With so many articles and talking heads speculating on the reasons for rising oil costs, I decided to dig into government and trade publications. The following are findings which provided me with a deeper understanding into global oil supply and demand. I am writing this so that you may critique my research and the publications to provide a clearer picture of what is occurring with our predominant energy source. I hope you will find a few minutes to tear apart my research and provide clarity into global oil.

First. What is crude oil? "Most crude oil and natural gas originate from plant and animal life that thrived millions of years ago in swamps and oceans. These organic materials were deposited with mud and silt from streams and rivers. The sediments eventually hardened to form sedimentary rock. Heat and pressure transformed the soft parts of the plants and animals into solid, liquid or gaseous hydrocarbons known as fossil fuels - coal, crude oil or natural gas." CAPP

The History Channel had an excellent show, titled Crude, explaining the process of how ancient oceanic organisms were formed into what we know as crude oil.

Over the last 100 plus years, mankind has learned to refine oil into many useful products. The product I am most interested in covering is for transportation energy. Gasoline, kerosene and jet fuel are a few of the most common products. These are perfect for transportation needs.

Question. What can move 4000 pounds over 40 miles? Answer 1 gallon of gasoline. What other form of energy can provide 125,000 Btu per gallon for less than 4 dollars? Even with 10% ethanol the Btu is 120,900 Btu. KEEP Gasoline can survive tremendous swings in environmental conditions and keep its effectiveness for several months.

What makes up the cost of a gallon of gasoline? About 50 percent of the cost is crude oil and 19 percent is from refinery costs. EIA The remainder is made up of taxes and distribution costs.

Is it possible to create gasoline? We have attempted to create an alternative with ethanol but this alternative has less stored energy. One gallon of ethanol equals 84,400 British Thermal Units (Btu's). KEEP This would result in moving a 4000 pound vehicle about 28 miles. In addition, there is debate over the amount of petroleum used to create 1 gallon of ethanol. After all, the Law of Conservation states "that energy can not be created or destroyed, it can only be changed from one form to another." WIKIPEDIA

So, I make the assumption that crude oil and its derivatives are a finite resource of energy. I am of the opinion that people will choose the path of least resistance to obtain this resource. This brings me to the two categories of oil fields. Conventional vs. Non Conventional. Conventional oil is drilled from the reservoir with relatively little effort. "Non-conventional oil is oil produced or extracted using techniques other than the traditional oil well method. Currently, non-conventional oil production is less efficient and some types have a larger environmental impact relative to conventional oil production. Non-conventional types of production include: tar sands, heavy oil, oil shale, biofuels, thermal depolymerization (TDP) of organic matter, and the conversion of coal or natural gas to liquid hydrocarbons through processes such as Fischer-Tropsch synthesis." WIKIPEDIA Examples of Non Conventional oil is Canada's Athabasca Oil Sands and Saudi Arabia's Khurais complex. On April 22, 2008, Neil King, Jr. wrote an article in the WSJ explaining that Saudi Arabia's Aramco will open Khurais next year. This is of concern since they hold the largest and longest producing easy oil reserve in the world, Ghawar. http://www.financialsense.com/Market/cpuplava/2008/0423.html In Ghawar, it costs $4000 to add one barrel of daily production capacity. In the Non Conventional field Khurais, it costs 400 percent more or $16000 to add one barrel of daily production capacity. Aramco had to spend $15 billion to set up the infrastructure necessary to extract oil from Khurais. That investment is to increase total Saudi output from 11 million a day to 12.5 million a day or 13 percent. Mexico's largest conventional oil field, Cantarell, is in decline. http://www.pemex.com/files/dcpe/petro/pcrudo2.pdf http://translate.google.com/translate?hl=en&sl=es&u=http://www.pemex.com/&sa=X&oi=translate&resnum=1&ct=result&prev=/search%3Fq%3DPEMEX%2B%26hl%3Den%26safe%3Doff%26sa%3DG%26pwst%3D1 http://www.dallasnews.com/sharedcontent/dws/bus/columnists/jlanders/stories/DN-LANDERS_29bus.ART0.State.Edition1.394e17b.html Mexico is concentrating its efforts to meet future demand and income on challenging deep water fields. http://www.chron.com/disp/story.mpl/editorial/outlook/5750897.html

At this point, I know of two theories pertaining to supply and demand costs.

First. "EROI (Energy Return On Investment) or less frequently, eMergy, is the ratio of the amount of usable energy acquired from a particular energy resource to the amount of energy expended to obtain that energy resource. When the EROEI of a resource is equal to or lower than 1, that energy source becomes an "energy sink", and can no longer be used as a primary source of energy." WIKIPEDIA

Second is the Export Land Model.

Analyst Jeff Vail, in an April 2007 posting on his Energy Intelligence blog,
titled "Five Geopolitical Feedback-Loops In Peak Oil", explained the Export Land
Model concisely thus:
“Export-Land” Model: Jeffrey Brown, a commentator at
The Oil Drum, has proposed a geopolitical feedback loop that he calls the
“export-land” model. In a regime of high or rising prices, a state’s existing
oil exports brings in great revenues, which trickles into the state’s economy,
and leads to increasing domestic oil consumption. This is exactly what is
happening in most oil exporting states. The result, however, is that growth in
domestic consumption reduces oil available for export. In states, such as
Mexico, where oil production is also in decline, the “export-land” model
predicts that oil exports will decline much faster than oil production—and this
is exactly what is happening, with the latest PEMEX report showing 5% production
decline year-on-year, but 11% export decline. Ultimately, the effects of the
“export-land” model itself suffers from diminishing marginal returns—when
exports shrink sufficiently, the oil-export revenue per capita will actually
begin to decline (eventually reaching zero, no matter how fast prices rise), at
which time the force behind rising domestic consumption will be eliminated. WIKIPEDIA

What is the world oil reserve? The White House estimates about 1.2 trillion barrels worldwide. http://www.whitehouse.gov/energy/2001/Chapter8.pdf The Department of Energy reports about 1.3 trillion barrels worldwide. http://www.eia.doe.gov/oiaf/aeo/assumption/pdf/international_tables.pdf Better than 50 percent is located in the middle east. http://www.eia.doe.gov/oiaf/ieo/oil.html The same DOE publication states "In the IEO2007 reference case, the production call on OPEC suppliers grows at an annual rate of 2.0 percent through 2030 (Figure 37)" while "Non-OPEC production increases steadily in the projections, from 49 million barrels per day in 2004 to 61 million barrels per day in 2030" or about 3 percent. http://www.eia.doe.gov/oiaf/ieo/oil.html Figure 36 of the same publication tells me OPEC Conventional Oil and world Non Conventional oil will be increasingly relied upon to meet oil demand.

What is the world oil consumption? According to the Department of Energy World liquids consumption in the IEO2007 reference case increases from 83 million barrels per day in 2004 to 118 million barrels per day in 2030. Two-thirds of the increment is projected for use in the transportation sector. http://www.eia.doe.gov/oiaf/ieo/oil.html The WSJ article mentioned earlier published current consumption at 87 million barrels a day. http://www.financialsense.com/Market/cpuplava/2008/0423.html The DOE publishes a World Liquids Consumption to increase 2.06% each year until 2030. China and Asia will average 2.7% alone. http://www.eia.doe.gov/oiaf/ieo/oil.html

I will not speculate on the price of oil. Benjamin Graham who wrote the industry leading book The Intelligent Investor clearly explained through numerous examples that humanity demonstrates over and over its poor skill in predicting any value. He taught to avoid guessing at the future and invest in the company's current asset value. The DOE's chart clearly shows its poor record of prediction in this link http://www.eia.doe.gov/oiaf/aeo/assumption/figure_2.html So, I will refrain from guessing the price and focus on what the industry and government have published.

From the articles above, I gather the following: The world has moved from Conventional Oil production to the far more energy and capital intensive Non Conventional methods. As the WSJ article published, this is 4 times more expensive. The publications have indicated a greater reliance on OPEC to meet the world demands. As the Middle East gains more petrochemical dollars, will they succumb to the Export Land Model as well as the physical law EROI? I have found no other physical law or theory to counter this argument.

The United States will continue to be a major consumer of crude oil but as the middle class in China and India continue to prosper so will their demand for crude derivatives. View the bottom of the first page of the link. http://www.iea.org/textbase/papers/2007/fs_oil.pdf

Based on these publications I am convinced crude oil will remain the only viable transportation energy source because of its high Btu per volume and other physical characteristics that allow it to be carried in a wide range of environmental conditions. Because of this and the growing demand for oil both in the USA and growing worldwide markets the oil producing countries will continue to search for oil fields. Until more Conventional fields are discovered, producers will have to use existing technologies to extract oil from more and more difficult reservoirs. Non Conventional reservoirs take significantly more time and expense to get "online." Much of the world oil is located in unstable countries such as Nigeria, Venezuela and the Middle East. Until these countries become stable it will be very difficult to rely on their reserves. This in effect reduces the total world supply, and puts a greater burden on countries with established Conventional fields. Thus depleting the "easy" reserves faster and forcing these countries to devote more money and time toward Non Conventional fields. It's my opinion this will force countries like Saudi Arabia and Kuwait to follow Mexico's example and sink into EROI and the Export Land Model. As this occurs supplies will tighten.

As previously stated, world liquids production is forecast to remain at about 2.5% with world average demand increasing 2.1%. There is only a 0.4% room for error. Any disruption will likely cause increasingly volatile supply/demand adjustments and speculation.