Econbrowser on Sweet and Sour...
Posted by Prof. Goose on August 22, 2005 - 5:39pm
I think Econbrowser deserves some credit, he is an economist who, while he doesn't agree with the premises of peak oil per se, he's a lot more open minded about peak oil than Levitt demonstrated in his screed we talked about yesterday. JDH has a post of interest (though HO has talked a lot about the types of crude, the problems with refining it, and the like around here before) over at this place.
Not all the black gooey stuff that comes out of the ground is the same. Crude oil produced by different fields differs importantly in viscosity and sulfur content. The more viscous crudes (as measured by a lower API gravity) are called "heavier," and those with higher sulfur content are called "sour" (as opposed to low-sulfur "sweet" crude). The heavier and more sour the crude, the more difficult and expensive it is to turn into usable refined products. The price of oil you usually hear quoted (such as the recent highs of $67 a barrel) is the price of a light, sweet grade like West Texas Intermediate.Of course, there's more to the story than this, but kudos to JDH for paying attention. I am sure HO will have something to say about this soon. :)
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For example, Venezuela has always had heavier oil. Because it costs more to refine Venezuelan oil sells at a discount to the lighter crudes like Brent or even the OPEC basket as a whole. The discount is about $10. Now who does that effect? Venezuela. They just get less money for their oil. So if the world price overall is now $65 what they are getting is about $55. But if you fill up with Venezuelan gasoline you are getting the same product at the same price as if the oil was Saudi oil.
Another problem for countries selling heavier oil is they can have problems selling it because not all refineries can work with it. Venezuela solved that by buying Citgo which has refineries geared to dealing with their types of cruds.
Lastly, while we are on the subject. Venezuela has lots and lots of extra heavy crudes - oil below 10 API. In fact they have almost as much of that as S.A. has oil period!!! And it can easily be turned into regular synthetic crudes with API over 20. It is just more expensive. To pump regular Venezuelan oil costs $3 to $4 per barrel. The extra heavy crudes which need extra processesing cost about $7 to $8 barrel. Sure its different but not radically so. Definitely profitable even at moderate prices.
Right now Venezuela produces about 580k of this stuff. Why so little when they could be flooding the world with it? Simple, they have a very smart President, Hugo Chavez, who understands oil markets well and is a key backer of a strong OPEC. He knows that to produce more of this stuff and break OPEC quotas would just send prices back down to $10 like they were before. He is having none of that - so they aren't ramping up production. If at some point their lighter crudes get exhausted then they'll move to exploit this.
Dream on, Oil Wars, dream on.... Even if Chavez could get this shit out the ground, which he can't, it would never send oil down to $10/barrel where it will never be again.... And probably, if we (the US) starting actually depending on investment to get that lousy oil out of the ground to supply our endless demand (so we can drive to WalMart or Home Depot), our (the US) government would assassinate him as we have so many others in the past who stood up to us on energy issues (Omar Torrijos of Panama, Jaime Roldos of Ecuador and others).
By the way, I know that this isn't directly relevant but I just received this as spam e-mail:Apparently, we are drawing some attention from those who would profit off the end of "life as we know it".
Care to comment on what you meant by Chavez not being able to get stuff out of the ground? They are already producing at their OPEC quota so they're aren't going any higher than that.
Also, there isn't "unlimited" demand. Demand is pretty inelastic. So if there were 3 or 4 million barrels more on the world marker right now prices would be right back down on the floor. Venezuela, could easily ramp its production up to that, and in fact there production would already be up by that much if Chavez hadn't come to power. Before Chavez, when Guisti was running PDVSA they were aiming at producting 6 MBPD by this time. That alone would glut the market.
And of course, if Venezuela was still a quota buster so would a others as well.
So there is no dreaming here. Chavez and Ali Rodriguez (who was the first Venezuelan to be president of OPEC since when...) did exactly what they said they were going to do.
If the 'market' actually worked, we would see billions being spent on oil tankers, drilling rigs and new refineries. I dont see this, just the pieces of the jigsaw starting to confirm 'PEAK IS HERE'
This is essentially a political issue. Chavez is talking to China. This makes George "Went to Yale" Bush and Dick "Dick" Cheney and Condy "Oil Tanker" Rice nervous. In fact, our Secretary of State has made threatening remarks toward the Chavez government, which, by the way, I support. Why is the Chavez government talking to China? To create a powerful negotiating position vis-a-vis the "Great Satin" -- that would be US :)
And why does Chavez need a powerful partner like China to either coerce the Americans or do business with Asia? Well, the answer is because he does not have the capital investment to get that lousy but large amount of crude of his out of the ground. If he could do it on his own, he could flood the market as you imply and become the new Saudi Arabia with those "heavy" oils of his. But he can't, it's that simple.
Please read that data carefully. That is "crude oil". Yes, Venezuela produces about 2.6 or 2.7 MBPD of "crude" But then it also produces about 600k of of "synthetic" crudes which is what the stuff they make from their extra heavy oil. When you add that in they come up to their OPEC quota. If you read the fine print on the bottom it even notes that the synthetic oil isn't included in their numbers.
Dave:
I have to totally disagree. Why would Venezuela want to produce 10 MDPD? They would be giving away their oil for free to do that. And they don't have the capital for that? This year PDVSA revenues are going to top $70 billion !!!! They just have better things to do than flood the market and undercut their own prices. Chavez ran his whole campeign in 1998 on revitalizing OPEC, cutting back on production, and defending prices. The first thing he did when he became president was fire Luis Guisti who was the very anti-OPEC head of PDVSA and started respecting oil quotas again. Then he had Ali Rodriguez, his top oil adviser, speakd to the Russian, Norwegians, and Mexicans not to up prodution when OPEC cut it. In that way they were able to impliment their new prices bands of 22 to 28 (which were HIGHLY conservative in retrospect). They were so successful Ali Rodriguez was elected the head of OPEC.
Oil has always been a boom and bust industry where produces have feasted and then gone bankrupt. But the demand for it is also very inelastic so if you can cut back supply even a little prices and profits can go way up. Thats why OPEC even exists in the first place. And Chavez understands that very well even if some others do not.
Also, on the assasination thing check this out: http://mediamatters.org/items/20...ms/ 200508220006
Someone calling for his head yesterday. And in case you missed it there was a US backed coup against him in 2002
http://mediamatters.org/items/20...ms/ 200508220006
Just go to oilwars.blogspot.com and there is a link to it.
"Oil has always been a boom and bust industry where produces have feasted and then gone bankrupt. But the demand for it is also very inelastic so if you can cut back supply even a little prices and profits can go way up."
Also applies to deregulated electricity.