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Oil In Industrial And Transportation Sector Engineering Essay

Oil is the most important energy source for the USA, Oil is mostly used in transportation, industries, residence and commercial use. At present, out of total energy demand of United states, oil accounts for 39%, coal accounts for 22%, natural gas provides 23% and 8% comes from nuclear power plants. In United States most of the oil is used by transportation sector and the transportation sector includes car, light trucks, buses, passenger & freight trains, airplanes etc. During 2007 about one third of total energy was consumed by industries and the usage of oil in industry was 46%.

Industries that are oil intensive in production (oil refinery and chemical industry), the impact of oil shock on them are on the supply side. Other industries like automobile industry, the impact is majorly on the demand side. The oil shocks impact is either through input-cost effect; as the price of oil increase the usage of oil decrease and it result in lower productivity of capital and labour, or through income effect; due to higher imported oil it will impacts the disposable income of households.

Industrial Sector:

Many people underestimate the importance of oil and mainly associate it with the petrol they put in car. However the value of oil is beyond it and it is used in manufacturing of many products like antiseptics, plastic, carpets, computers, cream, detergents, perfumes, tyres etc, it is widely used as input in many industries. The usage of oil has not decreased during last three decades in industries even thought the price of oil has increased. Rise in oil price has also affected the prices of its substitutes like gas, coal prices. If the increase in the price of oil sustains for long time, there is bigger impact on the macroeconomic. Many developing countries governments try to protect their industries and consumer from the oil price hike through various systems of control. These controls protect the economy on short term basis but at the cost of worsening the long term risk of financial stability and government risk.

In the United States three fourth of total energy consumed by industries majorly goes to these energy intensive industries; aluminium, chemicals, forest products, glass, metal casting, mining, and steel. One of the major portion of energy is consumed by the chemical industry, that accounts to 29% of oil consumed in the US industry sector.

Impact of Oil Prices On Different Industries during 70s:

According to Lee’s and Shawn’s finding the largest industrial consumer of the oil products as fuel and feedstock were petroleum refinery and chemical industries. They found great proofs in the trade magazines (from the table below) that during the crisis if input costs are increasing, these industries are largely affected. In 1973 oil shock, U.S. petroleum refinery performed sluggishly. “Dearth in the feedstock was held responsible and refinery shutdowns for repair and allocating crude oil possibly by the effects of new federal program”. Whereas, chemical industries are concerned they also face the same problems as petroleum refinery in both the oil shocks of 1973-74 and 1979-81. The problem was majorly from the supply end due to the scarcity of feedstock, which put an upper limit on the production.

On the contrary automobile industries were also facing problems due to increase in oil cost. Even with the first realization of the energy crisis automobile sale begun to plunge, especially for the standard and intermediate cars but for gas guzzlers it dropped unfortunately.

Summary of Trade Journal coverage of effects of oil price shocks in 1973–74 and 1978–81

Industry

Magazines or

trade journals

Major stories during

the oil crises

Main impact on industry

demand and supply

Petroleum refinery

Petroleum Engineer

International

Increase in input cost

Reduction in supply

Industrial chemicals

Chemical Week, Chemical & Engineering News, Industry Week

Increase in cost of production of chemicals. Reduction in demand for chemicals plays a secondary role

Reduction of supply, and minor reduction of demand

Paper products

Pulp & Paper

Shortage of petroleum reduced production of paper in 1974, weak

demand caused shutdowns of many paper mills in 1982

Reductions in supply and demand.

Rubber and

plastic

Industry Week

Reduction in demand in rubber and plastics due to slumps in auto sales, reduction in supply of plastics due to higher input cost

Reduction in demand

and supply

Steel and nonferrous metals

Ward’s Auto World, Chemical & Engineering News, Industry Week

Reduction in demand of steel and aluminum due to slumps in auto sales, increase in demand of steel in energy related sectors (rig and

pipeline building)

Mixed effect on demand, minor reduction in supply

Apparels

Apparel Industry

Magazine

Gasoline price increase

reduces demand for apparel through income effect

Reduction in demand

Automobiles

Ward’s Auto World, Industry Week

Slumps in sales of full-size cars

Reduction of demand

Machinery and

tools

Industry Week

Increase in demand of machines used for energy related projects,

reduction in demand of certain machine tools for the auto industry

Mixed effects in demand

Source: Kiseok Lee, Shawn Ni, “On the dynamic effects of oil price shocks: a study using industry level data”, Journal of Monetary Economics 49 (2002) 823–852.

Metal industries were majorly suffering because of the adverse effect of the plummeted sale of automobile industry, but also from consumer durables and households. The market depressed by 18.4% in 1974 from 1973. Some metals like copper, lead, zinc etc. may have an increased demand because of energy shortage.

Demand for machine industry was quite mixed because of oil impact. Some automobile related machinery was down but not for all kind machineries. The demand for mining, oil and gas exploration drilling machines, small automobile, railroad and pipelines building machines were up. The table above give the summary of the impact of oil on these industries and some more industries.14

Petroleum consumption in Industrial Sector:

(figure 18)

As per data available of 1973, oil was mostly used in transportation (around 9 million barrels per day) and secondly by industries (around 5 million barrels per day). However in 2001 the consumption of oil portraits different picture, the oil is still mainly used in transportation (around 13 million barrels per day) but the consumption of oil in industries has slightly increased in last decade.

Some of the major reasons why oil consumption by industries of United States has slightly changed during last three decades are (i) United States industries shift from being a manufacturing based economy to service based economy and (ii) industrial changes; the usage of advance technology and using recycled material to decrease the usage of oil in industries.

Manufacturing economy to Service economy:

As shown in the above graph, in 1973 the share of services sector of United States’ total GDP was around 50% which has increased to 70% in 2007 as the manufacturing of united states companies is outsourced to other countries such as China, Vietnam and brazil. Due to this reason the impact of rising oil prices did not affect the United States economy but affects the economies of developing countries like China, Brazil and Vietnam (where most of United States companies’ production is outsourced). China is producing most of the world product, because of economies of scale and cheap labour, the impact of recent higher prices of oil had little impact on USA economy compared to effects of 1970’s oil crisis. As Rogoff (2006) discusses that the shifting of manufacturing base from North to South has left the developing countries vulnerable, to same kind of economy-wide multiplier effect that OECD countries had to face during 1970s.

(ii) Industrial Changes from 1973 to 2000:

Since 1973 the United States industrial sector has grown by 60% but the energy requirement of the sector has grown by only 15%. After 70s when oil price increased from $3 to $30 dollar a barrel, industries realized for raised amount of input cost, most of the industries spend billions on research and development to advance their technology in order to decrease the consumption of oil. Advance technology has allowed industries to consume oil efficiently and industries have become leader in developing cogeneration technology. Cogenerators produces electricity and simultaneously produces useful heat (used in manufacturing), increasing overall efficiency by 50 percent. Not all the industries are equal consumers of energy, six industries consume lion’s share of energy of the total share consumed by the industrial sector.

Petroleum Refining:

Raw and unprocessed crude oil is unusable; we need to refine the crude oil to use it. An oil refining is an industrial process where raw crude oil is processed and refined into use-full petroleum products such as gasoline, diesel, asphalt base, heating oil, kerosene, and liquefied petroleum gas. Petroleum refinery is the largest consumer of energy among manufacturing industries. Enormous amount of heat is required to separate hundreds of different hydrocarbon molecules in crude oil to produce gasoline diesel, lubricants and feed-stocks.

According to Intermediate Energy Infobook (2010), 43 percent of the refinery’s operating costs are in form of energy cost. Petroleum Refineries have become more efficient in consuming oil and today consumes 25 percent less energy compared to 1973.

Steel Manufacturing:

The steel industry consumes energy to smelt the iron ore with coke and limestone in a blast furnace and at later stage remove the impurities such as sulphur, phosphorus and carbon. Steel is manufactured by using high temperatures and producing these temperatures takes lot of energy. The steel industry consumes around three percent of total United States energy demand. Energy consumes around 15-20 cost of total manufacturing cost of steel. Around 60 percent of this energy comes from coal and oil.

According to Intermediate Energy Infobook (2010), since 1973, steel manufacturing has witnessed a drop in energy consumption by 45 percent per ton of steel. With new technology companies are able to manufacture stronger steel, so less steel is needed. Steel is easily recycled and save lot money and energy. It requires 33 percent less energy to recycle the steel making it leading recycle product of United States. Two third of United States new steel is made from recycle scrap than to use iron ore.

Aluminium Manufacturing:

Aluminium is one of the widely used metals in the world; we use aluminium to make cans, foils, automobiles, bicycles, windows etc. Bauxite is refined to produce alumina and then alumina is dissolved in electrolytic solution, later placed in large steel containers and high voltage of current is passed through the solution from positive electrode to negative electrode. It takes huge amount of energy to produce aluminium from bauxite, the major energy input used is oil, coal and electricity. To convert one pound of bauxite into aluminium we need six to seven kilowatt-hours of electricity.

According to Intermediate Energy Infobook (2010), energy cost contributes around 30 percent of total aluminium manufacturing cost. Today it requires 23 percent less energy to manufacture aluminium compared to 25 years ago because of using new technology and recycling. Aluminium can be 100 percent recycled without losing its natural qualities, Recycling involves melting of scrap and requires only 5 percent of energy required in producing aluminium from ore. Recycling of aluminium has doubled compared to 1970s.

Chemical Manufacturing:

Chemicals are widely used to make consumer goods, such as medicines, paints, cleaning products, detergents, plastics and it is used in many food products, it is also used as input to agriculture, manufacturing, construction, and service industries. It is central to modern economy and covert raw material such as oil, natural gas, air, water, metals, minerals etc into more than 70,000 different products. The chemical industry uses significant amount of oil, natural gas and coal to power the equipments for heating, cooling and pumping and also as feedstock to manufacture chemicals.

Hydrocarbon is the principal ingredient of production of chemicals. Crude oil is the major source of hydrocarbon used by chemical industry. New and advance technology has enabled to make more products while using less energy from same amount of petroleum feedstock. Improved technology has also enabled chemical industry to be 41% more energy efficient compared to 30 years back.

Cement manufacturing:

Cement is used to make houses, roads, bridges, dams, airports etc. Manufacturing of cement require high temperatures – up to 3500 degrees Fahrenheit, which is achieved by using large quantity of energy. To make one ton of cement we need 4.7 million Btu - 418 pounds of coal as average energy input. In United States cement industry consumes 0.33 of total national energy consumption. To make enormous quantities of heat, coal and coke is used as they contain carbon, but there are many other sources of hydrocarbon. One such source is tires, which produces 25 percent more energy than coal and results in lower emissions.

The top priority of cement industry is to find alternative solution of fossil fuels. Twenty five years back more than half of cement manufacturers were using fossil fuels to produce the heat. According to PCA publication: U.S. and Canadian Labor-Energy Input Survey 2001, the cement companies has decrease the consumption of energy by over 33 percent from 1972 by using innovative waste-to-energy program. Today 20-70% energy requirement of cement plants are met with alternative fuels, most of these alternative fuels in form of consumer wastes or by-products from other industries.

Paper Manufacturing:

The United States is one the biggest consumer of paper in the world, paper is used to make newspapers, books, bags, and boxes. Enormous amount of energy is used in making of paper, from chopping, grinding, cooking the wood into pulp to rolling and drying the pulp into paper. Today 90 percent of paper pulp is made from wood. Paper production represents 1.2 percent of the world total economic output.

Today the paper and pulp industry consumes 42 percent less energy to make paper. Today with advanced technology, manufacturing of one reem (500 sheets) of paper requires 2 gallons of oil. In 1973, the same amount of paper required 3.7 gallons of oil. According to energy information administration recycling of paper consumes 40 percent less energy than making the paper from pulp.

Transportation Sector:

In 2007, automobiles, motorcycles, trucks and buses drove around 3 trillion miles within the United States. In United States 70 percent of oil is consumed by transportation sector, to move people and goods from one place to another. According to U.S. Energy Information Administration report(1996), from 1949 to 1973 the oil consumption by transportation sector grew by 3.6 percent per year. In the subsequent years from 1973’s oil embargo to 1986 (after which oil prices decreased to $ 20 a barrel) the rate fell by 0.6 percent per year. According to Transportation energy data book (2010), the total oil consumption by transportation in 1970 was 7.3 Million barrels per day which has increased to 13.14 Million barrels per day in 2008.

Automobile Sector:

Automobile sector is one of the largest segments in the world trade and accounts for 10 percent of the world exports. The United States is home to one third of the world’s automobiles. In 1973 there were 102 million cars on the road and now there are more than 135 million cars on the road. Most of the people think that aircraft, buses and trains consumes major chunk of oil but in the reality the picture is different, about 9 percent of oil is consumed by aircrafts and around 3 percent by trains and buses. Personal vehicles consume more than 60 percent of gasoline used for transportation and the rest is consumed by commercial vehicles.

After 1970s oil crisis, United States automobile sectors shifted their strategy and started manufacturing lighter, smaller and less oil consuming vehicles; they started downsizing large vehicles into mid-sized model to decrease the vehicles weight and used aerodynamic designs to decrease the oil consumption. According to Heavenrich and Hellman (1996) between 1973 to 1988, the performance of passenger cars was doubles and fuel economy increased for 14 MPG (mileage per gallon) to 28.6 MPG. As prices of oil remain low after 1988, there was no major improvement in mileages of passenger cars and the mileage increased a fraction from 28.6 MPG in 1988 to 31.2 MPG in 2008. After the oil crises United States automobile sector have shown innovation and produce efficient cars and when oil prices drops the improvement in automobile sector stops. Same follows for the consumers, in 2004 the most efficient cars and trucks sale was below one percent. After 2003-04 oil price hike automobile manufacturers are concentrating on production of hybrid car, which uses gasoline and electricity.

Commercial Transportation

Commercial Transportation includes trains, trucks, buses and planes for moving of people and good from one place to another. In last 30 years major changes in-form of improved millage efficiency, decreased weight and aerodynamic design has shaped the commercial transportation.

Trucks: Trucks consumes more oil than any other commercial vehicles, the consumption by trucks (light and heavy weight trucks) between 1970 to 2008 has increased from 1.5 million barrels per day to 6.38 million barrels per day. With improved engine design and computerized electronic controls, trucks has become more efficient in oil consumption; in 1977 an average truck use to consume 4.8 mpg (miles per gallon) and now trucks can travel 7 miles on one gallon (Table 1.14).

Airplanes: Just as fuel efficiency is important to automobile, it is equally important for airplanes. Since 1973, the number of passengers and cargos has doubled, but air transport has also doubled its fuel efficiency by using advanced technology and operation. For Airline Companies Jet fuel is the major cost after labour cost. Modern airplanes are bigger in size and carry higher load. The Airlines has increased fuel efficiency by using new and advanced engines, design modifications, better flight routing and single engine taxiing (use single engine to save fuel).

Rialroads & Mass Transit: Railroads are the major channels between cities for transportation of goods, the truck and marine shipping industries work closely with railroads for internal and external trade. According to the Association of American Railroad (news release, 22 Apr 2010), since 1980 the fuel efficiency of railroads has increased by 104 percent and today united states freight railroad averages 480 ton-miles to the gallon of freight. Mass transit is public transit system to move people from one place to another using buses, trains, rails and subways. According to Intermediate Energy Infobook (2010), the trips on Mass transit has decreased to only eight billion trips in 2004, due to increase usage of automobiles.

The United States oil consumption has increased from 15 million bbl/day to 20.6 million bbl/day from 1970 to 2009 and half of that oil is imported from other countries. When the OAPEC put an embargo on United States and increased the prices of oil, those effects were felt in all the corners of economy. Industries which used oil as input were facing daunting task, as their manufacturing cost increased but they responded well and with advanced technology decreased the usage of oil in the production and the oil consumption by industries in last three decades has slightly increased (figure 18). On the other hand, after the 1970s crises automobile sector felt the heat too and developed fuel efficient cars but after 1986 oil price drop lost the track and continue manufacture SUV cars that consume lot of oil.

Today oil consumption is mainly concentrated in the transportation sector, and industries have become more oil efficient and the demand of oil has slightly increased in thirty five years. This is one of the major reasons why 2003-2008 oil price hikes did not have major impact on growth and inflation rate of United States, transportation plays a role in the production process but the impact is more on the passenger vehicles and less on manufacturing cost of goods. As rogoff (2006) discussed that the oil is more concentrated in final demand and less used as input in the production, the impact of oil price has less impact on the economy.

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