Oil 101

As I watched the Deepwater Horizon oil spill unfold last summer, I found there were many fundamental questions about the oil industry that I didn't understand. So, I started reading. I read many websites. Of these, The Oil Drum was probably the most useful, but I was still struggling with some basic questions like: "How does a country benefit economically from letting an independent company take oil from its shores?" - and the sheer volume of contradictory opinion, punditry and proposed solutions, led me to conclude: "I need to dig deeper."

So, I bought a book, Oil 101 as it got excellent reviews, and seem to cover everything about oil from chemistry & history, to exploration, production & trading. I recently finished this book and while its not a quick read, it is very well-written, interestingly presented and comprehensive. Written from a neutral point of view in that it describes what is, not what ought to be, it gave me just what I wanted: a good grounding that I can now use for further education, and evaluation of where we're headed.

Unfortunately, the book has created a new problem for me: Nearly everything I now see being presented on this topic (again the Oil Drum is a notable exception) seems, simplistic and uniformed, aimed at supporting one political agenda or another and/or just plain out to lunch.

To take just one example: I stumbled across this article about how the Koch Brothers are manipulating the oil market.

Now, I'm no fan of the Koch brothers - particularly their support for the anti-union movements and the big sleight-of-hand trick that is the tea party - but this article presents 'facts' and jargon, not to educate, but to scare.

Take 'contango.' Investopedia defines it as: "When the futures price is above the expected future spot price. Consequently, the [futures] price will decline to the spot price before the delivery date." Got that? Simple, right? Riiight...

To make any sense of Contango, you need to understand the oil futures market (not to mention futures themselves), the spot market, global supply and demand (both now and at the time of the contract) how oil is delivered, etc, etc - all stuff covered in Oil 101, but curiously absent from this and every other article I've read that mentions the term - probably because its taken me months to build even a basic understanding of the topic, so an article can't even come close - even if the article writer understands it. Instead its summarized neatly as: "demand is expected to outstrip supply." Wow, so simple a child could understand it. Clearly those who use the term 'contango', just want to hide how simple it is in order to steal from the poor.

Oh, and the gist of the manipulation? The Koch's are artificially reducing supply by leasing four supertankers and storing oil in them (presumably because they are using Contango against us). Just how much supply have they deprived the world of by doing this? Let's do some math (all figures from Oil 101, which is about 2 years old now, but it'll get the point across):

The largest supertankers (unlikely that's what's being used here, but we'll go with it): are called ULCC's (Ultra Large Crude Carriers) and they can hold up to 560,000 DWT (that's Dead Weight Tonnage). Again, unlikely to be filled to the brim, but we'll use the number as is.

4 ULCC x 560,000 DWT ≈ 2.25 million DWT 7.5 barrels per DWT ≈ 16.8mm barrels

Wow, 16.8 million barrels of oil... that's how many days supply?

Not even one. Not even one for the US! In 2008, the daily consumption for the US was 20.9mm barrels per day (bpd). How much did the world consume in a day? 85.7mm bpd.

16.8 million barrels isn't even enough to feed all of 2008's US daily reactor capacity (17.5mm bpd). In other words, the heinous manipulation being described in the article - at worst - is shifting supply by a day.

In truth, its not even close to that, because ULCC's aren't likely to be used for that, not all of the DWT is actually oil, the oil being stored may not service as much demand, etc, etc.

So why is Koch industries spending money to lease tankers to store this oil? One guess is that its a hedge. They run refineries, and certainly buy oil to feed those refineries using futures contracts. By storing this oil, they can hedge those contracts with physical oil (much like one can hedge a stock futures position by holding actual stock). Another, possibility is that they are hedging against a short-term supply shortage for input into their refineries (e.g. maybe a couple weeks worth).

Not so evil sounding, once you put some numbers behind it. huh? Actually, it sounds to me just like the descriptions in the book of how global supply is stored and moved so we don't see occasional spikes of $15.00 gallon gasoline in the summer. In short: The refineries are doing their job.

Now as I said, the Koch brothers seem to have a lot of blood on their hands - but articles like the one linked, make that hard to spot when they simply stir up the rabble with BS. The sheer size of the oil-based economy is incomprehensible, the numbers are enormous. An oil tanker-full sounds like a lot, but it isn't even the proverbial drop in the bucket.

Reading this book has made it impossible for me to see the oil problem in simple terms. Nor are any of the "simple" solutions to it... simple. I'm not even sure 'problem' is even the right word anymore - it's like saying 'life' is a problem to be solved. True I suppose, but not very enlightening. No, oil is deeply entwined into the fabric of our lives, and as its details change, our lives - all of our lives - change with it. No-one - or everyone (take your pick) is to blame for that, it just is. Oil magnates and speculators make such great scapegoats - they're rich, remote - and very likely using their power for their own gain, but hanging them in the square won't fix things. Understanding the facts, so we can make our own decisions about how they are using their power (both right and wrong) will.

We all owe it to ourselves - and each other - to learn as much as we can about how our world works. I've joked that I'm one of only three people who've read this book that aren't in the oil industry (me, the book's editor, and proof reader), if you care about this topic - and want to make your own educated decisions about what's really going on - without resorting to simple solutions like boogeymen. You should join the three of us in reading this book.