Oil Industry Slippery Slope is the Tip of the Iceberg

We have moved beyond peak oil.  I remember sitting on a bench in Brisbane at a time when the SEQEB (South East Queensland Electricity Board) power went out. I think it was around 1990. I sat with my partner and said ‘what will happen when the shit hits?’ was my term. I just felt this situation of no power and how people would react, a way of life that is unquestioned. I remember reflecting on how will people cope? Then a few years later in 1994 I recall standing on a corner in a small town the UK (18 years ago now). Again, I had a flash of intuition where I thought ‘how will they cope when the shit hits the fan’ was the words in my mind and how I felt it, just a sudden realisation. I remember just looking at the faces and wondering. I still remember where I was today.

Tonight I heard a lecture and it confirmed what I felt. Indeed financial collapse will preceed energy collapse and systemic collapse. For many this is very distressing as it is about major change. For myself, I am not shocked as I feel it happening naturally. The earth cannot sustain unsustainable practices. Moreover, we are not living in reality, we are indeed in bubbles, which I would call thought bubbles. The word ‘denial’ was mentioned tonight and I just nodded, as did the woman next to me. In fact she said ‘denial is not a river in Egypt’, I said smiling ‘that’s what I usually say’. Those bubbles were described as oil bubbles (peaking then falling), housing bubbles (overpriced housing markets) and commodities and the list goes on. It was described as a phenomenon that happens as supply reaches a peak and declines and quite quickly. Moreover, what was made clear was we are all interconnected around the planet and the Eurozone debt problem is greater than world debt, I am not sure what that means but for me the inference is that the debt is sizeable and will affect the global financial system. The inference was that it will have knock on effects globally. So it is likely to precipitate what was termed a domino effect. I felt that term when writing poetry. I felt it as tipping points.

It was mentioned that we will move from globalisation to localisation. It is important for people to prepare but not to be afraid or some say ‘aware but not alarmed’. To move towards self sufficiency was mentioned and the importance at the local government level taking away barriers so that people can take care of themselves e.g. grow their own food, have chickens, solar ovens to prepare for self sufficiency. I thought of the challenges of local government and any perceived loss of revenue and indeed control. The speaker indicated it would not cost anything, it appears that by-laws could be repealed.

The vulnerability was mentioned as being dependent on the system. This has been my intuition for a long time. The speaker tonight was incredibly clear and had a good grasp of economics to my surprise. There was no drama just a clear sharing of factual information without doom and gloom. Of course there will be much resistance to change by those referred to ‘at the top of the food chain’ and others, but I think for many that resistance is not unexpected. Moreover, it was felt the solutions will come from the grassroots level not at higher political levels. It was pointed out that there is too much inertia in the political system, decisions can’t be made quickly and we are moving into times which require different solutions and ways of thinking (in my view).

So for many it was probably bad news or what one guy stated ‘gave him a headache’, yet for others they see a new world emerging. Change can be challenging, but what can you do when it happens, you find your resilience, you meet your neighbours and suddenly community emerges like the shiny diamond obscured by much build up and gumph. We will find the opportunity to grow commmunity, that appears to be on the horizon. We will come into alignment with natural systems is my feeling.

The speaker tonight did speak about energy in respect of renewables, there was little point in building infrastructure if the energy used/generated was 1:1 ratio, in other words if it took the same amount of energy to produce the product as to generate the same amount of energy. So a zero sum equation. So it is important to choose new technologies that use less energy to produce more energy and zero environmental damage and emissions. I felt the energy ratio was an important point.

The article below speaks of the link between financial crisis and energy scarcity. It is important to prepare for the future.

http://theautomaticearth.org/Energy/petroplus-tip-of-an-iceberg.html

 

Petroplus – The Tip of an Iceberg

MONDAY, JANUARY 30, 2012 10:21 AM
Energy08

The Automatic Earth has repeatedly stressed the intersection between our global financial system and our energy systems, which is typically something that is either unnoticed or misinterpreted by those focusing on just one or the other.

While many peak oil advocates tend to describe economic/financial crises as a function of scarce energy, TAE has argued that financial booms and busts can occur independently of energy issues.

In the TAE Primer article Oil, Credit and the Velocity of Money Revisited, makes the distinction clear:

“By the time we have oil shortages, we won’t have any credit-fueled demand because there will be no credit. First we lose the credit, which cripples purchasing power, then we lose demand (where demand is not “what you want”, but “what you can pay for”). We’ll have a temporary glut of oil, which will kill investment.

The lack of investment in new production, and lack of money for maintenance of existing equipment, and potential sabotage of existing equipment by those with nothing left to lose, set up a supply crunch. By that point very few have any purchasing power at all, and none of it credit-based, but governments and their militaries will be chasing down whatever is available for their own use (and hoarding where possible.

People have managed to leverage the darnedest things in human history. I’m not suggesting they do it in the absence of energy, but as I said before, the creation of virtual wealth through leverage takes much less energy than the creation of something real. Energy is required to fuel the necessary socioeconomic complexity of course, and it can be energy in many forms – food surpluses, wood or cheap/slave labour from colonies for instance.

Fossil fuels have enabled the largest increase in socioeconomic complexity in history, and financial innovation is part of that. But finance is not purely a passive consequence. It is a key driver in its own right, especially during contractionary times, or maybe we should say: THE key driver both during Ponzi growth times and Ponzi contraction (collapse) times.”

The growing financial strains in the oil refinery industry are a very good example of this distinction. Petroplus, the largest independent refiner in Europe, was first cut off from a revolving credit facility of $1.75bn with its banks and then was forced to file for bankruptcy. Emma Rowley and Garry White for The Telegraph reports on how this was not simply a one-off failure, but an increasingly large threat for many refineries.

The Petroplus failure is just the tip of the iceberg in the oil sector

“The end of last year saw the announcement that three on the US East Coast were to close. Prior to its collapse, Petroplus had shut three of its European refineries and halved output from its UK and German plants. As recently as Wednesday, Hovensa said it would mothball its giant St Croix refinery in the Virgin Islands and use it for storage.

That took the total closure count in refinery capacity to 1.5m barrels per day (b/d) for the year so far, Deutsche Bank analysts calculate. Over 2009 to 2014, they think nearly 5m b/d of refinery capacity will be permanently “idled”, a total amounting to 6pc of global capacity.

Yes, Petroplus was laden with high debt as a result of its private equity-backed business model, and some of its plants were in fact profitable. But it was also a victim of the slender margins faced across the industry.

The profits refiners enjoy by “cracking” crude oil into petrol and other products have suffered as operating expenses and the cost of Brent-linked crude oil have risen. Then you can add overcapacity into the mix, as global economic problems weigh on demand.”

Here we have a classic situation of over-leverage, over-capacity and plummeting demand for oil-based products combining to take a vital component of energy processing out of the picture over upcoming years. Demand levels will vary significantly across refineries depending on which specific products they produce, but the ongoing deterioration in global credit markets and the real economy are certainly key drivers of decreasing margins.

Much of the pain for the industry seems to be concentrated in OECD nations, as explained in a 2011 report by the International Energy Agency on the world’s oil and gas markets.

Medium-Term Oil & Gas Markets 2011 Overview

 

“With early 2011 refining margins mired below the heady levels seen at the middle of the last decade, we see a structural overhang in refining capacity persisting through the medium term. Globally, crude distillation capacity increases by 9.6 mb/d during 20102016 (95% of this in the nonOECD), with further additions in upgrading (6.9 mb/d) and desulphurisation (7.3 mb/d).

 

While capacity rationalisation amounting to around 1.8 mb/d has been identified within the OECD, it is offset by debottlenecking at other units and is insufficient to prevent utilisation rates there falling further, to around 75% by middecade.

 

OECD Europe has also seen opportunistic purchasing of distressed refining assets by producers keen to get an operational toe-hold in a maturing, but nonetheless strategically placed, swing refining hub. Restoring global utilisation rates to the levels enjoyed in the last five years would require over 4 mb/d of capacity closures or project deferrals by 2016.”

 

refinery

 

As is the case with most analyses by official institutions such as the IEA, we can safely assume that the effects of credit contraction on refinery utilization are being under-estimated. Refineries forced to scale back or go off-line in the short to medium-term will negatively impact crude oil demand, and we should see this add to the pressure currently weighing on crude oil prices. Lower prices will then feed back into the marginal financial pressures facing the oil industry.

These forces of debt deflation will make it much more difficult for producers, refiners, distributors and retailers of oil and oil-based products to maintain the levels of production, infrastructure, equipment and outlets needed to provide an adequate supply to meet demand down the line, once contraction of credit has largely ran its course. As TAE has consistently made clear, a sharp demand collapse now = an even sharper supply collapse later.

 

   

Posted: 2 weeks, 4 days ago by mrawlings #48
It occurred to me that the glut of energy capacity and the dearth of credit is likely to sadly make it especially difficult for green and renewable energy projects/companies. At a time when we ought to be devoting more resources than ever to reducing our footprint and restoring the productive capacity of natural systems, we’ll have too little available capital, and too little demand for additional production- not to mention what is likely to happen to the future discount rate.

As for the new site- very exciting, looking forward to new possibilities…

Posted: 2 weeks, 4 days ago by Carbon waste life form #66
The attitude of the populus of the UK to wind farms makes me a little sad: www.bbc.co.uk/news/uk-politics-16893018 there’s a debate going on about the additional expense of renewables in general now that households and businesses are facing hard times and high energy bills. It’s so myopic and, I think, reflects the idea that the market will react in time to provide renewables just in time.
I wish that people who speak up against renewables really study energy resources first. Otherwise it’s all noise in a vacuum. Once everyone knows the parameters of the subject, then it’s time to weigh it up!

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