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How To Position For the Next Great Oil Squeeze

Monday, November 14, 2011, 11:13 AM
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How To Position For the Next Great Oil Squeeze

by Gregor Macdonald, contributing editor
Monday, November 14, 2011

Executive Summary

  • Why smaller, independent oil companies should thrive as America struggles to increase domestic supply
  • A breakdown of often-touted 'new sources of domestic supply' (shale oil, kerogen, offshore fields, other Western Hemisphere finds) and why they won't come close to meeting US demand needs
  • How to hedge against the next great oil price spike
  • The wisdom of adopting a slower-based oil consumption lifestyle now

Part I - Selling the Oil Illusion, American Style

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II - How To Position For the Next Great Oil Squeeze

Using the latest data from EIA Washington, I made the following chart of actual imports of crude oil against production. This is a simple and direct accounting of what can become a rather complex topic filled with obfuscation and bad math. For example, by counting biofuels, ethanol, natural gas liquids, and the use of our own natural gas inputs to refine crude oil into gasoline, you can produce rather misleading accounts of net imports, such as this piece from EIA Washington titled How Dependent Are We on Foreign Oil?

Just so that we are very clear on the facts, natural gas liquids (NGLs) contain only 65% of the btu of oil, and, of course, they are not oil. As Jeff Rubin likes to say, "NGLs can go straight to your butane cigarette lighter, not your automobile." But by adding NGLs and ethanol to "oil supply," we can delude ourselves into thinking that the US produces not 5.596 mbpd of crude oil, but rather 10.037 mbpd of liquids.

Despite any legitimate conversation we could have about the usefulness of various energy resources, it would be silly to say (for example) that "we need not worry about expensive oil and its effect on the economy, because we can just switch to ethanol." The vastly smaller btu content of biofuel feedstock makes its inclusion in the accounting unhelpful, to say the least. As one Oil Drum commenter said to my previously cited post:

If the goal is to highlight the decline of crude oil production over time then including all other fuel sources is improper. You can't project a future production trend of one commodity by including other commodities in the analysis.

(Source)

Yes, precisely. To that point, let's now look at the chart.

 

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