Despite being a world leader in oil production, Iran lacks the refining capacity to supply its domestic demand for gasoline. (image: s.wsj.net)

The US is still working on legislation to impose new sanctions on gasoline sales to Iran, but the threat of sanctions is already having an impact. On Monday, Reuters reported that oil trading firms Vitol, the world’s largest oil trader, and Trafigura are going to stop selling gasoline to Iran. The firms join BP, Glencore, and Reliance Industries, who have already stopped selling fuel to Iran as the fear of US sanctions convinced them to halt their supplies.

The US is trying to use sanctions to pressure Iran to abandon its nuclear program. Firms who have operations in the US would be penalized for trading with Iran if sanctions pass. Gasoline sanctions are considered one of the most severe and effective sanctions that could be levied against Iran. Though it’s the world’s fifth-largest exporter of oil, Iran lacks the refineries necessarily to produce adequate supplies of its own fuel products and imports 40 percent of its gasoline.

In December Iran cut its rations of gasoline, but so far its domestic consumption has remained steady, reported Israel’s Haaretz on Sunday. The current rations allow consumers to buy 80 liters (down from 100 liters) at a subsidized price of roughly 10 cents per liter; any gasoline purchased beyond the allotted amount costs four times as much. The failure to reduce demand, coupled with Iran’s generous gasoline subsidies, could make sanctions especially painful. As major suppliers stop doing business with the country, Iran will have to seek out smaller suppliers that demand higher prices.

Vitol will complete any fuel deliveries that stem from previous agreements, but told Reuters that the company had not made any new deals with Iran since the beginning of 2010. Chinese oil traders supply Iran with 30 percent of its oil; France’s Total, Malaysia’s Petronas, and Kuwait’s Independent Petroleum Group also continue to sell to Iran.

The proposed US sanctions have already been successful in curbing gasoline supplies to Iran, even if they do not become law. How Iran will respond is unclear—especially because no new sanctions have actually been imposed. The Iranian government already plans to phase out subsidies, and is working to expand its refining capacity to make the country more energy independent. Iran’s envoy to OPEC, Mohammad Ali Khatibi, reminded observers of the most powerful card Iran has to play when he said on Monday that current oil prices were too low and that crude oil should be closer to $100 a barrel—a price point that some think would bring global economic recovery to a grinding halt.

Whether sanctions on gasoline (or the threat of them) will successfully disrupt Iran’s nuclear program—or whether Iran will use its oil exports as an economic weapon to combat sanctions and create a shock in global oil markets—remains to be seen.

UPDATE: On Wednesday the Wall Street Journal reported that Royal Dutch Shell is the latest company to announce that it has stopped selling gasoline to Iran. A company spokesperson would not comment on how possible sanctions may have influenced Shell’s decision, saying only, “Shell is not currently selling gasoline to Iran.” According to the Journal, Western companies are being replaced by companies from Asia, regardless of the threat of sanctions. Petronas, Malaysia’s state-owned oil company, confirmed that it was continuing its gasoline sales to Iran.

When oil traders got two similarly named African countries mixed up last month, heating oil and gasoline consumers paid the price. (images: pickatrail.com)

Here at HeatingOil.com, we often report on the maddeningly confusing logic (or lack thereof) behind the movements of oil prices.

Perhaps the most important lesson to be learned from such reports is that in the oil markets, perception is everything. Just last week, a marginally positive US employment report caused a spike in crude oil prices that drove up gasoline and heating oil prices. If the business media is to be believed, oil traders perceived the jobs data as a sign that the US economy is on its way to recovery, which means US demand for oil will pick up sometime soon, which means prices will pick up also, which makes traders want to buy up oil futures contracts to cash in on the coming price increases. As more traders bought up contracts, the demand for contracts increased, sending crude oil prices upward on the New York Mercantile Exchange on Friday. As a direct result of the buying trend on Friday, heating oil and gasoline consumers are paying a few cents more per gallon today.

So here we have a clear-cut example of how oil traders’ perceptions can have direct bearing on the retail prices of heating oil and other refined petroleum products. It seems a little arbitrary, but after all these traders are the experts, right? If they think the jobs report is reason to expect an uptick in oil demand, they’re probably right. Even if the jobs report was not good news, it was not as bad as it could have been. As TheStreet.com reported on Friday, “Though the report was modest in reflecting a flat month for hiring, the subtle loss is buoying positive sentiment among investors.” On Friday, traders simply did their job: their perception, as experts, led them to buy more oil contracts and drive up the price.

But what happens when traders’ perceptions are just plain wrong?

For an example, we need only to look back to last month. In a turn of events grossly underreported by the business media but deftly brought to light on Saturday by the Record Searchlight of Redding, California, traders made a boneheaded error that ended up costing consumers extra pennies per gallon.

On February 18, the West African nation of Niger experienced a military coup that deposed the nation’s president, Mamadou Tandja. On February 19, the retail price of heating oil increased by an average of 4 cents per gallon as a result of the previous day’s rise in crude prices. Although we didn’t know it at the time, it appears that the coup in Niger had a lot to do with those rising prices. The day after the coup, Reuters reported that oil traders mistaking Niger for its oil-rich neighbor Nigeria had sparked a buying frenzy that helped send the price of crude to its February high of $79.29 a barrel.

Political turmoil in oil-rich nations and regions can have a major effect on oil prices, and with good reason: if a major oil exporter is gripped by a crisis that interferes with its oil industry, world oil supplies drop and prices go up. Nigeria is the eighth-largest exporter of crude in the world, supplying about 3 million barrels per day, so a coup or other major upheaval in that nation would certainly drive up prices. Niger, on the other hand, does not produce oil—the CIA World Factbook lists the nation’s 2007 oil experts as 0 barrels per day (157th in the world), so political events in Niger should have no bearing on oil prices whatsoever. Even the business news source MarketWatch (operated by the illustrious Wall Street Journal), seems to have hastily reported the coup had taken place in Nigeria, as this correction indicates. With that report, MarketWatch managed to take a false rumor off the trading floor and into world commodities and financial markets.

And so it seems that oil traders’ misperception of Niger as Nigeria gave oil prices a significant boost. To be fair, Nigeria has more than its share of political problems, as rebel groups sporadically attack oil infrastructure in protest of what they see as unfair distribution of oil wealth on the part of the national government. A coup in Nigeria would make sense, which made the false belief that one had taken place there that much more believable. And of course the names of the two nations are quite similar, not to mention the fact the bulk of Nigeria’s oil comes from the Niger Delta region of the country. So perhaps the misunderstanding stemmed from an honest mistake. But honest or not, the point is that one piece of misinformation led to a trend that had billions of dollars worth of ramifications throughout the world economy, not least of which was American consumers paying more for their heating oil and gasoline.

Faced with their stupid and costly error, errant oil traders would likely claim that it was actually other factors that drove up oil prices on February 18, as Reuters explained:

oil prices continued rising afterwards to within cents of $80 a barrel on Thursday, spurred by other factors such as tension over Iran’s nuclear programme and a weaker dollar.

While that may be true, would prices have increased that much on that day without the Niger/Nigeria factor? It is literally impossible to determine with any certainty, but reasonable analysis would say no. Perhaps if traders had double-checked their information before reacting, heating oil would have risen by just two cents instead of four on the following day. Those two extra cents, multiplied by millions of gallons delivered around the country, amount to heating oil users paying millions if not tens or hundreds of millions of dollars for oil traders’ careless error.

Theoretically, oil markets only respond to two forces: supply and demand. However, as last month’s events show, the reality is that the whimsical perceptions of oil traders can have just as much influence on oil prices as supply and demand. Keep that in mind next time you notice the price of gas go up a few cents.

Oil traders: for crying out loud, check your facts! Put up a map of Africa in your cubicle, if necessary. Your mistakes can be expensive for the rest of us, so please do us the favor of making sure your perceptions are based on truth before you start the next buying frenzy.

Narrated by an Iraqi war veteran who earned a purple heart, the ad make a simple and logical connection between US oil consumption and US casualties in Iraq: America consumes oil from (among other places) Iran; Iran is the birthplace of explosively formed projectiles (EFPs)—weapons made specifically to pierce the armor of US military vehicles; EFPs are passed from Iran to insurgents in Iraq, who use them against US soldiers.

The ad is slated to run in states with senators considered to be on the fence when it comes to their votes on climate and energy bills.  Perhaps using an emotionally charged and rarely-utilized angle to advocate for a climate law that reduces US oil demand will swing some of those senators to the “yes” column when it comes time to vote.  However, as we’ve seen with the health care battle, anything thing can happen between now and the day of that vote—and that vote may still be months away.

Watch the VoteVets ad, “Tough”:

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Freefalling oil barrels illustrate a net export collapse. And yet there are still barrels. (image: gettyimages.com)

President Obama pledges to attain national energy independence, only to be publicly rebuked days later by the Saudi oil minister for his lack of practicality. Two prestigious energy tracking agencies (CERA and the UK Energy Research Center) study the issue and release hefty reports in the same month with opposite conclusions. These are some of the examples given by host Jim Puplava in a January 30 segment of Financial Sense Newshour to introduce the increasingly fierce peak oil debate.

But to independent petroleum geologist and guest expert Jeffrey Brown, a crisis of world peak oil production is less critical than a crisis of peak oil exports.

Most of the peak oil debate centers on supply, analyzing the productivity of oil fields both known and yet-to-be discovered. There is no consensus on the amount of oil left in the world. Experts diverge considerably in their estimates due to the lack of truly reliable data and the powerful political motivations involved. Brown takes a different angle by using a different model, one developed with colleague Dr. Samuel Foucher and originally inspired by Matthew Simmons. Dubbed the Export Land Model, it analyzes a nation’s net oil exports—the difference between a nation’s production and consumption of its total liquid oil products.

According to Brown, it’s the future net exports, not production, we should be paying closest attention to when searching for signs of peak oil, because that’s the factor that crashes first, and hardest. Brown’s analytical model is unique in that it emphasizes the tendency of oil exporting nations to experience economic growth even as their oil supplies diminish.

* * *

The model’s reasoning goes like this: A nation only exports the surplus of its vital resources. Following a peak in oil production, a nation is flush with capital after exporting more oil than ever in its history—oil that is often sold at previously unreached high prices as well–and its economy responds with growth. But with an expanding economy comes growing demand for oil, causing the nation’s domestic oil needs to cut into a supply that recently began a steady decline. These two sources of pressure on the nation’s oil surplus cause it to deplete at an ever-faster rate. Unless the nation does the unprecedented and keeps its rate of domestic consumption always at or below its exponentially declining rate of production, the surplus vanishes and exports stop.

The “iron triangle” of the Export Land Model. Increasing consumption causes a nation’s net export decline rate to exceed its production decline rate. (image: wikipedia.org)

It’s because the decline in oil exports accelerates that the bottleneck in oil made available to importing nations occurs as a “crash,” not the steady decline, or “long gradual tail” so often pictured by authorities like the IEA. As Brown said on the OilDrum discussion board: “I’ve compared a typical production decline profile to a commercial airliner doing a normal gradual descent for landing. An export crash, like the UK and perhaps Mexico, looks more like a terrifying near vertical dive into the ground.”

UK oil production and exports. The production curve is the classic “peak oil” curve. As can be seen, the drop-off in net exports is dramatically steeper than the drop-off in production. (image: energybulletin.net)

But even an airplane crashing into the ground still stops at the ground. Not so with an export crash, which is only one step on a still-lower descent. Brown discussed with Puplava how a net exporter can become a net importer within a matter of years, and gave the UK as an example, which peaked in net oil exports (as well as production) in 1999, and hit zero export status in 2005.

As these exporters slip into importer status, not only are they not delivering oil into the market, they’re creating additional demand for the remaining volume of exported oil. And these exporters are simply falling into the path that the US and China followed. We went from being a major oil exporter in the Second World War to net importer status only three years later in 1948. (from the interview with Puplava)

According to Brown, the UK is a “classic example” of his model, because it saw a rapid export crash with “virtually no increase in consumption.” The example of the US is also highly illustrative, as its fast consumption rate made it a net importer long before its production peaked—a margin of 22 years.

That’s why Brown’s comparison above is particularly daunting. If other countries are following the US’ pattern, the world could experience a supply shortage far in advance of a global production peak, or what most people talk about when discussing “peak oil.”

* * *

To an oil-exporting nation, a decline in its oil surplus means it needs to start selling some other product. But to a global community dependent on oil, a depletion of net exports may as well be a supply crash. That’s the insight that makes net export analysis so powerful, but it is still surprisingly ignored in most peak oil discussions.

According to Brown’s ELM analysis from 2008, net oil exports from the world’s top five producers have already peaked. A graph supporting this fact showed the price of oil against the average annual net oil exports from Saudi Arabia, Russia, Norway, Iran, and the United Arab Emirates. As prices rose, these countries’ cumulative net oil exports also rose—presumably out of the desire to cash in on increasing demand indicated by higher prices. But in 2005, crude oil exports from these countries dropped sharply. The decline continued even as prices skyrocketed on their way to the all-time peak of $147 per barrel in July of 2008. Brown explained the significance of this pattern in an email to HeatingOil.com:

I brought up the post-2005 production and net export volumes versus price because it does provide evidence that the post-2005 decline in crude production and the decline in net oil exports were, [in my opinion], largely involuntary, much like the Texas & North Sea declines. My point was that if producers and exporters were happy to meet rising demand from 2002 to 2005, why were they suddenly unwilling to meet higher demand from 2005 to 2008?

If we are to believe the Export Land Model, the answer is that they did not have the oil to export. The model, using EIA data for these nations’ oil consumption, production and exports showed that these nations had already reached peak oil production and export capacity, and would approach zero net liquid fuel exports by 2030. Because these countries are responsible for about half of all the world’s oil exports, the 2008 paper that presented these results predicted a literal “draining-away” of the world economy’s lifeblood. It is worth noting that according to the IEA, which does not engage in ELM analysis, 2020 is the projected date of the global peak in oil production.

In an article published on GetRealList on February 8, energy analyst Chris Nolen, after studying two of the top three exporters to the US, declared “The Oil Export Crisis Has Arrived.” Finding that Mexico and Venezuela together exhibited an 8% decline in exports since 2005, he suggested that a crisis has been present for some time, but has not fully manifested because of the recession’s dampening effect on the US economy and demand for oil.

* * *

The Export Land Model is just a theory, like any other. But what makes it compelling is that even if it’s a little right, it says that whatever happens will happen quickly.

Brown happens to think both a production peak and export peak has been reached. He has said that the spike in oil prices from 2005 to 2008 was the result of a furious bidding war for dwindling exports—a theory at odds with the belief that the price run-up of the past few years was a result of excessive speculation, not market fundamentals. That is how oil can be selling for $80 a barrel even though supplies are at record highs and demand at record lows (as had been the case in recent months). But if Brown is correct (and it’s possible that both were contributing factors), then current prices are not a confounding anomaly, but a reflection of true demand for a critical resource in advance of pending export scarcity.

Severe drought in Venezuela is the cause of an electricity shortage that could soon lead to higher oil prices. (image: physorg.com)

A severe shortage of electricity in Venezuela could lead to a reduction in the nation’s crude oil production and rising crude prices for the rest of the world. The worst drought in 50 years has dried up rivers and streams that generate hydroelectric power, causing electrical shortages in rural and urban areas of the country. The Wall Street Journal reports that Venezuela is so dependent on hydroelectric power that one large dam provides 73 percent of the nation’s electricity.

In a frantic attempt to prevent hours-long blackouts that have gripped the nation for months, president Hugo Chávez has suggested that he may divert electricity from oil producing and refining operations to populated areas, UPI reported on Tuesday.

If Chávez goes ahead with this plan, Venezuela’s lucrative oil production would be significantly reduced, and world crude prices could swing upward as supplies sag. According to the CIA’s World Factbook, Venezuela is the tenth-largest producer and exporter of crude oil in the world, contributing 2.18 million barrels per day to the global market (2007 estimate). According to 2008 data from the International Energy Agency, Venezuela is the source of 3.5 percent of world oil supplies. That contribution makes Venezuela a crucial supplier of oil, with enough clout to deeply affect market prices. “Analysts” quoted by UPI believe the effect of Venezuelan production slowdowns would be dire:

Industry analysts said any drop in Venezuelan oil production and exports could push crude oil prices to more than $100 a barrel unless other producers moved in quickly to make up for shortfalls.

As we’ve seen recently with economic instability in Greece and Iran’s nuclear ambitions, seemingly unrelated events around the world can exert a major influence on oil prices.

Time to add drought in Venezuela to that list.

A seven-day strike by French Total oil workers is stoking fears of a supply shortage, thus raising prices. (image: thedailyherald.com and Nicholas Whitaker via heatingoil.com)

Oil prices edged higher on Monday, led by the continued strike by refinery workers for Total, France’s largest oil company. The strike has forced refineries to remain idle, raising concerns about fuel shortages in France and beyond. A stronger dollar limited oil’s gains, since a strong dollar makes dollar-priced commodities more expensive for traders who hold other currencies. That drives down demand for crude and heating oil and typically lowers oil prices; however, worries about the strike in France and possible sanctions against Iran outweighed the effects of the dollar and gave oil prices a small lift yesterday.

Today’s average retail heating oil price in the Northeast is 1 cent higher than Monday’s average price.