"Mid Size Power Boats": A Guide for Discreminating Buyers - by David Pascoe


The Future of Fuel Prices


Boating runs on oil, so a crystal ball is needed.


With this article we introduce the first in a series of periodic reports on the state of the world oil industry which so dramatically affects boating. Herein I will review the highlights on how we got to where we are, what's happening now, and what the prospects are for the near future.

This writer has been following the oil market ever since the 1973-74 Arab oil embargo. My livelihood depends on the price of oil and, if I ever came to the conclusion that there was an acute world shortage of oil I would have gotten out of this business. Should fuel prices persist at $3.00+ that would pretty much doom powerboating. But so far over the years my research has proved correct: there isn't, and I didn't.

Anyone can offer opinions, and they do; nearly every day we hear exceedingly ignorant "experts" on television offering opinions and advice that are usually wrong. My research into the oil industry is of long-standing and extensive. I have studied the works of the doomsayers as well as the optimists in order to come to my own conclusions. The oil industry is a very complex business, mainly because it is worldwide in nature, with the single greatest factor influencing prices being politics, not supply. This is because politics is the single most important factor determing supply. Were it not for the people who stand in the way of oil production, we'd have gas prices of $1.50 and probably even less. For this reason I have included a brief analysis of the half-dozen nations that will have the greatest influence on prices. See links below.

For many years Saudi Arabia and OPEC were the primary influences on the fuel prices in this country. This has changed in the last several years as U.S. oil refiners have shifted their imports away from the Middle East as much as possible. Further, several new influences have come into play. The nations currently exerting influence on world oil prices are Canada, Iraq, Venezuela, Iran, China and India. Notice that the later two are not oil exporters, but major importers.

Political Scare Tactics

The widely circulated "Peak Oil" theory we have been hearing about lately asserts that world oil production has reached its peak and is now going into decline. How can that be when the U.S. Geological Survey has concluded that we have, since the beginning of time, used only one trillion out of known reserves of three trillion. And this is for conventional oil and does not include 11 trillion in estimated unconventional reserves like oil sand and shale.

Gas prices reached an average recent high of $3.15 in Sept. 2005. The previous high was $2.75 in March, 1981 during Iran-Iraq war. Between '81 & '05 prices averaged $1.75 for 24 years at constant dollar prices.

The question on every power boat owner and buyer's mind is what will the price of oil be in the near future. While fuel prices are dropping significantly, everyone wonders whether this is temporary or will it continue. From a high of $3.15 the current pump price has fallen to $2.36 as of 9/26/06. My research indicates that this decline will continue for at least the next six months but at what rate is not predictable. Prices are likely to be very near $2.00 by next spring.

The Major Price Factors

The main causes for the recent past and current high oil prices: Katrina damage, Federal and State government policy, and threats to future supply, namely as a result of unstable dictators like the madmen of Iran and Venezuela. Another major factor is the lack of adequate refining capacity in the U.S. with most of the existing centered in the western Gulf region.

There are numerous popular myths about high oil prices propagated by the media and the environmental lobby. The most prominent is that we are running out of oil, another that we are too dependent on Middle East oil (they like to call it an addiction), neither of which is true. There is so much documented evidence to the contrary that I won't even bother discussing it. The primary effect on oil availability, and therefore price, is political and not a shortage of the amount of oil in the ground. Another myth is price manipulation by oil companies. It seems everyone loves to blame a vast oil company conspiracy, but the truth is that it is OPEC and commodity speculators (like the Kennedy family trusts), combined with an insane U.S. oil policy, that have the primary influence on oil prices. The U.S. produces 40% of the oil it consumes and purchases 60% from foreign sources, primarily Canada, Mexico and Venezuela in that order. Only 20% of our imports are Middle Eastern. U.S. domestic production is pegged to international prices, so any price manipulation that occurs does so internationally, and not by "the greedy, evil oil companies" as the likes of CNN's Lou Dobbs and Fox's Bill O'Reilly are constantly ranting about.

Any prediction about future prices has to take into account the U.S. political climate. It is not true that the U.S. does not have an energy policy; it is merely incoherent and irrational, but a policy nevertheless. According to an editorial in the Oil and Gas Journal, when it comes to energy policy, the U.S. is an irrational and unstabilizing force on world markets. Our fuel price woes are almost entirely of our own making as the voters and the politicians they elect refuse to allow us to develop our own oil resources that exist in abundance. It is patently untrue that oil fields such as ANWAR and the Eastern Gulf would not make a significant difference were drilling allowed. We could easily add 50%, perhaps as much as 100% more to our domestic production. It is also true that this nation could be entirely self-sustaining if it so desired; the oil is there.

Most recently, because availability has increased and threats have decreased, the price is going down. A huge factor in the price drop is repair of Katrina damage followed by slightly increased world supply and slightly reduced demand. If the vast Iraqi oil fields (DOE estimate: 112 billion bbls.) could be brought on line, prices would drop dramatically. It's a little known fact that Iraq is estimated to now have reserves as great or greater than Saudi Arabia. The various estimates average around 220 billion barrels. The Kurds of Iraqi Kurdistan have recently completed a deal to pump one million bbl/day through Turkey. The Iraqi fields were never fully tapped by Saddam (apparently he was too stupid). Existing Iraqi production is off by 50% or around 1.5 million bbl/day. If existing capacity could be brought on line, prices would drop considerably. Estimates are that Iraq (exclusive of Kurdistan) could easily double its pre-war production of 3 mbbl/day to six if terrorists could be prevented from blowing up pipelines. Unfortunately, any thoughts about Iraqi oil are probably wishful thinking.

Another extremely important factor in our oil future is Canada which in the last two years has leaped from being number eight in proved oil reserves to number three. The reason for this is that economic production of oil from the Alberta oil sands has proven that the estimated one trillion barrels of oil contained in those sands are not a pipe dream but a reality. Currently producing 1.5 million bbl/day, Canadian companies are gearing up to double their production to 3 million bbl/day. The current Canadian output nearly equals the amount of oil imported from Venezuela. In another two years the antics of Hugo Chavez will be meaningless because we will no longer be buying his oil; it will be replaced by Canadian purchases.

How Much Oil in the World?

Experts generally agree that there is between 6 and 8 trillion barrels of conventional oil to be had from wells. In addition, there is an estimated 11 trillion of unconventional oil such as oil sand and oil shale. To put that in perspective, since the beginning of time, we have used up only one trillion. So, the notion that we are running out is just plain ignorant of the facts. Thus far we have used just 6% of what is known to exist. And this, of course, doesn't include what we don't know, which is a lot.

Natural Gas

Energy is a unit of power that can perform work. Virtually every form of energy has an effect on oil price in direct proportion to the quantity in use. Natural gas is a prime example of how switching from one form to another reduces oil use. Currently there is a shortage of the availability of natural gas that increases pressure on oil. The good news in this department is that gas production in Canada, the U.S. and Mexico is increasing.

BioFuels

The ongoing change-over to ethanol in the short term is raising gas prices owing to the need for costly new infrastructure changes. Oil companies estimate that this averages 11 cents/gal, but will decline in the near term after costs are amortized and result in a net reduction of 3 cents after several years. So much for all the hoopla over alternatives. Alternatives can have a greater effect when used directly as a basically undiluted fuel for new power generation. Typical cases are generators run from methane generated by garbage dumps. Each one of these reduces oil demand and price proportionately.

The Price Incentive

Recent very high oil prices provide a tremendous incentive to get more oil onto the market. One of these effects is occurring through the Iranian axis. Centered in the heart of Middle Eastern oil, there are numerous inefficiencies and political blocks to getting existing oil on the market which involve pipelines, not extractable oil. Iran has been instrumental in a number of recent deals for oil swapping through existing pipelines and planned future lines. The net result is, and will continue to be, increased efficiencies in production and transport from Iran, Iraq, Turkmenistan and the Caspian region. The oil is there, it's just not getting to market.

Iran is currently running way below what it should be able to produce at 4.3 mbbl/day. Prior to the overthrow of the Shah in 1979, production was 6.0 mbbl/day! Iran has allowed its infrastructure to deteriorate and has done little or nothing to expand its industry. Run by a gang of religious fanatics, the leadership of Iran gives new meaning to the term mismanagement. They live in fear of intelligent people and so have purged from their oil industry those most able to operate it efficiently. Venezuela has done the same thing. These two major oil producers are run by nutcases who sacrifice their own revenues in order to wage battle with others.

When it comes to high oil prices, there is a positive benefit that kicks in, especially in the realm of so-called "unconventional oil" Conventional oil is that which comes out of a well and is simply pumped out. Unconventional requires more extraordinary methods such as extracting oil from sand, porous rocks or finds ways of using lower quality oil such as very heavy crude. A major point ignored by doomsayers is that there is much more unconventional than conventional, and we are only just beginning to tap that source.

By far the greatest effect of higher prices on supply is the incentive for exploration, drilling and improving extraction methods. New drilling in South America drilling is up 52%. This is likely representative of the world in general. Old oil fields previously taken out of production get a second look; marginal fields formerly considered too costly are now feasible. The same with deep water fields where costs were formerly prohibitive. Moreover, high prices tend to dissolve political disincentives. The result of this factor means that a lot of new oil will soon enter the market, meaning further downward pressure on prices.

It is important to note here that, for our purposes, it does not matter where oil is found and who ultimately buys it. Every additional barrel found eases market pressures by that much. If India makes a big oil discovery, that is good for the whole world because this relieves price pressure. This is true of natural gas as well, of which there is a marked shortage. The more gas is found, the more oil prices ease since many end users - such as power plants and industry -- can substitute one for the other.

The New Oil Front

We have discussed the effect of Canadian oil sands briefly, but this is just the tip of a very large iceberg. There has been some amazingly good news lately in that Chevron has just made a new major discovery in the Gulf of Mexico1 that will ease prices in the next several years. Early estimates suggested that it might contain 9-15 billion bbl of recoverable oil equivalent, making it the biggest domestic discovery since Prudhoe Bay on Alaska's North Slope. US proved crude oil reserves are 21.4 billion bbl. This could increase available domestic reserves by at least 50%. This comes amid continuing media propaganda that there have been no major new finds in the last 30 years. So why haven't you heard about this in the media? Probably because the media demonstrably doesn't like good news, or oil.

Some bad news is that our own government(s) are partly responsible for high prices because they refuse to allow oil companies to exploit known large oil fields in both the eastern Gulf, Florida, California and Alaska. It is a proven fact that this nation could be entirely oil self-sufficient if we could but get around the political obstacles. So when you hear the political hacks grandstanding about oil, know that these hypocrites are the real problem. If you are disgusted with fuel prices, think about your congressmen because they are most likely the culprit.

The congressional block on Gulf Lease Area 181 has still not been overturned by Senate efforts. This area of 6 billion barrels remains in the no-touch zone.

A relatively new find, the East Timor fields (disputed between Timor and Australia) and crippled by civil war in Timor, is being put on line by Australia without resolution of the legal dispute. This oil is expected to come on-line in the near term.

Yet another remarkable find is in the Straits of Florida in Cuban waters, only 50 miles from Key West, which has made a recent splash in the news. Cuba is going full bore to develop these fields with an estimated 4.6 billion barrels plus 10 trillion cu. ft. of gas. Much of this find lies in U.S. waters where the Florida politicians refuse to remove the legal blocks to development. Thank you Senators Nelson and Martinez for keeping fuel prices high.

A recent Cambridge Energy Research Associates (CERA) study projects production rising by 21.25 mb/d by 2015 with 60% occurring in OPEC nations and 40% non OPEC. Meanwhile, oil consumption is expected to grow at a substantially lesser rate than production.

The Peak Oil Lobby

When we examine modern history we find that there have always been large numbers of pessimists, often rightly called doomsayers, who loudly proclaim that the sky is falling. With the advent of television, the doomsayers have made an industry of predicting doom because, just like blood and sex, apocalypse sells. Yet the track record of these pessimists is worse than bad; they are almost never right. The apocalyptics of the oil industry are called "peak oil theorists" and these are the ones who get the most media attention. They are in the same class as the economic doomsayers for whom the economy is always about to collapse. Peak oil theory is so pervasive in the oil media that it is hard not to be affected by this pessimism, since these are the kind of people who spend their lives spreading gloom and dismissing any positive reports. We have read reams of their writings and have found them to be totally devoid of any positive news and seem to be so infected by negativity as to be incapable of finding anything good. We therefore dismiss their works entirely as being biased.

Similarly, we dismissed all reports obviously prepared by or for those involved with selling oil investments as equally biased.

The Anti-Oil Lobby It is little recognized that there is a huge international anti-oil lobby headed by the likes of Greenpeace, along with dozens of known and unknown organizations. Such organizations get their power from covert financing by nation states as a form of political warfare. That is, one nation attacks another by funding ostensible environmental groups to file endless lawsuits and other means to try to stop oil development. Far too often these groups are successful.

According to the U.S. Geological Survey, the total known world oil reserves are 6-8 trillion barrels. Since the beginning of time, we have used only one trillion barrels, leaving two trillion of conventional oil remaining. But this number rises to an incredible 11 trillion when you factor in unconventional oil such as oil sands and oil shale, of which the U.S. and Canada possess the largest reserves (3 trillion total known). With numbers like that one has to wonder why all the talk about oil running out. The answer, of course, is that there are political agendas behind such talk.

How Oil Reserves are Estimated

It is a demonstrable fact that oil reserves are estimated with an over-abundance of caution. The date on which the "experts" predict that oil will run out or decline has constantly been pushed forward since the 1940's. The reason is the silly assumption that "known reserves" are all there is when, in fact, new oil is constantly being discovered. But that is never enough to satisfy the "experts". Further, new ways of extracting more and more oil from old wells are frequently being invented. Thus, known reserves are constantly expanding. The fact is that known reserves are nothing more than an estimate that is always being proved wrong. And will continue to be proved wrong. And the higher the price of oil, the more wrong that estimate will become.

Western Oil Shale

For the longer term there is some excellent news that is not being given much attention because oil companies are afraid to raise expectations due to past disappointments with developments of this resource. The name of this news is Western Oil Shale.

This nation has an estimated 2 trillion (the DOE supports this estimate) of recoverable high grade oil locked up in oil shale which is rock that is saturated with oil. This oil shale has been known to exist for much more than a hundred years. Western pioneers built chimneys for their homes with this rock and Surprise! The chimneys caught fire and wouldn't stop burning. The reason why shale hasn't been exploited is a matter of economics; heretofore it has been cheaper to import oil than to squeeze it out of rocks.

Back in the 1980's we taxpayers subsidized a large program to try figure out how to extract this oil economically and with minimal environmental damage, since oil shale mining is much the same as coal mining. It tends to make a mess of things. Most of the problems were solved but one: price. At that time world oil was less than $20 barrel and it was costing more than that to produce oil from shale. End of story, except for the anti-oil crowd who propagandized the matter, calling it a foolish boondoggle. Not true. Depending on methodology, oil can be extracted from shale on a massive scale profitably for the equivalent of between $25 and $32, far below the current $70 price.

This should be stunning news because it means that the U.S. can easily be energy self-sufficient for at least the next 100 years and beyond. So why aren't we celebrating? Once again, it's a matter of the politicians and the oil-hating environmental lobby. It's like trying to build a new refinery: to extract oil shale there are over 75 regulations in each of four different states, along with problems of liabilities should an oil company pollute the ground water. Were it not for that we could be utterly self dependent at a lovely $1.50 gallon for gas.

Because of current high prices, renewed interest in oil shale is strong and at least a dozen concerns are ramping up their efforts to make it a reality. Shell Oil leads the way in shale development4 with a revolutionary new method now under development. Tests have been positive but it seems that a sticking point is proving that pollution of ground water will not occur. This amazing method does not mine the shale like coal, but heats the rock underground until it reaches 600 C, which causes the oil to separate from the rock. To prevent contamination, water is pumped into the ground around the area and then frozen, creating a "freeze wall." It takes two years by current methods to heat the rock, after which the oil is simply pumped out. Moreover, 1/3 of the product extracted is natural gas, a factor that would help relieve our natural gas shortage.

The product extracted via the Shell method is very high grade, thereby not requiring intermediate steps as is required by mining methods. The result is a lower cost.

Many people are surprised to learn that Canada is our leading oil supplier. Canada? Oil? Since when? Since the discovery of the Athabasca oil sands in Alberta. Or, rather I should say the discovery of methods for extracting oil from oil sands - a difficult and costly process. The Alberta oil sands didn't get much attention until oil prices started going up. By the time the price hit $35 and showed every sign of going higher, all eyes were on Alberta. It took the Canadians twenty years to perfect their methods and build their plant, but today Alberta produces 1 million bbls/day and planning to hit 2 million bbls/day very soon, making Canada a major world oil producer.

But, hey! We can do that too. Between the U.S. and Canada we posses 3 trillion of proven oil. The source of this information is the Office of Naval Petroleum, U.S. Department of Energy report Volume 11, March 2004 which is very optimistic about developing these reserves. The major area of oil shale is in the three corner region of Colorado, Utah, and Wyoming. It has been proven that one acre can yield as much one million bbls and a 23 square mile area 15 billion bbls over 40 years. One ton of rock (roughly 3 feet square) typically yields 35 gallons or one barrel.

The big question, of course, is when. Shell has stated that it will do another two years of testing before they make a decision to go ahead with a major operation. If all goes well, a reasonable projection of when oil shale could begin to make a difference would be about ten years. However, this does not take into account the affect of prices holding above $60, which has a gold-rush effect. It is entirely possible that the rush to develop will accelerate in a dramatic way (as it did in Alberta in recent years) resulting in major production sooner than most observers expect. At this time, U.S. producers have an advantage. It took Canada twenty years, but Canada built on the research done in the 1980's in the U.S. We, in turn, can take advantage of Canada's development since the processes are similar, but not exactly the same.

The question producers now face is more a matter of the size of the facility they propose to create rather than if. Even so, major production could not begin sooner than 10 years, but that is still incredibly good news. In the meantime, we are stuck with volatile prices for a few years as Iran, with weapons pointed at the Persian Gulf, holds the cards.

The problem with predicting oil prices stems from the fact that fear, or the lack of fear, is a major price factor. Perusing the "experts" forecasts for September, we see that most are off by $8 and more. For the short term, both stocks and production are way up, so prices should continue to come down at least until winter heating demand kicks in.

Supply Buffer Factor

Heretofore, too much of the world's oil came from a small number of nations. That, fortunately, is changing as more oil is being found in an ever greater number of nations. This has the effect of reducing supply shocks when bad things happen. Refinery location and capacity, discussed below, has played a major role in the problem of price spikes. Now the whole world recognizes the need to diversify both supply and refining and so there is now a major emphasis of not placing too many eggs in too few baskets, which will go a long way toward making a brighter future.

New Oil Refineries

Katrina brought home the fact that the U.S. has inadequate refining capacity. No new refineries have been built in thirty years and, once again, the environmental lobby is the reason. However, existing refineries are gearing up to expand capacity by a reported 1.8 mbbl/day. The construction of a new refinery in Yuma Arizona has been in the works for a decade and is presently awaiting the US Senate to pass a bill for final approval. We can find no information as to whether this bill is likely to pass. A major component of high gas prices is what is mockingly referred to as "boutique" fuels; that is, too many states each mandating a different formulation. With refiners having to create many kinds of gas, this only serves to limit refining capacity and create bottlenecks in supply and transport. So once again, we see how it is government actions that cause fuel problems.

Gas Price Components

Ever wonder how the price of a barrel of oil relates to a gallon of gasoline? For every one dollar increase of the cost of a barrel of crude oil, there is an average increase of about 2.5-cents per gallon of gasoline. So, a $10 increase per barrel in crude prices means a 25-cent increase at the pump.

But you've probably noticed that prices do not increase or decline at the same rate as oil prices. This is due to lag time; the gas price today is based on the price of oil at time the refiner purchased it. That is, refiners purchase oil months in advance before it is refined and delivered. Why do we pay more at the gas dock than on the street? Because the marine seller's costs are higher and they sell less.

Figure 1. Price Components of a Gallon of Regular Gas

Price Components of a Gallon of Regular Gas

Summary

All major future indicators point to increasing supply and downward pressure on prices. Unlike the precipitous drop experienced in recent months, price declines will proceed more slowly in coming months and can be expected to level off at around $2.00, possibly as low as $1.75. The fly in the ointment is Iran which will continue to spread fear in order to keep prices higher. Fortunately, this becomes a case of crying wolf, and as time passes the futures market will give less and less credence to the madman of Tehran. Even should the Venezuelan dictator attempt economic war on the U.S. with his oil, this could only have limited effect in terms of price and duration.

The following links contain short summaries on the status of the nation states that now have, and will in the future, the greatest effect on oil prices. They have been kept separate from the body of this report because they are essentially political in nature.

Sources:
  • US Department of Energy, 2005 data
  • U.S. Geological Survey, 2005 data
  • Oil & Gas Journal, "CERA Study Disputes Peak-oil Capacity Growth Arguments" August 11, '06
  • Energy Information Administration, "International Energy Outlook 2006"
  • Office of Naval Petroleum, U.S. Department of Energy report "Oil Shale Resources," Volumes 1 & 11, March 2004
  • Oil & Gas Journal, May, October, 2005; April June, July, August 2006
  • Rocky Mountain News, "Shell's Ingenious Approach to Oil Shale is Pretty Slick," September 2, 2005
  • Canadian Government Web Sites
  • CIA: World Fact Book
  • Christian Science Monitor, "Exploring new oil fields in Iraq," January 3, '05
  • Milnet Brief: "Iranian Conventional Forces" 2/18/05
  • Asia Times, Mansour Kashfi, "Lack of data casts doubt on Iranian reserve hike."
  • Persian Journal, "New Oil Disorder, Interview: Dr. Parviz Mina, former Managing Director, National Iranian Oil Company
  • Asia Times, Chris Cook, "Sweet Deals Behind the "Iran Crisis'" April 11, '06
  • Business Day, "Plenty of oil for future, says Exxon Mobil" Sept 13, '06
  • General Accounting Office, GAO report number GAO-06-668 'Energy Security" July 27, '06

Posted September 27, 2006

TOP

 

David Pascoe Power Boat Books Visit davidpascoe.com for his power boat books

David Pascoe - Biography

David Pascoe is a second generation marine surveyor in his family who began his surveying career at age 16 as an apprentice in 1965 as the era of wooden boats was drawing to a close.

Certified by the National Association of Marine Surveyors in 1972, he has conducted over 5,000 pre purchase surveys in addition to having conducted hundreds of boating accident investigations, including fires, sinkings, hull failures and machinery failure analysis.

Over forty years of knowledge and experience are brought to bear in following books. David Pascoe is the author of:

In addition to readers in the United States, boaters and boat industry professionals worldwide from over 70 countries have purchased David Pascoe's books, since introduction of his first book in 2001.

In 2012, David Pascoe has retired from marine surveying business at age 65.

Biography - Long version

 

David Pascoe's
Power Boat Books

Mid Size Power Boats Mid Size Power Boats
A Guide for Discriminating Buyers
Focuses exclusively cruiser class generally 30-55 feet
With discussions on the pros and cons of each type: Expresses, trawlers, motor yachts, multi purpose types, sportfishermen and sedan cruisers.
Buyers' Guide to Outboard Boats
Selecting and Evaluating New and Used Boats
Dedicated for offshore outboard boats
A hard and realistic look at the marine market place and delves into issues of boat quality and durability that most other marine writers are unwilling to touch.
Surveying Fiberglass Powewr Boats
Surveying Fiberglass Power Boats
2nd Edition
The Art of Pre-Purchase Survey The very first of its kind, this book provides the essentials that every novice needs to know, as well as a wealth of esoteric details.
Marine Investigations
Pleasure crafts investigations to court testimony The first and only book of its kind on the subject of investigating pleasure craft casualties and other issues.
Readers
Worldwide
Over 70 countries
Countries List
Links to Each Chapter Contents with Excerpt at:
David Pascoe Power Boat Books davidpascoe.com
sidebar2-2

 

HOME > ECONOMY & FUEL ISSUES >