Oil

OIL
Ryan Carlyle, BSChE, engineer at an oil
company
(with comments from Kim Fai Kok and
Jay Bazzinotti)
9/29/2013 1jgillis767@aol.com

1) Oil is shockingly important
• The world economy has been developing with
oil as its lifeblood for over a hundred years.
• Oil is directly responsible for about 2.5% of
world GDP, but accounts for 1/3rd of our
primary energy supply (5 terawatts out of 15
terawatts total). It's over half if you include
natural gas.

World Energy Consumption by Source, in Terawatts Per Day

9/29/2013 jgillis767@aol.com 4

1) Oil is shockingly important
• Oil/gas powers 100% of all transportation, which, in
turn, directly accounted for 1/6th of world GDP in
1997.
• Except for a minuscule number of electric-powered
vehicles, you can't move anything anywhere faster
than about 25 mph without oil.
• You can't operate a modern military, and you can't run
a modern economy.
• Modern civilization would collapse in a matter of
months if oil stopped flowing.
• Oil is about as important to the developed world as
agriculture.

2) You have no idea how big oil is
• A globe-spanning spider web of pipelines and
shipping routes.
• The natural gas distribution pipelines in the US
alone could stretch from Earth to the Moon 7-8
times.
• There are millions upon millions of miles of pipe
on the planet to distribute crude oil, refined
products, and natural gas (mostly gas).
• Your house is directly connected to the Pliocene
era -- by the world's oil & gas infrastructure.

• About 40% of all seaborne cargo is oil, and
there is literally more seaborne cargo at any
given time (by weight) than there are fish in
the sea.
• Think about what that means for a minute.
The ocean isn't full of fish, it's full of oil
cargoes.

• There is no reason whatsoever to think any
feasible amount of renewables growth can
displace fossil fuels in a couple generations.
• Wind and solar are growing exponentially, yes,
but from such a small base that it doesn't
even make a dent.
• The use of renewables as a percentage of total
world energy consumption only increased by
0.07% from 1973 to 2009.

• World oil production was 82 million barrels per
day in 2010. At roughly 6 gigajoules per barrel,
that's about 5.7 Terawatts of power production
per day.
• World wind-power production in 2010 was 0.3
petawatt-hours. Averaged over a year, that's
about 34 gigawatts.
• World solar-power production in 2010 was 0.03
petawatt-hours. Averaged over a year, that's
about 3.4 gigawatts.

3) Oil is wealth – wealth for producers, and
wealth for everyone who uses it
• And oil is indeed high-quality energy. It is liquid, which
makes it easily to move and store. It's stable, and it
releases a huge amount of energy. It's also much, much
cleaner than coal. If it weren't for CO2 emissions, oil &
gas would be a nearly-perfect energy source. Look at
what their growth has done to the world's wealth:

• Energy efficiency is powerful and highly desirable, but
it can't compete (as a “solution”) with increasing the
primary energy supply.
• Increased energy efficiency actually (usually) results in
increased energy consumption, because of cheaper
costs (per unit output) and faster economic growth.
(This is called Jevon's Paradox ).
• Highly-developed nations can use advanced technology
to increase quality of life while using less energy, but
less-developed nations cannot. Getting to developed-
nation status requires a lot of high-quality energy.

Real GDP
Per Capita – 20th Century

• The parallel trend of each of those two charts (world
per capita energy consumption and real GDP) is not
accidental.
• Every transition to a cleaner, cheaper, more-
concentrated energy source causes dramatic
improvements in real global wealth (and quality of life).
– Electrification caused the growth from 1900 –1950.
– Oil enabled the post-war boom from 1950 – 1970.
– Natural gas contributed to the growth from 1970 – 1995.
– The growth since 2000 is due to increased coal
consumption in Asia.

Country
Human
Development
Index
Energy Consumption
(kgoe/person)
CO2 Emissions
(Tonnes
CO2/Person)
Top 12 HDI
Iceland 0.968 11718 7.6
Norway 0.968 5933.6 19.1
Australia 0.962 5723.3 16.2
Canada 0.961 8300.7 20
Ireland 0.959 3761.3 10.5
Sweden 0.956 5764.8 5.9
Switzerland 0.955 3718.6 5.4
Japan 0.953 4040.4 9.9
Netherlands 0.953 5012.2 8.7
Finland 0.952 7218.1 12.6
France 0.952 4518.4 6
United States 0.951 7794.8 20.6

Country
Human
Development
Index
Energy Consumption
(kgoe/person)
CO2 Emissions
(Tonnes
CO2/Person)
Bottom 12 HDI
Togo 0.512 445.3 0.4
Yemen 0.508 294.8 1
Senegal 0.499 233.2 0.4
Eritrea 0.483 199.3 0.2
Nigeria 0.47 776.9 0.9
Tanzania 0.467 464.9 0.1
Angola 0.446 606.1 0.7
Benin 0.437 301.4 0.3
Zambia 0.434 600.6 0.2
Congo 0.411 296.2 0.1
Ethiopia 0.406 277.9 0.1
Mozambique 0.384 435.8 0.1

• Sure, the biggest energy consuming nations could
reduce per capita consumption a lot, and still have high
quality of life.
• The US could learn a lot from Denmark. And current
trends show that they are steadily moving in that
direction
• Energy consumption per capita and per dollar of GDP is
steadily dropping in the developed world. That's a
good thing.

• But the energy required to lift 3 billion people out of
poverty is far, far more than the potential energy
savings from eliminating energy waste in the
developed world.
• This would entail refrigeration for vaccines, irrigation
for agriculture, and fuel for school buses.
• The planet cannot support 7 billion people at a low-
energy agrarian level of existence
• We have long since passed the point where we
can revert back to a low-tech, low-energy form of
civilization without billions of people dying of
starvation.

4) The oil industry is a really safe place to work
• Working on an oil rig used to be pretty dangerous, but
the industry has made huge strides in safety
improvements over the past few decades by increasing
automation, providing comprehensive safety training,
and changing the work culture.
• Jobs that are actually dangerous include truck-driving,
logging, fishing, and nursing.

5) Oil companies don't make that much money
• Contrary to popular belief, the Oil "Majors" --
ExxonMobil, Chevron, BP, Total, ConocoPhillips, and
Shell -- don't actually make all that much money.
• Yes, it's a lot in absolute terms because the companies
are so large, but the profit margins are pretty sad in
a good year.
• Bad years (like most of the 1990s) cause crippling
contractions and mass layoffs.

Minimum
5.31%
(Q209)
Average
8.2%
Maximum
12.49%
(Q212)
Minimum
14.36%
(Q208)
Average
22.17%
Maximum
29.66%
(Q112)
Minimum
-2.72%
(Q212)
Average
27.69%
Maximum
35.02%
(Q409)
EXXON/MOBIL
APPLE
MICROSOFT
Profit Margins

• Oil profits have beaten the S&P500 lately, and oil prices
are very high right now, but exploration / development
costs are rising faster than the price of oil.
• Net revenue per barrel is running about $20/bbl even
though oil went from $40/bbl to $100/bbl.
• What happens when China's big recession hits, and oil
demand drops significantly?
• This is an incredibly capital-intensive industry, in which
projects take longer than the business cycle. That's
fundamentally difficult to manage.

• Oil is a widely-traded, high-competitive commodity
market.
• In this case, 8-10% profit margin is the minimum risk
premium you can offer a company to convince it to
continue doing business in:
– A market where your product is almost completely
interchangeable with the next guy's product
– A business where each $100 million exploration well
has a 50-90% chance of being a failure

• Frankly, it's a miracle anyone wants to be in this
business at all.
• The major oil companies are underpaid. The risk-
adjusted returns are lower than most sectors.
• The only way oil companies survive this kind of
business environment is by consolidating, so that the
risks are spread out over a wider base.
• That's why oil companies are some of the largest
publicly-traded companies in the world -- they have to
be huge to survive.

• So where does all the oil money actually go? To foreign
national oil companies -- mostly OPEC.
• They have control of all the cheap oil that's easy to get
out of the ground, so they have a combination of high
net revenue per barrel and some semblance of cartel
pricing power.
• There's lots to know about the oil industry -- but if
more people understood the facts, we would have
much more productive public discourse about the
world's energy systems.

Statistics
• A gigawatt is 10 to the 9th watts
(1,000,000,000) or a billion watts
• A terawatt is 10 to the 12th watts
(1,000,000,000,000) or a trillion watts
• A petawatt is 10 to the 15th watts
(1,000,000,000,000,000) OR a thousand
terawatts

Statistics
• World oil production was 82 million barrels per day in 2010. At
roughly 6 gigajoules per barrel, that's about 5.7 terawatts of power
production.
• World wind power production in 2010 was 0.3 petawatt-hours.
Averaged over a year, that's about 34 gigawatts.
• World solar power production in 2010 was.03 petawatt-hours.
Averaged over a year, that's about 3.4 gigawatts.*
* [Update: I am greatly simplifying the solar issue to illustrate the point that oil is
big, which lots of people have objected to in the comments. 50-200 years is a
realistic time range for solar to hit 5TW generation. I think it'll take 100 years, and
many people think it'll be a lot faster.]

Major Trade Movements of Oil
• According to BP Statistical Review of World Energy
June 2010, the previous cell shows the major trade
movements.
• China and the US are very dependent on the Middle
East, especially Saudi Arabia, for oil. Both countries are
aware of this unhealthy symbiosis, and in 2006 China
started to invest heavily in Africa, and the US and China
established a “Strategic Economic Dialogue.”
• The Chinese were not too fond to speak about their
energy consumptions at that point. Though, in 2007
they agreed that China would let the US assist them on
energy saving.

The Commodity Exchange
• Oil is the most traded commodity in the world.
• Oil is not only traded between companies, but also in
the commodity exchange.
• These commodity exchanges exists to reduce the price
risk for oil companies. Investors buy a certain amount
of oil that will be produced in a near future. This kind
of trading has created speculations on the oil price as
banks and funds encourage investors to invest in future
commodities like oil, resulting the skyrocketing oil price
in 2004-2008.

Rising Prices
• China entering the World Trade Organization in 2001
has been seen as one of the reasons the oil price went
up, as lowering tariffs and opening up the economy for
foreign countries encouraged heavy foreign direct
Investment in China, resulting in a mass demand for oil.
• The Iraq War and the weakening dollar also affected
the rise of the oil price, because crude oil is quoted in
U.S. dollars and cents and reacts positively to a
cheaper dollar.

Bazzinotti’s Notes
• A barrel of oil holds 42 gallons of crude. There are
different types of crude. “Light sweet" means low
sulphur and easy to refine. “Tar sands" like the XL
pipeline stuff, which is like tar or mud, is hard to move
and hard to refine and very dirty.
• A barrel of oil renders about 24 gallons of gasoline.
The rest is made into diesel, wax, kerosene, benzene,
tar and other chemicals which are used for fertilizers
and plastics. Oil is an amazing thing and it really
makes our modern lives possible.

• Of the roughly 1 million wells pumping oil in the
world, more than half are in the US. So when people
say, let's just put in more wells, they don't really know
what they are talking about.
• Putting in more wells does not create more oil -- it
just pulls out the oil that is there faster, like sucking
down a chocolate shake near the end.

• Nothing in the world makes power or heat like oil.
Not wind, solar, nuclear, coal, wood – nothing. That is
why as long as oil exists we will be using it.
• A single barrel of oil creates almost 6 million BTUs.
The average American house uses about 15,000 BTUs
per hour.
• So you see how valuable oil is just from what it can
do.

• By any measure, oil is getting harder and more
expensive to get.
• In the 1930s, we were getting about 33 barrels of oil
for every barrel used to drill it, bring it up, refine it,
transport it, etc. That number today is 15.
• The tar sands that are used by the XL pipeline
sometimes produce as little as 3 barrels for every
barrel consumed -- just an absolutely terrible return
on investment.

• The XL pipeline oil is filthy and dangerous. It is not oil
as we think of oil, but tar. It requires great heat to
melt it to make it flow, and lots of water to move it
through the pipelines.
• The used water is ruined, and so deadly that a
massive lake of it in Canada kills all life that touches it.

• The XL pipeline would create a similar lake in Texas or
Louisiana of permanently polluted water so large it
could be seen from outer space.
• And TransCanada has not told the truth about the
leaks and millions of gallons that have already spilled
in Canada .
• The only good thing we can say about the pipeline is
that it would remove about 6,000 train cars of oil
from the railroad tracks.

http://www.quora.com/Oil-Exploration

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