Let’s run a simple thought experiment. The peak-oil theory says that over time, production of crude oil should stabilize and then begin to decline. Since we still expect the demand for oil to increase over time, we must conclude that over time, oil will be increasingly scarce, both in absolute terms and relative to other inputs involved in the production of fuels, such as transportation and refining capacity. In other words, over time, we should see crude oil accounting for progressively greater and greater share of the total cost of fuel.
Interestingly, this prediction is fairly easy to test. Both crude oil and heating oil are exchange-traded commodities, and, conveniently, both have a standard contract size of 1,000 barrels. Now let’s take the value of a standard heating oil contract, subtract from it the value of a standard crude oil contract, and call the difference “refining premium” (I am sure experts have a better name and/or better procedure for estimating it, but this is just a simple thought experiment, so we should be excused for lack of sophistication). If our reasoning above were correct, this refining premium should decrease over time.
Now, a quick reality check (refining premiums were computed based on daily NYMEX closing prices and then averaged to produce an annual value):
Strangely, the refining premium went up in the recent years of record-high oil prices.
But what if looking at this in absolute terms is a mistake? What happens if we attempt to state the refining premium in percentage terms (i.e., how much more expensive a barrel of heating oil is compared to a barrel of crude oil). Let’s take a look:
(Note the plunge the refining premium took in 1999, the year of record-low oil prices…)
It is, of course, possible that the refining premium simply changes in line with oil prices (after all, it takes energy to crack oil), but the 2007 refining premium is not exceptionally large compared to the 1997 premium, while the average oil price in 2007 ($72) was much higher than in 1997 ($21).
So, all in all, it does not appear that crude oil is becoming more scarce than other factors of production required to produce fuels. Can someone fit this observation into the peak-oil framework?
* * * * *
Twelve hours later
Hindsight is a great thing; now I remember that what I called “refining premium” above is actually called “refining margin” in the industry…
[Extensively edited for brevity by the blog owner]
Global crude oil production peaked in 2008.
The media, governments, world leaders, and public should focus on this issue.
Global crude oil production had been rising briskly until 2004, then plateaued for four years. Because oil producers were extracting at maximum effort to profit from high oil prices, this plateau is a clear indication of Peak Oil.
Peak Oil is now.
Oil production will now begin to decline terminally.
Within a year or two, it is likely that oil prices will skyrocket as supply falls below demand. OPEC cuts could exacerbate the gap between supply and demand and drive prices even higher.
By: cjwirth on January 23, 2009
at 10:54 pm
cjwirth,
Assuming you’re not a bot (a stretch, I know), there are a few problems with your statements.
For starters, you can’t seriously claim that something that has been observed for decades peaked during a period that ended less than four weeks ago. By definition, a peak is an increase followed by a decline. Until we have a history of decline, we can’t claim that there was a peak. So let’s revisit the issue in 2015 or so…
Second, the problem I am trying to discuss is that there is this particular piece of empirical evidence that doesn’t seem to agree with the peak-oil theory; given the peak-oil theory and some rather simple economic analysis, one must expect the refining premium to decline, as oil becomes more scarce compared to other inputs. In reality, nothing of the sort is happening; the refining premium rises in absolute terms and fluctuates within a fairly well-defined range in relative terms. What I would like to happen here is for someone to point out where my reasoning might be flawed (as in “the peak oil does not necessarily lead to compressing refining premiums because…”) or suggest a way in which this evidence might be viewed as consistent with the peak-oil theory. A verbal equivalent of shamanic dancing to the tune of “peak oil is here” is not the kind of response this post was meant to invite.
Third, even if you’re right in your predictions and prices will indeed skyrocket within a year or two, you may still be wrong in pointing out the reasons for the outcome you are predicting. Consider a hypothetical situation in which the constraining input is not crude oil, but something else, such as transportation or refining capacity; the rising demand for fuels would still drive the fuel price up and this upward pressure would still transmit to the crude prices, but the crude prices would grow more slowly than fuel prices, while the refining premium would increase. Incidentally, this is exactly what we see in the prices; the refining premium as a percentage of fuel price almost tripled between 1999 and 2008.
To summarize, I would love to see some discussion here, but I will not tolerate propaganda broadcasts. If you have something intelligent to say on the issue, you’re welcome to say it, regardless of your persuasion. If not, that’s why the human race invented moderation… This said, thank you for your input!
By: NC on January 24, 2009
at 5:03 am