do it when I am up early before everyone else. But it’s all of the peripheral stuff that was taking up so much time: Answering e-mails (this was consuming over an hour every day), getting involved in debates (another hour), answering questions in the comments section, etc. I have cut those things out.

I have taken my e-mail address offline (although a number of people still have it, and others still find me), and this has cut down the time required to handle e-mail by 90%. While I still have essays put up at The Oil Drum, I haven’t commented there since August. I rarely comment here anymore (and this post was an attempt to catch and address a lot of comments at once.

Now, do I ever short my family as a result of the blog? Sure, sometimes I have to tell my kids to wait just a bit as a finish something up. But do I come home from work and spend the rest of the evening doing correspondence? No. I think I have found a reasonable compromise, and one that my family is pretty happy with.

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Answer

Benjamin Cole provided some information on this. You can’t find information on all countries, and therefore there is much reliance on anecdotal information. A comment that I remember someone once making was “I am tired of hearing stories like, A lightbulb went out in Bangladesh, therefore Peak Oil.” I agree with this sentiment completely. We can’t rely on anecdotal accounts that there is a fuel shortage here or there. There have always been fuel shortages.

The best sources for this kind of information, though, are the BP Statistical Review of World Energy (as Benjamin mentioned), the IEA and the EIA (for more timely information than BP’s stuff). If you look at the two latter options, you will find that the vast majority of the world’s oil usage is covered. This table from the EIA is a good starting point.

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Answer

I am not a big pub guy, so I went to my friend Euan Mearns, who also lives in Aberdeen. Here’s what he said:

Depends what your looking for.

West end chique – try Simpsons on Queens Road. (crap beer but nice wine – the house Merlot is excellent)

My favorite of late is “No 10″ – Rubislaw terrace – good ales

Popular spots down town are The Prince of Wales and Ma Camerons

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Answer

Joules answered this question in the same way I would have: You would burn the biomass directly to produce the electricity. The EROEI is not the problem; capital costs for biomass-to-electricity plants are much higher because it is more difficult to handle the biomass. But long-term, I think this option will be one that we will count on heavily.

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Answer

I agree. I believe that if ethanol had to be used to provide energy to grow the corn and produce the ethanol, the whole thing would collapse. Remember, the energy balance is already very marginal. The only reason it is 1.3 or so is because of the credits for DDGS byproduct. On a fuel in versus fuel out basis, it is very close to parity.

I am convinced that we have to learn to get by on a lot less energy, but biofuels will provide a portion of our energy needs. I personally believe that the bulk of the solution must come from electricity. I contend that it is simply not possible for the world to produce enough biofuels to displace our current usage of petroleum. Conservation, greater efficiency, and electricity are going to have to be big parts of the equation.

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Answer

I am a fan of biomass gasification to produce electricity. In the long run, I think we really need it. But as I stated above, it isn’t the energy balance that is the problem; capital costs are much too high to enable it to compete with coal or natural gas. If carbon emissions were taxed, it would give the biomass to electricity option a boost.

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Answer

With gasoline inventories still so low, I think crack spreads are likely to explode again – certainly by late spring. Right now, with oil as high as it is, and with gasoline inventories where they are, it doesn’t make much sense that gasoline prices are soft. There is a bit of disconnect here, but one that I have seen frequently. This situation should put to rest any notion that refiners are in control of their margins, such that they boost profits by boosting margins. I know this seems to be a very popular notion, especially among those with the Oil Watchdog mentality, but any time I hear someone say it, I immediately know that at least on that topic, they are ignorant of the facts.

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Time to debunk another perpetual myth. In a story today in CNN – Big Oil’s Money Machine – consumer advocate Tyson Slocum makes the following claim:

“Are we getting any bang for our buck with record gas prices?,” asked Tyson Slocum, energy program director at Public Citizen, a national consumer advocacy organization. “They aren’t building any new refineries. If they’re not going to translate the high prices into investment for the consumer, why should they be allowed to charge high prices?”

What is it with these consumer advocates and not being able to get their facts straight? Here are the facts for Mr. Slocum. According to the Oil and Gas Journal (OGJ) the oil industry invested $176 billion in capital expenditures in 2006, and is forecast to invest $183 billion in 2007. Those aren’t small potatoes. So, would Tyson Slocum like to respond to that?

Furthermore, it is much cheaper to expand existing capacity than to build new refineries. The API recently estimated that it costs about 60 percent as much to expand existing capacity as to build new capacity. And refiners are definitely investing in expansions. In just the past 10 years, refinery capacity has expanded by 2 million barrels per day. That is the equivalent of adding 1 decent-sized refinery each and every year for 10 years. You can verify those numbers for yourself right here.

So, Tyson Slocum, given that new capacity is being built and major investments are being made – directly contradicting your claims – would you care to retract? Looks like something is being done with those “high prices” after all.