On a day when oil went over $120 per barrel you might wonder which direction production and prices are headed. Well, the richest man in the world (Warren Buffett or WB below) asked his long time business partner (Charlie Munger or CM below) where he sees oil production in 25 years. Charlie Munger sees oil production down in 25 years and Warren Buffett thinks a peak is possible in 5 to 10 years.
WB: Oil won’t run out - it doesn’t work this way. At some point the daily productive capacity will level off and then start declining gradually. There is the depletion aspect and the decline curves. We are producing 86m barrels per day or so, more than ever produced. We are closer, by my calculations, to almost our productive capacity, than we have ever been. I think our surplus capacity is less, and quite a bit less, than in past. Whatever that peak is, whether 5 or 10 yrs, the world will adjust, and we will think about it. Adjustments will cause demand to taper off. I don’t know how much oil is there, but there are lots of barrels of oil in place. We never recover total potential. We may have better engineering recovery in future. It is nothing like an on and off switch. You may still have enormous political considerations to get access to avail oil since it so important. There is nothing you can do over short period of time to wean world off oil.
CM: If we get another 200 yrs of growth dispersed over the world while population goes up, all oil coal and uranium will run out so you will have to use the sun. I think there will be some pain in this process. I think it is stupid to use up hydrocarbons of world so quickly. Stupid when there are few and limited alternatives. What should we have done? We should have brought all the oil over from Middle East and put it in our ground. Are we doing it now? No. Government policy is behind in rationality. If we have prosperous civilization, we must use the sun.
WB: Charlie, what is your over/under for oil production in 25 yrs?
CM: Oil in twenty five years, down.
I think that's a very easy call. Trying to call the next 5 years is harder because it is hard to guess how much the oil megaprojects will slip from their scheduled completion dates. Generally the big projects have been taking longer. We might already have peaked in conventional crude production. Or maybe a bunch of megaproject production start dates will line up and cause a new record in production.
Given where China is going with its oil demand (way way up) Buffett grasps what this means for prices.
WB: If this is true, that is big number. China is doing 10m cars this year, so down in 25ys is significant.
44 out of 1000 people in China own a car as compared to about 800 per 1000 in America (and some of us own multiple cars). China's car sales grew by 22% in 2007. China is going to bid up the price of oil so high that Americans will get a shrinking slice of the pie. American daily oil consumption might already have peaked.
We need good batteries to let us shift a substantial portion of all cars to electric power. I wonder whether Warren Buffett expects Burlington Northern Santa Fe (one of his investments) to electrify some of its rail lines once oil hits much higher prices points.
A little over a week ago Jad Mouawad of the New York Times wrote a piece on rising demand for oil and worries about supplies. His piece, while drawing attention to the problem, didn't go too far off the reservation of conventional thinking. He was pretty tentative about Peak Oil. Now he's back 9 days later and Mouawad seems to be leaning closer toward acknowledging we have a big long term problem with oil supplies.
As oil prices soared to record levels in recent years, basic economics suggested that consumption would fall and supplies would rise as producers drilled for more oil.
But as prices flirt with $120 a barrel, many energy experts are becoming worried that neither seems to be happening. Higher prices have done little to suppress global demand or attract new production, and the resulting mismatch has sent oil prices ever higher.
Prices have doubled and doubled again. Yet production has been pretty flat for the last few years.
“What is disturbing here is that things seem to get worse, not better,” said David Greely, an analyst at Goldman Sachs. “These high prices are not attracting meaningful new supplies.”
Mouawad even quotes Jeffrey Rubin of CIBC World Markets who I've recently posted about for Rubin's prediction of $225/barrel oil by 2012. Rubin effectively interprets the writings of Peak Oil theorists into language that the financial community understands.
Mouawad takes note of Mexico's plunging oil production.
Mexico, the second-biggest exporter to the United States, seems increasingly helpless to find new supplies to offset the collapse of its largest oil field, Cantarell. A combination of falling production and rising domestic consumption could wipe out Mexico’s exports within five years.
Mexico's rapid decline from its oil production peak deserves mention in the New York Times. But Mouawad could have been even more dramatic: Mexico's oil production is tanking while strong internal demand growth is causing net exports to drop even faster.
Mexico's gasoline imports rose to 360,700 b/d in March, the highest level since November 2007. This coincided with a 7.8% decline in the country's oil production in this year's first quarter to 2.91 million b/d, largely due to declining output from traditional oil fields.
Mexico fits a larger pattern. Rapid domestic oil consumption growth in big oil producing countries cuts down oil available for export. The New York Times has noticed the oil export problem as well. Some analysts call this the Export Land Model. At that link petroleum geologist Jeffrey Brown speculates that most of the remaining recoverable oil will not get exported. This collapse in available exportable oil could make the 2010s the most tumultuous decade since World War II.
Jeff Rubin of investment and merchant bank CIBC World Markets says a continuing world oil production plateau combined with growth in demand will double the price of oil in the next 4 years. Ouch.
Increasingly tight oil supplies will continue to push the price of oil higher with the cost of crude hitting US$150 a barrel by 2010 and soaring to US$225 a barrel by 2012, forecasts a new energy report from CIBC World Markets.
This will result in skyrocketing consumer gas prices in the U.S. with the national average price easily topping $4.00 this summer, reaching $5.50 in the summer of 2010 and hitting close to $7.00 by 2012.
Mexico has joined the list of states with declining oil production and Russia may soon. I think Rubin might be optimistic to see a world oil production plateau lasting all the way to 2012.
Rubin claims that the International Energy Agency has been overstating the production of oil because they've counted natural gas liquids that are not useful for all the purposes (e.g. making gasoline) that regular oil gets used for.
The report finds that current oil production estimates produced by the International Energy Agency (IEA) overstate supply by about nine per cent since it counts natural gas liquids in its numbers. The report notes that natural gas liquids, while valuable hydrocarbons, are not a viable substitute for oil and cannot be economically used as a feedstock for gasoline, diesel or jet fuel.
"While natural gas liquids only account for 10 per cent of total supply, they account for virtually all of the increase in petroleum liquids production since 2005," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets. "Stripping out natural gas liquids, oil production has not grown for over two years, which certainly goes a long way to explaining why oil prices have doubled over that period.
Oil consumption in the developed nations will decline due to increased competition coming from developing nations. A smaller fraction of the limited supplies will flow to the US, European countries, and other OECD members.
The report also notes that while production increases are at a virtual standstill, global demand continues to grow. While higher prices and a weak economy have seen demand drop in the U.S. - as it has in other OECD nations - this has been more than offset by demand growth outside the OECD.
"Car purchases in Russia, for example, are exploding as U.S. sales stagnate," says Mr. Rubin. "While in India the advent of the TATA, a car that will sell for as little as US$2,500, will allow millions of households in the developing world to own automobiles when they otherwise could not. Millions of new households will suddenly have straws to start sucking at the world's rapidly shrinking oil reserves."
I agree with Rubin's analysis unfortunately. Also, I do not see development of substitutes happening fast enough. So the 2010s look to be a period of declining living standards in Western countries. We'll eventually turn the corner as new energy and materials technologies mature. But the transition period will impose hardships on many. My advice: Buy a hybrid or diesel or very small gasoline car or a combination thereof. Also, choose jobs and residence addresses to minimize the need to travel. Also, try walking and bicycling. Most of all, mentally prepare yourself for the need to restructure your life as oil prices keep going up.
US oil consumption probably has already peaked. More new cars in other countries mean fewer miles traveled in the United States.
"In order to accommodate more drivers on the road in Russia, China and India, there must be fewer drivers in the U.S. and the rest of the OECD. And so there will be. U.S. oil consumption is likely to fall by over two million barrels a day over the next five years as retail gasoline prices rise from their current US$3.60 a gallon mark to almost US$7 a gallon.
Here is the full report (PDF).
With oil hitting $117 per barrel major media organizations are paying more attention to the future availability of oil. On the one hand, a New York Times discusses worries about future energy availability. On the other hand, the analysis still lends considerable credence to the idea that large increases in oil production are possible.
Today’s tensions are only likely to get worse in coming years. Consider a few numbers: The planet’s population is expected to grow by 50 percent to nine billion by sometime in the middle of the century. The number of cars and trucks is projected to double in 30 years— to more than two billion — as developing nations rapidly modernize. And twice as many passenger jetliners, more than 36,000, will in all likelihood be crisscrossing the skies in 20 years.
In all likelihood? How does that work? If the oil can't be found (and I do not believe it can) how can the number of passenger jetliners double?
CEOs of some major international oil companies (e.g. de Margerie of Total and Mulvey of ConocoPhillips) do not expect oil to go above 100 million barrels a day (we are at 85 million now). Russia looks like it has peaked. Mexico has peaked. Yet the International Energy Agency talks about a 35% increase in production.
All of that will require a lot more oil — enough that global oil consumption will jump by some 35 percent by the year 2030, according to the International Energy Agency, a leading global energy forecaster for the United States and other developed nations. For producers it will mean somehow finding and pumping an additional 11 billion barrels of oil every year.
Where is this going to come from? OPEC nations either lack the ability or the will to increase production. Even if they lack (we should be so lucky) the will why should they change their minds? The higher the price of oil goes the less they have to pump to make the same amount of money.
There's the highly dubious use of "proven reserves" to refer to reserves that OPEC countries claim to have against all evidence and logic. Unless OPEC countries want to provide enough evidence to the rest of the world for their claimed oil reserves why should the New York Times or the International Energy Agency take OPEC claims seriously?
The 13 members of the Organization of the Petroleum Exporting Countries account for three-quarters of the world’s proven oil reserves.
OPEC countries inflated their reserves back in the 1980s in order to justify to each other their production quotas. They've kept their unrealistic reserve numbers ever since.
It is time to move beyond a discussion of why oil prices have gone so high and focus on the prospects for substitutes. In particular, a realistic discussion of the future liquid fuels ought to center around the costs of substitute liquid fuels such as algae biodiesel, cellulosic ethanol, and coal-to-liquid. We will be able to reduce the relative portion of transportation powered by liquid fuels by use of more electricity and batteries in transportation. But for at least a portion of our transport needs (e.g. airplanes, longer distance vehicles) we will continue to need liquid fuels.
If algae biodiesel can't be made to work then coal-to-liquid will take off in a big way. Maybe jatropha or cellulosic technology using trees or switch grass might work. But I fear the ecological footprint from planting and harvesting the huge areas such crops would need. Near as I can tell so far algae biodiesel has the potential to produce the most liquid fuel per area of land. So I'd like to understand better what problems must be solved for algae biodiesel to work and at what price points it could work.
A company called PetroSun that does conventional oil field development and also algae biodiesel development believes their approach using native algae (as compared to genetically engineered or otherwise specially bred) with natural sunlight can make algae biodiesel workable.
Ethanol (corn) and biodiesel (soybeans) are what we currently have available as alternative fuels. We accept that. However, at productivity levels ranging from 40 to 300 gallons per acre per year from these crops, why would algae not be acceptable even at a lower case production rate of 2,000 gallons per acre per year? Perhaps because the algae-to-biofuels community is mainly focused on super strains cultivated in photo bioreactors? So far, the economics prohibit this segment of the industry from moving forward today and is the primary reason behind the statements that algae-to-biofuels are perhaps five years away. It will probably require $250 per barrel of crude oil or more for these systems to be economically feasible. In time, the price of a barrel of crude oil will support the technology of the photo bioreactors, but why wait?
PetroSun's farming system will utilize native microalgae strains, so as to not disrupt local ecosystems. As stated previously, we will also use either saltwater, brackish or wastewater in our pond system, thereby limiting the impact on the fresh water supply. Our background in the oil and gas industry is the basis from which we developed our harvesting and extraction technology. Despite our stated lower case rate of production per acre being far less than the annual 20,000 gallon theoretical limit of algal oil potential, we are satisfied that we can compete with crude oil pricing and maintain a competitive pricing structure over other vegetable oil feedstocks. We intend to improve on these production rates as we move forward during the maturation of the commercial production of algae-to-biofuels.
Will we need to use closed systems to keep out contaminating organisms? The coverings up the costs. But genetically engineered algae might some day provide advantages that make the closed systems financially worthwhile. PetroSun's management think they can create a workable system sooner using existing algae and lower cost growing ponds.
How much land to produce biodiesel to substitute for all oil used in transportation in the United States?One US government report from 1996 says 15,000 square miles would be required.
NREL itself said in its 1996 report that an area around the size of the U.S. state of Maryland -- approximately 15,000 square miles (3.8 million hectares) -- would be enough to cultivate enough algae to serve the entire transportation needs of the U.S.
That would represent around 140 billion gallons (530 billion liters) of biodiesel it said, working out at around 140,000 liters per h/y. Achieving production levels of such a scale in theory is one thing however; being able to do it in reality is another.
In 1996, the DoE estimated that it would cost twice as much to produce algae-sourced biodiesel than it would gasoline.
Today, the University of New Hampshire's (UNH) Biodiesel Group estimates it could cost as much as $308 billion to build enough farms across the U.S. to meet these production levels and another $47 billion to run them.
Physicist Michael Briggs of the UNH Biodiesel Group says that 15,000 square miles if used for algae biodiesel is pretty small compared to what we now use for agriculture.
To put that in perspective, consider that the Sonora desert in the southwestern US comprises 120,000 square miles. Enough biodiesel to replace all petroleum transportation fuels could be grown in 15,000 square miles, or roughly 12.5 percent of the area of the Sonora desert (note for clarification - I am not advocating putting 15,000 square miles of algae ponds in the Sonora desert. This hypothetical example is used strictly for the purpose of showing the scale of land required). That 15,000 square miles works out to roughly 9.5 million acres - far less than the 450 million acres currently used for crop farming in the US, and the over 500 million acres used as grazing land for farm animals.
Even if the amount of land needed turns out 3 times greater it is still small compared to current agricultural land uses.
Further, these yield estimates are based on what is theoretically achievable - roughly 15,000 gallons per acre-year. It's important to point out that the DOE's ASP that projected that such yields are possible, was never able to come close to achieving such yields. Their focus on open ponds was a primary factor in this, and the research groups that have picked up where the DOE left off are making substantial gains in the yields compared to the old DOE work - but we still have a ways to go. But, consider that even if we are only able to sustain an average yield of 5,000 gallons per acre-year in algae systems spread across the US, the amount of land required would still only be 28.5 million acres - a mere fraction still of the total farmland area in the US.
Needing 3 times as much land would triple costs. But what would those costs be?
The problem of energy prices looks set to get much worse before it starts to get better. China will eventually become the biggest consumer of energy with the US becoming a distant second. The Chinese are getting excited about larger cars. China could surpass the United States in number of cars sold per year by 2015 (though with smaller numbers than currently projected since declining oil production will cut into usage). If we do not come up with workable substitutes for fossil fuels then Asian economic growth, world population growth, and dwindling fossil fuels promise to make for a grim future. Vigorous attempts to slow population growth would really help too.
Some analysts think we are close to world Peak Oil production.
Chris Skrebowski, a researcher for the Energy Institute in Britain, told delegates that the oil supply will peak in 2011 or 2012 at around 93 million barrels a day, that oil supply in international trade will peak earlier than the oil production peak, and he forecast: "There will be supply shortfalls in winter before peak."
Skrebowski sees a number of indicators that Peak Oil is close.
According to Skrebowski, there were eight key pieces of evidence that insisted that the world was looming ever-closer to peak oil. These included the falling rate of discoveries of new oil-fields; sustained high oil prices; the age of the largest fields; the lack of real growth potential in oil-producing countries; the current lack of incremental flows; the sustained depletion of oil reserves; nongeologic threats to future oil-supplies; and the struggle to hold production by many of the major oil producers.
He explained that peak oil was predicted to become a reality in 2011 on the basis that the world’s major oil fields were being depleted at a rate of 4,5% a year.
The production decline rates of existing fields are an important part of the equation for when Peak Oil happens. Another important factor is the rate at which new oil megaprojects come on line. Megaproject delays - which are not uncommon - could make the peak come sooner. The debate about when oil peaks is partly a debate about how many projects will stay on schedule.
Don't look for help from ExxonMobil.
But how is it that crude can still trade above $100 a barrel, three times what it sold for at the start of the decade, despite a very wobbly economy?
If you want to understand that, it helps to listen in to ExxonMobil's (XOM) presentation to analysts in New York City in early March. Halfway through the three-hour meeting, Exxon management flashed a chart that showed the company's worldwide oil production staying flat through 2012.
So $100 per barrel oil isn't enough for ExxonMobil to find ways to boost production. Only national oil companies might be able to substantially increase production. The publicly traded international oil companies can't find enough oil to produce.
Jim Kingsdale expects hoarding to become a big problem.
What about supply? The recent Deutsche Bank report notes the perverse fact that since 2003 higher oil prices have caused lower growth in oil production, a phenomenon that is related to the hoarding issue that I have long discussed. Based is on the work of Skrebowski and the opinions of Maxwell and other experts on future oil supplies I suspect the world may scrape out the capacity to meet normal demand growth of developing countries for perhaps two more years, bringing oil use by the end of 2009 to perhaps 90 mb/d. But after that, oil supply growth will stop and then start declining. It could decline slowly by, say, 1 mb/d or it could decline more rapidly by perhaps 3 mb/d. If it declines by 1 mb/d between 2010 and 2015, it will be back to 85 mb/d in 2015. Implied demand, we saw, will be about 97 mb/d after the savings in U.S. car usage.
If you are sitting on a lot of oil why sell oil in a given year once oil production is in global decline? Each next year the price will be much higher. Leaving oil in the ground is a form of investment. This is why I think the environmentalists who oppose drilling in the Alaska National Wildlife Refuge (ANWR) have done us a big favor. The oil will get pumped out eventually assuming ANWR really has a lot of oil (and it might not). Meanwhile it sits in the ground waiting to help us in the coming harsh post-peak era.
Energy analyst Charles T. Maxwell thinks gasoline prices in the US will need to more than triple to force Americans into a radical restructuring of how they live.
Maxwell said it will take $12 to $15 a gallon to get Americans to let go of what he called the “precious freedom of mobility.” As much as Maxwell laments the loss, he sees no other way for the U.S. to impose enough conservation to deal with the growing imbalance between oil demand and supply that he sees developing around 2010 and getting worse in 2012 or 2013, as the world hits a “peak” in conventional oil production.
The Energy Watch Group is even more pessimistic since the EWG claims world oil production peaked in 2006 and we are looking at steep production declines going forward.
According to the scenario calculations, oil production will decline by about 50% until 2030. This is equivalent to an average annual decline rate of 3%, well in line with the US experience where oil production from the lower 48 states declined by 2-3% per year.
Still other analysts see peak oil between 2010 and 2012.
A decline in production in 2008 would be far more disruptive than a decline in 2012. Investments in reaction to the current high oil prices will gradually yield substitute energy sources in the coming years. We are better off if the world stays on an oil production plateau so that gradually rising prices send increasingly louder signals that we need to develop alternatives, implement conservation measures, and restructure our lives to need less energy.
We need nuclear, solar, and wind power and great batteries for transportation.
The growth in China's carbon dioxide (CO2) emissions is far outpacing previous estimates, making the goal of stabilizing atmospheric greenhouse gases much more difficult, according to a new analysis by economists at the University of California, Berkeley, and UC San Diego.
Previous estimates, including those used by the Intergovernmental Panel on Climate Change, say the region that includes China will see a 2.5 to 5 percent annual increase in CO2 emissions, the largest contributor to atmospheric greenhouse gases, between 2004 and 2010. The new UC analysis puts that annual growth rate for China to at least 11 percent for the same time period.
A constant percentage increase per year turns into an absolute increase per year. If China maintains an 11% CO2 increase per year through the 2010s then by 2020 it will likely emit more CO2 than all the rest of the world put together. Will they do that?
The study is scheduled for print publication in the May issue of the Journal of Environmental Economics and Management, but is now online.
Keep in mind that many Kyoto Accord signing countries are falling far short of meeting their pledges anyway.
The researchers' most conservative forecast predicts that by 2010, there will be an increase of 600 million metric tons of carbon emissions in China over the country's levels in 2000. This growth from China alone would dramatically overshadow the 116 million metric tons of carbon emissions reductions pledged by all the developed countries in the Kyoto Protocol. (The protocol was never ratified in the United States, which was the largest single emitter of carbon dioxide until 2006, when China took over that distinction, according to numerous reports.)
Put another way, the projected annual increase in China alone over the next several years is greater than the current emissions produced by either Great Britain or Germany.
Picture China's economy 2 times bigger. Picture it 3 times bigger. Huge demands for raw materials. Huge consumption of fossil fuels. Lots of pollution generated even from the solar photovoltaics industry.
Suppose rising CO2 emissions will cause global warming and that global warming will cause big negative impacts that outweigh the benefits. Well, we are going to have to use climate engineering techniques to stop and reverse the warming. Barring big breakthroughs to lower the costs of solar and nuclear power I do not see a substantial decrease in CO2 emissions until Peak Coal hits.
Most of this increase is coming from burning coal to generate electricity. If only they were building nuclear rather than coal electric power plants the emissions (and not just of CO2, also particulates, mercury, etc) would be far less.
China's installed nuclear power-generating capacity is expected to reach 60 gigawatts by 2020, a senior Chinese energy official said -- much higher than an earlier government estimate of 40 gigawatts. A gigawatt is the equivalent of one billion watts. The new estimate is equal to about two-thirds of Britain's total electricity-generating capacity today, although still equivalent to less than a tenth of China's current total.
Faced with an energy crunch resulting from its fast economic growth, China has decided to develop more nuclear power. By 2020, the nation will have an installed nuclear power capacity of 40 million kw, accounting for 4 percent of its total installed generating capacity.
They still see nuclear power as too costly as compared to coal. Without cheaper ways to generate cleaner power the world is going to become a dirtier place.
On The Oil Drum Stuart Staniford argues agriculture will not deindustrialize when the production of oil peaks and goes into long term decline.
So when you industrialize a society, is that a reversible process? Can you take it on a backward path to a deindustrialized society that looks in the important ways like the society you had before the industrialization? As far as I can see, the "second wave" peak oil writers treat it as fairly obvious that this is both possible and desirable. It appears to me that it is neither possible or desirable, but at a minimum, someone arguing for it should seriously address the question. And it is this failure that I am calling the Fallacy of Reversibility. It is most pronounced in Kunstler, who in addition to believing we need a much higher level of involvement in agriculture also wants railways, canals, and sailing ships back, and is a strong proponent of nineteenth century urban forms.
I think those who see collapse in a post-oil peak world are making a number of mistakes. First, they are underestimating the potential of substitutes. Granted, the substitutes will initially cost more. So a shift to substitutes will cause a dip in living standards. But that is not collapse of civilization and a reversion to people following oxen around farm fields. The biggest problem with substitutes is the lag time while new capital expenditures for energy substitutes get made as oil production declines. But oil production won't collapse in a year. We will have time to make the shift. For people in First World countries it will be difficult but not a collapse of civilization.
Stuart invents a new term for peak oil doomers that is technically more precise: reversalists.
I am going to christen this general faction of the peak oil community reversalists. This encompasses people advocating a return to earlier food growing or distribution practices (the local food movement), folks wanting to bring back the railways and tramcars, people believing that large scale corporations will all collapse, that the Internet will fail and we need to "make our own music and our own drama down the road. We're going to need playhouses and live performance halls. We're going to need violin and banjo players and playwrights and scenery-makers, and singers."
Stuart argues that reversalist arguments are a distraction from figuring out what we really need to do to handle Peak Oil. I agree.
And before moving on, I stress that I'm not making an argument that our time is in all ways better than earlier times and that nostalgia for the past is entirely misplaced. Nor am I making an argument that peak oil does not pose a massive and important challenge to us. Instead, I'm making an argument that society is unlikely to reverse its trajectory of development, regardless of what we might like. Calls for it to do so are a distraction and get in the way of figuring out what we really need to be doing, and what the real options and dangers are.
Fortunately, I suspect capitalists are not much distracted by the doomer/reversalist talk. The capitalists are looking for ways to profit from high energy prices and that means investing in substitutes.
So why does Stuart think farmers will do well in a period of declining oil production? Stuart compares farm profitability in the United States to oil prices from 1976 to 2006 and finds that farm profitability does not decline as oil prices rise.
The relationship is somewhat stronger - profits are a little likelier to be higher when oil is expensive, but oil prices explain only about 12% of the variance in profit margins. The relationship is just barely statistically significant (p = 4.9%), but I wouldn't set too much store in it, given that the regression is not controlled for any other factors that might be explanatory.
But certainly, there is no evidence for the idea that farms are less profitable at high oil prices - that inference is completely unsupported by the data since 1975.
The analysis does not include 2007, since the cost data are not available yet, but it is likely that 2007 had high profit margins (since crop prices were very high), and certainly it had fairly high oil prices. I will argue below that this is a harbinger of the game-changing role of biofuels, which will tend in the future to make industrial farming more profitable as oil prices rise.
So far higher oil prices have created higher demand for farm products and so higher oil prices have pulled up farm prices and farm production. Will that continue to be the case? I think it depends on whether farms produce more energy than they consume. If they do then Peak Oil means happy times for farmers and high costs for food.
Stuart then shows a graph of farm labor costs versus oil prices which shows that, if anything, farmers use less labor per acre when oil prices are high.
What we see is that wheat and soybeans show essentially no meaningful relationship between oil prices and the amount of labor per acre that farmers use. They use the same low amount regardless. Corn farmers actually spend less on labor when oil prices are high, for reasons that are unclear - however the relationship is quite strong (r2 of 43%) and very statistically significant (p = 0.005%).
Stuart points out that even without subsidies corn-ethanol was profitable part of the time in recent years.
But what I would argue is that if oil gets to $200/barrel, industrial agriculture is likely to do very well. I pointed out in Fermenting the Food Supply that corn-ethanol has been profitable even without subsidies at times in the last few years, and that whenever oil prices go up sharply, there is a huge spurt in the growth of the biofuel industry. This creates an arbitrage between food prices and fuel prices, and mean that the former must go up whenever the latter go up (since the biofuel industry can very easily use most of the global food supply without adding more than a modest fraction to the fuel supply).
Take away the government corn ethanol subsidies and that profitability picture probably wouldn't have changed much. Farmers would have planted less corn and less of the corn would have been bought for corn ethanol. The supply and demand would have intercepted at a lower price point at which corn ethanol would have achieved about the same level of profitability.
Stuart's argument has more merit if farms are net energy producers. If the Energy Return On Energy Invested (EROEI) is a ratio much higher than 1 for highly mechanized farms then farmers can produce more energy from what they grow than they use as inputs. In that case farmers can create the energy they need to run their operations and so the odds of survival for the large scale mechanized farms becomes very high. A lot of debate surrounds the question of EROEI of agriculture. I'm inclined to believe at this point that some types of grain agriculture have positive and rising EROEI. Here's an intuitive illustration of why that's probably true. North Dakota vegetable oil production is a few times greater than the amount of oil needed to operate all of North Dakota agricultural equipment.
Canola, soybeans, sunflowers and safflowers are some of the main crops. All of them are capable of producing about 50 to 100 gallons of fuel per acre that can be used in an unmodified diesel engine, he says.
An estimate of the fuel production from the state’s three main oil-producing crops in 2003 - soybeans, canola and sunflowers - is more than 300 million gallons. Fuel production from any other oil-producing crops would be in addition to this amount. In comparison, North Dakota agriculture uses about 85 million gallons of diesel fuel per year.
Note that North Dakota farmers also grow various grain crops. Also, some of these crops that produce oils also produce meal rich with protein and carbohydrates as byproducts. So it looks at first glance like North Dakota's farmers can produce the energy they need to run their operations.
But this isn't definitive proof by any means. We still need to know about the energy inputs for fertilizer production, farm equipment production, and other components of highly mechanized and automated agriculture.
So here's my conclusion: If mechanised agriculture has an EROEI substantially above 1 then mechanised agriculture survives post-peak oil. I strongly suspect that this is the case for some crops and that biotechnological advances as well as smart innovations in farm practice will raise grain crop EROEI much higher. So we should see mechanized agriculture expand as fossil fuels energy production declines.
Update: Note that with positive EROEI Peak Oil therefore means greater demand for agricultural land even if yield per acre rises. Part of the land will go toward creating energy to use to farm the rest of the land. Part will go to create energy to operate cars and airplanes and other parts of modern civilization. I suspect less of the land will go toward growing food.
When a tree falls in a forest where no human will hear it does it make any sounds? Yes, but some like to pretend no in order to make the point that without observers sounds might as well be absent. Well, previously I've highlighted work by Peak Oil theorists "Khebab" and "westexas" on how rapidly rising internal consumption is going to cut oil exports by big oil exporters. But the mainstream media hasn't paid much attention to this problem until now. So the writings of Peak Oil theorists have until now resembled trees falling in empty forests. Finally the trees are falling within earshot of people who matter. The New York Times has a story entitled Oil-Rich Nations Use More Energy, Cutting Exports:
The economies of many big oil-exporting countries are growing so fast that their need for energy within their borders is crimping how much they can sell abroad, adding new strains to the global oil market.
That crimping is going to get much worse.
Experts say the sharp growth, if it continues, means several of the world’s most important suppliers may need to start importing oil within a decade to power all the new cars, houses and businesses they are buying and creating with their oil wealth.
I like the "if it continues". Well, okay, we could get hit by a massive asteroid next year, wiping out the human race and ending the trend of domestic oil consumption growth by big oil producers. Or aliens might land and give us technology for making fusion energy workable for cheap. Or aliens might attack us and wipe us out. So the "if" part can be defended. But I think it safe to say those are pretty low probability events (and anyone with good outer space alien contacts please correct me in the comments).
We are effectively already at Peak Oil for the non-exporting countries. Think I'm just some crazy extreme loon nutjob? Well, maybe. But I've got the company of 7 NY Times reporters who contributed to their story:
Internal oil consumption by the five biggest oil exporters — Saudi Arabia, Russia, Norway, Iran and the United Arab Emirates — grew 5.9 percent in 2006 over 2005, according to government data. Exports declined more than 3 percent. By contrast, oil demand is essentially flat in the United States.
Cheap prices have been driving consumption increases in oil producing nations.
Saudis, Iranians and Iraqis pay 30 to 50 cents a gallon for gasoline. Venezuelans pay 7 cents, and demand is projected to rise as much as 10 percent this year.
Fatih Birol of the UN's International Energy Agency says between now and 2015 world oil production might increase 1.1 million barrels a day. That increase will get eaten up in producer countries while demand from India and China will grow by large amounts. The IEA is assuming 25 million barrels per day (mbd) of new production to offset declines of 23.9 mbd in existing fields. But that decline rate is probably optimistic. Some of the OPEC countries are hiding their real capabilities and painting an excessively rosy picture.
Oil consumption in the United States and other Western industrial countries will start declining before world oil production starts declining. Reduced exports by big producers will combine with increasing demand from India and China to push up oil prices and cut US, European, Austrialian, Canadian, and Japanese demand.
What should we do about it? Electrify everything. We do not face a shortage of fuels for generating electricity. To the extent that any activity can be shifted over to electrical power we need to find ways to do it. Liquid fuels are too valuable to be wasted on, for example, heating homes and commercial buildings. Oil for heating should be replaced with electrically driven ground source heat pumps which will actually lower the cost of heating. Vehicles that go shorter distances should be shifted to electric motors and battery power. We need better batteries to power vehicles for longer distances.
Update: Oil geologist Jeffrey "westexas" Brown was consulted by the NY Times writer who wrote their story.
Cliff and I had several conversations, but I am in no way taking any kind of credit for this story. This is his work, and I think that he did a very good job. I don't know what kind of discussions went on behind the scenes at the Times, but my guess is that trying to discuss the mathematical models of future exports was too complicated for an introductory article, and perhaps too scary.
My only real complaint is that I think that the MSM guys should reference the fact that Yergin's price and production projections have so far been way off the mark.
The NY Times should follow up with articles about expected rates of export decline for various oil producers.
Update II: Also see my post Wall Street Journal Takes Peak Oil Seriously. That's another sign that Peak Oil problems are entering mainstream discussion.
Update III: We need to build up nuclear plants and wind towers rapidly so that we can stop using natural gas and coal to generate electricity. This would free up the natural gas for fleet vehicle fuel and the coal to use to convert for liquids to power vehicles as well. This is not politically possible yet because Peak Oil is not yet an accepted event. Once it becomes accepted conventional wisdom remember that we need to reserve fossil fuels for transportation and plastics. Wasting them on heat and electric power generation is stupid.
On the front page today the Wall Street Journal basically legitimized the coming of peak oil.
A growing number of oil-industry chieftains are endorsing an idea long deemed fringe: The world is approaching a practical limit to the number of barrels of crude oil that can be pumped every day.
Some predict that, despite the world's fast-growing thirst for oil, producers could hit that ceiling as soon as 2012. This rough limit -- which two senior industry officials recently pegged at about 100 million barrels a day -- is well short of global demand projections over the next few decades. Current production is about 85 million barrels a day.
The WSJ writers refer to peak oil theorists as "debased" and try to put distance between the supposedly more legitimate statements now coming from the titans of the oil industry and the predictions of supposed peak oil nuts. I think these writers are unfair in their treatment of the lower status and, in their eyes, less legitimate theorizing of petroleum geologists and physicists. How dare anyone but owners and top managers of capital get taken seriously? But the titans of industry were not long ago painting a far rosier energy picture (as were inept national and international energy information agencies) and I'm finding it hard to see them as the more legitimate experts on this topic. The sharpest peak oil theorists are looking a lot more accurate in their assessments than the CEOs of big oil companies.
It is becoming harder to label someone as a fringe kook for saying that Peak Oil is coming Real Soon Now. You can still tell us we are wrong. But I'm no longer fringe on this topic and that of course makes all the difference in the world. It creates a problem for me personally. How can I be cutting edge? Now I've got to find more topics to be fringe on since some of my major themes are heading into mainstream legitimacy and acceptance.
Who are these non-fringe people who say we are nearing the peak? ConocoPhillips CEO James Mulva says we'll never hit 100 million barrels per day.
"I don't think we're going to see the supply go over 100- million barrels a day. Where is it all going to come from?" Conoco CEO Jim Mulva said at an investor conference in New York.
I've got readers complaining to me that I need to take global warming seriously and get out of the denial mode. Well, Peak Oil is going to do far more to cut CO2 emissions than the Kyoto Accords would have done had they actually been adhered to. All those models that projected future CO2 emissions based on the world using 130+ million barrels of oil a day are based on unrealistic assumptions. I doubt we'll even reach 95 million barrels per day. Then comes the downhill slope. Or are we already on it?
Jeffrey J. Brown (aka Westexas at The Oil Drum) says the real problem is that net exports will decline even more rapidly than total production.
Kenneth Deffeyes predicted that world oil production (note that he used crude + condensate, not total liquids) would peak between 2004 and 2008, most likely in 2005. He observed that world crude oil production probably peaked in 2000, but he never backed off what his mathematical model showed.
The cumulative shortfall between what the world would have produced at the May, 2005 rate and what it has actually produced is over 700 mb (EIA, crude + condensate). So, the crude oil data suggest that we probably did peak in 2005.
However, the real problem is net export capacity. We are working on our final written report on the top five net oil exporters (about half of current world net oil exporters), but note that their total liquids net exports fell by -3.3%/year from 2005 to 2006, and the decline in net exports is almost certainly going to accelerate from 2006 to 2007. This is the fundamental reason for high oil prices--we are bidding against other importers for declining net oil exports.
Brown and his often co-writer khebab (Samuel Foucher) argue that oil exported from current net oil exporters (countries that make more oil than they use internally) will decline more rapidly than oil production in those exporters. They call this the Export Land Model as they group all the oil exporters into "Export Land" and the rest of us in "Import Land". They expect more rapid growth in demand in oil exporters will cause their exports to drop even before their production does. This is an extremely important observation. The amount of oil available to buy will go down even faster than the decline rate of oil production. Worse yet, the number of people bidding on that oil is going up due to population growth and economic growth. Asian economic growth - especially in China - is going to bid oil prices up so much that oil imports into the United States, Europe, and Japan will decline more rapidly than oil exports from producers.
Think about that.
There's a wild card that could make the short to medium term picture even worse: Countries with large oil reserves could decide to lower production even more rapidly in order to conserve oil to sell later. With prices in the stratosphere why sell as much as you can sell now if the high prices at a lower production rate will give you plenty of cash to run your government and placate your population?
Given the plateau and decline in world oil production (the second graph is really bad news) and khebab's guesses on possible future trends in production I gotta say I'm feeling job insecurity. Stuart Staniford thinks production declines in some big existing fields might even accelerate. Not good. China might take any increase in oil production in 2008 (but Hamish McRae is being optimistic in assuming there'll be an increase for China to take).
The present climb in the oil price has coincided with rising demand from China. Put it this way: China used about three-quarters of the additional supply of oil in the world last year. The economic team at ING Bank notes that China may account for all the additional production this year. If China is to go on using all the additional oil that is available, or more, the rest of the world will have to get by with less. This makes the present surge in the oil price different from all previous oil shocks: it is caused by rising demand rather than restricted supply.
Recently I've gone through a shift in my thinking about Peak Oil. I'm no longer worried about trying to figure out when it will come. The analytical curiosity about future events has been replaced with something that is beginning to feel more like fear. Peak Oil looks to be coming soon enough that I'm thinking more along the line of how to earn a decent living while economies around the world go through one year after another of wrenching recession.
Got any constructive thoughts about adaptation? I'm keen to hear them.
Royal Dutch Shell decided to lift some (though not all) of the secrecy surrounding their research into extracting oil from oil shale in Colorado and Wyoming. Jon Birger of Fortune magazine was given access to Shell oil shale researchers and has written a pretty good piece on the prospects for oil shale energy production.
Spanning some 17,000 square miles across parts of Colorado, Utah and Wyoming, this underground lakebed holds at least 800 billion barrels of recoverable oil. That's triple the reserves of Saudi Arabia.
Since Saudi Arabia's reserves are well below their claimed reserves the multiple between oil shale reserves and Saudi reserves is probably more than triple. If Shell can extract that oil it will change the relative economic power of nations.
The reason you probably haven't heard about the Green River Formation is that most of the methods tried for turning oil shale into oil have been deeply flawed - economically, environmentally or usually both. Because there have been so many false starts, oil shale tends to get lumped with cold fusion, zero-point energy, and other "miracle" fuels perpetually just over the horizon.
"A lot of other companies have bent their spears trying to do what we're now doing," Vinegar says of his 28-year quest to turn oil shale into a commercial energy source. "We're talking about the Holy Grail."
Unlike the Grail, though, Shell is convinced that oil shale is no myth and that after years of secret research, it is close to achieving this oil-based alchemy. Shell is not alone in this assessment. "Harold has broken the code," says oil shale expert Anton Dammer, director of the U.S. Department of Energy's Office of Naval Petroleum and Oil Shale Reserves.
Shell physicist Harold Vinegar thinks the oil can be extracted for a cost of $30 per barrel but not before 2015. So oil shale isn't going to do anything to relieve our near term woes with rising oil prices.
But while the amount of oil available for eventual extraction from the shale is enormous the peak production rate will not entirely offset the coming decline in production of conventional oil.
Shell declines to get too specific about how much oil it thinks it can pump at peak production levels, but one DOE study contends that the region can sustain two million barrels a day by 2020 and three million by 2040. Other government estimates have posited an upper range of five million. At that level, Western oil shale would rival the largest oilfields in the world.
Of course, considering the U.S. uses almost 21 million barrels a day and imports about ten million (and rising), even the most optimistic projections do not get the country to the nirvana of "energy independence.
Shell's work in this area has stretched over decades. Their research puts them well ahead of other oil companies and have lots of patents which will likely let them start producing before their competitors.
Oil shale and oil sands are good because they'll make the world oil production decline less sharp. If the coming decline in oil production is too sharp the economic downturns in many societies could lead to breakdown of order and mass starvation as modern agriculture loses the ability to run on oil. The rate of decline which causes a collapse varies depending on the circumstances of each individual society. France with a large number of nuclear reactors is less vulnerable than Britain with a much smaller number. Countries with highly skilled populaces and lots of capital will be better able to rush into nuclear reactor construction, build wind turbines, rework houses to increase insulation, and engage in many other adaptive adjustments to the oil production decline.
Follow the link to the article to read about Shell's method of in situ oil shale extraction. If their planned experiments produce successful results America especially will be able to better adjust to the post peak oil world.
Venezuelans are buying big cars because their gas is subsidized and cheap.
Motorists in the United States smarting from rising gasoline prices, take note: Mr. Taurisano pays the equivalent of $1.50 to fill his Hummer’s tank. Thanks to a decades-old subsidy that has proven devilishly complex to undo, gasoline in Venezuela costs about 7 cents a gallon compared with an average $2.86 a gallon in the United States.
What do low prices do? They boost consumption of course. The same pattern of lower prices and rising consumption is seen in Iran.
Venezuela is not alone among oil-rich countries grappling with subsidized gasoline. Iran, a close ally, was shaken by unrest in June when its government rationed gasoline, which cost 34 cents a gallon at the time.
Some analysts expect Iran to stop exporting by 2014. Well, Venezuela appears to be on a similar path with very rapidly rising consumption.
Fuel smuggling into neighboring Colombia, where prices are much higher, is also rife. Domestic fuel consumption is up 56 percent in the past five years, to 780,000 barrels a day, said Ramón Espinasa, a former chief economist at Petróleos de Venezuela, the national oil company. One-third of oil production now goes to meet the subsidy, he said.
Perversely, higher world oil prices makes domestic consumption more affordable for oil exporting countries. The money flooding in due to the huge oil price rise raises living standards and gives people more cash for cars and gasoline. So what this lead to? The Export Land Model where oil exporters cease to export. In the Export Land Model the big oil exporters (grouped together in Export Land) have rapidly rising consumption and then when their oil production peaks their exports decline far more rapidly than their oil production. Us residents of Import Land (countries which are net oil importers) then find ourselves in a world of hurt.
The Export Land Model underscores why I believe our future quality of life and living standards hinge on how rapidly battery technology advances. We are headed for a big liquid fuels shortage. We need a substitute for liquid fuels for transportation.
More coal means even more pollution.
A new report by the International Atomic Energy Agency forecasts India will increase nuclear production eight-fold by 2030 to account for 26 percent of its power grid.
However, China plans to use nuclear power for only 4 percent of electricity generation by 2030. Globally, the IAEA estimates there'll be drop an overall drop in nuclear energy from around 15 percent in 2006, down to 13 percent in 2030.
China's industrialization is one of the biggest threats to the world's environment. If China reversed on coal and shifted toward nuclear we'd be a lot better off.
The ramp-up of coal electric plant construction in the United States might not happen.
Just nine months ago, the federal government listed more than 150 coal-power plants as "in development." Since then, at least 16 have been canceled, and many others have been put on hold, according to data from the US Department of Energy (DOE).
If political pressures against coal in the United States continue to build we will see a lot more nuclear power plants and wind towers.
Back in February 2007 TXU cancelled plans for 8 coal electric plants.
If shareholders approve the acquisition, TXU would back federal legislation that would require reductions in carbon dioxide emissions through a cap-and-trade system. It would shelve plans for eight of 11 coal-fired plants that current TXU executives had proposed for Texas and would drop plans to build new coal plants in Pennsylvania and Virginia. The company would also double its spending to promote energy efficiency, to $80 million a year, for five years.
Opposition to coal helps spur development of technologies which can replace fossil fuels. Down with coal. Up with the coming post-fossil fuels era.
Environmentalists who oppose coal-based electric power generation are beginning to make headway in blocking new coal electric power plants.
The Kansas Department of Health and Environment yesterday became the first government agency in the United States to cite carbon dioxide emissions as the reason for rejecting an air permit for a proposed coal-fired electricity generating plant, saying that the greenhouse gas threatens public health and the environment.
The decision marks a victory for environmental groups that are fighting proposals for new coal-fired plants around the country. It may be the first of a series of similar state actions inspired by a Supreme Court decision in April that asserted that greenhouse gases such as carbon dioxide should be considered pollutants under the Clean Air Act.
This is good news for nuclear and wind power technology suppliers. Take away coal and the most obvious next choice is nuclear for baseload.
The New York Times has an article on the growth of coalitions against new coal electric plants.
Government projections suggest that coal, which provides 50 percent of the nation’s electricity and a quarter of its total energy, will continue to dominate the nation’s energy mix, despite its environmental problems. As of last May, the Energy Department projected that 151 coal-fired plants could be built by 2030 to meet a 40 percent rise in demand for electricity, largely from soaring populations in Western states.
“Coal is still very much alive,” said Jim Owen, a spokesman for the Edison Electric Institute, an industry group.
But opponents of coal plants are winning some battles. Reports from the government, the industry and environmental groups show that at least three dozen coal plants have been canceled or scaled back in the last two years.
The coalitions that form against proposals for coal electric plant construction include ranchers and other rural Republicans in the West. Opposition to coal isn't just found on the left half of the political spectrum.
While coal plant construction will become increasingly limited by environmental opposition in the United States I do not expect this to happen any time soon in Asia. To the contrary, we are probably going to see a continued explosion in Asian demand for coal. The industrialization of India and China is creating huge demand for energy among populations who are not yet affluent enough to place much value in cleaner environments.
CORK, IRELAND, Sept. 17 /CNW/ - CIBC (CM: TSX; NYSE) - Oil prices are likely to hit US$100 a barrel by the end of next year as soaring rates of domestic oil consumption in the world's leading oil producing nations cuts into their export capacity, forecasts the chief economist at CIBC World Markets.
Speaking at the 6th Annual Association for the Study of Peak Oil & Gas conference in Cork, Ireland, CIBC World Markets chief economist, Jeff Rubin told delegates that the export capacity of OPEC, Russia and Mexico will drop by 2.5 million barrels per day by the end of the decade.
"Domestic demand growth of as much as five per cent per year in key oil producing countries is already beginning to cannibalize exports and will increasingly do so in the future as production plateaus or declines in many of these countries," says Mr. Rubin. "OPEC members together with independent producers Russia and Mexico consume over 12 million barrels per day, surpassing Western Europe to become the second largest oil market in the world.
"At current rates of domestic consumption the future export capacity of OPEC, Russia and Mexico must be increasingly called into question. These trends are likely to result in a sharp escalation in world oil prices over the next few years."
He noted that while he expects today's US$80 barrel of oil will reach as high as US$100 a barrel by the end of 2008, consumers in many major oil producing countries pay nothing near the global price for crude. He finds that highly subsidized gasoline prices are often a significant factor in surging rates of domestic oil consumption. In many countries prices are as little as US$10 a barrel.
With exports from OPEC, Russia and Mexico expected to decline by seven per cent over the next three years, markets will seek greater reliance on higher cost unconventional deposits. He expects that Canadian oil sands will surpass deep water wells as the single largest source of new oil exports by decade end.
Governments of many big oil exporters sell petroleum products for a loss in domestic markets. They use lower prices to buy domestic support for their governments. So gasoline is cheaper in Venezuela, Iran, Saudi Arabia, and Russia than in the oil importing countries. As a result domestic demand for oil products is growing more rapidly in the oil exporting countries than in most of the rest of the world. This has hugely important implications. Oil exporters will reduce their oil exports years before their domestic production peaks. Also, once their domestic production peaks their oil exports will decline much more rapidly than their production.
Rubin sees Canada has holding over half the oil that private investors can bring into production.
NEW YORK, Sept. 27 /PRNewswire-FirstCall/ - CIBC - Six of the largest oil suppliers to the U.S. are poised to significantly cut exports by 2012, ramping up pressure on supply and price, and intensifying the focus on one of the last great deposits open to private investment: Canada's oil sands.
The forecasted cuts by Mexico, Saudi Arabia, Venezuela, Nigeria, Algeria and Russia are the subject of a keynote address that Jeff Rubin, chief market strategist and chief economist at CIBC World Markets will deliver at the firm's Industrial Conference Oct. 2 in New York City. In his remarks, Mr. Rubin will share his latest research on the global oil supply/demand balance, with specific focus on the size and scope of the oil supply crunch facing the U.S. over the next five years.
On the bright side, Americans can downshift to much smaller cars. Our profligacy makes it easier for us to adjust to oil shortages. We have that so much energy usage that is easy to curtail. If we were already all driving European sized small cars with diesels we wouldn't be able to downsize as easily as we can now.
This argument is similar to the argument made by The Oil Drum bloggers westexas (Jeffrey J. Brown) and khebab (Samuel Foucher). In a recent post they elaborate on their Export Land Model of how the big exporters will gradually stop exporting due to growing domestic demand coupled by stagnate or declining production.
The current top five net oil exporters--Saudi Arabia, Russia, Norway, Iran and the UAE--account for about half of world net oil exports. From 2000 to 2005, they showed a combined 3.7% per year increase in consumption.
From 2005 to 2006, their combined consumption showed an accelerating rate of increase, to +5.3% per year. From 2005 to 2006, the top five showed a net export decline rate of -3.3% per year. Based on year to date data, it is a near certainty that this net export decline rate will accelerate from 2006 to 2007.
Basically, khebab and westexas divide the world into Export Land (e.g. Saudi Arabia, Russia) and Import Land (e.g. the United States, European countries, Japan, China). They see the supply of oil for Import Land countries dwindling much more rapidly than the total world production of oil. While some dispute their time scales (e.g. when exactly will world oil production peak?) it is harder to dispute the logic for their argument. The exporters will cut their exports more rapidly than they cut domestic consumption and their domestic consumption will even continue to rise beyond the point in time when they start reducing exports. That's a big "ouch" for the rest of us.
As I see it the world is in a race between declines in oil exports on one hand and the development of non-oil methods do to things that we now do with oil. Most notably, we need non-oil ways to power transportation and cars in particular. When will workable batteries for cars become available? If the Export Land Model is correct then the answer to the battery question is enormously important.
But since we just hit $80 per barrel $150 is less than a doubling. What, me worry?
Lord Oxburgh, the former chairman of Shell, has issued a stark warning that the price of oil could hit $150 per barrel, with oil production peaking within the next 20 years.
He accused the industry of having its head "in the sand" about the depletion of supplies, and warned: "We may be sleepwalking into a problem which is actually going to be very serious and it may be too late to do anything about it by the time we are fully aware."
Oxburgh argues that it isn't so much that we are running out of oil but that we are running out of oil that is cheap to extract. But we really are running out of oil too. Though new enhanced extraction methods such as toe to heel air injection (THAI) for heavy oil might delay the point of peak oil production.
As far as being too late to do anything about it: Well, the start-ups that are developing next generation batteries are doing the most to prepare us for declining oil production. Once we can shift most transportation energy usage to electric cars and electric trains declining oil production won't put an end to our mobile lifestyles.
The world will produce 118 million barrels of oil a day, up from its current 85 million barrels per day, just to satisfy projected demand by 2030, according to the Energy Information Agency.
"That's never going to happen," said Richard Heinberg, a research fellow at the Post Carbon Institute and author of three books on peak oil.
Heinberg says world production of regular crude oil actually peaked in May 2005. He also says production in 33 of the 48 largest oil producing countries is in decline, and that global oil discoveries peaked in 1964.
The people who see Peak Oil as happening in the next 10 years might be right. Suppose for the moment they are. Does that mean we will see $150 per barrel oil or even $200 or $300 per barrel? I have a hard time believing the higher price predictions because substitutes will become cost competitive below those higher prices and also because there are limits on how much people can afford to spend on oil.
The longer we go before world oil production peaks the easier the peak will be to handle. With time we'll get more technologies for producing and storing and using non-oil energy. We'll also gain technologies for using energy much more efficiently. So I'm not a doomster about Peak Oil even though I find the arguments for an earlier peak to be plausible.
If we hit an earlier peak (e.g. if it is happening right now) the economic cost will be substantial since we won't have as much technology to deal with it as we will if the peak comes 10 or 20 years from now. A peak in the next few years would cause a pretty sharp recession and require a lot of investment in more efficient vehicles and capital plant. But for the United States our profligate usage of gasoline actually makes adjustment easier. We could switch from bigger conventional cars to compact hybrid diesels and double or triple our miles per gallon. Countries whose populaces already drive compact diesels (e.g. about half of European car sales today are diesel) can't adjust as easily since they already are being relatively frugal in their oil usage.
Peak Oil anyone? The latest Medium-Term Oil Market Report from the International Energy Agency (IEA) paints a moderately bleak picture on oil availability in the next 5 years.
World oil demand will rise faster than expected to 2012 while production lags, leading to a supply crunch, the International Energy Agency said on Monday.
...
"Despite four years of high oil prices, this report sees increasing market tightness beyond 2010," the IEA said.
"It is possible that the supply crunch could be deferred -- but not by much."
Why is this picture only moderately bleak? They aren't yet predicting a decline in production. But the growing ranks of those affluent enough to buy gasoline and other petroleum products are creating market conditions similar to those we'd expect to see once oil production peaks. The price keeps going up.
Prices will keep rising until demand stops growing. How high will prices have go to go stop oil demand growth? $100 per barrel? $120 per barrel? We are going to find out.
The IEA expects assorted messed up places to stay messed up.
The report assumes no net expansion of capacity from Iran, Iraq and Venezuela and that 500,000 barrels a day of Nigerian oil - shut for a year - will not reopen in the next five.
Iran's own internal demand growth is going to cause Iranian oil exports to decline. So even if Nigeria's government puts down insurgencies an increase there will probably get cancelled out by a decline in Iranian exports. The civil war in Iraq still has some legs too. Though a US pull-out might accelerate the civil war and bring stability sooner.
The IEA projects declining oil extraction from OPEC countries by 2009.
But with forecasts of world economic growth of 4.5pc a year, the report argued that oil demand was likely to soar to 95.8m barrels a day in 2012 from 81.6m barrels this year.
At the same time it predicted production from the international oil cartel Opec would fall, slipping by 2m barrels a day in 2009, and it also cut supply forecasts for non-Opec countries by 800,000 barrels.
I am skeptical of claims that OPEC will substantially increase production. Probably most OPEC members prefer higher prices to higher production. Plus, the ranks of post-peak nations keeps growing. Pemex in Mexico can no longer keep up Mexican oil production.
Petroleos Mexicanos, the state-owned oil monopoly, said crude production fell 6.6 percent in May from a year earlier and dropped to its lowest this year as the company struggles with declining output from its Cantarell field.
We are not lacking in energy so much as we are lacking in energy storage for the types of energy which we can afford to create more of. We can build more nuclear power plants or wind towers to get lots of affordable electricity. But we do not have good enough means to store that electricity for use in transportation.
We need pluggable hybrid electric vehicles (PHEVs) and pure electric cars too. The energy cost per mile of electrically powered travel is much lower than the cost of gasoline to travel the same distance. But for electric vehicles to work out we need much better batteries. Some battery makers (most notably A123Systems) claim they have figured out how to make long lasting and affordable lithium batteries for cars. We are going to find out in 2 or 3 years whether this is the case. Those batteries are going to come not a moment too soon.
Short of PHEVs we have plenty of other ways to adjust: Get cars with smaller engines, diesel engines, or conventional hybrids. Also, live closer to work and take fewer car trips. Also, if you use oil or natural gas for heating then make your house much more energy efficient.
Dastardly humans won't be able to fry the world with excessive amounts of fossil fuels burning because we do not have enough fossil fuels left to burn to cause a first class disaster? Mother Gaia wisely limited the amount of fossil fuels she created because she knew her human progeny would wreak disaster if tempted with too much oil and coal to burn? Writing at The Oil Drum CalTech professor Dave Rutledge argues that the mathematical method which petroleum engineer King Hubbard used to predict the date of US oil production peak can also be used to predict how much coal will get burned in the world. Rutledge, Cal Tech Chair for the Division of Engineering and Applied Science, says the UN Intergovernmental Panel on Climate Change (IPCC) models for future climate change assume fossil fuels supplies available to raise atmospheric CO2 which overstate future hydrocarbon burning by a factor of 3 or 4 or more.
Often we do not have enough data to fit for remaining production this way. In these situations, I will use a Hubbert linearization to estimate the remaining production, like we often do for oil. Hubbert introduced this approach for modeling oil production in "Techniques of Prediction as Applied to the Production of Oil and Gas," in Saul I. Gass, ed., Oil and Gas Supply Modeling, pp. 16-141. National Bureau of Standards special publication 631. Washington: National Bureau of Standards, 1982. This is a great paper. It is difficult to find, but you can download it here (15MB file). Figure 2 shows a Hubbert linearization for world hydrocarbon production. The trend line is for 3.2 trillion barrels of oil equivalent (Tboe) remaining. We will use this number for our simulation of future atmospheric CO2 concentrations and temperature rise. This is 20% larger than the reserves given by the German resources agency BGR, 2.7Tboe. The BGR includes 500Gboe for unconventional sources. In contrast, the IPCC assumes that 11-15Tboe is available for production for its climate-change scenarios.
This fits with my intuition: We face such a huge looming problem with fossil fuels exhaustion that we should be thinking about moving away from fossil fuels due to rising costs and lowered production rather than because we might melt the polar ice caps. We need to embrace solar, nuclear, and wind because we just do not have as much fossil fuels left as the climate doomsters think we do.
If the Peak Oil, Peak Natural Gas, and Peak Coal folks are correct then why do the IPCC types spend so much time talking about climate catastrophe? My guess: Human-caused climate disaster makes for a far more dramatic moral story of human sin. Talk of using up all the coal and oil doesn't satisfy the need to see human action in such sinful terms. If we run out of oil then we suffer from the exhaustion of the oil but nature doesn't suffer as much as we do. We sin, but against ourselves. By contrast, if we heat up the planet the argument can be made for humans as massive sinners against nature.
Rutledge doesn't see how the IPCC scenarios for future atmospheric CO2 levels can happen given the amount of unburned and usable fossil fuels that are left.
Now we are in a position to see what some consequences for climate are. We convert future hydrocarbon and coal production to atmospheric carbon emission using EIA coefficients and plot them as the Producer-Limited Profile in Figure 10, together with the carbon emissions from the 40 scenarios. The Producer-Limited Profile has lower emissions than any of the 40 scenarios. This would be true even if we calculated the emissions with the full coal reserves. Jean Laherrere was the first to call attention to this anomalous situation. He has made the point forcefully and repeatedly, to no apparent effect.
Rutledge argues for carbon sequestration in order to avoid the 1.8 C heating. That amount of heating doesn't really alarm me. The biggest advantage I can see from carbon sequestration is that it will serve as a tax on coal and oil that will increase the incentives to develop energy replacements. A more rapid development of replacement energy sources will reduce the disruptions that will come with the exhaustion of oil, coal, and natural gas fields.
Heard the oft repeated claim that America has enough coal to last 250 years? A new report from the US National Academy of Sciences (NAS) claims recoverable US reserves are not nearly as large as has been claimed. Though another claim about America as "the Saudi Arabia of coal" might still be accurate. Why? If Matthew Simmons and other "Peak Oil" advocates are right then Saudi Arabia's oil reserves are also greatly exaggerated. The NAS report authors say attempts to spot check old recoverable coal reserves estimates have found far less recoverable coal than expected (PDF from Report Brief).
Present estimates of coal reserves— which take into account location, quality, recoverability, and transportation issues—are based upon methods that have not been updated since their inception in 1974, and much of the input data were compiled in the early 1970s. Recent programs to assess coal recoverability in limited areas using updated methods indicate that only a small fraction of previously estimated reserves are actually recoverable. Such findings emphasize the need for a reinvigorated coal reserve assessment program using modern methods and technologies.
Is this good news or bad news? I see it as good news. Coal is dirty. We have alternatives. The incremental cost difference going from coal to nuclear is probably at most 2 cents per kilowatt-hour (kwh). At the same time, wind and solar photovoltaics are declining in cost and photovoltaics probably can decline in cost by an order of magnitude. So coal has substitutes, at least for electric generation.
Small coal reserves seem more problematic for the coming peak in oil production. Coal-to-liquid (CTL) could help reduce the economic disruption that peak oil will cause to our living standards and lifestyles. Smaller coal reserves mean less CTL gasoline or diesel fuel. However Chevron and Shell research into oil shale extraction could provide another way to supply liquid fuels for that portion of transportation that does not go electric. Though the Natural Resources Defense Council (NRDC) argues that oil shale extraction will use too much of a limited supply of water in the Rocky Mountain states. What I'd like to know: at what price of oil and natural gas would nuclear energy become cheaper as a way to heat up tar sands in Alberta and oil shale in Colorado, Utah, and Wyoming?
The NAS coal report authors have revised US reserves from 250 years to 100 years at current consumption rates and so have reduced reserve estimates to only 40% of previous estimates.
The 250-year estimate was made in the 1970s and was based on the assumption that 25 percent of the coal that had been located was recoverable with current technology and at current prices, said one member of the study group, Edward S. Rubin, a professor of environmental engineering and science at Carnegie Mellon University.
But he said that more recent studies by the United States Geological Survey showed that at least in some areas, only 5 percent of the coal was recoverable with today’s technology and at current prices.
Even the 100 years estimate looks unrealistic given the boom in coal electric power plant construction now going on. But consumption could rise even higher if an oil production peak causes a building boom in coal-to-liquid plants to keep all the cars and trucks moving down the road.
The NAS coal report brief expects extracting difficult seams to cause more environmental and water problems. (PDF).
As mining activities extract coal from deeper and operationally more difficult seams, a range of existing environmental issues and concerns will be exacerbated and new concerns are likely to arise, particularly related to greater disturbance of hydrologic systems, ground subsidence, and waste management at mines and processing plants. Research activities should focus on developing techniques to mitigate the alteration and collapse of rock layers overlying mined areas, to model the hydrological impacts of coal mining, to improve mine mapping and void detection, to increase stability of waste heaps on steep slopes, and to improve the construction and monitoring of coal waste impoundments.
The money available for energy investments is enormous. Take the money spent on oil as a starting point. The current price for London Brent crude is over $71 per barrel and US oil is around $69 per barrel. Well, the United States uses over 20 million barrels of oil per day or over $1.4 billion dollars on oil alone per day. Add in coal, natural gas, nuclear, hydroelectric, and other sources of energy and the US economy spends billions of dollars per day on energy. If coal oil or shale oil can get made for $50 or $60 per barrel (and this seems likely from various reports) then the money can be found to build the capital plant to do the extraction and make the oil.
You can buy access to the full NAS report.
Update: If the Peak Oil pessimists (see here and here for Stuart Staniford on Saudi oil production) are right about an earlier date for a world oil production peak then it is it not too early to start talking about Peak Coal. If an oil peak comes sooner then we will not yet have the technologies needed to switch most transportation away from liquid fuel to electricity. Therefore big money will flow into coal-to-liquid (CTL) to make transportation fuels. As a result, coal reserves will decline much more rapidly.
But I'm not worried about Peak Coal. Coal, tar sands, and oil shale should buy us 2 or 3 decades to migrate to a much more electric economy. I think an early Peak Oil will be very costly if it comes as a surprise to most of industry. But my chief concern about a shift to coal is environmental. Coal is much dirtier.
Even if Peak Oil is still 20 years away Asian economic growth is pushing up the demand for energy so much that a shift to coal for liquid fuels could happen even before Peak Oil. I would rather the non-fossil fuels energy sources drop further in price and start putting a ceiling on energy prices than that coal consumption accelerates even more rapidly.
Production in Alberta is up 61 percent over the past four years. This year, Alberta's oil sands are expected to produce 1.2 million barrels a day, roughly equal to the production of Texas.
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However it's extracted, all bitumen has to be transformed into oil in a process called upgrading. There are several different steps in upgrading, all of them using a lot of energy, usually natural gas. It costs $23 to $26 a barrel - depending on the project - to produce light oil from sticky goo of the oil sands.
Tar oil production will almost triple in the next 10 years.
CALGARY, Alberta - A massive rise in crude production from Canada's oil sands region over the next decade will nearly triple the area's call on strained natural gas supplies, Canada's national energy regulator said Thursday.
Production from the oil sands of northern Alberta is expected to rise to more than 3 million barrels a day by 2015, according to a study by the National Energy Board, triple last year's output.
Production might rise as high as 5 million barrels by 2020.
The Canadian Association of Petroleum Producers’ forecast two weeks ago was higher than NEB’s at 3.5 million bpd by 2015 and 4.9 million bpd by 2020. Both said getting the increased oil production to markets must keep pace.
Sounds like a lot right? Well, world oil production is currently 81 million barrels and most of the fields have peaked or will have peaked by 2020. More conventional Canadian production is declining just like American conventional production is declining. So even the optimistic forecast of an increase of almost 4 million barrels a day is not enough to make much of a dent in total world oil supply.
I'm curious about production costs of alternatives for conventional oil since so many oil fields are in decline and more are peaking every year. Coal-to-liquid (CTL) looks like the most likely alternative for liquid fuels at perhaps $40 to $45 per barrel. Biomass ethanol is another possibility that will become more competitive once cellulosic technologies become cheap enough to use to break down the cellulose in trees and bushes. Oil shale is another possibility and oil shale might turn out to be only slightly more expensive than tar sands oil extraction..
My guess is that CTL can scale much higher than tar sands oil and eventually oil shale might supass tar sands in daily production as well.
One of the energy questions I'd most like to find answers for: What is the current cost for making liquid hydrocarbon fuels from various starter materials such as natural gas, coal, shale, and biomass materials? I suspect that at $70 per barrel oil now costs more than the production cost of liquid hydrocarbons from non-oil starter materials. But big money is probably holding back investing in massive Fischer-Tropsch coal conversion facilities out of fear that oil production could surge or demand could slacken and drive oil prices down below the costs of making synthetic. Then the synthetic plants would become huge investment losses. That happened with the Beulah North Dakota Great Plains Synfuels Plant which converts coal to a synthetic equivalent of natural gas.
Well, a New York Times article about a United States Air Force plan to shift toward jet fuels made from coal reports that the USAF and industry sources think coal-to-jet fuel would cost the equivalent of $40 to $45 per barrel oil. If they are correct then current oil prices are above long term sustainable prices.
In a series of tests — first on engines mounted on blocks and then with B-52's in flight — the Air Force will try to prove that the American military can fly its aircraft by blending traditional crude-oil-based jet fuel with a synthetic liquid made first from natural gas and, eventually, from coal, which is plentiful and cheaper.
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The Air Force consumed 3.2 billion gallons of aviation fuel in fiscal year 2005, which was 52.5 percent of all fossil fuel used by the government, Pentagon statistics show. The total Air Force bill for jet fuel last year topped $4.7 billion.
Although the share of national energy consumption by the federal government and the military is just 1.7 percent, every increase of $10 per barrel of oil drives up Air Force fuel costs by $600 million per year.
Mr. Aimone said that if the synthetic blend worked, plans called for increasing its use in Air Force planes to 100 million gallons in the next two years.
Air Force and industry officials say that oil prices above $40 to $45 per barrel make a blend with synthetic fuels a cost-effective alternative to oil-based jet fuel.
This is good news. When we reach a world oil production peak the result will not be Mad Max at Thunderdome. Sorry survivalists. Civilization will not collapse due to declining oil production.
I think survivalists should base their civilizational collapse fears around something more possible like, say, a repeat of the Toba supervolcano or something milder like a Mount Tambora explosion repeat. If you are a leftist or Muslim who wants to fantasize a horrible punishment of the United States then the bulge in the Yellowstone Lake area would probably be your best bet. The US would take a big hit if a repeat of the 6,400 centuries ago eruption happened.
When the volcano in Yellowstone National Park blew 6,400 centuries ago, it obliterated a mountain range, felled herds of prehistoric camels hundreds of miles away and left a smoking hole in the ground the size of the Los Angeles Basin.
Though a repeat of the 650,000 years ago eruption would be a major bummer for the entire world. (same event, slightly different time estimate)
This last happened at the Yellowstone volcano approximately 650,000 years ago. The caldera that it left is 53 miles long and 28 miles wide. In the area surrounding Yellowstone, 3000 square miles were subjected to a flow of pyroclastic material composed of 240 cubic miles of hot ash and pumice. Ash was also thrown into the atmosphere and blanketed much of North America. It can still be identified in core samples from as far away as the Gulf of Mexico.
Getting back to energy: Coal alone looks like it could fill in for oil once oil production peaks. Also, cost effective and environmentally acceptable oil shale extraction looks within the realm of the possible. A sudden oil peak that was not expected by the market would probably cost us a severe recession of a few years long while coal conversion plants and other facilities got built. Then the world economy would bounce back and resume growing.
The longer we go before a world oil peak the easier the transition. We'll have more technologies to bring more alternative energy sources online at lower costs. I'd rather we develop the non-fossil fuels versions of those alternatives more quickly because they'll eventually be cheaper than oil and at the same time much cleaner. Clean air and clean water are good!
