x PREFACE
Crude oil prices behave much as any other commodity, with
wide price swings in times of shortage or oversupply. The crude oil
price cycle may extend over several years, responding to changes
in demand as well as supply. Indeed, the economics of oil must take
into account that it is a depleting non-renewable resource and the
cost of extraction of a non-renewable resource depends not only
on the current rate of production but also the amount of cumulative production. The poignant question that always remains relates
to the lifetime of current crude oil reserves and whether there are
years or decades of reserves remaining.
Many pundits believe that the projections of running out of oil
are based on geology, not price. Every existing oil reservoir has
more than half of the original oil in place — many with more.
These are resources that we know exist; we know where they are
and what the oil looks like. Much of the crude oil that is left is
trapped in tiny pores and cannot be recovered by simple pumping, and more advanced, expensive procedures are necessary to
recover the crude oil.
Another aspect of crude oil economics is the cost of refining.
Refining high-sulfur crude oil also requires greater expenditures
for energy. In fact, energy accounts for approximately half of the
refinery cost. Refinery location is yet another variable. The closer
a refinery is to the crude oil source and the demand, the lower the
transportation costs. Otherwise, the refinery must factor in the
added cost of getting the products to market. The ultimate variable in crude oil economics is the price of crude oil, along with
crude oil quality. High viscosity, high-sulfur crude oil can cost up
to one-third less than low viscosity, low-sulfur crude oil. However,
because high-sulfur crude oil requires more processing, refineries
that buy primarily cheap crude oil incur more fixed expenses for
equipment and labor.
After decades of stable — even cheap — crude oil during the first
three-quarters of the 20th century, the geopolitical upsets of the 1970s
led to rapid surges in crude oil prices. In the past five years, these
surges have been magnified with crude oil process topping $147 per
barrel in the summer of 2008, after which prices seemed to stabilize
at approximately $80 per barrel. However, instability within the oil
producing nations has, at the time of writing (March 2011), caused a
surge in crude oil price to a figure in excess of $100 per barrel. There
are opinions that such prices surges are merely bubbles that will
burst and oil prices will return to lower levels.
Crude oil prices behave much as any other commodity, with
wide price swings in times of shortage or oversupply. The crude oil
price cycle may extend over several years, responding to changes
in demand as well as supply. Indeed, the economics of oil must take
into account that it is a depleting non-renewable resource and the
cost of extraction of a non-renewable resource depends not only
on the current rate of production but also the amount of cumulative production. The poignant question that always remains relates
to the lifetime of current crude oil reserves and whether there are
years or decades of reserves remaining.
Many pundits believe that the projections of running out of oil
are based on geology, not price. Every existing oil reservoir has
more than half of the original oil in place — many with more.
These are resources that we know exist; we know where they are
and what the oil looks like. Much of the crude oil that is left is
trapped in tiny pores and cannot be recovered by simple pumping, and more advanced, expensive procedures are necessary to
recover the crude oil.
Another aspect of crude oil economics is the cost of refining.
Refining high-sulfur crude oil also requires greater expenditures
for energy. In fact, energy accounts for approximately half of the
refinery cost. Refinery location is yet another variable. The closer
a refinery is to the crude oil source and the demand, the lower the
transportation costs. Otherwise, the refinery must factor in the
added cost of getting the products to market. The ultimate variable in crude oil economics is the price of crude oil, along with
crude oil quality. High viscosity, high-sulfur crude oil can cost up
to one-third less than low viscosity, low-sulfur crude oil. However,
because high-sulfur crude oil requires more processing, refineries
that buy primarily cheap crude oil incur more fixed expenses for
equipment and labor.
After decades of stable — even cheap — crude oil during the first
three-quarters of the 20th century, the geopolitical upsets of the 1970s
led to rapid surges in crude oil prices. In the past five years, these
surges have been magnified with crude oil process topping $147 per
barrel in the summer of 2008, after which prices seemed to stabilize
at approximately $80 per barrel. However, instability within the oil
producing nations has, at the time of writing (March 2011), caused a
surge in crude oil price to a figure in excess of $100 per barrel. There
are opinions that such prices surges are merely bubbles that will
burst and oil prices will return to lower levels.