Tuesday, February 20, 2007

Slick oil deal or an oil slick? 

Can someone with more background in the voodoo of oil economics explain how the London-Venezuela oil deal actually adds up?

Just a few queries in my mind, let us say.

In the real world of refining, you don’t get your oil just from one hole. The quality of oil from different fields varies tremendously. Libyan crude for example has a low level of impurities while Venezuelan crude is loaded with impurities.

I have heard that this makes it possible to use Libyan crude in rugged diesel engines without further refining – so for example Ghadaffi in the past has used Libyan supplies as a political lever in some African countries by shipping them crude at a subsidised price, by-passing western refineries. This for example is historically why every vehicle in Sierra Leone is diesel powered. Same quality point goes for some Siberian crude oil.

Venezuelan crude however can only be used straight from the well in basic heating applications (and pretty polluting ones to boot). It must be refined before going into busses, in London or elsewhere.

Refineries work most efficiently if the quality of crude oil input is fairly constant (otherwise production controls need expensive adjustments). One way to do this is to buy oil from a variety of sources. Venezuelan crude is often purchased to mix with ‘cleaner’ crude (such as North Sea Oil) to give a constant input stream for the refinery. This means that Venezuelan crude may actually be less valued (or a capitalists say, have a lower price) than oil from some other sources, but it does has a definite market niche.

So what exactly is London buying? Is there a refinery tuned just into dealing with Venezuelan oil? Where? What are the supply implications?

And what are the Fair Trade implications in all this? London is still a wealthier place than Venezuela. If London is buying oil below even the normal market price for Venezuelan output this is actually the opposite to all those earnest efforts to pay (for example) banana and coffee producers fair prices.

Have I got all this wrong? I await the detailed explanations with much interest.

Comments: Post a Comment

This page is powered by Blogger. Isn't yours?

Weblog Commenting by HaloScan.com