Why isn't the price of gasoline even higher?

In the last year, the price of gasoline has risen by 38%. The prices of other fuels have risen much more--diesel has risen by 64% and jet fuel has risen by 91%, and the price of West Texas Intermediate (WTI) crude oil has risen by 100%. Why aren't gasoline prices rising more than they are? Some will recognize this as the "crack spread" issue.

I see several possible explanations, including a long term shift in prices valuing diesel (or "distillate") more highly than gasoline; political pressure to keep gasoline prices low; and integrated oil companies not really needing a high gasoline pricing margin to keep overall profits at an acceptable level. I do not see ethanol as playing a significant role at this time. Regardless of the explanation, refineries and gasoline stations that are not part of oil conglomerates may find this a difficult storm to weather.

Figure 1 shows that the differential between the retail price of gasoline and the per-gallon cost of crude oil has recently dropped dramatically, leaving a much smaller margin to cover expenses and profit. It is this shift that I am discussing in this article.

gasoline prices declining relative to WTI

Figure 1. Average gasoline price minus WTI crude price; average diesel price minus WTI crude price; and average jet fuel price minus WTI crude price. (Averages are for full years, except 2008 which is for 6 months; crude prices have been converted to a per gallon basis.)

In this post, I divide my observations into four sections:

1. General observations and background

2. Changes in world product demand and recent US consumption

3. Who are the market players, and why this matters

4. What might be ahead?

In this post, I have not tried to address the question of how the futures market fits in with this situation. If prices in the futures market align with what buyers and sellers of the physical products would pay, futures markets shouldn't be an issue. If the futures market is tending to raise the price of some products and leave others artificially low, this could be contributing to unusual differentials that seem to be occurring now. For example, if speculation is playing a role in the high price of crude oil, but is having a lesser impact on gasoline ("RBOB"), it would seem like this could be causing dislocations of the type we are seeing.

Section 1. General Observations and Background

There are several problems with trying to analyze very precisely how much margin refineries need to be profitable. One problem is that refineries make a mixture of products. Another is that one really needs to break out costs more finely than I am doing in this analysis, to analyze very precisely what is happening. A third problem is that many of the costs, including refinery operation costs and some taxes, will vary with the price of crude oil. Thus, one would expect an upward drift in pricing margins over time, as we are seeing for diesel and jet fuel in Figure 1.

Clearly, the particular comparison figures make a difference also. In Figure 1, I am using average retail prices for regular gasoline, for diesel (all types combined) and spot prices for kerosine-type jet fuel at New York Harbor. Gasoline, distillate (which includes both diesel and home heating oil), and jet fuel are the three biggest categories of US petroleum products.

If we look at the output of all US refineries (Figure 2), we find that recent years, the distribution of the production of the various petroleum products has remained relatively constant.

Figure 2. Breakdown of Production from US Refineries, 1993-2008

Figure 2 shows that gasoline production has remained in a tight band at 42% to 44% of US refinery output. Distillate, which is used for both diesel fuel and heating oil, has gradually climbed from about 21% of output in 1993 to 25% of output in 2008. Jet fuel has been fairly constant at about 9% of total production. The "all other" category has declined from 24% to 21%, as distillate production has grown.

It seems to me that there are several reasons why shifts in production don't happen very quickly. For one, the mix of oil fields feeding our refineries changes only very slowly over time, and the particular oil going into a refinery is a significant determining factor of the mix of products coming out of the refinery. For another, even if a refinery has "cracking" or "coking" capability so that it can change the mixture of products it produces, it is expensive to use, and only a part of the refinery output will use it. Also, our built infrastructure uses a particular mix of products. This mixture can change over time, but only fairly slowly.

What does this pricing shift mean for refineries?

I think there are really two issues. One is that margin for gasoline refining is dropping. In fact, since we are looking at the difference between the retail price and the cost of crude, it is the whole top-to-bottom margin that is dropping, so there is less available not only for refineries, but for other operations such as gasoline stations. There have been many reports in the news recently about gasoline stations closing because of financial problems.

The second issue is that margins for diesel and jet fuel do not seem to be rising enough to make up for the drop in the gasoline margin. It is difficult to tell for certain, without knowing how much of the costs are fixed costs and how much are variable costs. I would expect that costs of refining would be quite closely tied to the price of crude, because refining is very energy intensive. If companies are looking at only the dollar spread, they may be underestimating how much their costs really will rise with higher crude prices, and think that the pricing margins for distillate and jet fuel are more adequate than they really are.

Because of the differences in margins by product, refineries may be able to improve their financial results if they can change their mix to generate more distillate and jet fuel, and less gasoline. Overall, they may still come out behind in terms of profitability, if pricing margins for distillate and jet fuel have not risen enough to offset the decline in the gasoline margin. Refineries that are producing a lot of gasoline now and lack the capability to change their mix will almost certainly suffer a loss of profitability with the current pricing margins.

Section 2: Changes in world product demand and recent US consumption

Recent US consumption trends

If we compare US consumption of various oil products in the first four months of 2008 with the corresponding amounts for the first four months of 2007, we find that US gasoline consumption dropped less than any other product.

Figure 3. Decreases in US consumption by product, January-April 2008 compared to January -April 2007.

Figure 3 indicates that consumption during the first four months of the year dropped by -1.3% for gasoline, -3.9% for distillate, and -3.8% for jet fuels. Other products, not shown on Figure 3 include residual fuel oil, -21.6%; asphalt, -13.1%; and natural gas liquids, -5.8%. Overall consumption of petroleum products decreased -4.2%, which is a huge change. These amounts are calculated on an average daily basis, and reflect the fact that 2008 is a leap year.

Thus, what we are seeing is that gasoline, with a disproportionately low price increase, is holding up better in consumption than other products, with larger price increases. Part of this is the fact that with the lower price increase, Americans have had less need to cut back on their demand. Part of it, too, is that it has been possible to continue to get imports, even with this relatively low price increase, indicating that overseas demand for gasoline is not high, compared to other products.

Part of what is happening is that US exports of petroleum products are increasing. In the case of distillate, we have shifted from being a net importer to a net exporter (Figure 4).

Figure 4. US Distillate Products Supplied (Consumed), US Produced and Imports. Years 1997 to 2007 are full years; 2008 represents January-April 2008 average.

Four months is a fairly short time period, and I am not certain that shifts in consumption among the various petroleum products during this period are necessarily indicative of longer-term trends. There is considerable seasonality in American's automobile driving and in the use of heating oil, and this may be affecting the numbers. It is interesting that gasoline prices have continued to stay disproportionately low, even after the summer driving season would normally have begun.

The world market is perhaps beginning to value distillate more highly, relative to gasoline, because of its greater energy content.

I think part of what may be happening, on a worldwide basis, is a change in the relative value of distillate and gasoline. Gasoline started as the higher valued fuel, but is now becoming the lower valued fuel.

As I understand it, when the United States first began refining petroleum, gasoline was viewed as the premier product. It was cleaner burning than diesel, and cars that ran on petroleum had quieter engines. The majority of petroleum produced in the US was light sweet crude oil. With such crude oil, it was easy to produce a high proportion of gasoline, with little refining effort.

With these considerations in mind, the US auto fleet was built using gasoline as its primary fuel. Refineries were optimized for producing the maximum amount of gasoline. The price of gasoline was set as high, or higher, than that for diesel. Diesel was viewed as almost as a byproduct that could be sold at a lower price to support gasoline sales.

When petroleum was cheap and plentiful, this approach may have made sense. The catch is that diesel is really the better value, in terms of the number of miles per gallon that vehicles are able to drive. Part of this difference is because of the higher energy content of diesel relative to gasoline, and part of this is because diesel engines tend to be more efficient. Another problem of the past--the bad odor of diesel emissions--has also been eliminated by removal sulphur from the diesel during the refining process.

Now that the price of petroleum is increasing, the consumers are becoming increasingly aware of the value of distillate fuel. We see this in several areas:

• European countries many years ago recognized the greater inherent value of diesel compared to gasoline, and taxed the use of gasoline so as to discourage its use. In recent years, there has been more and more shift toward diesel powered cars, as the lower cost and higher mileage of diesel cars becomes more important to consumers.

• India and China have also have adopted tax structures that favor the use of diesel cars over gasoline vehicles.

• Diesel is becoming the fuel of choice in a wide variety of applications around the world. These include electric power generation; backup power where power interruptions are a problem, and many industrial applications. Recent cold weather also increased the demand for heating oil around the world, further adding to demand of distillates.

With these shifts, world demand for distillate is rising more rapidly than demand for gasoline. Europe in particular tends to have left-over gasoline to export. I would expect the amount of left-over gasoline from around the world to grow, or decline less, as it continues to be the less-favored product.

At his point, biofuels are not really an issue for distillates. Costs are proving to be very high using palm oil or rape seed. Thus, there is no possibility of increasing distillate availability using biofuels, unless there is a scientific breakthrough.

Ethanol impact

Other authors assume ethanol production is increasing gasoline supply, and that this may be helping to hold down gasoline prices. While this is theoretically possible in the future, to date ethanol added to the gasoline mostly offsets MTBE taken out of the gasoline supply.

Figure 5. US Gasoline Consumption (Product Supplied), divided into US produced excluding Ethanol/MTBE, Ethanol/MTBE, and net imports. Years 1997 to 2007 are full years; 2008 represents January-April 2008 average.

When ethanol production was ramped up in the 2004 to 2006 period, one of the major purposes of ethanol was to act as a replacement for MTBE. MTBE is an oxygenate that many states banned because it contributes to groundwater pollution. MTBE is made from natural gas and had the side-benefit of extending the oil supply fairly cheaply.

The EIA provides data showing the total amount of oxygenates (MTBE + ethanol) added to the gasoline supply. Between 2003 and 2007 these increased from 343,000 barrels a day to 374,000 barrels a day, an increase of 31,000 barrels a day. This is hardly significant.

Of course, if one ignores the prior MTBE use, ethanol is adding to the fuel supply today. In the future, ethanol is expected to further increase the gasoline supply. Even if the amount is small, the higher supply may help hold down gasoline prices, and further exaggerate the shift in prices between gasoline and distillate that we are seeing. Longer term, the effect of this will be to encourage refiners to produce more distillates and less gasoline.

Section 3: Who are the market players, and why this matters

Refiners are the real buyers of crude oil

If one stops to think about it, the most direct factor determining crude oil demand is the number of refineries bidding for the crude. In general, refineries would prefer to be at full production, except when they are off-line for maintenance.

If refineries believe that they cannot sell all of the product they are making at a satisfactory price, they might also choose to limit production. One example of this would be refineries in China, where retail prices have been capped, but refineries must still buy crude oil at the market price. China recently raised retail prices. One might expect this to increase crude oil demand from refineries there, since they will now be able to sell their products at a better price.

Another example of refineries that would choose to limit their purchases is refineries that expect to lose money on the product mix that their refinery can produce, given current pricing margins. An example of this would be almost any US refinery that makes mostly gasoline using sweet light crude such as WTI, and is not set up to change its product mix significantly.

If a refinery is part of a vertically integrated oil company, it may be willing to live with very low refining margins, because even with these low refining margins, the profitability of the company as a whole is adequate compared to non-petroleum companies. In fact, vertically integrated petroleum companies may actually prefer these low refining margins, because with "normal" refining margins, there would be great hue and cry for excess profits taxes on these companies. If margins are low, vertically integrated companies may be using refining losses to offset part of the profits generated by, say, producing oil at $50 a barrel and selling the refined products at current prices.

I doubt that any politician would challenge artificially low refining margins for gasoline, since it means lower gas prices for constituents. In fact, pressure from politicians may contribute to the relatively low gasoline prices we see.

When it comes to buying gasoline overseas, these lower prices may not a huge problem, because the gasoline that is on the market is surplus gasoline, produced as part of the refining mix. Producers of the gasoline may be willing to take any reasonable price, if other buyers are not available.

The problem, of course, is that if gasoline prices are depressed for any reason, non-vertically integrated refineries are at a huge disadvantage. They are forced to buy crude oil at a high price and sell gasoline at a low price, because they have no other choice, and have no other companies in the group to share the poor results with.

Some non-integrated refiners can change their product mix to optimize profitability. These refiners may do better, although there is no guarantee that they will be profitable. If integrated petroleum companies are able to live with low enough margins, it is possible that it will be virtually impossible for non-integrated companies to produce a product mix that will provide an acceptable profit level.

Local service stations are intermediate buyers of gasoline.

It seems to me that the situation with service stations is not all that different from the situation with refiners. The gasoline produced by various refineries is placed in the pipeline, and service stations purchase it. The service stations that are owned as part of vertically integrated operations may be willing to live with a very low margin between the retail price of gasoline and the wholesale price of gasoline, because the loss can be offset against profits elsewhere.

Non-vertically integrated gas stations are put in a difficult spot, because they have to compete for customers with the vertically integrated gasoline stations. Quite often, there are two gas stations on a single corner. If one station sells regular gasoline for $4.09 a gallon, it is difficult for a nearby station to sell gas at $4.29 a gallon. Even $4.19 is a stretch.

Section 4: What might be ahead?

It is not clear how long the very low refining margin for gasoline might last. If underlying issue is a shift to greater demand for distillate and jet fuel, relative to gasoline, it could take years to completely resolve. If political influences are involved, it is possible that the situation could resolve after the next election.

If refining margins continue at their current levels, I would expect many bankruptcies among refiners that are not integrated with companies that also produce crude oil. This could happen around the world, since the issue is not particularly a US only issue. The refiners at greatest risk of financial difficult are those that currently make primarily gasoline and lack the capability of switching to other products.

EIA data indicates that utilization rates in the United States have been drifting downward, as shown in Figure 6. This might indicated overcapacity of certain types of refineries.

US refinery utilization lower in 2008

Figure 6. US Refinery Utilization

It is possible that the failure of a few refineries making primarily gasoline (and lack the capability of switching their product mix) would help get refinery supply back in line demand, at least with respect to refinery capacity for light crude. The smaller number of refineries for light crude would reduce the number of companies bidding for light crude, and would therefore cause its price to drift lower. Profit margins for remaining refineries would tend to rebound if there is less competition, and would help get the situation back to more normal pricing margins.

A problem might occur if there are too many refinery failures. It is theoretically possible that the world could be left with inadequate refining capacity if an excessive number of refineries fail. I expect that at least some governments would step in before they allowed a local refinery to fail, since output of a local refinery is often the source of local petroleum products. If governments get involved, pricing margins could remain distorted for a long period.

I expect that quite a few service stations are likely to fail also, especially ones that are not part of integrated companies. The failure of a few service stations is likely to have little impact, except in rural areas where service stations are rare. In these rural areas, some people may find it necessary to drive long distances to find a service station.

If diesel is gaining in demand relative to gasoline, I would expect the price for sweet medium grades of crude to rise closer to the price of sweet light crude oils, since medium crude yields a higher proportion of distillates and jet fuel. This shift in crude oil prices will tend to help get refining margins back to a more normal level.

If there are failures of non-integrated refiners and service stations, these are likely to start fairly soon, if refining margins remain low. Refineries and service stations are likely to find it difficult to maintain adequate credit facilities to borrow the funds they need to buy crude or gasoline. Once they lose their lines of credit, they are likely to go out of business quickly.

These are ideas of mine. I would be interested in hearing readers' ideas as well. Some of you have a lot more hands on knowledge of the situation than I do.

Here is the key. When refinery utilization has some room to increase, and demand is soft, it is very difficult to maintain margins. There is always someone there to fill a supply gap if necessary. That is one big difference from a year ago that has kept margins soft. Inventories got very low last year, and there was no additional supply to keep them from falling to record low levels. Therefore, price rose to (then) record levels.

The other factor is that - at least the last time I checked - gasoline imports were much stronger this year than a year ago. That's what kept inventories from falling through the floor this year.

Glad to hear your comments. You are a lot closer to the situation than I am.

I think the stronger imports this year are related to the relatively low demand for gasoline from Europe etc. that I mentioned, at least partly because of the continued switch to diesel.

Clearly US refinery utilization has been coming down for several years, providing the extra refineries to compete to fill the supply gap.

The Chinese are buying up diesel to run stand-by generators because of power shortages.The recent earth-quake has made the very tight electricity availability even worse because of hydro dam damage. SE Asia, and possibly middle east refineries sell of surplus gasoline to Australia, and probably US and rest of world.
Until China can build enough nuclear and coal power plants to supply electricity diesel will remain at a premium. India's new refinery that is designed to use heavy crude may also ease diesel shortage when it comes on line later this year.
If US has to go to rationing, better to be on gasoline as many essential services will get the diesel first. Also increases in CAFE standards should mean more a reduction in gasoline use. Fast tracking real big improvements in CAFE( INCLUDING SUV'S AND LIGHT TRUCKS)could really hold down to some extent further gasoline price rises.

I think you are right about the Chinese and diesel for backup generators. I think we are seeing more of that in other parts of the world.

I agree with you, too that rationing of diesel is likely to leave little for the regular driver.

I don't think CAFE standards are going to be all that important. They phase in too slowly. The economy will be in such poor shape by the time they become effective that there will be few new cars built. People are already sufficiently frighted by the high prices of gasoline that they are looking for higher milage cars, and I expect that to have a fairly big impact now and in the near future. The changed attitudes is likely to do more, quicker, than CAFE ever could.

Gail: That is basically my read of things too. Increased imports of finished gasoline to the US have depressed prices here and put the hurts on domestic refiners. As I understand it, you can generally get more gasoline than diesel out of a barrel of oil, and the US consumes 43% of the world's gasoline, so we're basically the beneficiary of the rest of the world trying to refine a sufficient amount of diesel to power themselves. I wrote two articles addressing this, and much credit to Robert for my education along the way:
High Gasoline Prices Are Here to Stay and The Big Picture on Q2 2008, Part 1

I heard today that some of the US refineries have been trying to add cracking capability, so they have more flexibility in what they produce, but have had difficulty in getting the EPA to approve the changes. This leaves them tied with less flexibility.

The thought that I had, particularly in Europe (which is mirrored in usage to the US) is to go for a petrol powered vehicle. Not only are prices of diesel going up fast, but with the increased costs goes an even fast shift to diesel powered vehicles by most people (we are already past the stage where diesels are the majority).

However there is only so much flexibility in the refinery outputs (think that's what Robert said) and so is likely that its diesels which will feel the pain more in Europe. That goes double if rationing comes in, when trucks all use diesel and would have first dibs on supplies.


One of my pals is considering a LPG car.
I have no idea what the security of supply is on that, or if taxes are going to be increased until there is no benefit - apparently they have risen by rather more than the tax on petrol in recent times.

If I remember correctly, you are in Britain.

I would consider an LPG car a short-term solution. Britain is headed for a natural gas shortage in the next few years according to Euan. Since the electric grid there uses electricity, this is a real problem. Britain is at the end of the supply line from Russia, and closer supplies are declining.

Britain it is Gail.
Darn nuisance these electric grids that use electricity! :-)
I know what you mean though.
A cold winter in Europe could see the cuts start this year.
Still, we have Gordon Brown on the case - or 'the revenge for Culloden' as he should be called.

Interestingly, it was the 'prudent Scottish bankers' who lost perhaps half of the money the country possessed in the Darien scheme, with a little help from perfidious Albion, and got bailed out as part of the terms for the Act of Union.

Somehow I doubt the EU will want us.

Yes, I'm starting to feel cold just thinking about this winter.

The Russia - Ukraine dispute may cause a crisis in Europe this time, and I heard somewhere (probably here) that Russia are also diverting some of their gas to electricity generation to replace the reduced output from their hydroelectric generation.

I'm only thankful I'm not in Ireland, which is even further away from the source.

FYI the P in LPG stands for Petroleum. I don't think any serious amounts of propane is created with natural gas as a feedstock, and I don't know if butane has even been tried before. LPG is oil, so doesn't really make any meaningful difference with regards to Peak Oil, although it can be cleaner burning than the higher hydrocarbons.

I just got back from Hong Kong one week ago. All the taxi's were LPG because gas is heavily taxed. Much of transportation was electric. The british style trams (double) were very odd-looking.

All the glazing was single layered glass. That bothered me, with all those ACs blowing like madness!


What did you think of T.Bone Picken's Nat Gas solution he presented yesterday?

I thought it made good sense, but I know a lot of people here would denounce it just on principle.

I should write a post about the US natural gas situation. Our supply is up a bit, but demand is up even more. One part is electric utilities using more natural gas; another is other kinds of uses, such as private autos making use of the fact that natural gas is presently cheaper than oil in terms of its energy content.

What I see as happening is various uses sending the natural gas price up to close to parity with the oil price. The amount of natural gas produced will go up a bit, but not a lot, because it takes a long time to put in pipelines. Also, we are close to maxed out on drilling rigs. Unconventional gas will be hard to ramp up much, because so much drilling is required.

At the higher natural gas prices, people with the new NG cars will find they don't save much money relative to gas engine cars. The fuel will not be widely available, because at current NG production levels, there isn't much NG available for cars. The price of electricity will soar in places that depend on natural gas, like much of the Northeast, California, Texas, and Florida. Homeowners will be up in arms.

About this time, natural gas supply will peak, and production will begin to decline. Then we will have all of the new users competing with the utilities, the ethanol plants, the plants making low sulfur diesel, the fertilizer plants, homeowners heating their homes, and regular manufacturing plants for NG. There will be a lot of unhappy former NG users.

Excuse me Gail if I missed your answer to research24 in which he asked your opinion about T Boone Pickens' proposal. Perhaps you missed it but yesterday on Nightly Business Report on PBS he gave some details. His idea is to use the windy corridor in the middle of the country to generate electricity and use natural gas as transport fuel. He would use electricity for transportation where possible and use LNG for auto and truck transport fuel by adding natural gas filling units to existing gas stations at a cost of about 400K per station(yikes!). He would use the grid to heat residences and run industry more.You of course will see lots of problems with adding all this capacity to a grid which is old and creaky and which couldn't absorb all the new input without a massive build out. Your post was very good and explained a lot about the refining business. I would be interested in seeing a list of the various refiners including what their capability is vis a vis coking and cracking equipment on site, output capacity etc. I have also read that some products like asphalt may become increasingly expensive because some of the newer refineries with the new coking units can squeeze more distillate out of their crude and don't have to sell off the residual asphalt cheaply.

You are right. I didn't see the details of T Boone Pickens' proposal. I think a major hold-up to Pickens proposal is that it would need a huge overhaul of the grid. I don't see that happening within 10 years, even if Congress appropriated money tomorrow, and started work on getting contractors to first design the upgraded grid, then actually get the parts and build it. By 10 years from now, US natural gas will be past peak, as will oil. It is hard to see anything major happening at that point.

I am afraid I don't have a list of who has what in terms of coking and cracking equipment on site. Perhaps one of the readers knows of such a list.

I know that asphalt and residual oil are already disappearing, as refineries with crackers and cokers refine them into higher-priced products. The oil companies see this is a way of getting maximum profit from the crude oil, but it is leading to a lot less asphalt.

All rickshaws in karachi are running on either CNG or LPG, 80% are on LPG, 20% on CNG.

A move to CNG and LPG replaces using NG to upgrade heavy sour oils not to mention the other critical uses for NG.

In my opinion we are heading quickly towards a world with the following fuel desirability levels.

light sweet > sour sweet > NG/LPG > heavy > heavy sour.

This is profoundly different from todays world with the heavy crudes priced at a premium to NG.

If I'm right then the light sweet vs heavy sour spread is going to widen considerably and NG cost reach parity and surpass the heavy oils.

This means refining the heavy sour crudes will quickly become only marginally economic. Your better off simply using the NG and propane directly. Your example shows this sort of transition.

CNG is actually the only real competitor for diesel in heavy trucking so expect a long term trend towards CNG is na lot of areas for heavy transport. Or better flex fuel trucks.


SWACO’s truck was converted to run on a blend of compressed natural gas (CNG) and diesel fuel by U.S. Energy Initiatives Corporation (formerly Hybrid Fuel Systems), based in Atlanta. The system installed by U.S. Energy includes a computer interface that adjusts fuel blend levels recalibrates the engine on the fly for optimal combustion. Other installed components include tanks, lines and a pressure regulator for the CNG.

“This is the cool part about my job,” said Tim Berlikamp about the new heavy duty CNG vehicle in the SWACO fleet. “This is what I love to do.”

Needless to say at some point there will a huge squeeze on gasoline supplies from the critical industries via optimization of refineries for diesel production and directly using CNG and bypassing refining of the heavy sour oil unless they are steeply discounted.

Needless to say export land faces a big problem if the exporting countries are setting on large supplies of heavy sour oil KSA and Iran are two that come to mind. They will see economies continue to grow light sweet prices go up and no demand for the heavy sour oils except at what they consider insulting prices.

What do you see happening with medium sweet? I was thinking it would move up relative to light sweet, because it is easier to make distillate from.

I think the medium sweets should track the lights. And your right you get more diesel out of them.

It really all depends on the various spreads not the absolute prices. As far as I know medium sweet is about equal to light sweet if you have a reasonably complex refinery.

One thing we don't do on the oildrum which is a shame is pay more attention to the spreads and prices of the various grades of crude vs NG/LPG although the absolute prices will continue upwards its the spreads that really matter if a refinery cannot make money refining certain inputs it won't refine them the absolute price is not relevant.

This is another place where free markets tend to have a tough time overall price increases tend to squeeze spreads but to meet demand you need the spreads to widen the net result is a fairly viscous upward spiral until demand drops. The problem is of course there is no downward pressure the spread is being widen via price increases not decreases. Oil producers might even make the claim that the market is well supplied because no one want to pay the prices they are asking for lower grades of crude.

But I can't imagine that any of the worlds crude producers esp the largest one would do something like that.

Two replies.

Overall I think that a move to flex fuel trucks that can handle a mix of diesel/biodiesel/CNG/LPG etc makes so much sense that we will go that route.

If we just assume simple carnot efficies the NG+heavy source = 60% and diesel -> mechanical = 60%.
60%*60% = 12% efficiency

But burning the NG/LPG directly but mixed in with diesel gives you 60% a 48% increase in efficiency.

Given that trucks take known routes and the service stations that provide fuel for trucks retrofitting to handle pressurized ng/diesel mixtures should be fairly easily doable. And given the premium for diesel the economics should work out.

You can dissolve a lot of NG into diesel under pressure.

Found a patent on this :)


I learn something new every day. I had never heard of dissolving NG into diesel.

Me too - I never knew that 0.6 * 0.6 = 0.12

Crap :)
Its .36

The difference is then 0.6-0.36 == .24 or a 24% loss in efficiency.

Way to many dead brain cells and this is why the population of Nigeria is 300 million :)

Now you know why I quite doing synthetic chemistry a few mistakes like this and kapow.
I had my fair share of ohh shit moments esp if the reactions where in german.
One of the things I've learned in life is do not start a synthesis translating the german on the fly !!!
They like to put very important info near the end like what not to do to keep from blowing yourself up.
Saure and what this ? ohh crap.

In any case its a significant loss in efficiency so the argument still holds.

Hydrocarbons are quite soluble in each other. This is where all the gas comes from when you pump oil and take it to atmospheric pressure just like co2 in water.

I've got no idea what the exact solubilities are but its pretty high.

Found this.


Thats not diesel closer to gasoline and I did not grab the paper but they are pretty high.

This trick is played with gasoline in the winter extensively i.e dissolving in volatile hydrocarbons.

I can't find the exact numbers but at least 10% is reasonable and a lot more at moderate pressures.
Adding in stuff like propane would probably help a lot.

It should be in this paper bit no access.


Diesel's kind of hydrophilic, and methane is of course completely nonpolar, so old or wet diesel may very well be a poor solvent for methane. But their mutual solubility is a complex function of pressure & temp in any case, so it would be tricky, to say the least, to volatilize the heavy liquid and the gas in a constant ratio.
"Like dissolves like" suggests you'd have better luck dissolving propane in gasoline.


page 14 has some constants but I can't quite figure out what they are saying.

But they seem happy enough to use simple mole fraction calculations.

Surprisingly real solubility at pressure seems hard to find this suggest simple mole fraction arguments are probably good enough and they are infinitely miscible into each other.


Was "sour sweet" meant to be "light sour"?, was tending toward a chinese menu...Neven

sour light :)

Bad day it seems.

1.2 million cars out of a total fleet of about 8 million cars are running on LPG in Thailand. More and more larger trucks are switching to CNG.

Pretty much all Hong Kong taxi's are LPG powered. A ride costs 15 HKD for the first two km. Just a bit more than 2 USD.

If oil was expensive, I sure didn't notice it there.

I think you are right about trying to look ahead to where the supply will be in the future.

It looks now like the tightness in supply will be worse on the diesel end of things, so petrol (gasoline) might be better, especially if taxes aren't too terribly unreasonable.

I have a hard time seeing refinery outputs changing very far, vary fast. We have basically the same oil fields and the same refineries. We can process a little of the oil differently and produce more diesel, but it is hard to see how the percentage will go up very much, very quickly. My graph of US refinery output shows how slow things have been to change here.

Well things do change anecdotal evidence indicates the US has continued to expand refining capacity esp complex refining capacity. The good news about the complex refiners is they have a lot more control of the product mix and can produce more gasoline and diesel from the heavy high sulfur crudes. The combination of excess refining capacity increasing NG costs and until recently decreasing spreads has not been good to complex refinery operations. I don't know about the rest of the world but I'd guess that both Europe and South Korea have also expanded to more complex refining and same for Japan.

Generally complex refineries are associated with processing of cheaper heavy sour crude but I don't see why they can handle lighter crudes or a mix. Robert can correct me if I'm wrong. Residuals are residuals so cokers work on the residuals of light sweet processing just as well as heavy sour.

It would be a great number to know but the relative fraction of the worlds oil converted to diesel and gasoline is probably a good bit higher today then five years ago because of expanded complex refining operations. This has put strong price pressure on residual products such as bunker fuel, asphalt and fuel oil.

Of the two diesel and gasoline diesel demand is more inelastic and used in commerce etc and has to expand with the economy you don't have a choice.

This has caused diesel prices to continue to increase inline with oil/NG costs while the extra gasoline is sent to the US.

I expect this trend to continue for at least another year with gasoline substantially lower than diesel and refinery utilization below capacity at least in the export land refineries. As long as we continue to have growth I can't see the spread between gasoline and diesel collapsing all that much for a while.

Fuel oil prices are also worth noting they are very strong and its another area where demand at least in the US is fairly inelastic. Some conservation is always possible of course but a big demand drop is probably not possible over the short term. So expect fuel oil prices to trend up more inline with oil prices.

Now I have heard of a new refinery in Spain that will only produced diesel no gasoline its also geared towards biodiesel. This statement was from a business man involved with the project I can't see how they cannot produce some gasoline but he was not a engineer. I did not press him on these "bold" statement.

This implies some sort of FC transformation as part of the refining process or using the lighter products for hydrogen or something. Needless to say a world wide move to emphasis diesel production over gasoline will make increasing economic sense and does not bode well in the long term for plentiful cheap gasoline imports into the US if its economically possible to significantly change the diesel/gasoline fractions.

I think the economic incentive to optimize for diesel will continue to grow overtime how well this can be done is going to determine how long relatively cheap gasoline continues. FT processes in a GTL/CTL context may not be economic but as part of a complex refining process they may well make sense. Googling indicates that its used in refining but I'm just getting patents. I don't see any technical barriers to optimizing extensively for diesel and producing little if any gasoline.

So Robert is it possible to move refinery output almost entirely to diesel and lower level products ?

Do you or anyone else have links where we can find breakdowns of petroleum products produced in other countries besides the United States? It would be nice to be able to look at some actual distributions of gasoline/diesel/other.

I know that it is possible to have very different mixtures. This is slide showing the mixture for Hawaii. I would presume they are using something other than light sweet oil as input.

If you want to start modifying refineries for more diesel, it would be cheaper to keep the gasoline and get rid of the kerosene and jet fuel.

If you want to go with petrol, you could get a Prius or get a B class subcompact with the smallest engine available, usually a 1.0L. Either one should use about 5L/100km with the Prius being better in the city.

I agree that gas prices are oddly lower than one would think they would be.

I have long advocated that Nancy Pelosi and Harry Reid launch investigations into why gas prices aren't higher.

The Democrats should also enact a "Paltry Profits Program" to compensate refineries for their low profit margins.


One cubic meter of natural gas has as much thermal energy as one liter petrol (37.8 MJ). If crude oil is $140 per barrel, $140/159 = 88 cents per liter then natural gas should be $880 per thousand cubic meter. That is not even considering refinery profits.

We have had a whole slew of links posted with NG producers predicting thermal parity between oil and natural gas.

My mondo meta model says that all energy sources eventually go to the same price minus a quality discount.
This means that in the end you pretty much pay the same for energy electric/oil etc. Sort of a singularity at this point only efficiency gains work.

The only way out is renewable/nuclear electricity coupled with efficient electric rail. But eventually all fossil fuel conversions are forced to a constant.

For example if the price of gasoline rises enough that CTL is viable coal would be diverted from electric production to CTL driving up the price of electricity. Eventually without expansion of renewable or nuclear you reach a sort of balance with no real benefit of one method over another. Rail of course still wins even in this case on efficiency grounds but rail without a move to renewable electric rail is not a long term solution. Its still one of those partial solutions that only delay the day of reckoning.

What we have to do is pretty clear we don't actually have a choice except to pass on the burden to later generations but they will have to deal with it with less resources then we have today.

Whats funny is most 18 year old kids don't realize that their parents are robbing them blind.

My kids are a little older than 18. They really don't like hearing about this. I don't think they have thought about the "robbing them blind" aspect.

Liquid fuels will always be at a premium because they're easy to store in vehicle fuel tanks. Gas or coal may approach the same price per unit heat as oil, but there will still be a discount because of the inefficiencies of GTL/CTL conversion. A carbon tax will make coal even less economical.

Price is not (directly) related to Cost. Price is an agreed amount that the consumer is willing to pay and the producer is willing to accept. The refiners cannot arbitrarily raise to price to any level and expect people to buy it. The consumer is (should be) unconcerned with the production costs of the product. The consumer is only concerned with the value of the product to himself.

There is a relation between Price and Cost and it is quite simple. If the cost exceeds the price then the product doesn't get produced (Thereby reducing supply and raising the price). However, as I understand it, gasoline is a byproduct of deisel production so in that sense it is "free" to produce (We've got it, we might as well sell it). This argument ends up working for any given product from a barrel so what the refiners really care about is whether the total product price from a barrel of oil exceeds the cost of the oil and the processing. If it does then the barrel gets processed and the prices for each component get set in their own markets without regard to the individual component's cost.

It seems to me that with gasoline there is a limit to how fast the price can rise before people stop accepting the price as "normal". If the price rises slowly, people keep driving, if it rises quickly people cut back on driving. Even if the total price rise is the same. Diesel and Jet Fuel don't have the same constraints as demand is less immediately flexible for hauling.


Whether or not diesel is as immediately flexible, I thought it was interesting that its usage had dropped by more than gasoline usage in the first four months of the year.

I think there may be a little flexibility in usage. I think shipping has been switched to train as much as possible, to reduce fuel usage. Trucks used to drive back empty, or deliver only a few goods to a store in a remote location. I think that some of these inefficiencies are now being taken out of the system.

I think that as with gasoline the death of the housing market has a far larger impact on diesel usage then efficiency gains. Given the amount of construction materials shipped by truck and the changes we have seen I'd say 90% or more can be attributed to the implosion of one of the largest US industries thats heavily dependent on trucking a lot of supplies. Efficiency gains are in the noise.

The problem of course is that once the housing industry is effectively gone we really don't have another big industry to collapse. Its down to what your saying retailers being careful with shipping costs and less overall spending etc.

I think we will get a clearer picture as we head into next spring since it will be our first spring not building houses in about 50 years. It really how demand evolves over next spring and summer forward that will give us a good idea how much conservation is possible without major infrastructure changes.

In my opinion it will probably simply track the economy fairly closely with failing retails sales reflected in decreased diesel usage. In the past when the housing market stumbled VMT went flat given the size of the bubble and the strong gasoline prices it makes more sense that it will first decrease sharply then go in a much gentler decline thats slowly flattening.

I thought it was interesting that the Department of Transportation's analysis of vehicle miles driven in the US does not distinguish between cars and trucks. The 1.8% decline in miles traveled in April is thus a mixture of car miles and truck miles. The biggest decline was on rural interstates, where I would expect a lot of truck traffic. That, plus the bigger decline in distillate fuel than in gasoline, leads me to believe that truck traffic contributed quite a bit to the decline.

Its whatever the fuel mix required to build out and populate your standard subdivision :)

If you have the data you can figure out the total fuel inputs required to take raw land and convert it to a subdivision. Not building one 200 house subdivision is a lot of gas and diesel asphalt etc etc not used.
Also of course the new happy McMansion owners need all the furniture and new SUV to hall the kids around to soccer and make the longer commute back to the city for work. None of this economic activity happens when you fail to build the subdivision. And of course you have to build all the strip malls and malls to support the subdivision and fill them with crap.

I'm actually surprised that we only got a 1.8% decline but given that the builders just now started defaulting
maybe we have more to go. My own guess was more like 3-4% decline once housing was truly DOA. I'm a bit alarmed we only have 1.8% so far.

I don't know what the percentage is for the housing market vs other hard industries that use fossil fuels but its got to be large. Either my guess is mistaken or we have a further 2-3% decline in consumption before gains from the death of housing are no longer possible.

I would think that diesel and distillate users are primarily industrial. Efficiency gains such as driving slower, and making aerodynamic improvements to existing vehicles fleets ought to be more likely when a corporate beancounter is looking over your shoulder. And of course a slowdown in construction, which is mainly diesel powered. Other charts I had seen had claimed diesel demand (US) was increasing, but perhaps they counted exports.

I would thinking low value uses (or at least uses prone to fuel switching) such as space heating, and power generation would be declining fairly rapidly. I think these areas typically use the heavier grades.

I live in what was once a boom town on the Gulf coast. You can tell that the construction is in the tank since ALL the Mexicans are gone. Two years ago they literally overran the place. As to who all that construction benefited, my guess would be Mexico #1. I can't detect that, other than grocery stores and check cashers, we locals got much of anything out of a glut of condo building other than the mess and traffic, and increased taxes. Of course, we now have 50 fingernail shops, 10 tatoo parlors and five cell phone stores, along with a big box wine store and golf ball store. Tremendous economic growth there.

Some alarming figures on oil use in coal generated electricity:


High oil prices add a lot to the cost of coal.

Of course, more trains should be electrified. That takes time though.

You are right about transport of coal using a lot of oil.

I think that whether we want to increase electricity either by shipping more coal long distances or by using transmission wires, we run up against infrastructure constraints. Our trains and tracks are pretty much maxed out now, and our transmission lines for electricity are serious problem as well.

If you want to figure the real cost of long distance transmission of electricity through the grid, somehow you need to get the cost of the necessary grid upgrade factored in as well, and paid for by someone. Read about the problems here.

High oil prices will add much to the cost of everything, including natural gas. Lots of rigs manufactured and drilling, lots of workers driving around in trucks, lots of workers and employees commuting to work. And all employees and stock holders make salaries/dividends and spending them and thus consuming oil.

It's called Peak Oil :) or :(

Don't remind me of our dependence on oil! And don't start bringing up fertilizers and plastics I'm scared enough already!

If it wasn't so sad, it could have been funny.

I think this is called "the deck of cards mode of societal collapse" where an interdependant system goes down due to one of its parts failing. I've read the theory behind it, now I'm getting to see the theory applied.

Gee I feel like I'm back in high school science lab.

There was a great article posted back in January called The Failure of Networked Systems. If you haven't read it, you should.

I think the financial system is heavily networked also, and tied in with oil/gas supplies. That is one of the reasons I think the financial system will be one of the first things to go, even before physical shortages of the oil and gas are major problems. People and businesses will not be able to pay back their debts, and it may cause a debt implosion.

Generally most people declare bankruptcy before they stop eating.

Ask any top model and she'll disagree with that. They stop eating and then make even more money.

Its not that sad actually. Its just over consumption.

Average american use a constant power of 11,000 watts and has annual income of $40,000 (GDP per capita). Average pakistani use a constant power of 206 watts and has annual income of $750.

Using tube wells you can have 10,000 cubic water sustainably at an average acre that get 2000 cubic meter water from rain and canal. The 5 times boost is due to pumping underground water that get there in rains and canal water of previous centuries. 20% of the water pumped that is 2000 cubic meter per acre get evaporated, run-off etc but its replaced by annual rain and canal water supply so on average the ground water volume remain same thats why sustainable method.

From these 10,000 cubic meter water available you can grow 47 tons of sugarcane that results in 3384 liter ethanol and 470 kwhr electricity after the energy used in making ethanol. You have to use 20% of this amount to power tube well to pump ground water so you have a net 2707 liter ethanol and 470 kwhr electricity for you. This is equal to (2707 * 0.67) + (470 * 3.6 / 37.8) = 1859 liter petrol which is equal to constant power of 2300 watts per acre.

That way if you agree to live in as much energy and economy as in pakistan you only need to have one tenth of acre producing bio fuels for you.

It is very interesting to hear your wisdom from Pakistan!

Unfortunately, sugarcane does not grow well in a large part of the world. In the US, it is only produced in Hawaii and three southern states. I found statistics that show that Pakistan is a large sugarcane producer. I did not know that. Here in the US we all hear about the success of Brazil in producing ethanol from sugar cane, but that success is not without its costs, and at any rate, the US can't produce much sugar cane.

In the US, some sugar is produced from sugar beets, but I understand that sugar beets are not a good raw stock for biofuels. Can anyone comment on the viability of sugar beets as a source of biofuels? One advantage of beets over corn is that they do not require as much water as corn, and they can grow in much worse soil than corn.

As I understand it, processing beets might be a manageable issue, but the low yield per acre lowers it's potential. In order to get high yield per acre, fast growing tall dense vertical plants are great, as they take up less space horizontally per unit of energy grown. Miscanthus or switchgrass are examples. Only the beets contain sugar. Same for corn ethanol, only the corn contains sugar. The beets' plants do not contain enough energy per area. If they did, and cellulosic, pyrolisis, or other advanced BTL were commercialized more, then maybe it's more interesting. I don't know if the yield will ever be as good as Miscanthus or switchgrass though.

Any sugar beets farmers out there that would care to comment?

I personally think there is some potential for seaweed. Fairly high yields are demonstrated. And some of them contain a lot of oil. Being flexible and in the water, they can make do with less structural material (cellulose) while still growing vertically so high oil production per unit of area is possible. Japan used to have a sea farm for biogas (electricity) production if memory serves. Don't know how viable the concept is. But at least it doesn't take up farmland.

Interesting idea!

Different climates are good for different species, thats why bio diversity. My understanding is that any place near to tropics is good for sugarcane production, if you are too north or too south of tropics you can't have significant sugarcane due to climate but then you may have other crops that better suit your climate.

Pakistan has just 60 million acres arable land for a population of well over 160 million, so we have like 0.4 acres per person, hardly to produce enough food. Usa on the other hand have I think atleast 600 million arable acres for 300 million people, 2 arable acres per person, so though sugarcane is not an option for usa there would be some other crop that can provide energy.

The whole point is scaling down. The per capita energy consumption of western world is simply too high. Only if it can reduce to 50 times to the levels of india, pakistan etc it can be get from biofuels.

I not believe that solar or wind can provide any significant amount of energy because of too high capital cost. One watt installation is atleast $3 and you have to have 5 watts installed to get one watt continuous and another 20% to compensate for losses in storage, therefore $18 per watt. World consumption is 15 trillion watts continuous of primary energy and 5 trillion watts of electrical energy equivalent. Now thats atleast $90 trillion. Not have yet taken into account energy loss in conversion from dc to ac or capital cost in changing all equipments to dc, capital costs of having an electric transportation system and maintenance costs.

If you do scale down things become far more manageable. There is something called Purchasing Power Parity which means that even though "undeveloped" (actually undestroyed) countries like Pakistan has energy consumption and economy 50 times lower than usa but we are not 50 times poorer. Due to PPP we are just 10 times poorer. Thats because basic essentials and also not so basic stuff are 5 times cheaper in pakistan than in "developed" world. You can buy as much food, clothing, real estate, soaps, detergents, human labour etc in pakistan in one dollar that you can buy in 5 dollars in usa. Also when your country is poorer difference between rich and poor people is not that high. Rich are not extremely rich (there are no billionaires in dollars in pakistan) and poor are not extremely poor (Pakistanis have an excellent diet, a high consumption of milk, meat, fruits, vegetables and 98% people own their own houses, we are also a high consumer of cotton products including clothes, we owe very little to banks etc). Also govts are pressured to provide most of education and health care because they can't expect "poor" people to pay for these. Most people have their own farms or other businesses so you go to work when you like or take a holiday anyday you like. Work specialization is not that high, means at a job you do a diversity of tasks keeping interest level high and boredom low. Then if you have any problem since you are poor its of low scale so can be easily managed. Most of all you are envied by none :).

Thanks for your comments.

You make me want to move to Pakistan--except the 0.4 acres of arable farmland per person.

Let's have a competition to find out the least likely 'everything' that is impacted by oil!


My visit to Wyoming was an eye opener. With natural gas production out in the "middle of nowhere", it is necessary for workers to drive long distances for necessities such as groceries and medical care. And of course extracting the natural gas requires a lot of workers driving around in trucks, visiting the gas wells.

All this is very interesting, but doesn't it need to be integrated into a more global perspective?

World oil production has increased in the last four or five years years, no?

During that same time you show U.S. refinery utilization to have declined. The oil that is not being refined in the U.S., plus the increased oil production, has to be being refined somewhere, does it not? If not, then material balance fundamentals would require that it is being stored somewhere.

How difficult is it to get a handle on what is going on globally? Are the production figures we get from some of the non-democratic governments, which lack transparency, reliable? Likewise, are the refining and consumption figures we get from opaque non-democratic governments reliable? Are their figures concerning how much oil they have in inventory reliable?

The reason I ask this is because of this report:


They use oil consumption, production and inventory statistics from something called "Haver Analytics," and these don't seem to mesh completely with statistics from other sources I have seen. Furthermore, they show global oil inventories to have increased from 88 to 90 days from the end of 2007 to 2008. That's an increase of 86 million BOPD x 2 days = 172 million BO. It also doesn't seem to mesh with some of the reports I've seen from OECD countries on two counts. First, other sources don't show any increase in inventories from OECD countries. Second, days supply from other reports I've seen for OECD countries are only 20 or 30 days, so the 90-day figure seems high. I couldn't find any other sources of non-OECD data for the first four months of 2008.

So I'm just a little bit confused.

World crude oil production has pretty much been on a plateau since 2005. There has been a small uptick in the first three months of 2008. I have plotted this, as if it were the full year number, so it may be a bit misleading.

US refinery production has been dropping as a percentage of world oil production. It looks to me like every time there is an uptick in world oil production, the new refining goes elsewhere, and the US percentage goes down.

I am suspicious that world oil supplies are a lot less fungible than people assume. If there are pipelines from a particular field to a particular refinery, the oil in that pipeline is likely to be the input to the refinery. It is the refineries without permanent arrangements, or whose old source of oil is badly declining that are out bidding for oil.

I don't think inventories are very important over the longer term. They pretty much get lost in the noise.

Thank you for your response, Gail the Actuary.

It's all fascinating stuff.

Just a couple of more questions:

Have you seen any figures as to what percentage of U.S. refining capacity is owned by the independent refiners and what percentage is owned by the major integrated oil companies?

Also, I have heard that the United States has the most sophistacated refining system in the world, able to refine a disproportionate amount of sour, heavy crudes. Is that true? And if so, wouldn't that give U.S. refiners a competitive advantage over foreign refiners?

I see in this report that it cost $0.14 per gallon to transport ethanol from Brazil to the U.S. (back in 2005):


That would be $5.88 per barrel! So maybe not only are oil supplies not as fungible as people think, but maybe refined products as well.

Regarding your question as to how much of US refining capacity is owned by independent refiners and how much is owned the major integrated oil companies, I looked around on the Internet for a while when I was researching this article, but didn't find an answer. I think a fair amount of production is done by joint ventures, which are jointly owned by combinations of major oil companies. These look sort of independent, but if they get into financial trouble, I would imagine that their major oil company parents could add a little extra funds, and fix things up. The true independents wouldn't have this luxury. I would be interested in seeing some figures on independent refiners, if someone has a reference.

I am afraid I don't know if our refineries are the most sophisticated. We built a lot of them a long time ago, and have upgraded them over time. I would think the most recent refineries would be most sophisticated, wherever they are. This is just a guess though. Someone from the industry could probably answer the question better.

Gail right on.

Refineries near the coast tend to be more complex and able to adapt to varying crude grades and those inland, sitting on a pipeline or an oil field, don't. Compare Hovensa St Croix and Big West Bakersfield, for example.

The less complex refineries can't profitably handle crudes they are not set up for and the retooling and adaptation takes a lot of capital up front for plant and also the switching of crudes inline is not easy, especially given the push to reduce inventory everywhere in the chain. So to your second point, inventory reduction speaks to the risk in the supply chain being driven into the refining companies by the low margins. Just like the utilities running as little surplus power on the grid as possible...... risky business.

Thanks! Good to hear from people with oil experience!

Diesel has 10 to 20 percent more energy per volume than gasoline.

Chris Shaw says that energy is the one true currency, always has and always will. Thus diesel is worth more per gallon.


Shaw has 4 other articles there for interesting reading.

Energy is the universal currency, if there really is one, but there is also exergy to consider - the 'quality' of energy. Diesel engines are more efficient than spark ignition engines, which adds to it's exergy alongside higher volumetric energy.

Electricity has the highest exergy, an attribute that makes it a likely candidate for future energy systems. After efficiency and conservation, the most promising pathway to mitigate the impact of Peak Oil of transportation lies in increasing the competition between oil and electricity.

Hey Cyril R. Don't forget that there is some 50%+ loss of coal, natural gas, and oil energy in producing electricity (much CO2 and stinky pollution too), then some loss of energy in transmission, then much loss in batteries. The 2nd Law of Thermodynamics must be considered.

It takes energy to get energy, and electric energy is not exception.

One must consider also the unknown and mysterious 4th Law of Thermodynamics: Electric energy is not what we need, rather we need liquid fuels.

Hey Cyril R. Don't forget that there is some 50%+ loss of coal, natural gas, and oil energy in producing electricity (much CO2 and stinky pollution too), then some loss of energy in transmission, then much loss in batteries.

Yes, electricity is 'exergy refined' in order to achieve that higher quality energy state. Even then, total losses are less than ICEV system when all losses are considered there as well. It's also easier to capture emissions and pollution in a few centralized non-mobile locations than with orders of magnitude more mobile polluters.

The main reason electricity has high exergy is that it is converted to other forms of energy with high efficiency (mechanical, heat pumps etc). What's more, there are various low carbon sources of electricity, making it more flexible than a monolithic oil system. Right now, oil has a monopoly position is many markets, because oil is convenient to store, transport and use, so exergy can't be optimized. New technology and government policy can change that. There's no rational excuse not to do it, and the window of oppertunity is short.

It takes energy to get energy, and electric energy is not exception.

That's a half-truth. Of course it takes energy to get energy, but the electric system is more efficient than the liquid fuel system, and is more flexible and diverse. Surely you can understand the danger of basing an entire societies energy needs on one or a few sources with very low system efficiency (hint, peakoil).

One must consider also the unknown and mysterious 4th Law of Thermodynamics: Electric energy is not what we need, rather we need liquid fuels.

Many people think they know what they want, but too few seem to realize what's good for them. Your definition of need is too narrow and your 4th Law has more to do with human action than physics.

Alright I'll go far afield of Gail's excellent posting - though to stay somewhat afield I am curious about a simple synopsis of the ability of various nations refining capacity - I understand the US has a lead in this and I suspect that despite/because of decreasing feedstock the ability to produce finished product from less "finished" feedstock may actually take on increased significance. Don't tell the Iranians, Mexicans or Palestinians. I just hope we don't see lot's of terrorist attacks on refining facilities.

Anyhow, you stated,

Energy is the universal currency

I have been giving this some thought for some time. One the one hand it is a sci-fi idea on the other it appears to be unfolding as we speak. Perhaps, never in human history has the notion of currency become more divorced from, what shall we call it, "tangible wealth". Gold is an abstract symbol of wealth -> the dollar is a a redeemable symbol of gold -> the dollar is a non-redeemable symbol of gold -> electronic digits are a symbol of dollars. Couple this with fractional reserve banking, hedging, derivatives, etc. I believe Kunstler said something along the lines of financial algorithmic turpitudes or something similar.

However, wealth is eventually tangible, if not easily defined. Is the price of oil increasing because the dollar is declining or is the abstract dollar losing value because the price of useful oil is increasing? I suspect the latter.

To go back to the sci-fi part, let's consider "exergy". If not merely, electronic digits, but "quality energy" can be rapidly transferred and is storable isn't this "currency". If wind and solar become the future perhaps payment is in kilowatts, if we are careful to prevent unneeded levels of abstraction.

I was estimating that diesel has about 15% more energy than gasoline. Different sources seem to have slightly different numbers of BTUs per gallon. I mentioned the 15% in one draft of this post, but I don't think it made it into this version.

Gail, you are correct noting the varying btu figures for diesel. Diesel picks up btus in the summer blends and loses btus in the winter blends which prevent gelling of the fuel in cold climates like here in Wyoming. My Cummins and mercedes diesels fuel mileage drop about 10% in winter. The cummins goes from 22 mpg in the summer to 19 to 20 in winter for example.

Diesel has 10 to 20 percent more energy per volume than gasoline.

On top of that, a diesel engine is around 30% more efficient than a combustion engine. I just checked the stats on a 2009 Jetta. The diesel version is 36% more fuel efficient than the gasoline version with the same size engine.

So at today's price for regular unleaded gasoline at the corner station ($4.22/gal), all else being equal (!) diesel for anything less than $5.74/gal (4.22 X 1.36, or $1.52 more/gallon) would be a bargain, right? That's way more than the current premium one pays for diesel, so it would seem that going for diesel equivalent in purchasing a vehicle would still make sense, Memmel's and Gail's points about trends notwithstanding?

Diesel engines are more expensive than gas engines. The VW TDI is one of the more affordable ones at $2000 over the price of the gas engine, but limited supply and customer demand will probably push that price premium higher. In other cars and trucks the diesel engine option is $3000-5000 extra.

I might also mention maintenance costs. Volkswagen has one of the worst frequency of repair records around. Also, your local Jiffy Lube will probably have difficulty with oil changes--doesn't carry the right oil or filters. My 26 year old son has a Golf TDI, and he has run into some of these issues. Resale value is great, though!

Yeah, right, and those diesel Jettas as so much fun to drive, too! ; )

You forgot to mention that it's also got the best anti-theft device ever put on a car: that "diesel" logo.

funny, when I bought my petrol thirsty bmw my friend mentioned, that its huge petrol motor is the best anti theft device

i am from europe though

Price of oil, gasoline, jet fuel, etc. should be figured in some kind of meaningful constant, not just in dollars. Which might take into account various parameters such as other currencies, yen, euro, and gold, silver, as apparently they still remain a standard people refer to (therefore it is often done), as well as measures such as per capita cost of food basket, or even a happiness index, etc. Very complicated problem to state the ‘real’ costs, the question has only an arbitrary, ad hoc solution.

And all that would be without totting up the cost of obtaining (extracting, refining, transporting, military adventures, etc.) fossil fuels and getting them to market, and without adding, or subtracting, the nefarious effects, such as CO2, pollution, deaths along the way, projections for the future, etc.

In short nobody has a clue, except that some ppl are feeling the pain of what for them are ‘high prices’, i.e. a change in their budgets - so that creates brou-ha-ha.

This may be a somewhat simplistic analysis of the crude/gasoline price differential but I offer it for your scrutiny.

The supply/demand dynamics are not nearly as dependent on excess capability of producers to supply a commodity as it is competition among those suppliers for market share. Though most folks are looking for the cheapest fuel price available, brand names do still carry some leverage (I’ll pay a little more for Chevron myself). A major portion of the rational for the sellers to accept the lower spread may be to maintain their market share. In the end, a refiner’s profit is hinged as much (and more, perhaps) on sales volume as it is the spread per gallon. Making an extra $.20 per gallon doesn’t benefit a seller very much if he looses millions of gallons of sales. Like all manufacturing processes there are fixed costs. It will cost a refiner a minimum of $X (fixed cost) to make a cracking run whether he pushes 200,000 bbls thru or 1 million bbls. I can’t offer the proportion of fixed costs vs. volume related costs but maybe someone here can.

I also see this market competition aspect of the supply/demand dynamics as a major factor in the run up in crude prices. Think back to the great days of $10/bbl oil in 1986. But it wasn’t just the existence of the excess capacity (about 10 million bopd)that drove prices down. As global consumption declined OPEC proved its impotence as a cartel. Members dumped as much oil as cheap as possible into the market. To prevent oil prices from dropping even faster Saudi began cutting back their production. Eventually the KSA would have to shut in their entire production stream. Hence they opened the valves and began reclaiming market share. And oil prices crashed to a level that absolutely no one had predicted as possible just a few years earlier. MARKET SHARE ACQUISITION is what drives the supply/demand model. Though it’s a factor in the process, excess production capacity itself does not drive prices down. Had OPEC acted as a true cartel and all members had cut production proportionally, higher oil prices would have persisted regardless of the amount of excess capacity. I see this same dynamic in the US refiners: if they were allowed to “cooperate” in their pricing schedules it’s easy to imagine gasoline prices being much higher.

Now let’s jump to today. When the world asks the KSA to produce an extra million bbls of oil it isn’t really asking that. Saudi cannot produce an extra million bbls of oil because there is no buyer for it. The world is buying exactly what it wants and can afford. What is actually being asked is that Saudi offer that million bbls of oil for less then the other exporters require. In other words, the world is asking them to take market share away from the other exporters. It would be this COMPETITION FACTOR that would put downward pressure on prices. But now let’s look at the different circumstances right now compared to 1986. Almost all oil exporters openly admit they are at PO. Saudi may or may not be…only time will be. Consider Mexico as a specific example. It is even being reported by the Mex. gov’t that their production is falling like a rock with virtually no near term way to prevent it. And if you didn’t know, their oil exports have provided as much as 60% of their federal budget. Ignoring the logistics question of transport, assume Saudi goes after Mex. market share of exports to the US. Mex. may not be willing to compete on a price basis with Saudi. They would certainly lose critical income right now if they were to give up some market share but they would also preserve price support for their remaining exports as well as saving production they’ll need even more desperately down the road. Though Saudi may be producing an additional million bbl oil/day, they would only be replacing the crude Mex. pulled off the market. In this scenario Saudi would only need to drop prices marginally at first and then easily raise them back up in time.

While there are questions as to how much extra production capacity the KSA may have at the moment, that factor may have no impact on the current pricing picture. Even if the KSA had an additional 10 million bbls they could throw into the market it would only generate lower prices if the KSA went after the market share from other exporters. The capability to produce more is not relevant if KSA isn’t willing to compete on a price basis with other exporters.

And a news flash just showed up this morning that truly highlights why the KSA isn’t motivated to go after a bigger market share:

The Energy Information Administration (EIA) estimates that members of the Organization of the Petroleum Exporting Countries (OPEC) earned $671 billion in net oil export revenues in 2007, a 10% increase from 2006. Saudi Arabia earned the largest share of these earnings, $194 billion, representing 29% of total OPEC revenues. On a per-capita basis, OPEC net oil export earnings reached $1,137, an 8% increase from 2006. Through June, OPEC had earned an estimated $645 billion in net oil export earnings in 2008. Based on projections from the EIA, July 2008 Short Term Energy Outlook (STEO), OPEC net oil export revenues could be $1,251 billion in 2008 and $1,322 billion in 2009.

So why would the KSA undercut pricing to take market share away from other exporters? Does the phrase "If it ain't broken don't fix it" sound familiar? I see only one possible motivation for the KSA to restrain crude prices: to prevent severe demand destruction as occured in the early 80's. But if the princes have been watching TOD they may not be to concerned: PO may outpace demand destruction to some degree. I see that horse race as THE determining factor in where we end up down the road.


Uh, could you explain that in 100 words or less? Like perhaps in English. Long strings of numbers make me dizzy.

Sure thing research,

I can make 10 widgets a day. My 4 competitors can each make 10 widgets a day. You need 10 widgets a day to live. Me and my competitors can make a good living by each selling you 2 widgets because we can charge you out the ass for them. As long as me and my competitors are each satisfied with selling you our two-widget share of the market you can cry all day long about our excess prodcution capacity...and we still won't care.

But what if you learn to survive on 5 widgets a day? What do we do then? Maybe I'll drop my prices to get another guy's sale. Or maybe...just maybe my competitors can't make more than 4 or 5 widgets a day in the near future. Hell...now I can sell you 1 widget for what I was charging for 2.

And that, my friend, is the really scary propect. And you should know: I actually make widgets for a living. But I still worry about you and my fellow citizens.

Sorry, Rock, I didn't mean to put you out there as I was only making a point for future reference that long posts full of technicals and numbers are tough on us amateurs. I make widgets, too, but I definitely cry about my excess production that goes unsold.

The one thing your leaving out is the quality of the various grades that the producers are offering the market.

Saudi Arabia's position as a producer is that they can sell all the light sweet oils they can produce and don't need market share on that front.

On the heavy sour side they are very aggressive with the price and are bargaining hard to get the best price possible. They are quit willing to withhold production if they don't get the price they want.

They are willing to wait till the world is forced to pay a premium price for heavy sour oils.

But in my opinion this will backfire if I'm right and further substitution of NG directly into the transportation network happens. We could have done it in the 1980's the only reason we did not is oil got so cheap continuing the substitution of NG for oil was no longer economic. This is the other side of Rockmans arguments and in my opinion what was driving the markets from the 1980's until recently.

Until now of course NG was cheap enough that complex refining of heavy sour oils was economic at a price spread not all that far from light sweet refining.

But things can and do change. But this time around high NG prices will simply make refining the heavy sour crudes uneconomic at any price point as direct use of the NG is simply more efficient and you get no net energy gain from complex refining of heavy sour crudes.

I didn't really forget the grade differentials. My tales are long enough w/o hitting the details too hard.

But you make a very good point with regards to the complexity of the system: NG price implications on sour processing, crude grade variations over time, varying market forces inside and outside of OPEC, etc

A complete model would be very complex. But even with such a model the variables (especially the emotionally driven aspects) range over such large yet reasonable limits that the potential conclusions would end up all over the board. We all have our prejudices as to how the story is unfolding. Thus the wide range of reasonable but often contrary conclusions.

Perhaps I wasn't aware of all the factors inplay during the 1975-86 period but the system seems much more complex and unstable now then it did back then. And I'll repeat the one fact that I can attest to first hand: NO ONE had forecast the level of demand destruction brought on by the global economic collapse. Just the opposite: oil was going to hit $100/bbl by 1990. All those expectations were crushed IN JUST SEVERAL YEARS. I am a stochastic kinda guy by my professional training but I do know the pitfalls of driving by using the rearview mirror. (Yes: PO will eat up a lot of the excess production capabilities due to demand destruction).

But like Yogy said: "It's dejavue all over again."

Memmel have appreciated your analysis that you have been advocating over the last week on the Heavy Oil/Natty Gas/price discount. I agree and it appears the market has legitimized your thought processes. While heavy oil diffentials in Canada have narrowed (due mainly to pipeline reversals and lower imports of VenMex heavy) the refiners have sought to protect their margins by contracting heavy oil at differentials to WTI. A Canadian heavy oil producer I own a few shares of, Baytex has entered into 3 medium term heavy supply contracts to supply heavy oil at 33%/$24.55 diffentials to WTI. IIRC the 33% contracts were originally put in place when crude was about $90-$100 USD. The contract discounted to the WTI by $24.55 was the most recent one executed.


Even with these discounts Baytex is reporting heavy oil recycle ratios of 7-9x times. Pretty impressive profits given natty has been stuggling to get to 2x.
THe fact the Saudi's refuse to discount to this level (not withstanding transport costs)would certainly explain why their buyers are refusing (ah make that well supplied) to take their heavy sour at discounts of only $6-10 a barrel.
Nice work!
Kudos to Gail to thanks for fleshing this out


I don't think we have enough NG in North America to transfer much of the transportation business to it. We are using all of the NG that is being produced now for some purpose or other. Production went up last year by what someone called "an astonishing 4.3%", and we might get lucky and have it go up by equal amounts for another year or two.

I think though that we will hit limits on NG production pretty quickly, partly because of the number of drilling rigs, and ability to build more, quickly. The other reason is that peak oil will put a lot of pressure on the NG industry, because workers need to drive long distances to get to work, there is a lot of truck driving in monitoring production from the field, and drilling rigs often run on diesel. It is all too easy for some necessary supply line to get cut, especially if someone decides to impose rationing, and doesn't figure out the inter-relationships.


Thats why Pickens was saying it had to be done in conjuction with increased electricity supplies, Move home heating to heatpumps and us the NG in diesels, I'm surprised Memmel suggested this as I understood that substitution is just rearranging the deckchair. Though he may be predicting what will happen and not endorsing it


To some extent it is rearranging deck chairs but its better to burn the diesel in the heavy haul truck fleet for real work then to burn it as part of a upgrading process for gasoline to haul the kids to soccer practice.

Nothing wrong with targeting critical infrastructure over casual use. I think NG or even more flexible diesel SVO ( straight vegetable oil ) truck fleet makes a not of sense in the short term.

Run out of gasoline ohh well run out of diesel and it is the end of civilization rapidly.

A multi fuel truck fleet adds badly needed robustness to our infrastructure. I'm by no means discounting rail esp for long haul but we will be dependent on trucking esp local and regional trucking for the foreseeable future.
Here is a syngas diesel engine.


syngas is a mix of hydrogen and carbon monoxide. It can be made from wood coal or even from refinery coke basically and reduced carbon source and water. I'd suspect once you moved to tanks and engines that could handle NG/Diesel then a move to syngas diesel is probably pretty easy this adds another fuel source.

All of this can be translated to diesel farm equipment.

Moving to a more flexible fuel base esp for critical infrastructure is not a bad thing.

Doing it for cars is a waste of resources. So in this particular case being able to multi source fuels from a variety of source while not changing the overall energy balance does add significant robustness to our infrastructure.

Really big picture approaches don't necessarily capture important details like this.

I'd also advocate a move to biodiesel or better SVO for farm equipment for the same reasons it gives farmers control of their fuel supply an increases the robustness of our mechanical farming system.

If you're going that far, why not go all the way and switch to an external combustion standard? Bag ICE altogether.

I think solid oxid fuel cells are the best solution for flex fuel.

A move towards mixed gaseous/liquid fuel for diesels and putting in the supply chain makes the next move to solid oxide fuel cells feasible.


A solid oxide stack at the fueling station could even generate power for people stupid enough to drive their EV out of town.

On point a lot of people advocating alternatives skip is that hydrocarbons are a really good fuel and they will have a use for the foreseable future in a number of areas esp heavy equipment and flight. We can limit the use to where its really valuable and with a flex fuel solution esp with solid oxide fuel cells its just a type of electric source of a electric transport centric economy.

These solid oxide electric generators could be switched for batter packs are if its not a issue you would have dual mode etc.

In a sense they would act more like a battery. But you need the flex fuel network for them. Flex fuel diesel offer a bridge from our current way to a new better way.

See I'm not always doom and gloom :)

There are some important things we need to do and the chevy volt is not on the list.
Solid/Oxide fuel cell battery powered heavy trucks for food distribution and flex fuel diesel trucks are at the top.

I know its not the route most of the idiots spouting EV's for the burbs like but I think that securing our critical infrastructure first then worrying about the soccer moms later. The fact the these people are to friggin stupid to even consider what really needs to be done causes me to dismiss the entire movement.

Sorry to be harsh but its getting to the point that human stupidity like the chevy volt and corn ethanol may leave us with rapidly failing infrastructure and oil and esp diesel become dear.

SOFC does have massive potential. I'm not sure about mobile appliations because their high temperature ceramic membrames don't like to be shaken around. The problem is you want high surface area but in a confined space (eg for mobile apps) that means going really thin. New materials could fix that though.

Chevy volt style hybrids make a lot of sense. They're basically the best overall compromise for most automotive applications. It's very close to a silver bullet for commuter travel, at least in terms of oil consumption. Light rail, bicycles, walking to work, carpooling, hybrid busses, home working etc can all help a lot too. We'll still need liquid fuels, but so much less that advanced biofuels could do all of it without too much societal and environmental burden even if algae are not commercialized on a large scale. Unless of course if we want infinite economic growth...

Cyril, the 16kwh battery on the Volt for it's 40 mile range means that at $1,000kwh it is likely to add around $16k to the cost of a similar ICE car.
The Prius targets 10 miles unassisted would need around $4k premium, and Toyota plan to reduce that with mass manufacturing to around $2,000.
This would do around 20% of drivers even in America, and if they charge up at work so they can go 10 miles there and 10 back then over 50% of American drivers would be good to go without using the ICE.
Sounds like a much more realistic spec to me!

Only problem is that you really can't count on the grid for support in US. In Britain, in a handful of years, I am pretty sure you can't either. Especially charge up during the day is likely to be a problem.

Gail, we have chatted about that a few times, and a couple of electrical engineers have chimed in to the effect that they reckon they can do a pretty fair job of keeping the grid running.
The problems with the American grid are basically at peak, which puts out around 1,000GW, and the average load is just about 460GW.
Alan has also put some figures on strengthening the grid, and transmission lines were surprisingly cheap.
I have previously provided information on charging extra for peak use, which works well to minimise such use.
In case you missed it, here it is again:

If all the American fleet of cars were EV's then you would only need around 100GW of power, and that level of penetration just ain't gonna happen for years, if ever.

This is also based on full EV's running at present average American mileages, not just plug-ins which would only do around 10 miles on a charge.

10 million Prius cars running 20 miles a day at 300/watts/mile takes 60 million kwh/day - that would take the output of around 2.5 1 GW power stations - and if it is a choice of staying stationary or building another couple of coal stations, then those coal stations will be built.
10 million plug ins will take ages to get on the road anywhere, and the wind build alone should easily cover it - the total costs of the turbines, transmission lines and electric should still be far less than current prices for gas.

The load on the grid will be miniscule, and higher costs will likely reduce electricity demand by far more than they will use.

Tainteresque arguments start to get a bit circular, where any particular solution to an issue is discounted as the system will degrade too much to support it, either physically or financially.

Just what would it take to falsify the proposition?
Loads of countries have gone bankrupt before the US, and they all had hugely less resources in mental,food,material and energy terms - they turned it round.

Maybe one good solution at a time will do the job.

Retaining fair personal mobility at a fraction of the energy cost is not too dusty.

EDIT: For Britain I think you are right. We haven't got the energy resources of the US and no real program to build enough stations other than for gas which will not be available in the quantities needed.

Perhaps. Our systems are so interconnected that failure (or shortages) in one area are going to cascade though the system. The point isn't that transmission lines are terribly expensive. It is that we have no system or plan for doing things to fix up the grid, and no way of funding it. Right now there is no place for people to plug in their cars at work--the majority are in large outdoor lots, with no electrical service around of any type. Someone would have to wire service to these lots, and put outdoor plug-ins in. I don't think it will happen, unless there is major funding from somewhere.


You make some good points about market share. I think I understand them, even in the long version.

How about man-hours of work equivalent? I think we have lost sight of this. The total man hours of work for the people on the globe will be going down, as we have less fossil fuels to utilize.

I think for a long time efficiency gains i.e doing work for stuff that matters will mask any loss in total fuel.

We can go a long way in simply not building shipping and selling useless junk around the world.

Thats for the 1st/2nd world however your 100% right about the 3rd world they already run a bare bones economy and are the once that can least afford to pay. Every price increase just pushes them to the edge.

The disparity in the effects on the various groups is nothing but astounding.

Your average American can default on his house rent a cheaper apt and have more money monthly to spend on food and fuel next he can but a econobox then default on his SUV payment and reduce further his expenses and finally he can default on his credit cards. If he gets laid off he can move close to McDonald's and get a job flipping burgers and still afford to own a car. The point is that the 1's world can default on debts for a very long time before its even reached the bar bones economy level. Except for job losses and resulting pay cuts at each stage monthly cash flow increases so purchasing power for necessities increase for quite a while instead of decreasing. And you do get some gains in efficiency as people move towards renting to get closer to jobs.

The second and third worlds don't have this buffer.


You seem to be ignoring "Peak cheaper apt" and "Peak econobox", I get your point though from the top of the mountain you can go a long way down before you drown

MexicanAmerican will not just be taco's.

Tata's biggest market with its cheap car may well be the US.


God forbid the Yugo makes a comeback.

Also a flood of cheap 250cc motorcycles is possible from china not to mention cheap Chinese cars.

At the end of the day you have to stay alive and make the best you can of your circumstances.

Given the rapidly imploding housing market if any demand exists for cheap apts we can throw them up en-masse
probably more likely is conversion of SFH to add-hoc apts of various sorts.

I'm sure you have at least seen pictures of the horrors thrown up in HongKong with exposed piping.
I could not find a picture quickly but you should see them they are increadible makes soviet stuff look good.

We have a long long way to fall from our current standard of living. And we can fall a long way before consumption of critical commodities such as oil and food is significantly reduced.

Just consider the vast differences in oil use in the US vs Pakistan. We can and will reduce till we are are the Pakistan of the future.
God only knows what Pakistan will be like when the US finally reaches that level.

Or we can put in renewable electric rail right off most of our oil based infrastructure begin creating wealth
primarily via quality goods. And export a sane way to live to the rest of the world.

If you want people to struggle to stay alive with a ever downward spiral of living then they can and the will.

What choice do they have ?

Memmel, I really love your comments and please keep writing. One aspect not touched upon in the "we americans have a lot more room to fall" leaves out a crucial factor of our currency which has been flushed down the toilet and as long as we have massive trade and account deficits, unfunded future liabilities and the unraveling liquidity(read: insolvency)nightmare all converging to a point source in the near term..... we are at much greater risk than people realize. Jeez, it's hard to be optimistic with all these storm clouds swirling.

If you want some scary reading, read today's Wall Street Journal. The front page is US Mulls Future of Fannie, Freddie. An editorial is The Price of Fannie Mae. The editorial says

The liabilities of Fan and Fred are currently not on this U.S. balance sheet. But one danger is a run on the debt of either company, putting pressure on the Treasury and Federal Reserve to publicly guarantee that debt to prevent a systemic financial collapse. In an instant, what has long been an implicit taxpayer guarantee for both companies would be made explicit – committing American taxpayers to honoring as much as $5 trillion in new liabilities. U.S. debt held by the public would more than double, and the national balance sheet would look very ugly.

This may be a stupid question but.... for the large, vertically integrated oil companies, don't they essentially sell the crude to themselves, i.e. to their own refineries? In which case, if their refineries' margins are low, wouldn't the entire profit picture suffer? We hear of record profits for Exxon, but how much of its own crude does Exxon refine versus selling to other entities in the business and where do these record profits come from if they are keeping refining margins so low? It would help my feeble brain's understanding to see some kind of rough breakdown of where crude from a given company comes from and goes to in terms of monetary flow. Somehow the $$ paid 'at the pump' for motorists, airlines, homeowners hoping not to freeze next winter, etc. must travel up through the jobbers, refiners, oil companies and apparently most of the profits are ending up in the oil companies' pockets.

ExxonMobil's profits are high primarially from increased revenue from their oil/gas production. They've actually have lost ground on the production volume side of the equation the last two years. They also have lots of other sub companies not in the oil patch. I haven't seen the data in quit a while but 15 years ago ExxonMobil's real estate holdings were worth many time more than their oil/gas reserves.

In the past, the only time preferential sales to their own refiners was a factor was when supplies were tight. I don't know the accounting details but there was a time when their refineries would buy the production company's crude at such high prices that the refiners lost money. Basicly taking advantage of tax law rules, so I was told. I live across the road from the largest oil refinery in the US: ExxonMobil Baytown Texas. ExxonMobil will buy oil for the refiner at the best price they can get regardless of the source. Also, it's a matter of symanitics in some ways: Valero might generate 1 million gals of gasoline but sell half to EM and half to Chevron. The EM tankers have the EM additives dumped in just like as Chevron will have theirs blended in. Same gasoline...different additives. And yes...I like Chevron and avoid EM whenever possible. Ask your favorite mechanic why.

I don't have a favorite mechanic - so why should I avoid EM gasoline?


I've been told by more than one mechanic that Chevron has one of the best for keeping your engine clean while EM is one of the worst. When they pull an engine apart they supposedly can tell from the amount of residue on the valves, etc if the car has been running on gas with good or bad additives.

Once upon a time, the only model we had was vertically integrated oil companies. I think there are sill quite a few vertically integrated oil companies around the world.

In the late 1980s and 1990s, people (MBAs) got the idea that competition was a good thing and there was a move to break up all kinds of companies. I have written about the problems this caused in the electric utility field.

The oil and gas business was no different. There was an effort to break up the big vertically integrated oil companies. Now there are numerous free floating refineries, that are independently owned. There are also quite a few joint ventures operated by, say, two big oil companies. I am not exactly sure how their finances work. I would guess that if a joint venture runs into financial problems, each of its parents would put in a little more money, and there would be no real financial problem. There may also be some refineries directly owned by oil companies. Someone from the oil industry could probably clarify better exactly what the arrangements are.

One of the problems I see now is that the free floating refineries are at a tremendous disadvantage to the integrated refineries. The integrated refineries are making a huge amount of money selling oil that cost $50 dollars to extract to themselves for $130 a barrel. They have lots of profits that they would probably just as soon not show, because if they did, the government would want to levy an excess profits tax.

When excess competition came along and lowered profit margins for refineries, the big integrated companies got along fine--just offset the losses against their big profits elsewhere, and the total even looked reasonable. I would expect this would even be the case if their refineries were owned as joint ventures with other big oil companies.

It is the refineries that are entirely separate that are at a huge disadvantage. They are the ones I expect are at risk of bankruptcy. With politicians anxious to hold down gasoline prices, I don't think anyone is worrying much about this problem, though.

On top of this companies with access to both internal oil and internal NG sources are making out even better.
They are paying "lifting" costs for NG and can afford to pay a premium for importing heavy sour and refining it over unintegrated refiners that don't control NG production. So your argument continues to hold.

This is probably whats keeping heavy sour prices from dropping.

As far as I know the Western Oil companies still have significant NG supplies.

However once the open market price for NG is lucrative enough they will back off on heavy sour causing the price to drop till its profitable to refine. It does put a floor on heavy sour prices but its sloping downwards.

Ohh and the recent recent price moves seem to be driven by this.


Notice the spread widening on NG even as light sweet softened.

The saudis increase of 300 kbd of heavy sour did nothing for the market.


Item costs $1.00
Ingredient of item costs $0.50; Labor, processing, overhead and taxes cost $0.40; profit is $0.10

Cost of ingredient doubles.

New cost of item = (2*$0.50) + $0.40 + 0.16 = $1.66

Ingredient price rises 100%, item price rises 66%

Profit margin is up 0.25%, profit is up $0.06 per item sold.

Is anyone out there?

It doesn't work that way, since someone chopped up the industry into little pieces. It works that way for the big companies that can put the pieces back together again. The little separate refineries are the ones with the problem.

If a few of them go out of business, the remainder hopefully goes to other US companies. If too many fail, I expect that the slack will be taken up overseas, and the US will lose out, because it will be much harder to import the finished products, once the oil has been refined elsewhere.

I disagree.

Whether there are 10 companies in the supply chain or 2, the price increase of a factor of production does not pass through to the pinal price on a 1:1 basis.

If crude is only 50 % of a refiner's expenses, then doubling the price of crude only requires a 50% increase in the price the refiner charges its own customers to maintain total profit, not 100%.

To maintain profit margin in a high-volume, low margin business, only the tiniest additional price increase is needed.

If small independent American companies are being squeezed out, I would argue they are being squeezed out by economy of scale and cheeper oversees overhead.

The problem isn't that production is being sliced into 10 companies or 2, it is that there is a very non-level playing field for the 100+ companies. These 100+ companies are in different businesses. Some will go bankrupt because of the slice they got, while the rest make money, the way the system works.

With diesel being likely to be more highly sought after, and thus more expensive, should one stay with a gasoline engine for personal transportation?


It probably makes sense to stay with gasoline.

We make a lot of gasoline in the United States, and it would be hard to switch much of this production to diesel or jet fuel. If the total amount of oil goes down, shortages of diesel are likely to be the bigger problem. We need a lot of diesel for producing food and for transporting goods. Diesel is also used for power generation in some countries. There wouldn't be much left over for consumers.

With gasoline, it is mostly the motoring public using the supply. If the supply is down, we might need to compete with police cars and ambulances, but not with all of the electric utilities around the world.

The gas price question surely has many answers...but I cant think of a single one.

Diesel fuel quality(cetane)might be part of it. Even though most US diesel is ULSD now, good luck finding higher quality(45 cetane)at your local pump. Actually, good luck finding any rating sticker. This is a big problem.

If its true that the US is exporting diesel, that cant be good either.

There may also be another factor pushing diesel prices up but I can't offer a sense of magnitude. Saw a story that actually pegged part of the price run up on ethanol production. Diesel production requires an addition of hydrogen. So does ethanol production. Thus the increased demand for hydrogen for ethanol put upward pressure on its pricing. One of the worst aspects of this relationship (if it's true...can anyone confirm) is that no one (neither gov't nor industry) monitored the hydrogen market: no prodction or sales figures, no inventory numbers, etc.

This may just be a urban tech legend. But with all the talented folks here I bet someone can confirm or kill this story.

Hmm no real hydrogen market exists hydrocarbons are converted to hydrogen as needed on site with NG the primary source. I think hydrogen is piped around some in areas with extensive petrochemical facilities.

But hydrogen is nasty stuff to move around it get absorbed into the metals making them brittle etc on special steels can be used to move hydrogen.

Here is a link.


A whopping 700 miles of hydrogen pipelines.

Can't see that ethanol production would require hydrogen. Natural gas is used a lot for distillation, and in the U.S. virtually all hydrogen is produced by steam reforming of natural gas, so there is some competition there.

IIRC, the biggest single user of hydrogen is the space shuttle.

Hydrogen is used in lots of processes. Perhaps the shuttle is the largest vehicle user of hydrogen.
I think that fuel, petrochemicals, and nitrogen compounds are 99% of the uses of hydrogen. The shuttle is maybe .0001%. I worked at a wafer fab and we used so much hydrogen we had our own liquid hydrogen tank. We got a shipment every three days. I think the shuttle launches every three months, but I could be wrong about that.
Our tank was only one tanker truck of liquid hydrogen, and the shuttle probably uses one hundred such trucks to fill it's large belly tank and internal tankage.

After thinking about it, I think the quote was that diesel and ethanol compete for natural gas. The natural gas is used for hydrogen for the diesel. It is burned for ethanol. So it is conflicts in natural gas availability that we need to watch out for.

I found it interesting to read this article about Cetane Number. It sounds like Europe requires considerably higher quality diesel than we can buy in the US. Higher numbers are better. In Europe, the minimum is 51. Here, the minimum is 40 and as you said "good luck finding higher quality (45 cetane) at your local pump".

And yes, the numbers definitely say we are exporting diesel (net exporter, in fact). It started toward the end of 2007.

Of course I don't buy your dismissal of ethanol. While your statement that ethanol is largely a replacement for MTBE (which is made from natural gas and puts the lie to the charge that ethanol increases natural gas consumption), it important to remember the MTBE was an "in house" product that did not really compete with gasoline.

Ethanol is not "in house" and does compete with gasoline especially if its use is mandated. There has been for some time a surplus of ethanol with severe price and cost pressures for distillers just as for refiners.

In a competive market costs are irrelevant. Prices are determined by supply and demand. Prices are discovered at the margin with the last transaction setting the value for the whole lot.

In commodities, if there is one extra unit the price will fall to find a buyer. If there is one unit short the price will rise to find a seller.

Commodity producers are price takers not price makers. Costs may not be recoverable in the market and producers fight it out and only the most efficient (lowest costs) are able to survive at the price offered by the market.

I submit ethanol has been a significant factor in holding down gasoline prices and ignoring it will not make it less true.

Gail, ethanol production/blending Jumped toward the End of last year. We're now blending about 609,000 bpd of Domestically produced ethanol, and, probably, another 20,000 bpd of Brazilian ethanol.

Anyways, when "consumption" is reported it includes the 7%, or so, that is ethanol. So, the difference is probably more like 625,000 - 325,000 = 300,000 bpd.

Add to that the fact that in today's global market if you produce enough diesel you're going to have some excess gasoline, and, there you are.

p.s. It's Terribly short-sighted of any government to favor one (diesel) over the other (gasoline.) It distorts the market, and leads to imbalances such as we're seeing today.


You may already know this but of trivia...many here do I suspect.

When Mr Ford began building cars he had to chose betwein gasoline and diesel. He picked gasoline because there was very little market for it at the time. It varies with the source but a bbl of crude contains about 22% diesel and a little smaller/bigger fraction of gasoline.

At least Mr. Ford understood market dynamics at the time. As you imply, it's a little scary having a gov't make that call given all the conflicting motivations.

People have already touched on this, but I wanted to stress the need (?I think) for hydrogen. The composition of oil varies, of course, but if we treat it simply as saturated hydrocarbons, any cracking requires an equimolar amount of hydrogen.

Dodecane to hexane:
C12H26 + H2 = 2 C6H14

If you want to make gasoline, you make a lot more unsaturated/aromatic compounds,
Dodecane to benzene:
C12H26 + 7 H2 = 2 C6H6.

Note: gasoline has a similar energy content to diesel, the tradeoff is a cheaper, quieter engine versus a more efficient diesel (Carnot cycle). The need for the aromtics is to get better burn properties (higher octane). That said, I am a little puzzled by the Wikipedia numbers which list diesel as 45 kJ/g, and gasoline as 47 kJ/g. My rough calculations are more like 45 and 42, respecively....which is in agreement with the increased proportion of hydrogen in the saturated diesel. (These calculations are based on mass, not volume, but http://en.wikipedia.org/wiki/Gasoline puts the energy per volume of diesel between grades of gasoline.)

Back to the point...processing oil will require more and more hydrogen as crude gets heavier. On the flip side, sour crude (H2S) can provide more and more hydrogen. Is this hydrogen recycled? Will hydrogen need to come from NG? Will it need to come from coal via a water gas shift reaction (WGSR)?

I'd like to thank the author of the original article...the changing relative prices of gasoline and diesel are interesting to watch, and the thoughts expressed give some great insights.

-dr (btw...I tried to post this a few minutes ago, but I seem to have failed--I apologize if I am repeating myself!)

C12H26 + 7 H2 = 2 C6H6

Interesting reaction. But you might wish to re-balance.

ehh..yeah. oops....kinda got distracted and forgot where I was going. Thanks, I did have some nagging thoughts as I left my desk, but I thought it was math related...not arithmetic!

C12H26 = 2 C6H6 + 7 H2

My original line of thought is that making gasoline (aromatics) gives H2, and this might allow for the cracking of big chains in the diesel scheme. Surely the petroleum/chemical engineers have all of this very well worked out? Is hydrogen moved from the reformers to the crackers?

You make a good point about the heavier oil needing more hydrogen. If the hydrogen needs to come from natural gas, that may be a limiting factor.

Somewhere up the thread, I showed the output of Hawaiian refineries compared to the US average, by product. After reading your post, I had an a-ha moment.

Hawaii has a strange output mix, but it also completely lacks natural gas. The output makes sense, if you realize they can't do any cracking. The output probably also works for them: There is a need for a lot of jet fuel for air travel. I expect they are using the residual fuel oil to as input to the electric power plants, and the gasoline for cars. I imagine they start with a heavier oil.

By the way, the calculations I was making with different BTU figures all seemed to give higher energy for diesel than gasoline - I was guessing 15% higher. Different sources seemed to differ, but comparing diesel and gasoline BTUs from the same source always gave a higher figure for diesel.

I appreciate your thanks. I am really looking at this from the outside in (my background is insurance), so I always wonder if I am missing something. I have picked up a fair amount about the oil and gas industry, but I am not an insider.

Thanks again to you...always a pleasure to read your posts.

The Hawaii graphic is interesting...what happens with "Resid"? You suggest power plants, but is that documented? (Well, gosh...I can look that up: http://tonto.eia.doe.gov/state/state_energy_profiles.cfm?sid=HI Does using crude for electricity generation mean nice wholesome unrefined crude or residual muck?)Obviously residuals aren't just left in a warehouse; is it used as ship fuel? That would go along with the market pushing the refiners to adjust-they make jet fuel and ship fuel at the expense of diesel and gasoline. Are there other product distribution data for other regions?

On this topic...at what point does it make sense to strip the hydrogen out of the crude to use in specific reactions? Can a few percent of the crude be turned into carbon and hydrogen? The market value of carbon can't be all that high, but maybe the hydrogen is? It would be a mildly uphill process thermodynamically, although I have no idea how the kinetics work.


Your talking about the syngas reaction.


C + H2O → CO + H2

Once you have syngas the world is yours theoretically in reality further transformation depend on the CO/H2 ratio generally needing more H2.

In any case syngas is a universal feedstock for any other petrochemical process. The CO can be split off and burned if its not needed downstream.

You can see why CH4 is the prefered feedstock.
CH4 + H2O → CO + 3 H2

This is the reaction used to create most of the hydrogen used.
It works for any carbon source from coke to methane.

I know the power plants are mostly powered by petroleum in Hawaii. Given the mix of output from the local refinery, I was sort of putting two and two together. Hawaii does have some wind and geothermal also, but no natural gas power plants, because there is no local supply.

Geothermal is a no-brainer for Hawai. Smack down of the middle of a hotspot! Although I understand there are have been a few technical issues with geothermal there.

I visited Puna Geothermal Venture. They have the capability of adding to current capacity, without any more drilling by using the hot water (which they are currently not using) in addition to the steam (which is all they are using now). There is some new technology that they could add, which would allow they to vary quite a bit of the supply up and down, to help offset wind variability as well. PGV has a proposal into HELCO to make the investment to be able to do these things, and they are hopeful it will go through. On paper, HELCO has a 30% capacity surplus (counting its petroleum fired plants), so it is not 100% sure it will happen.

The problem in Hawaii as everywhere else is transmission lines. PGV mostly services Hilo and the local area. If more geothermal is needed, it needs to be built close to the users. I expect that won't happen --inertia, capital expenditure, long time frame, need for drilling rigs, religious objection, etc. Also, PGV has the best site, in terms of location.

Rockman, my perception after very little study on the matter is that Ford was very strongly inclined toward alcohol (for powering cars, not for drinking:) However, Rockefeller's favorite cause, the Ladies "Temperance" League was able to get prohibition passed, and that virtually signed the doom of ethanol as a fuel.

His early cars were made to run on alcohol, or gasoline. They wuz "flex-fuels."

Anyways, when "consumption" is reported it includes the 7%, or so, that is ethanol.

7%? Didn't you just claim a couple of days ago that the blenders aren't meeting their targets? Which is it? If there is 7% (by volume) in there your claim from a couple of days ago was certainly false.

It's Terribly short-sighted of any government to favor one (diesel) over the other (gasoline.)

If they hadn't, we would be using a heck of a lot more gasoline (since gasoline engines are so much less efficient than diesel engines).

It distorts the market, and leads to imbalances such as we're seeing today.

Those are pretty funny words, coming from a huge ethanol booster.

RR, they could be using close to 7%, at present, and still Not make their mandate. I don't know; probably, they will. But, it was looking pretty suspicious there for awhile. Almost as if they were watching the Rick Parry challenge to the EPA to see how it would shake out. Anyways:

It is to my benefit that Europe, China, and India -among others - are encouraging diesel consumption through taxation; but, it's not going to work out well for the poor people who own diesel cars in countries where diesel isn't tax subsidized. It's also not going to be good news for those Walmart shoppers whose goods are brought in on truck, or those farmers who have to buy diesel for their tractors. Or for the Independent truck drivers that are going broke due to the high price of their fuel.

Am I a hypocrite? Maybe. But, I look at it as an anti-trust issue. Kind of like making Ma Bell carry MCI. It broke the monopoly log-jam, and ushered in a whole new age of communications. I, also, look at it as a bit of a National Security/National Economic Security project.

I don't know where you are getting your figures from. When I look at the report which seems to be the amount blended in Ethanol Refinery and Blender Net Inputs, the highest month was April, with 442,000 blended into the fuel supply. This would include imports.

My understanding is that to some extent we have an oversupply of ethanol. The amount actually produced in April 2008 was 562,000, in April 2008, according to this report. We have been averaging 28,000 barrels a day of imports as well in 2008. All of this has not gotten into the fuel supply. It is sitting in storage tanks, waiting to be blended in.

In the summer, the net impact on the fuel supply is actually the additional supply from the ethanol blended in, less the more volatile fractions of gasoline that have to be taken out, because of the ethanol addition (otherwise, the ethanol causes too much smog). The concern when the switch was made from MTBE to ethanol was that it would reduce the fuel supply. See Supply Impacts of an MTBE Ban.

I think the excess gasoline from Europe and other places is what is making the difference, not the ethanol. Regarding favoring one over the other, you have to remember that we were the ones favoring gasoline over diesel. That left cheap, fuel efficient diesel for others.

Gail, I was looking at production from the RFA. I admit, your EIA figures, although not current, are much better. That's a heck of a difference between product blended, and product produced. I guess trying to get all the parts moving at the same time results in some pretty lumpy numbers.

Dang, I just wish there wasn't such a lag. Anyway, that's good info; thanks a lot.


If we use the rule of proportionality -- if gasoline was $1.25 when oil was $30/bl. then gas at $130/bl should be $5.38. A huge difference over $4.11.

So you are right, gas is way, way out of whack. The question I've been asking myself for months is how much longer this can go on? Somethings gotta give.

Why do you think the price curve should be linear with cost? I can see no reason to assume that.

I don't. I simply have no other way of making a comparison since margins are highly variable. It does, however, at least give me a ball park number for comparison which can be adjusted by as many variables as you can think of. Obviously, as the price goes up the margin is going to decrease somewhat because competition will allow that. How much I've no idea.

I'm open to having my ignorance corrected.

Start with the percentage of cost that oil represents. This would be true of any product. Using proportionality is like assuming that cotton is 100% of the costs of a t shirt. If cotton or oil goes up 100%, the costs go up by 100% times the proportion that the raw material represents. Start by determining the percentage increase in cost due to oil, then adjust for other variables. Don't start with an absurd methodology and then try to fix it by adjusting.

The fact that gas does not go up by the same percentage as oil does not seem like a mystery to me. Why anyone would have assumed that is the mystery.

I have no idea why one should use the "rule" of proportionality. Better to use the rule that takes into account the percentage of total costs input that oil represents. The fact that your numbers don't track in no way demonstrates that gas is way out of whack.

Better to use the rule that takes into account the percentage of total costs input that oil represents.

No. It is best to remember that Price is not related to Cost. The consumer does not care what the product cost to make. Consumers care how valuable that product is to them.

The mystery isn't that gas prices don't track oil prices. The mystery is why have gas prices gone up so much now and not 10 years ago? (The answer is most likely supply/demand). Note that 10 years ago or so, gas had gone down to ~$1/gallon in the US in a booming economy. Gas prices at $3-4 would have had little effect on the mainstream US, even though we wouldn't have liked it. So, why didn't gas stations charge that? The market would have borne it better then than now. The only answers I have is over supply and competition.

It seems to me that users have recently become more aware of miles per gallon and other measures of the true value of the energy usefulness of the various fuels. On this basis, diesel is worth at least 15% more per gallon than gasoline, regardless of what it costs to make. This is a least part of the reason for the shift in prices.

Ten years ago, suppliers were willing to supply all petroleum products very cheaply. Cost of production was low. No one stopped to think what the products were really worth to the consumer. Producers just competed against each other, and kept prices low.

This is a graph I thought about including in the post, showing the ratios of the various fuel prices to the price of WTI crude. The reason jet fuel is lower, I think, is because it is more of a wholesale price, and the others are retail prices. The sharp downward slope was alarming to me. EIA has some charts showing crude oil was about 50% of the price of retail gasoline in the 2004-2005 period. If you assume all costs vary with the price of crude, you can get to a price over $6.00 gallon.


Is this because the retail margins and distribution costs are not percentage based? ie as fuel increases in value then a 'fixed' margin/distribution cost would reduce in percentage terms.

Either that or fuel retailers were creaming in in the late 90's


There is a mixture of costs between the crude oil price and the retail cost. Some of them probably go up in proportion to the price of crude oil, like quite a few of the refinery costs and transporting oil to service stations. Others, like operating the service stations, probably go up more in line with general cost inflation. So there is really a mixture, which makes it harder to look at.

I think, though, that refining profits were much higher a few years ago, and it is partly this that we are seeing in the declining percentages.

Gail to many posts but I you posted that the vertically integrated refiners had a significant advantage.
I think this is the biggest thing keeping prices of gasoline low right now vs oil prices since we now seem to have excess refining capacity. The vertical integrated refineries can afford to undercut the market price.

The reason diesel is not tracking is simply because we are shipping diesel out of the US so we are paying "world rate" for diesel.

And of course my some magic we manage to consistently get gasoline imports. This magic will end at some point when the base crude/NG supply cannot support it.

My opinion is that the looming NG shortages that seem to be coming for England my have a significant impact on exports of gasoline from England to the US.


Can you please exand on why the NG shortages in the UK will cause a drop in the gasoline exports to the US? Surely this logic would apply to the whole of europe, or it this some function of NG is required to refine heavy crudes and alters the crack spread? I think Euan et al all thought they would just freeze to death :-)



I presume what you are saying is that refiners won't be able to continue doing their "cracking" to upgrade the heavier grades of petroleum, because of the lack of natural gas. This will especially affect the lighter fractions like gasoline, because these will be missing without upgrading. Is this right?

I presume the medium grades would still produce reasonable amounts of diesel with just fractional distillation, and that should be OK, as long as electric power is available (or perhaps they can just burn some oil).

The heaviest grades wouldn't be good for much of anything without the NG, and this will push their price relativities lower.


Based on this graph is it fair to estimate that once shortages develop, excess refining capacity may no longer suppress gasoline prices and they will return to historic levels?

Retail gas prices are currently at about 125% of pre-refined raw crude oil prices. If they return to 200% of raw crude oil $4.12 a gallon jumps to $6.59 a gallon?

I am not sure it is as bad as 200% of raw crude oil prices.

The price of crude oil has gone up very rapidly, but the cost of hiring service station attendants and buying newspaper ads hasn't gone up as rapidly. Some of the costs will double, but not all of them. Maybe something in the 150% to 175% range would be more reasonable.

Also, there is still the excess profits issue. With the fast run-up, oil companies would be making very high profits if they could sell oil they produce at $50 a barrel at current market rates. It seems like that could help hold prices down as well.


MTBE (which is made from natural gas and puts the lie to the charge that ethanol increases natural gas consumption

Anyone who has made it past 3rd grade math would tell you that it depends on how much is used relative to how much is produced. In the case of ethanol, you burn natural gas which is largely used up in heating up water. In MTBE, the natural gas becomes part of the compound, and the energy is still available for combustion. MTBE also has a heating value of about 20% greater per unit volume than ethanol. That would also factor into the 3rd grader's analysis. (I will let you work out why).

I submit ethanol has been a significant factor in holding down gasoline prices and ignoring it will not make it less true.

Nor will wishing really, really hard make it more true.


Hate to jump into your debate here but I suspect you know the current answer to this question: when you remove the gov't subsidy, isn't ethanol currently selling for more than unleaded gas. I know about a year ago I read that it was. If so, then it's hard to imagine it's helping us much in the net price we pay. Last time I heard the number the gov't expectedin 2008, to subsidize ethanol production with $26 billion of tax payer money. I've don't ever remember the folks in the ethanol biz ever promising that their production would lower gas prices. It may help our trade imbalances a bit, increase the GDP of our farmers a bit, maybe even pollute a little less (although I've heard they've backed off that hope).

Also, is the gov't still tacking a $.50/gal import tariff on Brz. ethanol? I knew they were last year.

Rockman, the front month contract for ethanol is $2.71 Gallon.

The current blenders' tax credit is $0.46/gal. If you added the two you would get $3.17/gal. The front month for gasoline, presently, is $3.36/gal.

If you allow that in a 10% blend ethanol probably gives up 15% efficiency then one could say that at current prices ethanol is $0.30 overpriced and should not/would not be blended without the mandate.

This might, however, be short-sighted. One might ask what the price of gasoline would be without ethanol taking up 7% of the demand. Many people think it would be at least $0.50 higher. Also, with another 5 + Million acres of corn coming online next year (est.), and no 15 year floods predicted, and another 125,000 b/d of ethanol coming online next year, it's highly likely that the price of ethanol will decline over the coming year, whereas most analysts are thinking gasoline could get more expensive.

Sorry to interrupt. Hope that helped.

Good interuption kdolliso.

There are so many qualitative answer floating around it's good to see some hard numbers.

There's so many branches to the ethanol tree it's difficult to get a bottom line (if there really is a clear one). Such as a farm report I saw while in La. a couple of weeks ago: ethanol corn production may have lead to certain food shortages globally (or not) so the price of soy has jumped. La. farmers were expected to increase soy planting from 600,000 acs to 900,000 acs. They didn't offer numbers but the implication was that some corn fields would be replaced with soy.

In the case of ethanol you're leveraging solar with nat gas, or nat gas with solar. whichever.

I guess an interesting question would be: Which uses the most nat gas - MTBE, or Ethanol? adjusted for any difference in efficiency, of course?

If I conceded a fairly high figure of 35,000 btus of nat gas per gallon of ethanol (this would include fertilizer, drying seed corn, and process heat in the average dry mill plant,) What would be the amount of Nat Gas used to make a gallon of MTBE. This should include not just the nat gas combined in the mtbe, but, also, the amount of energy used to process it.

Anyone know?

In the case of ethanol you're leveraging solar with nat gas, or nat gas with solar. whichever.

In the case of MTBE you're leveraging isobutylene with nat gas. The energy isobutylene comes from the solar.

Which uses the most nat gas - MTBE, or Ethanol?

It's not that straightforward, because the molecular weights are so different. It doesn't matter anyway, because ethanol usage has gone far beyond MTBE replacement.

If I conceded a fairly high figure of 35,000 btus of nat gas per gallon of ethanol (this would include fertilizer, drying seed corn, and process heat in the average dry mill plant,)

Of course that's not a fairly high figure. It is an incredibly low figure; one that is far lower than any of the USDA energy surveys. It is also a figure that would put the EROEI at greater than 2.0 But we've been down this path before. 1. Someone claims a low energy usage in an ethanol plant. 2. There is no independent verification of any sort. 3. You then extrapolate that number of all of the ethanol plants in the U.S.

Did you forget This Study Robert?

It puts the mean dry mill plant at 31,000, with the low being 17,000. This doesn't include the nat gas used for fertilizer production, which I will admit is a skosche more than the 4,000 btus I have remaining; however, I'm pretty sure the average plant is a little bit better than this by now.

How do you get isobutylene from solar?

Did you forget This Study Robert?

Absolutely not. But apparently you did, as it doesn't support your claim.

It puts the mean dry mill plant at 31,000, with the low being 17,000.

Of course it also puts the average wet mill process at 47,409. Your first deception is to completely ignore the fact that there are plenty of wet mill plants out there. By choosing dry mill for your analysis, you are cherry-picking data. Your second deception:

This doesn't include the nat gas used for fertilizer production, which I will admit is a skosche more than the 4,000 btus I have remaining

A skosche? First, you said "would include fertilizer, drying seed corn, and process heat..." Now we know that wasn't true. In fact, the most recent survey I have seen from the USDA put the numbers for the farming, corn transport, and distribution energy inputs at more than 20,000 BTUs. So yes, your 4,000 is a "skosche" low. But then again, you have never been interested in accurate numbers, have you? You are interested in the best spin you can put on the numbers.

How do you get isobutylene from solar?

Isobutylene comes from fossil fuels, which is ancient, buried solar energy.

Kdolliso - How do you get isobutylene from solar?

Robert - Isobutylene comes from fossil fuels, which is ancient, buried solar energy.

OhmiGod! :)

I'll answer the rest of this nonsense, later. I'm laughing so hard I can't see my screen through the tears.

but, No one has built a "wet-mill" in years." Nor, are there any plans to. And, 20,000 btus for "off-site" is silly to the nth. Or, maybe you'd like to "show some figures." Do I smell a P & P reference coming on?

I agree with you on your point about there being a big difference between ethanol and MTBE, because MTBE is an in-house product, and ethanol is not.

MTBE is made from natural gas. MTBE was cheap to produce, and could be blended in before the gasoline was put in the pipeline. That made it doubly cheap. Ethanol requires a whole separate transportation system, so is much more expensive for the oil companies. Ethanol is more expensive than MTBE, even at the depressed prices caused by too much ethanol to blend into the gasoline. Ethanol also has a lower energy content than MTBE.

Substituting ethanol for MTBE definitely raises an oil company's costs. If it is basing its pricing on these costs, substituting ethanol would push the costs of the end product up, if the pricing margin were the same.

The amount of ethanol blended into the gasoline is going up in 2008, but slowly. The highest month is April 2008, with 442,000 barrels a day blended into the gasoline, according to this source.

When it is warm out, and ethanol is added to the gasoline, it is necessary to remove some of the more volatile liquids, to keep the Reid vapor pressure down (and prevent too much of the gasoline from evaporating and causing air pollution). One of the big concerns of those looking at substituting ethanol for MTBE was that it would reduce the total supply of gasoline. See Supply Impacts of an MTBE Ban.

The Bad part, of course, being that MTBE is poisonous. Also, Nat Gas, being non-renewable, is skyrocketing in price as we speak.

No one has answered the "how much nat gas is in a gallon of MTBE" question yet. I've got a hunch, though, that it's more than the 25,000 btus (total from All Inputs - farming, fertilizer, seeds, processing, etc.) that's in a gallon of ethanol put out by Corn Plus. BTW, many other plants are going the biomass route. Some with the Corn Plus technology - some with other biomass solutions.

x said:

Ethanol is not "in house" and does compete with gasoline especially if its use is mandated.

Well by gum. I suppose using your definition, if the government throws enough money at it or sends in the rozzers to destroy the competition, we can make anything "competitive."

TOD had a post a few days back on the cost to produce corn ethanol...


They came up with $3.00 per gallon, which is not that far out of line with the $2.55 per gallon these people came up with back in april:


Since ethanol only has 65% of the energy content as gasoline, that makes the price $4.61 per gallon energy equivalent.

So just how is it that domestic corn ethanol "competes"? Why with subsidies, that's how! Estimates on these vary widely, but the range is between $0.70 and $1.70 per gallon.


Of course the Brazilians can make the stuff for $1.64 per gallon. Add another $0.20 per gallon transportation and they can deliver it to the U.S. for $1.84 per gallon. But then the U.S. government tacks on another $0.54 plus $0.04 (2.5%) in tarriffs. That makes the final cost $2.42, or $3.72 per gallon energy equivalent.

But the subsidies only tell half the story about how much it costs the American people to protect its domestic farmers. The other half lies in what in war they call "collateral" damage. For you see, this sort of subsidy/tarriff arrangement is what the U.S. government defines as "free trade." But other countries don't see it that way at all. They don't call this "free trade". So many a "free trade" agreement that would have opened up foreign markets to American manufactures has bitten the dust. And of course it exposes the neo-liberals for the double-dealing hypocrites they really are.

Maybe old man Confucius wasn't so dense afterall when he said:

"The beginning of wisdom is calling things by their right names."

just a small technical point though ethanol has a lower energy content is has a higher octane rating so theoretically and ICE running on pure ethanol is more efficient (as it can run at a higher comp ratio).
The SAAB 9-5 bio-power uses this fact by actively increasing the turbo boost (effectively increasing the comp ratio) when its has a high octane fuel in it.

Diesels have 2 advantages, 1) the run much higher comp ratios and 2) because they don't require a fixed air/fuel ration (stoichometric 14 to 1 for gasoline) they are unthrottled and don't suffer the "pumping losses" a gasoline engine does at part throttle. They call it the "pumping loss" though you can really think of it as the "sucking loss"


The production cost of corn ethanol in June 08 was $2.45. That includes corn at $6.54 per bushel. The June market price was $2.54.

See: http://www.extension.iastate.edu/agdm/energy/xls/d1-10ethanolprofitabili...

If the Blenders get $0.46 per gallon subsidy, the pass through cost (no profits) are $2.00 per gallon ethanol or with some profits to the traders, $2.09. As ethanol has only 67% of the energy of gasoline, that would equate to $2.98 or $3.12 resp. per gallon gasoline.

But I don't think the Blenders care: they just sell at volume price. So, in essence the Blenders buy it cheaper than gasoline. Much cheaper. Granted they have some blending costs, but that can't be much.


I want to thank you for this article. Nicely done.

Fascinating post. What leapt out at me was the first chart, showing the historical crack spreads. What's up with jet fuel's historically tiny margin?

I think it is because this is more of a wholesale number I am showing, and the others are retail numbers. Because of this, it is missing layers of taxes and distribution costs. I suspect, though, that these are much lower because we do not have thousands of service stations selling jet fuel.

I think that even apart from the expense difference, the price of jet fuel may be lower. If it is, I think the reason is that gasoline was originally the premium fuel, and diesel became an important product. Products like residual fuel oil were much lower priced. Kerosine jet fuel may have started out as sort of as a lower cost by-product, and stayed that way. From what I can see, it has more BTU's per gallon than gasoline (12%?). If the price were hiked now to reflect its true energy content, airlines would be out of business.

Interestingly, since the summer driving season kicked in in mid June, the implied gasoline demand (based on producer shipments) is down about 4% y-o-y, like jet fuel and distillates. Murray

I agree with Down South. The original post looks at US demand for distillates and gasoline. That's not good enough. You need to look globally. Diesel and gasoline are produced locally from a global product - crude oil. And the world wants diesel - wants it for industry, heavy transporation (trucks, ships, rail), personal vehicle transportation, and heating. And like kdolliso pointed out, making all that diesel you're going to have some excess gasoline. To me, that's why gas prices haven't kept up with diesel prices. It all goes back to what TOD folks already know regarding peak oil... crude is so darn expensive because of supply and demand! Likewise, yes, both gas and diesel come from the barrel, but today the world demands diesel more than it does gasoline.

Additionally, even if looking at just the U.S., the original post's consumption numbers only looked at the first four months of this year. That won't explain the differences in crack spreads between gas and diesel because as of January 2008 the differences were already present in the marketplace. You need to go back to when gas and diesel commanded similar prices. If you go back a year ago to the first week of July 2007, gasoline and diesel were much more closely priced than they are today. In fact, gasoline was priced at a premium to diesel ($2.98/gal vs. $2.85/gal). So, the correct way to look at this problem would be to ask, "What has happended since then?" Again, just looking at the U.S., since that first week of July 2007 gasoline demand has dropped (-3%) while diesel demand has increased (+5.5%).

So, locally or globally, it seems to me that diesel is just in greater demand and that accounts for the difference in crack spreads between diesel and gasoline. I suppose, too, through in some ethanol to dilute the actual gasoline demand and the situation gets augmented. [The numbers I cite are from EIA.]

About the only thing I like about biofuels is that if we have major crop shortfalls we can always shut down the biofuel plant and eat the corn or sugar instead of turning it into fuel.


Last time I saw the numbers England was our biggest source of imported gasoline. Do you have any figures on the gasoline vs. diesel demand in GB? If they have switched to diesel for the most part then, as you imply, they may essentially be "dumping" gasoline in our market. And if diesel is starting to dominate global expansions maybe we'll become the favored dumping ground.

"I do not see ethanol as playing a significant role at this time."

420 000 bbl per day of ethanol blend.

Ethanol accounting for 75% of the rise in grain prices making 980
million people eligible for starvation now and TPTB
did this on a whim.


Maybe classifying it as a whim is being kind to the folks in DC. I'm sure the supporters of the farm lobbies saw it as a win/win: increase farm profits and do their share for our "energy independence". The only thing they were missing was the "we're saving the whales" bumper stickers.

It is sort of crazy, but helped the farmers get higher prices, increased politicians' chances of re-election, and reduced the chance of having to pay farm subsidies. With Iowa having the first primary election, ethanol had an unusually large role.

We exchanged a cheap US made high-energy additive for an expensive US made lower-energy additive. We are now adding a little more in volume, but it doesn't get us very far, very quickly.

Also, we are now told that with catalytic converters, we may not really need oxygenates, anyhow.

Gail Pup55 made a really important comment on peakoil.com


We have talked about vertically integrated companies but forgot that they are global.

A lot of the gasoline imports are coming from the same large companies that have operations around the world. This goes a long way to explaining why the US can get imports as needed but cause the big guys are making gasoline wherever its cheaper and shipping wherever its needed.

Another comment in the same thread.

Yes, that's what I gathered from an article I posted last weekend.
However it's funny that US domestic production actually took a significant and unexpected 100,000 bpd drop last week.

Watch this like a hawk because my cliff model has the US going over first then the rest of the world if US production goes screaming down then the world will follow.

I'll keep an eye on it.

Thanks for the link. Certainly the global companies can be of help by sending their excess gasoline here.

I notice that all of the week by week stuff misses the exports, and they are really up now. That is another factor that isn't added in until we get the data two months later.

No problem it really explains America's mysterious buying power it not that its imports comming from the same company i.e BP either refining in the US or refining in Europe.

It would be really cool if we could find out the originator of the gasoline exports vs refining in the US I bet money they are just running different refineries around the world based on which will give the highest return.

We are not actually bidding for most of these imports in the traditional sense they are simply internal product transfers.

In any case getting to the bottom of why gasoline always shows up when its needed in the US would be fantastic.

My prediction is whats going to take the US out is when these suddenly don't show up one day. All the other factors drive us down etc. But this is the killer because it would immediately spawn serious price spikes and shortages. All the other factors are subject to fairly slowly changing market arbitrage.

It seems to me that it is not so much other countries dumping gasoline, as much as the US having a surplus relative to the high value [and exported] diesel.

Here's the distillate imports (to US) vs exports for the last couple of years. It really is too bad that the EIA is only up to April, but the trends are still interesting. Distillate exports are seasonal, peaking in the summer, BUT this year our exports didn't really dip in the winter, they just slowed a little, then kept going up. Overall exports have increased while imports decrease. It is a little difficult to isolate countries, but it seems our imports are largely Canada and the Virgin Islands.

At the bottom of the list I have gasoline for the last 6 months...it is the "blending components" that have the largets numbers.

A graphic looks nicer, but I don't have anywhere to easily tuck a jpg. Here's the EIA data:

distillate imports exports (all in thousand barrels per day).
2005-jan 353 49
2005-feb 344 102
2005-mar 257 165
2005-apr 364 192
2005-may 281 199
2005-jun 236 227
2005-jul 243 189
2005-aug 263 163
2005-sep 275 108
2005-oct 507 109
2005-nov 486 92
2005-dec 435 65
2006-jan 552 123
2006-feb 388 156
2006-mar 292 120
2006-apr 297 200
2006-may 437 229
2006-jun 297 187
2006-jul 361 231
2006-aug 363 191
2006-sep 438 456
2006-oct 307 291
2006-nov 288 252
2006-dec 355 149
2007-jan 352 253
2007-feb 334 202
2007-mar 360 155
2007-apr 322 167
2007-may 272 227
2007-jun 273 240
2007-jul 318 243
2007-aug 346 311
2007-sep 261 274
2007-oct 288 274
2007-nov 245 296
2007-dec 241 230
2008-jan 307 335
2008-feb 248 402
2008-mar 241 358
2008-apr 255 472

.nov07 .dec07 .jan08 .feb08 .mar08 .apr08
import Finished Motor Gasoline 302 351 412 354 374 386
import Gasoline Blending Components 705 694 634 657 557 804
import Distillate Fuel Oil 245 241 307 248 241 255
import Residual Fuel Oil 397 342 435 308 400 359

export Finished Motor Gasoline 152 207 132 197 184 202
export Gasoline Blend. Comp. (net) 28 19 45 21 22 14
export Distillate Fuel Oil 296 230 335 402 358 472
export Residual Fuel Oil 325 336 342 407 475 377

A minor point Dr: you might not consider the USVI as imports so much as domestic. Last time I saw the number Hess owns the largest refinery in the western hemisphere in the USVI. It's a left over situation from the 70's when the gov't tried to cap the price of oil imports. US territories, like the VI, were exempt. In a clever but sneaky move Leon Hess bought and expanded the plant and began shipping product straigh into the east coast market.

Thanks for the information.

I think I have mostly gotten the making of graphs and posting them down. TOD likes PNGs or GIFs; save JPGs for true pictures. I make PNGs from Excel by right clicking on the menu, and choosing the "save picture" option. That works on a MacIntosh. It may not work on a PC.

In terms of uploading, I have found that it works to have a Blogger account for this purpose. I just make each Blogger post equal to one picture. Blogger has a button you can click for uploading pictures. Once I have the Blogger post up, I right click on the picture, and choose "save picture address".

The proper code for putting a picture on TOD that is 80% of the screen width and is clickable is then as follows (but use < > brackets, instead of the { } brackets I am showing for illustration is):

{a href="picture_reference.png"} {img src="picture_reference.png" width="80%" }{/a}

The picture reference is the http stuff that you have copied in by saving the picture address. It will already end in png, if it is a png picture. You can choose a different percentage than 80%, if you think that would look better.

It would be very interesting to see that supply chain flow chart memmel. Last year I watched ExxonMobil ship hundreds of millions of bbl of oil from offshore west Africa to Europe/GB. But I have no idea to which refiners or where the products showed up.

A big factor towards your potential disruption of this supply chain is China's growing position in w Africa. Recently Angola has become China's primary source for crude at the same time that China is buying and financing field development there on a major scale. My drillship left Eq. Guinea for Angola last year in an effort for XOM to establish themselves there. It will be interesting to see who ends up with the biggest slice of the pie. My bet is China.


It seems like a US dollar crisis would be the likeliest way fro the imports to stop showing up. For example, the government suddenly deciding to back up the liabilities of Fannie Mae and Freddie Mac, and doubling their external debt from $5.0 trillion to $10.3 trillion. If the US could no longer afford to pay for the imports, they wouldn't come.

I know I'm late to this (sorry), but could someone please explain to me why the change in subsidies and pricing in China would result in more oil consumption. I have heard others make the claim, but also without sufficient explanation (at least for me) of why it would happen.

This is my understanding (maybe an incorrect one) of how it works. China caps retail oil product prices. Refiners can't make money at those prices so the government covers the difference with a subsidy. The government then allows retail prices to rise some amount and reduces the subsidy associated with that price change. Refiners can get more for their products but receive less in subsidies. It may not be a one for one trade off (although retail prices still wouldn't be covering cost so it seems almost certain to be very close to one to one) and there may be ways to game the system, but I don't see how these changes would translate into increased demand for oil by Chinese refiners. Could someone please enlighten me?

Refiners were left holding part of the cost of the subsidy - the government did not cover all of it them.
So they were not pumping as fast as they could as they were loosing on every gallon sold.
Increasing the allowed price meant that these losses were reduced, so they could afford to pump more.

Thanks for the reply, but I still don't understand.

After the retail price increase and reduced subsidy nothing really will have changed (for the refiner). They would still be losing on every gallon sold. If the price increase and reduced subsidy are comparable (offsetting), then their bottom line is the same.

In the long run the refiners can't continue to operate if they are losing on every gallon sold. If that was true before the price changes, it's still true now. Even if losing less on each gallon sold it wouldn't normally make a refiner increase volume so they could maintain their pre price change larger total loses. But then it doesn't seem like that could be the situation before of after because if the subsidy does not cover the loses, the refiner will eventually be unable to operate.

Maybe I don't understand the process by which the subsidy is administered. I assume the subsidy goes to the refiners to cover the cost they can't get because retail prices are capped. Chinese refiners (without subsidies) have to be losing massive amounts of money. Currently large US refiners are each losing $100s of millions a quarter selling at much higher prices. (I believe Chevron for their latest quarter just reported a $250 million loss from refining.) So Chinese refiners have to be getting infusions of capital (subsidies) to continue operating. So how does an increase in retail prices and a reduction in the subsidy change the situation for the refiner?

The only way it can make any difference to the refiners is if the impact of the price increase is greater than the impact of the reduced subsidy. Given that the main reasons for reducing subsidies is to reduced demand (or cool demand growth) and reduce government expenditures, that doesn't seem likely.

Does reducing subsidies in other countries result in increased oil consumption? If not, why not? And if not, what's the difference between those countries and China?

You are assuming totally free markets. If all subsidies were paid by the Government to refiners immediately, then any reduction in subsidies should indeed lead to a reduction in consumption, minus whatever effect there is from people having previously economised due to not wanting to queue for hours for artificially cheap petrol..
In practise subsidies often result in all sorts of distortions in the markets, with Governments delaying reimbursements, saying they will only subsidise so much production, and on and on.
Governments also try to economise on their central budgets, laying some of the cost off to the refiners, local government, or whoever they can find to pass the costs on, who in turn react by trying to restrict supply.

Thanks again Dave. We are talking about retail price caps and subsidies so I am certainly not assuming a free market, although I may be guilty of applying free market reasoning.

I understand that subsidies and the process by which they are administered can lead to all sorts of distortions. I am just trying to get someone to explain to me the exact process by which those distortions in China lead to higher oil consumption when subsidies are reduced. If someone is going to make that claim, shouldn't they be able to present a reasonably compelling case? I've never seen one. (An unsubstantiated remark that refiners will make more, which I strongly doubt, doesn't cut it.)

I don't hear anyone claiming that recent price increases in Indonesia will cause increased oil consumption. Why not? If it will in China why wouldn't it in Indonesia or any other countries that subsidizes oil?

I'm not looking for another reply. I've beat this enough.

I think it depends on where a country is coming from. China had long lines with its price cap. There was a lot of pent up demand, that would have still been there, even at a higher price. I don't think that is true in the other Southeast Asia countries.

I agree with DaveMart. Also, there was previously inadequate supply, which was limited by very long queues. If China adds more supply, even at a higher price, there consumers may very well purchase more of it since they will no longer have to wait hours and hours for a fill up.

Besides the great points from Gail and Dave, there's another factor that distinguishes us from China: a big chunk of fuel demand in China is for commerce. I've spent a little time in China and saw very little leisure driving. Difficulties acquiring fuel held back commercial expansion. The higher fuel costs will just be added to the cost of doing business. More fuel = more commerce = more profit. On the down side China is starting to see some significant inflation. There will always be that balance between growth and inflation but growth is the current gov't mandate.

Besides the great points from Gail and Dave, there's another factor that distinguishes us from China: a big chunk of fuel demand in China is for commerce. I've spent a little time in China and saw very little leisure driving. Difficulties acquiring fuel held back commercial expansion. The higher fuel costs will just be added to the cost of doing business. More fuel = more commerce = more profit. On the down side China is starting to see some significant inflation. There will always be that balance between growth and inflation but growth is the current gov't mandate.