2 PETROLEUM TECHNOLOGY, ECONOMICS, AND POLITICS
The demand for gasoline and middle distillates (including aviation fuels) has risen significantly while refining capacity has only
shown a modest increase, if any. This growth in demand over and
above the increase in refining capacity has significantly raised refinery utilization rates and tightened the downstream market, raising
serious concerns over a potential supply gap in the downstream
oil market. This issue is particularly prevalent in the United States,
where low surplus refining capacity and stringent oil product specifications have resulted in reduced flexibility in the refining sector
to adjust to changes in seasonal demand patterns.
The economics of oil must take into account that it is a depleting non-renewable resource and the cost of extraction of a nonrenewable resource depends not only on the current rate of
production but also on the amount of cumulative production.
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. 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 and 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. Obviously, the ultimate variable in crude oil
economics is the price of crude oil. Crude oil quality is another key
variable. High viscosity, high-sulfur crude oil can cost up to onethird less than low viscosity, low-sulfur crude oil. However, because
high-sulfur crude oil requires more processing, refineries that buy
primarily cheap crude oil incurs more fixed expenses for equipment
and labor.
While there is a growing need to address these issues, there exist
barriers and constraints to the older oil person and the neophyte
alike, as well as the economist. Often the terminology employed by
The demand for gasoline and middle distillates (including aviation fuels) has risen significantly while refining capacity has only
shown a modest increase, if any. This growth in demand over and
above the increase in refining capacity has significantly raised refinery utilization rates and tightened the downstream market, raising
serious concerns over a potential supply gap in the downstream
oil market. This issue is particularly prevalent in the United States,
where low surplus refining capacity and stringent oil product specifications have resulted in reduced flexibility in the refining sector
to adjust to changes in seasonal demand patterns.
The economics of oil must take into account that it is a depleting non-renewable resource and the cost of extraction of a nonrenewable resource depends not only on the current rate of
production but also on the amount of cumulative production.
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. 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 and 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. Obviously, the ultimate variable in crude oil
economics is the price of crude oil. Crude oil quality is another key
variable. High viscosity, high-sulfur crude oil can cost up to onethird less than low viscosity, low-sulfur crude oil. However, because
high-sulfur crude oil requires more processing, refineries that buy
primarily cheap crude oil incurs more fixed expenses for equipment
and labor.
While there is a growing need to address these issues, there exist
barriers and constraints to the older oil person and the neophyte
alike, as well as the economist. Often the terminology employed by