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Crude Oil or Value-Added Oil Products?

by John Brian Shannon | May 8, 2016

For decades, easy access to crude oil powered the global economy and this is especially true in developed nations where the huge investment pool allowed governments and industry to capitalize on cheap energy costs. Cheap and easily available crude oil was a very necessary building block for the Western economies.

But the world is changing and although we aren’t yet at the end of the ‘Age of Oil’ we’re starting to see that day from afar.

We’ve come from $2 per barrel of crude oil (less than the cost of production at the time) to $125 per barrel and every price in between. On the supply side, we’ve seen the world’s largest oil consumer (the U.S.) increase domestic production from 10% of its demand to meet almost 100% of its demand — an unprecedented change in the global oil industry.

Due to that farsighted U.S. policy, the world became mired in its own crude oil glut and correspondingly, crude oil prices fell in recent months, only now rebounding after visiting the $26 per barrel netherworld. As of this writing, crude oil is hovering around the mid-$40 range and looks set to end 2016 in the low $50’s assuming the geopolitical paradigm remains stable.

Crude oil refining: Motiva Enterprises refinery, Port Arthur, Texas

Cheap crude oil was a necessary building block in building the world economy. Saudi Aramco through its wholly owned Saudi Refining Inc. subsidiary and Royal Dutch Shell plc. announce they’ve signed a non-binding Letter of Intent to divide the assets of Motiva Enterprises LLC. The Motiva joint venture was formed in 1998 and has operated as a 50/50 refining and marketing joint venture between the parties since 2002. Photo caption and image courtesy of; Motiva Enterprises refinery, Port Arthur, Texas

How to Change the Oil Industry into a ‘Win-Win’ Proposition

Like many industries, the oil industry has evolved over decades of time and from humble beginnings. Had it been planned the oil industry wouldn’t have its present structure and there wouldn’t have been a need for a ‘crude oil price’ — as refining crude oil into finished products would’ve been the norm.

Evolution of the World’s Largest Oil Producer

For decades the Saudis pumped and sold oil to the Allied Powers for less than the cost of production as their contribution to the massive Western effort against Nazi Germany and later against the West’s Cold War competitor, the Soviet bloc nations.

Until the Arab Oil Embargo in 1974, the only money the Saudis made from oil was where they competed against every other oil speculator in the commodity market. They certainly didn’t make anything on the extraction of the black stuff.

The Speculators in a Supply/Demand World

From the time each supertanker left port in Saudi Arabia until the moment they tied up at an oil refinery in the United States, speculators made huge sums or lost huge sums of money playing the crude oil supply/demand equation as each supertanker made its way from a Saudi port to an American port.

After some initial horrendous errors, the Saudis learned how to play the markets as well as New York’s best oil speculators, and in that way many individual investors and Saudi Aramco (the largest oil company in the world by a significant margin) saw some amount of wealth created from their resource.

Prior to the Arab Oil Embargo the Saudis didn’t make anything on the extraction side, but made it on the margins (speculating) by making educated guesses about the daily oil supply/demand equation of the United States. That’s no way to run a railway!

The Rise of OPEC

By 1974 the Saudis and the other OPEC nations had had enough and via the Arab Oil Embargo were able to get a reasonable price for their crude oil and not be forced to rely on notoriously unreliable oil price speculation to finance 80% of their economy.

Since 1974, the Saudis (along with every other oil producer, including the United States) have been making money on (1) the extraction side, and (2) on speculation, and (3) on the refining side of the oil business.

Too many middlemen! You can plainly see that where there are three steps with each having its own profit, there should’ve only been one.

Had the oil business been planned-out from the beginning, we would’ve seen Vertical Integration — where one oil company owns its own oilfields and extracts its own oil, refines their own oil into useful products, and only then offers those value-added fuel products as commodities in the world marketplace.

What we have now is a paradigm where gross total demand sets the wellhead price on crude oil (which has a profit attached to it) and the speculating of oil-in-transit (which is where big profit gets attached) and then more profit is attached by an oil refinery — which are usually owned by a third party. No wonder they call it black gold!

In a suddenly very competitive oil world, how to cut ‘fat’ and add profit?

By creating vertically integrated oil companies where only one company extracts the crude oil, transports it to a refinery, refines it into useful products, and then sells those products as commodities, we cut out the middlemen while raising profits for oil companies and lowering costs for consumers. Perhaps by a significant margin.

How to ‘Win-Win’ in the 21st-century oil industry: Don’t ever sell crude oil!

Sell finished petroleum products exclusively

Saudi Aramco is transferring to a Vertically Integrated business model — buying-out it’s partner Royal Dutch Shell in a multi-billion dollar deal at it’s massive Port Arthur, Texas oil refinery (the largest in the U.S.) which can process 600,000 barrels per day.

Saudi Arabia is already the largest single oil producer in the world (presently pumping just under 11 million bpd, but with the ability to pump 12.5 million bpd) and have been in the crude oil business longer than any other country, and own more supertankers than any other organization, business, or country, and are now purchasing oil refineries to complete the vertical integration of their business model.

This will allow the Saudis to lower their concern about wellhead price, and the speculation factor, and concentrate on supporting their best player — which is the refining stage. That is where the entire oil industry is going, some faster than others.

By concentrating on end products, Aramco and others will create new thrust towards the Vertically Integrated business model where resource extraction and transport are geared towards supporting their star player, their own oil refineries — wherever they may be located in the world. Profit at each step of the way will no longer be necessary nor desirable, cutting costs throughout their supply chain and adding profit to their value chain.

In a perfect world the Vertically Integrated business model will sweep past the existing ‘multiple middleman’ business model over the next decade and leave it in the dustbin of history.

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BONUS GRAPHIC

Average annual OPEC crude oil price from 1960 to 2016 (in U.S. dollars per barrel)

OPEC crude oil price from 1960 through 2016.

OPEC crude oil price from 1960 through 2016.

 

Can We Afford Another Round of Climate Failure?

by John Brian Shannon | November 9, 2015

Climate scientists say we must decide (at COP 21) to dramatically lower our CO2 emissions or we lose our last opportunity to stop global warming at a scale never before seen.

How many climate scientists?

A majority of climate papers agree that global warming is real and a looming concern for planet Earth. Image courtesy of James Powell

A majority of climate papers agree that global warming is a looming concern for everyone on planet Earth. Image courtesy of JamesPowell.org

Houston, we have a problem

The question, “Is there any doubt that global warming could threaten plant and animal life on the planet?” no longer seems relevant due to the astounding amount of quality research done in recent years which proves we do, in fact, have a problem.

One wonders about the other question, “Are our politicians up to the task?”

Don’t lose hope! There are some inspiring examples of environmental stewardship in the world

100% Now: Albania, Bhutan, Belize, Burundi, the Democratic Republic of the Congo, Ethiopia, Iceland, Lesotho, Mozambique, Nepal, Norway, Paraguay, Tokelau, and Zambia, are countries that produce virtually 100% of their primary energy generation (electricity) via renewable energy, while Samoa will hit that standard by 2017. (All of these countries produce a minimum of 95% of their electricity via renewable energy, and all of them have plans to meet their 100% target within a few years. As always, easy access to low-interest financing is one way to enable those targets to be met by 2020)

See: List of countries by electricity production from renewable sources (Wikipedia)

100% by 2021: Costa Rica will hit its renewable energy target by the end of 2021. At present the Costa Rican electricity grid is powered by 94% renewable energy, but many days of the year renewable energy production exceeds 100% of demand allowing the country to export surplus electricity.

100% by 2030: Denmark and Scotland and are well on their way to hit 100% clean electricity generation by 2030 — while the Cook Islands, Tuvalu, and Kiribati in the South Pacific expect to become 100% clean energy powered by 2050 including all transportation.

90% Now: Tajikistan, Kyrgyzstan, and Laos all produce more than 90% of their electricity via renewable energy and have ambitious plans to increase those targets. Limited funding is a factor.

80% Now: Canada produces over 80% of its primary generation from renewable energy (hydro-electric dams and nuclear power stations, with assorted minor solar power and wind power installations) but has, so far, has no plan to convert the remaining 20% of its electricity generation to clean energy.

80% by 2025: Nicaragua has an aggressive renewable energy program to replace its primarily fossil fueled primary energy (electricity) with renewable energy. The country is blessed with radiant sunshine, healthy wind resources and volcanoes (geothermal) all it lacks is the financing to accelerate its planned targets.

80% by 2050: Germany, an advanced country of 82 million people gets almost 40% of its annual electricity from wind, solar and biomass power and has an ambitious two-track programme underway called Energiewende that is simultaneously a) shutting down all of Germany’s nuclear power stations by 2022 (completely decommissioning them by 2045) and b) replacing that lost power generation with wind, solar, and biomass power.

By 2050 Germany expects to meet 80% of its electricity via renewable energy, and further plans to curtail energy use by 25% due to additional energy efficiency. The scale and speed of transition to clean energy in Germany is astonishing and enjoys broad support among the public.

See: German Renewable Energy Leaves Coal Behind (JBSNews)

20% by 2020: In the United States, primary energy (power plants that produce electricity or district heating, or both) are the single largest source of CO2 pollution.

Excessive carbon pollution is a contributor to climate change. Primary energy (power plants that produce electricity or district heating, or both) are the single largest source of CO2 pollution in the United States.

Excessive carbon pollution is a contributor to climate change. Primary energy (power plants that produce electricity or district heating, or both) are the single largest source of CO2 pollution in the United States.

Although a slow starter, the United States has made rapid advances toward a cleaner energy grid. Early legislation such as the Clean Air Act (1970, amended 1990) has now been joined by the EPA’s Clean Power Plan.

See: How the Clean Air Act Has Saved $22 Trillion in Health-Care Costs (The Atlantic)

It’s notable that the U.S. now spends more than any country in the world on its transition to clean energy and is quickly switching out of coal (good) to natural gas (better) and renewable energy (best).

Climate and Carbon: Renewable energy as a proportion of the total U.S. electricity demand (2015)

Climate and Carbon: Renewable energy as a proportion of total U.S. electricity demand (2015) Image courtesy of IER

China has the second-highest spend on renewable energy globally and breaks global solar and wind power installation records every year. By a wide margin.

And yet, all of it together isn’t nearly enough to lower our present carbon emissions to a safe level

Not even close, as the carbon bender we’ve been on since 1988 is mind-numbing.

“By the end of this year, more than half of all industrial emissions of carbon dioxide since the dawn of the Industrial Revolution will have been released since 1988 — the year it became widely known that these emissions are warming the climate.”

“The Global Carbon Project (GCP) estimates that in 2014, we will release a record 37 gigatons (GT) of carbon dioxide to the atmosphere from burning coal, oil, and natural gas, and manufacturing cement. That’s a 2.5 percent increase over emissions in 2013, itself a record year.”

“This brings the total industrial carbon dioxide emissions since 1751 to an estimated 1480 Gt by the end of this year. And, remarkably, more than half of these emissions, 743 Gt, or 50.2 percent, have released just since 1988.” — , Director of science & policy, Union of Concerned Scientists

Climate and Carbon. More than half of all industrial carbon dioxide emissions have been released since 1988. Image: Union of Concerned Scientists

Climate and Carbon. More than half of all industrial carbon dioxide emissions have been released since 1988. Image: Union of Concerned Scientists

See: Global Warming Fact: More than Half of All Industrial CO2 Pollution Has Been Emitted Since 1988 (Union of Concerned Scientists)

Convinced?

Most people are. Some 80% of North Americans want stronger government and corporate action towards cleaner energy, more efficient buildings and electric vehicles. Which is great.

But in 2014, some $548 billion dollars of subsidies were paid to the world’s fossil fuel corporations. And they’re in no mood to give it up.

Why would they?

Ever since large-scale coal, oil and gas extraction began around 1920, fossil fuels have been getting massive subsidies relative to their imprint on the economy.

If the plan at COP 21 is to remove those subsidies from the fossil fuel companies, then there is no point in anybody showing up there. At all. Because as far as plans go, that must surely be voted; “Least likely plan to succeed since there were rocks.”

If the plan is to legislate ever stricter air quality standards (to the point where it has any real effect on total global emissions) get ready to pay even more subsidies — perhaps double.

Yet, if that’s the plan, we might be wise to support it as we don’t have a second Earth to fall back on.

A more effective plan would be to leave fossil fuel subsidies at their present level and begin to match renewable energy subsidies to the fossil fuel subsidy rate, based on the barrel of oil equivalent (BOe) standard and let the market work on a level-playing-field basis

In that way ‘fossil fuel companies’ would morph into ‘energy companies’ — instead of remaining coal-only, oil-only, or natural gas-only companies.

Stand back and watch the CO2 emissions fall through the floor if that ever happens!

Standardizing renewable energy subsidies to match coal, oil and natural gas subsidies, means that real and profound change would begin to take place throughout our energy sector.

It should be pointed out that a very good case could still be made for keeping natural gas alive and thriving (with no change to existing subsidies) to fuel the transportation sector.

See: Energy Darwinism – The Case for a Level Playing Field (JBS News)

Climate and Carbon. Global fossil fuel subsidies vs. global renewable energy subsidies (2014)

Climate and Carbon. Global fossil fuel subsidies vs. global renewable energy subsidies (2014)

Because of the (over-hyped) variability of renewable energy (the Sun doesn’t always shine and the wind doesn’t always blow) a massive shift towards natural gas (hundreds of times cleaner than coal, BTW) or battery storage will be needed to balance electrical demand. Perhaps both.

Natural gas (CNG) cars and trucks are affordable right now and can use the present distribution system as gasoline and diesel vehicles, while battery technology approaches the point of affordable battery systems for cars and trucks.

See: Clean Energy: Renewables & Natural Gas Powered Electricity Grids (JBS News)

Although there is reason for hope at COP 21 in December, the few examples above represent only a handful of nations acting on the scientific warnings about global warming

There are almost 200 nations that must become convinced of the need to act on climate change this December, and many of them will be negatively affected by sea level rise, desertification, drought/heat waves, premature deaths caused by air and water pollution (China 410,000 per year, the U.S. over 200,000 per year, and Europe over 400,000 per year).

See: Air Pollution Costs the West Almost $1 Trillion/yr (JBSNews)

Now that we have broad and deep consensus by climate scientists that global warming represents an existential threat to our planet, all that is required is the will to act.

Let’s hope our politicians are bigger than the looming environmental maelstrom our civilization faces.

Climate and Carbon: Rooftop solar installation in Standard, CA the birthplace of California's oil industry. See? There is reason for optimism!

Climate and Carbon: Rooftop solar installation in Standard, California — the birthplace of California’s oil industry! See? There is reason for optimism.

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How Canada Could Excel at COP 21

by John Brian Shannon | November 8, 2015

Canada could contribute to the COP 21 success story with a straightforward move towards cleaner and renewable energy

Canada could contribute to a COP 21 success with a move towards renewable energy and hit a home-run in the process. File photo: COP 21 logo

Canada could contribute to a COP 21 success with a move towards renewable energy and hit a home-run in the process. File photo: COP 21 Paris logo

As a country that already sources 80% of its electricity demand from clean or renewable energy (mostly via hydro-electric power and nuclear power) it would be slam-dunk-simple to convert the remaining 20% of the country’s national electricity grid to a combination of cleaner and renewable energy over a period of 10 years.

If the promising and newly-elected government of Canada — headed by Prime Minister Justin Trudeau, and assisted by Natural Resources Minister James Carr, and Environment and Climate Change Minister Catherine McKenna — followed the plan presented below, Canada could hit an easy home-run on the climate change file.

Remember, Canada already produces 80% of its electricity via clean or renewable energy. It only needs to succeed on cleaning up the remaining 20% of its power generation. Slam. Dunk. Simple.

  1. SLAM. Write legislation to ban the burning of coal within Canada by 2020.
    BAM! We win. Canada is a renewable energy superstar and the talk of COP 21.

    Canada can simply export that much more coal.
  2. DUNK. Of course, the country can’t do without that 20% of primary power generation — most of which is coal-fired. Therefore, those coal-fired power plants must convert to natural gas by 2020.
    This has been done by many utility companies in the U.S. and is a mature and thriving industry.
    And whatever coal plants are too decrepit to convert to natural gas; Decommission them as part of the national energy infrastructure spending programme and replace them with true Hybrid power plants — where solar, wind, biomass and natural gas-fired electricity generators combine their various strengths to provide the same or more electricity than the decommissioned coal power plants they replace.
  3. SIMPLE. Direct the national energy infrastructure spending towards the goal of complete Canadian energy security, creating many construction and permanent jobs here in Canada.
    We accomplish this by building the Energy East pipeline — but with a change-up to twin pipes.

FYI — Canada’s crude oil has always been mixed with Saudi #2 (sweet) or Saudi #3 (semi-sweet) or Texas #3 (semi-sweet, a.k.a. Texas Intermediate) crude oil, in order to be clean enough to pass through the oil refinery without damaging the equipment.
Canadian crude oil barely registers #4 (sour) and is so corrosive that refineries refuse to refine it unless it is first diluted with liberal amounts of Saudi or Texas crude oil.
We need a twin-pipe system; One pipe to distribute the #2 or #3 crude oil (for dilution purposes) and the other pipe to carry our #4 crude oil to the refineries.
The Energy East pipeline should traverse all of the provinces and continue west into northeastern British Columbia, terminating in Yukon.

Why? To make Canada 100% energy self-sufficient.

As part of the national energy infrastructure spending programme, we should tender the construction of one oil refinery in each Canadian province appropriately-sized to the needs of that particular province with an additional 25% capacity built-in from day one.
That additional capacity helps to defray the cost of such refineries (via surplus finished oil product exports) and further, provides additional refining capacity in later years as Canada’s energy demand increases.
Like the huge water desalination plants in the Middle East, oil refineries require monstrous amounts of electricity to power them. Which is why we need Hybrid power plant installations near such refineries as part of our national energy infrastructure programme.

In the 21st century, it’s no longer all about being oil (only) or gas (only) energy companies or raw resource exporters. It’s all about being energy companies — that is, companies that meet the energy demand of their customers with many types of energy.

Some would say more appropriate energy.

What are the benefits?

Canada would hit an easy home-run in Paris at COP 21.

Canada would be seen as an important partner at COP 21, as one of the countries helping to drive momentum towards a cleaner global energy paradigm. (After COP 21, countries are going to be treated as ‘Part of the Solution’ or ‘Part of the Problem’ depending upon their contribution or lack thereof, to combat climate change and help improve air quality in cities)

The country would easily surpass the Kyoto clean air standards that it failed to meet by opting-out of that agreement. ‘Shamefully failed to meet’ it must be said.

It would create 100% energy self-sufficiency for Canada (yes, we would still need to buy sweet Saudi or Texas crude oil to mix with our incredibly sour crude oil, but we would then export more refined oil product to other countries than we would buy) and thereby stabilize our transportation energy market in a massive way.

Thousands of construction jobs would be created to build the (twin pipe) Energy East pipeline, to build each provincial oil refinery, and to ramp-up the distribution network in Canada to deliver the domestically produced end products of our crude oil.

Canada would ‘value add’ to the energy it extracts from the ground and instead of being the historical ‘hewers of wood and drawers of water’ that we’ve always been, we could be energy independent while improving the domestic supply chain and the even more important value chain. Value added resource extraction. Now there’s a thought!

It’s so obvious that Canada should do this and it already has such huge support across the country, that even if gasoline were to cost 1% more at the pumps (for example) Canadians of all political stripes would flock to support it.

And the time to do it is now. If a Republican president is elected in the U.S.A. in 2016, the new president could conceivably ‘pull out all the stops’ to prevent Canada’s energy independence from occurring before it ever gets started.

If Canada is a ‘real country’ then we need to act boldly and cut the energy apron strings from Momma America. (Don’t get me wrong, I love the Americans. But Canada must do what’s best for Canada and not be found to be working for a tiny number of (1%’er) Republicans in the United States)

It is time for Canada to step up to meet the challenges of our time, as previous Canadian leaders have met the challenges of their time. And this one should be an easy slam-dunk for Canada. All it takes, is the will to act.

The question is; “Does Canada have the right Prime Minister, the right Natural Resources Minister, and the right Environment and Climate Change Minister to make this a reality?”

My own sense is that the Trudeau government is ‘bigger’ than the problems Canada faces.

We’ll know by December 12, 2015. Talk to you then…