Third Age of Oil

Written By Christian DeHaemer

Posted August 25, 2011

Quote of the Day:

If the federal government’s regulatory operation were a business, it would be one of the 50 biggest in the country in terms of revenues, and the third largest in terms of employees, with more people working for it than McDonald’s, Ford, Disney and Boeing combined. – John Merline, Investor’s Business Daily

The above quote has nothing to do with what I’m writing about today. I just thought it summed things up nicely – especially in the oil industry. Oil inventories came out low this week, dropping 2.2 million barrels and pushing WTC back up above $85.80 per barrel.

The Kohlinator

I had a passing conversation with Keith Kohl – the famed oil man behind the $20 Trillion Report. He was making fun of an author who said that the Utah oil shale would create a second oil age. “Man, we are already in the second oil age,” said Keith.

“We are? How many oil ages are there?” I asked.

“Well I don’t know how you want to quantify it, but the age of easy oil is over. We are now going deep offshore, under the Arctic and into parts of the world where the rule of law is little more than wishful thinking.” Keith went on, “The third stage will happen when the cost of alternatives will be cheaper for the same product at the same price. Meaning, I’m not paying 40k for an econobox that will only go 100 miles every eight hours.”

“We need grid parity,” I replied.

“Well,” he said, pulling at his beard with two fingers. “The trouble is Hammer, utilities run on natural gas and cars run on oil.”

Nick Hodge came bouncing down the stairs, taking two at a time, and said, “They are selling wind power cheaper than natural gas now in Brazil. Google it.” Nick Hodge is the financial analyst of the Alternative Energy Speculator.

I did as bidden, and it turns out he was right. According to BusinessGreen:

The Brazilian authorities have this week confirmed that wind power in the country currently costs less than natural gas, after a series of energy auctions saw wind farm operators undercut other forms of energy generation.

Seventy-eight wind power projects won contracts in last week’s energy auctions held by Brazil’s National Electric Power Agency, totaling 1,928MW and priced at approximately 99.5 reals (£37.4) per MWh.

By comparison, the average price for power generated with natural gas is currently 103 reals (£38.7) per MWh in Brazil, while the average price for energy determined through the auctions was 102.07 reals per Mwh.

Upon further research some of the low cost was due to government subsidies and the wind farmers would be happier with higher prices. But then again the price of building wind power plants has been consistently dropping. This could be the first step in real competition.

Smoking Joe Goes to Mongolia

I was in Mongolia two years ago visiting companies and talking to the movers and shakers in the next big resource economy. Yesterday, Vice President Joe Biden showed up. Biden with Camel iin Mongolia

The Mongolians, being the generous people they are, gave him a horse which he promptly named “Celtic”.

Not only did Biden name a Mongolian horse after a Scotish football club, but in Mongolia they don’t name horses because they eat them. But the good news is that ABC news showed a picture of Biden with a camel.

Refining the Mongols

Two months ago Mongolian President Tsakhia Elbegdorj proposed to build an oil refinery, emphasizing its importance for Mongolia. In the spring the Mongolian mining industry ground to a halt because the Russians decided to halt exports of diesel. The thing is, Mongolia has more than six billion barrels of oil and no refineries.

Well they will soon.

Construction on the refinery began on 11 August in the southeastern city of Saishand in Dornogobi province in cooperation with Mon L Gas LLC. The Saishand refinery will process 5,000 tons of crude oil per year. The second refinery will be able to process 200,000 tons a year. And a third will be able to process 300,000 tons a year.

Last year Mongolians consumed less then one million tons a year. So, they aren’t going to join OPEC yet.

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Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.

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