Radical Noesis - Thinking outside the box

CNN Money writes Oil soars $2 a barrel. The supply shortage is in diesel and heating oils, and the future's market doesn't think that OPEC's promise to increase production will help - Opec set to raise oil production. .

"Crude oil surged 4 percent Monday as dealers worried that rising global demand for diesel would outpace refiners' ability to produce the fuel, and OPEC ministers signaled the cartel is powerless to rein in runaway prices with an output hike. (CNN) (See Side Note at end of article)

Increasingly, we are hearing that the problem is not the availability of petroleum, but the amount of that oil that can be refined. Is the issue really refining capacity? Or is that a mask for the deeper issue of declining oil resources. It is interesting to watch the attempts to distract folks from the underlying problem, and to offer solutions that are years - if not decades - in the future. A future where it will no longer be possible to deny that the usable global oil reserves are virtually exhausted.

Being suspicious by experience, I can't help but wonder if the "refinery issue" for oil, is similar to the "timber issue" in the U.S. Living in Oregon, the timber companies have consistently pushed for the cutting of old growth timber, while they trumpet their replanting programs. Oregon has lost tens of thousands of timber jobs and set timber communities against urban dwellers and environmentalists. Meanwhile, the real issue was that virtually none of the lumber mills were constructed to deal with second growth trees. The push to cut old growth was (and is) a processing issue, not a timber availability issue. Having watched this play out in Oregon, I now see "refinery capacity" everywhere I look. I must admit that I have little knowledge about oil production and refining, but could it be that existing refineries are not constructed to process much lower quality oil?

Watching the global maneuvering to make oil deals, one has to suspect that the issue is not refineries, but supply. The most recent example to hit the news - at least the international news - is India and China cooperating on oil procurement. Why are these booming competitors working together and who are they working with?

"Something unprecedented is happening in Asia. The two most populated countries of the world have agreed to work together to secure and use crude oil and natural gas reserves. (India Daily)

Please note they are "securing" reserves, not investing in refineries. India and China are joining forces to purchase shares in the "Russian state oil firm Rosneft, which should soon be partially privatized...". Given the questionable process of oil privatization in Russia (Russian Oil: The Plot Thickens, India and China might think twice before getting involved in this deal (The Russia House, After the Oligarchs). Regardless, the oil deals are flying with Russia and Venezuela and others. Nations across the planet are keen on "securing" oil supplies, and that should send a strong signal that the issue is oil availability, and not refining capacity.

The recent spike in the oil futures market in the US is due to a declining supply of crude oil imports into the US. Once again, a supply problem - not a processing problem. And what is driving prices?

"Oil broker Tom Bentz at BNP Paribas Commodity Futures said the drop in oil inventories wasn't particularly disconcerting to him, given the fact that supplies are abundant heading into summer. But because there is so much fear in the market about future supply tightness, Bentz said the shrinking inventories only fueled those concerns." (AP, 6/08/05)

This flippant sounding remark should ring bells, but probably won't. Why? Because it apparently wasn't "newsworthy" for the press. Who did reprint the AP article?
- Futures and Commodities Market News, Yahoo News, CBC News (Canada), Working.com (Canada), San Diego Union Tribune, Mideast Energy.com. In fact, no major news source in the US saw fit to publish the article.

It is clear that the issue is a supply issue. However, beyond the supply issue is the demand issue. Global demand for oil continues to grow despite the shrinking supply. One might think that rapidly developing nations - like China and India - might look at investing is a different energy path. Why they do not, continues to amaze me. But then, the U.S. continued resistance to either conserving, efficiencies, and alternative energy, also continues to amaze me. My guess is that the next big push will be new refineries - not stepping back from the dwindling oil supply path. This is more than unfortunate, because it takes us closer and closer to a global resource war.

The lines are already being drawn, and the US is effectively standing alone. The emerging big player is none other than Russia. It is central in deals across the globe in terms of oil production (followed closely by Venezuela, and Africa). The U.S. is hanging on tight to trying to control the South American oil resources - which is why there have been ongoing attempts to remove Chavez in Venezuela.

The reports (and not just the AP report) show that speculation and pricing is being driven about fears of a decreasing supply, and investors are not jumping on the refinery bandwagon.

[Side Note}
It is important to note that the supply of diesel in particular is short. The shortage in this area will have broader pricing effects than a shortage (and price increase) in gasoline. That is because of the dependence of both agriculture and transportation of goods, runs on diesel. In agriculture, the cost increases in diesel effect everything from fertilizer, to planting, to harvesting. On the transport side, most goods (including food) are transported by truck - trucks that run on diesel.