How Changing The Definition Of Oil Has Deceived Policy Makers

Everyone knows that world oil production has been running between 88 and 89 million barrels per day (mbpd) this year because government, industry and media sources tell us so. As it turns out, what everyone knows is wrong.

It's wrong not because the range quoted above can't be found in official sources. It's wrong because the numbers include things which are not oil such as natural gas plant liquids and biofuels. If you strip these other things out, then world oil production has been running around 75 mbpd this year. The main thing you need to know about the worldwide rate of production of crude oil alone is that it has been stuck between 71 and 75 mbpd since 2005 (calculated on a monthly basis). And, that has already had huge negative effects on the world economy and world society through high energy prices that are partly responsible for our current economic stagnation.

But because natural gas plant liquids production has been growing rather rapidly due to recent intensive drilling for natural gas and because those liquids are misleadingly lumped in with oil supplies, people have been mistakenly given the impression that world oil production continues to grow. Not true! What's growing is a category called "total liquids" which encompasses oil, natural gas plant liquids, biofuels and some other minor fuels. Total liquids are growing only because of large gains in natural gas plant liquids and minor gains in biofuels. And, this is why it is so important to understand what natural gas plant liquids are.

But first, an important question. Why do government and industry officials, oil analysts, and energy reporters equate total liquids and total oil supply? They claim that these other liquids are essentially interchangeable with oil. (I will discuss some of the not-so-savory motives behind this claim later.) In a recent report the U.S. Energy Information Administration put it this way: "The term 'liquid fuels' encompasses petroleum and petroleum products and close substitutes, including crude oil, lease condensate, natural gas plant liquids, biofuels, coal-to-liquids, gas-to-liquids, and refinery processing gains." Let's see why the "close substitutes" assumption is demonstrably false when it comes to most natural gas plant liquids and decidedly disingenuous when it comes to biofuels.

First, crude oil is what you think it is. It's a black, hydrocarbon-rich liquid that comes out of underground reservoirs. It can also be made synthetically from other hydrocarbons such as the bitumen found in the Canadian tar sands. Oil also includes something called lease condensate which refers to the light hydrocarbons that often occur in oil reservoirs. They are gaseous in the high-temperature environment of the reservoir, but condense to liquids when they escape the wellbore and are captured by special equipment located on the oil lease. These condensates become part of the crude oil stream. They are highly prized because of the ease in refining them, though they make only a small contribution to world oil supplies.

But what are natural gas plant liquids and are they good substitutes for oil? Unfortunately, confusion reigns because a very similar but more inclusive term, natural gas liquids or NGL, includes lease condensate, already discussed above and which we know is included in the crude oil stream. Usually, when people refer to NGL, what they really mean is natural gas plant liquids (NGPL).

NGPL are hydrocarbons other than methane that are separated from raw natural gas at a processing plant. They include ethane, propane, butane and pentane. The amounts vary. For example, raw natural gas extracted off the coast of Malaysia contains 11 percent ethane, 5 percent propane, 2 percent butane and about 2 percent of something called natural gasoline or drip gas, a low-octane fuel that is used today primarily as a solvent. Raw natural gas from the North Slope of Alaska contains a higher percentage of methane and correspondingly smaller percentages of ethane (7 percent), propane (4 percent), butane (1 percent) and other components including carbon dioxide and pentanes (2 percent). In these two cases you can see that ethane makes up about half of the NGPL, propane makes up about a quarter, butane makes up 10 percent of Malaysian NGPL and 7 percent of Alaskan slope NGPL.

So what is ethane used for? It's major use is as feedstock for the production of ethylene, one of the most widely used chemicals. Polyethylene is the world's most widely used plastic and found in such things as packaging film and trash bags. Other processes turn ethylene into automotive antifreeze. Yet others turn it into polystyrene which is used in insulation and packaging. Some ethane remains in the natural gas piped to our homes and factories, but not much. So far, it's hard to see how ethane, the most plentiful of the NGPLs, is a good substitute for petroleum-based liquid fuel products.

How about propane? Everyone is familiar with propane use in backyard barbeques and camping stoves. It's also used to heat rural homes. In addition, the Green Truck Association reports that there are 270,000 propane-powered vehicles in the United States. That's about one-tenth of one percent of the roughly 250 million vehicles registered in the country. Some claim that 17.5 million vehicles worldwide run on propane. If true, that would be about 1.7 percent of the billion vehicle worldwide fleet. Yes, propane is a viable substitute for petroleum-based fuels in transportation. But a lot more vehicles would have to be converted to propane for that substitution to be meaningful. And, then there is a ceiling on how much propane could actually be made available because as we've seen, it makes up only 4 to 5 percent of all raw natural gas production.

To the extent that propane displaces heating oil, it is a good substitute for oil. But again, limits on its production prevent it from being a panacea. Of course, natural gas itself is often a substitute for heating oil, especially given its comparatively low cost. So there can be a limited substitution effect where natural gas infrastructure is feasible.

How about butane? Everyone recognizes butane as the fuel for butane lighters. When it is mixed with propane, it is called liquified petroleum gas or LPG which is used for space heating. It's also used as a propellant in aerosol sprays. But no one can put butane into a vehicle. It's not a suitable liquid fuel for transportation. I suppose one could say that we'd have to use petroleum to make lighters if we didn't have butane. I'm not sure that's a good start for making intelligent energy policy based on the central role of oil in global civilization.

Pentanes have industrial and laboratory uses, but aren't used as liquid fuel.

The case for lumping NGPL with oil supply is not very strong. In fact, given that little substitution is possible and the growth in the substitutes that are available is limited, the merging of NGPL with oil seems more like a facing-saving gesture on the part of those who have consistently been wrong on oil supplies and prices in the last decade. And, it seems to be a move of desperation by an industry that has been having trouble in recent years replacing its oil reserves. If investors caught on to the idea that oil companies are now essentially self-liquidating enterprises, valuations would be cut drastically. And that, of course, means that stock options and stock holdings for top executives would be devastated as would positions held by big investors.

NGPL currently constitutes about 9 mbpd of so-called total liquids. Biofuels, some coal-to-liquids, and a tiny amount of (natural) gas-to-liquids constitute another 2 mbpd. Turning coal into liquid fuels for vehicles is now done mostly in South Africa, a holdover from the days of apartheid when the South African government feared an oil embargo could leave the country without fuel for transportation. Turning coal into gasoline and diesel is extremely dirty and extremely expensive. But South Africa paid for the equipment to do so long ago and now must simply pay for domestic coal to supply its coal-to-liquids refineries. Only a relatively small amount of natural gas is currently being turned chemically into liquid fuels, mostly diesel. The process is capital intensive and expensive, and thought to be suitable for converting natural gas that might otherwise be flared.

As for biofuels, America is already approaching the current limit of its ability to absorb the supply of ethanol. Most cars can only run with a 10 percent mixture. Above that engine parts in the vast majority of vehicles start to degrade. Of course, we could continue to increase the ability of automobiles to burn ethanol. But the scale problem is the deciding factor. In North America it would take 1.8 billion acres to grow enough corn to supply enough ethanol to run the North American vehicle fleet. That's four and one-half times the amount of arable land available. And besides, corn ethanol takes more energy to produce than it provides. It's not an energy source so much as an energy carrier. Similar limitations apply to biodiesel which is made from vegetable oil.

The remaining volume of total liquids production, about 2 mbpd, is what is called refinery gain. Simply put, the total volume of crude oil increases once it is separated into its various fractions. This is not a source of oil so much as a consequence of spending energy to refine it.

Even when non-oil products are considered, total liquids have barely budged, up just 3.5 percent for the entire period from 2005 to 2011. Even if these liquids were interchangeable with oil, they would be making very little headway in substituting for it.

But because few of the non-oil products now being lumped in with oil supplies are genuine substitutes and the ones that are have serious limitations on the volume they could provide, we should consider the truth about oil. Its supply is stagnant which accounts for the record prices of recent years. And, the promise that high prices would bring on copious new supplies has proven to be nothing more than wishful thinking.

The limitations on oil supplies are now upon us. The salient issue is the rate of production, not the supposedly huge resources that optimists may conjure up in their imaginations. How much oil you can get out out of the ground on a daily basis is what counts, and it's getting harder and harder to extract the amount of oil we desire from the Earth's crust each day. We extracted the easy stuff first. We cannot now expect to extract the difficult stuff at the same high rates as the easy stuff. And, we cannot expect that total percentage recoveries from the smaller, more complex and challenging reservoirs which we are now forced to exploit will be as high as those we've gotten from large, simple, straightforward reservoirs in the past.

Facing up to this reality will be difficult because it will require so many changes in our thinking and our society. And, it would require the immediate markdown of the value of one of the world's largest and most powerful industries because it now faces contraction in the not-too-distant future. No wonder the powers that be decided to change the definition oil instead of accepting reality.