Oil Prices

[agstar77]

It may get a lot more expensive to fill that 4 wheel drive. Noted oilman Boone Pickens calls oil to remain above 60 a Barrel with a spike to 75 and a good chance to hit 100. This is not good news for farmers considering how much fuel we use. Don't idle those trucks and tractors.

[Vader]

May be bad news for farmers in the short run but long term will help as it will drive the ethanol and biodiesel industries.

What are you paying for farm diesel today. Gas in Regina bounced up to $1.05.9 yesterday. Diesel stayed flat for the time being.

A bushel of canola makes 10 liters of biodiesel. I am using as a rule of thumb that the price of canola in $/bu divided by 10 equals the cost of biodiesel. I may be out to lunch but that assumes that the meal and the glycerine sales pay for crushing and other production costs.

So $7.00 canola equals 70 cents per liter biodiesel.

If oil goes to $100.00 per barrel and diesel rises by the same percentage that will make farm diesel $1.16 which would in turn support a canola price of $11.60 per bushel.

This is assuming that biodiesel must compete head to head with diesel as a fuel and ignores the increase in fuel efficiency derived from biodiesel.

[Vader]

This article is from last June. I would say that Boone Pickens is "right on" when it comes to the human resource challenge in the oil sands. Today Enbridge needs 3000 tradespeople for its pipeline project and 140 engineers, etc. etc. Drilling companies are shutting down their rigs one week out of four to give employees time off.


Famed Oil Tycoon Sounds Off on Peak Oil

By Michael J. DesLauriers
23 Jun 2005 at 03:17 PM EDT


TORONTO (ResourceInvestor.com) -- In recent months, legendary oil baron, T. Boone Pickens has become increasingly vocal about his view that peak oil is upon us and high prices are here to stay.

According to Business Week, the 77 year-old magnate has made more money betting energy prices would rise in the last five years than he did in the preceding half century working in the oil patch. Today, Pickens is the Chairman of BP Capital Management, a hedge fund that manages roughly $2.5 billion (about a third of that number is Pickens' personal wealth), and has been delivering for its investors in a big way.




If an investor had put up $1 million at the fund’s inception in 1999, the stake would be worth a whopping $28 million today. When hedge funds get it right, they really get it right!

The Man

Boone Pickens started his career in the early 1950's as a roughneck in oilfields in Oklahoma and Texas. He then became a geologist for Phillips Petroleum until 1954. In 1956, Pickens founded Mesa Petroleum and Petroleum Exploration with two other partners.

The next few decades witnessed massive growth for these companies, which ultimately emerged as Mesa following several mergers. The company became the nation's largest independent domestic producer of oil and gas, and one of its biggest gas producers.

Pickens achieved real notoriety in the 1980's after repeated attempts (some involving greenmail) to takeover major oil companies because of his conviction that acquisition opportunities in the marketplace were more profitable than exploration and production.

His Call

Addressing the 11th National Clean Cities conference last month Pickens said, "Global oil [production] is 84 million barrels (a day). I don't believe you can get it any more than 84 million barrels. I don't care what [Saudi Crown Prince] Abdullah, [Russian Premier Vladimir] Putin or anybody else says about oil reserves or production. I think they are on decline in the biggest oil fields in the world today and I know what's it like once you turn the corner and start declining, it's a tread mill that you just can't keep up with...So, when you start adding the reserves in these countries, you're not even replacing what you're taking out."

A little back of the envelope math was also quite enlightening, "84 million barrels a day times 365 days is 30 billion barrels of oil a year that we're depleting. All of the world's [oil] industry doesn't even come close to replacing 30 billion barrels of oil. We don't spend enough money to even give ourselves a chance to replace 30 billion barrels. It may be because the prospects are not there. I rather imagine that's what the answer is to that."

If we have achieved peak production but demand continues to grow with massive emerging economies in the far east and population growth, how will we achieve balance?

"Now you see the projections for the fourth quarter of '05, I mean like tomorrow; it is 86 to 87 million barrels of oil a day required. China [and] India [are growing fast. Our economy is going down a little bit, but it doesn't seem to be shutting off demand for gasoline, oil, natural gas, whatever. But around the world... just assume that the (U.S.) economy is slowing, but China is still ramped up; it is still 86, 87 million for the fourth quarter...Now we've got some pretty good inventory, those will be... I think...they'll be gone in the third quarter. I can't wait to see how this is all going to play out."

Big Oil

According to Pickens, the truth about the growing oil problem will not come from conventional sources. "The majors, they talk about plenty of oil and that they can produce more, but if you look at ExxonMobil, ChevronTexaco, BP (British Petroleum), all the production [is] going down every year. They don't replace and they don't add to production, but they say there's plenty of oil around.

"Now why would they say that? One of the chief economists with one of the major oil companies... I was at a conference where he was... we were talking and I asked, why do they say that? And he said, can you imagine what would happen if one of these major oil company's CEO's got up and made a speech and he said, 'We're running out of oil'? I said there'd be panic and he said, 'That's right. They're not going to make the statement. They're going to say there's plenty of oil around."

Prices

At the conference Pickens was calling for $60 oil by year-end. We have already seen it, and the forward curve is looking at even higher prices. As recently as Tuesday, Pickens told the Reuters Energy Summit, "I think people are scratching their heads as to whether the world will accept $60 like it did $50...You could go to $70, but at some point it's going to cost on the demand side. Sixty may slow everything down."

Oil Sands

Like Simmons, Pickens doesn't believe that the oil sands are an effective substitute. Pickens said Tuesday that huge development costs and a tight labour supply will prevent the Alberta oil sands and other unconventional means of production from covering the shortfall in supply. That said, Pickens holds a big stake in both the Canadian Oil Sands Trust [TSX:COS.UN] and Suncor Energy [TSX:SU].

According to Boone, "You add about a million a day [of oil sands production] for about $40 billion per million, that's about $360 billion dollars to add 9 million barrels a day...Could it be done? The money could be available for that. I'm not so sure if the human resources could do it."

In terms of other unconventional production sources, Pickens believes that with high oil prices and government assistance, the possibility for a bona fide shale play to develop in the Rocky Mountains is distinctly possible.

Conclusion

Resource Investor has now published three stories about peak oil, from authorities the likes of Matt Simmons, Henry Groppe and now T. Boone Pickens. Clearly the threat is very real and is still under-appreciated on Wall Street. In fact, many analysts are still calling for $25 oil, something they have been doing for the past 3 years, even as prices more than doubled, and more recently as the futures curve moved from backwardation into contango.

If $60 oil is here to stay, all sorts of opportunities are created for investors, not only in the shares of oil industry companies with more cash flow than they can handle, but also in some of the alternative routes for energy. If one’s portfolio has no exposure to black gold and is only negatively affected by its drag on the economy, the time to work it in as a hedge may be now.

If Pickens has managed to multiply his capital 28-fold in 6 years, it is probably incumbent upon readers to listen up.

[wd9]

Vader, 1 tonne canola at 42% is 420 kg oil divided by SG of .92 equals 456 litres oil. FFA's and glycerin account for 3.5% reduction in volume, equals now 440 litres biodiesel.

For the metric challenged 6$ canola is $265 a tonne. It is easier to stay away from the bushel.

At 300 per tonne oil (The moving number of course and feel free to fill in any number you want - $360 crushed delivered ROI etc minus min $60 (and this is low) for meal energy value or fert value or protein isolate input commodity - probably given avian flu in the future non allergenic protein could be quite valuable) biodiesel less processing is about 70 cents.

About 10 cents to blend and make biodiesel - less if glycerin is burned or polyols are made from the glycerin and sold as glycerin market is saturated already. Probably not though, industry isn't like farming where extra work doesn't mean less cost, it means more profit.

Now it is at about 80 cents at the blending facility. No tax yet, or delivery to the bulk dealer. Fill in your own numbers to calculate costs based on commodity and crush margins. Now you see why the US has a $1 a gallon or C$0.30/litre incentive - Europe more.

As prices change, breakevens vary of course. And as you can see calcs are not difficult, but do include many variables.

Also a litre of biodiesel has less energy than 1 litre of diesel (slightly) and produces a bit more NOX due to it's oxygen content.

The real issue, Canada is an oil exporting country, biofuels not that big an issue yet, but will be someday as the thirst for energy will rise globally.

So 265 canola is 80 cent biodiesel.

Today clear diesel is 85 cents/l and farm diesel is 71.5 cents/l.

Things to ponder, biodiesel life cycle analysis says 1 to 3.5ish in terms of energy input. As oil goes up, farmers should be smiling. It may cost more to put in the crop, but the crop value will rise above the crossover at 3.5 to 1. We are at the crossover point.

Charlie, what are your thoughts as an economics academic on this last point. Often we forget to consider the future and what it may bring.

FFA - free fatty acid.
SG - Specific gravity.

[wd9]

Oh yeah, more numbers:

Canada uses about 26 billion litres diesel. At B5 that is 1.3 billion litres BD. B2 is 520 million.

At .6 tonne per acre long average yield (26) that is (0.6 X 456 litres BD per tonne) or about 260 litres per acre for easy math which would require 5 million acres veggie oil at B5 and 2.5 million at B2.

Seems to me someone wanted numbers a few posts ago, hope this is what you were after, if not ask.

[Vader]

Agreed, on a straight comparison to diesel we are at the crossover point. If we can educate consumers of diesel fuel about the performance enhancing potential of biodiesel it should not have to compete head to head for energy value.

A 1% biodiesel blend gives a significant boost in fuel economy. Barry Hertz, a professor at the U of S, has done studies showing fuel economy increases at the one percent blend level and has suggested that if biodiesel were $2.50 per liter it would still be cost effective.

[wd9]

Yup, the lubricity property value and reduction of sulfur to zero and its effect on acid rain are all costs that are socio-political-enviro in nature but should contribute to its value also.

[ianben]

Thanks wd9

Those where the sort of figures I was after. Tonnes make it much easier for me. I will try to put my UK figures in your calculation and post back.

You dont have a similar thing for wheat from ethanol do you?

[ianben]

wd9
Governments tax fuel dont they another reason green fuel is just retoric when the words need action. So am having difficulty knowing the real cost of my diesel, fuel duty, vat.
Is your farm diesel totally tax free?

Can canola price be compared to barrel oil price?

[charliep]

Just a comment that WD9 numbers are accurate and reflect value in the current market.

Just a comment (and perhaps frustration as a civil servant) is that it should be more than government support that drives bio fuels. Customer needs should be as big as factor in pushing bio fuels ahead. With the exception of Husky/Mohawk on ethanol and some new upstarts on bio diesel (Kyoto fuels) that has not been occurring in Canada. How many farmers ask their fuel suppliers about their companies policy on bio fuels? Would you buy from a company that included ethanol/bio diesel even when their competitor is a penny a litre cheaper?

A question that is being asked around our shop (I mention with care) is what happens is the bio fuels policy is too successfull? Realizing their are by products of bio fuels that can be used as feed (distillers grains/protein meal), what happens if the bio fuels program is too successfull and can compete feed grains away from the livestock sector based not on economics but rather subsidies? Europe is only 40 % self sufficient in vegetable oil production so much of their policy is increasing imported vegetable oils. I will be in the Ukraine last two weeks of April and one of my jobs (outside the work I am doing on developing their extension services for farmers) is asking questions about increased oilseed (read ****seed) acres to fill European demand.

Bio fuels are a good thing. I think the model has to be a business one rather than one built on subsidies.

[ianben]

Hi Charlie
We have debated the pros and cons of the grain market for many years here, which I have enjoyed, and apart form managing risk have come to the conclusion farmers can have almost no influence on supply demand and therefore price.

Kyoto and green issues do seem influenced by the amount of oil a country has UK and Canada have and are not embracing bio-fuels like US and other non oil producing EU counties like Germany.
The EU subsidy is a tax break which is justifided by their cleaner susainable properties.
So is this a subsidy?
But when did a government like collecting less tax?

As farmers do we need to involve ourselves in the debate about the rights and wrongs?

However I do feel I need to educate myself on the basics of both bio diesel and ethanol in order to encourage this new demand.

More demand must be good for farmers but we need to know the real facts in order keep these new customers happy.

[wd9]

Ianben, no not for ethanol, just BD.

Road tax and fuel tax varies province to province. Manitoba is at 15 cents a litre off for BD production and I think BC will be at almost the same level. I must admit, the tax thing is complicated. Just guessing on them and they keep changing too, but will try and post better numbers on Monday on the taxes.

The 30 cents per litre the US has makes it all worth it. The challenge for infrastructure investment in Canada will be harmonization with the US or we simplt will not get crush capacity or BD facilities as they all will be in the US. Green takes green for a country to be green.

Also Charlie, you make it sound like the oil industry gets no incentives and are a pure business model.

[pilllypilsner]

first of all it was m. king hubbert who predicted peak oil in 1956.
second,has the oil price/canola price
ever been so out of whack.what happens if it tightens.i'm all for alternate energy but people should know the risks
before they put their money in something.
third,80% of the world's oil comes out of the strait of hormuz.iran is no push over and when war comes the price
of oil could go very,very high.

[WRAPper]

I think that's one of the key's WD9, The US is desperate to reduce it's offshore energy supply needs and thusly are throwing huge dollars at research and development right now. As is Europe, Canada having what they feel is an exportable surplus is lagging behind, read yesterday that we are 6 to 7 years behind the EU in renewable's.
Charlie ,
I agree with where you come from on this issue, but unless there is some form of parity of incentive with other jurisdictions will we Alberta farmers see this industry develop elsewhere and then see the continuation of the cycle of exporting raw unprocessed products elsewhere for further value added?
That flies in the face of Doug Horner's and the Alberta Government's stated goals of increased processing.
As WD9 has said don't believe the oil and gas industry hasn't been helped along the road at times.
Where's the ITC's in the budget for Biodiesel research and development?

Youu asked about the feed complex charlie, lets keep the canola meal here for our feeding industry 34% crude protein value there.

Another question should and could we be looking at lines of high yielding cultivars with not always great chlorophyll profiles to use in Biodiesel. (no WD nexera doesn't yield well enough)
Remember cyclone, huge yield 40 percent green seed,(ready in late october) but would farmers grow it or a variation at 70 bushels and 4 and a half dollars? IP to the biodiesel plant? Winter Canola?
Lot's of questions but maybe for a change lets look at it as lot's of opportunities.
Solutions not problems , that's the attitude we need to have here.

[wd9]

Oil content will be the key for alternative fuels. What to do with the mountains of meal and DDG's from ethanol will be another huge oppportunity for innovation - or cheap fertilizer.

Trouble with 60% oil content however, it is difficult harvesting little round jello packs as radically different seed structure will be required. Yield is only a small portion of the answer, oil content is where several problems can be addressed - meal, oil and oil seperation (less processing).