Wednesday, October 22, 2008

10 Things You Didn’t Know About Oil

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We all complain about the high price of oil: businessmen worry about the rising cost of petroleum-based raw materials, and politicians fret about the geo-political situations in oil rich countries and the rest of us pay through the nose whenever we fill up at the pump (yes, it has come down a bit, but only after such a huge run-up).

But what do we really know about oil? Do you know where petroleum came from? (hint: not dinosaurs). Or that during the early days of Standard Oil, gasoline was so useless that it was dumped in rivers? Did you know how much it actually costs the Saudis to produce a barrel of crude oil? (This explains why they're SO rich).

Here are the 10 Facts You Didn't Know About Oil:

1. Petroleum = Rock Oil

The word petroleum comes from the Greek word "petros" and the Latin word "oleum" meaning "rock" and "oil". Before "petroleum" was coined by German mineralogist Georg Bauer in 1556, people simply called it "rock oil."

Indeed, the Chinese, who had drilled the world's first oil well in 347 AD (a 800 feet or 240 m deep pit using bits attached to bamboo poles), called it - and still calls it - shi you, which literally means rock oil.

2. "Fossil Fuel" Came From Dinosaurs, Right?

Photo: Osborn, H.F. (1913)

It's common knowledge that oil came from decomposing dead dinosaurs and plant matters (after all, it is called "fossil fuel," right?) - but that's actually wrong. Though most scientists believed that oil has a biological origin, they don't believe that oil came from dinosaurs. They thought that oil was derived from single-celled planktons that flourished, died and then decomposed hundreds of millions of years ago.

Some scientists (mostly Russian and Ukrainian geologists) believe that oil wasn't produced from any living thing at all. This abiogenic petroleum origin hypothesis claims that oil was formed from deep carbon deposits dating from as early as the formation of Earth. If that sounds kooky to you, just know this: one of the proponents of this theory was Dmitri Mendeleev (yes, the guy who invented the periodic table of elements).

(If you're interested, Cecil Adams talked about this at The Straight Dope)

3. Ancient Uses of Petroleum

Greek Fire, from the Skylitzes manuscript

Humans have been using petroleum products for a long time. Asphalt was used in ancient Babylon as mortar for buildings and for waterproofing ships. Tar was first used in 8th century Baghdad to pave roads. Crude forms of kerosene was used to light lamps.

During the reign of the Byzantine Empire, greek fire - an incendiary weapon which exact formula was long lost to history but thought to contain various petroleum products - was a formidable weapon because pouring water on it only intensified its flame.

4. Love the Whales? Thank Petroleum!

In the 19th century, high demand for whale oil for industrial uses fueled the whaling industry. Indeed, whale oil was widely used for lamp illuminants (whale oil burned slowly without any odor), candle wax, and clock lubricants.

Whale oil was used as a glaze for early photographs, and it was an essential ingredient for pharmaceuticals, soap, varnish and cosmetics (whale oil imparts a "rich glossy sheen").

Thanks to petroleum distillation, however, the demand for whale oil dropped significantly until there's no longer any economic reason to go whaling. Indeed, commercial whaling was completely banned in 1986.

One final note: there is one thing that we still use whale oil for and that's space exploration. NASA found out that sperm whale oil does not freeze even in very cold temperatures (like in outer space), thus making it an ideal lubricant for space probes.


5. When Gasoline was so Cheap it was Worthless

Standard Oil refinery in 1910. Photo: Richmond Public Library

During the early days of Standard Oil (this was before cars became popular), kerosene was the name of the game. Gasoline, a by-product of petroleum distillation to produce kerosene, didn't have much demand. It was a cheap product used to treat lice and a solvent to remove grease stains from clothing ... In fact, gas was so cheap that oil companies used to dump it in rivers!

6. Zone Pricing: How Gas Gets Priced at the Pump

Ever wonder why the same gas costs differently across town, even if it costs the same to make and transport? You can blame zone pricing:

On a recent Wednesday, 72-year-old veterinarian Charles Hendricks filled up his Mercury Grand Marquis at a Chevron in west Anaheim. On the other end of town, 22-year-old sandwich store manager Ryan Ketchum gassed up his Nissan Sentra at a Chevron in Anaheim Hills.

Both men bought regular gasoline. Both pumped the gas themselves. But there was one important difference: Hendricks paid $2.399 a gallon, whereas Ketchum paid $2.539 — 14 cents more a gallon for the same Chevron gas. [...]

The primary culprit is zone pricing, a secret and pervasive oil company strategy to boost profits by charging dealers different amounts for fuel based on traffic volume, station amenities, nearby household incomes, the strength of competitors and other factors. (Source)

Wait, shouldn't that be illegal? Not according to both the Federal Trade Commission and the courts:

It's a controversial strategy, but the courts have thus far deemed it legal, and the Federal Trade Commission recently said the effect on consumers was ambiguous because some customers got hurt by higher prices while others benefited from lower ones.

(Photo: gj walberg [Flickr])

7. Oil Shocks of the 1970s

Cars waiting in line at a gas station (1979). Photo: Warren K. Leffler, Library of Congress

It's easy to think that today's sky high oil prices is a new problem, but the fact is, it actually has happened before. Twice.

In 1973, spurred by the Yom Kippur (or Ramadan) War, the Arab members of the OPEC announced that they would cut oil production and not ship oil to United States, Europe, and Japan for supporting Israel. In essence, they were using oil as a weapon to punish the West.

The effect was immediate: oil quadrupled in price (to $12/barrel - how quaint that seems now!) and gasoline price jumped more than 40%. The U.S. government moved to control the price of gas and lines of cars waiting to buy gasoline became a familiar sight. In many places in the country, gas was rationed:

... officials in Massachusetts, Maryland, New Jersey, Washington, B.C., Bade County, Fla., and other areas last week adopted Oregon-type rationing schemes that will allow motorists with even-numbered license plates to buy gas on even-numbered dates, and those with odd-numbered plates to buy on odd-numbered dates (Source)

To help reduce consumption, the national maximum speed limit of 55 mph was imposed in 1974, and the US started to stockpile crude oil in the Strategic Petroleum Reserve in 1975. Calls for conservation went hand in hand with greater interests in renewable energy, specifically wind and solar power.

In 1979, the second oil crisis happened when Ayatollah Khomeini took control of Iran after the Iranian Revolution, forcing the Shah of Iran to flee the country. For the second time in six years, the price of crude oil spiked and gas lines formed at the pump.

The 1970s oil crises were followed by the 1980s oil glut, which drove down the price of gas (though not to the level before the crises) ... and - surprise! - caused everyone to forget what it felt like to pay exorbitant gas prices until the next crisis.

8. The Reason the Saudis are so Rich

Extracting oil from the ground is complicated - but it's also a well established science. Have you asked yourself how much exactly does it costs Saudi Aramco, the state-owned national oil company of Saudi Arabia and the world's largest oil producer, to produce a barrel of crude oil?

Forbes magazine has the answer:

Aramco can quench its gargantuan thirst for development: It's easily the most profitable company on the planet. While results are closely held, Aramco stands to net, after amortization of capital costs, roughly $200 billion a year on revenue in excess of $350 billion. Last year oil minister Ali Al-Naimi told reporters that the average barrel of Saudi oil costs just $2 to produce. It sells for $130. (Source)

9. Rising Oil Price Ultimately Leads to Rising Goods Price

So what if oil price skyrockets if you can just walk or bicycle to work? Well, it turns out that out of 20 million barrels of oil United States imports every day, only 45% is used for gasoline fuel.

Though the large majority of the rest are used as fuel of some sort (like heating fuel), a portion of the petroleum is used for raw materials found in practically all consumer products sold today:

No business in America produces more of the oil-based ingredients that go into the nation’s products than the Dow Chemical Company, based in Midland, Mich. From Dow’s petrochemical operations come the basic ingredients of a wide variety of plastic bottles and packaging, including numerous containers once made of glass or tin.

Indeed, paint, computer and television screens, mobile phones, light bulbs, cushions, paper, mattresses, car seats, carpets, steering wheels and polyesters are all made with ingredients that Dow and other chemical companies refine from oil and natural gas.

Dow normally raises prices piecemeal. Last month, though, the surge in the cost of oil and natural gas, the company’s principal raw materials, produced a rare across-the-board price increase of as much as 20 percent. (Source)

So far, worried by the weak economy, many businesses have not passed along the rising cost of raw material to consumers. A growing number of economists, however, think that it's just a matter of time before they have to.

And it's not just the price of hard goods. According to the Buzzwatch blog at the Wall Street Journal, many other things are blamed on high oil prices:

- Some schools may cut back on field trips
- Pizza delivery charges are rising.
- Kangaroo harvesters are seeking alternative careers. (Really)
- Gas theft is on the rise in California’s San Joaquin Valley.

10. Have We Reached Peak Oil?

This graph shows that oil productions have peaked in non-OPEC, non-former Soviet Union countries. Domestic oil production in the United States peaked in the 1970s. (Image from Wikipedia)

"Peak oil" is a concept created by geoscientist M. King Hubbert in 1956 to predict when U.S. oil production would peak.

Scientists and oilmen are concerned about the amount of oil produced over time and the amount of oil still in the ground that can potentially be extracted in the future. Why? Because the cost of production would begin to go up as oil becomes scarcer (at the same time, the world's population would continue to grow thus requiring even more oil).

Economists say that oil demand is inelastic - this means that a small drop in production can cause price to skyrocket. Indeed, in the 1970s oil shock, a production drop of 25% caused oil price to jump 400%. So clearly peak oil spells trouble for the world's economy.

So, have we reached peak oil? Some people argue that we have and certainly the rising oil prices lend support to this argument (note that the decline in the value of the dollar also contributed to high oil prices), whereas others argued that we're about a decade away from reaching this point. It's prudent to note that other researchers predicted that we would reach peak oil in the 1990s, and that obviously didn't happen.

But one thing is for sure: if the 1970s oil crises were any indications, high gas prices are here to stay.


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