More thoughts on oil supply – and still no pictures

“Fungible” is an interesting word. The dictionary defines it as “being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.” Crude oil is a fungible commodity. Differences in quality affect prices and influence the best refinery for processing. But, in simple terms the world’s supply of crude oil can be considered as one large pot. Picture the producers pouring their oil into the pot and the users sitting around like kids sucking it out with straws. New discoveries make the pot bigger. Increasing demand is just those users sucking harder.

So what happens when we discover all that oil offshore that our politicians keep talking about? If the discoveries are big enough to meet our needs and we keep it to ourselves we become independent. That is a dream. More likely, discoveries will be much less than our needs. Again, if we keep that oil to ourselves we may not have to suck so hard from the communal pot. As Mr. Micawber’s economics suggested, we might achieve happiness. More likely, others will suck what we leave and there will be no change in the price of oil.

People are beginning to realize and accept that it will take five to ten years to develop any oil found in the new drilling areas. I wonder if they realize how much oil they will need to find to make any difference. This table shows some numbers taken from the data on the US Department of Energy website. I’ve selected the figures from 2007 and also those forecast for 2015 – when those “discoveries” might be arriving at the pump.

This table only shows three countries – USA, India and China. I have assumed that conservation allows us to reduce our oil consumption by 10 percent in the next 7 years. I have also assumes that India and China will only increase their oil per capita consumption by 10 percent during this time. (As the people of India and China become more affluent they will rightly expect the same standards as those of the West. My assumption of their demands may be very low). Adding the daily demands of just these three countries we see that it grows from 31 million barrels in 2007 to 36 million barrels in 2015. That pot will need to grow by an extra 5 million barrels per day just to meet the needs of US, China and India.

The largest oilfield in the USA is Prudhoe Bay in Alaska. It produces about 400,000 barrels per day. The biggest oilfield in the world is the Ghawar field in Saudi Arabia. Even it only produces about 4 million barrels of oil each day. The whole of Iran produces only 4 million barrels per day. Our politicians might hope the oil industry can discover another Prudhoe Bay. It is statistically unlikely that they will find another Ghawar. The demands of people sucking from that communal oil pot are getting bigger each day. It is obvious that the solution to our (and the world’s) energy problems has to be found outside the oil industry.

Thoughts on Oil - and no pictures

Wilkins Micawber in Charles Dickens’ novel, David Copperfield is famous for his statement, “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

The website of the Energy Information Administration allows us to apply this principle to crude oil prices. Data published on July 8, 2008 show world petroleum production of 86.48 million barrels per day. World consumption is calculated at 86.40 million barrels per day. If these figures are accurate the result for 2008 should be happiness. Forecasts for 2009 are not so rosy. World petroleum consumption is estimated to be 87.72 million barrels per day and consumption will be 87.76 million barrels per day. Mr. Micawber’s statement suggests misery in 2009. Obviously, nobody believes Government statistics for 2008 so crude oil is priced above $140 per barrel instead of happier levels. Misery could be here to stay.

Micawber logic predicts that happiness will only return if we increase production or reduce consumption. Our politicians have made loud proclamations about increasing production. They talked about drilling off the East and West Coasts and in the Alaskan Natural Wildlife reserve. A few sensible ones noted that even if this drilling found oil tomorrow it would probably take seven or eight years to bring the new oil to market. Domestic drilling is not going to restore the production/consumption balance. Overseas production increases might be possible in a shorter timetable. Venezuela’s Orinoco basin has about 1.2 billion barrels of extra-heavy oil in place. Venezuela exports about half a million barrels per day of this oil. The Venezuelan government has plans to significantly increase this volume. However, even here, where the oil location is known, the extraction technology is proven, and the environmental concerns are easily addressed, new production will take at least six years to come on stream. A similar situation probably exists in Saudi Arabia where increasing production from declining oil fields is unlikely to be as easy as the newspapers imply.

A different chorus of folks has stated, “we can’t drill our way out of this crisis”. If they had qualified this sound bite by adding “in any realistic timetable and at a reasonable price” they would probably be more correct. (But $145 dollar oil and lots of time can make even harebrained schemes look sensible.) The real answer for us is to reduce our consumption. In the US we use vast quantities of petroleum compared to other nations. We consume 20.7 million barrels per day compared to China’s 6.5 and India’s 2.4 million barrels per day. On a per capita basis those statistics look even worse. We use 70.6 barrels/1,000 people per day. China uses 2.3 and India 5.1. As the living standards in those countries continue to rise demands for petroleum will also increase – maybe to levels like the 30 - 40 barrels /1,000 people used by many countries in Europe? For the long run, it is unlikely that there will ever be enough oil again to satisfy Mr. Micawber’s requirements for happiness.

From "have not" to "have"

My last job with “Big Oil” was an assignment to a country not a million miles from here. For part of the time I was assigned to a site building an oil production facility. It was located about two hours drive from the nearest “large” town. For twelve months I travelled each Monday morning to the site and returned on Friday to my wife who remained in the capital. During that week I lived in a “single-wide” mobile home. This was located on a camp that dated back to days when the Seven Sisters controlled the country’s oil wealth. A high security fence enclosed a self-contained community. Within the wire were a well financed school, medical center, social club and swimming pool, supermarket, barbershop and beauty salon and even a 9-hole golf course with lighting so that oil company employees could complete their golf round without concern for the early tropical dusk. The camp had secure electric supply, treated water and mains sewage. We even had satellite TV and mobile phone service. It was remote, but not a hardship assignment.

On my drive to the construction site each morning I passed another community. This had no security fence, no supermarket, no swimming club, and no golf club. There was a few-room school but it had fewer teachers, no finance and no facilities. There was electricity and water. I never asked what happened to the sewage but in that community a well-developed sense of smell was not an asset.

There are a couple of verses in Matthew that always jar when I hear them. They are the ones that go, “whoever has will be given more . . . . whoever does not have, even that which he has will be taken away from him.” Jesus was not talking about worldly possessions but those verses came to mind each morning when I left my trailer and travelled to work. The gulf between those who had and those who had not was so embarrassingly evident.

The people of that country elected a new government almost ten years ago. So far, the gulf between rich and poor has not been removed. Still, I remain hopeful. During my adult life I have watched as an island country in Asia with no natural resources but a hard working and educated people became a commercial powerhouse. There is no reason why oil wealth should not be used to help nations closer to home follow that path.

I took the photograph above one afternoon when college students were on their way home. These are the future of that country. I am always nervous when taking street photographs. There are photographers who seem to merge with the crowd. I always feel that everyone is looking at me. I am tensed for that angry shout. That shout has not come yet and when I look at the images nobody is looking at the camera. Maybe I am invisible after all.

Jobs - here today, gone tomorrow

The recent primary in Michigan raised the question of unemployment at home and good jobs that have been lost overseas. Senator McCain said that some jobs would not return. He talked about retraining. Governor Romney claimed that he would encourage business to generate new jobs. I fear that Senator McCain was the more realistic. The United States is loosing more than blue-collar and industrial jobs. Large engineering companies that serve the oil industry have been moving work to other countries for years. They do not call it “outsourcing”. Instead work is assigned to “value engineering centers”. These “value engineering centers” are usually in countries like India, the Philippines, Turkey or the old Eastern Bloc. These countries all have one thing in common – educated workers who are paid less than the same skill earns the United States, Europe or Japan. So, US companies use them. European companies use them. Even Japanese companies use them.

When engineering outsourcing began, companies only exported easy and routine tasks. Later, simpler design and drafting were relocated. Now, those foreign centers have the skills and experience to engineer large parts of any industrial plant. The US, European and Japanese companies are still in control but they need fewer employees with higher skills and experience. Work is migrating to the management parts of their organizations. At the entry-level, US employees compete directly with young people at those “value engineering centers”. It does not need an economics degree to predict who will cost less and where the work will be done.

What about the future? Managers get their jobs because they have experience and ability. But, if all the junior jobs are outsourced, how will young US employees get the experience and skills they need to become managers? They can’t! The people working in the “value engineering centers” are just as well (maybe better?) educated as us. They are now getting the training and experience that was given to juniors in the US before outsourcing. Their kids, not ours will be the people who will build the future.



At one time this welder might have been working in USA. This photograph was taken in Korea. Skilled white-collar jobs are leaving US today just as this blue-collar job left US shipyards years ago.

Senator McCain’s proposal for more retraining may be a band-aid but it is not a cure. We need to change our business model. If we always demand the lowest cost then work will travel to people prepared to accept a smaller paycheck. It applies to the goods we find in Wal-Mart and it applies to design of major industrial projects. The jobs that once made televisions, toys, clothing, shoes, light bulbs or toasters will never return to the US. Only education and a willingness to pay a little more will keep the jobs we still have. Right now, the US is the market to the world. Maybe there is something to be said for import tariffs if they can stop the specter of our children and grandchildren with no livelihood. Certainly free trade has not brought the average worker the rewards that we expected.