Fossil fuels are not considered a renewable source of energy although we currently generate a staggering 90% of energy from fossil fuels. It is scientifically proven that climate change, greenhouse gases and many others issues to our planet’s health are related with fossil fuels and its conversion to energy. Not to mention the costs of retrieving this energy from the ground and under the seas which are now beginning to demand attention. Renewable energy sources are now being used as an incentive by governments working hard to minimize its carbon footprints as a large-scale energy source. Incentives in planning such as site assessments and development grants , installation of solar and wind energy both for residential and commercial use are now being carefully studied by governments around the world as a solution for our energy needs in a sustainable and responsible way.
In February of 2009, 183 countries signed and ratified the Kyoto Protocol which has the objective of reducing Greenhouse Gases into the atmosphere avoiding Global Warming by reducing these emissions by 5.2% by the year 2012. The most notable non-member of this committee is the USA which claims that there is no point signing the protocol as it’s about to end. This was said by president Barrack Obama in April 2009 with 2 years and a half remaining of the protocol’s agreement. (http://en.wikipedia.org/wiki/Kyoto_agreement)
Oil History
The contribution of technology towards oil exploration and refinery is described in our history along the years. At first, oil was used for medicinal purposes, cementing walls in Babylon and also for kerosene lighting, replacing animal, vegetable and coal oils.
After Henry Ford invented the automobile and later becoming a necessity instead of a luxury item for our society the demand on oil was hugely increased and in West Pennsylvania, the first oil well was drilled in that region by Edwin Drake in 1859. The well was 69 feet deep and produced 15 barrels a day. The area quickly boomed and the modern oil industry was born.
A contradiction regarding the quantity of petroleum in our planet is very common. Hubbert’s Peak or just Peak Oil is a theory that explains that when a maximum level of oil is produced is usually followed by a decline of production as it becomes less profitable to explore. However, critics say that as this theory were presented in 1956 the author could not predict external events such as huge increase on demand, application of new technology, economic crisis and war.
Biodiesel
As one of the alternatives for petroleum based fuels, biodiesels are made from animal fat or vegetable oils. A production process is used to convert the base oil to the desired esters and to remove acids from fat. Only diesel engines can run biodiesel although they need to be mechanical modified prior to using them. Biodiesels are also the world’s number one alternative for fossil fuels and its market is growing fast, spreading all across Europe and USA.
Research Method
This research intends to clarify fuel prices in Brazil by identifying oil extraction, refinery, workforce and tax prices. Although we have plenty of technology available for oil extraction and refinery, fuel prices continue to be an expensive trade mainly due to demand, and government taxations. Furthermore this project aims to compare taxes on fuel with British tax system and identify the direction this money is taking.
The contribution of technology towards oil findings, exploration and refinery is crucial nowadays as we all know, for Petrobras technology is thinking like an integrated energy company, focused on creating new forms of production of oil and its derivatives, and developing new energy sources, clean and renewable. But how much are we paying for all this? Taking into account that Petrobras is a joint private company, this means that the majority of its shares are owned by government, meaning that not only Petrobras will pay taxes as a multinational company but will be entitled to public taxation as well.
Furthermore, this project intends to clarify the involvement of politics in the petroleum industry. Identifying advantages and disadvantages in this connection.
Core Chapter – Research
This chapter contains a brief concept on technology and how it relates with the financial world - summarized procedures used to explore and refine oil, transforming them in commercial fuel.
The aim of this project is to identify how Brazilian and British governments reach their prices at filling stations by understanding both countries taxation by analyzing all steps from exploration to end product.
Technology
“100 years ago oil was a black goo that ruined the water. Technology made it a resource” By Paul Zane Pilzer
Technology can be defined in many ways; however a strict definition can say that it is a tool to get jobs done. It has helped society in countless directions, and also harmed in many ways when producing by-products or even when exploring fossil fuels. Present and future technologies have been discussed by philosophers who in disagreement debated to whether or not it will improve or worsen human life. Common sense says that it will improve conditions of life; however we need to have rules to control these upcoming technologies.
In the economy Pilzer says that technology gap means economic growth, and that wealth equals resource times technology. He claims that at one point technology will create gold by using natural resources. Finally, Pilzer says that in an economic downturn the technology gap is too small or it is not being applied as rapidly as it could be.
Oil Extraction and Refinery
Geologists nowadays use a system called seismic surveys to locate oil fields underneath the earth by using explosives underground and observing the seismic formation. For deep underwater reservoirs of petroleum instruments such as gravimeters and magnetometers are used followed by the drilling wells based on oil platforms which can be fixed platforms, round-hull platforms, jack-up platforms, semi-submersible platforms or drill ships.
The refinery process can be summarized as a crude oil burn in an internal combustion engine. The different boiling points will determine the form of fuel being produced. Petrol, for instance is created at a temperature of 160 degrees Celsius, while diesel 300.
The cost involving extraction and refinery varies according to each country. In Saudi Arabia the set up and operation costs are considered to be the less expensive in the world while in Europe and USA a large scale refinery costs around 5 billion USD and platforms costing around 1 billion USD or more. Not to mention the operational costs and subside technologies, usually from a different company, which can reach up to 100 million USD per month. Oil prices are reflected in each case directly.
Fuel Prices and the Pre-Salt Layer
Petrobras announced in 2008 an oil and natural gas find in an area known as pre-salt. The reserves are distributed over three large basins: Santos, Campos and Espirito Santo just off south and southeastern coast in an 800km along the coast of five states. The reserves of oil found in the pre-salt layer of the Brazilian coast are in the sea area considered the exclusive economic zone of Brazil. With oil reserves considered to be medium to high quality. The number of oil fields in the pre-salt area between the coastal states of Espirito Santo to Santa Catarina, with depths ranging from 1000 to 2000 meters from the water and between four and six thousand feet deep underground, are still to be confirmed.
Furthermore, getting up to 8000m from the sea surface, including a layer ranging from 200 to 2000m of salt, the area of pre-salt could be much higher than 800 kilometers, extending from Santa Catarina to Ceará claims geologist and former employee of Petrobras.
Energy-pedianews.com
Only with the discovery of the first three fields of the pre-salt Tupi, Iara and Whale Park Brazilian proven reserves, which were 14 billion barrels, rose to 33 billion barrels. However, Petrobras believe that these findings may rise even more with possible and probable reserves with potential to produce 50 to 100 billion barrels.
Despite recent discoveries of oil and a significant increase of production of barrels per day the tax burden of petrol already accounts for 59.2% of the price charged to consumers at filling stations. Fifty years ago, when Petrobras was created, taxes accounted for only 4.8% of pump prices.
In the pre-salt layer it is estimated that 50 billion barrels will be produced till 2013. Following those estimates 20 wells were drilled since 2005 costing Petrobras over a 1 billion USD. The Brazilian government is now taking greater control over oil wealth and politics are now considering following Norway’s example on their pre-salt distribution of profits which consisted in an integration impact that brought benefits for the country.
At the moment there’s a conflict between the states that border the pre-salt layer with the national government. The states representatives believe that all royalties from the discovered oil should stay within these states whether the government wants to invest the profits in a national way as Petrobras belongs to the union. President Luiz Inacio Lula da Silva said that the proceedings from this discovery are an opportunity to invest in education, science and technology, culture and environment and poverty eradication in the country. Our aim is to be a major economy in the 21st century he says.
To understand fuel prices in Brazil we first need to have the international price of oil barrels in mind. These same oil barrels suffered a great decreased on their prices in January 2009 costing 40 USD instead of the 120 USD which was previously charged. Due to a depreciation of the Brazilian currency towards the US dollar in this same year, Petrobras was forced to increase their prices so to keep up with international mark.
The fact that Petrobras kept their prices in an international mark is controversial by some politics who claimed that before taxation petrol prices in Brazil in comparison with international are as follows:
New York Mercantile Exchange (NYMEX) Jan2009
These prices appeared to be an increase made at the refineries to keep up with taxation which according to the National Agency of Petroleum the average price of unleaded Gasoline (25% of anhydrous alcohol) was R $2.511. According to Petrobras the charges on the litre of this same type of gasoline were:
- Distribution and retail R$0.42.
- Cost of anhydrous alcohol R$0.23.
- ICMS (TAX) R$0.70 (28%).
- Cide (TAX) R$0.32.
- Refinery production R$0.83.
With a reduction of 35% to match international market the unleaded litre of gasoline would cost R$0.54 at the refinery and the ICMS (TAX) would cost around R$0.59 being in total R$2.1 in filling stations.
The problem we have in establishing the final price for fuels is that ICMS varies between states, being revised every 2 weeks by their local government. Also, bearing in mind that Unleaded Gasoline in Brazil is mixed with anhydrous alcohol at the filling stations, Petrobras claims that they have no responsibility at final prices as they sell Gasoline “A” from refineries and at the filling stations labour prices for mixing gasoline “A” with anhydrous alcohol may also vary.
Not only that but to achieve a price reduction in Brazil at the filling stations we not only depend on oil barrels prices to drop but in our economy itself. For instance, when we have an international decrease on oil prices, our economy demands that taxation is increased, freezing prices at pumps disregarding current international prices. It is truly a catch 22 scenario.
Fuel 1Tax in the UK
Not different from Brazilian taxation the UK government currently charge 2 different taxes over fuel; being VAT and duty, making an average of 81.5% of tax on fuel. It’s also contradictory between its people but the answer for such high taxes is explained as a way to discourage people for using their cars thus saving the environment. In November 2007 when petrol prices were 93ppl it could be split as follows: Duty 54.19p; Product 20.98p; VAT 12.13p; Retailer/Delivery 5.71p.
Where all the taxes go?
Currently in the UK as well in Brazil all taxes on fuel are going to government’s general budget and to help fund public investment. In both countries it is fair to say that this money should be spend in the transportation sector rather then general budgeting as drivers could benefit from better roads, less traffic and so on. In the UK this year there has been an increase on duty of 2pence in every litre, again to be added to general budget. Some say that if the VAT is increased instead of duty the money could start taking the right direction.
Petroleum Politics
Petroleum politics has been extremely important to our history since the rise of oil industry, specifically in the Middle East in early 20th century. With today’s competition and globalization all steps from researches of oil fields to refineries are carefully being taking into account.
Since late 1920 when production of oil started to increase, several organizations were formed to control and rule this new coming commodity. As an early attempt to restrict oil production the Achnacarry Agreement was signed in Scotland in 1928 by global oil producers, followed by the discovery of the East Texas Oil Field which led to a boom in the petroleum industry in 1930 which had a significant decrease on oil prices at the time.
Today’s organizations such as OPEC which is formed by Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela has as its primary goal the safeguarding of its cartel’s interest. It is contradictory within western oil organizations the fact that OPEC has deliberately cut production by nearly 5 million barrels a day to keep prices at their standard. OPEC members are responsible for 35% of today’s oil production.
In Conclusion
As an entrepreneur we need to have a clear vision and opinion on today’s commodities. Keeping track of changes and why they are happening. Oil is one of the most important commodities and most discussed. Today we know for a fact that oil as harmful as it is for the planet’s health is a top business sector generating billions for governments and private sector.
Today’s vast technology has enabled companies such as Petrobras to explore new oil reservoirs as newly discovered Tupi (Pre-salt). The new equipment invented from tech scientists are considered a technological gap therefore enabling our society to benefit from these discoveries and to continue to afford fuel prices. It is a key element of the competitive strategy for these companies.
Furthermore, oil is a finite resource and although scientists agreed that oil comes from fossil plants compressed over thousands of years they have not created successfully in laboratories within the same compressed time conditions. Therefore, what is currently supplied in the grounds is what we are going to get.
We must bear in mind that prices of oil are here to stay. If the price per barrel of petroleum were to be less expensive it would come to a point that the cost of drilling and refinery would not be viable. What we must ask ourselves is the issue with taxation. Is this money taking the right direction? Are our governments investing enough in researches for renewable sources of energy? The level of taxation is punitive and is clearly harming several sections of our society. It is clear that demand for oil is increasing and supplies are decreasing. Positive global economic outlook, tight oil supplies and lingering concerns about the stability of oil supply are evidences that oil prices are to remain high – therefore, the focus should be on taxation and where the money is being invested.
References
The Future of Global Offshore Wind Power: The technology, economics and impact of wind power generation
Global | 2004-03
The Top Ten Oil & Gas Companies: Growth strategies, consolidation and convergence in the leading players
Global | 2006-06
