Eight Things About the Oil Business

I wrote a thesis in this subject. So this is not a rant for any side of the question. It's my public service--trying to make educated voters.

1. There is upstream oil, that�s the well. Midstream oil is the pipeline or tanker. Downstream oil is the refinery and distribution thereafter. You mostly hear about upstream, but you have to think about each aspect if you�re considering the market.

Upstream
2. It takes four years from the time of discovery/speculation to drill down to oil on land and seven to ten or longer to drill for it offshore. That does not include a time allowance for war, politics, glaciers, alligators or boa constrictors on-site. So if an oil exploration company finds crude in outer Whazoo, we�re still not getting it right away. And during the drilling process, wars, politics, glaciers, and boa constrictors don�t go away.

3. You can�t just pump oil at any rate you like. Each well has a different pump rate. And when oil wells get old, you have to baby them. Oil wells in Eastern Iraq (and Mexico�s Cantarella Field) have been compromised through over-pumping. Repair takes a lot longer than proper maintenance. As with anything else, it costs plenty to fix what�s ruined. And sometimes repair doesn�t work.

Midstream
4. Distribution has been worked out by the oil companies to minimize costs. Therefore, most of the United States� oil supply comes from non-Arab states. That would be 1. Canada and 2. Latin America and 3. Western Africa. Europe and Japan get most of their oil from the Persian Gulf and from Russia or other former Soviet states.

5. Because we get our oil from Latin America and West Africa, we should pay more attention to what goes on there politically, economically, and for that matter, weather-wise. To do this, you have to read British Broadcasting Corporation news articles. The U.S. news is about starlets with love problems.

6. Just because we aren�t in direct line to the Persian Gulf for oil, doesn�t mean those events don�t affect us�because�they do. (Ask anyone military.) West Africa�s crude, for instance, could easily ship to Europe for a premium price if the Arab states could not ship. Russia�s price would go up. The supply is a world supply, and a knock in one place reverberates everywhere else. As of 1973. That�s just the way it is.

Downstream
7. Worldwide distribution (tankers/pipelines) is pretty stable overall, by which I mean it corrects quickly to meet those knocks. But any local distribution is precarious: inside Iraq as it traverses ethnic divides, across Azerbaijan or Georgia when Russia is on its way in. Past poor people in hovels on its way to developed countries. This is a fact, and we need to consider it when thinking about deferred costs in our life with oil.

8. U.S. distribution is a lot more precarious than you guess. Most refineries are on the Gulf Coast. So is the nation�s Strategic Reserve. My proof is Hurricane Katrina. The issue with gasoline prices and other oil-related supply for the nation had far more to do with refineries out of production than Oil Platforms getting blown about the Gulf of Mexico. Then there is the U.S. pipeline network, also concentrated on the Gulf--and the less-networked pipelines from Western Canada to the North Central States. In the event of shortage, the further you are from the Gulf, the longer the wait for relief.

And I have at least two more posts planned on U.S. oil. I�ll do this again, inbetween other philosophies and memoirs and tales . . . .