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August 24, 2005

Sweet Crude and the Peak

By: Rowan

I have discussed several times that the global oil competition that is driving up oil prices is "sweet" crude. James Hamilton of Econobrowser, has an excellent explanation of the differences between sweet and sour crude oil. He notes that sour (or heavy) crude has higher sulfur content, and is therefore much more expensive to refine. Hamilton even has a nice chart of the quality of non-OPEC crude and its sulfur content. He points out that the current refining capacity for sour crude is limited. By default then, since refineries are set up for sweet crude, the competition shifts that direction - no matter how much heavy crude OPEC pumps. This may be why OPEC has kept arguing that there is a refinery problem - not an oil problem (a statement that is partially true).

We can deduce that oil has peaked as there is a relative scarcity of sweet crude which means that primarily sour crude is available. One might then ask is sweet crude has peaked. Chris Vernon of Vital Trivia wrote a nice piece on the peaking of sweet crude. He notes that according to OPEC's August report, in 2000 they were pumping 47% heavy crude. By 2004 that percentage had jumped to 51%.

This situation is not dissimilar from the old growth forest issue in Oregon that raged a few years ago. The argument ultimately got sound-bited to the spotted owl. There was an effort to save the old growth forests and the primary legal route was to save an endangered species - the spotted owl. The timber companies framed it as economy or a bird. The reality was that while there was plenty of second growth trees available, virtually none of the mills were capable of processing it. They were set up for the much larger old growth logs.

With oil, we have the situation that for decades the primary oil extraction has been sweet crude. Refineries were designed to process that grade of oil, and are largely incapable of sufficiently processing the heavy crude. Since it seems that the largest producers have pumped most of the sweet crude, we have a peak situation. In other words, they are pumping past the halfway point of the fields. This increases not only the cost of extraction, but gluts what refineries have the capability of refining sour crude. This decreases availability. Building refineries that are capable will cost lots of money and take time. Meanwhile, sweet crude is in high demand and being pumped as fast as possible - also increasing its price.

Unlike the lumber mill analogy, we can't "grow" more oil. Building refineries capable of adequately processing heavy crude will be a short term answer. Heavy crude production is (and will continue) to drop off as fields are exhausted.

Sweet crude competition is a sign (and verification) of the peak. All of the above - heavy crude majority, refinery capacity and capability, and sweet crude competition - set us on an ongoing cost increase regardless of actual availability.

Posted by Rowan at August 24, 2005 10:23 AM Category: Peak Oil


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