Sweet and Sour Crude

I'm always trying to come up with an explanation of why oil prices are going so high.  It finally dawned on me today that one of the not well advertised factors was decreasing supplies of light sweet crude.  It was brought on by a comment to one of my previous posts, I don't know which one or by who, but thanks to whoever it was.  It turns out several other articles have been written on the subject, but this is my version.

While we may have fairly large oil reserves remaining, the peak production of "conventional oil", the nomenclature that is used by many to describe the inexpensive light sweet oil that has made up our oil supplies until recently, has passed.  While conventional oil still makes up the majority of oil that is processed, the quantity of it is now decreasing and must be made up for by other supplies as well as the amount needed to supply the 1.5% increase in demand that has historically taken place (higher prices eliminated the increase during March and may continue to do so until, if ever, the prices go down). This shortfall is being made up by inexpensive heavy sour oil.  Heavy oil is oil that has a higher viscosity (thicker, more gooey) oil than conventional oil.  Sour oil is oil that contains more sulfur than conventional oil.  Both of these properties make the oil more difficult to process. 

This oil cannot be processed by refineries designed to process conventional oil and very expensive (read billions of dollars) "upgrades" have to be made to refineries to enable them to process heavy sour crude. Fortunately, in the US about 75% of refineries can handle heavy sour crude, and this may, in part, be responsible for their high profits. OPEC estimates that 45% of the worlds refineries can handle heavy sour crude and estimates that only 30% of remaining reserves are are conventional oil (I am a little wary of this number as the percentage could easily be reduced by counting the tremendous unproven reserves of heavy oil in Venezuela and Canada). On top of this, environmental regulations have become increasing stringent on the quantity of sulfur that is allowed in diesel and gasoline requiring even more modifications to the refineries.

Thus while the total supply of oil that we have is not decreasing, a premium price is now commanded for conventional oil.  Conventional oil now receives a price premium of $10-$16 over heavy sour oil.  We also still have a shortage of refinery capacity due to the damage done to refineries due to Katrina and a longer than usual shutdown of refineries for repairs and upgrading to allow more refineries to be able to process heavy sour oil.  This can be seen in recent figures that show increasing inventories of crude, accompanied by a higher than usual drawdown of gasoline inventories.

I found a longer and more elegant explanation in the Econbrowser, an excellent blog that you might add to your regular reading if you haven't discovered it. The Forbes article focuses on the refinery side of the problem. The Alexanders article provided information on the how many refineries could process heavy sour oil.

One additional comment is relevant to this subject.  The refineries that can already process heavy sour crude are enjoying higher than usual profits as indicated in the Washington Times article.

Sweet and sour crude, Econbrowser, August 21, 2005
Sour crude oil sweetens profits for refineries, Washington Times, March 13, 2006
US refiners get rid of sour oil, Alexanders Gas and Oil Connections, November 17, 2004 (from Kansas City Star)
Refining Problems Swell Oil Prices, Forbes.com, June 30, 2005
Topic Report: Impact of Refinery Capacity on Crude Oil Prices - Part 2, Apache Corporation, March 14, 2005

Technorati tags: oil, energy, technology

Comments

[Ender]

"(I am a little wary of this number as the percentage could easily be reduced by counting the tremendous unproven reserves of heavy oil in Venezuela and Canada)."

You should not be confusing heavy sour crude with unconventional crude. Heavy sour is still a liquid at room temperature and still flows like normal oil and requires almost no processing to deliver it to a refinery.

Unconventional and extra heavy oil is not really oil at all and requires LARGE amounts of energy , presently in the form of natural gas, and water to be processed into a form suitable for refining. It takes 1000 cu feet of gas to produce one barrel of crude oil from the Alberta tar sands. The water used to wash the sand from the oil is rendered toxic and has to be kept in huge tailing dams.

In short no natural gas no unconventional oil.

[JN2]

Ender, re tar sands: I thought they recycled the water? And there are proposals for nuclear in Alberta (bad idea). Maybe they could burn their own product for energy? Best of all of course is to leave it in the ground and live off current solar income.

[Brian]

Today I saw a graph in the Volkskrant (a Dutch national newspaper) plotting the price of Brent crude per barrel from the start of 2004. Brent is light sweet crude oil. (there is a similar graph in the washington post at http://www.washingtonpost.com/wp-dyn/content/article/2006/04/13/AR2006041300170.html)

What is clear from both graphs is that although there may be a momentary peak for the well know geo-political reasons there is an underlying gradual upware trend. Simply fitting a straight line by eye I'd say that Brent crude appears to be about $6 dollars above what you would expect based on this steady growth. That's not a hugh peak.

I expect people will pick me up and say this analysis is over simplistic. Nonetheless I think the numbers are evidence of an underlying inexorable rise in the price of oil. Seen against this background the current prices are in fact structural not incidental.

If the trend were to continue it suggests a structural oil price of $90 by end 2008. Interestingly the oil futures market (see http://futures.tradingcharts.com/marketquotes/index.php3?market=CL) is currently estimating about $71 for the same Dec 08 period. It will be interesting to see how this market prediction develops over the coming 6 months - 1 year.

Jim's analysis could about the oil mix may indeed be the root cause - I must admit I don't know enough to judge.

[ProcessingHeavy]

And what is the key element you need to process this heavy crude? You need lots and lots of hydrogen. Massive quantities of it.

[BegsTheQuestion]

Which now of course...begs the questions...why not save massive amounts of energy and expense an instead utilize the hydrogen directly as fuel?

There in lies the rub.

[Thomas]

Hydrogen is a bad fuel to handle and store. Adding hydrogen to tar sands/heavy oil gives much higher yeilds.

But this solution gives massive pollution and possibly climate change :-(

Natural gas is the best fossil fuel for stationary applications and therefore too good as source of hydrogen for upgrading. It's also much too good for home boilers producing luke-warm water, but that's a whole other debate...

-Thomas

[Alex]

In the short run, what difference would it make to use unconventional gunk as the feedstock for a Fischer-Tropsch process rather than upgrading'n'refining?

[amazingdrx]

"Conventional oil now receives a price premium of $10-$16 over heavy sour oil."

The cheaper feedstock should more than take care of the extra refining costs, that is how it would work in an unmanipulated market.

But in a monopoly gaming world oil market it will be an excuse for boosting gas prices once again. This is in fact positive proof of the manipulation.

Boost it to 10 bucks per gallon OPEC. It's the only course left to stop global climate disaster. Who knew that oil war/terrorism by facilitating market manipulation would actually help stop global climate problems by making oil price soar?

The Bush administration is actually encouraging the end of oil based transportation energy with it's neoconservative colonial empire fighting for oil.

Bush an agent of change? Yep. By ruining everything the status quo depends upon.

[Engineer-Poet]

I'll bet that F-T isn't as efficient as more-conventional processing for heavy crude and bitumen.  It may yield a cleaner product, but if you are dealing with anything other than a free feedstock you have to consider how much is required for a given amount of product.

[Jim from The Energy Blog]

I did say that this was one of the causes for increased oil prices, not the only cause. One of the main points that I meant to say was that using the Brent or WTI prices as the only indication of the price of oil was misleading with so much heavy sour crude being used.

The Washington Times article clearly made the point that the $10-$16 premium for conventional oil allowed refineries that could process heavy sour crude to make unusually large profits dispite the more expensive equipment.

I did mean that the Saudi's could be counting unconventional oil, or part of it, as their definition of remaining oil reserves. Although it does not flow at ambient temperatures it is processed and sold as oil. Part of Canada's tarsands oil has been officially counted as oil reserves. This is a major point of dispute when talking about remaining reserves and an official definition is needed to clarify this. It could easily be interpreted, as I have, that EIA counts unconventional oil as part of reserves or they could not forecast future production rates as high as they have. In my mind the question is at what price and how soon could these reserves be used.

Using heavy sour crude indirectly contributes to the steady cost growth, not the peak. The peak is largly caused by geopolitical problems.

The refinery part of the oil business suffers from having a relatively low ROI and the need to invest more in capital cost is not desirable.

The peak in gasoline price is exacerbated by the transition from MTBE as an oxygenate to ethanol. Domestic ethanol is not especially expensive, but we have to import about 1/3 of the required ethanol from Brazil and, although it is cheaper, their is a $0.51/gallon import tarrif on it. Their is also a short term infrastructure problem with the distribution of ethanol that is causing occasional local shortages of gasoline. The later is because we do not have enough tank trucks and gasoline with ethanol in it cannot be delivered by existing pipelines because it is hydroscopic and causes corrosion of steel pipelines. This problem will eventually be solved by some combination of more tank trucks, composite pipelines and more distributed production of ethanol.

Natural gas should not be used to make hydrogen. It can be made just as or more efficiently from coal and it is a cheaper feedstock. The problem is the capital costs are higher and it contributes to global warming if sequestration is not used.

[amazingdrx]

Good points Jim.

Have you heard of the Israeli solar powered refinery?

And plasma and microwave extraction and refining, wind electricity could do the processing. As well as provide hydrogen.

http://www.rexresearch.com/coal/elxcoal.htm

Plasma can also turn biogas (methane) into methanol, and string methanol into hydrocarbon feedstock for plastics and other chemicals normally obtained from oil.

Ultra cheap wind electricity produced from high wind great plains locations could be used when peaking to refine fuel, then fuel operations could shut down when wind is diminishing. This would smooth out the wind power component of the grid.

[Nguyen Thu]

My think way I will be to try to research about petrochemical technology. in vietnamese, all documents is old and i had to read informations on networld. I need to have technical document to research.
Thanks!

Nguyen Thu Mr
Hanoi University of Technology
Organic and Petrochem