Why won't you die?

I had a discussion with a coworker the other day on the dynamics of oil price and demand response. One of the arguments that she brought up highlighted a critical point in the debate over peak oil. A common argument against the idea that the world will someday simply run out of oil, or that efforts to find alternatives now are counterproductive, is that price signals will soon do their part to "crush" demand such that existing supplies will last longer and more alternatives will be found before there is a catastrophic drop in production.

This is a possible outcome under the law of demand, which states that as the price for a good rises, the quantity demanded will drop (i.e. demand curves have a negative slope). However, it depends heavily on just how much the quantity demanded responds to changes in price. This property, measured by the price elasticity of demand, is the key to understanding the magnitude of these effects. It turns out that the price elasticity of demand for gasoline is remarkably well-studied in the empirical literature. However, even most people with a reasonable understanding of the subject may have missed out on recent work that suggests that the American predicament is more dire than in previous years.

The articles about Keystone XL you aren't reading

Obama's delay of Keystone XL is a move to mend bridges with his environmentalist base before the election. Well, that's transparent.

Canadian Finance minister Jim Flaherty says that the delay of Keystone XL will accelerate Canada's efforts to build a pipeline to its west coast to ship to Asia. So, um, again about how delaying the pipeline does nothing to stop extraction or stop oil from going to China.

Stephen Harper, the Canadian Prime minister, is still hopeful. Good for him. I am frankly surprised that he doesn't feel emasculated, given that American environmentalists are attempting to dictate the environmental policy of the country he nominally governs.

I know the tone of this post is more opinionated and angry than usual, but I just have trouble grappling with how the environmentalist movement has been taken over by people with no knowledge of how ineffective their goals are at accomplishing anything.

EROEI and Peak Oil

A Forbes blogger by the name of Tim Worstall wrote one of the most technically illiterate posts that I've ever seen about peak oil theory and its connection to EROEI. Even though his example - showing EROEI has no bearing on the price or quantity produced of a nonfuel, premium value product - is completely irrelevant and total "nonsense," as he put it, he does demonstrate one thing very clearly: the linkage between a declining EROEI and smaller quantities of dearer oil is not intuitive. I'm going to try and explain it.

Misunderstanding Peak Oil

 Daniel Yergin's book claims to "debunk" the theory of peak oil, and has thousands of misled people gleefully waving it in front of green energy advocates as vindication of their skepticism. The misunderstandings extend even to the Technology Review book review there. I would have expected something that bucked the trend of stupid from an MIT publication, but apparently it'll have to serve as the latest example of people that don't actually get what peak oil means.

More on Keystone XL

I've posted before about the Keystone XL pipeline, but I wanted to emphasize one thing that hasn't been getting any coverage. While America dithers, the Chinese are heavily backing a project (Enbridge's $6.6 billion Northern Gateway) which will ship cracked bitumen to the west coast of Canada - as I mentioned before - where it will be shipped to East Asia.

Again, nothing wrong with selling oil to China, but it again goes to show that radical environmentalists who frame Keystone XL as a battle between "dirty" oil and carbon emissions vs clean energy and less oil dependence are presenting a false choice. Let me say this clearly: stopping Keystone XL will not stop the carbon emissions from bitumen extraction and cracking. It will simply send the oil to China instead of improving American energy security.

This. Debate. Is. Stupid.

I don't want to be against most of the environmental movement here. I really don't. I support their goals - most of them, anyway - and want to see a low-carbon, clean energy economy within my lifetime, even if that goal is ambitious. I want to cut our carbon emissions. I want to reduce dependence on oil in general, and foreign oil especially. And the way to do that is to encourage higher oil prices in America, and the most efficient way to do so is with a carbon tax. And that's that. Burning political capital on this will hurt the movement for years to come.

Furthermore, I'd have a lot of trouble believing that armchair environmentalists have really thought things through, particularly when what they are literally doing is an oblique method of supply disruption that will... uh... well, essentially change the flows of American money from Canada to enriching those lovely regimes in Venezuela, Gabon, Nigeria, and Saudi Arabia. Who would you rather buy from? South Park lifestyle enthusiasts aside, I think I know the answer.

Weighing in on the Keystone XL Pipeline

There's been an awful lot of fuss going on about the keystone XL pipeline in the last month or so. Dozens of environmental groups have latched on to the permitting of the pipeline, which is to carry syncrude from Canadian heavy tar oil to the United States, as the issue of their lifetimes. The New York Times carried an editorial by one of them, detailing their rationale and calling on President Obama to make the environmental decision of a lifetime.

I hope he walks out on the White House lawn and slaps this guy on the face.


The Keystone XL pipeline controversy is a farce. Extreme environmentalists have doctored the numbers to suit their propaganda needs and unnecessarily demonized Canadian producers. That editorial is an excellent example of their propaganda: "acidic crude oil" (all crude is acidic, and oil companies routinely handle more acidic and sour crudes), "highly sensitive terrain" (already traversed by multiple pipelines).  Here's the alternative picture:

Syncrude from Canada emits 70% more carbon dioxide during extraction and refining than conventional oil does, its true. But then following extraction and refining, we burn it. Focusing on the extraction stage unnecessarily demonizes the process. Over the entire lifecycle of an oil product from syncrude, emissions are only 7-15% greater.

Will the blocking of the keystone XL pipeline stop syncrude operations in Canada? No. Oil prices are high enough that Canadian producers will simply find a different market, and that market is likely to be in East Asia - i.e. China. Were this pipeline initiative to fail, the most plausible alternative is a pipeline to Canada's west coast, where it'd be sold on the international market.

There isn't much wrong with shipping to China per se, except that shifting our main source of fuels from the middle east to Canada has probably been the single greatest energy security coup in American history. Some energy economists have contended that the building of the Keystone XL pipeline to Houston will still cause the oil to be shipped to China; there are some merits to that argument, namely that foreign producers with stakes in American refining companies will pressure for the purchase of their oil. To me, however, this seems less likely than it might seem to be. Saudi Arabia has recently quit targeting 30% of their exports to the US, and Venezuela has production problems of its own, to name two examples. And even then, this argument continues to ignore that as American energy consumption increases, we can take advantage of the captive supply provided by that pipeline. After all, all things being equal, Canadian producers' delivery point prices will favor American producers. 

So, to summarize, blocking the keystone XL pipeline does a whole lot of nothing to the environment as extraction will continue, doesn't benefit the American economy or American energy security, and isn't as bad as it's made out to be.

"But wait," you might say, "it will extend America's dependence on oil!" Truth is, America is dependent on oil and will remain so for at least the next fifty years at least. Where we get it from won't matter. Stopping the supply of oil from Canada won't do anything to reduce American dependence on liquid hydrocarbons, sustained high prices will. The extent to which blocking a supply pipeline will impact American prices is the only mechanism by which this might act... and frankly, in a liquid global market for oil, it won't do much at all.

The only guaranteed effect I foresee from this pipeline is the mitigation of the price spread between West Texas Intermediate (WTI) at Cushing, OK, and the global price for oil. As I've blogged about before, WTI has been going for cheap because it is landlocked and has had an influx of syncrude from Canada that it can't unload fast enough. The increased WTI prices aren't likely to have an effect on gas prices in the United States as a whole (probably only in Kansas, Oklahoma, and the Texas panhandle due to the limited overland transport radius) and will increase profits for the companies that deliver to that location, including Canadian syncrude manufacturers. I suppose that's why they're doing it.

Environmental short-sightedness like opposition to Keystone XL will only hurt the American economy and our short-term energy security. And as a final, more general comment, it's immature activism like this in the energy arena that makes me want to puke. If you really want to help the environment, reduce dependence on oil and decrease carbon dioxide emissions, then work to build smart grids or build a renewable energy infrastructure. Or spend the money you devoted to going to Washington to retrofit your house with better insulation, double or triple paned windows, or (if it makes sense) small scale solar thermal water heaters or solar PV panels. Handcuffing yourself to the White House fence might be easier and more dramatic, but being a publicity whore is more damaging to the environment than hundreds of other things you can be doing. 

The Price of Oil Drops

Between Wednesday and Thursday of last week, the price of oil dropped precipitously. WTI spot prices dropped below $100 a barrel from a high of close to $115, though it's now again above $100. This is a pretty darned huge drop. It came pretty close on the heels of Osama bin Laden's death, too.

To me this suggests that the price rises in oil over the past couple of months have been largely speculation driven, though not necessarily for the reasons you may think. It's certainly not demand or supply driven. Supplies in Libya may have contracted, but they provided maybe 2% of world supply. It's pretty much certain that the price elasticity of supply for crude isn't that extreme. Though Libya does provide a significantly larger amount of the world's remaining light sweet crude (i.e., the good stuff), on a macro scale enough refineries are configured to run heavy sour crude nowadays that it shouldn't have affected supply overmuch anywhere except Italy, where the hapless refineries are configured to accept high-quality deliveries from Ras Lanuf. It also wasn't demand. While China has continued growing at a blazing rate, it is difficult to believe that global demand grew enough to increase prices 15% over the course of 2 months. That's a pretty derpy suggestion, in fact; spikes like that are only seen during some pretty extreme cases, like wartime.

So what we have is, I think, pretty clearly a short-term, speculative increase in the price of oil. It's pretty obvious that there were distinct triggering and ending events - rebellion in Libya and assassination of bin Laden, respectively. That doesn't necessarily mean that each phase was sustained by the triggers, however. I think there were other structural factors keeping the speculative capital in the market.

Econbrowser had some interesting analysis on the subject (http://www.econbrowser.com/archives/2011/05/lower_oil_price.html). Broadly, I'd agree with the conclusion that the precipitous price drop is also a function of the fact that after almost stagnating production for the past couple of years, supply is starting to exceed demand, albeit just a little bit. This is starting to impact inventories, driving the price down.

Obviously I don't have enough experience to know what the phase lag in between sustainably higher oil prices and supply increases ought to be, but a gap between world supply and world demand has been ridiculously high from 2001-2008. It follows from my perspective, at least, that supply is only now responding to higher price signals and driving the prices down because of one of two reasons. The first might be the lack of skilled drillers and drilling equipment, or other exogenous supply bottleneck. The second is that it's just getting harder to find enough oil to sustain production. I think both apply. It's important to note that the first bit is a problem that's been around for a while, but that it's gotten more severe as larger oil finds have been rarer and rarer.

As an aside, I went ahead and checked on something else. Unsurprisingly for me, it seems that the Brent-WTI price differential hasn't changed. The structural factors that are keeping buyers at Brent trading at higher prices than in Cushing haven't changed, and aren't likely to. Oh, the joys of a landlocked oil port with too much supply coming from Canada.

I was also thinking of talking about other oil supply trends here, but that might have to wait because I'm going to work on my thesis now.