Cincinnatus BLOG *** Political Commentary - Social Commentary

Transportation, specifically the automobile, will be the pivotal sector driving increased demand for oil and its substitutes over the next two decades. The developing world notably China and India, aspire to the freedom the automobile brings. Things we take for granted, such as the ability to escape the crowded city whenever we wish, to live in a green suburb and commute to work or just live a greater distance from our employment will now be come increasingly available to people in the developing world.  Per capita car ownership in China will increase to 40 cars per 1,000 citizens by 2010 from its current 24 and that is only the beginning of a steep secular trend. By contrast the United States has 765 vehicles per 1,000 and most Western European countries average about 500 per 1,000 citizens. OPEC’s World Oil Outlook 2007, forecasts that the total number of cars is expected to rise from 700 million in 2005 to 1.2 billion by 2030, and the capacity of commercial vehicles is anticipated to more than double.

OPEC projects a 34 million barrel per day (mb/d) increase in oil consumption between now an 2030, with developing countries accounting for 29, mb/d of this total, growing from 29 mb/d today to 58 mb/day in 2030. Transportation will be by far the largest contributor to increased use of oil in developing countries followed by residential and commercial use.

Oil is not an important fuel for electricity generation, but its role in transportation places it at the center of our energy dilemma.  In the United States alone, we consume 20.7 million barrels (42 gallons/barrel) of petroleum products per day, about 47% of which turns into the nearly 400 million gallons of gasoline we consume daily.  We also heat over 8 million homes, primarily in the North East with oil, produce diesel for commercial vehicles, use it as feedstock for our chemical and plastic industries as well as refine it into jet fuel to guarantee our ability to move about freely.

Products made from a typical barrel of oil

Source US Energy Information Administration: % equals more than 100 because there is a processing gain of approximately 5% from refining.

Of the 20.7 million barrels of petroleum products we consume daily in the United States we produce 5.1million barrels directly plus we fabricate an additional 2 million or so domestic barrels of petroleum products from natural gas, plant fuels, refinery gain and alcohol. Despite these domestic sources we still import about 13.7 million barrels a day of crude oil and petroleum products. The cost of importing all this oil is enormous, when oil was over $140 per barrel the cost was nearly $700 billion annually. At the moment, we have a temporary respite, as oil price have dropped to $40 per barrel but we cannot count on this price level to be maintained as the world economy recovers. Given the growth in the emerging market it would not be surprising to see oil top $200 or even $250 per barrel in the next decade. Even if there were no environmental, or national security issues involved, the cost to the economy of this transfer of wealth to foreigners would argue for a policy that brings us closer to energy independence. How we achieve that goal is the subject of debate but clearly no one magic solution is in the offing. It will take some combination of more fuel-efficient vehicles, alternate fuels, increased domestic production of oil and greater use of cleaner burning domestic natural gas.

Total Imports of Petroleum (Top 15 Countries)

(Thousand Barrels per Day)

Source Energy Information Administration

In 2000 the world consumed approximately 75 million barrels a day of oil and the International Energy Agency projects that consumption will climb to 87.7 million barrels in 2009. At the current rate of growth global consumption could reach 95 million barrels per day in 2015 and possibly 120 mb/d in 2030. The question is can we actually supply 95 or 120mb/d? Blame it on the big bad Oil Companies and lets have a windfall profit tax even though they only have a profit margin of roughly 9%! This excessive demagogic political rhetoric ignores reality and perverts serious policy discussions.

The reality is that in the 70’s Western Oil companies controlled well over 50% of world oil production. Today, “BIG OIL”, the combination of Exxon, BP, Royal Dutch Shell, Chevron, ConocoPhillips, Total and Italy’s Eni produce just 13% and that will probably decline over the next two decades. We have become increasing dependent on government-controlled entities for oil. Today’s ten largest holders of petroleum reserves are state-owned companies, like Russia’s Gaspron, Iran’s national oil company, Saudi Aramco and Petroleos de Venezuela. With the exception of Saudi’s Aramco these state owned firms are rife with bureaucratic inefficiencies, political corruption and indifference. International oil companies are better than national oil companies at finding and extracting oil but they are fighting a losing battle as more countries follow a policy of resource nationalization.