Our introduction to an October 2022 link to Our Finite World (Here at Climateer Investing We Recycle!):
....This piece by Gail Tverberg runs a bit contra to the Russell Napier interview that was making the rounds a couple weeks ago with his capex boom optimism but Gail is an actuary, she has to deal with the cold, hard reality of numbers and she's been applying that gimlet eye to the nexus of energy and finance for a long time....
From Gail Tverberg's Our Finite World blog, August 3:
It has recently become clear to me that heavy oil, which is needed to produce diesel and jet fuel, plays a far more significant role in the world economy than most people understand. We need heavy oil that can be extracted, processed, and transported inexpensively to be able to provide the category of fuels sometimes referred to as Middle Distillates if our modern economy is to continue. A transition to electricity doesn’t work for most heavy equipment that is powered by diesel or jet fuel.
A major concern is that the physics of our self-organizing economy plays an important role in determining what actually happens. Leaders may think that they are in charge, but their power to change the way the overall system works, in the chosen direction, is quite limited. The physics of the system tends to keep oil prices lower than heavy oil producers would prefer. It tends to cause debt bubbles to collapse. It tends to squeeze out “inefficient” uses of oil from the system in ways we wouldn’t expect. In the future, the physics of the system may keep parts of the world economy operating while other inefficient pieces get squeezed out.
In this post, I will try to explain some of the issues with oil limits as they seem to be playing out, particularly as they apply to diesel and jet fuel, the major components of Middle Distillates.
[1] The most serious issue with oil supply is that there seems to be plenty of oil in the ground, but the world economy cannot hold prices up sufficiently high, for long enough, to get this oil out.
As I frequently point out, the world economy is a physics-based system. World oil prices are set by supply and demand. Demand is quite closely tied to what people around the world can afford to pay for food and for transportation services because the use of oil is integral to today’s food production and transportation services.
Heavy oil is especially involved in this affordability issue. As oil becomes “heavier,” it becomes more viscous, and thus more difficult to ship by pipeline. If oil is very heavy, as is the oil from the Oil Sands of Canada, it needs to be mixed with an appropriate diluent to be shipped by pipeline.
Heavy oil often has sulfur and other pollutants mixed in, adding costs to the refining process. Furthermore, heavy oil, especially very heavy oil, often needs to be “cracked” in a refinery to provide a desirable mix of end products, including diesel, jet fuel, and gasoline. This, too, adds costs. Otherwise, there would be too much of the product mix that would be like asphalt. Also, as noted previously, even if the costs of production are high, the selling price of diesel cannot rise very high without raising food prices. This tends to keep the prices of heavy crude oils below those for lighter crude oils.
Many people believe that the high level of “Proved Oil Reserves” worldwide makes it certain that businesses can extract as much oil as they would like in the future. A major issue is whether these reserves mean as much as people assume they do. Oil reserves of OECD countries (an association of the US and other rich countries) are likely to be audited, but reserves of other countries may not be. Asking a relatively poor oil-exporting country the amount of its oil reserves is like asking the country how wealthy it is. We should not be surprised by fibbing on the high side. The problem is that the vast majority of reported oil reserves (85%) are held by non-OECD countries. These reserves may be significantly overstated.
Also, even if the reserves are fairly reported, will the country have the resources to extract these reserves? Venezuela reports the highest oil reserves in the world thanks to its heavy oil in the Orinoco Belt, but it extracts a relatively small amount per year. An October 2022 article says that the country is waiting for foreign investment to expand production.
Going forward, oil companies everywhere need to worry about broken supply lines for necessary items, such as steel drilling pipe. They need to worry about finding enough trained workers. They need to worry about the availability of debt and the interest rate that will be charged for this debt. If private oil companies look at the true prospects and find them too bleak, they will likely use their profits to buy back the shares of their own oil companies instead (as is happening now).
[2] While oil producers can crack heavy oil to make shorter hydrocarbons in a way that is not terribly expensive, trying to make near-gasses and light oils into diesel becomes impossibly expensive.
It is easy for people to assume that any part of the oil mix is substitutable for another part, but this is not true. Cracking long hydrocarbon chains works to make shorter chains, but the economics tend not to work in the other direction. Thus, it is not economically feasible to make gasoline into diesel (which is heavier), or natural gas liquids into diesel....
....MUCH MORE
Previously from Our Finite World:
