All Liquids Are Not Created Equal

Once upon a time when we talked about oil, the presumption was we were talking about crude oil (or perhaps crude oil plus condensate if you were a petroleum wonk). Nowadays, when BP, the Energy Information Administration (EIA) or the International Energy Agency (IEA) publish their flagship yearly reports (see here, here and here) the lead-in charts highlight ‘All Liquids’ (click for larger image).

I’ve taken the numbers below from Table 3.4 in the IEA’s World Energy Outlook 2012 (click for larger image). Apologies for the lack of a link since the report needs to be ordered and is not freely available on the web.

As can easily be seen, traditional conventional crude oil is making up an ever smaller share of total liquids in percentage terms, falling from 88.8% in 1990 to 63.1% in 2035 under the IEA’s Current Policies scenario (basically business as usual).

This would be irrelevant if all liquids are perfectly substitutable amongst themselves; i.e., they are fungible. Unfortunately, they are not. The EIA released a great graphic yesterday showing two key determinants of fungibility (there are others): energy content per unit volume and energy content per unit weight here (click for larger image):

Now note that when the EIA, IEA or BP reports ‘all liquids’ supply, the unit of measurement is barrels per day, which is a unit of volume. But actually what we are really interested is energy. Further, the biggest transformation within the ‘all liquids’ composition has been from crude oil to natural gas plant liquids. So in percentage terms, we are replacing high energy content per unit liquids with lower energy content per unit volume liquids.

In other words, given that what we really care about is energy, we are comparing petroleum ‘apples’ with natural gas liquid ‘pears’ when we report ‘all liquids’ in volume terms—that is, barrels per day.

My fellow blogger (Energy Balance)—and former professor of chemistry—down the road in the city of Reading, Chris Rhodes, puts it this way:

According to the U.S. Energy Information Administration (EIA), “the term ‘liquid fuels’ encompasses petroleum and petroleum products and close substitutes, including crude oil, lease condensate, natural gas plant liquids, biofuels, coal-to-liquids, gas-to-liquids and refinery processing gains.” Since the major gains in production have been in the form of NGPL, it is a matter of some importance to consider the exact properties of these materials in comparison with conventional crude oil, particularly in relation to providing liquid fuels.

And then adds some numbers:

A barrel of (natural gas plant) liquids contains far less energy than a barrel of crude oil (6.12 GJ).

The energy content of natural gas plant liquids (NGPLs) is as follows:

Natural gasoline (4.87 GJ), iso-butane (4.19 GJ), n-butane (4.56 GJ), propane (4.05 GJ), ethane (3.25 GJ) – data from original source converted from Btu to GJ. Moreover, they are far from being “close substitutes” for crude oil, in terms of their molecular and physical composition, and are mainly used for other purposes. The major single component of NGPL is ethane (42%), which is converted to ethylene mainly to make plastic from. Roughly 28% of NGPL is propane, which is mostly used to run small heating appliances, e.g. barbecues.

Chris is a chemist but those number above have major implications for economics as well. Professor Jim Hamilton, in a recent post titled “Dude, where’s my cheap gas” over at Econbrowser explains the implications for price:

About 80% of natural gas plant liquids are in the form of 2-carbon ethane or 3-carbon propane. Ethane is primarily used to make ethylene for petrochemicals and manufacturing, while propane has a variety of uses. But neither ethane nor propane is used to make gasoline. That’s why the boom in production of NGL’s has meant rapidly dropping prices for ethane and propane but not for the price of gasoline.

His post contains price charts for ethane, propane and gasoline, and I encourage you to take a look at these and contrast and compare. In addition, his conclusion could not be more blunt:

It’s obvious from the above price charts that it makes no economic sense to add gallons of ethane or propane to gallons of crude oil to try to summarize global oil supply. But growth of natural gas liquids has been a key factor in the reported increases in “world oil supply” over the last few years and is also a key component of recent optimistic assessments of future oil production by Leonardo Maugeri and the IEA.

There is no question that the boom in production of natural gas liquids is providing a great benefit to industrial users of ethylene. But if you’re waiting for it to lower the price you pay for gasoline at the pump, you may have to wait a while longer.

Or perhaps wait for ever. Let’s just track the price data and see.