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Application of Demand

& Supply
Crude Oil
Arvind S-01; Dhawal G-08; Rupesh S-26; Samay
L-29
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Introduction
Crude oil is a naturally occurring substance (i.e., “Fossil Fuel”, formed from
organic remains over a period of millions of years) found in certain rock
formations in the earth. It is a dark, sticky liquid which, scientifically speaking,
is classified as a hydrocarbon. This means, it is a compound containing
carbon and hydrogen, with or without non-metallic elements such as oxygen
and sulfur. Crude oil is highly flammable and can be burned to create energy.
Derivatives from crude oil make an excellent fuel.

Uses
Different types of oil that are obtained from crude oil are as mentioned below:
1. Ethane and other short-chain alkanes
2. Diesel fuel (petro diesel)
3. Fuel oils
4. Gasoline (Petrol)
5. Jet fuel
6. Kerosene
7. Liquefied petroleum gas (LPG)
8. Natural gas

Certain types of resultant hydrocarbons when mixed with other non-


hydrocarbons, create other products like:
1. Alkenes (olefins), which can be manufactured into plastics or other
compounds.
2. Lubricants (produces light machine oils, motor oils, and greases, adding
viscosity stabilizers as required).
3. Wax, used in the packaging of frozen foods, among others.
4. Sulfur or Sulfuric acid. These are useful industrial materials. Sulfuric acid is
usually prepared as the acid precursor oleum, a byproduct of sulfur
removal from fuels.
5. Bulk tar.
6. Asphalt
7. Petroleum coke, used in speciality carbon products or as solid fuel.
8. Paraffin wax
9. Aromatic petrochemicals to be used as precursors in other chemical
production.

Measuring Crude Oil


Crude oil is measured in barrels. When crude oil first came into large-scale
commercial use in the United States in the 19th century, it was stored in
wooden barrels. One barrel equals 42 US gallons, or 159 litres. In some
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cases crude oil is also measured in tons. The number of barrels contained in
each ton varies depending on the type and specific gravity of each crude,
however the average number considered would be around 7.33 barrels per
each ton.

Population

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The world population is the total number of living humans on Earth at a given
time. As of November 2008, the world's population is estimated to be about
6.7 billion (6,700,000,000). In line with population projections, this figure
continues to grow at rates that were unprecedented before the 20th century,
although the rate of growth has almost halved since its peak of 2.2% per year,
which was reached in 1963. The world's population, on its current growth
trajectory, is expected to reach nearly 9 billion by the year 2042.
The growth in population of the different regions from 2000 to 2005 was:
237.771 million in Asia
92.293 million in Africa
38.052 million in Latin America
16.241 million in Northern America
1.955 million in Oceania
-3.264 million in Europe
383.047 million in the whole world
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significant factor on petroleum demand has been human population growth.


Oil production per capita peaked in the 1970s. The world’s population in 2030
is expected to be double that of 1980. There are speculation or predictions
that oil production in 2030 will have declined back to 1980 levels as worldwide
demand for oil significantly out-paces production. There are claims that the
rate of oil production per capita is falling, and that the decline has gone
undisguised because a politically incorrect form of population control may be
implied by mitigation. Oil production per capita has declined from 5.26 barrels
per year (0.836 m³/a) in 1980 to 4.44 barrels per year (0.706 m³/a) in 1993,
but then increased to 4.79 barrels per year (0.762 m³/a) in 2005. In 2006, the
world oil production took a downturn from 84.631 to 84.597 million barrels per
day (13.4553×106 to 13.4498×106 m3/d) although population has continued to
increase. This has caused the oil production per capita to drop again to
4.73 barrels per year (0.752 m³/a).
One factor that has so far helped ameliorate the effect of population growth on
demand is the decline of population growth rate since the 1970s, although this
is offset to a degree by increasing average longevity in developed nations. In
1970, the population grew at 2.1%. By 2007, the growth rate had declined to
1.167%. However, oil production is still outpacing population growth to meet
demand. World population grew by 6.2% from 6.07 billion in 2000 to 6.45
billion in 2005, whereas, global oil production during that same period
increased from 74.9 to 81.1 million barrels (11.91×106 to 12.89×106 m3), or by
8.2%.

Agricultural effects of peak oil, Food vs. fuel and 2007–2008 world food
price crisis
Because supplies of oil and gas are essential to modern agriculture
techniques, a fall in global oil supplies could cause spiking food prices and
unprecedented famine in the coming decades. Geologist Dale Allen Pfeiffer
contends that current population levels are unsustainable, and that to achieve
a sustainable economy and avert disaster the United States population would
have to be reduced by at least one-third, and world population by two-thirds.
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The largest consumer of fossil fuels in modern agriculture is fertilizer


production via the Haber process, which is essential to high perennial corn
yields. If a sustainable non-petroleum source of electricity is developed, this
process can be accomplished without fossil fuels using methods such as
electrolysis.

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The world increased its daily oil consumption from 63 million barrels in 1980
to 85 million barrels in 2006
The demand side of Peak oil is concerned with the consumption over time,
and the growth of this demand. World crude oil demand grew an average of
1.76% per year from 1994 to 2006, with a high of 3.4% in 2003-2004. World
demand for oil is projected to increase 37% over 2006 levels by 2030
(118 million barrels per day (18.8×106 m3/d) from 86 million barrels
(13.7×106 m3), due in large part to increases in demand from the
transportation sector.
Energy demand is distributed amongst four broad sectors: transportation,
residential, commercial, and industrial. In terms of oil use, transportation is the
largest sector and the one that has seen the largest growth in demand in
recent decades. This growth has largely come from new demand for personal-
use vehicles powered by internal combustion engines. This sector also has
the highest consumption rates, accounting for approximately 68.9% of the oil
used in the United States in 2006, and 55% of oil use worldwide.
Transportation is therefore of particular interest to those seeking to mitigate
the effects of Peak oil.
Although demand growth is highest in the developing world, the United States
is the world's largest consumer of petroleum. Between 1995 and 2005, US

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consumption grew from 17.7 million barrels a day to 20.7 million barrels a day,
a 3 million barrel a day increase. China, by comparison, increased
consumption from 3.4 million barrels a day to 7 million barrels a day, an
increase of 3.6 million barrels a day, in the same time frame.
As countries develop, industry, rapid urbanization and higher living standards
drive up energy use, most often of oil. Thriving economies such as China and
India are quickly becoming large oil consumers. China has seen oil
consumption grow by 8% yearly since 2002, doubling from 1996-2006. In
2008, auto sales in China were expected to grow by as much as 15-20
percent, resulting in part from economic growth rates of over 10 percent for 5
years in a row. Although swift continued growth in China is often predicted, it
is predicted that China's export dominated economy will not continue such
growth trends due to wage and price inflation and reduced demand from the
US. India's oil imports are expected to be more than triple from 2005
consumption levels by 2020, rising to 5 million barrels per day (790×103 m3/d).

Production
The most common method of obtaining petroleum is extracting it from oil wells
found in oil fields. With improved technologies and higher demand for
hydrocarbons various methods are applied in petroleum exploration and
development to optimize the recovery of oil and gas (Enhanced Oil Recovery,
EOR). Primary recovery methods are used to extract oil that is brought to the
surface by underground pressure, and can generally recover about 20% of
the oil present. The natural pressure can come from several different sources;
where it is provided by an underlying water layer it is called a water drive
reservoir and where it is from the gas cap above it is called gas drive.
During the oil price increases since 2003, alternative methods of producing oil
gained importance. The most widely known alternatives involve extracting oil
from sources such as oil shale or tar sands. These resources exist in large
quantities; however, extracting the oil at low cost without excessively harming
the environment remains a challenge.
Chemically transforming methane or coal into the various hydrocarbons found
in oil. The best-known such method is the Fischer-Tropsch process.
As crude oil prices increase, the cost of coal to oil conversion becomes
comparatively cheaper. The method involves converting high ash coal into
synthetic oil in a multi-stage process.
Currently, two companies have commercialised their Fischer-Tropsch
technology. Shell Oil in Bintulu, Malaysia, uses natural gas as a feedstock,
and produces primarily low-sulfur diesel fuels. Sasol in South Africa uses coal
as a feedstock, and produces a variety of synthetic petroleum products.
The process is today used in South Africa to produce most of the country's
diesel fuel from coal by the company Sasol. The process was used in South
Africa to meet its energy needs during its isolation under Apartheid. This
process produces low sulfur diesel fuel but also produces large amounts of
greenhouse gases.
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An alternative method of converting coal into petroleum is the Karrick process,


which was pioneered in the 1930s in the United States. It uses low
temperatures in the absence of ambient air, to distill the short-chain
hydrocarbons out of coal instead of petroleum.

Oil shale can also be used to produce oil, either through mining and
processing, or in more modern methods, with in-situ thermal conversion.
Conventional crude can be extracted from unconventional reservoirs, such as
the Bakken Formation. The formation is about two miles (3 km) underground
but only a few meters thick, stretching across hundreds of thousands of
square miles. It further has very poor extraction characteristics. Recovery at
Elm Coulee has involved extensive use of horizontal drilling, solvents, and
proppants.
More recently explored is thermal depolymerization (TDP), a process for the
reduction of complex organic materials into light crude oil. Using pressure and
heat, long chain polymers of hydrogen, oxygen, and carbon decompose into
short-chain hydrocarbons. This mimics the natural geological processes
thought to be involved in the production of fossil fuels. In theory, thermal
depolymerization can convert any organic waste into petroleum substitutes.

Production Challenges
Oil extraction is costly and sometimes environmentally damaging
Offshore exploration and extraction of oil disturbs the surrounding marine
environment.
To avoid oil spills
Global warming on account of carbon-di-oxide emission resulting from burning
oil
Identification of correct oil well
Infrastructure setup for extracting oil
Government policies & approvals

Locations

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OPEC
The Organization of the Petroleum Exporting Countries (OPEC) is a
permanent, intergovernmental Organization (cartel), created at the Baghdad
Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia
and Venezuela. The five Founding Members were later joined by nine other
Members: Qatar (1961); Indonesia (1962); Socialist Peoples Libyan Arab
Jamahiriya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria
(1971); Ecuador (1973) – suspended its membership from December 1992-
October 2007; Angola (2007) and Gabon (1975–1994). OPEC had its
headquarters in Geneva, Switzerland, in the first five years of its existence.
This was moved to Vienna, Austria, on September 1, 1965.
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OPEC's objective is to co-ordinate and unify petroleum policies among


Member Countries, in order to secure fair and stable prices for petroleum
producers; an efficient, economic and regular supply of petroleum to
consuming nations; and a fair return on capital to those investing in the
industry.
They have quotas for each member of OPEC and in relation to this the price
of oil is set. Price setting is such that it effects the entire industry prices.

Cost & Investment

Oil exploration can cost tens or hundreds of billions of dollars.


The actual costs depend on such factors as the location of possible oil
reserves (i.e. on land or in deep water), how large the oil field is expected to
be, how detailed the exploration information must be, and the type and
structure of the rock below the ground. Exploration requires careful mapping
of the surface in order to locate suitable sites (ie, types of geological
structures), deep formation surveys (eg, with two and three-dimensional
seismic techniques), and test-drilling. It is not easy to determine a typical cost
of such activities.
OPEC has the lowest average production costs in the oil industry. This is
partly because some OPEC Member Countries have large amounts of oil in
reasonably accessible locations. Yet OPEC Members will still need to spend
tens of billions of dollars in future to meet the growing need for oil.

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Oil price

Medium-Term Oil Prices, 1994-2008 (not adjusted for inflation).


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In terms of 2007 inflation adjusted dollars, the price of oil peaked on 30 June
2008 at over $143 a barrel. Before this period, the maximum inflation adjusted
price was the equivalent of $95-100, in 1980. Crude oil prices in the last
several years have steadily risen from about $25 a barrel in August 2003 to
over $130 a barrel in May 2008, with the most significant increases happening
within the last year. These prices are well above those which caused the 1973
and 1979 energy crises. This has contributed to fears of an economic
recession similar to that of the early 1980s. One important indicator which
supported the possibility that the price of oil had begun to have an effect on
economies was that in the United States, gasoline consumption dropped by
.5% in the first two months of 2008, compared to a drop of .4% total in 2007.
However some claim the decline in the US dollar against other significant
currencies from 2007 to 2008 is a significant part of oil's price increases from
$66 to $130. The dollar lost approximately 14% of its value against the Euro
from May 2007 to May 2008, and the price of oil rose 96% in the same time
period.
Helping to fuel these price increases were reports that petroleum production is
at or near full capacity. In June 2005, OPEC admitted that they would
'struggle' to pump enough oil to meet pricing pressures for the fourth quarter
of that year.
Demand pressures on oil have been strong. Global consumption of oil rose
from 30 billion barrels (4.8×109 m3) in 2004 to 31 billion in 2005. These
consumption rates are far above new discoveries for the period, which had
fallen to only eight billion barrels of new oil reserves in new accumulations in
2004. In 2005, consumption was within 2 million barrels per day
(320×103 m3/d) of production, and at any one time there are about 54 days of
stock in the OECD system plus 37 days in emergency stockpiles.

Long-term oil prices, 1861-2007 (top line adjusted for inflation)


Besides supply and demand pressures, at times security related factors may
have contributed to increases in prices, including the "War on Terror," missile

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launches in North Korea, the Crisis between Israel and Lebanon. nuclear
brinkmanship between the US and Iran, and reports from the U.S. Department
of Energy and others showing a decline in petroleum reserves.
Another factor in oil price is the cost of extracting crude. As the extraction of
oil has become more difficult, oil's historically high ratio of Energy Returned
on Energy Invested has seen a significant decline. The increased price of oil
makes non-conventional sources of oil retrieval more attractive. For example,
the so-called "tar sands" are actually a reserve of bitumen, heavier, lower
value oil compared to conventional crude. It only became attractive to
production companies when oil prices exceeded about $25/bbl, high enough
to cover the costs of production and upgrading to synthetic crude.

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