March 29, 2012

Oil, Politics, and Amateur Accounting Fraud

Several of the Republican candidates have made extravagant promises regarding energy, the most stunning of which was probably Newt Gingrich’s claim that we have so much oil that we could supply not only our own needs, but those of Europe too. It hardly seems worth bothering to refute such a claim. Suffice it to ask, that if it were true, why did the Bush administration, the most oil-industry-friendly organization imaginable, not open up this bonanza?

Not to be left out of this circus of grand illusions, President Obama started making his own inspirational claims. The one of these that interested me the most was that the US, for the first time in many years, now produces more than half of its own oil. I am not new to this topic, and I know the generally accepted fraction of oil that we currently import is about two thirds. I was curious to see how he might have gotten to his magic fraction of less than half. Here’s how it was done.

The numbers appear to come from the U.S. Energy Information Administration or EIA. Their website tagline reads “Independent Statistics & Analysis”. It is reasonable to be suspicious of any organization that advertises itself as fair, balanced, or independent. The EIA site includes the page below to calm the public’s jangling nerves:

The rabbit leaps out of the hat in the form of a pie chart. It shows that, in 2010, the U.S. got 51% of its petroleum from domestic sources. As a dutifully trusting citizen, I am supposed to think that the President was right after all, and things are not as bad as I imagined. Being a skeptic (and a bit of a cynic) I read the copy. Two passages stand out:

“The United States was third in crude oil production at 5.5 MMbd.[million barrels per day]”

“In 2010 the United States imported 11.8 million barrels per day (MMbd) of crude oil and refined petroleum products.”

Well, ignoring the complication of refined petroleum products, these two numbers yield a crude oil import rate of 68.2% – very close to the two thirds I expected to see. So how did they jigger this down to 49%? The report also says:

“But crude oil alone does not constitute all U.S. petroleum supplies. Significant gains occur, because crude oil expands in the refining process, liquid fuel is captured in the processing of natural gas, and we have other sources of liquid fuel, including biofuels.”

The implication here is that we are being very clever making liquid fuel from natural gas and old French fry grease, but the sad fact is that we are really only making it with an accounting trick. This starts with redefining what “oil” is. When the President says “oil,” you and I, and everyone else outside the oil industry, thinks “crude oil” – but what the President and the EIA are talking about is a much more slippery definition of oil as “petroleum”. From the EIA’s glossary:

Petroleum: A broadly defined class of liquid hydrocarbon mixtures. Included are crude oil, lease condensate, unfinished oils, refined products obtained from the processing of crude oil, and natural gas plant liquids. Note: Volumes of finished petroleum products include non hydrocarbon compounds, such as additives and detergents, after they have been blended into the products.”

The consequence of using this definition is that gasoline and diesel fuel – “refined products obtained from the processing of crude oil” – can be included on the pie graph. That’s a big deal. When an American oil company demands imported crude oil to feed its refineries, that gets tallied on the import side, but the gasoline that they produce – that you and I demand at the pump – presto change-O! – is domestic petroleum, made right here in the USA! Not only that, but whatever crude oil we do produce domestically gets counted to our credit twice – once for the refinery as crude oil and once for the final customer as fuel!

To understand just how worthless this way of calculating oil imports actually is, just consider what it would yield in the worst possible case. Imagine we imported 100% of the crude oil we use, refine it all ourselves, and consume 100% of the refined products. A barrel of crude oil equals 42 gallons. The total volume of refined products from that barrel will amount to about 48 gallons (on average, the refined products are less dense). This ratio, then, would only yield a petroleum import rate of 47% – not the 100% crude oil import rate that actually matters. The worst case scenario would actually look better than the current situation!

We are in trouble. Most of us know this, at least intuitively, when we see the price of gasoline and of everything else going up. Unfortunately, you can’t expect much truth from anyone who still has a dream they think they can sell you, especially in an election year that promises to be a blood match between “the shining city on the hill” and “the audacity of hope”. Oil now flows from the mouths of politicians in great abundance. The facts of geology, however, remain unaltered and indifferent to our dreams.

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