Howard Labs

HowardLabs

Links

Books:

Matt Simmons       Twilight in the Desert

Ken Deffeyes         Hubbert's Peak

Ken Deffeyes        Beyond Oil

Richard Heinberg   The Party's Over

Richard Heinberg   Peak everything

Michael Klare        Blood and Oil

Michael Klare        Rising Powers,Shrinking Planet

Thom Hartmann    The Last Hours of Ancient Sunlight

Thomas Homer-Dixon The Upside of Down

James Howard Kunstler   The Long Emergency

Lester Brown       Plan B 3.0

No More Cheap Oil
Dave Howard
June 13, 2008

The time inevitably comes in the life of every oil field when the rate of extraction reaches a maximum. Afterwards production becomes increasingly more difficult and the rate declines. As petroleum is a finite resource there is a corresponding 'peak' in the rate of discovery of new fields, and/or the size and maximum potential pumping capacity of the fields newly discovered. Therefore there will also come a time when the collective production capacity of all the world's oil wells will reach a maximum. The term "peak oil" is used to refer to this point.

The maximum, or peak, in the rate of discovery of new production capacity was reached over 40 years ago. It is inevitable that worldwide production capacity will also peak someday relatively soon. In the US discovery of new oil fields peaked in 1930. The rate of discovery has declined ever since. And US oil production reached its maximum in 1970. If world production follows a similar timeline, as many experts think it will, then global peak oil is imminent.

The world's largest oil field is Saudi Arabia's Ghawar field. It dwarfs the next largest field and it is generally accepted by geologists that when it peaks the world will have peaked. The smaller oil fields haven't enough spare production capacity to compensate for Ghawar's decrease once it goes into decline.

The OPEC Cartel in general, and Saudi Arabia in particular have been the "swing" oil producers since US oil production capacity peaked in 1970. That is, the Saudi government owned oil company, Saudi Aramco, has been able to control the price of oil by increasing or decreasing the supply. They can continue to do so as long as they have spare pumping capacity. When they reach their maximum production rate, or peak, they will be able only to raise the price of oil ( by restricting supply) but no longer will be able to lower the price since that would require injecting more oil into the market.

Unfortunately for those of us who are trying to understand what the future holds the Saudi oil field data (production, reserves, etc.) have been a state secret since 1980 when Aramco became wholly Saudi owned. However Matt Simmons, a Houston investment banker to the oil industry, has been doing a lot of detective work, connecting dots he has uncovered reading a couple hundred peer reviewed technical articles written by Aramco engineers over the last 40 years and believes that Saudi production is either nearing peak or has already peaked. To put it bluntly, when the Saudi oil minister tells Bush that they still have a few million barrels a day (mb/d) spare capacity, Simmons thinks they're lying. And it reinforces Simmons point when the Saudis refuse to open the spigot as Bush has requested. (Simmons makes his case in his book, Twilight in the Desert.)

Until the end of the first quarter of 2008 (1Q 2008) it was thought that the previous record production in May of 2005 (2Q 2005) may have been the high water mark for world oil production, never to be reached again. But because the early 2008 supply numbers have bested those of 2005 it is apparently not the case that peak oil was reached in 2005. Therefore the claim has been made by some observers that the steady increase in the price of oil is not due to supply problems and should be seen as having other causes. While there are certainly other contributing factors, to entirely dismiss inadequacy of supply is premature at best, and probably just wrong.

Many analysts assume that worldwide oil demand will not reach worldwide supply (at which point Econ 101 tells us that the price will rise until demand ceases to increase) until world production capacity has peaked. This is because it is assumed that if there is any surplus production capacity then supply can be increased to meet demand.

In other words, is "peak oil" both a necessary and a sufficient condition for demand outrunning supply and causing a price hike? The answer is no. Although peak oil is sufficient, it is not necessary. When demand is growing faster than supply the two will inevitably meet at some point even though supply is still increasing. Thus the oil market can be in a "supply and demand" situation even before peak oil is reached. The rate curves that analysts should monitor are not rate of production and rate of demand but rate of increase of production and rate of increase of demand.

This may explain why oil prices have steadily marched upward recently even though the first quarter of 2008 recorded greater supply numbers than the previous peak in May of 2005. But some observers have adduced the recent uptick in production as proof that oil hasn't peaked and that therefore there is no supply constraint driving prices. This then lets them draw the (erroneous) conclusion that the high price of oil is solely a result of speculation in the futures market and/or the falling dollar. (Or simply oil company greed!)

There's no denying that speculation and the falling dollar are contributing somewhat to current oil prices but the danger of attributing the bulk of the recent price increase to those factors, as many newscasters and talk radio hosts are doing, leads to the notion that there is an "oil bubble" which will eventually collapse, returning us once again to cheap oil and Happy Motoring. This is dangerous.

The new favorite term sweeping through peak oil discussions like a west Texas dust storm is "demand destruction." It is shorthand for all the things we must do to lower demand for petroleum in order to stabilize the price. Change vehicles, drive less, drive slower, make fewer trips to the video store, etc. If conventional wisdom embraces the "oil bubble" notion there will be less incentive for people to get rid of their SUVs and massive trucks. Why trade for a gasoline sipper if you believe that prices will come back down soon? As I said, dangerous, because the stakes are too high. It's better to stop running and find that there is no cliff than to keep going and find out (too late) that there is.

Americans who are old enough to remember the oil shocks of the seventies and the long gas lines have largely come to believe that as we muddled through the previous crises, we shall get through this one as well, and things will then "get back to normal."

Sorry. This is the new normal.

The oil shocks of the seventies were a result of supply being temporarily restricted for reasons due to geopolitical events - the Arab reaction to the US support of Israel in the Yom Kippur war of 1973, and the Iranian revolution and overthrow of the Shah in 1979. There was still plenty of production capacity, the spigot had been turned down for political reasons. Also, Alaska's Prudhoe Bay oil began flowing around '78, and so had Britain's North Sea oil, which mitigated the actions of OPEC to a large extent eventually convincing the Saudis to relax the restriction.

Today the case is different. Demand has finally bumped up against supply.

The world's oil producers are pumping as fast as they can. Demand has out-stripped supply, and until demand falls to a level which can be accommodated by the currently available supply the price will continue to go up. The rate of new discoveries of oil reached its peak around 1960, and has been in decline ever since. Each year oil exploration yields fewer new finds than the year before and this has been the case for over 30 years. Even the discoveries of the Prudhoe Bay and the offshore drilling in the Gulf of Mexico weren't adequate to raise US production above the high water mark of 1970.

Onshore oil exploration in the continental US reached its apex in 1930, and US oil production peaked 40 years later. World oil production is bound to trend similarly, and according to a plethora of petroleum geologists it either already has peaked, or will do so imminently. M. King Hubbert, a geophysicist working for Shell, predicted in 1956 that the US production of domestic oil would continue to increase until sometime between 1965 and 1971 after which it would level off and then begin to decline.

Turns out Hubbert was spot on: US production peaked in 1970. (This is known as the Hubbert Peak.) In 1965 using the same methods he predicted that world oil production would peak sometime around 2000. It happens that Hubbert missed the mark somewhat for world wide peak, but an increasing number of oil geologists believe that we have now reached it.

Granted, there are new oil fields coming on line all the time, discovery having peaked doesn't mean it has stopped. But none have the requisite size to make up for the decline of Saudi Arabia's Ghawar field - the world's largest. Saudi Arabia has been the swing oil producer for a number of years in that they can control the world oil market (price) by opening or closing their spigot. No other country today produces enough to exert that control. (The US was the swing producer until our peak in 1970; at that time Saudi Arabia was just getting going.) Russia, the world's second largest exporter produced less last year than they did the year before. The Cantarell field in Mexico has been in decline for a few years now and they will likely be unable to export oil at all before long. North Sea oil peaked in 2000. Indonesia has opted out of OPEC for the simple reason that they only produce enough oil now for their own domestic consumption.

People are angry, and as emotional thinking generally has a tendency to overrule rationality, much finger pointing of late has missed the mark. The finger of blame has been pointed at the oil companies for their "greedy profit margins", the Arab oil producing countries for wanting to punish us for our foreign policy, the US government for not "doing something to get the price down." The US Senate wants to restrict arms sales to Saudi Arabia until they "get the price of oil down." John McCain talks about a moratorium on the 18 cent gas tax. (As Obama points out that would save the average driver about 30 cents a day, and would have a reverse effect on demand besides.) Congress voted to stop the flow of oil to our petroleum reserve (which is 97% full anyhow.) There's nothing any government can do right now. The problem is geological, the era of cheap easy oil is over. As Robert Hirsch, lead author of the Hirsch Report for the US DOE said, If you want to blame somebody, blame the geologists- we haven't been able to find enough oil.

Sadly it looks like Pogo was right: "We have met the enemy and it is us." The law of supply and demand is as unrelenting as the law of gravity. The price of gasoline (and diesel, and jet fuel, and heating oil, and plastics, and fertilizer, and pharmaceuticals, and.. and..) will only stabilize when demand has gone down to a level that can be met by the current (and diminishing) supply.

Demand destruction will begin with the lower income members of society since lack of affordability presents them with a harsh reality about which they can do little, whereas the wealthy can always just pay more to sustain their preferred level of consumption, albeit while grumbling about it. There is a sad irony in this because although the poor will be injured the most by high gas prices it will be they who contribute the most at first to reduction of demand and the eventual stabilization of the price. The Cadillac Escalade owners, the drivers of Lincoln Navigators, Ford Excursions, Chevy Suburbans and Hummers, most of whom can afford to continue their inordinate fuel consumption, will contribute to the high level of demand long after the poor have resorted to bicycling to work, carpooling or taking (where available) public transit, and turning down their heat in the winter and their A/C in the summer.

Unfortunately it won't be possible to stabilize gasoline prices entirely on the backs of the poor since even if most of them were to cease driving entirely it wouldn't be enough. Thus the price will continue to escalate until the comfort levels of the wealthy reach a tipping point. And even then, the price will stabilize at a point at which the wealthy driver can just barely afford it, leaving the accessibility of fuel permanently beyond the reach of lower wage earners.

It's not a pretty picture, and methinks it forbodes societal upheaval on a massive scale. Worldwide.

Human beings are inventive creatures but to assume that our brilliance and ingenuity brought us to the present state of technological excellence is a mistake. A correlative assumption is that when oil gets scarce we will invent a technological fix which will allow us to press on with the lifestyle most of us were born into. People born before the end of the nineteenth century knew what a world without the technological marvels made possible by the discovery of petroleum was like. We do not, except for what we read in books. However the main thing that seems to escape our notice is that we didn't invent oil. Petroleum (and coal and natural gas) are not the product of our inventiveness; they are a result of our good fortune.

We discovered oil. It was not a product of our intelligence. If the earth had been bereft of fossil fuels there would not have been an industrial revolution. True, Henry Ford's first cars ran on alcohol, and we would have eventually created an alcohol based economy, with perhaps some other organic fuels such as vegetable oils in the mix as well. Today the vehicles of the planet consume over 1.5 billion gallons of gasoline and diesel fuel each day. To grow enough of a fermentable crop to supply the energy used for cultivation, harvesting, transporting and distillation of the crop into alcohol or biodiesel and still have enough left over to power our vehicles would have taxed the carrying capacity of the earth far beyond its ability to acommodate the present 6.5 billion people.

The population of the world in 1900 was about 1.5 or 1.6 billion. With an ethanol (and/or methanol/butanol) based technology the population would have grown much more slowly, and by the year 2000 would likely have reached no more than 3 billion. The technology in this hypothesized world without oil would be vastly different than what we have today. There would be virtually no plastics, other than nylon, rayon, etc. and derivatives. Many medicines, fertilizer, pesticides, herbicides, asphalt paving, bituminous roofing materials, vehicle tires, hoses, o-rings and seals, paints, lubricants all would be unheard of, or at best rare.

The point of all this is that whereas we have done ourselves proud with the technological wonders we have created using a virtually free energy source, we did not create that source, and to imagine that we are now capable of replacing it with some ingenious invention or another is naive in the extreme. And solar thermal electricity, solar voltaic electricity, wind generated electricity, nuclear and tidal/wave generation all produce electricity, not portable liquid fuel. Thus transportation would be mostly reliant on battery powered vehicles, a near impossibility for semi tractor-trailer rigs and totally impracticable for aircraft.

Electricity may however be used to "split" water into hydrogen and oxygen, but the conversion efficiency entails losses of around 60% by the time the rubber meets the road for fuel cell vehicles and 80% to 90% for internal combustion powered hydrogen fueled vehicles. A more efficient way of producing hydrogen is by reforming natural gas (or coal gas), but to do so is simply to convert a finite and non-renewable resource into a different form.

As our demand for liquid fuels begins to outrun supply the price of fuel will continue to increase until there is enough demand destruction to stabilize it, and the price increase will also be reflected in everything that depends indirectly on petroleum. The petrochemical industry lacks the visibility of motor fuel mainly because most Americans are unaware of the petroleum base of millions of everyday products that we take for granted.

So what all depends on petroleum in today's world? It would be a lot easier to list the things that don't. In addition to home heating oil, gasoline, jet fuel for airlines, and diesel fuel used to transport goods across the country and from one country to another there are products such as plastics, fertilizer, lubricants, paints, solvents, pharmaceuticals, fabrics, tires, asphalt, pesticides, herbicides, adhesives, electrical insulation and sewer, gas, and water piping. These are a few of the things that depend directly on petroleum feedstock.

The list may be expanded by considering all the products which require heat in the manufacturing process. Metals, glass, solar cells, generators, bearings, copper wire, etc - components of wind machines - practically everything our civilization has come to take for granted depends either directly or indirectly on fossil fuel. Even lumber requires electric saws to machine it into usable sizes and shapes. Electric and hybrid cars will require considerable energy to produce. The list just goes on and on and on.

When the cost of oil goes up, the cost of just about everything goes up. When oil gets scarce, then many other things will become either scarce or disappear from general use entirely.

Will we wake up and prepare for a future without copious quantities of fossil energy while we still have enough left for feedstock for the many things that we will need in a post-hydrocarbon world, or will we use it all up first and then have to "make our wind machines out of wood and lubricate them with animal fat?"

III

As an oil field ages it begins at some point to require more energy to extract a barrel of oil than it did the previous one. Eventually it takes as much energy to produce a barrel of oil as there is in that barrel. The acronym EROEI stands for "energy returned on energy invested." In the early part of the last century when oil was light and sweet (low viscosity and no sulfur) and oil fields still had pressure the EROEI for a typical oilfield was around 100. For every barrel of oil equivalent (BOE) used, one hundred barrels of oil could be produced. Today the EROEI of oil production in the US is about 17. When the EROEI decreases to less than one it becomes a net loss to continue pumping. Before that point most oil fields are abandoned as uneconomical.

But there is a practical (as opposed to economic) rationale for continuing to produce oil with an EROEI less than one: if coal generated electricity is used to power the extraction process, it might be deemed advantageous to expend, say, a million BTUs of coal, a fuel unsuitable for motor vehicles, to produce half a million BTUs worth of oil, a portable liquid. The US has greater coal reserves than any other country and when oil becomes scarce it is to be expected that conversion of coal to oil in that way will be done. Coal may also be converted to liquid fuel more directly by means of the Fischer-Tropsch process.

Unfortunately converting coal to liquid, by whatever means, does nothing to mitigate the release of carbon dioxide into the atmosphere.

The EROEI of the Canadian tar sands (euphemistically called "oil sands" - the hydrocarbon contained is a solid) varies from as low as 3 to about 9. Since the tar sands reserves are reputed to be greater than even Saudi Arabia's oil reserves it is claimed by many that peak oil will not occur for a long time. The conversion of the hydrocarbon in this matrix requires a massive consumption of natural gas and water not to mention the environmental degradation that accompanies strip mining. When Canadian natural gas supplies run out we may see US coal transported to Canada to process Canadian synfuel that is then transported back to the US.

The so-called shale "oil" in the Greenriver formation of western Colorado, Utah and Wyoming isn't really oil. It is a compound called Kerogen, which is a fore-runner of oil, dead vegetation that didn't get cooked enough. It isn't a liquid. In order to extract it and process it into something that can be distilled into motor fuel it needs to be cooked some more. Typically it is extracted from the ground like coal, and then heated with copious quantities of water.

A new type of mining this kerogen is envisioned by Shell Oil, one of the participants of the failed attempt in western Colorado during the early eighties to produce oil from shale. They plan to sink electric heaters deep into the earth and heat the shale in place. By holding a temperature of 700 degrees F. for a period of 2 to 3 years the kerogen will be transformed to a liquid that can then be pumped to the surface. This will eliminate the tailings disposal problem that strip mining creates but will be extremely energy intensive. Shell anticipates building mega coal fired power generating facilities to supply power for the electric heaters. It has been estimated that ten new power plants would be needed for every million barrels of oil per day extracted, and The US currently imports about 15 million barrels a day. Is western Colorado ready for a hundred and fifty new coal-fired power plants?

The water consumed could easily amount to 200,000 to 300,000 acre feet a year. It's easy to see why Royal Dutch Shell is busily buying up water rights in western Colorado. The EROEI for production of oil from shale is estimated (by Shell) to be about 3.5. It would take a barrel of oil equivalent (BOE) to produce 3 and a half barrels of oil. Others have estimated that the EROEI would be much lower, perhaps even less than one. Thus, in spite of the massive reserves of kerogen in the western US, the economics are not even as good as for Canadian tar sands.

The only real solution to higher gasoline prices is lowering of demand. The price is high because demand has reached clear up to available supply. As we feel the pinch of high prices we will consume less, and by doing so lower demand. This will eventually stabilize the price, but it won't be coming back down. It will just quit going up. The question is how high will it have to go before Americans wake up and realize that their free lunch is over.

It won't do any good to sue OPEC or the oil companies, or reduce gas taxes or open up ANWR (there's about as much oil in ANWR as we use every eighteen months) or start mining shale. Corn ethanol is raising food prices that are already increasing due to transportation and harvesting fuel cost increases, and needs to be curtailed until cellulosic ethanol becomes viable. The recommendation of the present administration in Washington as well as Republican candidate John McCain to open up new areas in the US for oil exploration will have no immediate effect, and seem unlikely to have much long term effect either since many off-shore leases presently held by US oil companies are lying fallow.