2012 May 22 Tuesday
Marginal Oil Production Cost Nearing $92 Per Barrel

Energy analysts at Bernstein say the marginal cost of oil production, already $92 per barrel, is nearing $100 per barrel.

The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl.

Their analysis does not include OPEC or former Soviet Union producers. But this does not matter. Since the former SU and OPEC aren't going to grow their production fast enough to meet rising world demand the marginal cost of the other producers will determine at what price rising demand and market price will meet.

This rapidly rising marginal cost of production is what Peak Oil looks like. Peak Oil is going to happen because marginal cost will go too high for the world economy to afford to pay what it takes to boost production. At that point oil production will start falling. I originally expected peak production to happen at a much higher price for oil. But the European debt crisis, the deceleration of Chinese economic growth, and the continued weak US economic recovery make me think peak global oil production will happen at a price not much higher than current oil prices.

The costs of tight shale oil is very high and high oil prices are needed to keep it flowing.

"The United States is producing an awful amount of oil from tight shale and tight sands reservoirs... If oil prices send a signal and drop below the $90-$80 level it is going to be uneconomic to drill those well. So drilling will stop immediately," said Michel Hulme, fund manager at Lombard Odier.

How high an oil price is needed to start world oil demand headed on a downward slope? Higher or lower than the current price range near $90-100?

By Randall Parker    2012 May 22 10:48 PM   Entry Permalink | Comments (12)
2012 May 13 Sunday
IMF Team Sees Oil Price Doubling In Decade

A report from the International Monetary Fund predicts a doubling in oil prices.

The International Monetary Fund (IMF) has been warned by its internal research team that there could be a permanent doubling of oil prices in the coming decade with profound implications for global trade.

"This is uncharted territory for the world economy, which has never experienced such prices for more than a few months," the report warns.

Here is the IMF report: The Future of Oil: Geology v Technology Its writers are very up on the debate happening between economists and geologists over future oil production potential. They are familiar with the work of UCSD energy economist James Hamilton, Robert Hirsch's Dept of Energy report on Peak Oil, and geologists who have put forth models predicting future oil production including M. King Hubbert, Colin Campbell, and Ken Deffeyes.

Hamilton (2009), on the other hand, finds that temporary disruptions in physical oil supply have already had a major role in explaining historical dynamics of oil price movements. And furthermore, he argues that stagnating world oil production, meaning a very persistent reduction in oil supply growth, may have been one of the reasons for the run-up in oil prices in 2007-08. The main reasons why oil supply shocks affect output according to Hamilton is their disruptive effect on key industries such as automotive manufacturing, and their effect on consumers’ disposable incomes. In other words, the main effect is on aggregate demand. As for aggregate supply effects, his view is that there may be short-run impacts due to very low short-run elasticities of substitution between oil and other factors of production. But he assumes that such elasticities get larger over longer horizons, as agents find possibilities to substitute away from oil. This is because high prices start to stimulate technological change that can both increase the recovery of oil, and the availability of substitutes for oil. Therefore, even though Hamilton is closest among mainstream economists to seeing real problems emanating from the physical, geological availability of oil, he nevertheless subscribes to the economic or technological view whereby prices must eventually have a decisive impact on production levels.

The IMF authors point out that both the optimists (those expecting continued production increases) and pessimists (those expecting a decline off a production peak) have been wrong. But Ken Deffeyes's 2005 oil production peak prediction is not as wrong as it looks at first glance. When reading and listening to talk about oil production be very aware of difference between oil production (where we get black liquid out of the ground) and all liquids production. Usually when a story in the press refers to oil production they are really reporting on all liquids production. The quite small growth in liquids production since 2005 has come in the form of non-conventionals such as natural gas-to-liquid, corn ethanol, and tar sands oil. These non-conventionals have lower Energy Return On Energy Invested (EROEI) and they can not scale. Also, the maintenance of conventional oil production has come from a large scale up in drilling activity. The oil industry is exploiting smaller fields, smaller left-overs of big old fields. and deep sea fields. These trends are really end games.

What we need: technological advances that will let us substitute away from oil. If we are lucky the current oil production plateau will continue long enough for substitutes to mature. We especially need much lower cost battery technologies to enable our migration away from liquid hydrocarbons for most transportation needs.

By Randall Parker    2012 May 13 10:06 PM   Entry Permalink | Comments (38)
2011 May 23 Monday
Toyota Expects Prius To Surpass Camry

In a sign of the times Toyota is going to bring up wagon and smaller coupe versions of the Prius and a Toyota executive expects Prius to eventually outsell the Camry (which is the best selling car in America).

“We know the hybrid segment will grow faster if we add a little versatility,” Carter said. “It won’t happen in the next 12 to 24 months, but Prius will outsell Camry. It’s going to be what defines the Toyota brand in the future.”

It is telling that Toyota foresees this shift. Though another Toyota executive has already made clear that Toyota expects Peak Oil by 2020. So the bigger role for the Prius seems consistent consistent with Toyota's expectation of fundamentals driving the need for much greater fuel efficiency.

By Randall Parker    2011 May 23 10:47 PM   Entry Permalink | Comments (12)
2011 May 15 Sunday
More Oil Drilling In Alaska

A lesson: $100 per barrel oil is creates enough political pressure to open more oil fields for drilling in Alaska and offshore lower 48. The Alaska National Wildlife Refuge (ANWR) and Alaska's Pacific coasts are still to remain off-limits - for now.

President Obama will open Alaska's national petroleum reserve to new drilling, as part of a broad plan aimed at blunting criticism that he is not doing enough to address rising energy prices.

Environmentalist opposition to drilling in some areas has done us a favor by delaying the use of that oil until we really needed it. Of course, that wasn't their intent. But the practical result of their opposition to drilling was to prepare for Peak Oil.

With oil prices over $100 per barrel and prices going higher as the decade progresses additional sources brought into production 5 or 10 years from now will help much more than if they'd been developed 10 or 20 or 30 years ago. For a graphical view of how much oil production growth has slowed see figure 7 here in an article by Gail Tverberg. It shows in a single graph how growth in world oil production has gone thru a succession of down-shifts. That down-shifting has made economic growth progressively harder to achieve, especially in industrialized countries heavily reliant on oil.

As oil hits higher price points more restrictions on drilling will be lifted as the public becomes more concerned with their own living standards and jobs and less with distant places. $150 oil sustained for a couple of years will probably result in drilling in ANWR and any offshore areas that look promising.

I wish the environmentalists had been more successful because the amount of oil fields they've kept out of production is not enough to make the transition from oil slow enough to minimize the economic pain.

By Randall Parker    2011 May 15 09:52 PM   Entry Permalink | Comments (34)
2011 May 07 Saturday
Fatih Birol: Oil Production Already Peaked

Sounding very much like Ken Deffeyes on Peak Oil, Fatih Birol, chief economist of the International Energy Agency, says world oil production has already peaked.

When we look at the oil markets the news is not very bright. We think that the crude oil production has already peaked in 2006.

Maybe we'll hit another production peak this year or next. All liquids production is up to about 2006 levels now. When you read about current oil production keep in mind that the term "all liquids" is often reported in the press as meaning oil production. But the "all liquids" term includes liquids condensed from natural gas, ethanol made from corn, and other liquids. The stuff that made Jed Clampett rich is a large but declining fraction of "all liquids". Some of those other liquids aren't as useful as oil. The biomass-derived liquids like corn ethanol excessively inflate the useful amounts of liquids because it takes oil to grow and process the corn. So the all liquids figure isn't as good as it looks.

We've been on a bumpy plateau of world oil production since late 2004. A peak in any one year is less important than when the decline off the plateau starts in earnest and how steep a production slope we ride going down. Jeremy Leggett thinks the decline could be steep. Chris Skrebowski thinks we are a few years away from the start of the decline.

Sir Richard Branson
Let's not an oil crunch take us by surprise and be poorly prepared.

Dr Jeremy Leggett
The Oil Crunch is when global supply fails to meet demand and starts to drop, and arguably we fear, starts to drop so fast that you'd almost call it a collapse.

Chris Skrebowski
All the calculations tell us that it, it's, it's going to be no later than 2014 and it could be as early as 2013.

So if oil production starts going down sharply can renewables fill the gap? Mason Inman points to a report which claims renewables won't grow fast enough.

Renewable energy could, in theory, take over quickly from fossil fuels, according to a draft of a new report on renewable energy by the Intergovernmental Panel on Climate Change. The study says renewables could grow 20-fold in the next four decades—more than enough to meet projected demand. But in reality, the report argues, less than 2.5 percent of that potential will be put into place.

I see one ray of hope: If natural gas production from fracturing shale continues its current trend then at least in the United States and Canada natural gas could serve as a transition energy source away from oil. If you think the price of gasoline is going to skyrocket and you also expect natural gas prices to stay low then help is on the way: For the 2012 model year the Honda Civic GX natural gas vehicle will be sold nationwide in the United States. The previous Civic GX was sold in only a few markets.

What about cost? Civic hybrid at $23,950 (which also has more expensive trim levels) costs less than the current Civic GX at $25,490. By contrast, the base Civic model starts at only $15,805.

Does a natural gas car make sense yet? It has several downsides (and all substitutes for oil have substantial downsides - that's why oil costs much more per unit of energy, it is so convenient). First off, the Civic GX only holds the equivalent of about 7.8 gallons of gasoline. So you'll have about 250-300 mile range. Second, you'll have to spend several thousand dollars more when you buy the car. Plus, you'll have to either seek out rate natural gas recharging stations or buy a home recharging natural gas compressor.

Upside: Your cost of an amount of natural gas equivalent to a gallon of gas could be a half or a third of what you pay for gasoline. Check out this map of natural gas refueling stations. Prices vary enormously depending on whether much natural gas is produced in a region. It is hard to move natural gas around in anything but pipelines. So prices vary much more than gasoline prices do. Around Salt Lake City natural gas prices are very low at $1.27 per gallon. In parts of Oklahoma it costs less than $1. Ontario Canada has some even lower prices. If you want or need to to refuel at home you'll have to pay a few thousand more for a home natural gas compression unit that'll refill your car while you sleep.

My take: If natural gas prices stay as low as they have since collapsing in 2008 then by 2020 (and perhaps much sooner) natural gas cars will be a better value than gasoline cars for a large portion of the US and Canadian populations and ditto for a number of other countries with large natural gas reserves.

Update: Cheap NG: See Jean-Marie Bourdaire's video presentation on about shale natural gas costs and prospects. He discusses Arthur Berman's skepticism on shale natural gas and indications of why it might really be as cheap as claimed.

By Randall Parker    2011 May 07 07:11 PM   Entry Permalink | Comments (41)
2011 May 02 Monday
Jeremy Grantham: Peak Everything?

Will depleting resources become an obstacle to economic growth? Jeremy Grantham, co-founder of money manager GMO with $106 billion under management, has developed an interest in resource limitations as obstacles to economic growth. It is disturbing to read that he doesn't just think Peak Oil is near. He's closer to a Peak Everything position. See his article on GMO's web site PDF), on The Oil Drum or on The Energy Bulletin (and easiest to read).

The purpose of this, my second (and much longer) piece on resource limitations, is to persuade investors with an interest in the long term to change their whole frame of reference: to recognize that we now live in a different, more constrained, world in which prices of raw materials will rise and shortages will be common. (Previously, I had promised to update you when we had new data. Well, after a lot of grinding, this is our first comprehensive look at some of this data.)

Accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources: after 100 hundred years or more of price declines, they are now rising, and in the last 8 years have undone, remarkably, the effects of the last 100-year decline! Statistically, also, the level of price rises makes it extremely unlikely that the old trend is still in place. If I am right, we are now entering a period in which, like it or not, we must finally follow President Carter’s advice to develop a thoughtful energy policy and give up our carefree and careless ways with resources. The quicker we do this, the lower the cost will be. Any improvement at all in lifestyle for our grandchildren will take much more thoughtful behavior from political leaders and more restraint from everyone. Rapid growth is not ours by divine right; it is not even mathematically possible over a sustained period. Our goal should be to get everyone out of abject poverty, even if it necessitates some income redistribution. Because we have way overstepped sustainable levels, the greatest challenge will be in redesigning lifestyles to emphasize quality of life while quantitatively reducing our demand levels. A lower population would help. Just to start you off, I offer Exhibit 1: the world’s population growth. X marks the spot where Malthus wrote his defining work. Y marks my entry into the world. What a surge in population has occurred since then! Such compound growth cannot continue with finite resources. Along the way, you are certain to have a paradigm shift. And, increasingly, it looks like this is it!

In terms of how bleak a picture Grantham paints about resource limitations and other factors restraining growth he falls between Tyler Cowen's The Great Stagnation and Chris Martenson's The Crash Course: The Unsustainable Future Of Our Economy, Energy, And Environment. I've read and recommend Tyler's book. I'm not yet far enough into it to offer a take on Martenson's book.

Grantham says China's rapid growth has put an enormous demand on resources.

As I wrote three years ago, this growth process accelerated as time passed. Britain, leading the charge, doubled her wealth in a then unheard of 100 years. Germany, starting later, did it in 80 years, and so on until Japan in the 20th century doubled in 20 years, followed by South Korea in 15. But Japan had only 80 million people and South Korea 20 million back then. Starting quite recently, say, as the Japanese surge ended 21 years ago, China, with nearly 1.3 billion people today, started to double every 10 years, or even less. India was soon to join the charge and now, officially, 2.5 billion people in just these two countries – 2.5 times the planet’s entire population in Malthus’ time – have been growing their GDP at a level last year of over 8%. This, together with a broad-based acceleration of growth in smaller, developing countries has changed the world. In no way is this effect more profound than on the demand for resources.

Grantham says "peak everything" is our greatest challenge. Effectively he's predicting a return to the Malthusian Trap where death due to insufficient resources was a common occurrence. The rate of innovation will determine whether that's to be the fate of humanity. Faster rates of innovation could produce the technological innovations that would allow us to develop replacements for depleted resources.

If I am right in this assumption, then when our finite resources are on their downward slope, the hydrocarbon-fed population will be left far above its sustainable level; that is, far beyond the Earth’s carrying capacity. How we deal with this unsustainable surge in demand and not just “peak oil,” but “peak everything,” is going to be the greatest challenge facing our species. But whether we rise to the occasion or not, there will be some great fortunes made along the way in finite resources and resource efficiency, and it would be sensible to participate.

Annual gains in agricultural productivity have fallen from 3.5% to 1.25%. That growth rate is even worse than it looks because Asians with rising affluence are spending more on meat and therefore driving up prices for others whose earnings are still much lower.

Exhibit 10 shows that at the end of the 1960s, average gains in global productivity stood at 3.5% per year. What an achievement it was to have maintained that kind of increase year after year. It is hardly surprising that the growth in productivity has declined.

It runs now at about one-third of the rate of increase of the 1960s. It is, at 1.25% a year, still an impressive rate, but the trend is clearly slowing while demand has not slowed and, if anything, has been accelerating. And how was this quite massive increase in productivity over the last 50 years maintained? By the even more rapid increase in the use of fertilizer. Exhibit 11 shows that fertilizer application per acre increased five-fold in the same period that the growth rate of productivity declined.

What's worth noting here: First off, advances in genomics have not (at least so far) reversed this slowing rise in agricultural productivity. This makes sense intuitively. A lot of productivity-boosting changes to crop plants amounts to lowering their defenses (whether to insects, other species of plants, or other enemies and conditions) while substituting other measures for those defenses (e.g. pesticides, herbicides, measures to keep away birds). Well, there's a limit to how low the defenses can be lowered. Plus, there's a limit to how efficiently plants can convert sunlight into sugars, oils, and proteins. Diminishing returns on investment are to be expected.

As Grantham points out, we've continued to deplete aquifers, shift prime agricultural land into housing and commercial areas, and overfarm in ways that cause loss of quality topsoil. In theory if we only had really cheap energy we could run massive desalination plants along coast lines and pump the water hundreds of miles inland to grow crops in dry areas. But if some non-fossil fuel energy source does not become super cheap then food supplies in much of the world

Natural gas is used to make nitrogen fertilizers (hydrogen atoms from CH4 methane get bound to nitrogen to reduce it). We've been very fortunate that, unlike oil, natural gas prices have stayed low since collapsing in 2008 due to natural gas produced by fracturing shales deep underground. For any areas with cheap shale gas (and hopefully that will continue to be the case for the United States for a few decades) we'll continue to have that cheap source of energy to reduce nitrogen to make assorted nitrogen fertilizers. Whether most of the world will have cheap natural gas for some decades remains to be seen. As oil production declines the shift toward natural gas for transportation and chemical production will increase the demand and consumption rates of natural gas. Not clear what that'll do to its price.

After having read the full article upon reaching the end some of his conclusions are surprising. Running out of natural resources? For the United States he only expects a slowing of growth, not a contraction.

The slowing growth in working age population has reduced the GDP growth for all developed countries. Adding resource limitations is further reducing it. If our GDP in the U.S. grew 2% for the next 20 years, I think we would be doing very well. Dropping to 1.5% would not surprise me, nor would it be a disaster. In the past 28 years, we have increased our GDP by 3.0% per year with only a 0.9% increase in energy required. That is, we increased our energy efficiency by 2.1% without a decent energy policy and despite some very inefficient pockets like autos and residential housing. This would suggest that at a reduced 2% GDP growth rate, we might expect little or no incremental demand for energy, even without an improved effort. If in addition we halved our deficit in energy efficiency compared with Europe and Japan in the next 20 years, then our energy requirements might drop at 1.5% a year. Given the plentiful availability of low-hanging fruit in the U.S., this is achievable.

For countries less endowed with natural resources the prospects are more grim as their costs of inputs go way up. For the poorest countries the prospects are especially bleak because the world's poorest spend such large fractions of their incomes on food. Higher food prices for most Americans are an annoying inconvenience. But for someone who spends half his income on food a doubling of prices means hunger.

The bright spot with fossil fuels lately has been natural gas, which has the potential to serve as a substitute transportation fuel once oil prices get too high. Current natural gas prices are below the level that makes gas-to-liquid plants economically viable.

Deutsche Bank analyst Jarrett Guldenhuys figures a U.S. GTL plant could be profitable at gas prices as high as $4.70 per mmBTU and oil as low as $64.

With Brent oil around $120 per barrel and natural gas near $4 per mmBTU the prospects for more GTL plants seem favorable. But this depends on low natural gas prices as we've witnessed in the last few years.

If we could develop ways to get energy cheaply from non-fossil fuel sources then I'd be more optimistic about Peak Oil and Peak Everything. We can substitute cheap energy for minerals in many ways. Future energy costs will do much to determine whether we can handle the declining supplies of other commodities. It is not clear to me how this will turn out.

Update: As I point out in the comments, there's enough iron, aluminum, and magnesium in the Earth's crust that given very cheap energy we could get plenty of those materials for structural use. Our future pivots on the price of energy. Rising energy costs will make it even more expensive to extract minerals from the remaining lower grade ores. But a huge breakthrough in some method to very cheaply generate electricity (e.g. if Andrea Rossi's energy catalyzer really worked would make the declining ore concentration problem much easier to deal with.

Update: See Alan Fletcher on what it would take to prove Rossi's reactor is the real deal.

By Randall Parker    2011 May 02 03:12 PM   Entry Permalink | Comments (34)
2011 April 10 Sunday
China Oil Use Surpassing USA In 2018?

Steve Kopits says oil demand from China will surpass that of the United in just 7 years. To translate that into practical matters: Your price for gasoline will be a lot higher. You need to use something else to power your car (natural gas in his view) or use gasoline far more efficiently.

In evidence to the US House of Representatives Subcommittee on Energy and Power's hearing, April 4th, regarding the "The American Energy Initiative", Douglas-Westwood LLP's Managing Director, .Steve Kopits, gave dire warnings about the likely development of China's future energy demand

"China's oil demand will likely keep pressure on oil prices for the indefinite future," said Kopits. "China consumes 10 million barrels of oil per day (mbpd) on global consumption of about 88 mbpd. ...it is already the second biggest consumer of oil in the world ...we see China surpassing US consumption levels around 2018."

Kopits thinks we should seriously think about shifting part of our transportation energy demand to natural gas and I agree. Western nations need to get their energy demand basically out of the way of rising Asian energy demand. When faced with a zero sum game (or worse) the wise thing to do is find another game to play. Kopits thinks we are at considerable risk of an oil price shock in 2012. The Kopits slide show (pasted into an article with commentary by Gail Tverberg) there includes his observation that compressed natural gas tanks for vehicles in the US cost too much. He suspects safety regulations or other regulations are boosting their cost far more than makes sense. Kopits shows up in the comments of econbrowser.com blog posts by James Hamilton (UCSD economist who does a lot of research on energy economics). Back in December 2010 Kopits stated that the biggest factor holding back natural gas cars is the cost of the storage tanks.

The key to natural gas vehicles, based on our research in conjunction with Columbia University, is the price of the vehicle in the showroom. CNG vehicles have to be priced the same as gasoline powered ones. The fuel station appears to be a dependent variable ("Buy it and they will build.")

So no need to worry about the refueling infrastructure. But he identifies the key issue: why do natural gas vehicles cost so much? Low production volume? Safety regulations? Other?

Kopits thinks if the price premium for natural gas vehicles declined from $10k to $1k then they'd take off without any additional government intervention needed to encourage their use.

As I mentioned yesterday, I tesitified to the House Energy and Power Subcommittee on Monday, ostensibly on China's oil and gas, but all the Congressmen had their own wish list: one from Kansas wanted a coal-fired power plant; one from California wanted a nuke; one from Massachusetts wanted a lot of wind turbines.

All of these would be closer to realization if natural gas moved into use as a transportation fuel. At present, nat gas costs about $4 / mmbtu; as a transportation fuel, it would currently be valued (at steady state consumption) at around $12 / mmbtu. Thus, nat gas would tend to migrate out of power gen and into transport, leaving behind it space for more coal, nukes, wind. Onshore wind, for example, is thought competitive around $8 / mmbtu, so it would be comfortably in the money. (Yes, this is pure Picken's Plan. Don't let the Oklahoma twang fool you: the man is a very solid analyst.)

To make this happen, we need a CNG tank which can be delivered at the showroom at a variable cost no more than $1000 (ie, a payback period of less than 2 years). The Indians can do this for $200; in the US, the differential is well over $10,000. I believe (but am not entirely sure) that the high US differential is the result of CNG tank regulation, which is geared for safety and environmental protection without consideration of market constraints. That's enough to put CNG out of the money ($3,000+), and then low vehicle sales volumes and large allocated overheads do the rest. For example, Honda typically sold 1,000 CNG GX's per year. If you had only $10 million of overhead associated with this effort (not a lot by auto industry standards), then you'd have to allocate $10,000 per car to break even.

So, that's what we need: a $1,000 CNG tank. That's it. Our research with Columbia University suggests that neither filling stations nor energy companies need to be subsidized. Nat gas vehicles must be priced in the showroom the same as their gasoline counterparts. If you have that, you'll get market acceptance.

So, for me, CNG as a transport fuel is priority No. 3 for energy policy. Shouldn't be that hard to do.

Again, why do CNG vehicles cost so much? Does any reader know the answer?

A separate topic: Will the huge price premium of oil over natural gas remain? Looks like natural gas might go up to $7/mmBTU. That'd still make it much cheaper than gasoline, especially if gasoline keeps going up in price. Even $8/mmBTU would make natural gas useful for transportation if (as I expect) oil prices go much higher in coming years.

Update: Think Saudi Arabia is going to ramp up production? Saudi oil production peaked in 1981 and Saudi domestic consumption is causing declining exports on flat production.

By Randall Parker    2011 April 10 05:42 PM   Entry Permalink | Comments (24)
2011 February 19 Saturday
Saudi Oil Exports Drop 4.9%

Growth in domestic oil consumption in Saudi Arabia is cutting into Saudi oil exports. This trend will continue. Higher prices enable them to export less.

Saudi Arabia’s exports fell to 6.05 million barrels a day in December from 6.36 million in November even as Saudi production rose to a two-year high of 8.37 million barrels a day, JODI said.

Saudi oil exports have probably already peaked. Rising domestic oil consumption eats into exports. This is known in Peak Oil circles as the Export Land Model problem. Export Land is experiencing much faster consumption growth than the rest of the world. Export Land is exporting less as a result. This trend will continue.

What I expect will happen:

  • The peak in world oil exports will happen before the peak in world oil production.
  • The peak in US and other Western imports will happen before the peak in world oil exports.

Western nations are going to shift to lower energy lifestyles and spend more on technology that raises energy efficiency. India and China will displace Western nations from parts of the oil market. So Western consumption will peak sooner than China and India consumption. But their oil consumption will peak sooner than oil consumption in the big current oil exporters.

By Randall Parker    2011 February 19 11:24 PM   Entry Permalink | Comments (40)
2011 January 08 Saturday
Energy Production And Usage Graphs

The Oil Drum has a great set of many graphs showing energy production and usage from a variety of perspectives. That page has over 100 charts and graphs and it takes quite a while to load them from a number of sites.

The most sobering graph: World net oil exports peaked in 2005. A large and growing fraction of all oil extracted from the ground is used in the country of origin. So less is available to oil importing nations on international markets. Since oil demand is rising more rapidly in oil producer states than in oil importer states the fraction of extracted oil available for importers is declining. So for importers in a very real sense world oil production has already peaked.

You can see this trend with Saudi production versus Saudi exports. Their rapidly rising internal demand is typical of many oil exporting nations. It explains how the world has finally hit a new oil production record and yet oil prices are at $90 per barrel. Oil consumption in Western nations is below their 2006 peak as reduced oil exports combined with rising Asian demand drive prices up to levels that cut Western demand.

Before you take US Department of Energy, Energy Information Administration predictions of future oil production seriously take a look at their track record. For the last 10 years they've been excessively optimistic. Their 2001 prediction for 2010 is about 11 million barrels per day too high.

Our energy supply problem is primarily a transportation energy problem rather than broad energy supply problem.

U.S. Primary Energy Consumption by Source and Sector diagram image

Note the incredibly heavy reliance on oil for transportation. The diagram probably understates that reliance since the very thin renewable biomass energy line flowing into transportation is at least in part corn ethanol. Well, the oil used in corn ethanol production and transportation probably isn't accounted for in that diagram.

Lawrence Livermore National Labs has a similar US energy flows graph.

Fun fact: bicycle and car production were almost equal in 1970 but about 2 and a half times more bicycles are now made than cars. As those bike riders become more affluent hundreds of millions if not billions of them will buy cars. Electric bikes have a big future too.

Why high oil prices? A result of monetary policy? Probably not. Paul Krugman sees growing world demand for oil and other natural resources with the United States more as a bystander feeling the effects of this development in the form of higher natural resource demand. Menzie Chinn highlights the uncertainty about future rates of economic growth in China as a major unknown in attempts to project future oil prices. My take: Since the remaining oil has much higher extraction costs than the oil we were burning 10, 20 and more years ago we can at least be certain that oil prices will not drop below $60 per barrel for any extended period of time. The marginal cost of each additional barrel sets a floor on future oil prices.

The bumpy oil production plateau the world has been on since 2005 is not what most conventional peak oil theorists predicted. Yet it is not a case of Business As Usual either. That production plateau in the face of rising oil prices indicates the difficulty the oil producers have had in trying to boost production. If we are near Peak Oil (and I continue to think we are) then why the production plateau? Why not the declining slope after a short peak period as has been the case for oil production in dozens of countries in the past?

Here's my take on the production plateau: High oil prices are delaying the decline from global plateau. When individual countries peaked other countries were available to make up the production shortfalls. So oil prices could not go up and stay up in a sustained manner. But when the whole world reaches Peak Oil something different unfolds: oil prices rise to keep the oil coming. That's especially the case now due to rising oil demand as a result of Asian industrialization. So there's a big push now to extract oil from very expensive sources. These sources are coming online faster than would have been the case absent the high oil prices.

The longer time on the global plateau has pluses and minuses. The pluses include rising prices that encourage efficiency and innovation. The plateau gives us more time to develop substitutes and to change lifestyles in ways that reduce our need for oil. But the higher the world economy can push the price of oil the longer the plateau will last and therefore the faster we will use up the remaining oil. So when we finally come off the plateau the decline then will be faster.

As I've argued previously, the bigger the world economy gets and the more pieces of the economy reduce or eliminate their need for oil the higher the price of oil can go. If a couple of billion Asians can each develop enough buying power to find oil useful for operating scooters or doing cooking then the demand decreases in the West in response to higher prices will not cause a decline in prices.

What I expect to see: a cycle of oil price run-ups during economic expansions until oil prices get high enough to cause recession. In each cycle of expansion the Western countries will use less oil and Asia will use more. But once we come off the production plateau if the production decline is sharp enough even India and China will use less oil. The wild card: technological innovation. Cheap electric car batteries would be the biggest potential game changer.

By Randall Parker    2011 January 08 01:34 PM   Entry Permalink | Comments (63)
2010 December 28 Tuesday
$5 Per Gallon Gasoline In US In 2013?

John Hofmeister, former president of Royal Dutch Shell's US business unit, says gasoline in the United States is headed to $5 per gallon in 2 years and in 10 years shortages will become severe.

But former Shell executive John Hofmeister offered a more aggressive estimate, saying Americans could be paying $5 a gallon in two years. And he predicted that sometime between 2018 and 2020, supply and demand will become so out of balance that gas stations in several regions of the country will simply start to run out.

"I think it's going to be a cumulative problem that won't happen suddenly," Hofmeister, who now heads Citizens for Affordable Energy, told FoxNews.com.

$5 per gallon by early 2013? That seems too soon. Count me skeptical. I'm reminded of another oil price prediction that did not pan out. New York Times columnist John Tierney is about to win a bet with the late Matt Simmons about the price of oil.

I called Mr. Simmons to discuss a bet. To his credit — and unlike some other Malthusians — he was eager to back his predictions with cash. He expected the price of oil, then about $65 a barrel, to more than triple in the next five years, even after adjusting for inflation. He offered to bet $5,000 that the average price of oil over the course of 2010 would be at least $200 a barrel in 2005 dollars.

$200 per barrel oil was not in the cards because the world economy could not afford $200 per barrel oil. The world economy would go into recession if oil prices went that high and demand would slacken. We can't get to a sustainably much higher oil price without a few changes:

  • Shift more current uses of oil to other energy sources. That way more parts of economies are less vulnerable to oil price spikes and oil demand does not dip due to recessions.
  • Add less price elastic users of oil. This is happening in China, India, and other developing countries. China has a large number of people who use fairly small amounts of oil as compared to the size of their economy. In fact, China gets 68% of its energy from coal with the rest split across other sources. Whereas the world overall gets about 27% of its energy from coal and 33% of its energy from oil.
  • Decreases in oil production.

With the Chinese now producing a few million more cars per year than the United States they are on a trajectory for much higher oil demand. Add in rising oil demand in OPEC and I can see how the world economy will be able to support much higher oil prices in the future. But the needed economic development that widens the base of oil demand to create the bigger inelastic demand takes time to build up. We can't get to much higher prices sooner without a sharp decline in production.

By Randall Parker    2010 December 28 10:52 PM   Entry Permalink | Comments (65)
2010 December 05 Sunday
Robert Rapier On The Impending World Energy Mess

Robert Rapier has written a review of the new book The Impending World Energy Mess by Robert L. Hirsch, Roger H. Bezdek, and Robert M. Wendling. Rapier finds their coverage of adaptations to Peak Oil most interesting. This is where my own curiosity has shifted on the Peak Oil topic. That it is happening I have no doubt. But how will people and industries and governments respond? How quickly will they respond?

I felt the book became much more interesting when they started to discuss “How is the oil debacle likely to unfold?” This is where I began to find a lot of value in the book for me personally. Future scenarios were very well thought-out, and pros and cons were given for them. The authors delve pretty deeply into potential mitigation pathways. For instance, I have often thought about how people will cope as gasoline prices head higher. One of the possible options is that gas will be rationed. This book takes scenarios like that a step further. First, it makes a strong argument that it is a no-brainer that gasoline will be rationed, and then goes into several well thought-out options of how that might be accomplished.

If rationing gets implemented I expect that to increase the costs of adjustment to the declining availability of oil. Rationing has no other purpose than to hold down prices. Yet prices are the most powerful means to incentivize people to change their lifestyles.

My worry on Peak Oil: The longer the general public do not know it is happening either in the next 10 years or right now the longer they'll make purchasing, career, and lifestyle decisions that will make the adjustment all the harder. When big changes are going to force lifestyle and career changes it is best to get ahead of these changes. Adjusting before you have to costs less and avoids a lot of stress and worry.

This book has a foreword written by former Defense and Energy Secretary James Schlesinger. He also believes Peak Oil is coming in this decade.

Update: Check out some graphs of world oil production in recent years. Note how the last year oil production increased consistent with historical trends was 2004. It is possible oil production in late 2010 might surpass the average rate of 2005. But that would mean beating a rate from 5 years ago! Hardly business as usual and we have oil prices at about double 2004 in order to provide incentives to extract that much oil. The oil is harder to get to and more expensive to extract.

By Randall Parker    2010 December 05 10:13 PM   Entry Permalink | Comments (26)
2010 November 22 Monday
Energy Prices Boost Rural Living Costs

In the UK the added costs of living in a rural area raises the minimum income needed to live a fairly minimal existence.

The Commission for Rural Communities said someone in a remote village needed £18,600 a year to get by, compared with £14,400 for an urban dweller.

It means a villager must earn about 50% above the minimum wage of £5.93 an hour to reach a minimum living standard.

The report cited transport and fuel as the main extra cost burdens.

Curiously, the difference in living costs for a "rural town" versus an urban area was fairly small as compared to the additional costs of villages or, even more expensive, hamlets. Anyone know what the sizes are for each of these categories?

Since fuel taxes are higher in Britain than in America in a sense the British are living in America's energy future. The higher energy taxes in Britain simulate the effects of futurel higher energy costs due to Peak Oil. If compared today one would expect a smaller price premium in living costs in rural America as compared to rural Britain. Has any reader come across sources of information on living costs as a function of population density in the United States?

Of course, Britain is a much more densely populated country than the US. So one can get further away from populated areas in the US. So I wonder just how remote a remote British village can be, at least in England.

Since I expect Peak Oil to cause a big increase in the costs of transportation the rural area living cost disadvantage will grow. Shipping costs and commuting and other travel costs will all go up faster in rural communities. Also, shipping costs will rise more rapidly in areas more distant from sea ports and cargo rail stations. Though rural areas in farm country will have food supply advantages due to proximity to crops.

By Randall Parker    2010 November 22 10:13 PM   Entry Permalink | Comments (1)
2010 November 02 Tuesday
Dr. James Schlesinger: The Peak Oil Debate Is Over

James Schlesinger served in high positions under Presidents Nixon, Ford, and Carter as chairman of the Atomic Energy Commission, Secretary of Defense, Director of the CIA, and as the first US Energy Secretary. He's become convinced that the peak of world oil production is near:

What is the evidence?

First, we remain heavily dependent on super-giant and giant oilfields discovered in the 50s and 60s of the last century… I might add, of the last millennium. Only rarely in recent decades have discoveries equaled production. Mostly, it’s been one barrel discovered for every three barrels produced.

Second, old super-giants like Burgan in Kuwait and [Cantarell] in Mexico have gone into decline earlier than had been anticipated… and going into decline have been Alaska, the North Sea, western Siberia and the like.

Third, while it is not yet “Twilight in the Desert” (as you may have read) still we are well into the afternoon, even in Saudi Arabia. Even the Ghawar oilfield is increasingly hard to sustain.

Fourth, in 2004 we experienced our first demand-driven price spike, as opposed to the previous price spikes driven by supply interruptions. We still operate at about the level of production capacity of 2004.

Schlesinger has also written the foreword to the new book The Impending World Energy Mess by Robert L. Hirsch, Roger H. Bezdek, and Robert M. Wendling.

The rate of discovery is a fraction of the rate of consumption. World discovery peaked in the early 1960s. The rate of consumption surpassed the rate of discovery in the early 1980s. Since then we've been eating thru oil fields discovered long ago. I do not see the burden of evidence as on the Peakists any longer. An argument opposed to the expectation of a close peak needs to explain where the oil is going to come from that will enable much higher rates of production.

My advice: prepare in your personal life. When you move or take a job aim to minimize driving distances and ask yourself how vulnerable your job is to a decline in world oil production. Think about better home insulation. Think about other ways you can reduce your dependence on oil. Oil prices are headed upward and economic growth will remain anemic until an extended period of contraction sets in.

Update: James Lentz, President and COO of Toyota Motor Sales USA gave the Toyota view on Peak Oil almost a year ago: "we will probably see peak oil sometime around the end of the next decade." He said it could come as early as 2017.

The peak in Western consumption comes years before the peak in global production because oil consumption growth in oil producer states is cutting oil exports and Asian demand is displacing Western demand. India and China will bid up prices to levels that will cut Western demand well before production peaks. My guess is Western consumption has already peaked.

Update II: Charles Maxwell thinks the peak comes between 2015 and 2017.

Maxwell: Yes. Globally, I believe we’re quite close to the peak, simply because we’ve gone from 6 percent increases in production to 3 percent per year increases, to half a percent per year increases. I think peak will come between 2015 and 2017. So, we’re nearly on it.

But with increased internal consumption by oil producing countries and rising demand from developing Asian countries peak consumption by Western countries will come much sooner. For some Western countries peak consumption has already happened.

Update III: I am skeptical about our ability to rapidly transition to new energy sources. Peter Tertzakian's book A Thousand Barrels a Second: The Coming Oil Break Point and the Challenges Facing an Energy Dependent World sketches out information about previous energy transitions (e.g. sperm whale oil to petroleum oil for lighting) and how long they took. Many of those transitions were to more convenient energy forms. Well, liquid hydrocarbons are the most convenient energy form, especially for transportation. So the next transition is going to be to less convenient energy forms that cost more to use.

Update IV: See Robert Hirsch's slide show presentation on Peak Oil and also see former BP Chief Petroleum Engineer Jeremy Gilbert's slide show on Peak Oil.

By Randall Parker    2010 November 02 11:43 PM   Entry Permalink | Comments (78)
2010 October 06 Wednesday
US Food Waste: 350 Million Barrels Of Oil Per Year?

Translated into the oil used to make it Americans might waste 350 million barrels of oil per year or almost 1 million barrels per day. That's almost 5% of current daily oil consumption.

WASHINGTON, Oct. 2, 2010 — Scientists have identified a way that the United States could immediately save the energy equivalent of about 350 million barrels of oil a year — without spending a penny or putting a ding in the quality of life: Just stop wasting food. Their study, reported in ACS' semi-monthly journal Environmental Science & Technology, found that it takes the equivalent of about 1.4 billion barrels of oil to produce, package, prepare, preserve and distribute a year's worth of food in the United States.

Michael Webber and Amanda Cuéllar note that food contains energy and requires energy to produce, process, and transport. Estimates indicate that between 8 and 16 percent of energy consumption in the United States went toward food production in 2007. Despite this large energy investment, the U.S. Department of Agriculture estimates that people in the U.S. waste about 27 percent of their food. The scientists realized that the waste might represent a largely unrecognized opportunity to conserve energy and help control global warming.

Whenever I read about energy waste I think of that as good news. If we did not waste any oil then we'd be much harder pressed to cut back when world oil production goes into permanent decline. But all those SUVs and the wasted food means we've got lots of areas where we can cut back on waste.

We also have the potential to save energy by using more energy efficient means to produce, process, and transport it. Changes in farming methods, more sold in bulk (therefore less packaging costs), greater use of rail, less use of air cargo, and other changes could (and eventually will) greatly reduce the amount of energy used per unit of food consumed.

By Randall Parker    2010 October 06 10:04 PM   Entry Permalink | Comments (6)
2010 September 24 Friday
Oil Demand Shifting To Less Price Sensitive Markets

A February 2010 paper by by Joyce M. Dargay (Institute for Transport Studies, University of Leeds) and Dermot Gately (Dept. of Economics, NYU) makes its argument in its title: World oil demand’s shift toward faster growing and less price-responsive products and regions

Two liters a day – that’s what per-capita world oil demand has been for forty years. Yet this constancy conceals dramatic changes. While per-capita demand in the OECD and the FSU have been reduced – primarily due to fuel-switching away from oil in electricity generation and space heating, and by economic collapse in the FSU – per-capita oil demand in the rest of the world has nearly tripled, to more than 1 liter/day. In addition, the rest of the world’s population has grown much faster than in the OECD and FSU (1.85% v. 0.74% annually). As a result, the rest of the world’s total oil consumption has grown seven times faster (4.4% annually, versus 0.6% in the OECD and FSU) – increasing from 14% of the world total in 1971, to 39% today. Strangely, however, recent projections by DOE, IEA, and OPEC project a sharp deceleration of per-capita oil demand growth through 2030 in the rest of the world – from 2.54% annually since 1971 to 0.6% annually (DOE) or 1% annually (IEA, OPEC).

As someone who thinks Peak Oil is close I obviously do not expect world oil consumption to rise anywhere near as much as these researchers project demand will rise. Rather, due to geological limitations I expect production at best will rise very slowly and then plateau. After that comes world oil production decline. Therefore this rising demand will push up prices and those high prices will destroy demand elsewhere and I agree with them that demand is shifting toward less price-responsive customers.

The marginal utility of another barrel of oil is far higher when the oil is sold to a large number of scooter drivers in India or across a large number of small car drivers in China who are experiencing rising living standards (contrasted with the median income decline in the United States). So it seems inevitable that oil consumption will decline in the West faster than it does in the most rapidly developing markets in Asia.

The big rise in gasoline prices in 2007 and 2008 started a decline in vehicle miles driven in the United States that went even deeper as the recession started to bite. The result was the biggest decline in vehicle miles driven in at least 25 years. The current rate of vehicle miles driven is about equal to what it was 5 years ago - in spite of about 5% population growth since then.

A good overview of the shift in demand can be seen in Rembrandt Koppelaar's August 2010 Oil Watch Monthly (PDF). It has useful charts of world, regional, and national rates of oil consumption starting on page 8. The OECD oil consumption chart 20 on page 8 shows the Western countries and Japan on a downhill trend in their oil consumption while chart 23 on page 9 shows US oil consumption down as well. By contrast, the oil consumption charts for India and China on page 13 show their growing demand which is effectively displacing a portion of Western demand. The relatively high oil prices of today are made possible rising demand in India, China, and the oil exporting countries. They can afford to grow their consumption in the face of rising prices.

By Randall Parker    2010 September 24 07:29 PM   Entry Permalink | Comments (4)
2010 September 06 Monday
German Military Study Warns On Peak Oil

An internal study on the approach of Peak Oil done by the military of Germany (which was not supposed to see the light of day) shows the German military expecting drastic changes in the international order as a result of Peak Oil.

The issue is so politically explosive that it's remarkable when an institution like the Bundeswehr, the German military, uses the term "peak oil" at all. But a military study currently circulating on the German blogosphere goes even further.

The study is a product of the Future Analysis department of the Bundeswehr Transformation Center, a think tank tasked with fixing a direction for the German military. The team of authors, led by Lieutenant Colonel Thomas Will, uses sometimes-dramatic language to depict the consequences of an irreversible depletion of raw materials. It warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the "total collapse of the markets" and of serious political and economic crises.

The report authors foresee a future where despotic oil producing nations dictate foreign policy to oil importers. The authors worry about extremist political movements. Financial panics are probably an even stronger possibility. An extended period of economic contraction much more severe than the last few years will send many more banks into bankruptcy.

My advice: Next time you buy a car make it a hybrid. Next time you move or change jobs choose a location that cuts the length of your commute. But the cost of gasoline is not the chief problem we individually face as we head into a period of shrinking oil availability. No, our biggest challenge will be to stay gainfully employed at jobs which pay comparable to our current salaries. Given enough buying power you can deal with what's coming. Without the cash life becomes much more difficult and stressful.

Robert Rapier has more on the German report.

The Guardian suggests the UK government is also secretly concerned about Peak Oil.

Speculation that government ministers are far more concerned about a future supply crunch than they have admitted has been fuelled by the revelation that they are canvassing views from industry and the scientific community about "peak oil".

The Department of Energy and Climate Change (DECC) is also refusing to hand over policy documents about "peak oil" – the point at which oil production reaches its maximum and then declines – under the Freedom of Information (FoI) Act, despite releasing others in which it admits "secrecy around the topic is probably not good".

A UK industry group including billionaire Richard Branson already believes Peak Oil is close.

London, 10 February, 2010: A group of leading business people today call for urgent action to prepare the UK for Peak Oil. The second report of the UK Industry Taskforce on Peak Oil and Energy Security (ITPOES) finds that oil shortages, insecurity of supply and price volatility will destabilise economic, political and social activity potentially by 2015. Peak Oil refers to the point where the highest practicable rate of global oil production has been achieved and from which future levels of production will either plateau, or begin to diminish. This means an end to the era of cheap oil.

Update: If you are thinking passenger rail has a big role to play in adapting to Peak Oil then think again. Reihan Salam points to rail industry concerns that high speed passenger rail would displace as much as 6 times as much freight rail trains. Given that trucks use about 10 times as much oil as trains for hauling freight it probably makes more sense to shift more freight to rail rather than more passengers.

By Randall Parker    2010 September 06 11:05 AM   Entry Permalink | Comments (78)
2010 April 30 Friday
BP Drilling Rig Accident Makes Peak Oil Harder

Robert Rapier expects the BP drilling rig accident with the Deepwater Horizon rig to set back the momentum that was building for more US offshore drilling.

So I believe the long term implications of this incident will be to exacerbate our slide down the backside of peak oil. Fields take a long time to develop, and fields being developed now may have been producing oil in 5 or 10 years. But I believe this window of opportunity has now closed, and it will be much more difficult to find broad support for expanded drilling.

Since Obama was going to open up pretty small offshore areas off of Virginia and the Gulf of Mexico the loss isn't that great in my view. Also, the delay might only last a few years until oil prices and get high enough to shift public sentiment toward favoring more drilling.

Rapier wants to use additional drilling to provide revenue to reduce our oil dependence. My guess is that by the time substantial production starts flowing from new offshore fields the world oil prices will be so high and economically damaging that industry, the public, and governments will already be taking lots of actions to reduce oil dependence.

I have explained my position on this in the past: I think we should drill and use the proceeds to fund programs for reducing our oil dependence. I am trying to think practically here, and I think what will happen if we don’t develop the oil we have will be more dependence on oil imports as opposed to a hastening of a transition to renewable fuels. There will be an element of the latter, but it won’t be enough.

Still, I agree with Rapier that this latest accident is going to make the adjustment to declining world oil production harder to handle. That decline might start soon.

By Randall Parker    2010 April 30 12:21 AM   Entry Permalink | Comments (6)
2009 August 04 Tuesday
Fatih Birol Of IEA: Peak Oil In 2020

Fatih Birol, chief economist of the OECD's International Energy Agency (IEA), has pulled in his prediction for when world oil production will peak to only 11 years from now.

In an interview with The Independent, Dr Birol said that the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated.

The reason for the change? The IEA has found that production from existing oil fields is dropping a lost faster than they predicted.

The IEA estimates that the decline in oil production in existing fields is now running at 6.7 per cent a year compared to the 3.7 per cent decline it had estimated in 2007, which it now acknowledges to be wrong.

The faster existing field production declines the faster new fields must be discovered and developed just to break even. The problem: world oil discovery peaked in 1965. In spite of all the technological advances since 1965 the discovery rate is less than a fifth the peak rate and less than a third of the yearly oil consumption rate.

The IEA's peak date is getting closer to that of some other notable observers. For example, oil industry analyst Charlie Maxwell predicts Peak Oil in 2015. Robert Rapier puts a 90% probability of a peak by 2013. Here is a consolidated collection of oil production forecasts.

The debate at this point revolves around how big will be the dislocations and drops in living standards? We can't know for sure. It depends on just how soon the peak comes, how fast the decline happens after it, and how quickly substitutes come along and at what costs. The timing of the peak is key. The later it comes the more technology we'll have available to deal with it. I hope for a later peak but fear an earlier one.

Update: A few months later it turns out the IEA was not allowed to report the more pessimistic earlier date for Peak Oil. The US government pressured the IEA to not report the conclusions they reached of a more rapid rate of oil field depletion.

By Randall Parker    2009 August 04 09:03 PM   Entry Permalink | Comments (13)
2009 August 03 Monday
Nissan Leaf Electric Car 100 Mile Range

Will $20 per gallon gasoline cause the death of suburbs? Why should it? If you can commute between suburbs in an electric car then no need to move to crowded, polluted, noisy, and stressful cities.

YOKOHAMA, (Aug. 2, 2009) - Nissan Motor Co., Ltd. today unveiled Nissan LEAF, the world's first affordable, zero-emission car. Designed specifically for a lithium-ion battery-powered chassis, Nissan LEAF is a medium-size hatchback that comfortably seats five adults and has a range of more than 160km (100 miles) to satisfy real-world consumer requirements.


How can this range only satisfy the daily driving requirements of 70% of the world's consumers? Just how many people drive more than 50 miles each way to work and back?

Extensive consumer research demonstrates that this range satisfies the daily driving requirements of more than 70% of the world's consumers who drive cars.

You can do a 100 mile round-trip commute (if you are so unlucky) and recharge it while you sleep.

And, Nissan's approach makes charging easy and convenient. Nissan LEAF can be charged up to 80% of its full capacity in just under 30 minutes with a quick charger. Charging at home through a 200V outlet is estimated to take approximately eight hours - ample time to enable an overnight refresh for consumer and car alike.

The 200V outlet will require an electrical wiring upgrade in most American homes. The long range commuters will have to pay for a home electrical upgrade.

Ah, but there's the price.

However, we do know that the Leaf’s advanced battery—good for 100 miles on a charge—costs $10,000 on its own. Nissan plans to lease customers the battery, produced in partnership with NEC, when the Leaf goes on sale in late 2010. According to the New York Times, other EVs will follow.

My periodic debate partner, Jim Motavalli at the New York Times’ Wheels blog, reports that the Leaf will fall somewhere between the Nissan Sentra and the Nissan Altima in size. Price-wise, that probably means the sticker will be something like $25,000-$30,000, assuming that the EV technology will add to the cost.

Dan Neil, accomplished car reviewer for the LA Times, reports the battery stories 24 kwh. If it costs $10k then we are talking $400 per kwh. That high?

This first results of that effort debuted Aug. 2, when Nissan unveiled the LEAF, a five-seat compact, all-electric hatchback with lithium-ion batteries (24 kWh energy storage and max output of 90kW), giving the car a top speed of 90 mph and nominal range of 100 miles – a magic number, Nissan figures, in Americans’ driving psychology.

Here's how I see it: Peak Oil will push more lower class people into cities while the upper middle class upgrades to electric cars and stays in the suburbs. People on the economic edge of suburban financial viability can switch to electric bicycles and avoid the downsides of cities. Even if you didn't do the electric bicycling every day for every trip you could still use it to slash total fuel costs.

Update: If Nissan leases the battery but sells the car then a $30k price is higher than it looks. The Leaf's competition is a Prius that gets 50 mpg. At what price gasoline does it make more sense to drive a Leaf rather than the most efficient gasoline-powered or diesel-powered car? That price (whatever it is) puts an effective ceiling on the cost of commuting. If you can afford to commute at that price then you do not need to make other big adjustments to your lifestyle such as moving to a city once Peak Oil hits.

By Randall Parker    2009 August 03 08:33 PM   Entry Permalink | Comments (22)
2009 July 20 Monday
$20 Per Gallon Gasoline: Book Argument Plausible?

Forbes writer Christopher Steiner has a new book about the approaching era of declining world oil production entitled $20 Per Gallon: How the Inevitable Rise in the Price of Gasoline Will Change Our Lives for the Better. In it he takes an interesting approach toward explaining how declining oil production will change the world. Each successive chapter is named after a progressively higher price for a gallon of gasoline. At each higher price point he describes how our lives will change. This is a novel and interesting approach aimed at explaining to a broader public what Peak Oil means for us in our daily lives. He doesn't put a timeline on when the price points will get hit or predict how much the total economy will shrink. This is more of a lifestyle approach to Peak Oil.

In Chapter $8 he foresees the bankruptcy and liquidation (not reorganization) of most of the airlines in the United States and Europe. This assertion is plausible. Most people do not realize that US domestic flight seats have already shrunk 21% since 2001.

For the time being, analysts agree that the airlines, by cutting routes and employees, grounding planes and imposing fees, can weather the downturn. In fact, when the latest round of capacity cuts takes effect in September, the seats on domestic flights will drop to 66.5 million — down from a peak of about 84 million in 2001 and the lowest September figure since 1984, according to OAG Aviation, which tracks flight schedules.

We will, in time, return to 1970s and 1960s levels of air passenger transportation. I do not expect technological advances to prevent this because the aircraft need liquid fuels - no electrically powered substitutes available. Boeing's much ballyhooed 787 Dreamliner only boosts fuel efficiency 20%. Aircraft fuel efficiency would need to improve by multiples to compensate for Peak Oil and energy substitutes would have to be in the form of liquid fuels. Unless algae genetic engineering solves the problem we'll do a lot more of our travel on the ground. Robert Rapier has explained better than I can the problems of algae biofuels.

Steiner's lifestyle preferences are not my own. He celebrates what he sees as an expected return of the suburbanites to cities. Me, I think the people who left cities had good reasons for doing so. I like wide open spaces and I even like some suburbs. A retreat from the rural life and from exurbs doesn't strike me as a positive development. I think SWPL writers who live in cities do not appreciate that, no, not all people will enjoy cities like they do. City dwellers can be pretty damned provincial. (and why didn't he mention Vespa scooters?)

But I have a more fundamental disagreement with him over the idea of a coming urbanism: I'm not sure that by his own logic it makes economic sense. In Chapter $16 (yes, he thinks gasoline will go that high - I'll outline opposing arguments below) he argues that the cost of long range transportation will get so high that more food will be grown and consumed locally. Well, okay. But isn't that an argument against large cities? New York City needs to bring its food in from longer distances because it has so many people. The amount of land needed to feed them all has to stretch many miles away from it. This is made all the more problematic because NYC borders on fairly built up urban and suburban areas around it that also need to have their food brought it from distant places. So isn't the high transportation cost argument an argument for the spread of people out to places closer to where the food is grown? In the United States that would be places like Nebraska, Kansas, and the Dakotas.

Is $20 per gallon possible? Steiner makes no attempt to prove this. I would like to know if it is possible. My biggest puzzle about Peak Oil is just how high can the price of oil go? We know that the utter outer limit for the price of oil at any given time is something well less than world GDP divided by the number of barrel of oil made in a year. World GDP is currently about $55 trillion by one measure. Also, world oil production is about 30 billion barrels per year. If all money was spent on oil then the max price would be $1800 per barrel. Of course that's not going to happen. What would the people who sold the oil do with the money? Buy other stuff. Why spend all your money on oil if you can't even afford a car to burn gasoline or a house to heat? You aren't going to spend even a quarter of your income on energy, let alone a quarter of your income on liquid hydrocarbons. You'll move into a very small apartment in a converted house and ride a bike before that happens.

Speaking of riding bicycles, rather than abandon suburbs for the big city why not follow Jeff Radtke's suggestion and convert bicycles to electric power and get around a lot on an electric-powered bicycle? No need to move to the big city. For people who have shorter commutes the price of gasoline ceases to be an obstacle when you get around on electric power.

How can we hit high price points on gasoline? How high gasoline prices can go depends on substitutes. Given no substitutes at all the economy will decline with the price of oil. Less energy will mean less economic activity. Imagine a large number of lower priced substitutes for all purposes and that these substitutes all became competitive by the time gasoline hits $8 per gallon. In that case gasoline would never hit $10 per gallon for any length of time. In order to hit high price points the economy has to have enough affordable substitutes to enable economic growth to provide the buying power to bid up oil and gasoline. This would have to happen even as some subset of economically valuable uses of oil turn out to have no effective substitutes. Only then could oil and gasoline hit high price points.

Steiner argues that international trade will plummet as the cost of fuel for ships skyrockets. Jeff Rubin develops this argument in greater detail in a recent book (which I have not read): Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization. Are Rubin and Steiner correct? At least up to some point. But what about substitutes? Steiner misses an opportunity here because in his $18 chapter he reports the US Navy believes nuclear cruisers become cost effective at $120 per barrel (which we hit for a few months in 2008) and nuclear destroyers become cost effective at $200 per barrel. The question here is obvious: at what price of oil does nuclear propulsion become cost competitive for ocean going cargo ships? Answer that question and you will know the long term ceiling on the prices for long range container shipping. Is the price of nuclear cargo shipping so high that Wal-Mart's business models falls apart (as Steiner claims)? Or is he just expressing SWPL prejudice against Wal-Mart?

In a similar vein Steiner claims that long range shipping of fruits and vegetables won't survive $16 per gallon gasoline. But a lot of vegetables and fruits move transcontinental via rail. Well, even as Steiner paints a bright picture for passenger rail in chapter 18 he fails to recognize the potential for electrified rail for freight as a way to put a ceiling on the cost of long range land-based cargo shipping. At what price of oil does fully electrified rail become cost competitive with diesel-electric train engines? That price (whatever it is) puts a ceiling on the long run price of rail cargo shipping. Suddenly rail becomes powered by nuclear reactors or wind turbines or hydro. Want to predict what'll happen with freight after Peak Oil? Ya gotta figure out the competitive prices for nuclear powered cargo ships and electrified transcontinental cargo rail. If anyone knows the answers post in the comments please.

While I obviously have some bones to pick with Steiner's book I recommend it. He covers a lot of territory in an accessible way for a broader public. If you expect lots of data to prove his assertions you'll be frustrated. But if you want to get a sense of just how much the future will change as a result of the lengthening list of countries whose oil production has peaked this book hits many of the ways our lives will change. It is not a precisely calculated set of predictions. Some of his guesses will turn out wrong due to substitutes and innovations that enable less disruptive adaptations. Others will happen at different price points than he predicts. But the value here is that his book causes the reader to picture a future that is not going to be business as usual.

Update: There's not a single oil price point at which nuclear powered cargo ships or electrified freight rail become cost competitive. Consider rail. The various rail lines have different levels of traffic per mile, the regions have different prices for electricity, cost of installation will vary depending on terrain and extent of surrounding industry and power lines. Plus, the cost of steel, copper, aluminum, and other construction materials varies over time. However, in an era of declining oil production rail electrification will probably make sense. Read Alan Drake and Phillip Longman on the potential to shift more freight to rail and to electrify rail. This would greatly reduce the transportation impact of Peak Oil. Also see Brian Wang on Nuclear Power For Commercial Shipping. If the optimistic numbers he provides there are anywhere near correct I do not see why Peak Oil has to cause a collapse of international trade.

Update II: One of the world's largest cargo ships, the Emma Maersk, has a 109,000 hp (81 MW) engine. The whole ship cost about $145 million to build. One analysis shows a nuclear powered equivalent as having lower total costs assuming $2500/KW of nuclear power and $500/ton diesel fuel. The $2500/KW cost estimate looks low. A recent MIT cost update put big land-based nuclear power plants at $4000/KW. How do smaller nuclear power plant costs differ from the costs at larger plants? For large nuclear plants here is a recent overview of an assortment of cost estimates for new nuclear power plants.

Update III: Brian Wang has put together even more useful links on nuclear-powered cargo ships. Costs for fossil-fuel powered cargo ships are going to surge because of regulated requirements for ship operators to shift to cleaner and more expensive fuels.

Based on current refining capacity and planned upgrades, Purvin and Gertz estimate bunker costs could soar by about $300 a metric tons as a result of the switch to gas oil.

Bunker fuel is already at $424 per ton in Singapore at the time of this writing. This price is already high enough to make nuclear-powered cargo ships cost effective according to some estimates. I do not expect global shipping to collapse due to higher fuel costs. Rather, the industry will just shift to nuclear power.

By Randall Parker    2009 July 20 11:58 PM   Entry Permalink | Comments (53)
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