May 7, 2012

Saudi oil prices

With all due respect to the top energy official of the world's most important oil-producing country, Saudi Arabian Minister of Petroleum and Mineral Resources Ali I. Al-Naimi has it wrong. If he truly wants lower oil prices, he has the unalterable ability to make that happen.

In a recent op-ed piece in the Financial Times, Al-Naimi stated, "Saudi Arabia does not control the price; it sells its crude oil according to international prices." This statement implies that Saudi Arabia is somehow forced to adopt prices listed on some international price list as the Saudi Official Sales Prices (OSP). Does it not stretch one's credibility to believe that the largest producer in the world allows some entity other than itself to determine the price it puts on its invoices?

The real fact is that the Saudis choose to use prices adopted from speculative trading activities. They have a free choice in the matter. If the Saudis wished to do so, they could substitute their own internally chosen numbers instead of using the speculative numbers. For example, if the Saudis thought that the price should be $80/bbl, they are perfectly free to establish $80 as their OSP. No one can stop them. Further, since the nature of the system bestows upon Saudi Arabia the unique position of swing producer, and since the swing producer is the final determinant of prices, the Saudis choice of $80/bbl would become the international price. Rather than the Saudis following the speculators, the speculators would be forced to follow the Saudis.

Is it possible that the powers-that-be in Saudi Arabia do not possess a valid understanding of the petroleum pricing mechanism? While such a prospect borders on the incredible, the opposite explanation, that they know but they are trying to obscure their real intentions, is even more incredible. For the sake of the world economy it is imperative that they get it right.

William R. Edwards
Edwards Energy Consultants
Katy, Tex.

Biofuels and CO2

James K. Fallon's article on how "… biofuels will struggle to match ambitious objectives" thoughtfully delineates the barriers that are likely to thwart greater quantities of renewable fuels (OGJ, Apr. 2, 2012, p. 98). In discussing environmentally rationalized policies, such as the Renewable Fuel Standard 2 provisions for certain categories of fuel and California's Low Carbon Fuel Standard, his treatment—like most—takes at face value the CO2 reductions claimed by those regulations. However, what policymakers declare to be "low carbon" based on assumption-driven lifecycle analyses may not withstand scientific scrutiny regarding real as opposed to modeled emissions impacts.

Indeed, the very term "low carbon" when applied to liquid fuels is a misnomer. Chemically, the combustion emissions of fuels that can substitute for one another are essentially identical per unit of delivered energy. On a lower heating-value basis, for example, the CO2 released when burning ethanol is only 0.4% lower than it is for gasoline. Clearly, if biofuels have a climatic benefit, it is not when they are burned. Rather, it is through any net CO2 uptake that might have been achieved when their feedstocks were grown. The magnitude of such uptake is far more uncertain than implied by the simplistic notions of "carbon neutrality" that have been one impetus for biofuels policy.

Although biofuels may renewably recycle carbon, the land resources for growing biomass are finite. As land use expands, the result is an uncertain but likely very large release of terrestrial carbon stocks. This carbon debt occurs either directly or indirectly for any biofuel feedstock that requires quality land or forest and is produced at large scale (beyond the levels available from waste products).

Therefore, the prospects for biofuels will be further undermined as it becomes more clear how poorly their high costs stack up against their highly dubious environmental benefits.

John M. DeCicco, PhD
Professor of Practice, School of Natural Resources and Environment
Research Professor, University of Michigan Energy Institute
Ann Arbor, Mich.

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