The Great Simplification with Nate Hagens - Arthur Berman: "The Devil is in the Diesel"

Episode Date: November 9, 2022

On this episode, petroleum geologist Arthur Berman returns to discuss recent diesel shortages and go into depth on the importance of diesel and the complexity of getting it and other products from a barrel of crude oil. He and Nate also talk about the nuances of the global oil market as it shifts from the effects of the Russian/Ukraine war. Is the USA really a net exporter of petroleum and energy independent? And would making every car and truck on the road electric powered free us from needing crude oil?  About Arthur Berman: Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and is currently consulting for several E&P companies and capital groups in the energy sector. For Show Notes and Transcript visit: https://www.thegreatsimplification.com/episode/44-art-berman

You're listening to The Great Simplification with Nate Higgins. That's me. On this show, we try to explore and simplify what's happening with energy, the economy, the environment, in our society. Together with scientists, experts, and leaders, this show is about understanding the bird's eye view of how everything fits together, where we go from here and what we can do about it as a society and as individuals. There's kind of a general recognition that diesel is somehow important to our lives, or it's a name of an actor in a Pulp Fiction movie. The reality is that we assume that oil equals gasoline, but oil equals far more than gasoline, and each barrel of oil requires a certain sequence of when the different products are distilled off. With me today for a second conversation on the Great Simplification is my colleague Art Berman, who is a petroleum geologist, who's going to explain the importance of refining and other products than gasoline in a barrel of oil. What this means for the future, why we are currently having a diesel shortage and higher prices, especially in the East Coast, and what this all means for the future.

please welcome Art Berman. Hello, my friend Art. Hey, mate, how you doing? I'm good. How are you, sir? I'm doing very well, thanks. So you and I, I've never thought about this, but we've probably been parties to 10,000 emails in our little group over the last decade.

And there are, as, you know, the first podcast I did, with you was in January and since then some large energy relevant world events have happened. And so a lot more people are becoming less energy blind as a result of the NATO-Russia situation. And so there's a lot of things that we could talk about and I expect we will talk about in the future. But let's take it one topic at a time. There's been a lot of information in the news about diesel fuel and some of the shortages of various fuels in Europe. And so on our first discussion, which I hope everyone can go back and listen to and you did a very helpful PowerPoint that was attached to it, we talked about what is oil, where does it come from, how much is left, the relationship to our economic system. today I would like to cover what do we get from oil.

And I think there's a common assumption in our society that, oh, we get oil out of the ground to create gasoline. And that is true, but that is just a tiny part of a much more complex puzzle, which with your help today, we can unpack for our listeners. So, so let's start there. Do you have any comments to that brief intro? Yeah, sure. No, I think you're absolutely on the right track. First of all, I fully agree that the world is becoming more energy aware. And by that, I think we both mean that whereas, say, a year ago or, you know, 10 months ago,

you talk about energy and people didn't really think about it all that much in their lives. You know, if a gallon of gas costs more than they're used to, okay, that's a drag and they'll complain about it. But I think that the events of the last several months, certainly since the Ukraine invasion, have heightened the world's sensitivity to the fact that energy is really important. The inflation that's affected the world is due largely to cost of energy. that's not the only source, but it's it's the biggest one in my view. And people are slowly starting to make that connection. But, and the big but is that the rest of it is understandably just kind of a black box for people. So, you know, you mention, well, you know, gasoline costs too much. And I don't use diesel, but I guess it's a big deal. And, and I don't, I don't think people really understand where all that comes from. from what has to happen to get it, and nor do I expect them to understand it. And so you and I know each other well, and I'm a geologist, I'm a petroleum geologist. I'm not a chemical engineer.

Chemical engineers are the guys that design and run refineries. I'm not a refinery expert. I know a fair amount about it, and maybe that's perfect for the people who listen to your podcast, because I'm not going to, I don't know enough to get everybody too confused, you know, about, you know, isomers and polymers and alkaloids. And so, you know, let's keep it simple. But, but I think there's a huge amount of information that will, should cause people to say, oh, okay, I never knew that before. And that, that's my hope. And that's what we're after. And I'm less concerned about forecasting oil and gas price movements or imports and exports in the next six months or anything like that. I'm trying to get a lot more people to understand the energy landscape so that we can make better intermediate than long-term decisions. So let's just start with diesel. What is diesel? Why is it important? And why is it in the? news. Diesel is one of the many refined products that are created from a barrel of oil. And in the United States, we have a culture, a society that runs a whole lot more on gasoline

than it does on diesel. That's not the case for most of the world. There are a lot of reasons for that, but let me just keep it simple and say that, in the end diesel is cheaper to use and it has it's more diverse in its and its uses so diesel's important because it literally is the the hemoglobin of the world economy so all of the sure no go ahead Nate I often say that gasoline is the hemoglobin of the world economy but to be technically correct gasoline is the hemoglobin of the consumer economy. Diesel's probably the hemoglobin of the actual industrial transportation systems and the

heavy lifting of the world economy, yes? Yeah, and consumers, you know, you and me and everybody else, when we order products, most of those come to us in some fashion thanks to diesel. So diesel is the primary fuel that runs mines. oil rigs, all of the extractive operations that get the raw materials out of the earth and into our grubby little human hands. It is the primary fuel that runs ships, trains, and trucks, which are the main way of moving those natural resources from where they come out of the ground to where they can be converted into products. it goes back into those same forms of transport to distribute it to the rest of the world. So, you know, just to use an example, we want steel. And so we mine iron ore, let's just say in South America, using diesel powered equipment.

We put it on a ship, which uses diesel. We send it to, say, China. China manufactures it into steel from iron. an awful lot of that process uses fossil fuels. They put the finished product on a boat, send it, say, to the United States by diesel. It gets picked up, say, in the port of Los Angeles, either by a truck or a train, and it goes out to its consumers of whatever that steel product is by diesel. So by the time it finally arrives, you know, I might put it in my gasoline-powered car if I buy

bought a steel pipe at, you know, at Home Depot or whatever. But everything that led up to it is principally diesel. So one clarification in what you said, and then I have a bunch of questions. I am not a consumer. I am a human. But other than that, that was a good description. And can't we just use gasoline to replace that diesel? Why do we have to use diesel for all those things that you mentioned?

Well, put most simply, it's first of all because all of the equipment that uses diesel is designed for it. So let's just say it was a coin toss. You could use either gasoline or diesel. Somebody made a decision 30, 40, 50 years ago that we're going to use diesel. So even if it were a bad decision, and it wasn't, by the way, I'll get to that in a second. If we decided that we wanted to change, We basically have to scrap all of the equipment that runs our transportation and mining system or retrofitted or something. Which is probably tens of trillions of dollars of equipment or something of that magnitude. And decades of time and not to mention a big waste of material. But the reason that diesel was chosen over gasoline way back when is because it's a more energy compact. form of a fuel that it can you know to to use the cliche it has more bang for the buck so the you know with it's it's more energy dense it has more energy per you know for cubic meter than

gasoline so we you know it's a more productive fuel and it runs more efficiently so it costs less the fuel itself costs more per gallon or per liter or whatever you're talking about than gasoline, but it runs so much more efficiently that in the end, you end up saving a lot of money. So that was why 30, 40, 50 years ago, the decision was made. Let's use diesel for all this equipment. But if that was true, and this is going to get to a core part of the topic we're going to discuss today, if that were true 30 or 40 years ago, why didn't we run all of our vehicles on diesel instead of gasoline? Well, in a lot of the world, they do run most of their vehicles on diesel instead of gasoline.

But here in the United States, where the automobile started, was invented, for that matter, we have a peculiar kind of oil. It's called a light oil. And we'll talk a little bit more about why that's so. But for right now, let's just say our oil is light, and it lends itself. to manufacturing gasoline. It's a very easy, quick step to go from U.S. oil into gasoline. And let's go back in time and think about what was going on in the early 1900.

So Henry Ford is, you know, trying to commercialize an automobile. And the first, you know, Model A or whatever it was actually ran on ethanol. It ran on alcohol. And that was for a variety of reasons, but just about the time that automobiles or internal combustion engines were being thought through also in Europe, actually a little earlier in Europe, there was this huge discovery of oil just north of where I'm sitting here in Houston at a place called spindle top. And most of the oil produced in the United States or in the world, up until that time, came from kind of crappy little wells that produced, you know, a couple of barrels of oil a day. And people were smart. And they said, well, you know, gosh, oil would be nice. You know, we could use some distilled form of it. But, you know, it just, we don't get the volumes.

And this discovery at spindletop, it blew out millions and millions of barrels a day. And the whole world said, oh, my God, we had no idea that you could get. volumes like that. If we can get volumes like that, then let's rethink this whole ethanol formula. Let's use oil. Another historical fact that's interesting is that up until that time, until the automobile, the main use of oil was for kerosene, for lighting. Okay, John D. Rockefeller and his standard oil empire. I'm, you know, I'm a little concerned about what they did with all the products that come out of a, of a distillation tower before you get to kerosene, but I'm guessing they just dumped it

on the ground or burned it because kerosene was the product Americans demanded for lighting. So there's so many questions that I want to ask you. I mean, I've spent 20 years researching energy and it's importance to, our society, but I know very little about the processing. And I think most people just assume, oh, there's oil in the world and it's pretty uniform. And we turn it into gasoline and a few other things. So was the oil that we had at spindle top also relative to the rest of the world, light oil? And what are the differences in oil and in the salient differences around the world without

getting too much in the weeds. Sure. So let's just say for argument's sake that all oil in the world is essentially the same. Okay? It's not. But for this high-level conversation, let's say that it is. And so what determines whether an oil is light or heavy, its density, basically, is how deeply it was buried.

and to what temperatures it was exposed to. So think about the earth as a kitchen. And, you know, you've got all kinds of dead algae, plankton, that settled to the bottom of the ocean, got buried, and went deeper and deeper into the earth, and the organic matter that made up their bodies and their cells is slowly converted into oil. And to the extent that that oil is less cooked,

it's going to have more of the heavy parts that make heavy oil, and the more and more you cook it, the more and more it changes its form and becomes lighter and lighter. And so when Rockefeller wanted to make kerosene, he didn't go to Texas. He found a field on the Ohio-Indiana border, which was very shallow and just happened to be. relatively heavy oil. So the United States, you know, is not exclusively light oil, but predominantly

it is. And so Rockefeller happened to intentionally find some heavy oil so he could get the kerosene out of it. Now, the oil at spindle top would be fairly useless for kerosene because it was buried more deeply, exposed to more heat and more pressure, and all those heavies, the heavy parts of the the petroleum molecule were essentially burned off. They were, they were naturally distilled off. And so the oil at spindletop, and of course I'm generalizing hugely here, but is mainly a gasoline-prone kind of an oil. And so you can't really make very much or very good diesel or kerosene out of spindle-top oil. We have a lot of oil refineries in the world and in the United States. So what you're saying is the oil refineries kind of accelerate the processes of

pressure and time that Mother Nature did over millions and tens of millions of years to create lighter or heavier oil and the various things that are distilled from it. Yeah, I mean, what happens in a, in a refinery, it looks like, you know, a lot like an alcohol still. Okay. You know, instead of putting in, you know, corn, corn and water, you put in crude oil and you heat it up. And, and when you heat it up, the light stuff comes off first. And what's the lightest? What is the light stuff? The light stuff is going to be natural gas and natural gas liquids. Okay, things like propane and butane, you know, when you go out and you, you know, buy a lighter to start your charcoal grill or if you smoke cigarettes a cigarette lighter,

you know, that's that's butane. If you heat your house, if you live in the country and you don't have, you know, don't have a pipeline to your house to deliver natural gas, you buy a tank of propane. Okay. That's how I heat my house, propane. So propane is just, you know, one step heavier than butane, which is one step heavier than methane. Which is one step heavier than methane, which is natural gas. So, so we have a refinery, which is like an alcohol still, and the inputs is a barrel of crude oil, which obviously for a U.S. refinery, it optimally would be U.S. oil because it's close and we don't have to import it. And we heat it up. And to what, like, temperature level are we talking about roughly?

Hundreds of degrees. And, and let me step back and say, actually, not. Most of the oil that goes into U.S. refineries, or let's just say, you know, at least half is not from the United States because the United States oil doesn't have the necessary components to make the cash products that the world wants, like diesel, kerosene, jet fuel, etc. That's the reason that the U.S. imports oil because our oil isn't right for what the world needs. It's right for a right for a some of what the world needs, but not the rest of it. So we're an energy launderer. We are an energy launderer.

That's correct. That's right. So it's heated to hundreds of degrees, naive, non-person who got Cs in college chemistry. Why doesn't it explode if it's gasoline and butane and propane? There's no oxygen in there or there's... Yeah, it's contained in a, in a press. pressure vault. Okay. So it's maintained at a pressure in which, and you're right, there's no oxygen. So it's, uh, any kind of volatile reaction is not able to, to take place. But, you know,

talking about those temperatures, I mean, we're, we're talking about, um, you know, if you want diesel, you know, you're talking about something like 400 degrees centigrade. Well, let's, let's start at the top and go down the entire barrel. If, if, if, if you're, if you're willing because I think this is important to understand. So we put in a barrel of oil, well, thousands of barrels or whatever in the mix. And we're probably importing a different sort of oil to combine with our light, more cooked oil that's in the United States into some of these big refineries all over the nation. But a lot of them are in the area where you live in Texas and Louisiana. and at a lower temperature, the whole barrel is being cooked, right?

But at a lower temperature, like 150 degrees Celsius or something like that, the lighter fractions are boiled off or distilled off. And you said that is butane and propane. And then what comes after that? Gasoline. So gasoline is, you know, I mean, so oil is just, a chain of molecules that have a carbon center with various hydrogens around the outside. And so natural gas, methane is the simplest. It's got a carbon in the middle and four hydrogens. So it's

CH4. Okay. And then you can, you know, you start doing, even though I wasn't terribly good at math either. I mean, you know, you can do the, you know, C2H8 and, you know, and so it's just, it's a very simple step that the lightest stuff comes off first because it has a lower boiling point, if you will. I mean, that's kind of what we're talking about here. So, butane is, you know, got a few more carbons and a few more hydrogens than methane. Propane's got a few more than butane. There's a bunch of other stuff that, you know, there's, you know, there's, you know, Heptane and octane and all that. What are those used for?

Those are used for, you know, for similar, they're flammable substances that are used for different kinds of fuels also. But they're, you know, they're a little bit more. I mean, we don't consume them ourselves. They're mostly used as feedstocks for other petrochemical processes. Like creation of plastic bags and medicines and football helmets and things? Yeah, yeah. So, I mean, yeah, like baggies and, you know, all the plastic that we use come from these natural gas liquids that come off before gasoline. So the heavy type, I mean, the light type of oil that we have in the United States is good for those plastic product precursors.

It's great. Absolutely great. Okay, so precursors, plastic, octane, things like that, then propane and butane, then gasoline. And at this point, how much of the barrel of oil is left, roughly? Oh, probably 80%. So the, yeah, so we're talking about, yeah, so, I mean, roughly speaking, something a little bit less than half of a barrel is gasoline. Okay. And like 20% is diesel.

And then the various natural gas liquids, those are about 15%. So we take off the 15% right away and we've got 85% left to play with. But 40 to 50% of it is gasoline. Yeah, yeah, it is. And then 20% is. So what comes after gasoline? after gasoline comes diesel so gasoline comes off first kerosene jet comes off next and then diesel and then heating oil fuel oil sorry oh yeah well i'm i mean i don't this is i'm in preparing for this podcast i'm actually learning some of these things so what is kerosene

used for currently the same lighting and lamps and such or well not so much much. Carosine, I mean, so the words carousine and jet are usually hyphenated, okay, because they're not exactly the same, but their principal use as far as humans as consumers are concerned is for aviation fuel. Got it. That's the main use. Okay, so gasoline, then carousine jet, then diesel fuel. Right. And diesel is also called distillate. And it also functions as heating oil, for example, on the east coast of the United States, very prevalent. Yeah, well, I mean, heating oil technically is actually a little bit heavier. There's a fair amount of overlap between kerosene, jet, diesel, and fuel oil.

It's a spectrum, okay? Okay. Of which kerosene is the bottom and fuel oil is the top. Okay. And fuel oil is what for ships and such? It's used for shifts, you know, and again, like ships are required to shift to a lighter type of distillate when they're within territorial waters for environmental reasons. They get outside. Because the heavier stuff is more polluting.

Exactly. So the heavier stuff is what you'll hear is, it's called bunker fuel. Don't ask me why. Okay. So when you're within the territorial waters of a country like the United States or Europe, where they have concerns about emissions and air pollution, the ships are required to use a lighter form of distillate that doesn't pollute. When they get out to sea, they can do what they want. Although, just to cover that and complete it, the marine community got together a couple of years ago in 2020 and said, all right, you know, we need to regulate more carefully what we burn at sea. And so a tremendous effort was made to lower the sulfur that was emitted and to basically clean up the act when it's at sea.

But still, it's, you know, it's a double standard. So octane chemical precursors, butane, propane, gasoline, kerosene, jet, diesel, fuel oil, what's left after all that? Just some really heavy gook? Heavy gook, which is used to pave our, you know, our roads, asphalt, various kinds of lubricants. You know, when you when you lubricate your bearings, I mean, if you've ever looked at the stuff that comes out of that tube, I mean, It's, I mean, it's thick and pasty. I mean, it doesn't look anything like oil. And then there are things called paraffins, which are, you know, very, they almost look like wax.

And they're used for, well, I mean, when you want to keep mosquitoes out of your yard, when you're having a barbecue, you might, you know, put some kind of a thing that looks like a candle into something on a pole and you light it. and that's paraffin. So yeah, by the time you get to, you know, to the bottom of the distillation tower, I mean, you're basically talking about tar.

I mean, that's what it looks like. It's black, gooey, tar. So in the same way, well, not in the same way, in a very different way, but the same metaphor

that Native Americans used every part of a buffalo. Current Americans use every part of a barrel of oil, it seems. We do, yeah, because it all contains energy. So this is a tangent, but we've emailed about this before. The whole electric car battery emission story, you know, that's a topic for another day. But in each barrel of oil is the roads that the electric or regular cars

up we'll drive on and how in the heck will the world create roads if we don't have the bottom 10 or percent of the sludgy asphalt from every barrel of oil that is the leftover which we use to not only create roads but to maintain and repair them. I just went on a bike ride today and someone just smoothed out the asphalt which without it I would have had a bumpy ride Are there, is this a topic? I don't even remember hearing or reading about how we're going to replace asphalt if we have to go fossil free. Yeah, these are, these are some of the details that somehow often get left out of the story because we, the public, are assumed to be energy blind. And maybe the politicians who, you know, who spin these stories are nearly as energy blind as the public that they're speaking to. But, you know, if you read our, you know, our mutual friend Vashlov Smeel, who, for anyone who wants to get a little bit more deeply into energy than we're talking about right now, the guy's written.

That guy writes as many books as I have podcasts. But go on. The guys, he's amazing. He's written 40 books, right? But, but Neil says. I keep pestering them to be on this show and eventually I think he'll crack. But he's like, I'm too busy writing books, Nate. I don't want to do any interviews.

Go on. Yeah. So, so, you know, he says that the four pillars of modern civilization are plastic, steel, cement, and fertilizer. all four of which require petroleum. How does cement require petroleum? Well, you've got to extract the materials. I mean, if you've ever, you know, if you've ever seen a sidewalk that's broken or somehow cut,

you'll notice that it's full of rocks, right? And so the cement making process is very energy intensive that you have to extract, just like you extract iron ore from a mine in South America, or you extract oil from deep in the subsurface. All of the operations that go into getting the materials and assembling them for cement require fossil fuels. So you've got plastics that come from oil and natural gas liquids. You've got steel, which, has to be extract. The iron has to be extracted. It has to be transported. It has to be heated at very, very high temperatures, usually using coal. We don't really have a very good way. I mean, we could theoretically, you know, smelt metals using electricity, but it would be unbelievably complicated, super expensive. And we're just not, we're not engineered to do that at this time.

So steel, fertilizer is something that most people don't even think about very much, but I mean, most of the reasons that we have nearly 8 billion people on planet Earth today is solely because of fertilizer, which is made from petroleum. So at the end of World War I, the world population was a little bit more than 2 billion people. And without fertilizer, it would have stayed at about two. 2.2, 2.3 billion people because the planet couldn't feed more than 2 or 2.3 or 4 people, billion people. But a couple of German guys figured out how to liquefy air under great pressure and temperature, which provided the source of nitrogen needed to create fertilizer. I mean, humans have known how to make fertilizer forever. We just didn't have enough free nitrogen on planet Earth to do it.

until Hobber and Bosch came along, figured this out, and all of a sudden, we could fertilize the world, and we could start growing the population because fertilizer expanded the productivity of the soil. And so most of the problems that we have on planet Earth today, in my opinion, are because we got too many people. And we got too many people because of fertilizer, but you can't do fertilizer without portrayal. mostly, hydrogen from natural gas, other fossil energy. So those are Schmiel's four pillars of modern civilization. And I mean, I'm as sympathetic as I know you are to people that put the environment first. And I think you do and I do. But when they talk about, you know, well, let's just get off of fossil fuels. They're cutting the pillars off of the four elements that, that uphold modern civilization.

It's okay if you want to do that, but it's not that, you know, it's got real consequences. I mean, you know, you're bringing down the civilization that you want to keep. So you can't have it both ways. There are alternatives to many of these things. For instance, there is biodiesel.

Can you talk about that for a moment? Yeah, so you can essentially synthesize the, you know, the heavier components of diesel using things like soybeans and, you know, other agricultural products. Now, it's not exactly the same, but it's similar enough that you can actually run a diesel engine off of it. Okay, that's what's called biodiesel. And people say, oh, well, you know, easy peasy. Let's just let's stop using oil. Let's start making biodiesel. And I'm one of those who say, I wish it were true.

And so what are the obstacles to biodiesel? Well, first and foremost, in my opinion, is that you're using a food product to create energy, which means that you're competing for food. food which feeds human beings and animals and the rest of the planet. So the same argument there is with corn ethanol. Exactly. So at the very least, you're making it more expensive to get food. And at the very worst, you're crowding certain people out of the food market because

you want to make energy with it. The biodiesel, it turns out, is not as energy dense as the diesel from petroleum. So it doesn't have the same level of efficiency. You have to put more energy in to get the same energy out, which is kind of inefficient. Turns out that it's, for reasons I couldn't even begin to explain, it's tremendously corrosive. And so whereas you can put diesel into a pipeline and just pipe it all over the country, with biodiesel, you actually have to put it into a special truck that is sealed on the inside. So now you're using real diesel to transport biodiesel. Just as an aside, I read the other day about now, there's a kind of tanker ship used to transport coal that

runs on wind. Okay, so we're using wind energy so we can move the world's worst polluting fossil energy around the world. I mean, you know, that the Irish, any there is just it's just exquisite, I think. But so, so the transport part of it is a problem. And, and, and it also turns out that it's corrosive to the engine when you, when you put it in. So I'm not trying to make a case against biodiesel. I'm simply trying to say that, you know, your, your premise was, well, aren't there alternatives? And yes, there are alternatives. And none of those alternatives, at least from a purely, from the standpoint of efficiency can compete with the real thing, with diesel.

And it's the same for many of the other alternatives. We can overbuild solar and wind and via hydrolysis, create fake fossil fuels, CH4 and other things. That could be chemical precursors for some of the other things on your list, but that is massively more expensive and complicated than the current refined stuff that we're pulling out of the ground and just turn it into this distillation to create all these products.

So, you know, one of the things that I increasingly point out to people is all these technological answers to our energy and environmental situation, these newfangled tech that creates alternative energy, all of these plans are predicated on this 200-year history of more and more energy available to humans every single year with the exception of financial crises, COVID, and a few big recessions. Every single year, we've had more access as a species to energy.

And I think that also blinds us to, the potential of technological fixes to this, because at some point, we're going to have less energy every year. And so what does technology do for us then when we have a declining amount of access to energy every year? So that's something that I think about. Well, and it's an important thing. So it's not just availability of energy, it's the cost of that energy. And so, I mean, energy costs go up and down, as everyone who pays any attention knows. But the unfortunate truth is that energy kept getting cheaper and cheaper up until around the beginning of the century. And it's been getting more and more expensive ever since then. And so

all these technological fixes were based on an assumption of not only abundance but cheap. And the cheap went away and the abundance is on its way out, as you point out. And hopefully one of the things the world is starting to awaken to with what's happening today is it's getting really expensive. And all the money in the world can't necessarily get it all to the right place at the right time. So maybe there's beginning, all the supply chain issues that everyone is frustrated. by, I mean, that wasn't something anybody, well, I just wouldn't say anybody, but that wasn't something the average person thought about two or three years ago. Now everybody's aware of it. And that's a good thing. And my point is that all of these alternatives to say diesel, aside from their cost and et cetera, et cetera, they're not without environmental consequences. And that's something that somehow doesn't come across when we're, when we're, when we're, were being pitched on so-called green products. And again, I'm not, I'm not trying to in any way dissuade people from using, you know,

more environmentally sound practices and products. But everything has a consequence. So as you were speaking, lots of thoughts are rolling through my head. Let's get back to the different fractions that are distilled off. from a barrel of oil. If we were headed to a world, let's just say hypothetically, that there was a diesel shortage and we had this machinery around the world and we needed to have X amount of diesel. But at the same time, we had switched to electric cars or people didn't drive as much because there was public transportation in order to get to the diesel, in order to

produce diesel, we need a certain amount of oil. And we first need to burn off those fractions that are lighter than diesel. And gasoline is one of those. And gasoline is 40 to 50% of the volume of a barrel of oil. So you can't just say, oh, I need this asphalt or, oh, I need this diesel. The only thing you could say is, oh, I need this octane or butane. And that's the first thing that comes off. Everything else, you have to burn off all this other stuff before you get to it. So this itself is a complexity problem in our global system. Yes? What do you think about this? 100% true. You cannot, I mean, it's a process. It's a sequential process. You can't get from A to D without going through B and C, and what you just said was that the B and C part of the process are like more than

half of all the stuff that comes out of oil. So what are you going to do with it? Let's just say you live in a world where nobody really needs very much gasoline. Okay, that's great. But you need the diesel. What are you going to do with all that gasoline? Are you going to, you know, are you going to bury it in the ground? Are you going to burn it? I mean, what are you going to do with it? If we get off of internal combustion cars, we're still going to need the diesel machinery and the asphalt and the other products from a barrel of oil. So what do we do with it? Can we shift our refineries so that the gasoline, what's currently the gasoline could actually be diesel or doesn't it work that way? The refineries don't work that way, but there is a process which is called reforming.

And so it is possible to take gasoline and using some fairly intensive chemical processes, you can basically add carbon to it. So going back to where we started, you know, all oil is carbon. plus some hydrogens around it. And so the problem with the light parts of the distillation process and up through gasoline is there's not a whole lot of carbon in there, at least compared to the kerosene jet, the diesel, and the fuel oil. So chemists know how to, you know, how to force more carbon into those compounds and then can essentially synthesize or they reform the lighter molecules back into heavier molecules.

At a cost, at a big cost, probably. And there's a scaling problem too. I mean, you can do it, you know, you can do it for relatively small volumes without that much difficulty. But if you're, you know, if you're talking about, you know, let's take half the gasoline or a quarter of the gasoline that we refine and let's turn it into something else. Whoa. I mean, now you're talking about.

two and a half million barrels a day of something just in the United States, a quarter of all the gasoline that now has to be reformed into something else. And that's a scale that's, you know, as far as I know, is just, you know, we're not, we're not set up for that. So is this, so let's talk about U.S. refineries for a moment. Do we have a problem with a matching, a mismatch between the type of oil supply and the eventual desired products going forward because we have primarily light oil? No, not really. And that's because we live in a connected world.

And so we take a lot of the light oil we produce and we export it. Okay, we're currently exporting. Because other countries have heavy oil and they want the light oil so they can get the butane and propane and other things. Yeah, and there are specialized refineries in parts of the world that are just geared toward gasoline, okay? And such refineries actually exist in Europe. They're generally kind of smaller refineries. They exist in Latin America.

They exist in China. These are the teapots you hear about, okay? So these countries, most other countries are a lot less gasoline. driven, and excuse the pun, than the United States. Most other countries in the world use, you know, at least a third diesel, two-thirds gasoline, or 50-50. But they all use gasoline. I mean, automobiles that run on gasoline are all over the world. So there's always a need. It's just we don't need it here. So we export three, four million barrels a day a light oil in the United States. So a lot of what we produce just goes somewhere else. And then we turn around and we import

heavy oil. So you hear about, you know, all this, you know, this theater that goes on between the U.S. presidents and the kings of Saudi Arabia. Well, what's that about? Well, it turns out that Saudi Arabia has just the, you know, the perfect oil that you can just dump right into an American refinery. It's got exactly the right consistency. And so we don't have that oil. And so we need that oil from someone else. And Saudi Arabia is a perfect place to get it. So they have the perfect oil period? Or they have the perfect oil for our situation? No. So the average refiner in the world is very similar to the average refinery in the United States. It takes, you know, kind of a medium-heavy input grade, much heavier or heavier than the average oil the United States makes.

And you can get to that level two ways. You can either buy the perfect oil, say from Saudi Arabia, or you can take a little bit of our light oil and mix it with some nasty heavy stuff from Canada and you get a blend. Is that why there was such a push to approve? And we know about the push to boycott and not build. But is that a big reason why we wanted the Keystone pipeline so that we could import heavier oil to merge with our light oil? Yes. But an important and is we're already importing it. I mean, Canada is the biggest source of foreign oil to the United States.

And we're importing just as much oil from Canada's day as we would have with the Keystone XL pipeline or without it, which is the case today. It's just that instead of being able to get here by a pipeline, it gets here by, trains and trucks. So the Keystone XL, I mean, it made sense to me just purely as a scientist because it's a more efficient way of getting the oil to the United States. And empirically, it's a safer way. I know people hate to hear this, but I would much rather trust a pipeline than a bunch of train cars knocking around in rail yards to prevent spillage and explosions, and there were a lot of explosions, and some of that's been fixed. But to be clear, the U.S. is in no way constrained on its supply of oil from Canada because Keystone

XL didn't happen. It just costs a little more to get here. While we're on that topic, there is this Byzantine media blitz that's all over the place on Twitter and elsewhere that the U.S. is an oil exporter. Can you just briefly unpack how much oil and oil products the United States uses daily or yearly and how much we produce domestically versus how much we import? If you could just summarize that in as simple terms as possible, because I think there's a lot a confusion about that. Right. So when we hear people talk about, oh, the U.S. is a net exporter of oil. Okay. They're talking about crude oil plus refined products like diesel, gasoline, etc.

Okay. Now, nobody else in the world, except the United States, defines net exporter that way. a country is a net exporter of oil if it exports oil. If it exports more than it imports, okay? But since we're an energy launderer, we get to redefine what it means to be an exporter. Exactly. So now without, you know, and again, I'm not, I'm not trying to be critical. The U.S. imports a lot less crude oil than it did, say, 10 or 15 years ago. Because of the shale situation.

Right. We had to import a lot of light oil 10 or 15 years ago because we had, our production had declined. So we've pretty much eliminated that. We no longer have to import other countries light oil. But since we don't produce very much of the heavy oil ourselves, we never is a strong word. we, it's very unlikely that we will ever and stop importing other people's oil until the world just doesn't use oil anymore. As long as we're in the business of exporting refined products, we need heavy oil or we can't do it. It's just that simple. So when people say we're energy

independent, first of all, it's, it's really not true. It's really not true. Well, compared to Japan and Europe and the UK it is, but, but go on. Well, but it's still not true. I mean, we're, we're a whole lot more energy independent than, you know, than Japan and Europe. Okay, absolutely. But, you know, now we're talking about, you know, well, you know, who's, I mean, of a bad lot, who's the best. Well, but so we're 80 to 85 percent energy independent, yes, but let's talk about, I mean, you can break that down if you like, but I want to talk about the oil part, especially. I think we're at, we can, we can, we can, we can, 20, 21 million barrels of oil per day, and we produce 12 or 11. Well, again, now, you know, we consume, so nobody consumes crude oil. Right, right, except the refineries. Except the refineries.

So America consumes 20 million barrels a day of refined products, not oil. Okay. Okay. But so what we're, so to keep the arithmetic straight, you know, let's talk about. about how much crude oil goes into American refineries. And the amount of crude oil that goes into American refineries is something around the, you know, around 13 to 14 million barrels a day. Okay. The United States produces about 11 or 11.5 million barrels a day. And so you could say, oh, well, we're almost there, you know, a couple of more million barrels a day and we're there.

Well, but what I just told you a little while ago is except that we turn around and export three or four million of our produced barrels elsewhere, because we can't use it in refineries here. So we have to then import more appropriate oil to replace that and also get back to the 13 or 13.5 million that goes into our refineries. And we consume 20 million barrels worth of product. Product. Now, and somebody is going to say, in fact, you said it to me in an email not very long ago. Well, wait a minute. That doesn't make sense. How can we have 13 million go in and we get 20 million out?

And the answer is, the simple answer is that a lot of what we consume are natural gas liquids, many of which don't come from this refining column at all. They come from natural gas. completely different source. And so, you know, an awful lot of what we consume, go into the plastics that you talk about, go into all sorts of natural gas liquids. And then there's biofuels. Okay, there's, you know, a million and I don't even worth the night number is, but it's more than a million barrels a day of what we call gasoline comes from corn. But that's counted in our consumption. And then there's another thing called refinery game that when you take crude oil, which has a very

high density and you refine it into products that have a lower density, there's actually an added volume, there's more oil, there's more product that comes out than goes in. So you take all that confusing gobbledygook that I just mentioned and the arithmetic does add up. But just just to make it clear and to get back to your laundering comment, Michael Levy or Levy is a guy that he used to be an energy analyst and now I think he's a lot. he's part of a hedge fund or something like that because he's a smart guy. But years ago, he talked about, he said, now, if a country manufactures no automobiles, zero, but buys five million automobiles every day from, let's say, Italy, imports them, paints them green, paints the car is green,

and then exports them back to Italy and Europe and sells them, are we a net exporter of automobiles? No, we're a net exporter of green paint. That's what we've done. And so the oil refining analogy that Michael was talking about there is, I buy oil from you, I put it into my refinery, I turn it into gasoline and diesel and other products, and then I sell it back to you,

and I call myself a net export. border. I'm selling you green paint, man. Now, I'm not criticizing the process. I mean, you know, you want to make money. It's a legitimate way of making money and you're, you're providing a product that people need. But let's be honest about what you're doing. You're exporting green paint. So in this discussion, I've come away so far with two main takeaways. Number one is we're not going to seamlessly or in any near-term time frame get off of oil because it is central to our modern way of life. If we radically change our way of life, we then might be able to get off of oil. And then the second takeaway is our system is so

complex our global supply chains and the systemic risk from any international hiccup due to Russia or China or a financial meltdown or any other international risk really can gum up this just in time global import export of green paint in this case the hemoglobin inputs to our modern economy because in autarky or a world without trade, the U.S. has plenty of oil, not as much as we used to, and what we have now is mostly light, tight oil, which depletes very rapidly. But we still have a lot, especially relative to most countries in the world. But we cannot produce the things we need just from our oil.

It has to be either build different types of refineries. And why would they do that? because they're not getting the signals from the market to do that, or we need to continue to merge our oil, mix it with heavier fractions that we get from other countries' flavors and types of oil. Yes? Yes, and let me add one important footnote to that, and that is you talk about, you know, we could build new refineries or different refineries. or different refineries, okay?

I mean, we're talking tens of billions of dollars per refinery, and it's like a 30 or 40-year investment. Okay, so we live in a world today where most of the investment money, the smart money, rightly or wrongly, doesn't believe there's 30 or 40 years of investment life in an oil refinery, that somehow we're going to be driving. electric cars and, you know, true or untrue, and you and I know, we don't think it's true, but it doesn't matter.

Well, we think it's true for a different reason. Well, okay, fair enough. Yeah, yeah. But the point is, is that you need credit. You need somebody else's money to make these big capital intensive projects happen. And if the investment community says, now, you know, we don't see it, guys. You know, if you could do this in five years, we'd talk about it. But 30 years, forget it.

So that's a problem. Now, will that change? I don't know. Maybe, maybe not. But so just because somebody says, well, we could do it doesn't mean that it's realistic to expect that it will happen. So what are the risks you see from the current? refining situation and the current diesel, I don't know if a shortage is the right word, but the very high price of diesel and the burning of oil for heat in places in Europe that

didn't happen before the war. In the next 10 years, are there risks you see to the refining situation in addition to what we discussed? Well, sure. And some, and some of those risks, well, let me just back up and say for a moment, unknown to most people, the guy who's running Russia right now, Vladimir Putin, has a PhD in energy economics. I didn't know that. Yeah, he wrote a thesis on basically why his thesis is that the Soviet Union fell apart. because it mismanaged its oil resources, that it didn't invest in the necessary infrastructure and refining, and therefore was at the mercy of the West. And so what's happening right now, this you mega hiccup, as you call it, you didn't say mega, I added that. What's happening right now with diesel and with natural gas is not an accident.

I mean, this guy knows exactly what he's doing. And I'm not one of those people that, you know, secretly admires Vladimir Putin. I'm just saying he knew exactly what he was doing. He said, look, I got all the cards right here. And I'm going to play those cards. And when those cards, when playing those cards don't work to his satisfaction, he plays another card. So right now he's bombing energy infrastructure.

in Ukraine. The guy knows about energy. Say what you will. If you Google Putin's PhD dissertation, you'll see there are lots of people who think that, you know, he had a ghostwriter do it or he plagiarized it. You know, I don't care because that's not the issue here. Point is, is even if all those things are true, this man knows more about energy than all the leaders of NATO put together because he somehow did have to pass his defense. So we're dealing with a guy who understands how to play energy much better than any of our NATO leaders. And I would argue probably any of the other leaders in the world. So this was a planned intervention.

So is it likely that we'll see something, you know, will a hiccup have the same implications in the future? We don't know. But this one's here to stay, I think. This is, in my view, this is part of a radical restructuring of the world order. And whether Putin lives or dies or stays in power or is taken from power, I don't think that's going away. I think the world is pretty evenly divided. And one side of that divide sees natural resources. and the means of production of those natural resources as the key to their success, and they're not us. And their idea is not a bad one. Well, let me put you on the spot here. So usually at around this time, I ask my guests some personal questions about the future. And I think I'd like to withhold that opportunity until we have more of a less of a chemical discussion. and more of an organic human discussion about future trajectories.

But I will put you on the spot and ask, given everything you just said about the importance of oil and oil products to our current way of life and the mega hiccup in Ukraine and what that portends for a biophysical awareness of what holds our system together, if you were energy czar or benevolent dictator in this country, what are some of the measures you might consider to make our path either the United States or the entire global culture more resilient to maybe a more energy scarce, less affordable future? Yeah, you are putting me on the spot. not that I didn't expect it. I don't have solutions, but if it were me, the word I would use is cooperation.

That rather than beat our chests about, you know, how we are the badass United States and we're a net exporter of oil and we don't need no stinking, you know, whatever's in Saudi Arabia, a bit of humility would be a really good thing. and say, you know what, whether we love these guys or hate these guys, we really need these guys. And these guys need us. I'm not, you know, speaking generally, but whether it's Saudi Arabia, whether it's Russia, whether it's China, that, you know, this aggressive kind of approach that we seem to be taking. And when I say we, I'm not talking about political parties. I'm talking about we as the United States of America.

and NATO, certainly in the last few years, but I mean, it is, it's, I mean, it's a recipe for disaster. If you want to maintain our civilization in some form like we're used to. Now, if you don't, that, that's another conversation altogether. And I'm not, I'm not even beginning to suggest that we just, you know, shock all the plans of decarbonizing and, you know, trying to consume. I mean, we really do need to radically modify our behavior towards energy as a species. But that's not the question you're asking me. And so if the question you're asking me is how do we manage the systemic risk, the way you manage it is cooperate. Now, there are red lines that you cannot cross. I mean, somebody does something that's so horrible that you say,

say, look, you know, we can't work with you anymore. I get that, you know, and I'm not, I don't have a degree in diplomacy or I probably would be a different person. But that's what I think is important. And, and, you know, as far as managing this current crisis, you know, all of this aggressiveness, you know, I think just gets us faster and faster to an outcome that doesn't have anything to do with what we're talking about as to do with, you know, nuclear war or war, which is, you know, okay, you know, how much do you want to be right? Is being right the answer? Or is, you know, is preserving the planet the answer? I mean, probably neither one of those is the right answer, but something in between, right? Well, yeah, the challenge is that our species

historically, when there is a phase shift to a smaller physical pie, cooperation is against out groups is not the first thing that we fix and that is that is worrisome. But in addition to the nuclear war risk and the financial overhang, you've laid out a case for the complexity of our energy infrastructure and all these different products that don't just naturally spring out from a barrel of oil. There's a big intermediate step, which is the refinery. and that process. Art, I know you are leaving for a well-deserved vacation in the morning. I think this was very helpful conversation, at least for me to understand that,

how oil turns into these other products. There's a ton of other things I want to talk to you about, but maybe we close this. If you have any other final thoughts on this broad topic of diesel, oil refining, et cetera. And then I'll have you back in a couple months to talk about many other topics relevant to our energy future, including one that you and I email about a lot, which is what can renewables do and in tandem with depleting fossil fuels and what are the barriers and opportunities

there. So any closing words, my friend. Yeah, my closing words are that you shouldn't expect. Nobody should expect that whatever the problems that we identify, let's just say here in the United States, since we're both here at the moment, nobody should expect that we're going to solve these problems in the near term, whatever they are. And if you do, then you probably don't understand them well enough to really have, uh, uh, uh, uh, a vote at the table. You're entitled to your opinion. But when I hear people say, oh, well, you know, we just need to get these refiners off their ass and tell them to make more diesel. Well, I think we've pretty much put that to rest. I mean, you, you know, you can't, you can't make something without making a lot of other things and you can't, you can't make something out of something that doesn't have what you need in it. So, you know, the idea of, well, let's just stop

importing other people's oil and use our own, okay, you know, live on gasoline, everybody. You're not going to get your diesel. Oh, whoops, I didn't know that. Recognize that all of these people, these groups, you know, whether they're refiners or oil producers or whatever, you know, I mean, they actually have a business to run. Now, you know, you may not approve, I may not approve of their corporate governance and their ethics and all of that. But, you know, when we have, when you have, when you have political leaders who stand up and say, well, you know, these guys shouldn't charge us as much because they're making a lot of money right now. Okay, you want to apply that across the board to, you know, to all corporations and all sectors. Okay, I can get behind that. But, you know, don't,

you're not going to get away with singling out one sector and say, well, you guys can't charge as much. but if Amazon or Facebook or you know Apple or you know Facebook wants to do it well you know sure why not I mean you know it's it's just it's just so unrealistic to make comments like that okay so it's red meat I get it I mean but but my point to your listeners who presumably are you know on a more thoughtful level is if you if you want something let's make sure that it's that it's realistic and feasible And just because it sounds good, it probably has all sorts of problems that the people that are talking about it either don't want to acknowledge or don't understand themselves. It's not a perfect world. But this petroleum system that we've been talking about for the last hour or so, as you've correctly pointed out, man, it's got a lot of moving parts. It's really complicated. I mean, what I'm talking about here is just the surface of it. And I'm sure that there are plenty of listeners that are confused enough as it is. And I get confused about it. But let's just leave it with it's hugely complex. It's got a lot of moving parts.

And hugely important. And to think that simple solutions will solve it is just not consistent with life. Thank you, my friend. Enjoy your vacation. And I'm sure we'll be emailing soon. I will have you back because you and I share a looking two or three steps ahead at our energy and society a conundrum that we face. And I like to hear your insights and wisdom.

Always a pleasure to talk to you, Nate. Thanks. So much, Art. If you enjoyed or learned from this episode of The Great Simplification, please subscribe to us on your favorite podcast platform and visit the great simplification.com for more information. on future releases.