Saturday, April 9, 2011

Ethanol Efficiency - A great post by Advanced Biofuels USA

A great blog post (see the original post HERE) by Advanced Biofuels USA by Robert Kozak (NOTE: This is a nonprofit organization I am unfamiliar with other than this post). The article discusses a graph produced by the NRDC showing the CO2 intensification of various energy sources..

The big things I really wanted to pull out of this post.  I haven't seen this said better:

This trendline also got me thinking about how long it took the petroleum industry to reach its current efficiency that allows it to produce a gallon of gasoline for about 26 lbs CO2. As it turns out, the answer is at least sixty years -1910-1970.
Production and quality improvements have been slow in the petroleum industry. While the first oil well was drilled in Pennsylvania in 1859, demand for gasoline did not really exist until 1900 when cars with internal combustion engines began to be produced. It really took off after 1908 when the Ford Model T began production.  However, neither performance (octane rating) nor conversion efficiency were quick to follow.
For instance, the catalytic cracking of crude oil into gasoline, which doubled existing yields of gasoline, was not developed until the 1930s. Octane ratings, a measure of gasoline’s ability to withstand pressure to produce more power (current regular gasoline has a rating of 87 and ethanol 105+), were about 40 until Allied aircraft needed high octane fuels to fight German and Japanese planes in WWII. This octane development work was largely financed by the US government. The current hydrocracking technology which again increased gasoline yields, did not come on-line until the 1960s, while the current rate of oil to gasoline conversion was reached after the 1973-4 oil shock.

Saturday, April 2, 2011

Why did Oil Prices Go Back Up?

Above is a graph showing crude market prices over the last few years.  More on the spike from this most recent February below.

I've been meaning to get this post up for over a month.  Oil prices rose back to 2008 levels suddenly in February.  The price increases coincided with civil protests in the Middle East.  First starting in Egypt the protests expanded to Libya, Iran, Saudi Arabia and Syria.  This unrest ultimately leading to the stepping down of Egypt's long time dictator and an open revolution inside Libya which continues to this day.

Of course the unrest is the defacto explanation for oil prices as the news covers the rising pump prices.  In my own small oil business I haven't had one call to my office by customers asking "why is diesel a dollar more than a few months ago" which is odd.  Usually get a consistent stream of calls as oil prices hit certain dollar marks.  As we past $3 and moved onto $4 a gallon for finished products I didn't hear a peep from my customers.  It seems as if the American consensus is that petroleum is just higher than $3 a gallon and $4 is acceptable.

Here is what I don't get though in this rational script of why prices are high.  For two weeks Egypt's protests grabbed headlines and the markets didn't move but a little bit per barrel.  It wasn't until President's Day, a day the US Markets were closed, that a true price spike occurred. This spike was isolated to just commodity futures trading (not Supply and Demand forces).

There was no watershed event in the Middle East (other than the lack of Egypt's upheaval spreading beyond its Euro-aware neighbor Libya).  The grand scheme of world oil production Libya shutting off its spigot would not normally cause a move like this as a permanent realignment of pricing.  But on a day the US Markets happened to be closed a ran occurred in smaller trading markets with an expected result caused the following day in the US.  I can't help but actually see this as a speculative run attempting to push the price of oil up. 

This strikes me as literally a bold and obvious move to manipulate markets like something out of the Age of America's Robber Baron past.  Player's with market power exercised it in a coordinated way not as an expression of market efficiency but taking advantage to leverage their own market power to pull profits off the top.  Our current oil prices are not solely set by a currently adequate and for the most part unchanged Supply and Demand but because of trading volumes in a futures market.

I also want to share with you my perspective on President's Day.  I remember it because I was at my desk and the Editor of OPIS (the Oil Price Information Service) sent out an email that immediately grabbed my attention.  See below:

Below is the email I received.  I wanted to post it for a single reason.  To document the day prices went back up without a real market explanation.  See's Editor's email below:

---------------------------- Original Message ----------------------------
Subject: Oil Futures Soar in Electronic Trading; Marketers See Hefty
Tuesday Price Increases
From:    "Oil Price Information Service" >
Date:    Mon, February 21, 2011 11:10 am
To:      "Mark Fitz" >

This breaking news story is brought to you by Oil Price
Information Service...

   The peace and calm for marketers who are today observing
Presidents' Day has been interrupted by a paroxysm in global
prices for crude and refined products, which almost certainly
will add 5cts/gal or more to wholesale prices tomorrow.
   The New York open outcry markets are closed, but some hefty
volumes have changed hands in electronic trading and sent
overseas crude prices as high as they've been since September
2008,[NOTE: bold emphasis is mine] and pushed gasoline and diesel prices up 5- 7cts/gal in the
   Brent crude, which has been the driving force behind NYMEX
RBOB and heating oil futures price gains in 2011, traded for over
$105/bbl this morning, spurred by violence that appeared to
escalate into chaos in Libya. Libya produces some 1.7 million b/d
of crude. There are also concerns that violence in the Persian
Gulf may be ratcheted higher as unrest in the region shows no
completion date.
   April Brent crude was trading at $104.73/bbl, up $2.21/bbl at
Even higher numbers were seen in electronic WTI action, where the
expiring March contract moved up $4/bbl to $90.19/bbl and the
April contract (which will soon represent the prompt month)
rallied some $4.38/bbl to $94.08/bbl. This latter rally has the
interest of technical analysts, who believe it may signal a much
larger pop.
   March RBOB futures were up 5.87cts/gal at $2.61/gal and April
(the low RVP month) moved up 5.87cts /al to $2.749/gal.
   March heating oil was up 6.46cts/gal at $2.7775/gal and April
barrels were 6.52cts/gal higher at $2.7912/gal.
   Most U.S. oil companies are closed today, so OPIS has not yet
seen a host of intraday moves. Terminals are quite busy, however,
as jobbers race to get ahead of price increases that might add
$400-$500 per load when spot markets reopen for business
President's Day 2011 was the day the oil market returned to 2008 prices.
People far smarter and better qualified than me have theories of why. 
Their theories just don't make sense in my gut.

Now the US Energy Information Administration has this to say about crude prices and Libya:

Crude Oil and Liquid Fuels Overview.  EIA expects continued tightening of world oil markets 
over the next two years, particularly in light of the recent events in North Africa and the Middle East, the world's largest oil producing region.  The current situation in Libya increases oil market uncertainty because, according to various reports, much of the country's 1.8-million bbl/d total liquids production has been shut in and it is unclear how long this situation will continue.  The market remains concerned that the unrest in the region could continue to spread.

Libya and the Middle East unrest definitely has something to do with prices. But they don't have anything to do with a jump like we've seen. A sustain jump indicative not of risk in the future but of a realignment of Supply and Demand needs.  Especially a jump that occurs primarily around a single big day of trading when the US market is closed and no really big information has changed the market's perspective. Lets look at prices during that short time frame.

Notice the price spike in this shorter time frame.  That was President's day.  Or in this chart the day missing between Friday before and the Tuesday after President's day (as our markets were closed).  Supply and Demand did not change.  Only the volume of people in the market for futures. 

My only real thought that derives from this is a need for diversification and true substitutes for petroleum derived liquid fuels. 

NOTE: For those who disagree and believe that markets are rationally pricing the risk of a Libyan oil being sucked out of the market here is a list of production numbers showing where Libya is in the grand scheme of things (this being non-academic and provided by a 3 min google search).  The new production that has come on line since 2007 I would believe should have offset a good chunk of this.  I don't see supply interruptions in my market either leading me to believe there is still plenty of crude available for refining and available tank space for storing refined product (unlike 2006-2008 in my market where there were consistent outages by my suppliers).  And again, just my passing thoughts without even close to enough research to really justify a strong argument.  This is just my gut thinking.