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Energy - March 2

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Many more articles are available through the Energy Bulletin homepage.

Q&A: What's Going on With Gasoline Prices?

Kevin Drum, Mother Jones
... Q: How come it's gone up so much?

A: Gasoline prices are linked very tightly to crude oil prices. Stuart Staniford has the wonky graph here and the wonky explanation: "Technically, 97% of the variance of the price of gas is explained by the price of oil."

Q: So what's the relationship?

A: The University of California-San Diego's James Hamilton, your go-to guy for the effect of oil prices on the economy, says his rule of thumb is that a $1 increase in the price of crude produces a 2½-cent increase in the price of gasoline. Lately, gasoline prices have been linked most closely to the price of Brent crude, and since the beginning of the year Brent has gone up from $107 to $123, a $16 increase. By Hamilton's rule, this should have produced an increase of 40 cents in the price of gasoline.

Q: Hey, that's almost exactly right! So there's nothing more to it than oil prices?

A: Pretty much. There are a few miscellaneous other factors, like refinery shutdowns and the change from winter to summer formulations, but they don't amount to much.

Q: Fine. But why have oil prices gone up?

A: In the long run, the answer is just supply and demand. Oil production has plateaued over the past few years because everyone in the world is pumping full out, and there's very little spare production capacity left. Meanwhile, because the global economy is recovering, demand has increased. Americans may be using less oil these days, but that doesn't make up for rising consumption in Asia, particularly China and India. So the basic reason for climbing oil prices is Econ 101: When global supply is stagnant and global demand goes up, prices increase.
(2 March 2012)
I wish there were more straightforward analyses like this in the media. -BA

A model of oil prices

Chris Nelder, Smart Planet
Everyone wants to know why gasoline prices are high, and going higher still, while the U.S. remains in the throes of recession. Yet the usual explanations—threats by and against Iran, inventory levels, speculators, and so on—strangely avoid the most fundamental and obvious reason: supply and demand.

Perhaps this is because getting current data on supply and demand, then making sense of it, can be a challenge. Blaming speculators requires no data literacy. Inventory numbers are easy to get and analyze. And it takes no effort at all to build a story around a headline.

In a decade of studying oil data, I’ve seen these kinds of panics and heard the same misguided interpretations over and over. So I know that if you really want to understand why oil prices are what they are, you need a much more sophisticated model which accounts for supply and demand, along with a great deal of additional complexity. Today I’ll share a conceptual model I created which, while by no means comprehensive, should give you a much better understanding of oil prices both in the past and the future.

But before I do that, I will explain some important concepts for the uninitiated.

The first thing to understand is that oil is a global market. The gasoline prices you see in the U.S. are affected by both domestic and world supply and demand. U.S. data only gives you half the picture.

In the chart above, I have used the benchmark for oil prices known as Brent Crude, a trading classification for various grades of “light sweet” crude that come from the North Sea. Of the more than 150 crude benchmarks, Brent is a reasonably good marker for global oil prices. The U.S. benchmark, known as West Texas Intermediate or WTI, is not a good global price marker because it reflects transportation congestion at its trading point in Cushing, Oklahoma. This congestion has resulted in a local storage glut which depresses its price.

Oil supply can be characterized in many different ways, and supply data can vary substantially from source to source depending on how it is defined. I recently explained why “peak oil” should be understood as a phenomenon of crude oil only, but in this article I will use the more generally-accepted “all liquids” definition of supply which includes non-oil components such as synthetic liquids made from tar sands, and natural gas liquids associated with crude oil. The supply data in this model comes from the U.S. Energy Information Administration (EIA), mainly because they conveniently offer current, global data in a monthly format, and exclude biofuels.
(February 29 2012)
Suggested by EB coeditor Simone.

Facing the Facts on Fossil Fuel

Andrew Miall, The Mark News
We are so accustomed to our dependence on petroleum that discussions of alternative energy futures take its convenience and efficiency for granted.

This is Part 1 in a three-part series focusing on fossil-fuel dependence and the intersection of energy and the environment. Part 1 discusses what underpins our current dependence on fossil fuels to meet our energy needs: its unmatched efficiency as an energy source.

... There is an increasingly urgent need to develop new and cheaper renewable-energy technologies. For one thing, the supply of petroleum is finite (something I will discuss in more detail in Part 2 of this series). For some applications – air transportation and the manufacture of plastics and other synthetic materials being among the most important – there is currently no substitute for petroleum. As a developed society, we often fail to recognize our enormous dependence on fossil fuels for these purposes.

Current renewable technologies, in addition to being of limited use, are very inefficient. In order to measure the efficiency of various energy sources, economists have created an index called the Energy Return on Energy Invested (EROEI), which considers how much energy it takes to get the useful energy out (for example, the energy required to drill a well). EROEI can help us understand which energy sources promise a good return on investment.

Andrew Miall Former president, Academy of Science, the Royal Society of Canada; professor of geology, University of Toronto.
(21 February 2012)
The second part of this series is also online: Those who argue that there will never be a final "oil crisis" fail to recognize resource limits.

A Dynamic Function for EROI

Michael Dale, Susan Krumdieck, and Pat Bodger; Sustainability (via The Oil Drum)
The post below is a reproduction of a paper published in the open access journal Sustainability by Michael Dale, Susan Krumdieck, and Pat Bodger (Vol. 3). The article is a first in creating a dynamic function where Energy Return on Energy Investment changes of an energy resource are estimated over time. In this manner it becomes possible to get an estimate of how much net energy a given fossil oil, gas, coal or renewable energy source yields during its lifetime. The created EROI function is based on theoretical considerations of energy technology development and resource depletion.

... 1. Introduction

Energy is fundamentally important to all of the processes that occur within our modern, (post)industrial society. It has been famously described by James Clerk-Maxwell as, “the ‘go’ of things” [1]. Modern society currently uses around 500 exajoules (1 EJ = 1018 J) of primary energy, 85% of which comes from fossil fuels. Some proportion of this 500 EJ must be used in the extraction and processing of energy resources, as well as in the manufacture of energy technology infrastructure, such as oil rigs and dams for hydroelectricity. This paper is intended as a discussion piece regarding some of the conceptual issues surrounding long-term dynamics of the energy supply system which maybe understood using the dynamic EROI function.

... 4. Conclusions

We have presented a top-down framework for determining the EROI of an energy source over the entire production cycle of an energy resource. This function allows production costs (in energetic terms) to be predicted into the future. This EROI function, coupled with a purely physical allocation function to allocate energy demand between different energy sources, will allow a new form of energy supply forecasting to be undertaken, based solely on physical principles.
(28 February 2012)

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