Oil 101

By Morgan Downey



Originally published





Aug 18, 2019


Aug 28, 2019

PurchaseExternal link
Book starts out with history of oil
Began in the US production was greater than demand because demand was largely for kerosene for lamps (to compete with and replace whale oil)
Eventually, electric lights replaced this
Rise of the automobile forever changed demand for oil
Discovery around the world
US companies and then regulatory groups determined stated prices of oil
Large oil producing countries, primarily in the Middle East, could produce extreme quantities, far larger than they themselves consume (this was only the case in the US very early on)
Over time, used this to get more favorable terms over profit splitting with US/European firms and to seize more control over mining and production
Such large scale of production and economic implications → highly politicized, led to conflict and economic shocks throughout conflict in Israel, Russia, Iraq, Iran, ...
Since ~ 2005, demand has outpaced supply → OPEC can have less control over pricing (but neither can anyone else)
Netback pricing: rather than going with fixed prices, base prices for a more opaque good (ex. crude oil in Azerbaijan) to a more transparent good (like unprocessed oil in the US, or even finished goods in the market like oil, jet fuel, ...)
This leads to more efficient markets and fairer modes of profit sharing for producers
With demand > supply, over the next decades, radical innovations in efficiency of (1) use, (2) production, or (3) alternatives will have to manifest to bridge this gap
No individual path of research (to this point) seems like it will ever be able to reach the scale of oil production today → we will likely need a portfolio of solutions
Most likely, we should look to: renewables, Nuclear, better forms of shared transportation
Within OPEC itself (at times reaching %55 of global production, and always exporting more than each nation needed), it was difficult to keep cartel members to their promises
Distributing production quotas was a function of reserve capacity & population (plus negotiations). Thus, countries could inflate their discovered reserves to be budgeted more production, which led to all OPEC countries doing this, which made it nearly impossible to deduce how much oil each country actual had in their reserves
International observers instead tracked tankers and estimated their loads based on how far tankers floated above the water
My thoughts: when there is money and uncertainty, people will go to very far stretches to minimize said uncertainty

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