On the future doom and gloom of the oil snatchers, we haven’t seen anything yet

Hobbes, the crude oil spot price for a Brent barrel of crude closed last Friday (last Monday was bank holiday in the UK) at $132.73. And yesterday London got gridlocked courtesy of hundreds of lorry (truck) drivers. Toyota would make a fortune out of a successful hybrid truck. So far FedEx has the largest fleet of hybrids in the world with a “massive” 95 vehicles at present. I make it that traditional British hauliers are not interested in paying the premium price.

Pundits have started talking about oil as the new bubble in financial markets. The Daily Telegraph reports that even George Soros thinks that:

Speculators are largely responsible for driving crude prices to their peaks in recent weeks and the record oil price now looks like a bubble […].

Well, coming from the king of speculators, we will be very careful to panic as of yet. Especially when he expects oil prices to collapse when the US and UK fall into recession.

So what happens with global demand? OK, Since China is the workshop of the world and the UK and US its top spenders, oil demand is expected to slow down, but drop? I don’t think so.

We opened the can of warms, and the Patels and Changs of the world want their Tata Nano parked on the driveway.

Nowadays, history is an old man vegetating in an old people’s home. Nobody cares about him. Nobody wants to listen to his pool of knowledge.

But as we are starting to hear, some people are turning to our elders for clues. It seems that oil consumption in China and India is only starting to grow to relevant levels for the world economy. According to the Energy Information Association (EIA), they are consuming oil at a rate the US did in the early years of the 20th century. We don’t need every Chinese in town driving for spare chop-sticks with their SUV (Sino Urban Vehicle) to fulfil Goldman Sachs’ prophecy. Even if China’s oil demand moves half the distance between its current per capita oil consumption level and Hong Kong’s, that’s a lot of extra demand. And Hong Kong is not exactly open-road paradise.

All well with the price of a crude oil barrel. We can understand a price, specially set in US dollars, not some Chinese remninbis, Second Life linden dollars or Star Wars Old Republic galactic credits standard.

But what do we know about the barrel and its contents? Little.

With a little help of enotes.com, I found out that apparently, a barrel of crude oil holds 159 litres and through a wide range of chemical processes nowadays we can squeeze out approximately 80 litres of gasoline, 11 of jet fuel, 34 of distillates and petrochemical feedstock, 15 of lubricants, and 11 of heavy residue.

Needless to say, our modern world depends on all these products.

We all know what gasoline is for and it is not difficult to work out what jet fuel drives. Also:

Distillates are used to produce lower grade fuels such as kerosene for use as a heating fuel and diesel fuel for use in powerful vehicles such as trucks, ships and industrial machinery. Other even lower grade fuels are used to provide energy to industrial processes not requiring the same combustion quality required by higher speed engines. Distillates also yield a wide variety of waxes that are turned into products used for lining milk cartons, as water repellant coatings, cosmetics, electrical insulators, sealants, medicinal tablet coatings, crayons, candles, and many other everyday items.

Petrochemical feedstock is processed into supplying an ever growing assortment of products such as anti-freeze, bases for paints, cleaning agents, detergents, dyes, explosives, fertilizers, industrial resins, plastics, synthetic fibers (nylon, polyester, rayon), synthetic rubber, solvents, thinners, and varnishes. [… T]he impact of plastics is among the most consequential petroleum products in the civilized world.

I will stop here, if you want to continue please visit our friends at enotes.com.

It is the petrochemical feedstock that attracted my attention. Anybody who’s not been sleeping for the last year or so, will have noticed the increasing price of his, or other people’s favourite meal. But guess what, we are a lot of people in this world, and if Thomas Malthus was right, population growth has finally outpaced food production growth.

Thanks to technical and genetical improvements we have been able to increase crop yields, but one of the main boosters has been chemical fertilisers. Let’s say that a lot of communities in the world depend on petroleum-based fertiliser, pesticides, herbicides for their survival. Actually, probably all 6.3bn of us.

Organic groceries? C’mon, as if organic crops could escape from acid rain… Plus, like other fallacies (anybody order an ethanol world?), yields on organic orchards and vegetable gardens are deadly low, especially for a worryingly growing hungry Earth. And today I heard on the radio that nitrogenous fertiliser prices have raised 10-fold in the last 12 months to a record $500 per tonne.

Where am I going with all this? Well, populist politicians around the world keep talking of ensuring energy independence through unsuccessful war and phony energy policies (USA) or successful market forces (China), but we forget that if we can slow or stall our economic and industrial activity, we cannot stop eating.

And that raises a question I have spent time researching off and online but haven’t been yet been able to answer: How long does it take for a the 159 litres of crude oil in barrel to end up at a pump near you or as the fertiliser on your veggies?

I find lots of information on the breakdown of petrol prices, but couldn’t find any information on how long does it take for a $132.73 barrel to hit the food and petrol markets? Two days? I doubt it. 6 months? I don’t know, but if that is the case, 6 months ago the barrel was almost 50% cheaper! So we haven’t seen anything yet! 3 months? Well a 30% increase in price will definitely rock the industry, transport and food markets. And if the crude oil price is based in the futures market… we cannot really know what that particular price refers to in terms of time, but we know for a fact that it is in the future, not the present. So $132 haven’t yet filtered through to the transport and chemical markets.

I think that high oil prices are here to stay. I am no expert, but I don’t see why Indians and Chinese citizens who just discovered the comforts of the middle class world would be willing to return to their rural lives. Oil at $200 the barrel? As I said before, if I am not wrong with the fundamentals, do not trust the inflation adjusted oil price charts, it is true that the end of the gold-standard put a dangerous money-printing weapon in American hands, but the last spike in prices seems to answer to a human revolution in Asia, not (only) greedy speculators.

Oh! Should we talk about the effect in inflation? Let’s leave it for another day. Just in case, I keep stocking on gold.

.Calvin

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