Quality Or Quantity?

Jim Brown
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Saudi Arabia's oil minister tried to assure the world today that Saudi stand ready to replace any lost output from Libya in any "quality and quantity" desired. Those are big words for a country without the actual capability to back it up.

I received an email from a reader today asking for the "real" answer to the quality and quantity question. "Isn't the oil issue really about quality and not quantity? Does it matter that the Saudis' can flood the market with sour crude when what we need is the kind of sweet crude that Libya produces?"

Our reader has hit the nail on the head. It is not a question of how much oil is available but how much of the right kind of oil.

It is absolutely both quality and quantity. There is not enough light crude and OPEC has very little excess capacity in light crude. Saudi claims to have 4 mbpd of "excess capacity". Unfortunately that is heavy sour crude that Europe cannot use. I use the unleaded and diesel analogy. If you run out of gas and push your car into the filling station and they are out of unleaded but have plenty of diesel you are out of luck. They have "fuel" but they don't have the fuel you need.

Saudi has oil, or at least claim they do, but it is thought to all be in various grades of heavy, sour crude that requires special refineries to process. It is more expensive to refine because of the special process required and the refinery has to dispose of the unwanted by products like mountains of sulfur and hazardous chemicals.

The link below points to a list of all the grades of crude oil sold in the world. Note that some of them have sulfur contents up of almost 6%. For comparison the Algerian Zarzaitine light crude has only 0.06%. With an API of 42.8 it is one of the lightest crude in the world. Saudi's lightest crude is 1.09% sulfur with the rest of their grades averaging around 3% sulfur. List of Oil Grades

For Saudi to say they will provide any quantity and quality is a market pleasing answer but it is total crap. It was meant to calm the market until cooler heads prevail and Libya changes leaders.

Libya produces nine grades of oil. All but two types are light sweet crude. Saudi Arabia produces eight common grades of oil. All eight grades are sour and only two are light. (Oil is considered light if the API gravity is 34 or higher, 31-33 is medium and 30 or below is heavy. Oil is considered sweet if the sulfur is less than 0.5% and sour if over 1.0%)

Barclays Capital has already exposed the false concept Saudi could just replace the Libyan crude barrel for barrel. "Firstly, the grades and quality of crude available from Saudi Arabia are likely to be different from Libya. For instance, the volume-weighted average of Libyan grades would have an API of around 37-38, while the current shut in Saudi production is biased towards medium crude. Moreover, Libyan crude is sweeter. Moreover, the time taken to bring those Saudi barrels to the market is likely to be significantly longer compared to the ongoing Libyan production. Thus, the concept of a barrel for barrel replacement is not a correct one."

I built two tables showing the grades of oil from each country. Ponder for a minute how Saudi Arabia is going to supply any "quality or quantity" of oil in place of the missing oil from Libya? Saudi does not even have a light sweet grade.

Libyan Oil Types

Saudi Arabian Oil Types

The answer to Saudi's plan was in the Financial Times tonight. The Times is reporting that Saudi is proposing to SWAP its oil for light oil destined for someone else and deliver it to the refineries in need. For instance, if refinery ABC in Brazil has a shipment of light crude from the Lula field but that refinery can also refine heavy sour crude common to South America then Saudi would arrange a swap of Saudi heavy sour crude for the light crude and pay a premium for the difference in price and shipping.

Some West African crude, such as Angolan crude can also be redirected to Europe, the sources said, while Saudi Arabia could temporarily send extra oil to Asia to compensate.

In other words, there would be NO INCREASED PRODUCTION of light sweet crude. There is no available capacity for light sweet crude in Saudi Arabia, which everyone knew all along.

This would only be a very short-term fix and require some serious planning, swapping and shipping in order to make it work.

This is an extremely important clue as to why peak oil is closer than you may have thought. The mechanics of this work around to calm the oil markets is only a short-term fix and would not be possible once demand increases as expected through the end of 2011. Demand is expected to increase by 1.5 mbpd in 2011 and the majority of that will be in light sweet crude.

Long term this is the real peak oil problem. The first peak will be in light crude, the kind most refiners use and the kind referenced to the Brent/WTI futures price. As the world runs short of light crude as it did in 2008 the price is going to rocket even though Saudi/OPEC may claim there is plenty of oil available.

I am predicting a Great Energy Recession to begin in late 2012 as light crude prices push gasoline back over $4. I predict peak oil or I should say "Peak Sweet" will occur as early as 2012 depending on how the current recovery accelerates.

We have some serious problems ahead and it is too late to fix them. An all out drilling program today in the U.S. and offshore could not add appreciably to our supplies for 5-7 years and it will be way too late to avoid disaster.

Could it be that the group denial of peak oil is starting to develop cracks? My email today has exploded with peak oil questions just because of the intraday spike to $120. Suddenly some consumers are coming to the realization peak oil is no longer theory and could actually be fact.

Jim Brown

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