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Transcript from My EIA Panel Session

I only recently became aware that the 2009 Energy Conference put on by the Energy Information Administration has posted the audio and transcripts of all of the sessions. You can hear the audio or download the transcript from my session – Energy and the Media – here. I summarized the overall conference in two posts right after the conference:

The 2009 EIA Energy Conference: Day 1

The 2009 EIA Energy Conference: Day 2

My fellow panelists were Steven Mufson from the Washington Post; Eric Pooley from Harvard, (and the former managing editor of Fortune); and Barbara Hagenbaugh from USA Today. The panel was moderated by John Anderson of Resources for the Future (and a long-time reporter and editorial writer for the Washington Post).

There were questions on the oil price run-up of 2008 (and how the media handled the coverage), false balance in reporting, scale of biofuels versus petroleum usage, peak oil, and the role bloggers are playing now with respect to reporting news.

I will extract portions of my comments below, correcting the transcription as needed for clarity. (For instance, when I said I also write for The Oil Drum, it was transcribed as “aldrum.”)

Mr. Anderson: …subject of energy of the media, a rich subject if ever there was one. My name is John Anderson. I’m joined here by four people who are in the midst of that subject. From my left, Steve Mufson, who writes on this for the Washington Post, and incidentally was also a Beijing Bureau Chief of the Post for several years which turns out to have relevance to our subject. Eric Pooley, who had a long career at Time Incorporated. He was national political correspondent among other things, and managing editor of Time, and has recently been at the Kennedy School at Harvard. Robert Rapier, who resides over the R-SQUARED Energy blog which I and I suspect many of you pay attention to, and Barbara Hagenbaugh who covers economics and energy for USA Today.

I would like to start off by going around the table and asking about a piece of recent history clear in everybody’s minds — four dollar gasoline last summer, $147 oil. That was a huge story for several months. In retrospect, how did we do? Did we get it roughly right? Did we have the causes and consequences roughly right? And in retrospect, what could we have done differently?

My response to that one:

Mr. Rapier: I’ve got a stat counter on my blog, and it tells me what brought people in there and where they came from. “Why are oil and gas prices rising?” is probably the number one keyword search that brings people in. Sometimes ironically from the media, they want to know why oil and gas prices are rising.

I’m an inventory watcher, and I use the EIA data religiously every week when they put out the statistics. On Wednesday I go in and I look to see what oil inventories are doing, what gasoline inventories are doing because we have a pretty good idea of what the gasoline inventory situation is.

So in 2007 we had, I think it was ten or eleven weeks in a row, that gasoline inventories fell, and they fell well below the average range just as we were going into summer driving season. And I got in a little bit of a friendly banter back and forth with Doug McIntyre who wrote This Week in Petroleum at that time, he works for the EIA, and I said I think we’re heading for record gas prices by Memorial Day. He said that generally prices pull off before then and level off. And I said, “Yes, but look at the trend here. The gasoline inventory trend was like this.” I said, “Something has got to give here because demand is just about to pick up.” And sure enough, that’s when we hit $3.00 gasoline by Memorial Day.

In the world oil markets it’s a little bit more murky because we don’t always have good inventory data. Again, we do in the U.S. We’ve got pretty good data in the U.S., but gasoline — if you want to know what gasoline prices are going to do, pay attention to inventories, and the time of year. I mean, if gasoline inventories are low in the fall; it’s not such a big deal. Gasoline inventories low going into summer driving season, that’s something you better watch out for.

Hurricane season. Going into hurricane season you better have good inventories. And we didn’t last year, and that’s again — when the hurricanes started to come in, I warned people we’re going to see some gasoline shortages. And we did because the refineries went down. We didn’t have enough inventories on hand, and suddenly spot shortages.

I was then asked about peak oil:

Mr. Anderson: I hope the EIA is listening. There may be someone from the EIA here for all I know. Robert, you have dealt recently in your blog with the interesting question are we running out of oil? This is one that all reporters constantly have to deal with. How do you deal with that?

Mr. Rapier: It’s obviously a very controversial subject. And often I see very frequently media stories dealing with peak oil as we’re actually not running out of oil. We’ve still got a trillion barrels in the ground. So the issue is not running out of oil. We will never be running out of oil. We will have oil for one hundred more years. It’s can we get it out of the ground fast enough to keep up with demand growth? And that’s where the problem is going to lie in my opinion and forward.

We may see an oil production peak in the next three to five years. There are a lot of very authoritative people who believe that that’s the case. There are some people that would believe that renewables are going to come in and fill that void. I’m not one of those people. I believe it will — there will be a contribution, but if we have a world oil production peak in the next three to five years we’ve got a serious problem.

But again, it’s not about running out of oil. And that’s the most common misconception I see about peak oil when people write about peak oil. They want to debunk that by showing how much oil is left in the ground, and that’s what we’re talking about, issues like one trillion barrels of shale in Utah. The trillion barrels doesn’t help if it takes more than one trillion barrels worth of energy to get it out. In that case it’s useless. It takes a tremendous amount of energy to get that oil out. So we don’t have a trillion barrels of recoverable reserves, maybe a very small fraction of that because the energy balance on that is very marginal.

On the issue of there not always being black and white answers to some of the questions:

Mr. Anderson: Barbara, how does a reporter working from day to day deal with the problem of editors and readers who want sharp clear answers to questions like this that are very much in controversy and very often as Robert suggests aren’t even quite the right questions?

Ms. Hagenbaugh: It’s complicated, and you know, USA Today a lot of times, I’ve got this much space to do all that. So I mean, the most important thing is like Robert just said, there’s two sides to this story and this is always to try to bring that out. I sometimes — editors get frustrated with me because I don’t come out and say this is how it is and this is what the answer is.

On the question of false balance:

Mr. Rapier: I put the question to my readers on my blog and also at The Oil Drum where I write—I said, “Energy in the media, what do we need to talk about?” False balance, probably the most popular answer. One reader gave the example: “scientists discover that the earth is round: flat earth society disagrees.”

The problem is it’s not always clear who the flat earth society is especially in the new biofuels technologies. Algae into biodiesel, is that flat earth thinking that we’re going to be doing that on a grand scale within five years? I can’t even tell for sure early on. I have to really dig and dig.

Steve (Mufson) interviewed me about three or four years ago. It was very early on whenever I was writing about ethanol. He interviewed me for about an hour and one tiny snippet showed up in that story. And I thought, boy, that was a lot of work, but I understand why he did it now. Steve is one of the best writers out there on energy. He does his homework. It really takes a lot of discussion to determine whether I’m credible or a complete nut, and that’s what you have to do. And not everybody does that. And so you get some of this false balance reporting; lazy reporters who simply want quotes from both sides. It’s important for the reporters to really do research. And the good ones do, and the good ones don’t take the false balance approach.

Then came an exchange that was longer than I remembered it being:

Mr. Anderson: Robert speaks with some authority. He’s the one person on the panel, and one of the few people writing on this subject who has a technical background. He’s a chemical engineer, unlike most reporters. Steve, did you want to add anything to that?

Mr. Rapier: That means I can get away without wearing a tie, though, and people forgive me for that.

Mr. Anderson: What about ethanol? How should a reporter approach the future of ethanol? What are the questions he should ask?

Mr. Rapier: Energy in and energy out is very important, but it’s not the only important thing. And I give an example. Some people say that if it takes more than a BTU of a fuel to make a BTU of ethanol that’s a no go. It’s not really because coal, for instance, is quite cheap. So if you took two BTUs of coal to make a BTU of liquid fuel ethanol, from an economic standpoint maybe that’s doable. So the energy in and energy out is not the complete story.

Unintended consequences — I don’t think we spend enough time thinking about what can happen here. What are the things that can happen? Cellulosic ethanol -we turn all this biomass into cellulosic ethanol. What are the implications?

There was a story a while back. Michigan, they figured out they might not have enough trees to fuel this cellulosic ethanol plant because cellulosic biomass in general has a very low energy density. And that’s what I call the logistical problems of cellulosic ethanol. You have to go out farther and farther to fuel this plant. Do the calculations of a mid-size cellulosic ethanol plant; it is going to consume the equivalent of about one million mature trees a year. So think about a 20-year lifetime, 20 million trees, that’s a lot of biomass. And as you get out to the edges of that you’re burning up all your energy getting it back into the plant.

So, those are the kind of things I would question. Your logistics. How are you going to logistically pull this off? How many trucks in and out of days is that? And how in the future are you going to fuel this? A lot of the biofuel options we have are really recycled fossil fuel because they’re entirely dependent on fossil fuel. If fossil fuel prices go up —they have to go up because that’s what they are. They’re fossil fuel. And we really need to go to something — and I talk about the Brazilian ethanol example.

I’m a fan of Brazilian ethanol. I was in India last year, and they do the same thing. I went through a plant. They end up with a waste material at the plant that they have to dispose of bagasse It’s free fuel. Now we don’t have something — in Louisiana and Florida they could potentially do something like that, but the economics of selling molasses and sugar are better than turning it into ethanol, but they do the same thing. They’ve got all the bagasse, and they use it to fuel their plant. A model like that will work. And people sometimes say — and this is some of the false balance that we discussed earlier. Dan Rather, Frank Sesno out there saying, “I was in Brazil. I saw what they did. We can do the same thing.” The problem is we’ve got a higher population than Brazil. We use six times the per capita energy of Brazil. It’s completely apples and oranges.

So, no way can we emulate Brazil, but I see person after person saying the ethanol miracle in Brazil was done because the government set the mandates and they set the standards. What they don’t tell you is that the ethanol miracle really is about 90-percent oil. Ninety percent of their energy comes from oil, and Brazil makes a lot of oil per capita, and they’ve got a lot of oil reserves. That’s how the ethanol miracle in Brazil happened.

On the question of trying to sort what is and isn’t credible:

Mr. Rapier: It’s like Eric said, there’s a lot of garbage out there. And the thing is you can find an argument for any position you wish to make. I can support the flat earth position by things I find on the internet. I can go edit Wikipedia and then use that to support the point that I’m trying to make. So you really have to be careful and you have to know what’s credible, what’s not credible. It’s like drinking from a fire hose. There’s just so much information.

When I’m researching a story, I could take either side and I can support it.

It then went into Q&A from the audience:

Mr. Hall: Yes, Chris Hall, independent oil and gas producer from California. I enjoyed the discussion on ethanol because I think as an industry we spent $135 million to fight Proposition 87 which would have imposed a severance tax, but EIA and the country is focused on reducing our dependence on foreign oil by increasing investment in green energy. And yet the forecasts show the need as you referred to for large supplies of oil and gas and coal during the next 20 years. Meanwhile, the domestic fossil fuels are under attack in Washington, as well as state and local governments, to punish them for last year’s high prices, for polluting the environment, to raise funds to offset deficits, to pay for development of renewable resources, all of which appeal to the public. For example, the Administration 2010 budget would result in the elimination of most of the R&D budget from Department of Energy for the oil and gas industry, would increase 150 percent in oil and gas taxes and a 40 percent reduction in drilling by one account. This will only lead to less domestic oil supply for our needs. How can the media help explain the problem so that we just don’t make matters worse?

Mr. Rapier: I spend a lot of time writing about that kind of issue, and make no mistake I’m a big fan of alternative energy. I would like to see us produce all our energy domestically, but I’m a realist as well. I submitted a question to Secretary Chu yesterday. He did not take it, but it was along the lines of I find it very ironic that he is calling on OPEC to continue producing and at the same time domestic oil and gas has essentially no part in the Administration. So I agree with that. I think the reality is we’re heading down a path here where we’re likely to increase our imports because we’re going to disincentivize our domestic production.

And I know the administration is counting on renewable to fill that gap. I don’t believe that’s going to happen. I believe they will play a part. I believe we should continue to fund that, but I’d also like to see the Administration take a more realistic view of some of these forecasts. Seventy-nine percent oil and gas, maybe that’s not desirable, but that’s what it looks like it’s going to be. So we prefer to get that domestically, I think, as much to the extent possible, but I think we’re just going to be importing it more from OPEC when biofuel targets fall short. We’re going to be counting on Venezuela, and you’ll hear future energy secretaries continue to call on OPEC: “Please don’t cut us off.”

My friend Morgan Downey then asked which books I recommend:

Mr. Downey: Morgan Downey. Just written the book Oil 101. And Robert, I read in your blog this morning that a survey came out earlier this week that said that more than half of Americans could not name one alternative fuel. And is there a role for books and other slow media in improving the average person’s energy IQ and what books in oil would you recommend?

Mr. Rapier: Well, Morgan knows that I’m 250 pages into his book, which is a fantastic book, by the way. The survey you refer to, that was pretty disheartening to read that. I think 51 percent of people surveyed couldn’t name an alternative fuel. Thirty-nine percent couldn’t name a fossil fuel. Nineteen percent said I couldn’t care less. I think you’ll find and I see the same thing, interests waxes and wanes with oil prices. Oil prices are high. Gasoline prices are high. People want to know what’s going on. So the best thing for your book would be for gas prices to start setting new records this year. People will pick up the book and they want to know what’s happening? Why is this happening?

Mr. Downey: Any other books in oil you recommend, or what do you read?

Mr. Rapier: I read a lot of different view points. One of the first ones I ever read was Twilight in the Desert which I think is a good book. It has some faults, but it kind of brings attention to the potential issue with Saudi Arabia. So that was one of the early books that influenced me.

Within the industry, I’m reading technical books on refining. And this is what I told Morgan, that his refining section is incredibly detailed. I don’t think there is a popular book that exists like that with that kind of information. Within the refining industry I’ve got technical refining books, and those are the things that I read to — how do we troubleshoot the cat cracker – and you don’t go into that sort of detail, but for a lay person who really wants to be informed about energy, I can’t give your book a high enough endorsement. I think it’s a fantastic book.

Mr. Rapier: Gusher of Lies by Robert Bryce, I really like that one, too.

There was a question about fact-checking, which was the last thing I responded to:

Mr. Rapier: I have a big issue with fact checking myself. I saw that with the SPR, Strategic Petroleum Reserve. The rate of fill that was reported and picked up and reported and reported was wrong. I showed the actual numbers from the SPR. It was about half what the reported fill rate was. And those kinds of things annoy me. And I wonder why more people don’t. Somebody, somewhere calculated a number based on some monthly fill rate and extrapolated it for a year, and it was just wrong. And then everybody picked it up and just ran with it. So I sympathize.

Anyway, my contribution was only a small part of the whole, which I think went on for about an hour. I would have published this sooner, but only became aware of the transcript about a week ago.

December 28, 2009 Posted by | cellulosic ethanol, Doug MacIntyre, EIA, Energy Information Administration, gas prices, logistics, Media coverage, Morgan Downey, Peak Oil, Steven Chu | Comments Off

A High School Senior Asks About Peak Oil

I tend to get a lot of e-mails, and I try to make a point to answer them all. Sometimes, the e-mail is a question that I can quickly answer. Sometimes it is a request for comments on a specific technology. But sometimes I get one that someone put a considerable amount of time in, and it warrants a very detailed and thoughtful response. I just received one like that that I felt was worth sharing with readers. I asked the writer for permission to publish it, and she agreed in the hopes that it can help others struggling with these questions, and hopefully spawn some fruitful discussion.

This letter was written by a high school senior, and it is the sort of letter that makes me hopeful for the future. The letter resonated strongly with me, because I have been through some of the same thought processes as I worked my way through the implications of peak oil. I will insert my comments in the text as [RR: Comment].

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Dear Mr. Rapier:

Thank you for posting your email address at TOD! I apologize in advance for the length of this letter, but I just can’t seem to express my thoughts succinctly on this topic. I know you are a busy man, but I would greatly appreciate it if you could read and respond to my message and help put my mind at ease.

I am writing to you to ask you some questions about peak oil. I am in my last year of high school and discovered peak oil by accident a few months ago. Like many people, I found Savinar’s site first, and of course my first reaction was one of terror. I stopped reading about the subject immediately to preserve my sanity. However, I knew I had to be honest with myself and keep investigating. Thankfully I found you and Stuart Staniford and all the others who believe that while some trouble may be coming, doom is not.

[RR: There are a couple of things bound to frighten many people new to peak oil. One is is you find Matt Savinar’s site and read through it before you have read through anything else. Another is if – like me – the first book you read on Peak Oil is Jim Kunstler’s The Long Emergency. I read it and thought “Can things really get that bad?” My wife read it and concluded “There is no hope.” What I told her is that this is one view of how things might play out. Nobody knows the future, and I see my job as working to change the future so it doesn’t play out according to worst case scenarios. Incidentally, I have since met Jim Kunstler, and he doesn’t come across like a doomer in person. He is very charming and witty, and is generally a fun guy to be around. But his writings have scared a lot of people.

On the other hand, if your introduction to peak oil is Peak Oil Debunked (which I often recommend to people who have become depressed over peak oil), you may come away with the impression that the post-peak world will be smooth sailing all the way. I don’t believe that (and I don’t think JD at Peak Oil Debunked does either). What I believe is that peak oil will present some upheavals and personal hardship for many people. Even if we have lots of coal and natural gas, the transition will be costly. I think what you are seeing in the economy right now is a taste of what a post-peak world will initially look like: Spiking energy prices that put a burden on people and keep us flirting with recession for many years.]

However, I still have some concerns. Though I do not want to believe in doom, the doomers’ arguments tend to keep resurfacing in my mind and bothering me. On my good days I think, “We can pull through. It won’t be fun, but we can do it.” But on my bad days I think, “What if we can’t?”

[RR: Over the years, I have gone through the same thought process. My undergraduate training is as a scientist, and one thing you learn as a scientist is to continually challenge your conclusions. In other words, conclusions are tentative. You have to be willing to ask yourself what kind of data it would take to cause you to change your position. If you find yourself fitting the data to the conclusion, or rationalizing away evidence that doesn’t seem to fit the conclusion, you have slipped from serious inquiry into dogma. In my view, many doomers are guilty of the latter.]

In other words, I sound like you in your article “My Worst Fears”: doom is my worst fear, but not my expectation. Scenarios, like oil production, fall on a bell curve, with heaven on earth at one end and hell on earth at the other, and in a world in which many factors play into any given situation, it seems simplistic to me to just say, “Well, it’s absolutely gonna be the worst-case and we’re all gonna die.” In real life, the worst-case scenario almost never plays out and reality lands somewhere in the middle. However, that worst-case scenario has a habit of captivating the mind, especially when you’re like me and have no real ability to prepare for it. So I thought I’d write to someone who knows a lot more than me to get my questions answered. (I’m also including, at the bottom, a few of the reasons why I think the doomers are most likely wrong.)

Who exactly are the doomers? Obviously, Kunstler, Heinberg, and Savinar are doomers. However, I had questions mainly about TOD in general and Simmons and Hagens specifically. Simmons, in most places, is called a doomer. However, I have heard him quoted as saying that humanity will “muddle through” peak oil. Does this mean that he is just a super-negative non-doomer? Or is he a doomer trying to tone down his position for the public?

[RR: I am going to be quite critical of Simmons here. Fans of his shouldn’t consider this Simmons-bashing; I just think this needs to be said. I definitely consider Simmons a doomer. I also consider him to be alarmist much of the time. I understand very clearly his desire to have people take this issue seriously, but lately he has latched onto some pretty skimpy evidence and run with it. (I thought it extremely ironic that he recently accused others of running off on a tangent based on skimpy data). The problem is that he takes a little bit of information – which he sometimes doesn’t understand very well – and then draws sweeping conclusions. Many – even some of his allies – acknowledge the contribution of Twilight in the Desert, but they question whether he isn’t doing more harm than good at this point.

An example of that – which I have discussed before – was his talk at last year’s ASPO conference. He claimed in his presentation that we don’t have a good idea of our gasoline inventories, and were just beginning a gasoline crisis that could bring the entire country to a halt. He spun quite a frightening tale, and I could see the shock on some people’s faces. Such shock tactics may work to get people’s attention, but if you cry wolf a few times they backfire.

Contrary to Matt’s argument, the evidence was just the opposite. Even as he was speaking, refineries were coming back online from hurricane outages and inventories were recovering. I was asked about Matt’s comments on a later panel session, and I said I thought gasoline inventories were beginning to recover and that they would be higher in a month. They were. Further, I noted that I was previously in the group that submitted weekly gasoline inventories from our refinery to the Department of Energy, and that we actually have a pretty clear idea of what gasoline inventories looked like from week to week.

Another example is his argument about the $100 trillion corrosion issue in the oil industry. The gist is that he argues that the oil industry is full of rusting infrastructure, and he questions whether we have the money or even the iron resources to fix the problem. Further, he questions aloud how it is that he – Matt Simmons, investment banker – has ‘discovered’ this problem that the oil industry has missed. I won’t go into all of the reasons that Matt is way off the mark on this, as that would be an essay in itself. A corrosion engineer at The Oil Drum has weighed in on this issue, and explains that corrosion is well-understood, and not actually something that Simmons just discovered. Oil companies are full of corrosion engineers who work to replace corroded equipment as needed. There was actually a lot of behind the scenes discussion on how hard to rebut Matt on this, as many felt like this warranted a sharp rebuttal. In the end – because he is considered to be a friend of TOD – he was treated much more gently in public than he was in private.

I did not attend this year’s ASPO conference, but I did get an e-mail from someone who saw his presentation. This from a friend and long time acquaintance of Matt: “Matt Simmons was NOT worth seeing. he seemed a bit crazy – not much new.”]

Obviously you and Staniford are not doomers. I have also seen Kjell Aleklett and Robert Hirsch distance themselves from the doomers. You mentioned that Nate Hagens was not a doomer, and that he wanted to use the term “resource depletion” rather than “peak oil” because peak oil was virtually copyrighted by doomers. However, when I read some of Nate Hagens’ articles at TOD, they sounded remarkably doomerish! I thought, since you know the man, you could tell me what his position was (since, as a student, I have no time to sit on my computer all day and read nothing but peak oil articles).

[RR: Nate is a friend of mine, and I feel like I know him fairly well. His big interest is in human psychology as it relates to peak oil – and I have suggested to him that he distance himself from the phrase “peak oil” because of some of the connotations it has taken on. Nate doesn’t expect people to collectively do the right thing, and as such he is more doomerish than I am. Funny story about Nate is that his original moniker at TOD was “The Last Sasquatch.” I liked a lot of his writing, and talked him into posting under his real name. I told him that he would be taken more seriously that way. He ultimately did start posting under his real name, and gained a lot of credibility as he continued to write. Nate talks about that decision here. But on a scale of 1 to 10, with 1 being extreme doomer, I would consider Nate to be about a 3 or 4. I consider myself to be about a 6 or 7 – fairly optimistic, but also realistic that it won’t be a piece of cake. Five years ago I was a 5.

By the way, I got to spend some time with Bob Hirsch at last year’s ASPO. I can definitely relate to his thinking. He considers the problem very serious, but something we can painfully work our way through if we get busy. That pretty much reflects my own thoughts.]

TOD in general seems to be a semi-doomer site. It sounds as though it used to be balanced, but shifted at some point. Consequently I only read a few contributors, and rarely touch the comments, which usually degenerate into debate about very fine points that I don’t understand or turn into “when you’re starving to death you’ll see that I’m right.” Which of the main contributors over there are doomers? Because sometimes it’s hard to tell. (By the way, I define “doom” to basically mean “die-off and/or Industrial Revolution reversal scenario.”)

[RR: I don’t want to name names, but very few of the ‘staff’ there are doomers. But two of the most frequent contributors are, and that may make TOD staff seem more doomerish than we really are on average. The readership, I think, does tend toward the doomerish end of the scale, but you have people all over the spectrum. And I can tell you through my own experiences that some doomers feel personally affronted if you challenge some of their views, and are vocal about it. This was also Stuart’s experience right before he stopped posting. He posted some articles forecasting that the future might not be complete doom and gloom, and he got some venom thrown his way. That is why I post there infrequently.]

Source of Aleklett/Hirsch/Simmons statements (dated May 2005, from attendee at Uppsala peak oil conference): [Simmons, Aleklett, and Hirsch] think Peak Oil is a very grave issue, but they also think the doomers are wrong. On a specific question they said Richard Heinberg was very much too pessimistic. They meant Heinberg was too pessimistic on technology and society. They didn’t believe that the end of the world was near, but that we would, and I quote, “muddle through.” They said we might have a few rough decades but that world will not end. For example, Aleklett was asked if he believed airborne mass tourism would continue in the future. He answered that sailing boats are very nice.

Is there any mathematical possibility of world decline rates approaching 8-12%? Doomers seem to throw these numbers around as though they are gospel truth. However, I have never seen a doomer actually lay out the math behind their enormous decline rates. I have only ever seen people in comments confuse field decline rates with world decline rates. Also, I have never heard any leading peak oil expert (except Simmons) predict anything worse than maybe a 6% decline rate. In fact, JD worked out Aleklett’s latest release and found that he was predicting a .5% annual world decline rate!

[RR: As you mention, individual fields can decline at those rates, but as prices rise different technologies can come into play that allow more oil to be extracted and so observed decline rates may be less than what would be observed in a constant oil price environment. But this may also accelerate the decline when it really begins in earnest. I was at the annual Energy Information Administration conference last April and in one of the presentations a slide was presented that showed that decline rates are climbing. See Slide 6 here.]

There is also a more specific question I want to ask you on this same topic. Freddy Hutter (at the Trendlines website) posts innumerable graphs and checks peak predictions and such. While I disagree with his “superabundant” scenario, his site is useful for getting the lastest predictions from leading people. He stated this (on the right side of the page under “worst-case scenario”):

Using the lowest recognized estimate of All Liquids (2021-Gb by EWG/LBST 2008), and assuming 2008 (85.4-mbd) as Peak Year, this projection depicts the Avg Decline Rate of 4.6% required mathematically to exhaust this conservative URR. The significance is that half of this year’s volume will still be available in 2035, and flow won’t dip below 10-mbd until 2055. Finally, All Liquids exhausts in 2083. A post-peak production decline rate higher than 4.6% “strands URR”…and that phrase is an oxymoron. Ignore all pundits that suggest a post-peak average extraction decline rate of over 4.6% in their musings. And please read their alarmist TEOTWAWKI forecasts with these hard numbers in mind.

Is this anywhere close to true? What is “stranding” URR and why is it an oxymoron? Since I agree with Staniford’s assessment that the decline rate is largely what determines the severity of the scenario, I would much rather side with Hutter and the “cornucopians” (a word I hate due to its pejorative application to anyone who is not a doomer), but I need to know if this is really true or not before I do that.

[RR: I think what he means is this. URR is the amount of oil that is ultimately recoverable with current technology. Assume for a moment that URR is estimated to be 100 units. Assume what has been produced is 50 units, and 10 units are being produced in the current year. Now assume for the purpose of illustration that the presumed decline rate is 50%. So then your cumulative recovery based on that decline rate might be something like 50 at the beginning of Year 1, 60 in Year 2, 65 in Year 3, 67.5 in Year 4… We already said that URR was 100, but it doesn’t look like we can get there with that presumed decline rate. So what has happened is too high of a decline rate was presumed which results in a cumulative production rate that will ultimately fall short of present URR estimates. Hence, the oxymoron.]

What is Hubbert Linearization and what is it good for? Some people seem to hold up HL as though it can work miracles, and some people seem to throw it in the trash heap. However, I have noticed that it seems to be used two different ways: to either predict a region’s peak, or predict the post-peak decline rate. You have come out against its use to predict a peak, but Staniford’s article on a slow world decline rate was based entirely on the second usage of HL. Since JD linked to this article as one of the main arguments in favor of a slow decline, I’d like to know if HL can be properly used this way, or if it useless here too.

[RR: And I can tell you that Stuart definitely agrees with me on the issue of using it to predict peak. He has stated this publicly and we have corresponded about it a great deal privately. What has happened here is something I often see. Someone has a theory. They think their logic is impeccable. They start using the theory to make predictions. But they never bothered to validate that theory by plugging in known data to see if it gives the right answer. In the case of HL, I did that and showed that it gave wrong answers more often than not. Hence, using HL to predict a peak is akin to astrology as far as I am concerned.

I have seen this before with relatively inexperienced engineers. They build a model, and start to use it without validating it. But models must be validated. That’s the only way you can have some confidence in the model predictions. (Then there are those who hear the word “model” and they immediately discount the results. That is also the wrong approach).

Because that article by Stuart was written very early on – and Stuart did modify his views on HL as time went by – I can’t really say whether HL gives reasonable and consistent answers on decline rates. I can’t say I have done those checks.]

Vis-à-vis Staniford’s article, how will world economic troubles affect peak scenarios? I am of the opinion that it is very possible that a major depression is looming sometime in the next decade, what with the credit contraction and stock market losses. Obviously a depression would kill oil demand, which might soften peak initially. However, it would also kill funding for alternative energy projects and other mitigation efforts. While I am still not convinced this necessarily spells doom, it could make the transition much more painful. I wonder if the initial depression (economically-induced and having nothing to do with energy or oil) would kill the demand and funding, and we would then stumble our way through recession after recession as peak “ripples through” until suitable alternative technology is developed. Does this sound even remotely accurate? Because the “worst fears” part of me is deathly afraid that a depression now, at the “critical moment,” could trigger the doom scenario. Staniford did not seem to think this, and neither did any of the commenters (early on, at least; I didn’t read the whole thread).

[RR: I think it all ties together. A sharp peak will cause an initial supply shortfall that will result in spiking prices which can cause recession/depression – as well as a drop in funding for renewables. This will cause demand to fall, which will cause prices to fall. Demand then picks back up, and we repeat the cycle. Due to reduced funding for alternatives in troubled economic times, the longer term mitigation options are endangered. This is how I foresee peak oil. It will cause economic troubles, which will feed back into demand. The ultimate impact is that oil will last longer than had the peak not resulted in economic difficulties. This was my premise in The Long Recession.]

Reasons I think the doomers are wrong/suspicions about doomers (in no particular order):

1) The track record/statistics of doom. People have always made doomsday predictions. Since civilization still exists, they obviously did not come true. First it was a global ice age earlier this century, then it was nuclear holocaust, then it was Y2K, etc. Now it is peak oil, or by extension resource depletion. While I understand the gravity of the concerns behind this latest doomsday “fad,” I am just not convinced that doom will play out, due to both their track record and to the mere probability of the event. The bigger and more severe the event, the probability necessarily goes down (like the probability of a major Gulf Coast hurricane vs. the probability of a meteor hitting the earth tomorrow). And doomsday is of necessity a very large and very severe event, pushing the chances down into the realm of the highly improbable. However, I do understand that statistics must be weighed against reality.

2) The lack of presented mathematical evidence for huge world decline rates.

3) The strange distribution of professions amongst the major voices of peak oil. Most of the more optimistic voices in the community seem to have been connected to energy at some point. They are either geologists or in some oil- or energy-related profession. However, the major doomers seem to be either journalists or lawyers, neither of which are energy-related jobs. I question the expertise of these people, especially when their predictions seem to flop so often and so spectacularly. They strike me, overall, as the sort of “annual prophets” who make negative predictions like clockwork, and whose followers seem to get yearly amnesia when their hero’s predictions are totally off the mark.

[RR: Geologists are pretty well-represented in the doomer camp. Think of people like Ken Deffeyes and Collin Campbell. And of course many doomers gain strength in their convictions from Hubbert himself, who was also a geologist.]

4) The “dark side” of peak oil. You don’t have to dig too far into any issue related to resource depletion before you find these people. The people who post things like “only the fit in our society should be allowed to have children” and “we should euthanize the handicapped” and “it’s cruel to be altruistic because it props up the weak,” etc. Obviously these people are all doomers, though not all doomers fall into this category.

[RR: While I view those people as a tiny minority, it has always bothered me that so many doomers can casually talk about billions of people worldwide dieing off as a result of peak oil. My mind can’t even comprehend such a horror, yet people toss that around as casually as if they were debating whether to have a second helping of lunch.]

5) Large amounts of other fossil fuels to “ease us into” the transition. There have now been huge natural gas discoveries under Texas and Louisiana, and if they turn out to be anywhere near as big as they say, it is, as one of your commenters put it, “nearly unalloyed good news.” Coal is even more abundant. From the EIA Coal Reserves page:

As of January 1, 2008, the DRB (Demonstrated Reserve Base) was estimated to contain 489 billion short tons [of coal]. In the United States, coal resources are larger than remaining natural gas and oil resources … Worldwide, compared to all other fossil fuels, coal is most abundant and widely distributed across the continents. Estimates of the world’s total recoverable reserves of coal in 2004 were about 998 billion short tons. The resulting ratio of coal reserves to production is approximately 164 years, meaning that at current rates of production (and no change in reserves), coal reserves could in theory last more than one and one-half centuries.

From Wikipedia’s coal article (not sure if this information is reliable – it’s Wikipedia):

At the end of 2006 the recoverable coal reserves amounted 800 or 900 gigatons. The United States Energy Information Administration gives world reserves as 930 billion short tons. At the current extraction rate, this would last 132 years. However, the rate of coal consumption is annually increasing at 2-3% per year and, setting the growth rate to 2.5% yields an exponential depletion time of 56 years (in 2065). At the current global energy consumption of 15.7 terawatts, there is enough coal to provide the entire planet with all of its energy for 37 years (assuming 0% growth in demand and ignoring transportation’s need for liquid fuels).

Of course, I do recognize that burning that much coal would result in a very bad spike in pollution (I am not yet convinced of the science behind global warming). However, it seems like more than enough to help us “limp along.” (One question about the coal, though: on my first and only visit to the Energy Bulletin website, I saw Richard Heinberg saying that a new study said that we only have 15 years of coal. I wonder if this is true – it is Richard Heinberg, after all. Have you heard of this?)

[RR: I had not heard Heinberg say this, but if he did I think he is wrong. I think one thing that is really going to help us transition away from oil is that we do seem to have substantial natural gas reserves. Natural gas is far more fungible as a transportation fuel than are things like coal, biomass, wind, or solar power, so it should buy us time. Hopefully we don’t squander that time. Of course if our coal reserves are as significant as is often claimed, CTL is a longer-term option for producing liquid fuels, albeit at a higher price point than we are accustomed to.]

6) All major doomers seem to be Americans. Now I am an American, so this is not American-bashing. However, it does make me wonder if, by living in this country, these doomers have a slightly lopsided view of the world (as regards usage and perceived “needs”), since no doomers seem to be coming out of “emerging” countries like China or India or even out of Europe. Notice also how almost all peak oil discussions seem to degenerate, often unknowingly, into “Americo-centric” scenarios (“the U.S. economy will implode,” “the U.S. dollar needs oil,” etc.).

[RR: I had never made this observation, but that does seem to be generally correct (although I do know of doomers who are European or Australian). Maybe this is because we Americans use so much oil, and our way of life is more dependent on oil than is much of the rest of the world. I have always felt like this makes us more vulnerable to oil shortages and oil price shocks. So perhaps it is just that we see the implications of peak oil as being more serious, because for us they may very well be more serious.]

Sorry again for the length of this message. I hope you can help me sort through my confusion. By the way, I love R-squared Energy Blog. It is a voice of moderation in a corner of the interent gone mostly mad, and it is nice to hear that not everyone is a doomer.

[RR: Thank you for your e-mail. As I said, it gives me hope for the future that you are so thoughtfully weighing these issues. Good luck on your quest for the truth. Just keep in mind that ultimately none of us know how the future is going to play out. Personally, I consider a number of possible scenarios, and I plan accordingly. Some of those scenarios including asking questions like “What if Matt Savinar is right?” Ultimately, I think you have to plan for some of the scenarios you think are low probability in the same way that you buy homeowner’s insurance for a house that you don’t believe will ever burn down. You do have to draw a line somewhere, though.]

October 18, 2009 Posted by | Jim Kunstler, Matt Simmons, Peak Oil, reader submission | 47 Comments

Answering Reader Questions 2009: Part 4

This marks the final installment of answers to questions recently submitted by readers. This final installment covers the impact of E10 on fuel efficiency, my general optimism (or lack thereof), algal fuel, thermodynamics and energy limitations, Accoya, and litigation. Once again, thanks to the readers who submitted questions, and thanks to those who helped answer them. Without the help I received, this might have been a 10-part series.

Here are the links to the previous installments:

Part 1 – Covered plasma gasification, natural gas projections, free energy, promising alternative energy technologies, and GTL

Part 2 – Covered coal-to-liquids, technology hype, green gasoline, refining improvements, allocation of money toward renewables, electricity consumption, the Automotive X Prize, Big Oil, cellulosic ethanol, and Exxon’s recent algae announcement

Part 3 – Covered advice to engineering students and some books I recommend

The Questions

Wendell Mercantile wrote: The average fuel economy in Minnesota, which mandates E10, was 11% worse than in Wisconsin where drivers are allowed to choose. Minnesota drivers actually went fewer miles, while burning more fuel to do it. Answer

Melanie wrote: Reading over your last Q&A session, you seemed pretty optimistic. Have the events over the course of the last 2 years left you with the same amount of optimism or more/less? Answer

Mike wrote: I know your stance towards algae biofuel companies, but I want to bring a company to your attention called PetroAlgae. (I couldn’t find a reference to them on your blog.) I think they’re pursing a very nice model of licensing instead of building and also combining food with fuel production. They are claiming that the proceeds from the proteins should almost cover the costs of the whole process. With your expertise (and maybe knowledge about their processes), could you say something about the feasibility of those claims? Answer

Evan asked: 1 How can a nation/person “create” more energy/matter, if they do not take it from another nation/person?

2 Will renewable energy be able to account for the fundamental law of conservation of energy/mass? Economically?

3 If the US is the least efficient user of highly demanded fossil energy, why is its currency(time) worth so much? Do Americans just work too much?

4 Will we see currency exchange rate changes, which are weighted more upon per capita (person) energy efficiency? Answer

James Clary asked: What do you think about the economist article about hardening soft wood?

How to toughen up softwood: A hard act to follow Answer

takchess asked: Q: Do you envision that there will be a lot of IP lawsuit once cleantech is mainstream? Do you think this will be or is a disincentive for investment in this area? Answer

The Answers

Answer

This one was debated at length in the comments following the question thread, but I just wanted to add that I have posted a guest essay on this topic before: Wisconsin Tops Minnesota. It was written by Gary Dikkers.

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Answer

That’s a good question. I suppose in general I am more optimistic over the short term, primarily because I saw a relatively fast response to high oil prices. People did cut back on consumption, which was encouraging. The downside is that we are still dealing with fallout from those high oil prices. Not that I have ever been someone who could entertain the thought of a multi-billion person die-off due to peak oil, but I feel better about the overall prospects for humanity. I don’t feel as optimistic about the prospects for the economy, though. I think we are approaching The Long Recession (and may have entered it). I have never seen such a poor job market before. This is going to be extremely tough for a lot of people who have gotten used to a certain standard of living.

I am seeing this first hand in the engineering ranks right now. Since I started my career, demand for engineers has always exceeded supply. Presently, that is not the case (as I am finding because I am still trying to place some engineers that we recently laid off). The Wall Street Journal just reported that 50% of this year’s college graduates do not have jobs. If the job market is to improve, we have to have a recovery. If recovery causes demand for oil to increase, prices are going to climb and the recovery may stall. Wash, rinse, repeat.

I think the way we live is going to change. That’s not necessarily pessimism, because the way we live has to change. I don’t think many people would suggest that our current consumption (and not just of oil) is sustainable. The pessimistic side of me says that the way we live will change because that change will be forced upon us in unpleasant ways (e.g., people simply no longer able to maintain their standard of living), instead of governments making wise policy moves to prepare us for a future in which cheap energy is no longer plentiful.

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Answer

I have heard of PetroAlgae, and just spent a bit of time on their website. Let me first say that I think upwards of 90% of the bioalgae companies out there are being highly irresponsible with their investors. The technology isn’t close to being capable of producing cost-competitive fuel, and we have companies grossly over-promising (or even committing outright fraud).

On the other hand, I do believe that algae can be a niche solution. The problem is that it is being pedaled as a scalable solution, and therefore companies are popping up all over the place to take investors money. Most will inevitably declare bankruptcy after a few years.

But let’s talk about the niches. In my opinion there are a couple of ways algae could work. If it is to be truly scalable so that it can be a big contributor to our fuel supplies, I only see one obvious path. Algae must be developed that can excrete oil. In this way, the algae can grow, you skim off the oil, and you avoid the materials handling nightmare of harvesting and processing the algae. But that is going to require new technology, and unfortunately the invention of new technology isn’t a given.

The second way that I think algae can work is if there is a valuable co-product that offsets the production costs. This is PetroAlgae’s claim. The problem I see with this approach is that it isn’t scalable. You are going to be limited by the ability to put co-product in the marketplace. If the co-product is sufficiently valuable (let’s say you engineer algae that can produce insulin), then you could indeed offset the expense of algae production. But as it scales, you start to flood the market with this valuable co-product, and it is no longer so valuable. Or, if the co-product is already a commodity, it isn’t going to command a high enough price to offset production costs. Thus, I think this approach will be limited to niches. The approach described in the previous paragraph is the only one I think can be scalable.

Specifically on PetroAlgae, let’s look at one of the claims made in the video hosted on their site. Executive VP Bill Haskell makes the claim that a commercial licensee of a PetroAlgae system can produce 1.5 million barrels of transportation fuel a year. Krassen Dimitrov has made a case (PDF warning) that I have yet to see seriously challenged that based on the solar insolation falling on the earth at best one might produce 1 gallon of algae-based fuel per square meter of area.

If we look at the 1.5 million barrel claim above, that ultimately translates into a land requirement of 15,560 acres for just growing the algae. That is a 24.3 square mile plot of land. To put that in perspective, this is a plot of land 4.5 times the size of the largest refinery in the U.S. (which also has a capacity of 140 times greater than that claimed for the algae production facility that occupies 4.5 times the amount of land). And we haven’t even begun to consider processing all that algae.

Bottom line? I think their claims are exaggerated. I suspect that if you asked them to produce data justifying that 1.5 million barrel claim, one would find that they are making projections from small experiments and don’t actually have data to back that up.

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Answer

Let me try to answer these questions all together, because they are driving at the same theme. This isn’t really about creation of energy. Both fossil fuels and biofuels are about harnessing solar energy. In the case of fossil fuels, that is solar energy that was gathered over millions of years and cooked at high pressures and temperatures by the earth. Discovery of this ancient solar energy provided a windfall of energy that most of us take for granted.

We know this windfall is going to run out some day, and we already don’t like the fact that we have to rely on other countries to sell us part of their windfall. So we try to come up with schemes for capturing that solar energy and processing it immediately. This can of course be done in many ways, from direct solar capture, through the growing and conversion of biomass into energy. Generally the attempts to use solar power in real time suffer from various shortcomings (as do fossil fuels). However, some of those shortcomings are masked by the fact that the solar power that is being capture in real time is supplemented to a large extent by that same fossil energy we are seeking to replace.

The core of the problem is that many people – and I would say that most of our political leaders – don’t really appreciate the huge differences in the net energy from fossil fuels and the net energy from most renewable fuels. I have seen schemes floated in which our fossil fuels are displaced by cellulosic ethanol. You know what’s missing from those scenarios? The energy to produce the cellulosic ethanol. When that is taken into account, the primary energy production required to run a world on renewable energy is far greater than the primary energy production required to run a world on fossil fuel. So we have to do one of two things. We have to get used to the idea of eventually using a lot less energy, or we have to find better schemes for converting sunlight. (Or we will have to devote huge amounts of manpower to energy production – diverting productivity from the rest of the economy). In the short term, we will continue to draw heavily upon our fossil fuel reserves, but that can’t last forever.

In closing, let me offer up an example of how primary energy would need to increase if we switched from the high energy returns offered by fossil fuels to the much lower energy returns of most fossil fuels. Here are some numbers I have put together in the past. In a fossil fuel-based society, the energy return is currently somewhere around 10/1. Of 85 million barrels per day, 8.5 million of those barrel equivalents were used to produce the oil. For the sake of this exercise, let’s assume that oil was used to make oil. That leaves us with a net of 76.5 million barrels with which to power the world.

[Note: Thanks to Engineer-Poet for pointing out a math error here.] Now, drop the energy return of that same society to a biofuel range of 1.3 to 1. We have to solve two equations here: Net Energy = Energy out – Energy in, and Energy return = Energy out/Energy in. Solving these two equations for a net of 76.5 million barrels of oil means we have to produce a total of 255 million barrels of oil equivalent. In the fossil fuel society, it takes 85 million barrels of total production to sustain it. In the low energy return society that approximates today’s biofuels, it takes 255 million barrels per day to sustain it. That means that if we tried to run the world on low energy return biofuels, we would need to triple the overall energy output over what we produce today.

People who say energy return doesn’t matter fail to grasp this point. Unless biofuels are able to substantially improve their energy return – or we have a huge reduction in consumption – a lot more resources are going to have to be devoted to the energy sector.

Of course caveats abound when using an energy return to evaluate a biofuel. As I pointed out in one of my essays on Coskata, it is also possible to have a very good energy return and not net out much energy. Consider an example in which you start with 100 BTUs of biomass, consume 99 BTUs of the biomass to convert it to 1 BTU of liquid fuel, and input 0.1 BTUs of fossil fuel in the process. You could argue that your fossil fuel energy return was 10/1, but your conversion efficiency was terrible. You started with 100 BTUs of biomass and ended up with 1 BTU of liquid fuel.

These are some of the considerations we have to undertake as we try to ramp up biofuels to displace fossil fuels.

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Answer

You probably knew this – which is why I imagine you asked the question – but I was interviewed for that article. The interview took place way back in January, and I had forgotten about it until someone sent me the link.

I thought the article captured the gist of the interview in a concise manner. The key points I make to people about Accoya are generally around the modification of the hydroxyl groups in the wood, and how that impacts the properties of the wood.

I do want to reiterate that despite the career change I am in the process of making, I still feel like Accoya is a fantastic product with a bright future. I will maintain an advisory relationship to Accsys/Titan Wood after I leave, so you will probably see me writing about it on occasion in the future.

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Answer

There are several lawyers who read this blog, and almost every time I make a negative comment about their profession, one or more of them sends me a note. And I will probably get one after this.

In my opinion, litigation is attracted to big piles of money. Even if 99% of lawyers only go after cases with strong merit, there are always going to be some lawyers ready to file a suit at the slightest whiff of cash. My feeling is that we have too many lawyers, and the marginal lawyer has to find a way to make a living. So we get more lawsuits than we should have.

There is a lot of money flowing into the clean tech sector, and there are many people jumping in who may not have a clear picture of who owns various IP. That is a prescription for lawsuits. So, yes, I do expect more lawsuits as clean tech goes mainstream. That is the society we live in. Will it be a disincentive to invest? I don’t know. I do know that the money that flows out of the sector and into lawyers pockets won’t necessarily be invested back into the sector. So there will be a drain in my opinion. It could be that it is a tiny fraction in relation to the overall investments. Let’s hope so.

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OK, as far as I know I got the ones that hadn’t been addressed already (either in previous essays or by someone else in the comments). If someone feels like they didn’t get a question answered, ask in the comments following this essay and I will try to address it.

August 9, 2009 Posted by | algal biodiesel, E10, eroei, eroi, ethanol, fuel efficiency, litigation, Peak Oil, PetroAlgae, thermodynamics | 141 Comments

What If I’m Wrong?

Risk Assessments

I spend a lot of time playing “What if?” We all do this. I do this when I am driving – “What if that car at the next intersection pulls out in front of me?” – when I am working – “What if that high pressure line ruptures?” – and at home – “What if I wake up and find the house is on fire?” I also spend a lot of time pondering the question “What if there are energy shortages in the near future?

When we do this, we are generally trying to understand the potential consequences of various responses to a given situation. This sort of exercise is a form of risk assessment, and it is a very important tool for making decisions about events that could impact the future. Sometimes the consequences are minor. If I choose not to take an umbrella to work and it rains, there is probably a small consequence. If I choose to pass a car on a blind hill, the consequence may be severe, and may extend to other people.

In this essay I will explore the implications of the question: “What if my viewpoint is wrong?

What If I’m Wrong About Peak Oil?

I guess it was my training as a scientist that emphasized to me that conclusions are tentative (I was two years into a Ph.D. in chemistry before I decided the job prospects were better for a chemical engineer). They are subject to revision as additional data come in, and you have to always be willing to consider that you may be wrong. But acknowledging that I could be wrong has to go hand-in-hand with the consequences of being wrong.

I spend a lot of time thinking about the possible consequences of peak oil. My view on peak oil is that it presents an enormous challenge for humanity, that we will begin to face these challenges within 10 years, and that there is no easy solution. I see spiking oil prices and the subsequent fallout as a prelude to what lies ahead. These views have influenced my profession, where I have chosen to live, what I read, and what I say to others. Fear of peak oil has influenced some people not to attend college, or to quit their jobs and move away to remote locations. It has even caused some people to decide against having children. But what if I am wrong about the timing of peak oil? What are the consequences?

For me, this one has low consequences. If I am wrong and we have adequate oil supplies for the next 40 years, then perhaps I live a more frugal life than I might have otherwise. I prefer to walk, ride a bike, or take a train instead of hopping into a car to drive some place. When I drive, I probably drive a smaller car than I would have otherwise. Then again, I have always been frugal, so perhaps I would have done all of these things regardless. The one thing that it may have impacted upon in a major way is my interest in energy.

But if I am right, then I have plans in place to manage the impact as well as I can. Those plans start with minimizing my energy consumption. It is my small insurance policy. If the worst case doomers turn out to be right, then there isn’t a lot I can do except try to make sure my family and I are in circumstances that minimize the risk. Further, I have done a lot of work that is aimed at improving our energy security in the years ahead. That work includes promoting renewable energy technologies that I think can make a long-term contribution, but also arguing for conservation, and better utilization of our own natural resources. So if I am correct, then I have chosen to work on things that have the potential to mitigate the consequences.

But what if the other side is wrong? Government agencies devoted to monitoring our natural resources often reassure us that there is plenty of oil for decades to come. But what if the government, industry, etc. turn out to have missed the mark on peak oil? In that case I think we will be in for a lot of trouble.

If the peak comes quickly and the decline is steep, I believe we will be wholly unprepared. There is not a cheap, easy substitute for oil. Much higher prices will be inevitable in such a situation. Industries – such as the airline industry – won’t be prepared and we will see perhaps entire industries go bankrupt. While I do believe that over time we can transition to natural gas vehicles (and our supplies of natural gas look adequate for a while), that will take some time. If the government is wrong and the peak happens much sooner than expected, we will be in for a very difficult transition period.

What If I am Wrong on Global Warming?

Another question I think a lot about is “What If I am Wrong on Global Warming?” To me, this one is more complicated. If the Al Gore contingent is correct, then we are facing some very major problems. As I have written before, I don’t expect us to be able to rein in carbon dioxide emissions, so I see a future with ever higher atmospheric CO2. And while I tend to come down on the side that human activity is contributing to global warming, the scientist in me reminds me that “conclusions are tentative.”

On the one hand we have potential global devastation if Al Gore is correct (because again, I believe carbon dioxide in the atmosphere will continue to climb). On the other hand are those who believe that human activities play little or no role in global warming. They view the opposition as putting global economies at risk by putting a price on carbon emissions. While I think global devastation is a much worse consequence than economic stagnation, the impact of that could be pretty severe as well.

So we have two camps, each of which thinks if the other side gets their way it will lead to global disaster. So we get a lot of vitriol in this debate, which I don’t like. I don’t know what the ultimate outcome on this one will be, but one thing I don’t want to see is the debate stifled by placing derogatory labels on those with whom you disagree.

I never discount the possibility that I could be wrong about something. I would say that precious few of my views are embedded in granite. That’s why I write this blog; to discuss, debate, learn, and change my mind when reason dictates that.

July 1, 2009 Posted by | climate change, global warming, greenhouse gases, Peak Oil | 43 Comments

The 2009 EIA Energy Conference: Day 2

Energy and the Media

This was the panel I had been asked to participate in. My fellow panelists were Steven Mufson (one of my favorite mainstream energy reporters), from the Washington Post; Eric Pooley from Harvard, (the former managing editor of Fortune); and Barbara Hagenbaugh from USA Today. The panel was moderated by John Anderson of Resources for the Future.

I can only imagine that a number of people looked at the lineup, looked at my inclusion, and thought “What’s that guy doing up there?” So here’s the background on that. When I was working at the ConocoPhillips Refinery in Billings, Montana, we followed the weekly release of the EIA’s Weekly Petroleum Status Report very closely. We included this information in a weekly supply/demand report, and it helped us to make decisions on how to run the refinery for the upcoming week.

When I started my blog, I began to follow and report on the weekly inventory release, which happens on Wednesday mornings and is followed in the afternoon by This Week in Petroleum. Kyle Saunders (Professor Goose) at The Oil Drum liked the weekly reports and asked me to bring them over to The Oil Drum. This all helped drive more traffic to the EIA website, and helped more people come to appreciate the value of the EIA data.

Doug MacIntyre, at that time the primary author of This Week In Petroleum, started commenting occasionally on my blog, and was quick to answer any questions that readers had. Over time I corresponded with several people at the EIA, and they invited me up to the conference last year. The timing didn’t work out last year as I was in the Netherlands, but this year’s conference was doable. So that’s how I ended up on a panel with the mainstream media.

The panel consisted of use all sitting around a table and taking questions from John, and eventually the audience. I will mostly report on what I said, because it was pretty difficult to take notes while sitting around the table.

The first question was on the price run-up last summer, and whether the media coverage was adequate. We all had somewhat different answers on this, but I took the opportunity to point out that the weekly inventory data can be an important predictor of prices. The plunging gasoline inventory data was the basis of my predictions for $3 and $4 gasoline in the Spring of 2007 and 2008 respectively (which we did in fact see). The other thing I pointed out about this issue is that Google searches on “rising oil/gas prices” probably drive more first-time traffic to my blog than anything else. (Searches for the “water car” are also quite popular).

Next John asked about phony, or false balance in reporting. Before the panel, I had asked readers at my blog and at The Oil Drum for suggestions on topics to cover, and false balance was mentioned by several readers. An example one reader gave was “Scientists report that the earth is round – Flat Earth Institute objects…” So how much credibility do you afford different sides of the debate?

The others on the panel agreed that this was a problem. I made two observations. One, it isn’t always easy to figure out which side is the Flat Earth Institute. I spend a lot of time trying to figure that out at times, especially over newly announced technologies. Second, the good reporters do a lot of research when they are reporting on a story so they can determine who is credible. I noted that Steve Mufson had interviewed me by phone in 2005, and all that came from that hour-long interview was a partial quote in the story. At the time I was annoyed, but later on I came to understand that Mufson was just doing a lot of homework to get the story. Most of his questions were designed to figure out if I knew what I was talking about. The people you have to watch are the ones who call for just a quote.

As an example of false balance, I talked about Brazilian ethanol. Dan Rather and Frank Sesno have both been guilty on their Brazilian ethanol reporting. In hindsight, perhaps their reporting wasn’t false balance so much as completely unbalanced, and lacking any semblance of critical reporting. They both essentially reported the Brazilian ethanol story as “They did it. We can be just like them.” I went on to explain a bit more about the truth of Brazil’s energy independence miracle, which I will update in an upcoming essay (but is also covered in my ASPO presentation from last September (Biofuels: Facts and Fallacies).

There was more discussion about scale (e.g., biofuel versus petroleum usage) and the role bloggers are playing now with respect to reporting news (some specialist bloggers can provide a technical analysis that the mainstream media may lack; on the other hand they don’t always write to journalistic standards). I know I am forgetting some topics, but ultimately John started to take questions.

There were some good questions, but also some instances where the questioner simply wanted to make a point. Morgan Downey asked what energy books I liked. I told him that I was about 250 pages into his book, Oil 101, and that it was a fantastic book. I also mentioned Twilight in the Desert as an influential book on me. I noted that while I had some issues with Twilight, I thought it did a great job of driving home the importance of Saudi Arabia in the world oil picture, and just how important it is that we understand what’s going on there. Finally, I mentioned Gusher of Lies as a book I had really enjoyed.

I was asked about peak oil and the notion that we are running out of oil. I took the opportunity to clarify that peak oil does not mean we are running out of oil – but the media often misconstrues the issue in this manner. I said that we would still have oil in 100 years. Peak oil means that we can’t get it out of the ground fast enough to meet demand, and that if the production peak is near that we are facing some difficult years. (Other than this question and my answer, there was scarce mention of peak oil during the conference).

A representative from (I believe) the California Independent Petroleum Association got up and made a statement that he felt that despite the important role the industry plays, they are being demonized and singled out for punitive taxes. I responded that I could empathize; that one of my greatest concerns is that we will discourage domestic oil and gas production, and then biofuels fail to deliver per expectations. In that case I think we become even more dependent upon OPEC.

Fellow panelist Eric Pooley disagreed and said we need even stronger incentives for moving away from oil. That really misses the point I was making, though. You can have the strongest incentives in the world, but they can’t assure that technology breakthroughs will occur. So while you are promoting one industry at the expense of another, very successful industry that plays a critical role in the world, what is the contingency plan if the incentives don’t pay off?

I was asked about how I come up with ideas for what to write. I said that I browse the news headlines on energy every morning, and that I have Google news alerts on topics like “energy”, “oil prices”, and “peak oil.” If something strikes me as particularly interesting – or particularly wrong – then I may write something about it.

After the panel, a number of people came up and introduced themselves. Some thanked me for speaking up on behalf of the oil and gas industry. One audience member asked me why I don’t write more about “the global warming scam.” As I said to him “I am not touching that with a 10-foot pole.” He asked why, and I said 1). I am not an expert; 2). Discussions over the issue always seem to degenerate into name-calling. I will repeat my position on this. Coming from a science background, I have a healthy respect for scientific consensus in areas where I don’t have specific expertise. On the other hand, the issue has become so polarized that people who do try to discuss the science are frequently shouted down and called names. I don’t endorse those sorts of tactics, no matter how correct you think you might be.

Investing in Oil and Natural Gas – Opportunities and Barriers

Once again, there were two sessions going on simultaneously that I wanted to see. I had to miss Greenhouse Gas Emissions: What’s Next? But I have been a big fan of Deutsche Bank‘s Paul Sankey for several years, and I wasn’t about to miss his panel. Sankey has testified before Congress several times on the oil and gas markets, and I often feel like he is the only one there who knows what he is talking about. (I formerly summarized one of his appearances in Gouging is an Idiotic Explanation). Joining Sankey on the panel were Susan Farrell of PFC Energy, John Felmy of the American Petroleum Institute, and Michelle Foss of the University of Texas. The moderator was Bruce Bawks of the EIA.

The panel agreed that $50 was about the average break even price for oil production today, suggesting that prices are unlikely to fall below that level for long. Farrell commented that worldwide expenditures on exploration and production amounted to $500 billion in 2008. She also noted that oil companies have been unable to arrest the decline rate; that it is in fact increasing. I believe it was also Farrell who suggested that in 2010 the haves would acquire more of the ‘have-nots.’ Someone on the panel stated that the global supply crunch still exists.

I think it was Felmy who said that even if we make a large scale move to hybrids or electric vehicles, 50% of the world’s lithium reserves are in Bolivia. So we may end up trading Chavez for Evo Morales. I don’t know; I think I would make that trade.

As always, Sankey made a lot of interesting comments. He said that while the banks might make a lot of money in a cap and trade system, intellectually it didn’t seem like a good idea to him. He said he preferred a direct carbon tax. He said that we are setting up a slingshot for prices right now, but “2010 could be a bloodbath.” He also said that the overall policy imperative of the new administration seems to be “anything but oil”, but he believes that “attacking the oil and gas industry will be incredibly harmful to the U.S. economy.”

Other Sankey zingers:

“Alaska would rate as one of the ‘countries’ most hostile to the oil industry.”

“I am not sure there is any equity in any bank in the U.S.”

“If we stopped producing gold tomorrow, we have 100 years of supply in inventory. If we stopped producing oil tomorrow, we have 55 days in inventory.”

Finally, someone on the panel (I think it was Sankey) recommended the book Oil on the Brain as providing great insight into the industry. The author, Lisa Margonelli, had a pretty average view of the industry until she delved deeply into the supply chain, traveling to Iran, Nigeria, Chad, and Venezuela. I have not read the book, but will put it on my reading list.

Thus ends my recollections of the conference. As I said in the previous entry, this is not so much a detailed account of everything as it is just my own observations and things that stuck with me as interesting, odd, etc. If you spot something that you think is in error, please let me know. For me, this was an interesting experience, and one that I was glad to be a part of. In conclusion, I want to thank the good people at the EIA for inviting me.

Previous Entries

Energy Secretary Steven Chu’s comments

The 2009 EIA Energy Conference: Day 1

April 14, 2009 Posted by | American Petroleum Institute, api, ConocoPhillips, COP, EIA, Energy Information Administration, Paul Sankey, Peak Oil, twip | 37 Comments

The 2009 EIA Energy Conference: Day 2

Energy and the Media

This was the panel I had been asked to participate in. My fellow panelists were Steven Mufson (one of my favorite mainstream energy reporters), from the Washington Post; Eric Pooley from Harvard, (the former managing editor of Fortune); and Barbara Hagenbaugh from USA Today. The panel was moderated by John Anderson of Resources for the Future.

I can only imagine that a number of people looked at the lineup, looked at my inclusion, and thought “What’s that guy doing up there?” So here’s the background on that. When I was working at the ConocoPhillips Refinery in Billings, Montana, we followed the weekly release of the EIA’s Weekly Petroleum Status Report very closely. We included this information in a weekly supply/demand report, and it helped us to make decisions on how to run the refinery for the upcoming week.

When I started my blog, I began to follow and report on the weekly inventory release, which happens on Wednesday mornings and is followed in the afternoon by This Week in Petroleum. Kyle Saunders (Professor Goose) at The Oil Drum liked the weekly reports and asked me to bring them over to The Oil Drum. This all helped drive more traffic to the EIA website, and helped more people come to appreciate the value of the EIA data.

Doug MacIntyre, at that time the primary author of This Week In Petroleum, started commenting occasionally on my blog, and was quick to answer any questions that readers had. Over time I corresponded with several people at the EIA, and they invited me up to the conference last year. The timing didn’t work out last year as I was in the Netherlands, but this year’s conference was doable. So that’s how I ended up on a panel with the mainstream media.

The panel consisted of use all sitting around a table and taking questions from John, and eventually the audience. I will mostly report on what I said, because it was pretty difficult to take notes while sitting around the table.

The first question was on the price run-up last summer, and whether the media coverage was adequate. We all had somewhat different answers on this, but I took the opportunity to point out that the weekly inventory data can be an important predictor of prices. The plunging gasoline inventory data was the basis of my predictions for $3 and $4 gasoline in the Spring of 2007 and 2008 respectively (which we did in fact see). The other thing I pointed out about this issue is that Google searches on “rising oil/gas prices” probably drive more first-time traffic to my blog than anything else. (Searches for the “water car” are also quite popular).

Next John asked about phony, or false balance in reporting. Before the panel, I had asked readers at my blog and at The Oil Drum for suggestions on topics to cover, and false balance was mentioned by several readers. An example one reader gave was “Scientists report that the earth is round – Flat Earth Institute objects…” So how much credibility do you afford different sides of the debate?

The others on the panel agreed that this was a problem. I made two observations. One, it isn’t always easy to figure out which side is the Flat Earth Institute. I spend a lot of time trying to figure that out at times, especially over newly announced technologies. Second, the good reporters do a lot of research when they are reporting on a story so they can determine who is credible. I noted that Steve Mufson had interviewed me by phone in 2005, and all that came from that hour-long interview was a partial quote in the story. At the time I was annoyed, but later on I came to understand that Mufson was just doing a lot of homework to get the story. Most of his questions were designed to figure out if I knew what I was talking about. The people you have to watch are the ones who call for just a quote.

As an example of false balance, I talked about Brazilian ethanol. Dan Rather and Frank Sesno have both been guilty on their Brazilian ethanol reporting. In hindsight, perhaps their reporting wasn’t false balance so much as completely unbalanced, and lacking any semblance of critical reporting. They both essentially reported the Brazilian ethanol story as “They did it. We can be just like them.” I went on to explain a bit more about the truth of Brazil’s energy independence miracle, which I will update in an upcoming essay (but is also covered in my ASPO presentation from last September (Biofuels: Facts and Fallacies).

There was more discussion about scale (e.g., biofuel versus petroleum usage) and the role bloggers are playing now with respect to reporting news (some specialist bloggers can provide a technical analysis that the mainstream media may lack; on the other hand they don’t always write to journalistic standards). I know I am forgetting some topics, but ultimately John started to take questions.

There were some good questions, but also some instances where the questioner simply wanted to make a point. Morgan Downey asked what energy books I liked. I told him that I was about 250 pages into his book, Oil 101, and that it was a fantastic book. I also mentioned Twilight in the Desert as an influential book on me. I noted that while I had some issues with Twilight, I thought it did a great job of driving home the importance of Saudi Arabia in the world oil picture, and just how important it is that we understand what’s going on there. Finally, I mentioned Gusher of Lies as a book I had really enjoyed.

I was asked about peak oil and the notion that we are running out of oil. I took the opportunity to clarify that peak oil does not mean we are running out of oil – but the media often misconstrues the issue in this manner. I said that we would still have oil in 100 years. Peak oil means that we can’t get it out of the ground fast enough to meet demand, and that if the production peak is near that we are facing some difficult years. (Other than this question and my answer, there was scarce mention of peak oil during the conference).

A representative from (I believe) the California Independent Petroleum Association got up and made a statement that he felt that despite the important role the industry plays, they are being demonized and singled out for punitive taxes. I responded that I could empathize; that one of my greatest concerns is that we will discourage domestic oil and gas production, and then biofuels fail to deliver per expectations. In that case I think we become even more dependent upon OPEC.

Fellow panelist Eric Pooley disagreed and said we need even stronger incentives for moving away from oil. That really misses the point I was making, though. You can have the strongest incentives in the world, but they can’t assure that technology breakthroughs will occur. So while you are promoting one industry at the expense of another, very successful industry that plays a critical role in the world, what is the contingency plan if the incentives don’t pay off?

I was asked about how I come up with ideas for what to write. I said that I browse the news headlines on energy every morning, and that I have Google news alerts on topics like “energy”, “oil prices”, and “peak oil.” If something strikes me as particularly interesting – or particularly wrong – then I may write something about it.

After the panel, a number of people came up and introduced themselves. Some thanked me for speaking up on behalf of the oil and gas industry. One audience member asked me why I don’t write more about “the global warming scam.” As I said to him “I am not touching that with a 10-foot pole.” He asked why, and I said 1). I am not an expert; 2). Discussions over the issue always seem to degenerate into name-calling. I will repeat my position on this. Coming from a science background, I have a healthy respect for scientific consensus in areas where I don’t have specific expertise. On the other hand, the issue has become so polarized that people who do try to discuss the science are frequently shouted down and called names. I don’t endorse those sorts of tactics, no matter how correct you think you might be.

Investing in Oil and Natural Gas – Opportunities and Barriers

Once again, there were two sessions going on simultaneously that I wanted to see. I had to miss Greenhouse Gas Emissions: What’s Next? But I have been a big fan of Deutsche Bank‘s Paul Sankey for several years, and I wasn’t about to miss his panel. Sankey has testified before Congress several times on the oil and gas markets, and I often feel like he is the only one there who knows what he is talking about. (I formerly summarized one of his appearances in Gouging is an Idiotic Explanation). Joining Sankey on the panel were Susan Farrell of PFC Energy, John Felmy of the American Petroleum Institute, and Michelle Foss of the University of Texas. The moderator was Bruce Bawks of the EIA.

The panel agreed that $50 was about the average break even price for oil production today, suggesting that prices are unlikely to fall below that level for long. Farrell commented that worldwide expenditures on exploration and production amounted to $500 billion in 2008. She also noted that oil companies have been unable to arrest the decline rate; that it is in fact increasing. I believe it was also Farrell who suggested that in 2010 the haves would acquire more of the ‘have-nots.’ Someone on the panel stated that the global supply crunch still exists.

I think it was Felmy who said that even if we make a large scale move to hybrids or electric vehicles, 50% of the world’s lithium reserves are in Bolivia. So we may end up trading Chavez for Evo Morales. I don’t know; I think I would make that trade.

As always, Sankey made a lot of interesting comments. He said that while the banks might make a lot of money in a cap and trade system, intellectually it didn’t seem like a good idea to him. He said he preferred a direct carbon tax. He said that we are setting up a slingshot for prices right now, but “2010 could be a bloodbath.” He also said that the overall policy imperative of the new administration seems to be “anything but oil”, but he believes that “attacking the oil and gas industry will be incredibly harmful to the U.S. economy.”

Other Sankey zingers:

“Alaska would rate as one of the ‘countries’ most hostile to the oil industry.”

“I am not sure there is any equity in any bank in the U.S.”

“If we stopped producing gold tomorrow, we have 100 years of supply in inventory. If we stopped producing oil tomorrow, we have 55 days in inventory.”

Finally, someone on the panel (I think it was Sankey) recommended the book Oil on the Brain as providing great insight into the industry. The author, Lisa Margonelli, had a pretty average view of the industry until she delved deeply into the supply chain, traveling to Iran, Nigeria, Chad, and Venezuela. I have not read the book, but will put it on my reading list.

Thus ends my recollections of the conference. As I said in the previous entry, this is not so much a detailed account of everything as it is just my own observations and things that stuck with me as interesting, odd, etc. If you spot something that you think is in error, please let me know. For me, this was an interesting experience, and one that I was glad to be a part of. In conclusion, I want to thank the good people at the EIA for inviting me.

Previous Entries

Energy Secretary Steven Chu’s comments

The 2009 EIA Energy Conference: Day 1

April 14, 2009 Posted by | American Petroleum Institute, api, ConocoPhillips, COP, EIA, Energy Information Administration, Paul Sankey, Peak Oil, twip | 62 Comments

The Next Five Years

Peak Lite and the Current Oil Picture

A few years ago, after spending a lot of time thinking about peak oil, and then watching the price of oil break out of its historical trading range and head higher, the idea of Peak Lite came to me. Over time the price of oil had bounced between $10 and $30 a barrel, but about 5 years ago it broke from that pattern and started the steady climb that culminated in $147/bbl last summer. I had been having various debates about whether we were or weren’t at the global peak in oil production (I was taking the ‘not yet but soon’ position), but it started to become clear to me that we didn’t require a global peak before we started to feel the impact of peak oil.

I proposed the following to explain what I thought was happening. (Don’t get too fixated on the dates or prices as they are just there to illustrate the concept). Figure 1 shows the sort of price behavior if spare oil production capacity is constant. Of course spare production fluctuates up and down, as does price, but my thesis is that constant excess capacity should keep the price relatively stable – as long as the excess is large enough that several different producers have the ability to step up and fill shortfalls. This concept is illustrated by Figure 1, with a constant four million barrels per day (bpd) of excess capacity and an oil price of $25/bbl.

Figure 1. Simulated Oil Price Behavior at Constant Spare Capacity


Figure 2. Simulated Oil Price Behavior at Eroding Spare Capacity

Figure 2 illustrates the case in which demand growth is outstripping supply growth, leading to diminishing spare capacity. This is the mode that we have been in for the past few years. Spare capacity was eroded by several million barrels during the first half of this decade, and as a result the price of oil climbed higher, and became increasingly volatile. This was caused by a combination of stronger demand worldwide, and an oil industry that had not anticipated such strong demand growth. As a result, the global oil industry didn’t invest aggressively enough to meet demand, and while capacity did grow, it didn’t grow quickly enough to keep prices stable.


Figure 3. The Next Five Years?

Figure 3 illustrates a future in which world demand has collided with world supply, and then demand growth continues to stay ahead of supply growth. In the world of peak oil, this happens because supply is falling. In the peak lite world, it can occur even if supply is increasing. In the figure, I show an example of supply and demand colliding in 2010, then demand exceeding supply in future years. Of course demand as defined in Economics 101 won’t actually exceed supply, demand will just be destroyed by rising prices (as shown on the right axis) to keep it in equilibrium with supply. Figures 2 and 3 illustrate what Peak Lite is all about; that you don’t have to have falling supplies to start experiencing the effects of peak oil.

I created the original figures in mid-2007, and as we know by mid-2008 oil prices had risen much higher than the $95/bbl I illustrated on the figure. But circumstances have changed. As a result of climbing oil prices, new projects have begun to come online. Strong price signals from the previous five years had resulted in major investments into new oil production (but it takes a few years to bring new projects online); about 5 million bpd of new capacity was expected to come online in 2008 alone.

At the same time, oil prices climbed much too quickly for the economy to even begin to adjust, and this contributed to the overall economic collapse. The combination of high prices and the economic troubles have taken a bite out of demand (at least temporarily). So we essentially find ourselves back in the position of having perhaps three or four million barrels of excess capacity around the world, and oil prices back in the $40’s. Thus I think Figure 4 explains where we are now – and where I think we are headed.


Figure 4. When Do Prices Bounce Back?

In Figure 4, the year 2007 shows a world in which oil is at $80 and the demand has nearly caught up with supply. 2008 shows an example of no spare capacity, and the oil price sharply higher. Then 2009 shows the situation with reduced demand, some incremental capacity increase over 2008 (new projects scheduled to come online in 2009 will generally be too far along to cancel), and the corresponding price collapse arising from the largest spare capacity situation in several years.

So, where do we go from here? I think it depends on how quickly demand bounces back.

The Next Five Years

What might the next five years look like? Do we revert back to Figure 1, in which we see steady prices for years (except this time in the $40 region)? Or do we return to the eroding capacity case of Figures 2 and 3? I have reason to believe the latter is the case.

One reason for this is that the oil industry needs higher prices to warrant new projects. Sig Cornelius, the Chief Financial Officer of ConocoPhillips, recently stated that oil needs to average $52/bbl in order for the company to break even. The cost of finding and developing oil has gone up, and recently Eni CEO Paolo Scaroni said that oil prices would need to be $60 to keep up the needed investments. As a result of low oil prices, drilling rigs are being underutilized and projects are being canceled:

E&P Capital Expenditure Cutbacks

The International Energy Agency estimates that about $100 billion of worldwide oil production capacity expansion projects have been cancelled or postponed over the past half year. According to Barclays Capital, oil companies have cut worldwide exploration and production spending by 18 percent so far this year. Deutsche Bank estimates that U.S. energy exploration-and-production spending will drop $22.5 billion this year, a 40-percent, year-on-year decline.

Saudi Arabia has cancelled the development of several fields such as the Manifa and Dammam oil field, which would have added about 1 million barrels per day (MMBpd) of capacity. Refinery projects have also been delayed or cancelled while Saudi Aramco reviews cost estimates in the light of the significant weakening of oil prices. Saudi Aramco will consider re-issuing a tender for Manifa’s development at a later date, assuming bids from contractors reflect a reduction in raw materials to match lower oil prices.

Such cancellations come at a price, which the article summarizes:

New oil-and-gas projects usually take several years of development before starting commercial production. According to Cambridge Energy Research Associates, the scaleback in exploration and production could reduce future global oil supplies by up to 7.6 MMBpd in five years, or 9 percent of current production. If demand suddenly comes back as it did in 2003-2004, there could be a resulting shortfall of production and much higher energy prices. The International Energy Agency (IEA) also warns that the credit crisis and project cancellations will lead to no spare crude oil capacity by 2013.

The longer oil prices stay low, the worse the shortfall will be due to the project cancellations and increasing demand. Incidentally, these factors also explain a big part of why the oil industry is historically cyclical; in the good times producers spend money, and then when supply gets ahead of demand and the price falls, they slow down on investing. This eventually leads to tightness again, so the good times return. The steepness of the World Oil Price curve in Figure 4 could be much steeper if demand recovers sooner rather than later.

The prospect of sharply higher taxes on the oil industry is a second factor that threatens to slow the development of new oil projects. A recent study by the American Petroleum Institute concluded that this number is “at least” $400 billion over the next 10 years. That seemed quite high to me, so I wrote to the API for a breakdown. Jane van Ryan, Senior Manager of Communications at the API, responded:

The figure is, according to our tax experts, “at least $400 billion” and could be significantly higher.

Using EIA numbers, our tax analysts have examined the impact on the industry of the administration’s cap-and-trade proposal using five scenarios. The results indicate that about 60 percent of the administration’s proposal, which would raise $645.7 billion in “climate revenues,” would be funded by the oil and natural gas industry. This means the industry would pay about $400-450 billion. We have opted to use the lower figure.

The industry’s share of business-wide tax provisions as well as new taxes on the industry are estimated at $80-90 billion over ten years. Again, we have opted to use the lower figure. These tax provisions include the reinstatement of the Superfund Tax, the repeal of the LIFO provision, internal enforcement/reform deferral/related tax reform policies, an excise tax levy on federal offshore leases in the Gulf of Mexico, the repeal of the enhanced oil recovery credit, the repeal of the marginal well tax credit, the repeal of the expensing of intangible drilling costs, the repeal of the deduction for tertiary injectants, the repeal of the passive loss exception for working interests, the repeal of Sec. 199 for oil and natural companies, the increase of the G&G amortization period for independent producers to 7 years, and the repeal of the percentage depletion for oil and natural gas.

While I won’t get into all of the pros and cons of new taxes, higher taxes will provide a disincentive for projects which are projected to have a marginal financial return. If this further contributes to underinvestment, it will worsen the overall tightness in the oil markets, which will put more upward pressure on prices. Thus, high oil prices will likely again be a campaign issue in the 2012 presidential elections.

Conclusions

While the oil industry is historically cyclical, I believe we are approaching the point at which the industry will no longer be able to build out enough new projects to stay ahead of demand. This could manifest itself as peak oil, in which case the rate of depletion permanently overtakes the rate at which new production comes online. Or it could first manifest as peak lite, in which case new production still stays somewhat ahead of depletion, but can’t keep up with new demand. In either of these situations, I think the historical cyclicality of the oil industry will disappear. In early 2008 I thought we had reached that point, but it appears that we had at least one more cycle ahead.

While it is too early to tell with a high level of confidence just where we are on the depletion curve, the summer of 2008 provided of taste of life in an oil-constrained world. The current level of underinvestment and the prospect of higher taxes are setting up another situation in which spare capacity erodes, leading to higher oil prices and greater volatility. Add to this the prospect of a global oil production peak, and I have trouble seeing a case where oil prices will remain stable in the coming years.

As an investor, I use blue chip oil stocks as a defensive measure against much higher prices. I am not one who subscribes to the idea that oil companies are going to be put out of business by running out of oil, or by ethanol, algal biodiesel, or any other combination of alternative fuel technologies. In fact, I strongly believe that if an alternative technology begins to look attractive enough, oil companies have deep enough pockets to shift their business in that direction. But I think that’s unlikely to happen any time soon.

As a consumer, it would probably pay to evaluate just how much higher prices might impact your budget – and then take action. Can you sustain oil prices that return to $150/bbl or more? Even if you can, do you want that uncertainty hanging over your budget? If not, then it would be prudent to take steps to minimize the personal impact of high oil prices. Steps to consider include utilizing more fuel efficient transportation, public transportation, ride-sharing, and if possible locating closer to your place of employment.

Plan ahead and don’t get caught off-guard like so many did last summer. It is only a matter of time before history repeats itself. Here’s hoping our political leaders make policy decisions that won’t worsen the impact.

March 24, 2009 Posted by | oil prices, oil production, Peak Lite, Peak Oil | 36 Comments

The Next Five Years

Peak Lite and the Current Oil Picture

A few years ago, after spending a lot of time thinking about peak oil, and then watching the price of oil break out of its historical trading range and head higher, the idea of Peak Lite came to me. Over time the price of oil had bounced between $10 and $30 a barrel, but about 5 years ago it broke from that pattern and started the steady climb that culminated in $147/bbl last summer. I had been having various debates about whether we were or weren’t at the global peak in oil production (I was taking the ‘not yet but soon’ position), but it started to become clear to me that we didn’t require a global peak before we started to feel the impact of peak oil.

I proposed the following to explain what I thought was happening. (Don’t get too fixated on the dates or prices as they are just there to illustrate the concept). Figure 1 shows the sort of price behavior if spare oil production capacity is constant. Of course spare production fluctuates up and down, as does price, but my thesis is that constant excess capacity should keep the price relatively stable – as long as the excess is large enough that several different producers have the ability to step up and fill shortfalls. This concept is illustrated by Figure 1, with a constant four million barrels per day (bpd) of excess capacity and an oil price of $25/bbl.

Figure 1. Simulated Oil Price Behavior at Constant Spare Capacity


Figure 2. Simulated Oil Price Behavior at Eroding Spare Capacity

Figure 2 illustrates the case in which demand growth is outstripping supply growth, leading to diminishing spare capacity. This is the mode that we have been in for the past few years. Spare capacity was eroded by several million barrels during the first half of this decade, and as a result the price of oil climbed higher, and became increasingly volatile. This was caused by a combination of stronger demand worldwide, and an oil industry that had not anticipated such strong demand growth. As a result, the global oil industry didn’t invest aggressively enough to meet demand, and while capacity did grow, it didn’t grow quickly enough to keep prices stable.


Figure 3. The Next Five Years?

Figure 3 illustrates a future in which world demand has collided with world supply, and then demand growth continues to stay ahead of supply growth. In the world of peak oil, this happens because supply is falling. In the peak lite world, it can occur even if supply is increasing. In the figure, I show an example of supply and demand colliding in 2010, then demand exceeding supply in future years. Of course demand as defined in Economics 101 won’t actually exceed supply, demand will just be destroyed by rising prices (as shown on the right axis) to keep it in equilibrium with supply. Figures 2 and 3 illustrate what Peak Lite is all about; that you don’t have to have falling supplies to start experiencing the effects of peak oil.

I created the original figures in mid-2007, and as we know by mid-2008 oil prices had risen much higher than the $95/bbl I illustrated on the figure. But circumstances have changed. As a result of climbing oil prices, new projects have begun to come online. Strong price signals from the previous five years had resulted in major investments into new oil production (but it takes a few years to bring new projects online); about 5 million bpd of new capacity was expected to come online in 2008 alone.

At the same time, oil prices climbed much too quickly for the economy to even begin to adjust, and this contributed to the overall economic collapse. The combination of high prices and the economic troubles have taken a bite out of demand (at least temporarily). So we essentially find ourselves back in the position of having perhaps three or four million barrels of excess capacity around the world, and oil prices back in the $40’s. Thus I think Figure 4 explains where we are now – and where I think we are headed.


Figure 4. When Do Prices Bounce Back?

In Figure 4, the year 2007 shows a world in which oil is at $80 and the demand has nearly caught up with supply. 2008 shows an example of no spare capacity, and the oil price sharply higher. Then 2009 shows the situation with reduced demand, some incremental capacity increase over 2008 (new projects scheduled to come online in 2009 will generally be too far along to cancel), and the corresponding price collapse arising from the largest spare capacity situation in several years.

So, where do we go from here? I think it depends on how quickly demand bounces back.

The Next Five Years

What might the next five years look like? Do we revert back to Figure 1, in which we see steady prices for years (except this time in the $40 region)? Or do we return to the eroding capacity case of Figures 2 and 3? I have reason to believe the latter is the case.

One reason for this is that the oil industry needs higher prices to warrant new projects. Sig Cornelius, the Chief Financial Officer of ConocoPhillips, recently stated that oil needs to average $52/bbl in order for the company to break even. The cost of finding and developing oil has gone up, and recently Eni CEO Paolo Scaroni said that oil prices would need to be $60 to keep up the needed investments. As a result of low oil prices, drilling rigs are being underutilized and projects are being canceled:

E&P Capital Expenditure Cutbacks

The International Energy Agency estimates that about $100 billion of worldwide oil production capacity expansion projects have been cancelled or postponed over the past half year. According to Barclays Capital, oil companies have cut worldwide exploration and production spending by 18 percent so far this year. Deutsche Bank estimates that U.S. energy exploration-and-production spending will drop $22.5 billion this year, a 40-percent, year-on-year decline.

Saudi Arabia has cancelled the development of several fields such as the Manifa and Dammam oil field, which would have added about 1 million barrels per day (MMBpd) of capacity. Refinery projects have also been delayed or cancelled while Saudi Aramco reviews cost estimates in the light of the significant weakening of oil prices. Saudi Aramco will consider re-issuing a tender for Manifa’s development at a later date, assuming bids from contractors reflect a reduction in raw materials to match lower oil prices.

Such cancellations come at a price, which the article summarizes:

New oil-and-gas projects usually take several years of development before starting commercial production. According to Cambridge Energy Research Associates, the scaleback in exploration and production could reduce future global oil supplies by up to 7.6 MMBpd in five years, or 9 percent of current production. If demand suddenly comes back as it did in 2003-2004, there could be a resulting shortfall of production and much higher energy prices. The International Energy Agency (IEA) also warns that the credit crisis and project cancellations will lead to no spare crude oil capacity by 2013.

The longer oil prices stay low, the worse the shortfall will be due to the project cancellations and increasing demand. Incidentally, these factors also explain a big part of why the oil industry is historically cyclical; in the good times producers spend money, and then when supply gets ahead of demand and the price falls, they slow down on investing. This eventually leads to tightness again, so the good times return. The steepness of the World Oil Price curve in Figure 4 could be much steeper if demand recovers sooner rather than later.

The prospect of sharply higher taxes on the oil industry is a second factor that threatens to slow the development of new oil projects. A recent study by the American Petroleum Institute concluded that this number is “at least” $400 billion over the next 10 years. That seemed quite high to me, so I wrote to the API for a breakdown. Jane van Ryan, Senior Manager of Communications at the API, responded:

The figure is, according to our tax experts, “at least $400 billion” and could be significantly higher.

Using EIA numbers, our tax analysts have examined the impact on the industry of the administration’s cap-and-trade proposal using five scenarios. The results indicate that about 60 percent of the administration’s proposal, which would raise $645.7 billion in “climate revenues,” would be funded by the oil and natural gas industry. This means the industry would pay about $400-450 billion. We have opted to use the lower figure.

The industry’s share of business-wide tax provisions as well as new taxes on the industry are estimated at $80-90 billion over ten years. Again, we have opted to use the lower figure. These tax provisions include the reinstatement of the Superfund Tax, the repeal of the LIFO provision, internal enforcement/reform deferral/related tax reform policies, an excise tax levy on federal offshore leases in the Gulf of Mexico, the repeal of the enhanced oil recovery credit, the repeal of the marginal well tax credit, the repeal of the expensing of intangible drilling costs, the repeal of the deduction for tertiary injectants, the repeal of the passive loss exception for working interests, the repeal of Sec. 199 for oil and natural companies, the increase of the G&G amortization period for independent producers to 7 years, and the repeal of the percentage depletion for oil and natural gas.

While I won’t get into all of the pros and cons of new taxes, higher taxes will provide a disincentive for projects which are projected to have a marginal financial return. If this further contributes to underinvestment, it will worsen the overall tightness in the oil markets, which will put more upward pressure on prices. Thus, high oil prices will likely again be a campaign issue in the 2012 presidential elections.

Conclusions

While the oil industry is historically cyclical, I believe we are approaching the point at which the industry will no longer be able to build out enough new projects to stay ahead of demand. This could manifest itself as peak oil, in which case the rate of depletion permanently overtakes the rate at which new production comes online. Or it could first manifest as peak lite, in which case new production still stays somewhat ahead of depletion, but can’t keep up with new demand. In either of these situations, I think the historical cyclicality of the oil industry will disappear. In early 2008 I thought we had reached that point, but it appears that we had at least one more cycle ahead.

While it is too early to tell with a high level of confidence just where we are on the depletion curve, the summer of 2008 provided of taste of life in an oil-constrained world. The current level of underinvestment and the prospect of higher taxes are setting up another situation in which spare capacity erodes, leading to higher oil prices and greater volatility. Add to this the prospect of a global oil production peak, and I have trouble seeing a case where oil prices will remain stable in the coming years.

As an investor, I use blue chip oil stocks as a defensive measure against much higher prices. I am not one who subscribes to the idea that oil companies are going to be put out of business by running out of oil, or by ethanol, algal biodiesel, or any other combination of alternative fuel technologies. In fact, I strongly believe that if an alternative technology begins to look attractive enough, oil companies have deep enough pockets to shift their business in that direction. But I think that’s unlikely to happen any time soon.

As a consumer, it would probably pay to evaluate just how much higher prices might impact your budget – and then take action. Can you sustain oil prices that return to $150/bbl or more? Even if you can, do you want that uncertainty hanging over your budget? If not, then it would be prudent to take steps to minimize the personal impact of high oil prices. Steps to consider include utilizing more fuel efficient transportation, public transportation, ride-sharing, and if possible locating closer to your place of employment.

Plan ahead and don’t get caught off-guard like so many did last summer. It is only a matter of time before history repeats itself. Here’s hoping our political leaders make policy decisions that won’t worsen the impact.

March 24, 2009 Posted by | oil prices, oil production, Peak Lite, Peak Oil | 54 Comments

The 2005 Peak Falls

Today the Energy Information Administration released the December 2008 oil production numbers. Peak Oil 2005 is now history. 2008 has officially eclipsed the previous 2005 peak for the all-time annual oil production record, albeit just barely over 2005. Average daily production in 2005 was 73.737 million barrels per day (crude oil plus condensate) and average daily production in 2008 was 73.791 million barrels per day. For the year, 93.6 million more barrels were produced in 2008 than in 2005.

Just in case you are keeping score, the monthly record also now resides in 2008. July 2008 checked in at 74.8 million barrels per day. One wonders what that makes Ken Deffeyes, who after calling the peak in December 2005 (at 74.2 million bpd), said “I can now refer to the world oil peak in the past tense. My career as a prophet is over. I’m now an historian.”

The numbers may be found here: Crude Oil Including Lease Condensate

I have been saying since 2006 that I didn’t think the 2005 peak would stand (and sometimes getting into heated arguments with dogmatic believers as a result). But due to the economic collapse, I expect 2008 will stand as the record for a while – and quite possibly forever. It all hinges on how long it takes for demand to recover. OPEC has shaved about 2 million barrels a day off of production since summer, and I suspect they will be very slow to open the taps back up if prices head higher. If we don’t eclipse the 2008 production numbers within 3 years or so, I don’t think we ever will.

March 11, 2009 Posted by | EIA, Peak Oil | 1 Comment

The 2005 Peak Falls

Today the Energy Information Administration released the December 2008 oil production numbers. Peak Oil 2005 is now history. 2008 has officially eclipsed the previous 2005 peak for the all-time annual oil production record, albeit just barely over 2005. Average daily production in 2005 was 73.737 million barrels per day (crude oil plus condensate) and average daily production in 2008 was 73.791 million barrels per day. For the year, 93.6 million more barrels were produced in 2008 than in 2005. Had prices not collapsed in the 2nd half of 2008 – causing many producers to dial production back – the record would have likely been much higher.

Just in case you are keeping score, the monthly record also now resides in 2008. July 2008 checked in at 74.8 million barrels per day. One wonders what that makes Ken Deffeyes, who after calling the peak in December 2005 (at 74.2 million bpd), said “I can now refer to the world oil peak in the past tense. My career as a prophet is over. I’m now an historian.”

The numbers may be found here: Crude Oil Including Lease Condensate

I have been saying since 2006 that I didn’t think the 2005 peak would stand (and sometimes getting into heated arguments with dogmatic believers as a result). But due to the economic collapse, I expect 2008 will stand as the record for a while – and quite possibly forever. It all hinges on how long it takes for demand to recover. OPEC has shaved about 2 million barrels a day off of production since summer, and I suspect they will be very slow to open the taps back up if prices head higher. If we don’t eclipse the 2008 production numbers within 3 years or so, I don’t think we ever will.

March 11, 2009 Posted by | EIA, Peak Oil | 91 Comments

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