Understanding the Oil Supply Crisis

Or why it's not as simple as just 'lowering the prices'

Oil supply chains are a difficult topic to grasp. An overly simplified view is that oil is just pumped from the ground, processed through refineries, and then just sold as either petrol or diesel on the open consumer market, but it is a vastly more complex subject than this.

Crude oil comes with different grades

Just like you’d expect variations in the quality of diamonds or gold ores, you also have a variation in the kind of properties, and thus quality of crude oil. The Balance notes there are six kinds of crude oil:

Heavy/Sweet

Heavy/Sour

Medium/Sweet

Medium/Sour

Light/Sweet

Light/Sour

Their sweetness or sourness is determined by their sulphur content. A higher sulphur content means a more ‘sour’ mix, which is an undesireable impurity and thus requires more extensive refining to remove, and thus costs more to refine.

Refineries are calibrated to specific grades

It isn’t simply the case of the sour oil spending longer in the refinery: refineries must be finely calibrated to the type of oil produce that they are going to receive. So a refinery designed to handle a ‘sweet’ oil does not have the additional refining ability required for a ‘sour’ oil, and a ‘sour’ oil refinery has more refining than needed for a ‘sweet’ oil and would ‘over-refine’ the product.

Not all refineries refine for ‘transportation fuels’ (such as petrol, diesel, jet fuel, etc), and not all types of oil are suitable for this purpose. Heavy oils are used to make asphalt and plastics, where-as light oils make things like petrol and diesel.

Refineries are large, complex industrial buildings, and would cost a considerable amount of money to convert to differing types of oil. Even if you converted them to handle less-sweet oils that were heavier, you would still be paying in the increased refining costs and the lower return yields, as well as the long-term costs in shutting down the refineries to make the changes with.

Different regions produce different oils, in different quantities

It isn’t as simple as importing oils from ‘somewhere else’, either, as the variation in oil quality is largely geographical. Some regions have higher sulphur contents than others. So even if you find an oil exporter you’re willing to trade with, there is no guarantee they have the type of crude oil you’re after.

Venezuela, for example, only largely produces heavy oils. In contrast, Russia has an abundance of both heavy and light, sweet and sour, being one of the largest oil exporters would be difficult to replace.

Competition over a dwindling set of options

Then there’s the other side of the problem: market competition. You’re not the only one seeking alternative oil supply lines, which not only increases pressure on production rates, but also prices as there’s less and less of the alternative supply to go around.

The United Arab Emirates is already nearing the maximum output capacity, with Saudi Arabia in a similar predicament, a point which alarmed French President Macron to the point he interrupted Joe Biden to beg for assistance.

Supply and demand drive price. More people want alternative oil sources, but there’s not enough to go around, which drives up the price to the highest bidder. The oil prices have gotten so bad that Sri Lanka have begged Russia for assistance as their fuel supply shortage spirals out of control, as smaller countries do not have the financial power to compete with the likes of the US or the EU.

But even if oil were readily available, prices still wouldn’t come down, because…

Oil is transported by different means depending on source

The oil from Russia to the EU is transported by pipeline. Pipelines in general are cheaper to operate than fuel-burning lorries or ships, are able to transport much larger volumes in less time, and allow for dynamic supplies in real-time, where flow rates can be reduced if there’s too much oil, or increased if there is too little.

Oil transported from other countries, such as Saudi Arabia, have to travel via much slower moving, unwieldy, fuel-burning oil tankers. Ignoring the obvious ecological risks of oil spills, costs of crew, rental of the ship itself and insurance, it is a much slower form of oil transport with a much lower overall capacity.

It takes time to load and unload ships, time for the ships to travel, and requires appropriate storage space at the ports the ship docks at. None of the UK or EU ports were ever designed for the levels of oil capacity of which Russia has been sending via pipelines. You would need a never-ending conga line of oil tankers to get anywhere near pipeline levels of transportation.

The EU is already choking on maximum gas capacity issues with LNG, and similarly is to follow in relation to the oil supply, if a suitable source is even found, which is unlikely as the main candidates are already at maximum capacity, and the US is declining to permit any oil drilling or new oil wells, with the XL Keystone Pipeline panned in the year prior.

But what about trying to somehow ditch oil altogether? Well…

Switching to electric vehicles is highly unrealistic

Both oil and gas are used heavily in electricity generation by many nations, including the UK and Europe. The crunch in supplies has reached such a point that Germany is now importing more coal, Austria is reopening coal plants, the UK is extending coal plant operations, with the EU buying South African coal more than ever.

Still, this will not be enough. To reorient the energy infrastructure of a nation would take on the order of decades, not months. The energy grids will simply have no spare energy generation capacity for supporting electric vehicles (EVs), with calls for energy rationing already occurring in the UK, and, for those naive to think it is a Brexit-only feature, also in the EU.

This of course glosses over the fact that households are already struggling to pay food prices and energy bills in the thousands - it is extremely doubtful they could scarcely afford even a relatively cheap EV at, say, £40,000, a truly "let them eat cake" moment if there was one. This is ignoring the fact the EVs would add on top of the energy bills themselves.

Renewables will save us, right?

Well, it depends which country you’re in. If you’re in Norway, over 98% of the electricity is from renewable power. If you’re in the UK, however, 66.9% of power comes from non-renewable sources including nuclear power, of which 35.7% is gas.

This means as fuel and gas prices rise, and availability drops, so will grid capacity also drop. And this means proposals such as switching off EV charging during peak hours. That is to say, there is not enough renewable energy in enough countries to cover the shortfall.

But, lets say you could convince your government to go all in, spend as much money as necessary to acquire the renewable power components required. There’s a horrible catch, and you probably already see it coming…

Renewables require oil and gas

No, you did not read that wrong. Referring back to earlier, heavier oils are required to make plastics in order to build key electronic components, and lighter oils are required to fuel the mining rigs that dig up the earth to find the rare earth materials used in renewable energy.

Oil is also required to ship the components worldwide. Wind turbines use large quantities of oil to grease their gears, and require a periodic oil change to ensure optimal functionality, and to avoid destruction of moving parts.

For nations to build and ship these parts, they need to first make them, and even if you’re willing to overlook the issue of human rights abuses in China, you still need to ship them and deliver them using vehicles. Germany’s entire manufacturing industry (renewables and all) is facing total collapse in light of the EU gas sanctions.

There’s also the other aspect…

Renewables market competition

It won’t just be one or two nations suddenly doing a U-turn to rapidly adopt renewables to stave off a power shortage, but it would be, at the very least, 28 countries (US included), all suddenly wanting the same thing.

This drives up demand, which in turn lowers availability, which in turn drives up price. It’s not so much supply, as the amount being demanded in such a short space of time. The equal to trying to deliver a fragile pizza without getting squashed during a London Underground peak commute rush hour where several train services are inoperable.

Lower fuel duty taxes?

There is a limit to what this can do. Some countries have adopted this, but it’s kinda like removing the cherry from a large cake in order to reduce calories. It will be very superficial short-term, as the taxes are no longer the main price drivers, but the overall oil market.

Convert more food into fuel?

A waste in terms of energy. As the Real Engineering video titled The Problem with Biofuels notes, farmers burn more fuel growing the crops, through planting with tractors, spraying with insecticide, removing weeds, harvesting, preparation, transport and storage, than you would ever get back in the form of fuel.

Drive less?

This wouldn’t solve the oil price, as most of the demand is driven by the energy generation and manufacturing sectors. Not all jobs can work remotely, for example, healthcare, and this wouldn’t solve the issue for the people who couldn’t afford the fuel prices to begin with.

In Summary

The EU shot itself in both feet when it tried to go to war with Russia fully unprepared for the crisis that would entail. More concerned with how they looked rather than how sensible their policies were, the EU rushed headfirst into a bad situation of which the impoverished general public will be forced to pay.

Of course, the rich bureaucrats will scream at the public they must ‘suffer for Ukraine’, or even in some cases the “Liberal World Order” (whatever that means), but it’s highly unlikely the highly paid, money-under-the-counter bureaucrats are going to be the ones to truly bore this brunt.

This could have been avoided with some sensible and level-headed planning or even pre-planning, however the politicians were more concerned with how they looked, rather than how the public themselves are faring. Lose your job in a pandemic, win a free unaffordable fuel crisis and food price spike as a free bonus!

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