Enkidu's Rant - The Other Side of The Mountain

2005-12-05T17:54:00.000-08:00

Place your bets! It’s time to play “pick the peak”! Will it be 2010, 2007? How about (gulp!) 2005? Princeton Geology Professor Dr. Kenneth Deffeyes predicted the date of peak oil production to be on Thanksgiving 2005. He recently stated: “I see no reason to retract my Thanksgiving, 2005 prediction”. Is his prediction correct? Unfortunately, we won’t know for certain for a few more years. Peak oil is something that can only be seen in the rear view mirror. That’s because production numbers jump around a bit and it’s hard to see a real trend in the short term numbers. However, it’s worth watching. Interestingly enough, according to the EIA, the highest output so far was in April of 2005 - 84.6 million barrels a day.

Blast from the Past: 1982 saw the publication of “THE GLOBAL 2000 REPORT TO THE PRESIDENT: Entering the Twenty-First Century.” This report was prepared by the Council on Environmental Quality and the Department of State, and stated:

“In the long term, the rate of petroleum reserve additions appears to be falling. As a result, engineering considerations indicate that world petroleum production will peak in the 1990-2010 interval at 80-105 million barrels per day, with ultimate resources estimated at 2,100 billion barrels.” Hmm…those numbers look familiar…Thanks Matt (emphasis added)

The Giants: As noted above, you can’t be sure about the timing of the peak until after it has passed. Nevertheless, there may be some early indications of the impending peak, like when the giant fields start to falter. The largest field in the world is Ghawar in Saudi Arabia. The Saudis have been rather secretive about its prospects. Independent sources have suggested that it may be past peak. ref 1 ref 2 The 2^nd largest is Burgen in Kuwait. Recently, the Kuwaiti government has confirmed that Burgen has passed its peak. Third in size is Mexico’s Cantarell field. Pemex recently announced that Cantarell will start it decline in 2006. Next in size, Daquing in China, is declining as well.

Deep Throat at PEMEX?: Oilcast.com has an interesting interview with a “senior engineer” at PEMEX. Naturally, anything like this must be taken with a grain of salt. Highlights – Cantarell has a depletion rate of at least ten percent for next year and probably it will reach twenty percent within two years. The Saudis are pumping at maximum capacity. Maximum production worldwide will be between 85 and 90 million barrels daily.

Puttin’ EIA predictions to the test: Wouldn’t it be nice if we could just rely on the government to warn us when the peak and adjust for the impending decline in petroleum prodicts? The EIA is a US governmental agency – and division of the US Department of Energy. Roger Arnold at ROE has done an interesting comparison of some of the IEA predictions from 2001:

What the EIA predicated: “…North Sea production reaches a peak in 2006, at almost 6.6 million barrels/day…”
What actually happened: The North Sea peaked in 1999 at 5.947 mb/d. For the first nine months of 2005 the North Sea has averaged 4.787 mb/d, 1.16 mb/d below the average for all of 1999, the peak year.

EIA: “They say Norway will peak at 3.7 mb/d in 2004…”

What actually happened: Norway peaked in 2000, averaging 3.197 mb/d for that year. So far in 2005 they are averaging 2.719 mb/d

EIA: "…The United Kingdom is expected to produce about 3.1
mb/d by the middle of this decade, followed by a decline to 2.7
mb/d by 2020." The UK peaked in 1999 at 2.684 mb/d…”

What actually happened: the UK is producing an average of 1.668 mb/d, or about 46 percent below where the EIA expected UK production to be.
EIA: “Expected production volumes in Mexico exceed 4 million barrels/day by the end of the decade and show little decline out to 2020.”
What actually happened: The 12-month moving average of Mexican production peaked six months later in June 2004 at 3.408 mb/d and has been steadily declining ever since.
EIA: …"Argentina is expected to increase its production volumes by at least 100,000 b/d over the next two years, and by the middle of the decade it could possibly become a million barrel/day
producer"
What actually happened: Argentina peaked in 1998 at 847,000 b/d average for that year and so far in 2005 it has averaged 712,000 b/d.

Waiting for the Futures Market

2005-08-26T18:25:00.000-07:00

Over at Econobrowser, Professor Hamilton raises an interesting point. He offers the following argument: 1) when the peak in oil production occurs, it is likely that prices will rise as users bid up the price for the remaining product. 2) If peak oil were likely to occur in the near future, say in the next five years, the clever people who buy and sell oil futures’ contracts would bid them up to the point that the price for future oil would be greater than the price for today’s oil. 3) As it stands, the price for a 2010 oil future is less than the 2005 price. Therefore, 4) peak oil will not occur in the near future. Q.E.D.

Does this argument hold together? Is it a good basis for planning our own individual futures? Let’s take a closer look. In general, I’d have to agree with the first premise. It is reasonable to assume that at peak, the price of oil will rise. Of course, if it rises too much, it may create a reduction of economic activity. This would reduce demand for oil and cause the price to fall. But, initially there will be a price rise. The second premise also has merit. I am willing to agree that the folks who buy and sell oil futures have access to the same information that the rest of us have. Further, unlike many prognosticators, they have a direct financial incentive to get the numbers right. As to the current futures market, it looks like the traders believe that the price will remain in the 60s until spring, then diminish slowly as we move into the future. By 2011, they will merely be in the high 50s. So, the traders are not pricing oil for 2010 higher than oil for 2005.

Does this mean that the peak is not at hand? I think not. It is true that when the traders start valuing future oil higher than current oil, we are in trouble. That is when people start hording – taking more oil off the market, which will make the price rise even higher! However, just because the traders aren’t worried yet doesn’t mean that the peak isn’t around the corner.

First of all, the futures market has no better crystal ball than the rest of us. Take a look at the market five years ago; the traders had priced 2005 oil in the 30s, not in the 60s! Secondly, we can’t afford to wait until the traders become convinced that peak is near. The futures market only looks out five to seven years. If peak oil is ten years away, does that mean we should wait for the futures market radar to pick it up? Or should we start conserving oil and promoting alternatives now? According to the Hirsh Report, “Even crash programs will require more than a decade to yield substantial relief.” Furthermore, the futures market changes every day. Today, the Saudi’s announced they “won’t” increase their production in the foreseeable future. If the traders become convinced that they “can’t” increase production, the futures market will change dramatically. We will not be given any warning.

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Rough Seas Ahead

2005-08-07T20:25:00.000-07:00

I finally got around to reading the Raymond James report on investment opportunities in companies engaged in oil production from oil sands: “The Oil Sands of Canada – The World Wakes Up: First to Peak Oil, Second to the Oil Sands of Canada”

Although the report’s main focus is on the oil sands industry and the technologies upon which it relies, it also contains a realistic, and somewhat sobering, analysis of the peak oil situation.

Peak Oil Is Upon Us

With respect to the peak, the authors are straightforward, stating: “It is a fact that world oil production will peak; with oil being a non-renewable resource this is necessarily the case. We believe that this peak will occur in the next five to ten years…many of the world’s oil producing nations have already reached their production peaks and are now experiencing declines in total oil output. Many more countries will be added to this list in the coming five to ten years, until global oil production growth can no longer be sustained.” (p 38) “There is currently an ongoing debate over the world’s oil reserves and peak global oil production. On one end of the spectrum is the belief that the world will never run out of oil. On the other end, there are those who claim that world production has already peaked and that we are descending along the back side of the supply curve. We believe the world is close to a peak and, further, that conventional light on-shore oil production may have already peaked.” (p44)

Peak Date

The authors give credence to the Hubbert methodology, praising his “landmark paper”. They remark upon the accuracy of Hubbert’s prediction of the US peak, and note: “Hubbert also predicted that world oil production would peak near the year 2006…This prediction (made almost 50 years ago) may prove to be quite accurate” (p 39). They use the Hubbert method to suggest a peak of conventional oil production in 2010. They also review the declining growth rate in oil production, noting that: “(a)t the peak, the growth rate is zero and then the rate of growth turns to negative as we start the decline down the other side of the peak.” The report seriously questions the IEA’s projections that production increases will average 1.8% through 2037, and asserts that they are “highly unlikely.”

Depletion Rate

The report does not specifically predict the depletion rate – the slope of the downside of the curve. The world production curve will resemble the US curve. Their illustration of the curve offers 2% or 3% as likely depletion rates (p 43) and also notes that: “…even a conservative 2% annual decline in current world production of 83 million b/d represents 1.7 million b/d. In other words we need 1.7 million b/d of new production every year – just to remain at current levels” (p 45)

Hard Crash or Soft Crash?

Given these limitations, one might think that Raymond James would be predicting a depression, or at least a recession. In fact, the authors do give that scenario serious consideration, stating: “…one of the worst scenarios from a global economic perspective would be oil rising to unsustainable levels (for argument’s sake, say over $100/b), the global economy being hit dramatically and causing many years of pain. A more attractive scenario might include sustained oil prices of US $60.00/b, which could allow the accelerated development of other sources such as oil shales, Liquefied Natural Gas (LNG), Gas to Liquids (GTL), nuclear and alternatives.” (p 77) But how could the price stay within a reasonable range? “We believe there needs to be a demand response to higher oil prices because a supply response is not likely.” However, the authors note that this could be tricky. With respect to the laws of supply and demand, they state: “With most other products we consume, prices don’t significantly increase because as demand drops off, alternatives become more attractive or supply increases. In the case of oil, demand has not dropped off, there are no reasonable alternatives (except at much higher prices) and increasing supply and reserves has proven to be very difficult in recent years.” Consumers’ willingness to pay for oil despite rising prices may continue unless alternatives are made available. However, this would require a substantial investment by companies involved in the alternative fuel business. “For instance if, hypothetically, oil prices suddenly went to US $200.00/b, we would not merely park our gas burning cars one day and the next day begin driving our solar powered cars. Fuel cells might be a small part of the answer, but there is no infrastructure for distributing hydrogen. Further, the hydrogen required for fuel cells is not – contrary to common opinion – a source of energy.” (p 78)

So, according to Raymond James, the best, or perhaps least worst, case would be a slowdown in economic activity, resulting in enough demand destruction to keep oil prices from spiking. Prices would nevertheless remain at, or near, the $60/b level, which would encourage the continued development of unconventional oils and alternatives to oil. The authors are quite aware that this scenario is not guaranteed. “In reality, it is more likely that oil prices will continue to be more volatile with ongoing upward pressure.” (p. 77)

Therefore, they note that, “(o)ne of our biggest concerns is that the demand response will be delayed to the point where high oil prices cause severe economic damage, and then demand will drop causing a collapse in oil prices.” (p. 77) This would cause a global recession. Sobering indeed.

The Eye of the Storm

2005-07-31T13:32:00.000-07:00

Things seem awfully calm on the natural gas front. After tripling between 1998 and 2003 (from $2.10 to $6.31/mcf), prices seem to have leveled off. This year’s storage appears to be on, at or near the five year average. Is everything back to normal or is this just a temporary lull? Let’s take a closer look...

U.S. natural gas production peaked in 1973. It now appears that Canadian production has plateaued as well. The administration’s “plan” appears to have three parts: 1) Drill like crazy 2) Hope for good weather, and 3) Wait for the arrival cavalry, i.e. the tankers bearing liquefied natural gas (LNG).

Let’s take a closer look at the plan:

Drilling and Production. In a recent article on EnergyPulse, Professor Frank Clemenet of Penn State reviews the drilling data for the three major natural gas producing regions in North America: Texas, Canada and the Gulf of Mexico (GOM). Taken together, these regions account for 58% of the US NG supplies, and are therefore critical to this aspect of the plan.

In Texas, gas production is falling fast. Since 1970, drilling has increased 300%. Nevertheless, production dropped by 38%. Similarly, gas production dropped in 2005. Production for February was 12% below that of February of 2004. In Canada, drilling increased by 77% between 2002 and 2004. Canadian production remained stagnant at 17.4 bcf/day. In the GOM, production fell 18% between 2001 and 2004. Unlike Texas and Canada, drilling in the GOM has decreased, probably because of a lack of profitable sites. In 2002 there were153 rigs in the GOM. Currently, however, there are only 95 rigs!

Consequently, even with heroic drilling efforts, it is unlikely that North American production will grow, or even remain level.

Weather. Luckily, there has been good news on the weather front. In 2004, the US had unusually mild weather. A recent article from Raymond James points out just how unusual it was. The average summer temperature in 2004 was cooler than 92.5% of the summers since 1899. Obviously, the weather is unlikely to continue cooperating in this manner. If temperatures return to their normal long-term averages this summer, there will be an increased demand of 6 bcf/day and gas prices could spike to double digits.

The Cavalry. What about LNG imports? Can they be increased to make up the difference? Over the last few years existing LNG facilities were able to expand quickly to pick up the slack caused by falling production. However, this is the “low hanging fruit”. If LNG is to continue to fill the gap caused by production shortfalls, new facilities will need to be built. Is this scenario likely? The Energy Information Administration (EIA) thinks so. They project that LNG will grow from 1.75 bcf/day in 2004 to 7 bcf/day in 2010, and nearly 12 bcf/day by 2015. Importation of LNG is predicted to increase from 2.9% of total NG use (as it does today) to a whopping 15% – a fivefold increase in 10 years!!!

Naturally, other experts are skeptical of the EIA’s optimistic projections. Andrew Weissman questions whether this timetable can realistically be met. Weissman suggests that there may be insufficient LNG available for purchase on the world market. He notes that output from most existing projects and those currently under construction is already committed to customers. The next round of projects will not have LNG available to deliver to the US until 2012 or 2014 at the earliest. Weissman suggests that even under a best case scenario, “…there will be a massive natural gas supply deficit in the US market during the period between 2008 and 2012.” Another EnergyPulse contributor, Murray Duffin, reviews the numbers of ships that would be required to transport all this LNG. He suggest that this plan would require an additional 100 ships devoted to the US LNG trade by 2010, but that even if shipbuilding capacity were doubled, we would still be 50 ships short . In a comment on Mr. Weissman’s article, Duffin states: “Personally, I expect total supply to drop from the present 22 Tcf/yr to less than 18 Tcf/yr by 2010, and then struggle to maintain that level with both drilling increases and LNG imports.”

The Kindness of Strangers

2005-07-03T20:40:00.000-07:00

I have been reading an opinion piece from the San Antonio Express. Scott Tinker, Texas's state geologist, suggests that we should not worry about the peak oil “hype”.

Although he admits that, “(t)he global demand for conventional oil has, or soon will, outstrip the global capacity to supply conventional oil,” and that, “(i)f no substitute for oil existed the world would indeed be in for an energy shock and possibly an economic collapse,” Tinker believes there are, “realistic near-term alternatives to conventional oil”.

“Fortunately, price and technology will allow for production of heavy oil, tar sands and shale oil, whose combined global reserves far exceed those of conventional oil; coal liquefaction and gasification; improved gas-to-liquids technology; and alternatives to oil led by conventional and unconventional natural gas,” Tinker says. “Solutions abound, but will take planning and coordinated investment.”

I would have to agree that there are a lot of resources out there. Even the doomiest of peakniks would have to admit that there is a lot of coal, natural gas and tar sands. Also, it must be admitted that some of them can, at current prices, profitably be converted into a liquid form. In fact, the tar sands folks say they can make a profit at $20/barrel. The coal-to-oil technology has been around since World War II. So what's the problem? In a word: “money”. As Tinker notes, these solution will require “coordinated investment”.

What's wrong with those capitalists? Where are the nimble risk takers? Here is a money making opportunity and they are sitting on the sidelines. What about the oil companies? They are rolling in dough and they understand the business. Why don’t they jump on those opportunities?

An article in an issue of Alexander’s Gas and Oil Connection from last December explains why: experience. According the article, in April of 2004 IEA head Claude Mandil held a high-level meeting with oil company execs in an attempt to persuade them to increase investment. He pointed out that the investment was falling short by 15% of the amount needed to keep up with demand. However, the oil execs stood firm: “Fearful prices would collapse again as they did in 1998, no one was ready to raise spending sharply”. They remain mindful of the 1980s, when they went on a drilling spree and the excess capacity drove prices down for nearly a decade. Investors didn’t react well and the oil stocks tanked. Investors are still wary. As the president of one investment fund stated, “History is replete with price spikes that didn’t last.” If companies start bumping up investments because of higher oil prices, he says, “I’d look at that skeptically. I approve of higher dividends and (share) buyouts.”

Similarly, the state owned oil companies are also unwilling to invest in new production. As the Financial times reports, “While oil rich countries have enjoyed three years of high prices, many have not reinvested the profits in finding and producing more oil. Instead they have often spent the money on keeping powerful minorities on their side and social programs that are becoming increasingly expensive as their populations grow and unemployment rises.”

In short, even if the resources are there and they can be produced at a reasonable profit, we may still see supply problems. What does that mean for the rest of us? We are dependant on “the kindness of strangers” – oil companies. They have delivered cheap oil for decades, but it’s not clear they will continue to do so. Furthermore, if peak oil happens suddenly, there is nothing waiting in the wings. Without transparency (see my earlier post, dated Thursday June 9, 2005), oil companies will not invest until they are sure that OPEC cannot dump cheap oil on the market,and OPEC isn’t showing its cards. So, it may be a bumpy ride.

Experts Say…

2005-06-23T19:53:00.000-07:00

The recent announcement by CERA that peak oil will be delayed until 2020, reminds me of the wisdom of Ronald Reagan’s advice regarding nuclear disarmament: "Trust but verify". Of course, until CERA releases the full report, it is hard to “verify” i.e. evaluate the persuasiveness of the analysis. In the meantime, should we even “trust”? Before we do, it might be useful to reflect on earlier pronouncements by the experts on a different natural resource peak issue: the peaking of the natural gas production in North America. As noted in the Hirsch Report:

“A dramatic example of the risks of over-reliance on geological resource projections is the experience with North American natural gas. Natural gassupplies roughly 20 percent of U.S. energy demand. It has been plentiful at real prices of roughly $2/Mcf for almost two decades. Over the past 10 years, natural gas has become the fuel of choice for new electric power generation plants and, at present, virtually all new electric power generation plants use natural gas.

Part of the attractiveness of natural gas was resource estimates for the U.S. and Canada that promised growing supply at reasonable prices for the foreseeable future. That optimism turns out to have been misplaced, and the U.S. is now experiencing supply constraints and high natural gas prices. Supply difficulties are almost certain for at least the remainder of the decade. The North American natural gas situation provides some useful lessons relevant to the peaking ofconventional world oil production.”

Hirsch notes that policymakers were blind to the problem because of their reliance on the accepted wisdom of the leading experts.

“As recently as 2001, a number of credible groups were optimistic about the ready availability of natural gas in North America. For example:

In 1999 the National Petroleum Council stated “U.S. production is projected to increase from 19 trillion cubic feet (Tcf) in 1998 to 25 Tcf in 2010 and could approach 27 Tcf in 2015…. Imports from Canada are projected to increase from 3 Tcf in 1998 to almost 4 Tcf in 2010.

In 2001 Cambridge Energy Research Associates (CERA) stated “The rebound in North American gas supply has begun and is expected to be maintained at least through 2005. In total, we expect a combination of US lower-48 activity, growth in Canadian supply, and growth in LNG imports to
add 8.95 Bcf per day of production by 2005.”

By 2004, it was clear these optimists would be forced to make a quick revisions.

“The current natural gas supply outlook has changed dramatically. Among those that believe the situation has changed for the worse are the following:

CERA now finds that 'The North American natural gas market is set for the longest period of sustained high prices in its history, even adjusting for inflation. Disappointing drilling results … have caused CERA to revise the
outlook for North American supply downward … The downward revisions represent additional disappointing supply news, painting a more constrained picture for continental supply. Gas production in the United States (excluding Alaska) now appears to be in permanent decline, and modest gains in Canadian supply will not overcome the US downturn.

Of course, the fact the CERA was mistaken in one resource assessment does not demonstrate that the group is untrustworthy, per se. It does suggest that we need to look closely at the underlying data and assumptions that they used in their prediction. In addition, perhaps we should bear in mind the risks of being over-optimistic. As the Hirsch Report concludes:

“If experts were so wrong on their assessment of North American natural gas, are we really comfortable risking that the optimists are correct on world conventional oil production, which involves similar geological and technological issues?

If higher prices did not bring forth vast new supplies of North American natural gas, are we really comfortable that higher oil prices will bring forth huge new oil reserves and production, when similar geology and technologies are involved?”

The Future is in Scum

2005-06-23T12:48:00.000-07:00

Invest in scum! That’s what Dr. Geoffrey Chia recommends in an interesting interview on the Australian Broadcasting Company. In particular, he recommends scum (i.e. algae) that can be converted into biofuels. Dr. Chia provides rather good criteria for an ideal fuel:

“It should be a liquid over a wide range of ambient temperatures, be easy to contain and it, or its derivatives, should be a viable aviation fuel. It should be renewable, should not add to the net carbon dioxide load in the atmosphere and should be non or minimally polluting. It should have minimal environmental impact in the event of a spill and be biodegradable and non-toxic. A major bonus would be if it could be used in existing engines with no or minimal modification.”

Sounds like biodeisel. The potential of algae as a source material for biofuels is also noted in “The Energy Blog”: Biodiesel from Algae is Here. The author notes that the University of New Hampshire calculated that the all transportation fuel used in the US could be generated from algae. Furthermore, the land required to grow the algae would only be approximately 3% of the land currently devoted to crops. Finally, a recent report from the Marine Biotechnology Institute in Japan notes that researchers have a found a bacterium that photosynthesizes light oil. “Recovering the oil is simply a matter of collecting and smashing the bacteria.”

So, biofuels may play an important part in dealing with peak oil. The International Energy Association (IEA) noted Tuesday that that biofuels are increasingly competitive, thanks to the rise in oil prices. According to the IEA, even without subsidies, biofuels are competitive with petroleum when the price of oil is between $60 to $100/barrel. Unfortunately, at the current rate of development, it will be many years before biofuels are able to take over from petroleum. Last year the world produced enough ethanol to offset about 2% of gasoline use. The IEA expects that to rise to 4-5% by 2010 and predicts that biofuel use, including ethanol and biodeisel could reach 10% of world fuel use by 2025. It’s not clear that the peak can be held off for that long. Even the optimistic Cambridge Energy Research Associates (CERA) has predicted that we will reach peak oil by 2020. Perhaps some additional governmental support would be in order.

Mexican Standoff

2005-06-18T11:34:00.000-07:00

It is somewhat disconcerting to hear that Mexico may have difficulties maintaining its current level of oil production. After all, Mexico is a very important source of oil for the US. It provides 16% of the US’s imported oil, or about 1.5 million barrels a day. After Canada, Mexico is the US’s second largest source of oil.

Unfortunately, Raymond James confirms that the Mexican oil production is now, or will soon be, at peak. (see RJ's June 13, 2005 “Stat of the Week”) RJ notes that, while Mexican oil production rose from 1999 through 2004, it appears to be leveling off in 2005 and RJ predicts it will decline in 2006. In support of this prediction, RJ notes the following:

- The Cantarell oilfield, which is responsible for over half of Mexican production, is predicted to peak this year. This prediction comes from Ramirez Corzo, the chief executive of Pemex, the state owned oil company. Once it peaks, Cantarell could decline at a rate of 10% to 15% per year. “Once this mature field peaks, it is going to be virtually impossible for the rest of Mexican production to offset the declines.”, says RJ

- Pemex also lacks sufficient funds to pursue opportunities to offset the decline in Cantarell. The Mexican government treats Pemex as a cash cow, and taxes it heavily. In fact, taxes on Pemex provide one third of the Mexican budget. In 2004, Pemex generated $69 billion in revenue, but taxes took over $40 billion. Pemex had a net loss for the year and had to borrow to fund capital spending.

- Foreign companies cannot step in to increase Mexican production, as the Mexican constitution forbids foreign investment in exploration or production.

Of course, a Mexican peak would not present a serious problem to the US if other counties had the spare capacity to fill in behind Mexico, but, as RJ notes: "…in conjunction with other non-OEC producers having peaked long ago (US, Britain, Norway etc) and others that are currently experiencing production growth slowdowns (Russia and Venezuela being the most important), the Mexican slowdown takes on added importance."

The Learner’s Permit

2005-06-14T10:30:00.000-07:00

What about alternatives? Does it really matter if oil production peaks? Aren’t there lots of alternatives waiting in the wings? Yes. Of course there are lots of alternatives, and now that the price of oil is $50 or more, these alternatives will be able to come forward and compete head to head with petroleum. This is good. “Let a Thousand Flowers Bloom”

Bring on the cold fusion, the solar powered electric cars, the hydrogen fuel cells, the bio-diesel made from seaweed. It’s all good.

So, what’s the problem?

Now we come to the learner’s permit. I remember studying that darn permit book and knowing that I would never pass. Why? Because I couldn’t remember how many feet it took to stop at 65 miles an hour. I know it was something like 100 feet before you put your foot on the brake (reaction time) and then another 200 feet for the brakes to actually stop the car, but I could never remember the exact number! Well, maybe it’s not all a loss. Let’s use stopping time as a rough analogy for the oil producers’ response to peak oil. The reaction time might be the time to do the R&D on alternatives and the testing in the lab, and the braking time might be the time needed to get the financing and the permitting and construct the project. All this before we see one drop of oil!

As I mentioned in an earlier post, the best work I have seen dealing with this whole issue is a report done for the US Department of Energy by the energy consulting firm SAIC. The report “Peaking of World Oil Production: Impacts, Mitigation & Risk Management”, is popularly knows as the Hirsh Report, after the lead author Robert L Hirsch

Of course, it’s a good news/ bad news story. Here is the bottom line:

Viable mitigation options exist on both the supply and demand sides but, to have substantial impact, they must be initiated more than a decade in advance of peaking.

The report points out that the problem of that the peaking of oil production presents is a transportation problem. Two thirds of the oil consumed in the US is used in transportation, a sector which is almost completely (95%) dependant on oil. So, peak oil is not an energy problem, it is an oil problem. What that means is that, unless an energy source can be transformed into a viable transportation fuel, it will not substantially ameliorate peak oil. This pretty effectively rules out energy sources that can only produce electricity but not oil, such as nuclear, solar, wind, geothermal, tidal, etc. Electricity is not yet a transportation fuel. The basic problem is battery technology. Although there has been a lot of R&D thanks to California’s push for a zero-discharge cars, the proper battery has not yet been invented. Available batteries are too heavy, too costly and won’t support acceptable driving distances. Similarly, hydrogen is not yet a viable transportation fuel. It is still in the R&D phase and can’t be relied on yet. Biodiesel, ethanol and shale oil get the same treatment in this report. Although promising, they are not ready for primetime.

So, what technologies are ready for implementation on short notice? The report suggests four available technologies: Enhanced Oil recovery, Coal to Gas conversion, "Heavy Oil” (Canadian Tar Sands and Venezuelan Heavy Oil), and natural gas to liquids. Additionally, the report recommends one conservation approach – aggressive CAFÉ standards. Most of these technologies are already being implementation on a limited basis. They are commercially available, but the report suggests that these technologies will not be sufficient to deal with a “peak oil gap” unless they are more quickly scaled up.

Thus, if this crash program were implemented 20 years before the peak, the world would not see a significant shortfall in oil availably. If the program were implemented 10 years before the peak, there would only be a small gap in availability. On the other hand, waiting to act until the peak is has passed, “…leaves the world with a significant liquid fuel deficit for more than two decades” (at 59)

The report does not predict the date of peak oil. It notes 11 experts with estimates ranging from 2007 to 2025. Just for fun, let’s average them :o) We get a mean of 2013, and a mode of 2010, which is clearly less than 20 years away. Even assuming that we still have 20 years before peak, what is the likelihood of a crash program will be promptly implemented? There is some talk on Capital Hill of a new Apollo Energy program. However, given that the program is being promoted by the Democratic Party and that its funding relies on “reducing corporate tax shelters and loopholes”, its chances may not be that great.

Through a Glass Darkly

2005-06-09T21:13:00.000-07:00

Well, what’s the problem anyway? We’ve been pumping oil since 1848. What’s that - about 150 years? We’ve poked holes in every continent, under the sea, in the desert and in the permafrost. We’ve got sophisticated imaging techniques: 3-D, 4-D – who knows what else? How can there be any question about how much oil there is? I mean, they can put a man on the moon, why the heck can’t they figure out how much oil there is on earth? :>)

(Before going further, I want to mention an article by Kevin Drum which I am going to lean on pretty heavily. It’s in the Washington Monthly and I highly recommend it. (Look here) He also did a series of columns which are well worth reading. (Lots of graphs!))

Anyway, there is a lot of data about oil reserves, especially in some specific areas of the globe. Unfortunately, the areas we know the most about are the very areas where production has already peaked. The US, for instance, is probably the best understood oil production region. Oil production peaked in the US in 1970 and has been dropping steadily ever since. This seems to be the case in the non-OPEC world at large. Other major non-OPEC producers, such as Britain, Norway, and Mexico, are already in a production plateau or decline. Although Russian production increased by almost 50% since 2000, further increases are not expected. Even Exxon Mobil appears to concede that the non-OPEC world is at or near peak. So, we turn our eyes to OPEC and, in particular, the prize: Saudi Arabia. However, as the Drum article notes:

“The problem is that projecting the capacity of Saudi oil production is a tough nut. Ever since the Saudis took control of their national oil company, Aramco, from Western oil companies in 1980, a shroud has dropped over every facet of the kingdom's oil industry. The Saudis release no official data on how their aging fields are holding up, or how well their exploration efforts are going, and their published production totals may not be credible, let alone how much they will be producing a decade from now. As with most OPEC members, Saudi claims of proven reserves have increased steadily since 1980, but most analysts agree that these numbers have been manipulated upward for political reasons related to OPEC production quotas and bear little relation to reality. For oil industry experts, Saudi Arabia is a gigantic black hole, a target of guesswork, not analysis.”

Matt Simmons is an energy investment banker from Houston. His recently published book ‘Twilight in the Desert’ (which I have not yet read) attempts to unravel this mess. He raises serious questions about the ability of the Saudis to significantly increase production. In a recent interview Simmons was asked, “Are you familiar with the report, Exxon's 'Outlook for Energy'? From my reading of the report, it said that practically all the future production increases in the world are going to have to come from OPEC. With what you are telling me and what you have written in your book, what you are telling me that it's not going to happen."

Simmons replied, “It has a one percent chance of happening. Maybe half a percent, really.”

The Saudis, of course, vigorously deny the claim. “The world is more likely to run out of uses for oil than Saudi Arabia is going to run out of oil," says Adel al-Jubeir, top foreign policy adviser for Saudi Arabias de facto ruler Crown Prince Abdullah. See interview here.

Who should we believe? Does anyone have an ax to grind? Yes, everyone does! :>)

Why would the Saudis want to assure the world that there is plenty of oil? Well, as long as there is plenty of oil, there is no reason to gear up for finding alternatives. Developing alternatives would cut into the oil sales and reduce prices. Also, let’s not forget that the Saudi Arabia is a monarchy. How would it play at home if the locals believed that their resources had been frittered away on palaces and jumbo jets, that that the welfare state was coming to an end, or that the payments to fundamentalist mullahs would be reduced?

On the other hand, Simmons may also have something at stake. Let’s not forget that the price of oil has been depressed for the last 20 years. When the price is low, oil companies don’t drill. They don’t borrow money from investment bankers, like Simmons. The oil companies are still smarting from those years and are reportedly still assuming that the price of oil will revert to $35/barrel, and are evaluating (and rejecting) their oil drilling projects based on that assumption. So, if Simmons can make a convincing case that the Saudis aren't likely to flood the market with cheap oil, perhaps the oil companies will start doing some drilling (and some borrowing).

Conclusion: There are no easy answers. In fact, maybe we are asking the wrong questions. Maybe we shouldn't be asking how much can theoretically be produced. How about asking how much new production can we realistically expect in the near future? Will it be enough to cover the gap created by 1) expected reduction in non-OPEC production, and 2) the increased demand around the globe?

Welcome

2005-06-09T13:06:00.000-07:00

Greetings!

Welcome to my blog. Why a blog? Well, my initial idea is to provide a handy place where my friends and family can get some information about our current energy situation. To be honest, some of my friend and family are sick and tired of hearing my ranting about peak oil (I’m not naming names, but you know who you are!) They can drop in from time to time and get as much (or as little) information as they want. In the meantime, in social situations, I can get back to discussing more important topics, like the new White Stripes' CD and what’s up with Brad and Angelina :>)

So, let’s get to the big question: exactly how boring is this blog going to be? How gloomy? Good questions! There is only so much bad news a person can take before “doom fatigue” sets in. So I want to keep it light and optimistic. Doomers have plenty of web sites already (for a really bad time, go here.)

First, I hope to discuss the current speculation on the timing of peak oil- the time when the world production of petroleum hits its maximum and starts its decline. Estimates vary pretty widely (see a cool site comparing oil depletion scenarios). Kenneth Deffeys, a geology professor at Princeton University, predicts peak oil will occur in 2005. (see a review of his new book here) The USGS picks 2037 as the peak year (see a summary here). Some economists, such as Michael Lynch, say that, thanks to improving technology, we will continue to push the peak date into the future (see an article by Lynch here) . What about your humble blogster? Well, I’m neither a geologist nor an economist, but I still have an opinion! Hey, this is America; everyone has an opinion! :>) Actually, I don’t think that we have sufficient data to predict the “geological” peak – the year in which we just physically can’t pump oil any faster. Unfortunately, the way the new oil projects are coming on-line (or rather not coming) suggests that we will have shortfalls starting by 2008. Take a look here for the analysis by Cris Skrewboski, the editor of the Petroleum Review.

Secondly, I hope to cover some of the alternatives which may ameliorate the decline. Oil isn’t the only option. Are any of the alternatives - hydrogen, bio-diesel, oil sands, nuclear, wind, solar and cold fusion - ready for prime-time? Can we rely on the marketplace to make alternatives available in time or do we need a government to step in? When should we get started gearing up for the transition to the post-petroleum world? The best thing I’ve seen so far that explains the alternatives is a report prepared for the US Department of Energy by an energy consultant. It is 90 pages long but very readable (honestly!). Or, you can see an executive summary here .

Finally: where the rubber meets the road – what’s it going to be like in the post-peak world? What will the social and economic impacts be? Will we be riding bicycles or driving in hypercars? Will we still get our lettuce from Salinas, California, or from someone’s backyard garden? Inflation, deflation or…gulp!...stagflation? Is there anything we should do now to get ready?

So, sit back and and enjoy the ride. I’d love to see some feedback and suggestions.