The Joke is on Us

Craig,

I’m definitely interested in free markets - not that they’re that easy to find. However, I’m not sure how well breaking up the ATT monopoly actually served competitive pricing. There are, of course, a number of factors, but I expect consumers are paying a lot more, not less.

What about regulated monopolies?  We make strong arguments and implement strict policies for utilities like natural gas, electricity and to a lesser extent, telecommunications.  Why don’t these same principles apply to the fuel that is of the single most importance to our economy?  In a regulated context, would it be easier to set policies that could reduce such dependance?

Tip,

Interestingly, that option had not occurred to me.  A couple of thoughts.  Regulated monopolies tend to be less effective when major innovation is necessary.  The problem is that the way they work is a regulating body has to approve all financials and tend to fix the price based on cost.  In the utility sector, which is dominated by regulated monopolies, we are having a hard time making the transition to renewable energy, because who is going to pay for it.  Historically, utilities were fairly stable, so regulating them was not a big deal.  Now, it is becoming a hinderance to alternative forms of energy.  The oil industry will likely have to make a similar transition, so regulating them as monopolies may end up causing more problems. 

By the way, I doubt breaking up the oil companies is the best solution, and certainly is not politically feasible, but I had to say it was an option to at least have a well-rounded discussion.

I thouroughly enjoy reading Mr. Mayberry’s thoughts. Having said this though I would like to add the following comments and the latest article from the Wall Street Journal on the subject of “Peak oil”.

Mr. Mayberry’s analysis in my view is flawed by using the major oil companies to base his monopoly pricing analysis.

Major private oil companies like Exxon, make a juicy target for claims of monopoly abuse, but the simple fact that the majors only control 10% of the world’s oil supply. This is simply not enough control, to utilize monopoly pricing. Now if Craig had only used OPEC ...

Second, mandating that the CAFE standards be raised seems logical and a silver bullet, as most gasoline production in consumed by cars. Hence better mileage and lower demand, in turn would lower prices.

We are forgetting that the technological ability to raise mileage is a very high bar to physically climb over. Mere words will not allow us to design cars that are high mileage cars. Technology comes with great difficulty.

The high price of gasoline makes any company which can make a mileage breakthrough, a sure sales and profit smash. Plenty of incentives, without any dictates from folks who couldn’t build a car if their life depended on it.

The “oil peak-cons” have predicted peak oil no less than five times in the last 40 years. Each time they have been wrong. Why believe them now, with such a poor track record?

Good question.

The stone age did not end, because of lack of stones, nor did coal replace wood because of lack of wood.

Here is the best factual analysis of peak oil that I have read. Enjoy.

OPINION

 

The World Has Plenty of Oil

By NANSEN G. SALERI

March 4, 2008; Page A17

Many energy analysts view the ongoing waltz of crude prices with the mystical $100 mark—notwithstanding the dollar’s anemia—as another sign of the beginning of the end for the oil era. “[A]t the furthest out, it will be a crisis in 2008 to 2012,” declares Matthew Simmons, the most vocal voice among the “neo-peak-oil” club. Tempering this pessimism only slightly is the viewpoint gaining ground among many industry leaders, who argue that daily production by 2030 of 100 million barrels will be difficult.

In fact, we are nowhere close to reaching a peak in global oil supplies.



Given a set of assumptions, forecasting the peak-oil-point—defined as the onset of global production decline—is a relatively trivial problem. Four primary factors will pinpoint its exact timing. The trivial becomes far more complex because the four factors—resources in place (how many barrels initially underground), recovery efficiency (what percentage is ultimately recoverable), rate of consumption, and state of depletion at peak (how empty is the global tank when decline kicks in)—are inherently uncertain.

- What are the global resources in place? Estimates vary. But approximately six to eight trillion barrels each for conventional and unconventional oil resources (shale oil, tar sands, extra heavy oil) represent probable figures—inclusive of future discoveries. As a matter of context, the globe has consumed only one out of a grand total of 12 to 16 trillion barrels underground.

- What percentage of global resources is ultimately recoverable? The industry recovers an average of only one out of three barrels of conventional resources underground and considerably less for the unconventional.

This benchmark, established over the past century, is poised to change upward. Modern science and unfolding technologies will, in all likelihood, double recovery efficiencies. Even a 10% gain in extraction efficiency on a global scale will unlock 1.2 to 1.6 trillion barrels of extra resources—an additional 50-year supply at current consumption rates.

The impact of modern oil extraction techniques is already evident across the globe. Abqaiq and Ghawar, two of the flagship oil fields of Saudi Arabia, are well on their way to recover at least two out of three barrels underground—in the process raising recovery expectations for the remainder of the Kingdom’s oil assets, which account for one quarter of world reserves.

Are the lessons and successes of Ghawar transferable to the countless struggling fields around the world—most conspicuously in Venezuela, Mexico, Iran or the former Soviet Union—where irreversible declines in production are mistakenly accepted as the norm and in fact fuel the “neo-peak-oil” alarmism? The answer is a definitive yes.

Hundred-dollar oil will provide a clear incentive for reinvigorating fields and unlocking extra barrels through the use of new technologies. The consequences for emerging oil-rich regions such as Iraq can be far more rewarding. By 2040 the country’s production and reserves might potentially rival those of Saudi Arabia.

Paradoxically, high crude prices may temporarily mask the inefficiencies of others, which may still remain profitable despite continuing to use 1960-vintage production methods. But modernism will inevitably prevail: The national oil companies that hold over 90% of the earth’s conventional oil endowment will be pressed to adopt new and better technologies.

- What will be the average rate of crude consumption between now and peak oil? Current daily global consumption stands around 86 million barrels, with projected annual increases ranging from 0% to 2% depending on various economic outlooks. Thus average consumption levels ranging from 90 to 110 million barrels represent a reasonable bracket. Any economic slowdown—as intimated by the recent tremors in the global equity markets—will favor the lower end of this spectrum.

This is not to suggest that global supply capacity will grow steadily unimpeded by bottlenecks—manpower, access, resource nationalism, legacy issues, logistical constraints, etc.—within the energy equation. However, near-term obstacles do not determine the global supply ceiling at 2030 or 2050. Market forces, given the benefit of time and the burgeoning mobility of technology and innovation across borders, will tame transitional obstacles.

- When will peak oil arrive? This widely accepted tipping point—50% of ultimately recoverable resources consumed—is largely a tribute to King Hubbert, a distinguished Shell geologist who predicted the peak oil point for the U.S. lower 48 states. While his timing was very good (he forecast 1968 versus 1970 in fact), he underestimated peak daily production (9.5 million barrels actual versus eight million estimated).

But modern extraction methods will undoubtedly stretch Hubbert’s “50% assumption,” which was based on Sputnik-era technologies. Even a modest shift—to 55% of recoverable resources consumed—will delay the onset by 20-25 years.

Where do reasonable assumptions surrounding peak oil lead us? My view, subjective and imprecise, points to a period between 2045 and 2067 as the most likely outcome.

Cambridge Energy Associates forecasts the global daily liquids production to rise to 115 million barrels by 2017 versus 86 million at present. Instead of a sharp peak per Hubbert’s model, an undulating, multi-decade long plateau production era sets in—i.e., no sudden-death ending.

The world is not running out of oil anytime soon. A gradual transitioning on the global scale away from a fossil-based energy system may in fact happen during the 21st century. The root causes, however, will most likely have less to do with lack of supplies and far more with superior alternatives. The overused observation that “the Stone Age did not end due to a lack of stones” may in fact find its match.

The solutions to global energy needs require an intelligent integration of environmental, geopolitical and technical perspectives each with its own subsets of complexity. On one of these—the oil supply component—the news is positive. Sufficient liquid crude supplies do exist to sustain production rates at or near 100 million barrels per day almost to the end of this century.

Technology matters. The benefits of scientific advancement observable in the production of better mobile phones, TVs and life-extending pharmaceuticals will not, somehow, bypass the extraction of usable oil resources. To argue otherwise distracts from a focused debate on what the correct energy-policy priorities should be, both for the United States and the world community at large.

Mr. Saleri, president and CEO of Quantum Reservoir Impact in Houston, was formerly head of reservoir management for Saudi Aramco.

Craig,

I appreciate your scholarship and activism on a variety of issues.  Ditto for Tip Johnson and Doug Karlberg.

Your post was coincident with the latest Time Magazine cover story, “The Clean Energy Scam”. The article roundly criticizes biofuels and is surprisingly incisive for the left-of-center Time.  It also reaffirms what many have been saying for years—ethanol production increases global warming, destroys forests and resource land and inflates food prices.  Governments have no business subsidizing biofuels, but do so for purely political purposes.  The Time article would resonate even louder if it had been published before the Iowa caucuses, but this is, after all, an election year and Time has to sell magazines.

Still, the Time images of the strip mining of Brazilian rain forest for soybean production are compelling—nearly a million acres in the last 6 months.  Plus the revealing stat that the corn needed to fill the tank of an ethanol-fueled SUV would feed one person for a year.  A fact worth pondering the next time you’re canvassing for famine relief.

If we properly dismiss the notion that biofuels are viable substitutes for oil, how do we cope with the perceived oil shortages and increased demand?

Sorry, but I don’t agree that increasing CAFE standards and subsidizing mass transit are responsible solutions. As a former Chrysler executive, you are well aware that there are limits to producing 60 mpg automobiles with average weights of 3000 lbs. and the capability of transporting passengers in a safe and efficient manner.  30 mpg is about all you can expect from an internal combustion engine.  Slightly more for hybrids, but it’s tough pulling a trailer with one.  Since 30% of the greenhouse gases produced by an automobile over its lifetime are incurred in it’s production, the environment would take a large hit if everyone went out and purchased a new hybrid tomorrow.

Due to the use of batteries, a Prius has a larger carbon footprint than a Hummer, in terms of environmental cost of production.  My 2006 Ford gets 20 miles per gallon.  It is comparable in weight, horsepower and performance to my 1967 Ford, which gets 16 miles per gallon.  So in 41 years, we have seen an increase of 4 miles per gallon in a very standard, utilitarian automobile.  Progress?  The suspension and brakes in my 2006 are better, but the ‘67 has more legroom, no cupholders and large ashtrays. 

EPA ratings and car ads notwithstanding, most new cars don’t get much more than 25 miles per gallon, as any owner can attest.  Raising CAFE standards will not bring down gasoline prices or increase production. The foreign and domestic automakers have plenty on their plates—like the unsettling prospect that consumers will not discard their cars after a few years and buy a new one.  More government regulation is not the answer.  Governments don’t build cars or drill for oil.

The comments attached to Doug Karlberg’s post are true.  We have plenty of oil.  And we are lucky that a lot of that oil is right here in North America—particularly Canada.  The key is price.  At $100 a barrel, it is profitable for energy companies to extract oil products from oil shale and oilsands.  There are more hydrocarbon deposits in Alberta and Saskatchewan than in Saudi Arabia.  Plus, both provinces have lots of liquid petroleum and huge untapped reserves of natural gas.  If you enjoy the warmth of your home on a chilly evening, you can thank your neighbors to the north for providing the fuel to make it so.  And to the Creator for a continent that is rich in untapped hydrocarbons.

Gasoline in my neighborhood is presently $3.85 a gallon.  Analysts say it will hit $4 a gallon by Memorial Day.  Across the border, Canadian gas is about $5 a gallon.  I drive a lot.  I can tell you that these recent “spikes” in the price of gas have done nothing to reduce driving or traffic congestion.  When U.S. gas hits $5 a gallon, some motorists will likely reduce their driving.  Most will not.  Any more than they reduced their consumption of bottled water when the price in your neighborhood convenience store hit $2 a quart. $5 for a gallon of gas—a wasting asset that is millions of years old and takes a myriad of processes to extract, refine and deliver from a distance is a bargain.

The only sure thing is that we are not going to see Clinton-era gas prices of 90 cents per gallon.  90 cent gas is an economic artifact from a previous century.  I don’t see a reduction in unnecessary driving, which all of us do, as a particularly bad outcome as a result of higher gas prices.

How many own a vehicle that runs on alternative fuel?  Our station wagon was converted to natural gas in 1987 and still purrs along on this cheap, non-polluting and plentiful fuel.  If government was really serious about reducing dependence on “foreign oil” they would mandate natural gas pumps at every service station in the U.S.  For those unfamiliar with natural gas fuel, it is a dual system; you can switch back to gasoline by flicking a switch on the dash as the car is traveling down the road.

Food prices will increase because of the higher cost of diesel fuel (now more per gallon than gasoline) and the attendant costs of fertilizer and fuel for farm machinery.  This is not necessaily a bad thing.  Since 1978, food prices have dropped 38% relative to the prices of other goods and services.  Since the late 70’s, men and women have increased their daily food intake by 180 calories for men and 360 for women.  Food has gotten cheaper and people are eating more.  As a result, a lot of us are fat.  In a culture that is struggling with epidemic obesity, an increase in food prices may not only be manageable, but desirable.

One way to reduce upward pressure on food prices is to cease production of ethanol from corn.  Once government subsidies to the ethanol industry are removed, the biofuel industry will collapse and we can use resource lands to product a product with an inelastic demand and increasing value.  Food.

Mass transit is appropriate for larger cities with established grid patterns.  Buses and trolleys may be popular in Eurocentric Bellingham, but subsidizing them through increased gas taxes will not play well with voters in a rural county where every other registered vehicle is a truck.  If you want to see a fresh alternative to the automobile, check out ridek.com. 

The future of urban mobility is in personal electric cars.  Lots of people just won’t ride the bus, for a variety of reasons.  Nothing, including high fuel costs, will force someone to do something he doesn’t want to do. 

John Lesow

Point Roberts

Doug Karlberg,

With all due respect, I’m not sure how you can call an opinion piece in the WSJ a “factual analysis of peak oil.” I don’t expect footnotes in an opinion piece, but some of the wild claims cry out for references. Just to touch on a few points...;

Site manager note:  this comment post by David has sentences cut off.  Tis April 15 and we are looking into what is the cause.  This will hopefully be fixed asap.  My apology.  John Servais

One truth he states is “the viewpoint gaining ground among many industry leaders, who argue that daily production by 2030 of 100 million barrels will be difficult.” This is the demand that is expected, and many industry leaders including Oil CEOs and the IEA’s chief economist Fatih Birol are not seeing how we can get there.

Saleri states that “the globe has consumed only one out of a grand total of 12 to 16 trillion barrels underground.” Where in the world does the 12 to 16 trillion figure come from? The highly optimistic CERA thinks there’s 3-4 trillion. It is prudent, however, to only talk about Proved Reserves. According to the EIA, “Proved reserves of crude oil are the estimated quantities that geological and engineering data demonstrate with reasonable certainty can be recovered in future years from known reservoirs, assuming existing economic and operating conditions.”  The Oil & Gas Journal reported in Jan. 2007 proved reserves of 1,317 billion barrels.  Peak Oil researchers question even this amount, since there is no reliable accounting for proved reserves, and oil companies tend to inflate their numbers (google Shell in this regard).

Saleri also offers no evidence for being able to recover 2 out of every 3 barrels in the ground. The industry has been employing high tech methods for a number of years now, and their primary achievement is being able to deplete existing wells faster.

It is extremely important to become aware of a concept that Mr. Saleri does not mention. Energy Returned on Investment, or EROI. Yes, there’s plenty of oil in tar sands and shale oil. They are also extremely expensive to extract. In our current situation (“the end of easy oil” as many in the industry acknowledge), the Canadian tar sands are now becoming economically viable. However, in order for them to actually benefit the oil consuming world, it is axiomatic that these resources must be able to return more energy than it takes to extract and process them. Tar Sands are very energy intensive, and will become more so.  They require much natural gas, which is in short supply in North America, not to mention huge amounts of water. And no small point: extracting oil from tar is a disaster from an environmental (and climate change) standpoint.  And shale oil? Exponentially worse. Shale oil is really neither shale nor oil. No proven technology yet that is economically feasible for that one.

For emphasis, please remember this concept of EROI: unconventional sources have to be able to provide more energy than the energy it takes to deliver these sources to us.

More and more researchers are saying Peak Oil is near. The Hirsch study for the Dept. of Energy tells us we need 10 to 20 years lead time to adequately prepare. It’s not too early to begin now.

Here are some references to look into:

Energy Watch Group, The Oil Supply Outlook, October 2007

Van der Veer, J. (Shell CEO), Two Energy Futures

Thierry Desmarest (Total CEO), Le Monde, Oct. 31, 2006

Dr Jim Buckee (Talisman Energy CEO, retired), audio interview ABC Local Radio:

It is the underlying decline of the world’s major fields that is the dominant driving factor here.

U.S. General Accounting Office (GAO), Crude Oil:

Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production - Report to Congressional Requesters, February 2007

Kharecha, P.A., & Hansen, J.E., Implications of Peak Oil for Atmospheric CO2 and Climate, NASA, GISS and Columbia Univ. Earth Institute

(Submitted on 20 Apr 2007 (v1), last revised 17 Mar 2008 (this version, v3))

Brown, J.J. & Khebab, M. King Hubberts Lower 48 Prediction Revisited, March 6, 2006

Simmons, M. The Peaking Of Fossil Fuels And The Transformation Of The National Security Environment, Pentagon Briefing, Feb. 2008

Room, D., Calif. Senator Asks Energy Secretary about Oil Transparency, February 2008</a>

Alnaimi, A., “The Role of the National Oil Companies in a Changing World:

Economic and Energy Relations”, OPEC, 2004

Gordon, R. & Stenvoll, T., Statoil:

A Study in Political Entrepreneurship, for The Joint Baker Institute/Japan Petroleum Energy Center Policy Report, Rice University.

Robert L. Hirsch, R. Bezdek, R. Wendling, Peaking of World Oil

Production: Impacts, Mitigation, & Risk Management, report prepared for and sponsored by U.S. Dept. of Energy, February 2005

Bezdek, R. & Wendling, R. & Hirsch, R., Economic Impacts of Liquid Fuel Mitigation Options, prepared for The National Energy Technology Laboratory, Pittsburgh, April 2006

Mr. McLeod,

You certainly researched your material adequately. I am impressed.

I don’t wish to enter the debate as to who is right about peak oil. Suffice to say that oil will likely peak someday and the prediction as to when, has been made several time before, and been wrong.

Some of your comment was cut off in posting, but if I understand your drift you dispute the claims of oil still left in the ground. I don’t know exactly how much is left in the ground, but even the most pessimistic views of oil supply admit that we do not currently have the technology to recover all the oil from all the known drilled reservoirs, in addition to the oil discoveries that are now feasible, but were unimaginable 20 years ago.

Probably the larger point though is not who is right about peak oil, but the understanding that a healthy switch is well under way to replace oil for energy use, where possible.

I suspect though that some forms of oil use will persist, as they are more difficult to replace or substitute than others. (i.e. coal fired 747’sOne of the problems with this debate though, is that there are solid impartial experts on both sides of this debate, which does not tell me who is right, but that there are valid arguments for both sides.

It will be fun to watch this switch from oil occur, which I am sure will take decades.

~

Hi Doug,

It looks like the formatting error on my previous comment has been fixed. I’m certainly no expert, but I’ve been following the Peak Oil issue since seeing the documentary “The End of Suburbia: Oil Depletion and the Collapse of the American Dream” in 2004. [This video, along with “Crude Awakening” and “The Power of Community: How Cuba Survived Peak Oil” is available for rental at Film Is Truth - all are excellent.] I then researched the issue on my own, trying to look fairly at both sides of the debate. After almost a year of following the issue, I was convinced that the great preponderance of the evidence was on the side of those saying Peak Oil is near. Events and new reports since then have reinforced my opinion.

The argument that peak oil predictions have always been wrong in the past doesn’t work for me. Which predictions are being discussed? It also doesn’t tell me anything that helps me decide if current predictions are correct. Contrary to what Mr. Saleri states, in March of 1956, M. King Hubbert made the following observation: “According to the best currently available information, the production of petroleum and natural gas on a world scale will probably pass its climax within the order of a half century, while for both the United States and for Texas, the peaks of production may be expected to occur with the next 10 or 15 years.”  This indicates his prediction for a world peak in approx. 2006, and a peak for U.S. oil production between 1966 and 1971. [http://graphoilogy.blogspot.com/2006/03/m-king-hubberts-lower-48-prediction.html]

Indeed, the U.S. reached peak production in 1970.  Have we reached a peak in world production yet? Some think we have, but most will agree that it’s too early to tell for sure.  Until recently the peak month was May 2005. We’ve been on a “bumpy plateau” since then, but hitting a new high (barely) in Jan. 2008 (thanks to the tar sands of Canada).  The world produced less oil in 2006 than it did in 2005, and less in 2007 than it did in 2006.  Will we produce more in 2008 than in 2005?  We’ll have to wait and see - it’s possible, as there are new projects that have come on line, but the new projects have to make up for the decline of existing fields. 

Personally I’m convinced we’re near the peak. I would be surprised if the peak turns out to be later than 2010. Of course there are many predictions, and ranges given, and different probabilities proposed. Of course we can’t nail this down precisely - for many reasons. As I mentioned in the previous comment, transparency is not forthcoming from the oil companies, and we have even less transparency from OPEC. Matthew Simmons however, did a wonderful job putting the clues together about the situation in Saudi Arabia in his book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.” At any rate, it seems almost certain that the peak will occur before 2020, and wether the peak is now or in 20 years, the actions we should take to begin a transition are the same. Remember the Hirsch report told us 20 years is needed to make a smooth transition off of this lifeblood of our economy.

In response to the comment about hoped for new technology that will be able to extract more oil. First, it’s tough to put trust in these unproven hopes that increases in technology will save the day. How soon will it be here, and when will we need it? Second, let me remind again of the EROI concept. Even when the technology becomes available, and even when it might become economically feasible (ROI), it is of no use if it’s not able to give us a positive return on the energy invested. Deep water drilling in the Gulf of Mexico, for example, takes a whole lot more energy inputs than the easy to get at oil we’ve been used to. Getting previously unrecoverable oil out takes a lot more energy. Getting oil from tar and shale takes a WHOLE lot more energy. So we’re getting increasingly less and less bang for our buck.

I think we all agree that we need to transition off of our oil addiction as much as possible. I hope we also agree that we need to do move as quickly as possible off of our oil addiction, regardless of whether a peak is at hand, because the downstream effects of this addiction (greenhouse gases effects on climate change). I’m less sanguine that the healthy switch is already well on it’s way.

I agree with Craig that the only viable answer is in demand reduction. Developing mass transit to the scale required will be expensive and energy intensive, and will become more difficult the longer we wait. We best begin now. Increasing fuel efficiency is definitely necessary, but we need to be aware of Jevons’ paradox and try to mitigate its effects - usually efficiency gains don’t result in an overall decrease in demand.

For my money, the best way forward is to embrace the concept of Relocalization. As Jason Bradford has written,

“In general, common themes include decentralization of political and economic structures, less material consumption and pollution, a focus on the quality of relationships, culture and the environment as sources of fulfillment, and downscaling of infrastructural development.

?The case for relocalization will be made in the context of responding sensibly to two problems facing societies right now: climate change and peak oil and gas. Both problems are a result of our dependency on fossil fuels, but some solutions to one will only exacerbate the other. This is why a new approach, that of relocalization, is necessary.

?Relocalization starts from the premise that the world is a finite place and that humanity is in a state of overshoot. Perpetual growth of the economy and the population is neither possible nor desirable. It is wise to start planning now for a world with less available energy, not more.

?While we can?t know future threats precisely, scientists do agree that creating a carbon-cycle neutral economy should be the dominant task occupying our minds. This is exactly what Relocalization aims to do.

?Relocalization advocates rebuilding more balanced local economies that emphasize securing basic needs. Local food, energy and water systems are perhaps the most critical to build. In the absence of reliable trade partners, whether from peak oil, natural disaster or political instability, a local economy that at least produces its essential goods will have a true comparative advantage.”

+ Link

Mr. McLeod,

You have obviously done your homework. Your comments make me think, which I enjoy. thank you.

They say that the first step in solving problems, is admitting that you have a problem. On the oil side of things, I suspect that the end of our oils supply is an admitted issue fairly widely. This alone gives me hope that the human intellect, with a dash of greed will bring us new and novel methods of addressing this huge energy issue. The End of the Oil Age.

I am not convinced that there will be a single magic bullet solution, but a series of solutions that address this multi-faceted problem.

It has been a pleasure discussing this with you. I shall move on to another issue. I hope to meet you again.

Doug