Why you should consider driving E85: The Truth About Oil

The World is Changing

Before considering the merits of purchasing renewable alternative fuels like E85 or other biofuels, or purchasing an FFV, you should first consider the problem with the current situation and cost of doing nothing. Then you can begin to truly understand the value of new laws, products, and the need for freedom of vehicle and fuel choice.

The information provided in this section is not intended as an attack or diatribe of blame and shame aimed at oil companies or oil producing countries. This research is provided to help you understand the impact oil use and production have on you and help you come to your own decision. A decision based on information to help you understand how oil use impacts your personal freedoms, your environmental and economic well being, and your children’s energy future too. We hope you begin to understand why there is a sense of urgency throughout the nation and why civic, industry and government leaders are calling for a change in business as usual. Changing status quo will require a better understanding of why there is a crude oil crisis and why the country will need some cooperation from every driving consumer.

One key indicator of that national urgency is the passage of the Energy Independence and Security Act of 2007. This new energy bill was passed by members of both parties in the Senate and House of Representatives and signed by the president on December 19, 2007.This bill helps the nation wean its addiction to crude oil imports and relying on only gasoline for car transportation.

The Use of Oil is a Growing and Interconnected Problem

Crude oil is not a single problem. It is the “perfect storm” of many related problems all intertwined to create a huge force that effects our economy, energy security, national security, the environment, and global diplomacy. Oil permeates every fabric of your life. There are hundreds of petrochemicals produced from oil that are used to make our homes, computers, air conditioners, home cleaning products, and our clothes. But that is less than 5% of its use. The vast majority of oil is used by people like you to go to and from work, produce and distribute food, and defend our country.

You are Paying a High Price For Crude Oil – And Everything Else

As a result the interconnection of your tax payments and rising costs of products and services – everything we use will face a price increase. The cost of food production and distribution, airlines tickets and their layoffs, sales at retail stores and their layoffs, automobile makers and their layoffs (1 out of 10 jobs in the U.S. is connected to making automobiles) all have a ripple effect just like the stock market falls right in step with your retirement plan. It is a tragic domino effect that has hit our country and cost our economy trillions of dollars in the past decade and today. We have survived – but at what cost? What is the “lost opportunity” of those trillions of dollars we have shipped abroad? Could we have financed the cure for cancer, fed the hungry, employed the unemployed, built new schools, discovered new drugs to fight disease, and/or developed new renewable energy technologies? It only cost the U.S. $35 billion to discover the atom bomb and end World War II, $95 billion to rebuild Europe after the war, $360 billion to build the world’s largest Interstate Highway system, and $17 billion in taxes each year to fund oil companies and fossil fuel research.

What would you do with $2 billion dollars per day we spend on oil imports?

It is unlikely we will rid ourselves of oil or oil imports in the near future, but we can dramatically reduce its value, price and use as strategic weapon against our country and you.

Diminishing Returns on Your Crude Oil Investment

Historically, U.S. crude oil production and use helped position our country as an economic superpower and provided the foundation for a quality of life other regions of the world are trying to emulate. Today, the costs and benefits of relying on crude oil for energy needs, especially transportation, have reached a point of diminishing returns. In fact, some industry and government leaders believe reliance on crude oil and the importation of crude oil from unstable regions of the world may be the single largest threat to our nation. Reliance on crude oil is not just a single threat to a boarder or infrastructure; it is a massive multiplicative threat that reduces our country’s geopolitical position and effects of our diplomatic efforts in the world. Most importantly it has impacted our personal freedoms which are rooted in our ability to sustain our economy, protect our environment, and support democracies in other parts of the world.

It’s no secret anymore that for every nine barrels of oil we consume, we are only discovering one –
The BP Statistical Review of World Energy

There is a great summary of the nation’s crude oil situation in a presentation on February 27, 2007 to the Governors’ Ethanol Coalition by Allan B. Hubbard, Assistant to the President (Bush) for Economic Policy & Director, National Economic Council. An overview of oil use and its impact on the United States, “Security Risks Resulting from Oil, and Key Elements of Energy Security” is provided below:

• Crude oil imports are rising much faster than consumption (65%)
• The U.S. is largest consumer of crude oil with China growing quickly
• The U.S. has 10th largest proven reserve
  • The U.S. has 2% of crude oil reserves and falls behind some not so friendly or cooperative governments like Saudi Arabia, Iran, Iraq, Kuwait, United Arab Emirates, Venezuela, Russia, Libya, and Nigeria.
• About 66% of crude oil is used for transportation.
• Crude oil continues to dominate fueling the transportation sector (97%)
• The Strategic Petroleum Reserve hasn’t kept up with rising imports and only has about 60 days worth of supplies.
• [As a result] the US faces economic risks, volatile prices hurt families and businesses, and terrorists view global oil infrastructure as attractive target to hit us.
• [As a result] the US faces national security risks as Iran/Venezuela emboldened by high prices, and there are associated diplomatic, political and military costs

This is not exactly what you may expect to hear from a traditionally “free market-based” Republican Administration with strong interests in Texas and other oil producing regions of the world. The United States is not alone in its concern over growing oil demand and the lack of alternatives.

The Bigger Picture: World Crude Oil Outlook by the Numbers

“In a high growth scenario, which assumes that China’s and India’s economies grow on average 1.5% per faster than the Reference Scenario, energy demand is 21% higher in 2030 in China and India combined. The global increase in energy demand amount to a 6%, making it all the more urgent for governments around the world to implement policies, such as those taken into account in the Alternative Policy Scenario, to curb the growth in fossil-energy demand and related emission.” – International Energy Agency, 2007 World Energy Outlook, China and India Insights.

The Fast 50 Dirty Laundry List*

Here is the laundry list of concerns about oil and it’s eventual that you may not have know that have a direct impact on you.

United States Oil Supply and Demand

1. The U.S. reached peak oil production in 1970.
2. The U.S. has 2% of the worlds proven reserves.
3. U.S. crude oil imports have risen from 0 to over 60% during those 38 years.
4. The United States accounts for about 44 percent of the world’s gasoline consumption.
5. The U.S. sells 10,000 cars per day. China is selling 25,000 cars per day.
6. It has been very difficult for the U.S. government to get consumers buy smaller cars and drive less.
7. It takes 17 years for the newer efficient vehicle fleet to turnover.
8. Although U.S. consumers are currently consuming less gasoline and driving less miles for the first time in 30 years – crude oil prices continue to rise.
9. There has been a heavy consolidation in the U.S. oil industry that limits competition in the transportation fuels market and constricts the number of crude oil buyers.
10. Ethanol is the only alternative fuel that has successfully been commercialized and sold into commerce.
11. During the past 30 years major oil companies have produced no alternative transportation fuels and their research commitment is small.

International Oil Supply and Demand

12. Twenty three oil producing countries have reached peak oil production, including Russia.
13. 83% of the world’s proven oil reserves are in the Middle East.
14. Worldwide crude oil demand is rising fast. Oil demand forecasts estimate 20 million barrels per day of new demand will be needed by 2030. The world’s largest oil producer (i.e., Saudi Arabia) produces 8-12 million barrels per day.
15. The Saudi Arabia’s spare “swing” capacity has not swung open for several years.
16. Proven oil reserves are shrinking.
17. There have been no recent new major oil discoveries to replace Middle East oil.
18. Long term crude oil price increases reflect a long term supply/demand imbalance.
19. The U.S. has not been able to convince OPEC or Saudi Arabia to voluntarily increase crude oil supplies. Some believe they have reached peak oil, or worse, they simply do not care to help us.
20. Rising natural gas and water levels in important oil fields in the Middle East indicate peaking oil production.
21. Several of the worlds’ largest oil fields have reached peak production.
22. Many oil exporting countries are now becoming oil importers.
23. The use of new oil extraction technologies is a tell tale sign of lower reserves and/or lower production.
24. The need to deploy new oil reservoir management technologies to maintain production levels is an indication of peaking oil production.
25. The world is discovering the wrong kinds of oil that are necessary to meet demand driven by transportation fuels.
26. The world lacks of a system to audit and prove proven oil reserves.

Geopolitical, National Security, Economic and Environmental Concerns

27. The total societal/external costs for crude oil (e.g., health issues, national security, and economic stagnation) add another $50-100 to the market price for oil.
28. The dollar continues to weaken due to import/export imbalance, of which about $2 billion per day is for oil.
29. Over 80% of the world’s oil is privately owned by a state/government controlled company.
30. The concentration of proven oil reserves is located in countries with unstable governments or that are hostile towards the United States.
31. It is very likely that some of the money provided to oil producing counties through the sale of crude oil and gasoline funds terrorism.
32. There is a lack of reliable and auditable oil data about world oil production.
33. There is lack of planning for energy needs after the world reaches peak oil
34. The lack of reliable data to forecast oil production.
35. There is a long and continued legislative battle by oil interests to discourage the development of alternative fuels, including international interests.
36. Trillions of dollars will be needed in investment to create and upgrade oil infrastructure necessary to keep up with growing world demand
37. There will be future oil transportation bottle necks
38. There will be future oil infrastructure processing bottle necks
39. There is still a war in Iraq, which has lasted longer than World War II.
40. Threat of nuclear weapon production in Iran and the risk of future military conflicts.
41. There are increasing internal pressures on the Royal family in Saudi Arabia for being friendly with the United States.
42. Record pricing and speculator hysteria is driving an already volatile oil market.
43. Since September 11, the U.S. has sustained record high oil prices, record high gasoline prices, record high natural gas prices
44. Data secrecy by OPEC and other oil producing countries makes predicting actual proven oil reserves and oil production capability impossible.
45. The largest oil producer, Saudi Arabia, relies on a small number of large oil fields for large percentage of oil supplies.
46. There is an old and concentrated refining infrastructure in the United States because it is more economical for low cost oil producing countries to make value added petrochemicals and gasoline.
47. There are still very few alternatives to oil – especially for transportation – the largest user of crude oil.
48. Climate change has been linked to burning fossil fuels (crude oil and gasoline).
49. Crude oil spills continue to create environmental issues for countries all over the world.
50. Gasoline is one of the most toxic and carcinogenic materials you come into contact with on a regular basis.

* Reference Sources, additional research, and some suggested reading materials.

1. Blood and Oil: The Dangers and Consequences of America’s Growing Dependence on Imported Petroleum, by Michael Klare, published by Henry Holt and Company
2. The End of Oil: On the Edge of a Perilous New World, by Paul Roberts, published by Houghton Mifflin Company
3. Over a Barrel: Breaking the Middle East Oil Cartel, by Raymond J. Learsy, published by Nelson Current
4. Beyond Oil: The View from Hubbert's Peak, by Kenneth S. Deffeyes, published by Hill and Wang (a division of Farrar, Straus and Giroux)
5. Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy by Matthew R. Simmons, published by John Wiley & Sons, Inc.
6. The Empty Tank: Oil, Gas, Hot Air, and The Coming Global Financial Catastrophe, by Jeremy Leggett, published by Random House
7. Winning the Oil Endgame, by Amory B. Lovins, published by the Rocky Mountain Institute in cooperation with the Department of Defense.
8. Freedom From Oil, by David Sandlow, published by McGraw Hill
9. Apollo’s Fire: Igniting America’s Clean Energy Economy, Jay Inslee and Bracken Hendricks, published by IslandPress
10. Energy Victory: Winning the War on Terror By Breaking Free of Oil, Robert Zubrin, Published by Prometheus Books
11. U.S. Department of Energy, Energy Information Administration
12. World Energy Outook 2007, International Energy Agency , http://www.iea.org/Textbase/npsum/WEO2007SUM.pdf
13. The Association for the Study of Peak Oil and Gas
14. Peak Oil News
15. Matthew Simmons and Company International
16. Crude Oil: The Supply Outlook, the Energy Watch Group, October 2007
17. Our Dependence on Foreign Oil, Congressman Roscoe Bartlett, Congressional Record, April 20, 2005
18. GAO Report on Peak Oil, Congressman Roscoe Bartlett, Congressional Record, March 29, 2007

Future Crude Oil Demand

Over 1.5 trillion barrels of oil equivalent have been produced since Edwin Drake drilled the world’s first oil well in 1859. The world will need that same amount of meet demand in the next 25 years alone – Source: Energy and Capital, Angel Publishing

In the IEO2007 (Department of Energy/EIA) reference case, world consumption of petroleum and other liquid fuels grows from 83 million barrels oil equivalency per day in 2004 to 118 million barrels in 2030. [This is a 20 million barrel per day increase, nearly 25% over today’s existing demand/production imbalance.] OPEC producers are expected to provide more than 50% of the additional production in 2015 and 66% in 2030.

Who Owns the Crude Oil Supplies?

The United States has 25% of the world’s population and only 2% of the world’s oil reserves. The U.S. owns 2% of world’s crude oil reserves and is 10th on the list behind Saudi Arabia, Iran, Iraq, Kuwait, United Arab Emirates, Venezuela, Russia, Libya, and Nigeria. Not having oil is only part of the problem, according to the Department of Energy’s Energy Information Administration we don’t really know how much other countries have, but we do know they have been changing their forecasts downwards for years, and we can not audit international oil supplies or proven reserves.

Reserve estimates for oil, natural gas, and coal are very difficult to develop. The Energy Information Administration (EIA) develops estimates of reserves of oil, natural gas, and coal for the United States but does not attempt to develop estimates for foreign countries. As a convenience to the public, EIA makes available foreign fuel reserve estimates from other sources, but it does not certify these data. Please carefully note the sources of the data when using and citing estimates of foreign fuel reserves. – Department of Energy’s Energy Information Administration

The True Cost of Oil

Translating this price into dollars and cents at the gas pump, one of our forecasters, the chairman of Houston-based Dune Energy, Alan Gaines, sees gas rising to $7-$8 a gallon. The other, a commodities tracker at Weiss Research in Jupiter, Fla., Sean Brodrick, projects a range of $8 to $10 a gallon.

Environmental Impact of Oil Production and Use

What’s in Your Gasoline?

Depending on your profession, gasoline is probably the most toxic chemical you come in contact with on a regular basis. The United States accounts for about 44 percent of the world’s gasoline consumption. Gasoline is a petroleum-derived liquid mixture consisting mostly of aliphatic hydrocarbons, enhanced with iso-octane or the aromatic hydrocarbons toluene and benzene to increase its octane rating, and is primarily used as fuel in internal combustion engines. Gasoline is a complex mixture of over 500 hydrocarbons that may have between 5 to 12 carbons.

Many of the non-aliphatic hydrocarbons naturally present in gasoline (especially aromatic ones like benzene), as well as many anti-knocking additives, are carcinogenic.

Two ingredients of gasoline -- benzene and butadiene -- topped the EPA's list of the most dangerous airborne carcinogens. Emitted mostly from car tailpipes, they are responsible for 35% of the cancer risk posed by air pollutants, the EPA data show. Both have been linked to leukemia in human and animal studies.

Related Articles

• Review of new evidence regarding the relationship of gasoline exposure to kidney cancer and leukemia. [Environ Health Perspect. 1993]
• Renal cell cancer and exposure to gasoline: a review. [Environ Health Perspect. 1993]
• Hematopoietic and lymphatic malignancies in vehicle mechanics. [Crit Rev Toxicol. 1997]
• Nested case-control study of leukaemia, multiple myeloma, and kidney cancer in a cohort of petroleum workers exposed to gasoline. [Occup Environ Med. 1999]
• Risk of esophageal, ovarian, testicular, kidney and bladder cancers and leukemia among finnish workers exposed to diesel or gasoline engine exhaust. [Int J Cancer. 2004]

Energy Security and National Security Source: Energy and Capital, June 11, 2008

The Export Land Model

Dallas-based independent petroleum geologist Jeffrey Brown and Dr. Samuel Foucher (aka "Khebab"), a Ph.D. expert on signal processing, have been working for about two years now on a model to demonstrate the net export problem, which they call the Export Land Model (ELM). Progress on the model and its implications have been regularly discussed on TheOilDrum.com, including the recent update "Is a Net Oil Export Hurricane Hitting the US Gulf Coast?"

The model proposes a hypothetical oil exporting country called "Export Land," and makes the following simple and reasonable assumptions about it:

• Peak production rate: 2 mbpd
• Rate of decline post-peak: 5%/year
• Internal consumption: 1 mbpd
• Rate of consumption increase: 2.5%/year

Here's their model in graphical terms:

Source: The Oil Drum

The results of this analysis are startling:

• Exports cease in only nine years, far faster than overall oil production.
• Exports decline at an accelerating rate, starting at about -13% and ending at about -48%, averaging about -29% per year over the 8 years of decline.
• Only about 10% of the oil produced after the peak is ever exported!

Applying the concepts in the model to the world's actual oil production, they focused on the world's top five net oil exporting countries—Saudi Arabia, Russia, Norway, Iran and the UAE—which together account for about half of the world's net oil exports.

The results were ominous:

In their middle case scenario, these top five exporters will approach zero net oil exports around 2031, starting from an average net export decline of about one mbpd per year in 2006. In a recent post, Brown notes, "net exports by the top five net oil exporters dropped by 800,000 bpd in 2006, from a 2005 peak of 23.5 mbpd, and I estimate that they dropped by about one mbpd in 2007."

According to a recent article in the Wall Street Journal, data from the EIA did indeed show about a one million barrel per day decline in exports in 2007.

Exporters to the U.S.

Since "peak exports" is what we really should be worried about in the U.S., let's take a closer look at our imports.
Here are the top 10 sources of U.S. crude oil and petroleum product imports, as of March 2008:
Top 10 Suppliers of U.S. Oil Imports and Their Fuel Costs

Sources: Oil Import data: EIA. Gasoline prices: German Technical Corporation

According to EIA, the total crude oil and petroleum product supplied to the U.S. market in March was about 612 million barrels. Total imports were 389 million barrels, or 64% of our total consumption. (Considered on an annual basis, and looking only at crude oil, our imports are probably closer to three-quarters of the total than two-thirds.)

By way of example, if it were all priced at $130 a barrel, the oil we imported last year would have cost $638 billion, which is probably in the neighborhood of what we'll spend this year for imports. That's over four times as much as we are spending annually on the war in Iraq.

The economic fallout from oil prices has arrived in the form of a widening trade deficit. According to a report from the Commerce Department yesterday, both the price and the volume of imported oil hit new highs in April, which contributed to overall U.S. imports reaching a record $216.4 billion. The trade deficit now stands at $61 billion.

No economy can survive such a drain on its finances. If we don't do something to stop that flow of money to oil exporters, it will kill us. Consider this: The price of oil has approximately doubled over the last year. If it doubles again in the next year, that fiscal wound will be bleeding at the rate of about $1.3 trillion per year, or about 10% of our total GDP!

Charts for Our Top 9 Suppliers

To see how the export decline problem might affect us here in the U.S., we now look at the net exports of our top 9 suppliers in turn. Normally, I wouldn't have attempted this sort of data analysis for a weekly column, but I just discovered that Jonathan Callahan of Mazama Science has released a very handy little online tool called the Energy Export Databrowser that makes it easy. (The tool uses data from the BP 2007 Statistical Review, which has no data for the Virgin Islands, so their production not shown here.)

Here are his charts of oil consumption, production, exports and imports for each country, with the net percentage change from 2005-2006. (Note: for countries with no consumption data, only production is shown.)

Canada: Exports +16.4%

Fortunately for the U.S., oil exports from Canada are actually rising, due to a boom in production from unconventional oil and gas, and tar sands. Canada's production is truly the only significant bright spot in the outlook for oil imports to the U.S., and we have focused on it intently in picking stocks.

Saudi Arabia: Exports -4%

The situation for the world's top oil exporter is quite different, where exports decreased 4% from 2005-2006, and 7% from 2006-2007 (EIA). At Saudi Arabia's level of production, this is an enormously worrisome development.

Mexico: Exports -4.2%

Mexico's export decline is of particular concern, since they are one of only two suppliers who can reach us by pipeline. Their supergiant field Cantarell has gone into collapse, declining at the rate of about 14% a year. By the end of 2009, it is projected to be producing only half of what it was producing at the end of 2004.

Nigeria: Production -4.6%

Nigeria continues to be beset with civil unrest and strikes, which have shut in between 800,000 and 1 million barrels per day of capacity for the last two years, and dampened hopes for a significant increase in its production. In fact, its production actually fell from 2005-2006:

Venezuela: Exports -5.5%

Venezuela's exports have been in decline for a decade, and the rate appears to be accelerating. According to the latest EIA data, Venezuela's net export decline rate now stands at -7.6% a year.
Brown notes that the combined net oil exports from Venezuela & Mexico to the US dropped at the whopping rate of -32% per year over the six months between last October and this March.

Iraq: Production +9%

Production data from Iraq is notoriously unreliable, due to a robust black market and deliberate reporting of incorrect data. We also have no consumption data for Iraq in this database. In my considered opinion, the extremely slow progress that the Iraqi congress has made in establishing revenue sharing and production agreements between the various parties, and the continuing violence and sabotage in that country, makes it an unreliable hope for increasing exports substantially, at least in the foreseeable future.

Algeria: Exports -1.1%

Algeria is one of the few African oil producers where the environment is relatively stable, and where oil production might hope to be increased. It is also utterly dependent on its oil revenues, which make up nearly all of its export income, and that should serve to make it a compliant participant in the global oil markets. However, it is still a small producer, accounting for only about 5% of our oil imports.

Russia: Exports +1.5%*

I put an * after that number because Russia's export situation has changed since 2006, where the dataset used to generate these charts ends. I included this chart for the sake of completeness, and to keep with the same dataset as the other charts.

According to Brown and Foucher, Russia's exports declined 6.7% from December 2006 to December 2007. Their projected 10-year net export decline rate for Russia is -8.2%/year, ±4%, with a middle case scenario approaching zero net exports in 2024.

(For a good detailed look at Russia's oil production, see Foucher's recent analysis, "Russia's Oil Production is About to Peak.")

Angola: Production +14.2%

Angola has just surpassed Nigeria for the first time in 50 years as the top African oil producing nation. The country produced 1.87 million barrels per day in April, according to OPEC, vs. Nigeria's production of 1.81 million barrels per day. As previously mentioned, this is mostly due to the shut-in capacity in Nigeria. Angola's production—accounting for about 5% of the U.S.'s imports—might be increased a little in the coming years, but in the absence of consumption data the exportable portion is unknown, and in any case is fairly insignificant in the big picture for the U.S.

Looking at those charts, one thing should be very clear: Many of the big exporters on whose output we most desperately rely aren't going to be reliable for much longer. Most of the production gains are from small producers in Africa, which are fraught with conflict and relatively inhospitable to foreign investment, so we shouldn't count on them too much, either.

A Sobering—and Profitable—Thought

The impending export crisis is a very sobering realization. When oil imports simply aren't available, we will be forced to live within a smaller energy budget, and the adjustment could be painful.

So never mind the fact that the world will still be consuming a wee little bit of oil by the end of the century.
Never mind that we're only about halfway through the total amount of oil that the world will ever produce.

In fact, never mind peak oil.

The real questions are much more urgent:

Will the world be ready to deal with zero next exports from the top five exporters in a mere 25 years or so? World net exports appear to be declining at about 2.5% per year already, and according to the ELM model, we should expect that rate to accelerate.

Closer to home, will the U.S. be prepared to replace the two-thirds of its lifeblood that is imported, before it goes off the market? High oil prices and a struggling economy have already reduced our imports by 6% over the last year, but how close to the bone can we cut?

Energy Security and National Security Source: Energy and Capital, June 11, 2008

Energy Security and National Security Source: Energy and Capital, June 11, 2008