COMPARATIVE INVENTORY & GAS STORAGE REPORT DECEMBER 1, 2022 (2022-44)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT NOVEMBER 30, 2022 (2022-44)

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COMPARATIVE INVENTORY & GAS STORAGE REPORT NOVEMBER 23, 2022 (2022-43)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT NOVEMBER 23, 2022 (2022-43)

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COMPARATIVE INVENTORY & GAS STORAGE REPORT NOVEMBER 17, 2022 (2022-42)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT NOVEMBER 17, 2022 (2022-42)

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ENERGY AWARE #4: THE DEVIL IS IN THE DIESEL

Global diesel is in short supply.

Analysts are concerned about diesel because it is the hemoglobin of the global economy. The world’s mines, oil rigs, construction, ships, trains and trucks run on diesel.

Typically, inventories should be 30% higher this time of the year. Such low levels are alarming because diesel is the workhorse of the global economy. It powers trucks and vans, excavators, freight trains and ships. A shortage would mean higher costs for everything from trucking to farming to construction.
–Javier Blas, Washington Post, October 18, 2022

Most government leaders, journalists and industry analysts don’t understand why there is a problem. That’s because it’s a refining issue and it’s not something simple that can easily be fixed by pressuring refiners to make more diesel. Let me explain.There is a sequence of products made in a refinery that includes gasoline, kerosene, jet fuel, and diesel that all must be distilled from each barrel of oil. It’s not an a la carte menu in which you can order diesel but tell the waiter to hold the gasoline, kerosene and jet fuel.

Petroleum products are distilled from crude oil like whisky is distilled from fermented grain. For both petroleum and whiskey, a liquid is heated to create a vapor that is then condensed back into a liquid again. In the case of whiskey, distillation removes the heavier molecules that condense at the bottom of the still—the wash—and are later thrown away. Only the lightest fraction—the whiskey—that condenses at the top of the still is kept.

For petroleum, the whiskey is gasoline and a few lighter molecules. The wash is everything else including fuel oil, diesel, jet fuel and kerosene. These are not thrown away because in today’s market, they are worth more than gasoline.

Oil is a complex molecule that consists of a long chain of mostly carbon and hydrogen atoms (Figure 1).

Figure 1. Oil is a complex molecule that consists mostly of long-chains of carbon and hydrogen. Source: Labyrinth Consulting Services, Inc.

Refineries upgrade crude oil into higher value gasoline and distillate products by breaking this long molecule down into smaller chains of carbon and hydrogen by a process called fractional distillation. The general molecular structures of propane, butane, gasoline and diesel are shown in Figure 2.

Figure 2. The general molecular structure of propane, butane, gasoline and diesel. Source: Labyrinth Consulting Services, Inc.

 

In a refinery, crude oil is heated under pressure in a furnace into a vapor and then fed into the bottom of a distillation tower (Figure 3).

Longer-chain molecules have higher boiling points than smaller molecules and condense back into liquids at the bottom of the distillation tower. The vapor cools as it rises through the column and different hydrocarbon molecules or fractions condense and run out of the tower at different levels.

The figure shows the main intermediate products that come out of a distillation tower with their average number of carbon atoms (C1 – C4, C5 – C8, etc. in the figure). These intermediates are then put through a series of blenders, treaters and catalytic processes that result in final products like gasoline, diesel and jet fuel.

Figure 3. Crude oil is heated in a furnace, vaporized and put into the bottom of a distillation tower. Source: Valero & Labyrinth Consulting Services, Inc.

 

Most U.S. refineries were built in the 1970s and were optimized for gasoline production because that was the most valuable cash product at the time. Diesel has since become more important but no large refineries have been added in the last 50 years. Increasing the volume of diesel means increasing the volume of all other refined products. The problem is that gasoline accounts for more than half of all petroleum product consumption today in the United States but diesel (distillate) accounts for only 24% (Figure 4).

Figure 4. Gasoline accounts for 53% of U.S. finished petroleum products in 2022. Distillate accounts for 24% and kerosene-jet for 9%. Source: EIA & Labyrinth Consulting Services, Inc.

To make matters worse, gasoline consumption has been weak. U.S. gasoline consumption has been below the 5-year average since June 2022 (Figure 5). Refining is a business. For as much as refiners would like to produce and sell more diesel, they can’t justify making more gasoline and other products that cannot sold at a profit.

Figure 5. U.S. gasoline consumption has been below the 5-year average since June 2022. Source: EIA & Labyrinth Consulting Services, Inc.

In other parts of the world, refinery configurations are different and often designed to optimize diesel production. In Europe, for example, diesel yields are sometimes as high as 40% and gasoline yields as low as 15 or 20% (Figure 6).

Figure 6. Typical EU refinery fuel consumption as % of yield in simple and complexrefineries. Source: Bourgeois et al (2012) and Labyrinth Consulting Services, Inc.

Refineries that produce higher diesel yields use heavier crude oil as input. Not all oil is the same even though this is rarely considered or discussed by journalists or analysts. Some crude oils are heavy and others are light. That property of oil is expressed by its API gravity, a variant on specific gravity or density. Heavier oils have lower API gravities and lighter oils have higher API gravities. Lighter oils have limited middle distillates and heavy gasoil compounds that are need to make high-quality diesel.

Figure 7 shows a range of common crude oils used in U.S. refineries arranged by sulfur percent and API gravity. Most U.S. onshore oils including tight oils, and Brent oil are light and sweet (orange circles). Many Saudi Arabian and Iraqi oils, and Alaska North Slope oil are heavier and have higher sulfur content (blue circles). Many oils from Canada, Mexico, South America and West Africa are heavy with a range of sulfur content (black circles).

Most U.S. and Brent is fine for refining gasoline but must be blended with heavier grades to produce diesel. This is why the U.S. cannot be oil independent no matter how much oil it produces.

Figure 7. A range of  crude oils arranged by sulfur percent and API gravity. Source: Valero & Labyrinth Consulting Services, Inc.Refineries cost billions of dollars to build and are designed to operate for decades.

Figure 8 shows the intermediate product cuts for a range of oil types and API gravities. The red and green columns indicate distillate and heavy gas oil products that are suitable for diesel production, and the yellow and orange bars indicate gasoline components and naphtha products suitable for gasoline production. This clearly shows that an oil’s potential for diesel production is inversely and progressively proportional to its potential for gasoline production.

Figure 8. Potential Intermediary Products of Different Oils. Source: Carnegie Endowment and Labyrinth Consulting Services, Inc.

 

The last refinery built in the U.S. with significant capacity was in 1977 although smaller new plants and existing plant upgrades have occurred more recently. New complex refineries have operating lives of about 40 years can cost $15 to $20 billion. That’s a stretch for an industry that struggles with investor expectations of a limited future for fossil fuels.

Refiners understand that low diesel inventories are a relatively temporary problem triggered chiefly by Russia’s invasion of Ukraine. The European Union imported 39% of its diesel and gasoil from Russia in 2021 and its loss leaves a huge hole in worldwide supply.

There is little flexibility to modify the kind of crude oil input or distillate yield once the refinery is built. Suggestions by some people to re-design, to build new refineries, or to use new technologies to boost diesel output are not realistic.

Refining is a complex system that cannot be adjusted without unanticipated consequences. Simple solutions are incompatible with complex systems. The world is connected and interdependent for energy and refining in unavoidably fundamental ways. The lesson of the Ukraine War should be that energy cooperation is a far more important and strategic factor than territorial or ideological disputes.

 

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COMPARATIVE INVENTORY & OIL STORAGE REPORT OCTOBER 19, 2022 (2022-41)

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COMPARATIVE INVENTORY & GAS STORAGE REPORT OCTOBER 13, 2022 (2022-41)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT OCTOBER 13, 2022 (2022-40)

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ENERGY AWARE #3: U.S. ENERGY INDEPENDENCE AND OTHER DUMB MEMES

The United States is energy independent. Banning oil exports would lower oil prices. Strategic Petroleum Reserve releases lowered gasoline prices. There is a shortage of refinery capacity in the U.S. The cancelation of the Keystone XL Pipeline has limited U.S. oil supply and contributed to higher energy prices.

These popular memes are wrong.

The U.S. is not Energy Independent

The U.S. produced about 11.3 mmb/d of crude oil in 2021 and imported about 6 mmb/d of crude oil per day. That doesn’t sound very energy-independent.

When politicians and journalists talk about American energy independence, they’re not really telling the truth. They’re playing with truth. The energy independence meme confuses oil and refined products. They’re not the same. Let me review the facts.

The U.S. is a net importer of crude oil. U.S. net imports of crude oil averaged 2.9 mmb/d in the first seven months of 2022 (Figure 1 blue fill). That’s way down from almost 9.4 mmb/d during the same period in 2001, and moving in the right direction but it’s hardly energy independent.

The U.S. is a net exporter of refined products. Net exports averaged 5.9 mmb/d in 2022.

Figure 1. The U.S. is a net importer of crude oil & a net exporter of petroleum products. U.S. net imports of crude oil have averaged 2.9 mmb/d in 2022 and net exports of products have averaged 5.9 mmb/d. Source: EIA & Labyrinth Consulting Services, Inc.

The problem arises when crude oil and the products refined from it are combined.  That’s the blue curve in Figure 3 and voila. A country that imports more oil than Europe uses, magically became a net exporter in October 2021.

Figure 3. The U.S. is a net importer of crude oil & a net exporter of crude + petroleum products. U.S. net imports of crude oil have averaged 2.9 mmb/d in 2022 and net exports of crude + product have averaged 0.9 mmb/d. Source: EIA & Labyrinth Consulting Services, Inc.

No other country in the world accepts this definition of being a net exporter. A country is a net exporter of oil only if it exports more crude oil than it uses. Saudi Arabia’s net crude oil exports are about 7.3 mmb/d. Canada exports almost 3 mmb/d of crude oil. The U.S. is a net importer of 3 mmb/d of crude oil.

About ten years ago I read article by Michael Levi in which he discussed this peculiar notion of American energy independence. Imagine, he wrote, a country that produces no automobiles but buys millions of unpainted cars from other countries. It brings them to domestic factories, paints them green, and then sells them on the world market. Is that country a net exporter of automobiles? Of course not. It’s a net exporter of green paint.

In the first seven months of 2022, America imported an average of 6.3 mmb/d of crude oil and exported an average of 5.9 mmb/d of refined products. Green paint.

Banning Oil Exports Would Not Lower Oil Prices

Several congressmen recently proposed that President Biden ban oil exports. They argued that this would lower make the country more energy independent and lower oil prices. It sounds like a good idea but it’s wrong because most of the oil exported from the United States cannot be used in U.S. refineries.

Refined products are made by heating crude oil in a distillation tower (Figure 4). The lightest fractions—butane, propane and gasoline—are separated first and the heavier fractions—jet fuel, kerosene and diesel come off later at higher temperatures.

Figure 4. Crude oil is refined into increasingly heavier petroleum products through heating in a distillation tower. Source: Energy Education & Labyrinth Consulting Services, Inc.

Not all oil is the same. It comes in different grades like most commodities. Crude oils are classified by their densities. Some oils are heavy and some are light. Some contain relatively complex hydrocarbon molecules and others contain simpler compounds. Some are good for making diesel and the entire spectrum of refined products while others can only be used to make gasoline and lighter products.

These different properties of oil are expressed in the API gravity scale which is a variant of specific gravity or density. Figure 5 shows where major U.S. crude oils fall on the API scale and the approximate API ranges needed for production of key refined products. Many U.S. oils lack the heavy compounds needed to make diesel but are good for making kerosene, jet and gasoline.

Figure 5. Many U.S. oils lack the heavy compounds needed to make diesel but are good for making kerosene, jet and gasoline. Source: Global Security, Enverus, EIA & Labyrinth Consulting Services, Inc.

The average API gravity crude oil input for U.S. refineries is about 33° but Figure 5 shows that the average values for many U.S. oils do not meet this requirement.

Figure 6 shows the API profiles of key U.S. oils and imported oil. Most U.S. regions produce oil that includes some refinery-ready grades that are 35° or less (light blue fill) that can be used to refine diesel but only in small proportions. They all have ample light grades of 36° to 45° (yellow fill) and greater to produce kerosene, jet and gasoline.

The 6 mmb/d of imported oil (right-hand profile), on the other hand, is refinery-ready or heavy enough to be blended with lighter U.S. oil to create a refinery-ready mix although special refineries are needed to manage the heavy fractions and bitumen.

Figure 6. U.S. imports mostly heavier grades of oil that are not produced domestically in significant volumes except from Alaska and the offshore Gulf of Mexico. Source: Enverus, ExxonMobil, USGS & Labyrinth Consulting Services, Inc.

Most of the oil that the U.S. exports is the surplus of light oil that is not needed to produce the range of refined products that U.S. consumers demand. Banning or restricting exports of that oil would not result in greater usable supply or lower prices. Re-designing U.S. refineries would not change the underlying light composition of U.S. oil so would do little to increase the domestic supply of diesel.

I’m not arguing for or against crude oil exports. I’m merely making the point that banning or restricting exports would probably make little or no difference for oil price.

There is no shortage of refining capacity

Analysts and journalists have been hyperventilating about the fact that the U.S. “lost” about 1 mmb/d of refining capacity during the COVID recession in 2020. It’s true but most of those shuttered refineries were old, small and inefficient, and would have been closed anyway. The economic closure during the pandemic was simply a good time to make those changes.

Figure 7 shows U.S. refinery utilization compared to the pre-Covid 2018-2019 average level. It shows no evidence that refinery capacity is a problem since so far, 2022 refinery utilization is consistent with 2018-2019 levels.

Figure 7. There is no evidence that refinery capacity is a problem in the U.S. 2022 refinery utilization is consistent with 2018-2019 levels. Source: EIA & Labyrinth Consulting Services, Inc.

Refining is an industry, not a public service organization. The industry chose to close refineries and may decide in the future to build new ones. At the moment, however, it does not seem to agree with analysts who think it has a capacity problem.

Lower Gasoline Prices Because of Lower Demand, Not SPR

The U.S. government announced plans to release approximately 260 mmb of crude oil from the its Strategic Petroleum Reserve (SPR) between October 2021 and October 2022 in order to lower high gasoline prices. Releases actually began earlier in August 2021 and so far, about 205 mmb have been released or 3.7 mmb per week. Gasoline prices have fallen so the Biden administration has claimed “mission accomplished.”

Figure 8 shows U.S. gasoline price, consumption and the consumption 5-year average since November 2021. It seems fairly clear that demand destruction was the main reason for lower gasoline prices and not SPR releases.

U.S. gasoline consumption fell below the 5-year average in early June when gasoline prices reached more than $5.00 per gallon. Lower consumption led to lower prices. It appears that consumers are sensitive to an approximate price threshold of $4.00 per gallon. When the price falls near that level, consumption increases but remains far below the 5-year average which includes the pandemic years of abnormally low vehicle use.

Figure 8. U.S. gasoline consumption fell below the 5-year average in early June when gasoline prices reached more than $5.00 per gallon. Consumption has increased since price fell below $4.00 but remains less than average. Source: EIA & Labyrinth Consulting Services, Inc.

Energy is a complex system so I would not want to conclude that the SPR releases had no effect on refined product prices. At the same time, the evidence does not suggest those releases were the principle cause.

The Keystone XL Pipeline Has Had Little Effect on Oil Supply

Some Americans believe that failure to build the Keystone XL Pipeline is a cause of high energy prices. It’s not. How can something that never was be a cause of anything?

I supported the project because it would have made imports from Canada more efficient and therefore, less costly. I publicly criticized Obama for canceling the pipeline a decade ago.

At the same time, presidential politics have not slowed increased oil imports from Canada to the U.S. Imports have increased 1.9 mmb/d (98%) since the pipeline project was announced in 2008, and 20% since Obama canceled the Keystone XL Pipeline in November 2015 (Figure 9).

Figure 9. Presidential politics have not slowed increased oil imports from Canada to the U.S. Imports from Canada have increased 20% since Obama canceled the Keystone XL Pipeline in November 2015. Source: EIA & Labyrinth Consulting Services, Inc.

Energy Blindness

We are energy-blind. Energy is the basis of life and yet we know less about it than how to search for cat videos on our phones.

Fossil fuels have provided the unparalleled productivity of human society over the last 75 years. They allowed population to grow from 2.5 to almost 8 billion over than period, and lifted billions of people out of poverty.

“Instead of appreciating this giant one time windfall, we developed stories that our newfound wealth and progress had emerged purely from human ingenuity…One barrel of oil represents almost 5 years of human labor, and human economies only pay the cost of its extraction…not the tens of millions of years of natural processes to create it. We have underpaid for the main input to human economies – and economic texts do not recognize this fact…We had become Energy Blind.”
–Nate Hagens, The Great Simplification

There is some limited truth behind all of the memes that I have discussed but not nearly enough to say that they are true. Most Americans want to believe in energy independence so they are eager to accept it as true. Analysts invent what become memes to get attention and pitch their companies’ products. Other analysts and journalists repeat them and before long, most people believe that they are true. We like simplistic reductions of a complex world because it’s easier than thinking which requires study and work.

I’m not suggesting that everyone needs to become an energy expert. I’m saying that memes are a lazy approach to something too important to be lazy about.

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COMPARATIVE INVENTORY & GAS STORAGE REPORT OCTOBER 6, 2022 (2022-40)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT OCTOBER 5, 2022 (2022-39)

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ART BERMAN NEWSLETTER: OCTOBER 2022 (2022-9)

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COMPARATIVE INVENTORY & GAS STORAGE REPORT SEPTEMBER 29, 2022 (2022-39)

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ENERGY AWARE #2: THERE IS NO CLEAN, CHEAP ENERGY

There is no clean, cheap energy.

Clean energy requires materials that use energy for their extraction, transport, manufacture and distribution. That includes the steel, cement, and batteries for wind turbines and electric vehicles. We don’t know how to do any of that without using fossil fuels.

That seriously complicates the popular idea that fossil fuels can be replaced by renewable energy.

The use of energy inevitably rearranges additional materials in the environment. This posits a problem that goes beyond the carbon content and specific material requirements of given technologies, and thus cannot be solved through energy substitution.
Leiva and Schramski (2022)

Nuclear Energy

Many believe that nuclear power is important for decreasing reliance on fossil fuels for electric power. That is partly because an operating nuclear power plant emits almost no carbon dioxide or other greenhouse gases. This ignores the energy and emissions that go into the components and construction of a nuclear plant.

It is wrong to ignore the use of fossil fuels in the construction (and ultimate decommissioning) of the power plant as well as the mining, milling, transport and eternal storage of nuclear material. To this must be added the fossil fuels used in the building of the array of machinery to make nukes possible and the disruption of aquatic ecosystems from the emptying of hot water.”
Don Fitz (2019)

Solar Energy

It takes energy to produce solar panels. This includes mining the raw materials and transporting them to a factory. Most of that work is done with diesel.

A solar cell is made of silicon. Sand, quartzite gravel or crushed quartz are melted at temperatures of 1800°C in an arc furnace. Today, most of the electric power comes from coal and natural gas. The resulting silicon dioxide is then treated with phosphorous and boron that must be mined using fossil fuels. The chemical processing of these elements also produces considerable toxic waste.

More electric power is needed to manufacture the panel. The finished product must be transported and distributed by ship, train or truck, all of which use diesel.

I am not suggesting that it takes more energy to make a solar panel than it produces. I’m simply pointing out that it is misleading to call solar energy clean.

Wind Energy

Wind energy also has a carbon footprint. Wind turbines are made of of steel, concrete, fiberglass, copper, as well as rare earth metals.

Mining metals and rare earths is energy intensive. Making steel requires the use of metallurgical coal in blast furnaces. The manufacture of concrete emits lots of carbon dioxide.

“The biggest contributors to the carbon footprint of wind turbines are steel, aluminum and the epoxy resins that hold pieces together — with the steel tower making up 30% of the carbon impact, the concrete foundation 17% and the carbon fiber and fiberglass blades 12%.”
Chris Helman, Forbes (2021) 

Then, there’s the problem of disposing of worn out solar panels and turbine blades. Renewable equipment is not renewable.

Wind and Solar Aren’t As Cheap As Advertised

Low price has become the clarion call for renewable energy.

“Today, renewables are the cheapest source of power,” said IRENA’s Director-General Francesco La Camera.

Whenever I hear statements like that I ask, “What costs are included and excluded?”

La Camera’s claim is based on leveled cost estimates that compare the cost of generating electricity from different types of power plantsLeveled cost does not account for the cost of providing “backup” electricity for renewable power with natural gas or battery storage.

A recent study of leveled costs in Minnesota concluded that wind and solar are much more expensive than nuclear, coal and natural gas for electric power generation.

Figure 1. New solar facilities are the most expensive form of new electricity generation built under the Walz Proposal. Once costs such as property taxes, transmission, utility returns, battery storage, and overbuilding and curtailment, are accounted for new wind costs $272 per MWh, and new solar costs $472 per MWh. Source: The American Experiment

Those findings are consistent with net energy or EROI, an approach that calculates the amount of usable energy output from an energy source versus the amount of energy input to produce that energy resource.

Figure 2 shows that the net energy (EROI) for wind and solar PV including backup generation for periods when the wind doesn’t blow and the sun doesn’t shine. They are an order of magnitude lower than for other energy sources used in electric power generation.

Figure 2. The net energy (EROI) for wind and solar PV are an order of magnitude lower than for other energy sources used in electric power generation. Source: Weissbach et al (2018) & Labyrinth Consulting Services, Inc.

Another way to look at this is to compare power densities—the measure of how much electric power can be extracted from the same unit area supplied by different energy sources.

In Figure 3, I show power density values and a comparison based on the number of energy “workers” indexed to natural gas.

It takes 176 solar workers or 470 wind workers to equal 1 natural gas worker for the same time rate of energy transfer. As in the previous examples, wind and solar compare unfavorably to natural gas, nuclear, heating oil and coal.

Figure 3. It takes 176 solar workers or 470 wind workers to equal 1 natural gas worker for the same time rate of energy transfer. Power Density = how much electric power can be processed per unit area. Source: Van Zalk & Behrens (2018) & Labyrinth Consulting Services, Inc.

There is No Clean, Cheap Energy

The energy debate today is largely about whether renewable energy sources can substitute for fossil fuels in time to avert an ecological and climate catastrophe. A secondary theme is whether economic growth will continue without fossil fuels.

That’s the wrong way to think about energy and the earth. It’s not a competition between energy teams. It’s not about which energy source we think is better but instead, how the earth’s ecosystem can survive if humans don’t start using a lot less energy.

“Without a biosphere in a good shape, there is no life on the planet. It’s very simple. That’s all you need to know.”
Vaclav Smil

No energy is clean or cheap, and earth’s future is bleak unless humans use a lot less energy.

Wind and solar energy are not clean but they are cleaner than fossil fuels. They are not cheaper and that has implications for economic growth.

What about technology?

Technology is the deus ex machina (god from the machine) common in ancient Greek and Roman plays. Plots got so complicated that a god had come down to earth to fix everything so the story could resolve and have a happy ending.

Technology does not create energy. Instead, it is a way of extracting existing energy faster and concentrating it.

The…growing…size and scale of modern human economies…allows for new inventions and adds to social and physical complexity. This in turn requires a larger energy spigot to keep things running without recession or dislocation.
–DJ White and NJ Hagens, The Bottlenecks of the 21st Century: Essays on the Systems Synthesis of the Human Predicament 

Technology isn’t cheap either—check the price tag on your mobile phone, roof-top solar panels, replacement EV battery or fracked shale well.

We live in a complex society that relies on energy to maintain that complexity. Nothing about a complex system is black and white. Yet, the energy debate assumes that there is some sort of black-and-white choice between fossil and renewable energy. That is not only wrong—it’s impossible.

The real deus ex machina for human civilization is biophysical and economic collapse, mass migration, civil strife and war unless we face the harsh reality that the energy consumption party is ending.  History suggests, however, that we will not change our behavior until bad things start to happen in earnest.

“You have to use less because we’re in a world crisis—It’s not going to happen. The only thing will be the price.”
—Kiril Sokoloff, The Great Simplification (August 2022)

In the meantime, let’s at least embrace the reality that energy is not a biblical struggle between the forces of good and evil.

The problem is overshoot and population growth enabled by massive levels of energy consumption. Climate change is a result.

The earth’s problems can’t be blamed on any industry. Instead, they result from the collective behavior of the human race. The idea of clean versus dirty energy is an infantile passion play that reflects energy & reality ignorance.

Be energy aware. There is no clean, cheap energy.

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COMPARATIVE INVENTORY & OIL STORAGE REPORT SEPTEMBER 28, 2022 (2022-38)

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COMPARATIVE INVENTORY & GAS STORAGE REPORT SEPTEMBER 22, 2022 (2022-38)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT SEPTEMBER 21, 2022 (2022-37)

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Energy Shock, Energy Transition: A Perspective from Inside the Energy Industry

Energy Aware #1: There Is No Energy Transition Away From Fossil Fuels

This is the first in a series of posts intended to provide a practical understanding of energy, its central role in human civilization, and a spectrum of realistic options that may exist for our collective future. I do not presume to know the solutions to our planet’s ecological and climate problems. I merely hope to share the knowledge I have gained in over four decades in the energy industry with those who want to become more energy aware.

 

Most people believe that an energy transition is underway in which fossil fuels will be a thing of the past some day.

The number of people who searched Google for the term “energy transition” has increased seven-fold since 2005 (Figure 1).

Figure 1. The number of people who have searched Google for “energy transition” has increased 7-fold since 2005. Source: Google Trends & Labyrinth Consulting Services, Inc.

More than 30% of Americans favor ending the use of fossil fuels completely.

Even organizations whose core interest is energy talk about an end to fossil fuels in the relatively near term.

“The energy transition is a pathway toward transformation of the global energy sector from fossil-based to zero-carbon by the second half of this century.”
International Renewable Energy Agency (IRENA)

Many people believe this is possible but it is a fantasy. I say that based on facts, not on any preference or bias.

People believe the fantasy because they want to. That belief is only possible because of energy blindness.

 

There Is No Energy Transition Away from Fossil Fuels

Energy transitions are additive. New energy sources are added to older ones but nothing is replaced (Figure 2).

Biomass (wood, plant material and crop residue) was the principal form of human energy other than food until the 1880s when coal, oil, natural gas and hydroelectricity overtook it. Nevertheless, biomass use did not decrease. In fact, twice as much biomass is used today as it was in 1800.

Figure 2. Energy transitions are additive. No energy source has ever been replaced. Source: Our World in Data & Labyrinth Consulting Services, Inc.

Even when we look at energy sources as a percent of total consumption, there is no case for earlier sources being replaced by later ones either. Figure 3 shows the same data that is in Figure 2 except as percentages of total consumption.

The percent of biomass and coal has decreased over time but fossil fuels are not being replaced by renewables, hydroelectric power and nuclear energy. Renewable energy is less than 5% of total world consumption. All non-fossil sources actually declined from 23% of total in 2000 to 21% in 2019.

Figure 3. The percent of biomass and coal has decreased over time. Even on a percentage basis, fossil fuels are not being replace by renewables. Source: Our World in Data & Labyrinth Consulting Services, Inc.

The world has been in a continuous energy transition since coal became an alternative to biomass in the 18th century. The introduction of oil, natural gas, hydroelectricity, nuclear power and renewables were part of that continuum, not discrete energy transitions. No major form of energy has been replaced or eliminated in the last 200 years.

A new energy transition that will lead to a non-fossil energy future is a belief.

It is a beautiful belief but it is impossible based on everything we know about energy and technology today. All forms of renewable energy production require materials that use substantial amounts of fossil fuels for their mining, transport, processing, manufacture and distribution. Moreover, we know of no way to produce the four pillars of modern civilization—steel, cement, plastic and fertilizer—without fossil fuels.

It may be possible that some of these obstacles can be overcome in the future but almost certainly not in time to make a difference for the ecosystem or the climate.

Lower carbon emissions are critical for the future. That does not mean we can pick a fantasy and make it happen.

Most credible forecasts project that fossil fuel use will decrease over the next 25 years. It is unlikely, however, that they will account for less than about 50% of total energy consumption by 2050.

Fossil energy is fundamental to our way of life, and there is considerable momentum which favors its continued use. Ending or even substantially reducing its consumption would almost certainly lead to painful decreases in living standards and population. Only higher energy prices will cause the behavior change needed to make a difference.

I am not arguing in favor of fossil fuels but simplistic ideas like just ending their use are unrealistic and involve tremendous risk.

Purposeful change requires understanding the facts, events and choices that led to the present state. This suggests that we should become more energy aware.

 

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COMPARATIVE INVENTORY & GAS STORAGE REPORT SEPTEMBER 15, 2022 (2022-37)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT SEPTEMBER 14, 2022 (2022-36)

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COMPARATIVE INVENTORY & GAS STORAGE REPORT SEPTEMBER 8, 2022 (2022-36)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT SEPTEMBER 8, 2022 (2022-35)

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ENERGY SHOCK

The world is in energy shock.

European imported coal prices increased 421% before Russia invaded Ukraine. German electric power price increased 518%. European natural gas jumped 765% and Asian spot LNG, 957%.  Since then, it’s gotten even worse.

U.K. natural gas futures price has increased +$99.86 (+574%) from $17.41 to $117.27 per mmBtu just since June 8 (Figure 1).

Figure 1. U.K. natural gas futures price has increased +$99.86 (+574%) from $17.41 to $117.27 per mmBtu since June 8. Source: MarketWatch, CME & Labyrinth Consulting Services, Inc.

Now Europe’s energy crisis is on a path to even worse outcomes.

Russia announced on September 4 that gas supplies to Europe via the Nord Stream 1 pipeline would not resume in full until the sanctions against Russia were lifted. Finland’s Economic Affairs Minister stated ,

“This has had the ingredients for a kind of a Lehman Brothers of energy industry.”
–Mika Lintilä

Many governments are planning to subsidize consumers with price caps and to help industry with loans. My friend and colleague Nate Hagens recently noted that,

“Europe is committing economic suicide.”
–Nate Hagens

That is because these bailouts are happening at a time of economic contraction, high inflation and rising interest rates. That means increased and unproductive debt at a time that states cannot afford its service except with more debt.

French President Emmanuel Macron recently stated,

“What we are currently living through is a kind of major tipping point or a great upheaval … we are living the end of what could have seemed an era of abundance…the end of the abundance of products of technologies that seemed always available.”
–Emmanuel Macron

Meanwhile, OPEC+ has decided to cut production by 100,000 barrels of oil per day reversing 15 months of output increases. Although oil is relatively less expensive for Europeans than natural gas and coal, many countries have begun using diesel as a substitute to generate electric power.

In August, Saudi oil minister Abdulaziz bin Salman (ABS) said that this may be necessary to correct problems in the market because “the paper and physical markets have become increasingly more disconnected.”

That is rhetorical nonsense but that’s not what is really going on. This is about the second Cold War to create a new world order.

It should be obvious by now that Russia’s war in Ukraine is about much more than territorial expansion. Ukraine is the staging ground for a larger conflict between states who are dissatisfied with the present world order versus those that are more-or-less satisfied. We only need to look at the countries that continue to buy Russian oil and cooperate with Russia on oil: China, India, Saudi Arabia and the rest of OPEC including Venezuela, Mexico, Kazakhstan, Azerbaijan, Malaysia, Sudan, South Sudan, Oman, Brunei and Bahrain.

Credit Suisse’s Zoltan Pozsar wrote a fascinating post about this in which he identifies the TRICKs bloc of nations—Turkey, Russia, Iran, China, and North Korea—an alliance of economies sanctioned by the U.S. getting ever closer economically and militarily. China and Russia held naval exercises with Iran earlier this year. Iran hosted talks in July between Russia and Turkey, and India, China and Russia held joint military drills a week ago.

The world has begun the descending arc of the Oil Age. Europe’s energy crisis, the war in Ukraine, and escalation of U.S. – Chinese tensions over Taiwan are all part of a struggle to dominate remaining fossil resources as well as new energy sources.

The world is in energy shock. That seems to be awakening people from the big sleep of energy blindness. A major economic contraction seems inevitable. The world order that has existed since the end of World War II is ending. It’s a lot to take in.

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COMPARATIVE INVENTORY & GAS STORAGE REPORT SEPTEMBER 1, 2022 (2022-35)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT AUGUST 31, 2022 (2022-34)

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ART BERMAN NEWSLETTER: SEPTEMBER 2022 (2022-8)

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COMPARATIVE INVENTORY & GAS STORAGE REPORT AUGUST 25, 2022 (2022-34)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT AUGUST 24, 2022 (2022-33)

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Saudi Prince Delivers a Message About The Second Cold War

Saudi Prince Abdulaziz bin Salman (ABS) said this week that OPEC+ may need to cut oil production. This may be necessary, he said, to correct problems in the market because “the paper and physical markets have become increasingly more disconnected.”

This is rhetorical theater. It has no real basis is fact. But that’s not what this is really about.

This is about the second Cold War to create new world order.

In a written statement to Bloomberg, ABS stated,

The paper oil market has fallen into a self-perpetuating vicious circle of very thin liquidity and extreme volatility undermining the market’s essential function of efficient price discovery.
–Abdulaziz bin Salman

It is true that volatility has been extreme since the Russian invasion of Ukraine in late February, 2022 but that was nearly six months ago. The worst of the volatility ended in April so the timing of ABS’s comments makes little sense based on oil-market technical concerns.

Liquidity and volatility are inversely related. When volatility is high, investors are reluctant to invest in futures contracts. That’s because the price variance is too high to make manage risk. With limited capital flowing in and out of oil markets, it is difficult to convert an asset/contract into cash. High volatility begets low liquidity.

ABS’s distinction between the futures (paper) and physical (spot) markets does not survive the light of day.

Figure 1 shows Brent futures price (red), futures price volatility (blue) and 2021 average price volatility (dashed blue). Both price and price volatility increased after Russia’s invasion of Ukraine in late February of 2022. Volatility decreased in April but has not returned to the pre-invasion 2021 volatility average.

Figure 1. Brent oil-price volatility & futures price both increased with Russia’s invasion of Ukraine in late February 2022. Source: CME, EIA & Labyrinth Consulting Services, Inc.

Figure 2 shows corresponding data for Brent spot price and spot-price volatility. The relationship between Brent spot-price volatility & spot price looks nearly identical to Brent futures volatility and futures price.

Paper and physical markets have not become increasingly more disconnected. They are, in fact, perfectly connected…just not the way that ABS likes.

Figure 2. The relationship between Brent spot-price volatility & spot price look very similar to Brent futures volatility and futures price. Source: CME, EIA & Labyrinth Consulting Services, Inc.

That’s why the Saudi prince’s comments are theater. That is also the easy part.

The more difficult part is why he make these comments, why he makes them now, and why he was willing to put them in writing for Bloomberg?

Javier Blas made an astute observation yesterday which I dismissed at first.

“To me, his message Monday wasn’t targeting speculators but rather Western policymakers, who are busy trying to suppress prices via a deal with Iran, the release of strategic reserves or a cap.”
–Javier Blas

It should be obvious by now that Russia’s war in Ukraine is about much more than territorial expansion. Ukraine is the staging ground for a larger conflict between states who are dissatisfied with the present world order versus those countries that are more-or-less satisfied.

We only need to look at the countries that continue to buy Russian oil and cooperate with Russia on oil: China, India, Saudi Arabia and the rest of OPEC including Venezuela, Mexico, Kazakhstan, Azerbaijan, Malaysia, Sudan, South Sudan, Oman, Brunei and Bahrain.

Putin’s chief reason for invading Ukraine was broken promises about the expansion of NATO into countries in Eastern Europe formerly aligned with the Soviet Union. The longer-term conflict in Ukraine has been about the parts of that country that wanted to join NATO and other parts that preferred a relationship with Russia.

The press and public somehow seem to have missed the significance of Putin’s and Xi Jinping’s February 4, 2022 Joint Statement.

“This is a pledge to stand shoulder to shoulder against America and the West, ideologically as well as militarily. This statement might be looked back on as the beginning of Cold War Two.”
Robert Daly, Director of the Kissinger Institute on China and the United States

The First Cold War was fought for dominance in the new world order that emerged after World War II.  Despite the popular focus on the Berlin Wall, the Cuban Missile Crisis and the Vietnam War, the Middle East was the centerpiece of the Cold War.

During the post-war period, the world shifted quickly from coal and biomass to oil. Franklin Roosevelt met with Saudi King Abdul Aziz Ibn Saud in February 1945 to secure U.S. access to oil. The Soviet Union occupied Afghanistan beginning in 1978 as a counter to Iran which was a U.S. ally at the time. The Soviets supplied Iraq with more weapons than any other country during the Iran-Iraq War from 1980 to 1988. Russia supported Egypt and other Arab states in their many conflicts with Israel beginning in 1974.

Today, the world has begun the descending arc of the Oil Age. The Second Cold War is a struggle to dominate remaining fossil resources and new energy sources. Russia is using natural gas supply as a weapon to damage the economies of Europe. Grain and fertilizer exports have been severely reduced since the Russian invasion of Ukraine this year. In addition, Russia and Ukraine are important exporters of uranium and Russia is a leader in nuclear technology around the world.

None of this is coincidence. Vladimir Putin’s PhD dissertation was Mineral and Raw Materials Resources and the Development Strategy for the Russian Economy.

This is the background and context for Price Abdulaziz bin Salman’s comments this week. His message is that Russia’s interests are our interests and the West’s problems are not our problems.

 

 

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Decoupling Delusion

The future looks bright because economic growth requires ever smaller amounts of energy.

With lower levels of energy consumption and a growing economy, reductions in carbon dioxide and other environmental contaminants will occur naturally. Humans will not have to significantly modify the products we consume nor will we have to make major changes in our behavior.

That is the miracle of decoupling.

That is nonsense.

Decoupling is based on a belief that economic growth has required less and less energy consumption since the early 1970s. This is called the energy intensity of GDP.

The energy intensity of GDP is the amount of energy required to create a unit of economic growth measured by gross domestic product (GDP). This relationship is false and results from the fatal error of adjusting historical GDP for inflation without making a similar adjustment for the price of energy.

The Miracle of Decoupling

McKinsey captured the miracle of decoupling in its 2019 report Energy and GDP Growth.

The amounts of energy that economies need have increased virtually in lockstep with the amounts of wealth that economies create…Nonetheless, our analysis suggests that while a more populous world will create more wealth than ever, energy demand rates will plateau and demand rates for fossil fuels will begin to decline worldwide.

How can that be?

…A steep decline in energy intensity of GDP, primarily the consequence of a continuing shift from industrial to service economies.

The best of all possible worlds.

The correlation between oil consumption and economic activity (GDP) is well known (Figure 1, courtesy of Simon Michaux). Countries that use more oil have greater productivity and, therefore, higher GDP.

Figure 1. GDP versus Total Liquids Consumption in 2018. Source: Simon Michaux, BP and Labyrinth Consulting Services, Inc.

The miracle of decoupling arises when energy consumption and GDP are shown as a time series. Figure 2 shows the energy intensity of GDP—the same data shown in Figure 1—as a ratio for each year since 1970 (blue line) along with total energy consumption (orange line).

Morgan Stanley used a similar plot of the oil intensity of GDP to project that the world will use less than half the oil in 2040 to increase GDP $1000 as it did in 2000. Eureka!

Figure 1. Energy consumption per dollar of GDP increase has declined since at least 1970. This suggests that GDP can increase using less energy every year. Why then does energy consumption continue to increase? Source: EIA,FRED, OWID, BP & Labyrinth Consulting Services.

The relationship is compelling but it violates most of the laws of physics.

Work is required to create the material production measured by GDP and work cannot occur without energy. How can the economy continue to grow by doing less work and using less energy? McKinsey says that the principal reasons are a shift from industrial to service economies and a marked increase in energy efficiency. 

These sound like reasonable explanations but clearly, the entire world can’t become a service economy. My colleague Thomas Murphy recently wrote,

Continued economic growth in the face of steady-state physical resources would require all growth to be effectively in the non-physical sector…Physical resources…must shrink to an ever-smaller fraction of the economy, translating to a small and diminishing fraction of an individual’s annual income having to go toward physical goods. All the food, energy and material purchases would become essentially free. This result makes little sense in the context of supply and demand.

Similarly, energy efficiency advances are real but infrequent and early gains are the most significant and easiest to make.

Efficiency improvements are not unbounded…Once a physical resource is saturated, we might expect some continuation of efficiency gains that can provide a modicum of additional economic growth. But it will probably be confined in both time and magnitude—the rate of improvement starting at less than 1% per year and declining from there.
–Thomas Murphy

Fatal Error of Inflation Adjustment

Energy consumption is affected by the cost of energy. Analysts who make energy intensity curves adjust GDP for inflation without making an adjustment for energy consumption.

Energy was purchased using the money of the day, not an inflation-adjusted amount that was much higher. This progressively distorts the resulting calculation of  energy consumption per dollar of GDP for each year before the benchmark year for inflation adjustment.

Table 1 compares world GDP adjusted to 2020 dollars and using nominal GDP in the dollars of the day. It also shows global energy consumption and the resulting energy intensity of GDP values.

By inflating 1970 GDP to $27 trillion instead of the nominal GDP of $4 trillion in that year, the resulting intensity value of 2.42 is almost seven times lower than the 16.12 using nominal GDP.

Table 1. Comparison of GDP and energy intensity of GDP for inflation-adjusted and nominal GDP cases. Source: EIA, BP, IEA, FRED, OWID, World Bank & Labyrinth Consulting Services, Inc.

Figure 2 graphically shows how much distortion is introduced into the resulting energy intensity curves.

Figure 2. Adjusting GDP for inflation without adjusting energy consumption distorts the value and slope of the resulting energy intensity curve. Source: EIA, BP, IEA, FRED, OWID, World Bank & Labyrinth Consulting Services, Inc.

The implications are profound. Rather than a linear decrease over time, the rate of change in energy intensity is now approaching zero.

Efficiency and shifts toward service economies play a part in decreasing energy intensity but these effects are over-stated. The sharp decreases in intensity before 2000 resulted more from productivity gains than from efficiency gains as more of the world shifted energy consumption to oil from coal and biomass energy sources.

The likelihood of future decreases in energy intensity are low. That means that it is improbable that future GDP will increase without substantial increases in energy consumption. That is bad news for climate change and for earth’s ecosystem.

When things look too good to be true, they usually are.

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COMPARATIVE INVENTORY & GAS STORAGE REPORT AUGUST 18, 2022 (2022-33)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT AUGUST 18, 2022 (2022-32)

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Paradigm Shift: End of the Oil Age

The world thinks it’s in an energy crisis today and indeed there are shortages in some places but the world is undergoing an energy crisis more fundamental than the simple shortage happening today in Europe. A shortage can be remedied.

The larger problem is that oil use began to decline from 48% of total world energy consumption after 1977 (Figure 1). This was the beginning of the end of the oil age.

Figure 1. The end of the oil age began with the price shocks of the 1970s. Oil consumption has fallen from 48% to 36% of total energy use since 1977. Source: EIA, BLS & Labyrinth Consulting Services, Inc.

 

Per-capita oil consumption has been flat since since 1985 (Figure 2). That means that individual worker productivity is not growing as it did before the oil shocks.

Figure 2. World per-capita oil consumption reached a peak in 1978 and has been on an undulating plateau since 1985. Source: EIA,FRED, OWID, BP & Labyrinth Consulting Services.

The world thinks that an energy transition is underway but fails to understand that transitions are additive. The relative percent of fuels changes but volumes rarely decrease. The world uses, for example, as much biomass today as in 1800 (Figure 3). Nor is there any likelihood that this transition will take 30 years instead of the century or longer period for earlier transitions.

Figure 3. Energy transitions are additive. The relative percent of fuels changes but volumes rarely decrease. The world uses as much biomass today as in 1800. Source: EIA, BP, IEA, FRED, OWWD, World Bank & Labyrinth Consulting Services, Inc

The real crisis today is that oil is the economy. The oil age has been ending for 50 years but there is no substitute for oil. Wind, solar and nuclear only address electric power generation which accounts for only 18% of world energy consumption. Even if we could magically transform 100% of electric power to non-fossil energy sources, this would not address the other 82% of energy use that society needs.

The medium- to long-term should be increasingly affected by limited supply growth (Figure 4). The market will send price signals to producers based on its sense of medium-term supply urgency. Prices will rally until inflation and a fragile economy end the rally. This is the dialectic that I expect will dominate oil markets in 2022 and probably beyond. There is great opportunity for those who understand this pattern.

Figure 4. World oil production is unlikely to regain November 2018 peak of 102 mmb/d. Source: EIA STEO, EIA AEO 2022 & Labyrinth Consulting Services, Inc.

These themes are playing against a backdrop of massive global debt load and the imaginary recovery from the economic closures of 2020 and 2021.

Price formation in oil markets is all about supply and inventories are part of supply. Old-paradigm analysts believe that oil demand must revert to ever-higher levels which supply simply cannot meet. In fact, the opposite is true. The correct oil paradigm is supply-driven and price-constrained.

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COMPARATIVE INVENTORY & GAS STORAGE REPORT AUGUST 11, 2022 (2022-32)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT AUGUST 10, 2022 (2022-31)

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COMPARATIVE INVENTORY & GAS STORAGE REPORT AUGUST 4, 2022 (2022-31)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT AUGUST 3, 2022 (2022-30)

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ART BERMAN NEWSLETTER: AUGUST 2022 (2022-7)

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COMPARATIVE INVENTORY & GAS STORAGE REPORT JULY 28, 2022 (2022-30)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT JULY 27, 2022 (2022-29)

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COMPARATIVE INVENTORY & GAS STORAGE REPORT JULY 21, 2022 (2022-29)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT JULY 20, 2022 (2022-28)

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COMPARATIVE INVENTORY & GAS STORAGE REPORT JULY 14, 2022 (2022-28)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT JULY 13, 2022 (2022-27)

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COMPARATIVE INVENTORY & GAS STORAGE REPORT JULY 7, 2022 (2022-27)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT JULY 7, 2022 (2022-26)

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CURRENT PROJECTS