Differences across grades of crude oil can tell us a lot about why oil prices have become so high.
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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.
The graph at the right shows the price differential (in dollars per barrel) for European Brent (a relatively light, sweet crude) over Mexican Maya (a heavier sour). The price premium for light sweets had typically been about $5 a barrel up until last summer, when it began rising quickly, now standing at triple its earlier value. To put the size of the current price spread in perspective, if the price of light, sweet crude had only risen as much (in dollars per barrel) as the heavy sour, the increase in the price of light, sweet crude during the last year would have been a third smaller than what we actually observed.
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One factor contributing to the dramatic increase in the price spread is a decrease in the supply of light, sweet crude. The higher quality crude supplies of course get used up first, so the world is now increasingly reliant on a lower quality product. The graph at the left reveals that every year over the last five years, the average API gravity of non-OPEC oil production has decreased (produced crude is increasingly “heavy”) and the sulfur content has increased (crude is increasingly “sour”).Vital Trivia used data from OPEC’s August Oil Market Report to calculate that global production of light, sweet crude actually declined between 2000 and 2004– peak oil has already passed, at least as far as light, sweet crude is concerned.
While supply of light, sweet crude has gone down, the demand has gone up. In January 2004, the U.S. EPA’s Tier 2 low-sulfur gasoline regulations began to be implemented. This rule was announced by President Clinton on December 21, 1999, though the announcement gave the nation’s refineries four years to develop plans to cope with the changes that have only recently begun to be implemented. A study by Deutsche Bank noted regulations to reduce fuel sulfur content also being implemented by Europe, Singapore, Philipines, Australia, China, and India. Harry Chernoff mentioned Japan and Canada as well, and noted that the easiest way to meet these standards is to start with a lighter, sweeter crude:
These increasingly stringent standards would reduce the yield of gasoline and diesel per barrel of crude even if the quality of the crude inputs were not declining. Starting with heavier, sourer crudes means even lower yields of gasoline and diesel.
The third critical ingredient is
refining capacity. British Petroleum reported that global refinery capacity increased by 1.8 million barrels a day between 2001 and 2004, while global crude production was up 5.3 mbd. Moreover, not enough of this capacity is able to process the increasingly heavy and sour crude supplies. Chernoff again:
The marginal refining capacity in the world cannot process heavy, sour crudes at all, let alone process these crudes into light, sweet products. Converting existing refining capacity to process heavy, sour crudes to produce light, sweet products is expensive and time-consuming. In the U.S., the conversion (for the refiners who are converting) is a multi-year, multi-billion-dollar project. Some refiners have elected to produce light, sweet products only from light, sweet crudes. Others have elected to retire refining capacity. In parts of the world that supply markets with only higher sulfur products or that have dropped out of the market to supply low-sulfur products, little or no conversion will take place and the demand will continue for the diminishing fraction of light, sweet crudes.
Although the change in the price spread is pretty dramatic, the explanation is quite simple: (1) supply is down, (2) demand is up, and (3) the capital investments necessary to cope with facts (1) and (2) were not made. Government regulation in response to environmental concerns appears to have played an important role in both (2) and (3).
Technorati Tags: peak oil, oil prices
Excellent explanation – you nailed it!
(and thanks for the referring link)
It seems that the price increase of oil is the biggest factor in the increase in the spread. If sweet was $30/bbl and sour was $25, I’d expect sour to be $50 when sweet hit $60. So the spread would double in nominal terms, but the ratio would remain the same.
Maybe the first graph could be re-drawn to show Maya as a % of Brent. Then we could see the impact of non-price issues.
Best Regards!
It’s basically impossible to open a new refinery in the US, because of all the regulations.
Fascinating fact that light sweet grades seem to have peaked already.
I’ve started ploughing through “Advanced Reservoir Engineering” by Ahmed and McKinney to educate myself better. Can’t say I recommend it as a text — too much of a recipe book of calculation techniques and not enough exposition of principles — but now I’ve coughed up the $$ for it, I plan to try and stick to it.
This morning, I learnt about Darcy’s equation, which is the basic equation of fluid flow in a permeable medium (not formulated, incredibly, until 1956). Essentially, the flow rate is proportional to the pressure gradient, the rock permeability, and inversely proportional to the viscosity of the fluid (kind of makes intuitive sense that gooey oil would move slower through barely permeable rock than slippery oil through open rock).
It seems to me the implication is that, in any given reservoir, the capital cost of generating a given production of oil is going to be directly proportional to the oil viscosity – the slower flow per well has to be compensated for by more wells. So not only is the stuff less valuable when you get it out, it’s much more expensive to produce. However, I’m guessing that depletion of heavy oil fields might go significantly slower also (because they are probably under-drilled compared to lighter oil fields).
But then again, hydro-fraccing might have changed this – essentially they can create a big old fracture out from the well and keep it open with sand to allow production from a much larger rock surface than the well alone would have.
I’d be interested if any oil industry people can correct me on this.
Stuart.
CR, in March 1998 (the trough in oil prices), Brent got down to $12 a barrel and Maya to $7 a barrel, exactly the same $5 a barrel spread as in April 2004, when Brent had almost tripled to $32 a barrel and Maya went to $27. So I’m not sure you’d necessarily expect that sweet and sour price should be proportional rather than a fixed differential. In any case, since April 2004 the price of Brent has doubled again but the spread tripled.
I found this post very interesting because I’d been hearing about a lack of refining capacity but at the same time the near by Adelaide oil refinery shut down, which didn’t make sense to me. I now guess that it shut down because it could only refine sweet crude. I know my friend’s girlfriend is building a sulfur tower or other odd device at a refinery in Brisbane, so I suppose more and more of our petrol will now come from refineries that have invested in sulfer removing technology.
Don’t blame the governement’s regulamentations. The data show that the Hubbert’s peak for light crude is on us. That is the main factor that is causing the light crude oil prices going to sky. There are no free market that can spare the world from use all oil. Because with governamental’s regulamentations or no governamental’s regulamentations, the heavy crude have a higher coust to produce gas and it flow slower. It is more expensive to produce the heavy crude and it is more expensive to use it to make gas, so the market will ever prefer buy the light crude. And the market ever prefered to buy the light crude BEFORE the governamental’s regulamentations. So, not blame the governamental’s regulamentations, it is not the main factor.
The main factor causing the oil prices going to sky is called HUBBERT’s PEAK. It is something that the free market cannot foresee and cannot find an answer. But only the governement can create a public project for find a substitute for oil…
But evidently is too late.
Joo Carlos
Sorry the bad english, my native language is portuguese.
It was mentioned that new refineries can’t be opened in the U.S. due to regulations. If this is true, would it really matter? Wouldn’t it be cheap to ship refined petroleum products from Mexico and other nearby countries?
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It’s basically impossible to open a new refinery in the US, because of all the regulations.
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It really isn’t necessary – far better to debottleneck & expand existing capacity & very much more economical. I never worked in petrochem directly but worked in biofuels & ag prossesing… similar though. We tripled the capacity of the plant I worked in (from 100,000 bushels of corn/day to 300,000 bushels of corn per day) for less than what one 100,000 bu/day plant would cost.
Refinery economics are similar – debottleneck and expand capacity is FAR better and cheaper than new plants.
BTW – I know they are adding cat cracking capacity everywhere as we speak and de-sulfurizing units as well… the two mega refineries I drive by regularily both have massive expansions going on over by the cracking units… cranes all over the place… I assume they are adapting to heavier sourer feed… it will just take time & money to get them on stream but at these prices I can assure you there is incentive.
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It was mentioned that new refineries can’t be opened in the U.S. due to regulations. If this is true, would it really matter? Wouldn’t it be cheap to ship refined petroleum products from Mexico and other nearby countries?
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Yes and no… the trouble with importing finished petroleum products are two fold:
(1) there are so many local blends & requirements… I read somewhere something like 200 blends of gasoline alone in the US… seasonal & geographic differences. Hard to manage the inventory diversity from abroad. Could import ‘base feedstock’ like raw gasoline then remix for local requirements… but still not easy, still requires facilities.
(2) the demand for petroleum products is so variable, the lead-times so long to deliver and the storage logistics & logistics capacity so limited that it is MUCH easier to import unprocessed crude and then have the refineries change the make up of the products as necesary to meet immediate demand… Increase the ratio gasoline yield to heating oil/diesel when heading into summer consumer driving season… then shift back to more heating oil/diesel come fall. Output mix is different but all fed from same crude feedstock… just a matter of how much to run through what units… how much flow to crack or reform… then where to draw off on the stills to get the ratio of product they want.
I think you will see more imported finished distillates but only a baseline quantity… the domestic refiners will then ‘trim’ to match demand more exactly.
Thanks for the feedback. I guess I was thinking about that wrong.
Dryfly: It’s harder than you might think to wander the legal thicket to add capacity to existing refineries. There’s the New Source Review, as nicely summarized by Earth Justice (at http://www.earthjustice.org/backgrounder/display.html?ID=65“) in essence provides: “The law (NSR) did, however, include important provisions addressing the older plants: If and when they make changes that increase emissions, they are required to retrofit with up-to-date technologies. This is a key part of what the law calls the New Source Review program.”
The current administration modified the rules. Earth Justice isn’t happy with that:
“Now, however the rules have been drastically changed. In 2002 the Bush EPA rewrote the NSR rules in ways that will slow, even reverse, the progress that has been made in controlling pollution from electric utilities, refineries, chemical plants, and other “stationary sources.” This attempt to weaken new source review, has been challenged in court by fourteen states, various municipalities and air pollution control agencies, and several environmental organizations.”
Naturally, this has put modifications in limbo…
As far as importing from foreign lands, you correctly identified the blend issue and point to the NIMBY solution – we simply transfer our problem overseas. I’m sure there are economic cases that can be made for that … but doesn’t it just lead us to being accused of more third world exploitation? What are the economic costs of relying on other countries to allow us to set up refineries on their territory and what will we do if they decide to nationalize them? War for gasoline?
Joao, I agree with you that governmental regulation is not the most important explanation for the declining supply of light, sweet crude. Nevertheless, it seems very hard to argue that governmental regulation did not contribute to both the increased demand for light, sweet crude and to the lack of adequate refinery capacity to process the heavy, sour crude. I did not make an abstract argument that “government regulation is bad” here, but rather the specific claim that requiring a lower sulfur content of gasoline has the effect of raising the demand for low-sulfur crude, and that hindering the construction of refineries has the effect of reducing refinery capacity. One can argue about the quantitative magnitude of these effects, but it seems hard to claim that these effects are nonexistent. Note also that the surge in the price spread coincided with the implementation of the sulfur regulation.
On importing refined petroleum, I know that Hawaii already imports a lot from a variety of countries. But I guess Hawaii has an advantage in not needing to worry about seasonal variation in blends. The petrol is bought on the open market, so there is no need to own refineries in other countries or worry about them being nationalized.
Eagle1 – almost ALL major upgrades & debottleneck efforts are at plants meeting the new regs… and this had little to do with the regs themselves but rather the economies of scale of the big plants … the big plants are the ones that are the most economical to scale up… they are also the ones that are the most likely to already meet the tightest emmision requirements.
I see this in my own backyard… two refineries near me, one HUGE and one small. The small one hasn’t been expanded much since I was in college as a chemical engineer (before Jimmy Carter)… The other plant is newer and a couple orders of magnitude larger… both however were built BEFORE the tighter emmission regs went into place… the larger one modernized and scaled up continuously through the years.
You see the samething all across the country. The big plants where the capacity is most economically added are mostly certified to the modern regs… smaller older plants are not. Many old plants will be shut down even if they are grandfathered in forever to old regs because the technology they employ is so old… they are so small & inefficient.
It has been very difficult to scale up, meet the new sulfur rules & process the heavy sour crude simultaneously… It is in fact a testimony to good engineering that they have done as well as they have (I am actually quite surprised it has gone this smoothly – I did not think it would).
I do NOT see the regulations as the biggest hurdles (they have to get the sulfur out or our cities will be unlivable)… the biggest hurdle has been the shifting feedstock and how quickly the demand & supply equilibrium shifted. They did not see the end of cheap sweet light crude coming as quickly as it did… faster than the processing capacity could be adapted.
JDH
The coust to refine high heavier crude oil is higher than refine light crude oil. It is simple chemistry to know why it have higher coust and it is NOT mostly because there are the process for extract the sulphur.
Oil is made from carbon molecules. Now, there are carbon molecules that have more carbon atoms, they have longer carbon molecules. Heavier crude oil is made with longer carbon molecules, so it is heavier and it have higher viscosity.
Gas is made from a combination of shorter carbon molecules. So, to extract gas from lighter crude oil the refineries need only distille the crude oil. However, to extract gas from heavier crude the refineries need first break the longer carbon molecules (“craking”) and after that they can distille the gas. The process is more expensive using heavier crude than using ligther crude. And the net money return is lower when building refineries that use heavier crude oil (well, the refineries need burn a lot of oil to heat up the heavy oil to crack the longer molecules). The coust come mostly from the craking process and not from the sulphur extraction process.
The market will look first and mostly for the oil that it is cheaper to make gas, it is easy to see why there are a highter demand for light crude oil. The main factor working here is NOT the government regulations. The main factor here is GAS DEMAND (so, it is wise to produce more SUVs?). HIGHER THE GAS DEMAND, HIGHER THE LIGHT CRUDE OIL DEMAND(that is cheaper to use to make gas).
The true problem isn’t the low-sulphur crude demand, but the light crude demand that higher bacause it is cheaper to make gas. However, as the low-sulphur oil is mostly the lighter oil it is possible to make the mistake to think that the reason the market want buy more light crude is because the light crude have less sulphur. The truth is that the market want buy more light crude is because it is CHEAPER to produce gas.
The true problem is the higher gas demand and not the government regulamentions for lower sulphur gas.
(But you need admit that high sulphur gas is an externality, someone will pay for the hidden acid rains coust, if not the refineries then the logging and fish industry and the agriculture… some economic coust will eventually come to the market)
The consequence is that the market will deplet faster the light crude oil than the heavy crude oil. The world is thirst for gas and heavier oil is not good to produce gas. The market will build up mostly the cheaper refineries, so the market will built up mostly refineries that use light crude oil. It is not a problem…while there are light crude oil.
To resume my point, it is not the governement regulamentations, it is the gas demand…
Demand for heavy oils has been curtailed to some degree by environmental regulations on power plants. Here in Northern California, ALL the fossil fueled plants are taking out their oil storage tanks so they can burn natural gas exclusively.
Gas is a much cleaner fuel so that here in California you just can’t burn oil. Fuel switching is impossible now which will just drive gas higher in price. At about $7 a million BTU, its already increased MORE than gasoline.
If you check you’ll see that natural gas in North American has appeared to have peaked already. That’s why politicians are rushing to get LNG importation terminals build so that we can continue to keep the lights on. Let’s hope the terminals come on line and the LNG is available soon – it’s going to be cutting it close.
When Duke Power’s Moss Landing Plant, north of Monterey, was taking out their tanks, one caught fire. You could see the smoke in San Jose.
I was amazed to see on the EIA site that only 3% of electrical generation in the U.S. comes from petroleum. It’s probably closer to 0% in California.
Oil is basically a non-issue for electricity generation in the U.S. It’s all transportation and chemicals.
Dr. Hamilton suggests that given a choice (assuming they can process all grades), a buyer of crude will be neutral when the relative prices are:
P(Maya) = P(Brent) – F
Where F is the extra cost per barrel to process the sour/heavy Maya crude. He then offers some excellent explanations why the spread differs from F.
My thinking when I wrote my first comment was that there was some “shrinkage” associated with the extra processing and less refined product per barrel from the more viscous grades of crude. So my thought was a buyer would be neutral at:
P(Maya) = P(Brent)*X – F
Where X is the shrinkage (or less refined output expressed in dollars).
If X is 1.0 (or close to 1.0) than I’m all wet and I agree with Dr. Hamilton’s analysis. However, if X is something like 0.95 (only 95% of the refined product from sour compared to sweet), than a portion of the rise in the spread between grades can be explained as the overall price increases.
That was my thinking for my initial comment. I don’t know enough (or more precisely, anything) about petroleum refining to answer if there is less output for more sour and or heavier grades.
Best Regards.
It is interesting to note that Hubbert had it right: he forecasted that the world oil would peak in 2000. At that time, he meant of course mainly the conventional, light sweet “Texan” oil. The share of non-conventional oil has risen steadily. When Hubbert made his forecast there was ie. no deep-water oil production. Therefore his forecast was amazingly accurate. This confirms nicely Hubberts methodology and the Peak Oil theory. No technological advance or new investment during the last 30 years has been able to change the basic depletion process of conventional oil.
We can look at the non-conventional oil and natural gas liquids as new type of fuel compared to the “conventional” oil. The non-conventional oil has its own depletion curve.
CalculatedRisk wrote:
“However, if X is something like 0.95 (only 95% of the refined product from sour compared to sweet), than a portion of the rise in the spread between grades can be explained as the overall price increases.
That was my thinking for my initial comment. I don’t know enough (or more precisely, anything) about petroleum refining to answer if there is less output for more sour and or heavier grades.”
From Wikipedia (just look for craking):
“Cracking – In petroleum geology and chemistry, cracking is the process whereby complex organic molecules (e.g. kerogens or heavy hydrocarbons) are converted to simpler molecules (e.g. light hydrocarbons) by the breaking of carbon-carbon bonds in the precursors. The rate of cracking and the end products are strongly dependent on the temperature and presence of any catalysts.
In an oil refinery cracking processes allow the production of “light” products (such as LPG and gasoline) from heavier crude oil distillation fractions (such as gas oils) and residues. Fluid Catalytic Cracking (FCC for short) produces a high yield of gasoline and LPG while hydrocracking is a major source of jet fuel, gasoline components and LPG. Thermal cracking is currently used to “upgrade” very heavy fractions (“upgrading”, “visbreaking”), or to produce light fractions or distillates, burner fuel and/or petroleum coke. Two extremes of the thermal cracking in terms of product range are represented by the high-temperature process called steam cracking or pyrolysis (ca. 750 to 900 C or more) which produces valuable ethylene and other feeds for the petrochemical industry, and the milder-temperature delayed coking (ca. 500 C) which can produce, under the right conditions, valuable needle coke, a highly crystalline petroleum coke used in the production of electrodes for the steel and aluminum industries.”
“Fluid catalytic cracking is a commonly used process and a modern oil refinery will typically include a cat cracker, particularly refineries in the USA due to the high demand for gasoline. The process was first used in around 1942, and employs a powdered catalyst. Initial process implementations were based on a low activity alumina catalyst and a reactor where the catalyst particles were suspended in an rising flow of feed hydrocarbons in a fluidized bed.
In newer designs, cracking takes place using a very active zeolite-based catalyst in a short-contact time vertical or upward sloped pipe called the “riser”. Pre-heated feed is sprayed into the base of the riser via feed nozzles where it contacts extremely hot fluidized catalyst at 1230 to 1400 degrees F. The hot catalyst vaporizes the feed and catalyzes the cracking reactions that break down the high molecular weight oil into lighter components including LPG, gasoline, and diesel. The catalyst-hydrocarbon mixture flows upward through the riser for just a few seconds and then the mixture is separated via cyclones. The catalyst-free hydrocarbons are routed to a main fractionator for separation into fuel gas, LPG, gasoline, light cycle oils used in diesel and jet fuel, and heavy fuel oil.
During the trip up the riser, the cracking catalyst is “spent” by reactions which deposit coke on the catalyst and greatly reduce activity and selectivity. The “spent” catalyst is disengaged from the cracked hydrocarbon vapors and sent to a stripper where it is contacted with steam to remove hydrocarbons remaining in the catalyst pores. The “spent” catalyst then flows into a fluidized-bed regenerator where air (or in some cases air plus oxygen) is used to burn off the coke to restore catalyst activity and also provide the necessary heat for the next reaction cycle, cracking being an endothermic reaction. The “regenerated” catalyst then flows to the base of the riser, repeating the cycle.
The gasoline produced in the FCC unit has an elevated octane rating but is less chemically stable compared to other gasoline components due to its olefinic profile. Olefins in gasoline are responsible for the formation of polymeric deposits in storage tanks, fuel ducts and injectors. The FCC LPG is an important source of C3-C4 olefins and isobutane that are essential feeds for the alkylation process.”
HEAVY crude need be cracked for produce gas while the LIGHT crude don’t need it. It is not cheap to crack the heavy oil and the gas produced is lower quality gas (it have bad residues…bad for the engine that use it…).
So, there are LESS gas output for refining HEAVY crude oil…
Joo Carlos
Sorry the bad english, my native language is portuguese.
If heavy crude weighs more than light crude, wouldn’t it have more chemical energy per barrel than light crude? So you might not have much less gas output after cracking it compared to refining light crude.
Ronald wrote:
“If heavy crude weighs more than light crude, wouldn’t it have more chemical energy per barrel than light crude? So you might not have much less gas output after cracking it compared to refining light crude. ”
To crack the hevay crude they need heat it:
“Pre-heated feed is sprayed into the base of the riser via feed nozzles where it contacts extremely hot fluidized catalyst at 1230 to 1400 degrees F. The hot catalyst vaporizes the feed and catalyzes the cracking reactions that break down the high molecular weight oil into lighter components including LPG, gasoline, and diesel.”
Guess that, they need burn oil for crack the heavy oil… and after that they need burn oil to heat up the cracked oil for distille the gasoline.
While heavy oil have more chemical energy, the refineries need waste a lot of energy to refine heavy oil to usable energy (gasoline). The net energy output is lower than refining light crude.
Heavy oil have a LOWER price than light oil. And light oil EVER HAD a higher price before the government’s regulations for sulphur. The real reason to light oil have a higher price is because light oil is better/cheaper/faster to make gas.
In other words: heavy crude is NO GOOD if you want gasoline…
Joo Carlos
Sorry the bad english, my native language is portuguese.
I agree with you that heavy crude isn’t as good as light crude, Joao. I was just curious if heavy crude had more energy per volume that might slightly offset some of the disadvantage of having to crack it.
Full specifications for various crude oil grades can be found here (and on subsequent two pages):
http://www.emis.platts.com/thezone/guides/platts/oil/crudeoilspecs.html
The document provides estimates of the yields (normalised) of refined product mix that could be expected from processing each grade of oil at various refining locations worldwide.
The actual table of resultant yields can be found here:
http://www.emis.platts.com/thezone/guides/platts/oil/crudeoilspecs4.txt
As you can see, there is a great deal of difference between the refined output of Maya and that of WTI.
Dr. Hamilton, I have a related hypothetical question. Let’s say you have two oil wells (congratulations!) one that produces light, sweet crude and the other produces lesser grade. Let’s further suppose that the cost of production from each well was the same. As demand (and price) rises doesn’t it make sense for you to pull from the lesser quality well first?
Catching my eye: morning A through Z
Here’s what’s caught my eye this morning:
Beldar comments on the Vioxx case which was settled down in his neck of the woods on Friday.
There are comments on Benedict XVI’s statement to Muslims from Bloggledygook. Wretchard trans…
I don’t think so, Dave Schuler. So I don’t have to do any hard arithmetic, suppose the price today is $50 a barrel, next year it’s going to be $55 a barrel, and I’ve got another investment (besides storing oil) that could also earn me a 10% return. Let’s say cost of producing high-quality oil is $20 a barrel and cost of producing low-quality oil is $30 a barrel, and that technology only enables me to produce from one well at a time.
If I produce the high-quality stuff this year, I make $30 which I invest at 10%, so have $33 from that next year plus $25 from producing my second well, which is $58 profit. If I produce the low-quality stuff this year, I make $20, nets me $22 plus $35 = $57 profit next year. More profits from using the best stuff first. Reason is discounting– a dollar today is always worth more than a dollar a year from now.
But anyway, thanks for the two oil wells! I appreciate them both, even the heavy, sour one.
Professor,
Great subject to comment on, and nice insight about peaking on sweet crude as opposed to total crude. And while adjusting the sweet/sour spread is not instantaneous, at least some signs exist that adjustment could be underway at least on the international side. China recently signed a deal with Saudi Arabia to import sour crude, which comprises most of SA’s spare capacity according to Simmons. China is also building sour crude refining capacity — believe I read this in the Wall St Journal within the last two weeks.
While many people blame regulations for making new refining capacity hard to build in the US I am skeptical — industry, particularly the energy industry, gets a sympathetic hearing from the current Administration when it wants regulations changed. If a company wanted a refinery built now, the betting here is, they most probably could. I conjecture that regulation is largely an excuse. Perhaps more to the point: since oil companies (Exxon Mobil in the longterm forecast now available on its website, Chevron in its ad campaign about the end of easy oil) are now acknowledging the validity of the PO argument, they may think that new refining capacity may not actually be useful. Or they aren’t confident enough in its usefulness to pony up for new refineries.
Furthermore, sour crude is difficult and dangerous to handle since it contains hydrogen sulfide, a poisonous gas. So, given the recent history of refinery accidents (BP has had 2 major accidents this year that have caused fatalities) the extra layer of difficulty posed by refining sour crude over sweet may also be a consideration. At least in the US where workers’ survivors tend to take potentially negligent parties to court.
Ronald wrote:
“I agree with you that heavy crude isn’t as good as light crude, Joao. I was just curious if heavy crude had more energy per volume that might slightly offset some of the disadvantage of having to crack it. ”
Okay, let’s try again, this time will explain some chemistry.
Chemical energy is stored at the atomic bonds that make the molecule. If a molecule have more atoms the molecule have more energy stored, so you are right to say that heavy crude have more energy stored. However, energy stored isn’t the same than energy used. If the energy stored isn’t used that is lost energy.
Now, for use heavy oil for make gasoline the refineries need crack the heavy oil first (the process will break the atomic bonds that form the molecules). When cracking the heavy oil the long carbon molecules are broken to lesser carbon molecules, the atomic bonds that form that molecules are broken and that energy is lost. Worse, the cracking process need energy. So, to use heavy oil for make gasoline is a loss of energy. That is not an efficient use for the energy stored inside the heavy oil.
A more efficient use for the energy stored inside the heavy oil is use it to make diesel. So, it is possible to use that energy that the heavy oil have more than the light oil.
The fact is that Europe have government regulations that make the cars at Europe use diesel (so, europeans can use more efficiently the energy stored inside the heavy oil). But USA have free market that made sure that now you have SUVs….
Joo Carlos
Sorry the bad english, my native language is portuguese.
Great post! I am worried though that JDH is beginning to sound like a “peak oiler”! The inability of the Saudis to produce more sweet/lights had signaled this conclusion for a while. A lot of peak oil research has also made the distinction between conventional oil and unconventional oil (oil from tar sands, coal, etc). Most people and the mainstream press, however, tend to just focus on the total amount of petroleum produced while missing the fact that we are not getting enough of the “right” type of oil.
Now, the growing sweet-sour and light-heavy spreads is sending the right economic signals. So the question now is whether that signal is strong enough and timely enough to avoid a severe crunch by eliciting more sweet/light production (not if JDH is right and sweet/light has peaked) or substitution by heavy/sour oil (doable but requires large new infrastructure investments and relaxation in govt regulation). We have some hard choices to make between environmental regulation, curbing demand, and increasing supply. Note that government has a significant role even if we restrict govt action to only dealing with existing regulation. On the supply side, do we open up ANWR, allow offshore development, rationalize the 200+ blends of gasoline, make it easier to build new refineries, etc, etc? On the demand side, do we increase taxes to curb demand more than the market price will achieve, do we tighten CAFÉ, etc, etc?
Jo㯠Carlos writes: “To resume my point, it is not the governement regulamentations, it is the gas demand…”
One of the unintended consequences of govt regulation is that, if it not flexible enough, it invites strategic behavior from firms who can exploit the barrier to entry such regulations provide. So with regulations making it very difficult to build new refineries (not impossible since a refinery is about to be permitted in Arizona), it does not take to long for incumbent firms to realize that lack of capacity expansion will result in super normal profits. No one can blame the refiners for not building capacity as demand rises; California is a case in point where the refining capacity constraint is hit every so often whenever a refinery goes down. Those in charge of public policy are now slowly realizing the bind we are in so much so that Shell got into a lot trouble when they tried to retire an existing plant (see http://money.cnn.com/2005/05/26/news/international/ftc_shell.dj/).
As a sidebar, a similar situation was one of the key reasons for the 2000-2001 energy crisis; no major power plant had been built for a decade with the state preferring to import power from neighboring states. When demand in those states rose, California experienced shortages and it was easy for the in-state generators to behave strategically to exploit the situation.
Ronald, I think the difference is the types of bonds. Hydrocarbons are short or long chains of carbon with lots of hydrogen attached. The amount of energy released depends on the ratios of C to H. Methane, aka Natural Gas, has a ratio of 1:4. That’s why it’s such a clean and energy-rich fuel. Ethane, C2H6 has a ration of 1:3 – not as good. Heavier crudes, with longer carbon chains of up to C20H42, approach ratios of 1:2 – a much lower density of energy.
RayJ,
There are no shortage for refineries that can use light oil. To be true, soon everyone will have refineries that can use light oil that will be not be used. As the Chevron ad said it, the era of cheap oil is over… we are near or on the oil peak for light oil.
Now, about refineries that can convert heavy oil to gasoline, if you read my posts you will see that it is plain lost energy/money to use heavy oil to make gasoline. It is better use the refineries that exist to use the heavy oil to make diesel. By the way, the peak for the heavy oil will come in 10 or less years… so, it is not good idea invest money for give all refineries the heavy oil cracking processing, because soon the heavy oil will be not cheap too.
The problem really isn’t the governement regulamentation. The problem is:
1- that the peak oil will make the oil supply be inelastic – any 3 digit price the market pay for oil and the supply will not go up, the supply will start go down after the peak oil;
2- the gas demand and the oil demand too are inelastic for short and medium time periods, any change to demand need long time to happen – short time changes to demand will be simply painfull, big recession with inflation.
The data that the professor JDH bring us simply show that the light oil supply is almost inelastic now. There are a huge demand for gasoline, but the light oil production cannot go up. It is something that make me think that Matthew Simmons is right about the saudis oil.
Now, to think that heavy oil will save us from gas crisis is simply delusional. Heavy oil isn’t a good oil to make gasoline. It is better use it to make diesel. Worse, heavy oil too will not last forever.
And worse…heavy oil have a higher production coust than light oil. Heavy oil isn’t cheap oil.
It is better find other energy resource and soon. But to blame governmetal regulation for the light oil prices going to sky is simply get lost from the real problem, peak oil.
Sorry, the ad is right, the era of cheap oil is over…
Joo Carlos
Sorry the bad english, my native language is protuguese.
Joo Carlos
I’m always bemused by the “tastes great – less filling” style of argument posed by Joo Carlos, August 22, 2005 11:04 AM. When considering the choices of increasing CAFE mileage requirements or expanding national refinery capacity, or drilling in ANWAR, or raising the gasoline tax, or simplifying the number of blends and any of several other ideas, my reaction is that we need to do all of these things – work both sides of the equation. Small improvements added with bigger improvements will ultimately make a large impact.
A more enlighten, and a free(er) market approach will, in my opinion, make for a better future. The current higher prices we are paying at the pump are actually good news. Painful now – but an incentive to get real when it comes to policy. My sense is the environmetal folks have had it their way for the last 30 years – too many regulations without any ‘ecomonic impact’ study requirements, very little ‘scientific peer review.’ Although Mr.Bush is now in the White House, we have 30 years of some good some bad environmental regulation on the books, enforcable by the courts, that cannot be overcome by presidential fiat: change will be slow. It is now time for the free market types to get more of their ideas put into practice. It will take time to solve these problems. (Sorry if I am getting a bit political.)
Question: Does the new energy bill include tax incentives for the refiners to expand capacity? If we need to find a way to increase capacity using a more sour, thicker crude, I would hope so. Tar sands here we come?
Dr. Hamilton has opened my eyes to the complexity of the oil challenge we all face. I’ll be following this blog for a while. I’ll try to keep relatively quiet. 🙂 Thank you Dr. Hamilton.
There is more to this than just the energy to process heavy. Capital cost & lost opportunity cost plays a role in the light/heavy differential as well.
*********
The energy from heating and re-heating for the cat & other crackers is a minimal consideration… seriously. Some effect but not the biggest. The big cost differential for light sweet vs heavy sour is (1) capital (2) throughput limitation & restriction (reduced output of preferred products not so much true shrinkage loss).
******
ALL distillation processes require considerable heating & cooling. Heating at the bottom boilers then cooling at the top end condensers. I ran distillation columns for almost five years and know.
Surprisingly cooling is often even more expensive than heating if cooling water alone isn’t sufficient then refrigeration ‘chillers’ are needed – especially common producing the lightest fractions in hot/dry climates. The chillers are electrically powered like monstrous air conditions. Massive energy pigs… we had them and ran them in the hot humid Midwest summers when our cooling towers couldn’t keep up. I don’t think this is a major constraint for most refineries however (needing chillers that is).
One reason process heat for refineries is cheaper than folks would think is because they use waste products or cheaper sources of heat energy – say coal. ‘Co-gen’ is becoming increasingly common, where a separate power plant is co-located next to a refinery/petroplex and generates the electricity to drive the plant (pumps, blowers, chillers, etc) and also generate very high temperature steam to use for moderate heating processes. In our plant we built a co gen facility and actually sold the excess electrical power to the utility.
They can’t always use ‘cheaper’ alternative fuels for heat but even then can still bleed back waste streams to heat units and reduce the usage of ‘purchased natural gas’… This is especially common in reformers where they will strip hydrogen off and then burn it to heat the process or other processes. If fuel cell technology takes off this will be where a lot of hydrogen will come from (and not be internal ‘waste heat’ anymore).
Short point is there are almost ALWAYS waste streams in refineries they can burn to use for heat if they look around.
The last source of ‘almost’ free energy is heat exchange… stealing excess heat in one process to then heat up a different process. Think big radiators – heat one side up and cool the other down. As chemical engineers we spent unbelievable number of hours looking for ways to couple processes this way… without the ability to diagram it is hard to explain but believe me it is done A LOT.
**************
In summary ‘heavy’ is bad because the capital to crack & process it is very much more expensive than the capital necessary to just process light. There is some ‘shrinkage’ and ‘energy’ differentials but that is pretty minimal really. To get an idea of just how much additional capital there is – read the wiki description J Carlos gave on the cat cracking process and *IMAGINE* all the equipment & controls necessary… probably 100s of millions of dollars of stuff for one good sized commercial unit alone…
Even if a plant is designed to run a lighter blend… it can run a heavier blend but will immediately become bottlenecked at all the operations where the heavy stuff is processed and then under utilized where light fractions are processed… So the ability to manage the heavy flows & ops will then dictate the overall output capacity of ALL product streams… With such a feedstock the cheaper less profitable heavy products will be produced at full capacity but the more demanded light ends will not. So the question of (A: buy expensive light feed vs B: struggle to run cheap heavy) isn’t JUST how much the heavy costs to process but also the lost opportunity cost of not being able to sell as much lighter products as the capacity of the plant would suggest (if it ran light).
In a pinch like this there are only two ways out (1) change feedstock back to the expensive lighter feed or (2) change the process to manage the feedstock better. Option 2 takes time but is happening world wide as we ‘speak’.
On the sour/sulfur issue… it is just one MORE additional bottleneck… the question of whether it is a bigger or smaller problem than the heavy is plant specific. Meaning some plants will be more severely bottlenecked by sour… while others by heavy. Regardless if a plant is designed to run light/sweet it will be bottlenecked and the output of lighter more valuable products will be held back.
I hope this helps.
I find this discussion very worthwhile, including Joo Carlos comments. I used to work for Monsanto as a chemical engineer. How does the cold cracking that snuck into the recent bloated energy bill fit into the shifting sweet and sour world? apparently the Congressmen voted for it but not a one could say what it was. Is it in use anywhere in the world? What is its downside?
Anciano – I know nothing about cold cracking – that was before my time… plus I specialized in bio-processes but because I was in the bio-fuels side interfaced with some petro-chem folks and some rubbed off. I’m now in the marketing side of advanced materials & related mfg. and farther from it then ever – miles from the chem plant days. But all those long hours of mass and energy balances will be with me probably all my life – distant nightmares if nothing else.
The irony is YOU at Monsanto & ME in bio-fuels probaly have more ‘catalyst’ background than a room full of traditional petro-engineers… As you know most of the horse power in a refinery is in the ‘seperations’ not the ‘reactions’… with the goofy crudes out there that will certainly change.
I’d like to thank everyone for their explanations.
Econbrowser on sweet and sour
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 …
Regarding the difficulties of opening new refineries in the US, this is what senator Wyden had to say about the issue: The Oil Industry, Gas Supply and Refinery Capacity: More Than Meets the Eye
http://wyden.senate.gov/leg_issues/reports/wyden_oil_report.pdf (pdf file, 69KB)
Here’s a newly updated story to the contrary
FTC clears Shell in refinery closing
Agency says company wasn’t trying to drive California gas prices higher with Bakersfield shutdown.
http://money.cnn.com/2005/05/26/news/international/ftc_shell.dj/
The Bakersfield refinery closure issue is clearly a Barbara Boxer rant (at least that was the first I heard of it). She brought this up as an opportunity to get her name in the papers and to publicly diss Big Bad Oil. She’ll say anything.
Eh? “When cracking the heavy oil the long carbon molecules are broken to lesser carbon molecules, the atomic bonds that form that molecules are broken and that energy is lost.”
Can’t be “lost”, conservation of energy. And the cracking process is endothermic, according to the wiki info.
Joseph writes; “The Bakersfield refinery closure issue is clearly a Barbara Boxer rant”.
Maybe, but there was enough reason for the case to be referred to FTC and the FTC to carry out an investigation. The fact that Shell were not even willing to sell the refinery to a third party until pressure was applied is one of the reasons why some people felt they were trying to reduce capacity in California. After the refinery was sold, Shell’s excuse for not putting it up for sale initially was that they “didn’t think anyone would want it”!
Preço do petróleo para dummies
James Hamilton e petróleo, uma combinação perfeita. Claudio…
Joao,
You said: “There are no shortage for refineries that can use light oil.”
I agree. But there is a shortage of refineries that can use heavy oil. Valero is one of the few refiners who invested in infrastructure to handle to heavy oils which is why they are now very profitable (see http://www.washingtonpost.com/wp-dyn/articles/A23631-2004Nov30.html).
Your claim that it is inefficient to refine gasoline from heavy oil may be one of the reasons why spread between light and heavy oil is increasing. It may be more efficient to make diesel from heavy oil but in the USA the larger demand is for gasoline. You can be sure that when it becomes easier to build refineries, the ones that will be built will be able to handle heavy oil.
Ray
RayJ wrote:
“I agree. But there is a shortage of refineries that can use heavy oil. Valero is one of the few refiners who invested in infrastructure to handle to heavy oils which is why they are now very profitable ”
Ray,
The true question is what make the refineries not to invest to build the infrastructure to refine heavy oil to gasoline. You say that is the government’s regulamentations for sulphur. Sadly, if you read the arguments that were posted by the guys that work at refineries (and that know it better than you and me!) you will see that the shortage is mainly caused by the fact that to build that structures that crack heavy oil to make possible the refineries use the heavy oil to make gasoline aren’t cheap. The government regulamentions are a lesser factor, the main factor is the coust to build up the cracking structures. Get rid from the governamental regulamentations will NOT solve the problem, cracking structures will continue to be NOT CHEAP.
The normal refineries (that not have cracking structures) can distille the heavy oil to diesel. Diesel is a heavier oil and it is possible to find it at the heavier crude and the refineries not need crack it to get diesel. If you look at the data at http://www.emis.platts.com/thezone/guides/platts/oil/crudeoilspecs4.txt (that FTX provided to us) you will see the Maya crude not cracked can provide enough diesel.
Let’s make clear some points:
1- governamental regulamentations aren’t the reason why there are few light crude at the market, the real reason is that the light crude is near or on the peak (in other terms, the light crude is near depletion);
2- light crude is good to make gasoline, heavy crude isn’t good to make gasoline, heavy crude is good to make diesel;
3- to use heavy crude to make gasoline the refineries need cracking structures and that cracking structures are not cheap (there are a long explanation above from dryfly);
4- IMHO, the reason why there are not enough investiment to build up cracking structures is that they are just NOT CHEAP, and not because the government regulamentation want that the refineries have structures to clean the sulphur;
5- If you want mantain that refineries cannot invest to use heavy oil to make gas is because the government regulamentations want the refineries have structures to get rid from the sulphur, you need show data…what are the coust for buid structures that get rid from the sulphur? They are more expensive than the cracking structures? The reason why the investiments aren’t being made is because the government regulamentations want structures that get rid from the sulphur or because the cracking structures are expensive?;
6- Finally, we know that heavy oil is better to make diesel (just look the data at http://www.emis.platts.com/thezone/guides/platts/oil/crudeoilspecs4.txt), so what is the better solution (lesser economic coust)? Try to convert the refineries to use heavy oil to make gasoline or change the demand pattern at USA (just go see the US Oil Demand by product, by sector, 2002, at http://www.theoildrum.com/, you will see how much the USA demand gasoline).
By the way, heavy oil is only a temporally solution. If light oil is peaking now, how much time we have before the heavy oil get to peak too?
And if the heavy oil will peak soo can be not a good idea invest money to build up cracking structures…the return can be not enough to pay the investment.
Joo Carlos
Sorry my bad english, my native language is portuguese.
Well it seems to me that if the *oil companies* believe we are at or near peak, they would *not* be rushing to build new refineries.
They are not rushing to build new refineries.They don’t see a solid profit opportunity. It would be interesting to hear what the execs are saying in private about the reasons why.
“And if the heavy oil will peak soo can be not a good idea invest money to build up cracking structures…the return can be not enough to pay the investment.”
yeah!
Oil companies aren’t building refineries for two reasons. First, historically, refineries haven’t made a lot of money. The return on investment isn’t that great. Second, with the price of crude going up, investing in exploration and production has a significantly higher return. When you compete for investment dollars inside an oil company, E&P wins over refining.
A note on Shell’s Bakersfield refinery – It’s about half the size of the average refinery in the US. Because of economies of scale, it’s probably not cost competitive with the other refineries. In addition, its crude sources, the oil fields around Bakersfield, are declining which means to keep operating it will have to pipe crude in from the coast. The coast is also where all of the demand is for the product. Hence you pipe the output back to where the crude came from. That gives the big refineries on the California coast a huge cost advantage over the Bakersfield refinery. Finally, a refinery needs continual investment in order to keep going because stuff breaks and wears out. Shell has a lot better things to do with their investment dollars.
The only way the private company is going to make money on this operation is by skimping on maintenance and getting the refinery at a bargain basement price.
The oil fields near Bakersfield used to have a pipeline to Avila Beach where tankers could dock and haul off the crude. The fields around San Ardo and Taft are examples.
They had to tear up Avila Beach (literally, the beach and the town on top of it) to “remediate” the area from decades of oil storage and transport. While I’m not certain, I doubt tankers make Avila a port of call any more so oil can’t go in or out that route.
In addition, the emission credits from a closing refinery must be worth a great deal of money. In most California air quality districts, they gradually squeeze the amounts of SO2, NOX, etc that are allowed to be released. A grandfathered refinery would have retained substantial credits that it would be free to sell or trade if and when it closed.
Of course, Boxer blames it all on a conspiracy.
I think that the refinery-regulation argument primarily could apply to the price of gasoline, not the price of crude oil. (i.e. if refining capacity limited, feedstock not limited, output product costs would rise, not feedstock)
Most existing US and Chinese refineries are designed to accept light sweet crude, and are operating full out. But the price of feedstock is rising. (i.e. if the feedstock limited, it doesn’t matter as much about capacity to process it).
Also, there is an inability to substitute (either process-wise or end-use). The problem is that most US and Chinese cars, light trucks, SUVs accept gasoline. So, going diesel would take time.
Does anyone know about the cost of diesel compared to gasoline? When I was a kid diesel was always cheaper. Then, around 1990 and the invasion of Kuwait, diesel became more expensive. The price may have gone down for a while after that war, but it seems that diesel has been more expensive than gasoline for a long time now. Shouldn’t we expect gasoline to become more expensive than diesel as light crude becomes more expensive? Or do I just live in a funny country? Or am I overlooking something?
I’m not sure if this helps, but gasoline is C$1.10/litre and diesel is C$1.00/litre in Vancouver. So, say 10% less than gasoline.
The gasoline cost translates as approx. US$3.65/US gal I believe.
Thanks for telling me the cost of diesel in Vancouver, muhandis. Obviously I live in a funny country.
TOD has a nice post extending this idea a bit today, if anyone is interested.
http://theoildrum.com/story/2005/8/23/233714/826
The Peak of Light Sweet Crude?
Vital Trivia recently made a fascinating claim that light sweet crude has passed its peak production. If true, this is a very significant milestone in the peak oil story, and strong evidence for the idea that there is a near-term peak in total liquids …
Sweet Crude and the Peak
I have discussed several times that the global oil competition that is driving up oil prices is “sweet” crude. James Hamilton of Econobrowser, has an excellent explanation of the differences between sweet and sour crude oil. He notes that sour…
Does anyone know how the new requirements for ultra low sulfur diesel being phased in starting in 2006 will play into this whole issue?
I think that demand for diesel vehicles in the US would take off very quickly if more were available. Where I live (small town in the rockies) large diesel pickups are very popular as they are more efficient than comprable gasoline powered trucks, and also tow better (most people buy them to pull their camp trailers, horses, snowmobiles, etc).
I would love to be able to buy a diesel-powered mid-sized truck or suv, but the only thing available right now is the Jeep Liberty. I need something larger that I can fit 3 child seats in, has 4wheel drive and decent clearance. Nothing is available right now in the US that meets those requirements and gets decent gas milage. Seems like a perfect application for a diesel.
:::
Does anyone know how the new requirements for ultra low sulfur diesel being phased in starting in 2006 will play into this whole issue?
:::
Ya it will drive the price up.
In fact the biggest reason diesel is as or more expensive than regular after historically being cheaper is because the phase in is ahead of schedule… surprisingly. I just read about this a few weeks ago and ‘tossed’ the url (sorry)… but the basic theme was… the units are on schedule almost everywhere… many are on line already and are ‘commissioning’…
The only problem (as with gasoline) is that most refineries were intending to run sweet crude if not light sweet crude… and the glut of sour is bottlenecking the feed streams to BOTH gasoline & diesel fractionation…
Plus it appears these ultra-clean de-sulfur columns are tricky to run so plants haven’t ramped up to full nameplate capacity yet.
Summary: tricky equipment & dirtier feed are adding to the tight supplies & driving up cost. No conspiracy here… not yet anyway.
One bright spot for US diesel is gas-to-liquids (GTL). Since the result can be a very high quality diesel fuel with relative high cetane rating (70?) and almost no sulfur, it might allow diesels to pass California emissions.
Qatar is building a GTL facility but conversion costs alone are expected to be $20 to $30 a barrel. Still, that should make GTL a market competitor to LNG for “stranded” natural gas resources and a serious “non-conventional” motor fuel.
Personally, I’d be happy to be a California volunteer as a test pilot for one of those European BMW 7-series with a diesel V-10.
Carnival of the Capitalists – 2005-08-29
Welcome to this week’s Carnival of the Capitalists. If you were here the last time, you might notice some changes.
[completely biased recommendation]
One of the biggest changes is our new sister site: CodeSnipers. It is one of CaseySoftware’s
contribu
Economic ripples of Rita
Crude-oil prices surged on Monday as it became clear that Tropical Storm Rita would threaten the Gulf Coast, then prices fell on Tuesday morning when the National Hurricane Center forecast a more southerly path for Rita that might spare the…
Please send us some detail on “MIDDEL EAST SOUR CRUDE OIL”.
thanks
Anuj gupta
Too many ‘peakers’, but
to be one of these, someone must assume to know not only where and how much crude oil(s) remain but also exactly what technologies are current and _will_ become so. Perfect crystal balls are interesting.
yes, have read Simmons, Laherre, et al, and they can’t make the case without assuming to know what they cannot know, including proprietary corp data.
too often it’s forgotten – or never grasped in the first place – that we are talking about _managed_ production, the Combination of integrated oil majors and a cartel of national producers that puts another lie to neoclassical economic theory.
I’d guess that Ft McMurray says something about the heavy oil question,,and if we look at ‘just’ the Canadian and Venezuelan heavy deposits, we can also say ‘adios peak oil’ — unless that mythology is seen as just one aspect of the capital system’s ideological struggle to break free of the multi-decade post-Fordist slump, i.e. as justification for a new and ‘green’ social industrial complex that in practice would most likely be one more perversion of green ideals.
No conspiracy but fact of history
Can you get more diesel out of heavy crude vs. light? Thanks