[extropy-chat] Peak Oil news

Hal Finney hal at finney.org
Thu Mar 9 09:14:43 UTC 2006

Gary Miller writes:
> Even if abiotic oil is real or there is a lot more oil down there than we
> previously thought isn't the real limitation on meeting increased oil demand
> the current small number of world refineries and high cost/long time frame
> of building new ones?
> I have not read where the world is building new refineries at a pace which
> will keep up with world demand.

There may be some short term refinery capacity shortages but things are
probably not as bad as they have been made out to be in some quarters.
Western countries are slow to build refineries because they are ugly,
polluting monsters and have instead been enhancing capacity at existing
refineries.  As a result there is a shift to building refineries in
the third world and then shipping gasoline and other refined products.
Some might characterize this as exporting pollution.  Here is an
article discussing new refineries in the Middle East:


"The Organisation of the Petroleum Exporting Countries, the cartel that
controls 40 per cent of the world's oil supplies, plans to increase
its refining capacity by almost 6m barrels a day, or 50%, in the next
seven years."

Current worldwide oil production is about 85m barrels per day so an
increase of refinery capacity of 6m barrels a day is a significant
improvement.  And refineries are being built in other parts of the world
as well.

> Saudi Arabia has claimed during the recent gas hikes that if they increased
> oil supply that the refining capacity did not exist to bring the gas prices
> down.  Even the rather minor hurricane disruption last year caused major
> spikes in gas prices.
> Add to this the greater risk of terrorist action against the world
> refineries as evidenced in Saudi Arabia and increased risk of disruption of
> oil supply due to war in the unstable middle east and the probabilities seem
> to add up to at least one major disruption in the oil supply before 2010.
> Add to this the greater risk of more hurricane disruptions in the gulf due
> to the 30 year hurricane cycle we are starting into.

Yes, it is probably reasonable to foresee at least occasional supply
disruptions.  Recently though there has been enough stored capacity to
deal with them pretty well.  The hurricanes dealt a blow to worldwide
oil production but aside from a price spike that lasted about three
weeks there was not much long term effect.

> If such an incident occurred though would oil prices go up or down?
> We would lose partial capacity to process the existing oil currently on oil
> carriers or existing within the capacity of the oil pipelines.
> I would anticipate that gas prices would soar but oil prices might actually
> drop.

You would think that damage to refineries would have this effect;
however in practice oil and gasoline prices usually move together.
I have seen two explanations offered for this phenomenon.  The first is
mere market inertia, that traders expect energy prices to be correlated
and this becomes a self-fulfilling prophecy as they all put in trades on
that expectation.  The second is that even though a refinery outage would
produce a temporary drop in oil demand even as gasoline prices soar, soon
enough the refineries will be fixed and then the pent-up demand will need
to be satisfied.  Reserves that were drawn down need to be replenished
and postponed consumption must be met.  The result is that the temporary
oil glut will soon be replaced by heavy demand.  Because the oil market
is forward looking, it anticipates this effect and incorporates it into
today's prices, hence oil does not fall when there is a refinery outage.

> How could one best invest to capitalize on these combined risks?

Theoretically the markets are already pricing in these risks.  Do you
think these possibilities for supply disruption are unknown to oil
traders and would come as a surprise to them?  I doubt it.

Nevertheless, you could always speculate, guess when something is going to
happen and hope to get a long or short position at just the right time.
Or you could hedge, treating the markets as a form of insurance so that
an adverse move that costs you at the gas pump is compensated by you
making money on the market, and vice versa.  Generally, as with other
insurance, hedges will cost you money on average, as you are offloading
risk to the speculators.


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