Thursday, February 7, 2008

Government Predicts Oil At $225/Barrel

Our old friend Jim Rogers has his own take on things. Jim recently remarked that “It doesn’t look like $90 or $100 is going to do it” (meaning, restrain demand growth). Of course, in the short term it will take a while for people to adjust to the new reality of $90 oil.
But even in the short term some economies are craving oil regardless of a price increase.
In China, for example, there is not enough pier space for the tankers to dock and unload their cargoes of crude oil – even at $90 per barrel the imports into China aren’t slowing down.
Eventually the supply issues will come back to the fore. Jim Rogers believes that $200 oil -- or even $300 oil -- is possible within the next 15 years.
Even the US Government is Pricing Future Oil at $225
If you don’t believe Jim Rogers, how about the U.S. Department of Defense? No less an oil-burning institution than the DOD is planning for a future of $225, and higher, oil.
The U.S. Navy, for example, is currently designing future ships using $225 per barrel as a baseline for the price of fossil fuel. In fact, the Navy, under the direction of Congress, is also planning to use nuclear power for all future large surface combatants. And the Air Force is designing engines and fuel systems to work on synthetic jet fuels derived from coal and natural gas.
There is an astonishingly complex engineering process for qualifying synthetic fuels to work in military-grade engines, at high altitudes, high G-forces and supersonic speeds. But all of that is happening even now. The Air Force knows that it cannot lose any time in getting this done. And the Army and Marine Corps are looking hard at the fuel-efficiency of ground combat vehicles.
Post-Iraq, the Army and Marines will be re-equipping their forces with much new gear. So the planners are hard at work figuring out how to design and procure “mobility systems” that have the best possible fuel-efficiency. This is all because the DOD planners are forecasting oil prices of $225 per barrel and more.
Refiners Are Caught in the Middle, How are they Affected?
At $90 per barrel, refiners around the world have been processing less crude oil. It is fair to say -- and the ministers of OPEC have stated it repeatedly -- the world’s immediate needs for crude oil are amply covered. (Well, amply covered if you enjoy paying $90 per barrel.)
In fact, one survey indicates that at least 400,000 barrels per day (bpd) of worldwide refining capacity is currently offline. On the face of it, this is the equivalent of four major refineries shutting down, at 100,000 bpd each. But in reality, it is more like 20 refineries in different regions of the world closing down partway.
What is driving these refinery closures? Refiners have idled parts of many units that process crude so they can perform routine maintenance, repairs and upgrades. This is a seasonal phenomenon. The refineries of the world have already processed the supply of heating oil for the Northern Hemisphere winter. That is, just about all of whatever heating fuel people are going to use between now and the end of March has already been processed. That fuel is in the transport system, headed to a terminal near you. So there is no large demand for more heating fuel right now.
Meanwhile, there is still time before the refineries have to start building up motor fuel stocks for the late spring and summer driving season. Thus, the refineries are engaged in rolling closures for maintenance. Without the maintenance, the refineries tend to blow up and burn down. So don’t complain.

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