R-Squared Energy Blog

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Our Tax Dollars at Work

First off, a couple of announcements. After being able to stay at home for the past two months, I have a very heavy travel schedule over the next two weeks. My participation here will probably be limited. I am off to Seattle tomorrow, on to the Netherlands from there, will visit Switzerland and Germany, back to the U.S. mainland, on to Canada, and then back to Hawaii. I have essentially piled up eight visits I need to make into one big, exhausting trip. My ability to post and respond to comments and e-mails will be spotty at best.

Second, my first essay went up yesterday at Forbes: The Price of Energy. My intention is to put something up there every week or two, and my primary goal is to be educational with the essays. I don’t plan to do any major debunking of company claims there, although I will still do that here occasionally. I will generally first post the stories targeted for Forbes on my blog, modify as appropriate based on the comments (in the case that something is incorrect or unclear), and then post it at Forbes.

Now, on to today’s story. Yesterday I saw a story on what is one of the silliest ideas I have ever heard from a politician. It isn’t the first time I have heard it mentioned, but I believe it is the first time one of our legislators actually announced they were going to take action on it:

Braley Announces Legislation to Require Country of Origin Labeling for Fuels

Washington, DC – In an address to the Iowa Renewable Fuels Association today, Rep. Bruce Braley (D-Iowa) announced he will introduce legislation to require country of origin labeling for fuels. Braley will introduce the bill, Country of Origin Labeling (COOL) for Fuels, tomorrow when he returns to Washington, DC.

The bill will require the Department of Energy to conduct a study and implement its recommendations to ensure American consumers have the ability to decide at the gas pump whether they want to purchase domestic fuel products, such as biofuels produced in Iowa, or gasoline produced in hostile nations that many terrorists call home.

“When we fill up our vehicles, there’s no existing method for us to know where the fuel we’re purchasing comes from and which nations are deriving the economic benefit from that purchase,” Braley said. “When we put food in our bodies or clothes on our backs, we know exactly where those products come from. Americans should have the same opportunity to vote with their wallets at the gas pump.

The intent of the bill is not the reason this is a dumb idea. I think most people would appreciate a choice of the country of origin for their fuel. We would ideally prefer that fuel to be sourced domestically (unless of course we have to pay a premium for it), and beyond that many would prefer to buy fuel from Mexico over Venezuela. So to be clear, I understand the spirit of the bill.

The silly part comes about in the attempted execution. The petroleum supply chain does not segregate products by country. Sure, a supertanker may leave Saudi Arabia with 100% Saudi crude, but once it arrives it gets mixed with whatever else may be left in the pipelines and crude tanks. Then, as it goes through the refinery, there are streams from many different sources. Finally, when it goes into the pipeline and on to the retailer it gets mixed with products from many different locations. In fact, in many places the fuel you put in your car has portions from many locations.

There are exceptions; the Billings Refinery I used to work at only got crude domestically or from Canada because no supertankers have access to the refinery. But then once product ships to Denver or toward the West Coast, it will inevitably mix with product derived from elsewhere (e.g., product coming up from Texas to Denver will probably contain some Venezuelan crude).

I wonder if one of our government leaders will figure out that essentially all of the corn ethanol produced in the U.S. today is enabled by petroleum, and that petroleum is inevitably sourced from imports. So I suppose the corn ethanol should be labeled as well: “This ethanol was enabled by Saudi/Venezuelan/Russian crude.” No, I suppose we will keep that skeleton in the closet.

The purpose of this bill from the Congressman from Iowa is of course to try to tilt the playing field in the direction of corn ethanol. That’s understandable, as that is his job. But the idea is either very poorly thought out, or it is just an example of him posturing for his constituents.

I don’t believe this bill has any chance of passing, but presuming for a moment that it did, the labels would all have to look like those food labels that say something like “This food was processed in a facility that also processed peanuts. It may have in fact touched peanuts at some point.”

Our product label would read like “This crude may have been sourced from the U.S. and/or one or more of the following 30 countries…” This would appear on every gasoline and diesel pump in the U.S., and would therefore be ignored by everyone. In other words, trying to pass such a bill is simply a waste of time and taxpayer money.

Note: This story was also characterized very well at Bnet by Kirsten Korosec:

Label My Crude: Iowa Congressman Wants Americans to Know Where Their Fuel Was Born

In that essay, Kirsten pointed out the impracticality of implementing such a plan, and also linked back to my essay on the Top 10 suppliers of crude to the U.S. to show readers where U.S. crude imports actually do come from.

January 27, 2010 Posted by | energy policy, ethanol, farm policy, Iowa, politics | Comments Off on Our Tax Dollars at Work

Top 10 Sources for U.S. Oil for 2009

It has been two years since I posted the Top 10 oil exporters to the U.S., so I thought I would update that list. In 2007, the U.S. imported just over 10 million barrels per day (bpd) of oil, with our top three suppliers being Canada (1.90 million bpd), Saudi Arabia (1.44 million bpd), and Mexico (1.41). Total oil imported into the U.S. in 2007 averaged 10.0 million bpd. OPEC countries supplied just over half of that – 5.3 million bpd. (All data sourced from the EIA).

Data for 2009 are available through October, so I tabulated the twelve-month period from November 2008 through October 2009. Total petroleum imports were down 7% from 2007 at 9.3 million bpd. Top U.S. suppliers for this time period were Canada (1.94 million bpd), Mexico (1.13 million bpd), and Saudi Arabia (1.09 million bpd).

Top 10 Sources for U.S. Crude Oil in 2009

1. Canada – 1.94 million bpd
2. Mexico – 1.13
3. Saudi Arabia – 1.09
4. Venezuela – 1.01
5. Nigeria – 0.74
6. Angola – 0.48
7. Iraq – 0.47
8. Brazil – 0.30
9. Algeria – 0.28
10. Colombia – 0.25

Observations

Canada remained the top supplier to the U.S., and their total exports to the U.S. actually increased slightly over 2007. Imports from Brazil and Columbia also increased.

OPEC supply was down to 4.6 million bpd, which is lower both in absolute terms and as a percentage of total imports (53.7% in 2007 versus 49.1% in 2009).

Dropping out of the Top 10 from 2007 were Ecuador and Kuwait. Taking their places were Brazil and Columbia.

Even though Mexico regained the 2nd spot from Saudi Arabia, total imports form Mexico fell by 20% over 2007.

The most unusual observation for me was that we actually imported a small amount of oil from China.

The overall theme seems to be that in general suppliers that are closer to the U.S. are gaining market share at the expense of those who have to ship their oil halfway around the world. However, there are a couple of important exceptions to that observation.

Equatorial Guinea did not make the list (15th place), but saw their exports to the U.S. increase by 67% over 2007. This trend could see them move into the Top 10 within a couple of years. Imports from Russia were up 98% over 2007, and they just missed the Top 10 (11th).

My expectation when I update this list again in 2012 is that either overall imports will be up, oil will be over $150/bbl, or both.

January 26, 2010 Posted by | EIA, investing, oil exports, oil production | Comments Off on Top 10 Sources for U.S. Oil for 2009

Prices of Various Energy Sources

As we continue to develop biomass as a renewable source of energy, it is important to keep the cost of energy in mind, because this has a very strong influence on the choices governments and individuals will make. I sometimes hear people ask “Why are we still using dirty coal?” You will see why in this post.

Last year I saw a presentation that projected very strong growth in wood pellet shipments from Canada and the U.S. into Europe. My first thought was “That doesn’t sound very efficient. Why don’t we just use those here in North America?”

It didn’t take very long for me to find out the answer to that. It is because wood pellets are much more expensive than natural gas in North America. On top of that it takes more effort to use wood for energy than it does natural gas. That combination means that wood has a tough time competing with natural gas in North America.

When I was looking into that issue, I compiled a list of the price for various energy types on an energy equivalent basis. The price is as current as possible unless noted. I have converted everything into $/million BTU (MMBTU), and the sources are listed below.

My preference is to use EIA data over NYMEX data because the former is an archived, fixed number. I have included energy for heating and for various transportation options. For comparison I also included the cost of electricity and the cost of the ethanol subsidy/MMBTU of ethanol produced.

Current Energy Prices per Million BTU

Powder River Basin Coal – $0.56
Northern Appalachia Coal – $2.08
Natural gas – $5.67
Ethanol subsidy – $5.92
Petroleum – $13.56
Propane – $13.92
#2 Heating Oil – $15.33
Jet fuel – $16.01
Diesel – $16.21
Gasoline – $18.16
Wood pellets – $18.57
Ethanol – $24.74
Electricity – $34.03

Observations

It isn’t difficult then to see why wood pellets have a difficult market in the U.S. For people with access to natural gas, they are going to prefer the lower price and convenience of natural gas over wood. For Europe, their natural gas supplies aren’t nearly as secure, so they have more incentive to favor wood as an option.

The cost of the ethanol subsidy is interesting. We pay more for the ethanol subsidy than natural gas costs. However, if you consider that we are paying a subsidy on a per gallon basis – and a large fraction of that gallon of ethanol is fossil fuel-derived, the subsidy for the renewable component is really high.

For instance, if we consider a generous energy return on ethanol of 1.5 BTUs out per BTU in, that means the renewable component per gallon is only 1/3rd of a gallon. (An energy return of 1.5 indicates that it took 1 BTU of fossil fuel to produce 1.5 BTU of ethanol; hence the renewable component in that case is 1/3rd). That means that the subsidy on simply the renewable component is actually three times as high – $17.76/MMBTU. Bear in mind that this is only the subsidy; the consumer then has to pay $24.74/MMBTU for the ethanol itself.

Sources for Data

Petroleum – $13.56 (EIA World Average Price for 1/08/2010)
Northern Appalachia Coal – $2.08 (EIA Average Weekly Spot for 1/08/10)
Powder River Basin Coal – $0.56 (EIA Average Weekly Spot for 1/08/10)
Propane – $13.92 (EIA Mont Belvieu, TX Spot Price for 1/12/2010)
Natural gas – $5.67 (NYMEX contract for February 2010)
#2 Heating Oil – $15.33 (EIA New York Harbor Price for 1/12/2010)
Gasoline – $18.16 (EIA New York Harbor Price for 1/12/2010)
Diesel – $16.21 (EIA #2 Low Sulfur New York Harbor for 1/08/2010)
Jet fuel – (EIA New York Harbor for 1/12/2010)
Ethanol – $24.74 (NYMEX Spot for February 2010)
Wood pellets – $18.57 (Typical Wood Pellet Price for 1/12/2010)
Electricity – $34.03 (EIA Average Retail Price to Consumers for 2009)

Conversion factors

Petroleum – 138,000 BTU/gal
Gasoline – 115,000 BTU/gal
Diesel – 131,000 BTU/gal
Ethanol – 76,000 BTU/gal
Heating oil 138,000 BTU/gal
Jet fuel – 135,000 BTU/gal
Propane – 91,500 BTU/gal
Northern Appalachia Coal – 13,000 BTU/lb
Powder River Basin Coal – 8,800 BTU/lb
Wood pellets – 7,000 BTU/lb
Electricity – 3,412 BTU/kWh

January 19, 2010 Posted by | coal, EIA, electricity, Energy Information Administration, ethanol prices, ethanol subsidies, gas prices, oil prices | 1 Comment

Energy Policy and Renewable Hydrocarbons

The following guest essay is by Frank Weigert, a retired DuPont chemist who was involved in some of DuPont’s early work on alternatives to petroleum in the mid-1970’s. This work spurred a lifelong interest in a renewable hydrocarbon economy. Recently Frank sent me an e-mail in which he described his views on a pathway that could lead us away from our dependence on petroleum. It was a very detailed and technically interesting e-mail, and I asked him if we could turn it into an essay for others to read. What developed from that request was the essay below.

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Many people find it hard to think rationally about our energy problems because there is so much misinformation and disinformation out there. Some is the innocent confusion of people misinterpreting scientific terms in layman’s language. An example is the word “oil”.

Some is more sinister, with whole industries planting lies and distortions to confuse the issues. Corporations and their lobbyists spend large amounts of money protecting their short-term interests from reforms needed to promote long-term good.

Politics distorts good decision making. If Iowa didn’t hold a Presidential beauty contest every four years, ethanol would not be on the agenda. If corn-based ethanol wasn’t on the agenda, then ethanol from cellulosics wouldn’t be either.

Economics is used as a weapon against change by polluting industries who are not now held accountable for the damage they do. Utopians refuse to see just how expensive some of their proposed solutions are. While the magnitude of our energy problem is orders of magnitude greater than the CFC / ozone problem of two decades ago, some of the precepts used to solve that problem also apply to the current one.

The world needs to think outside the box. We have a remarkable opportunity to establish a sustainable energy future that could last centuries. Short-term solutions which profit existing businesses should not be allowed to crowd it out.

1) Biofuel Definitions.

Non-chemists all too often get confused by the differences in chemical nomenclature and more conventional terms. Oil as an ingredient in salad dressing is not the same as oil as a synonym for petroleum.

Green plants make nucleic acids, proteins, hydrocarbons, carbohydrates, and lipids. Only the latter three need concern us as fuel precursors. Hydrocarbons have only carbon and hydrogen in their structure. Examples include natural rubber and other materials made from isoprene oligomerization.

Carbohydrates have formulas around (CH2O)n: Carbo (C) – hydrates (H2O). Glucose, C6H1206, is a monomer. Sucrose is made from glucose and another sugar fructose with the loss of one water molecule. Both sugars are soluble in water. Polysaccharides such as starch and cellulose are insoluble in water. Yeasts ferment soluble sugars to ethanol, an alcohol. The technology to ferment insoluble carbohydrate polymers practically does not yet exist.

Lipids are esters of the alcohol glycerin and long-chain fatty acids. Transesterification with a short chain alcohols such as methanol or ethanol converts these lipids to glycerine and esters generically known as biodiesel. Biodiesel is not a hydrocarbon.

Hydrocarbon reactions are generally many orders of magnitude faster than the reactions of polar molecules such as those involving alcohols or esters. That means that the equipment required to reform hydrocarbons is much smaller than that required to ferment carbohydrates to ethanol or transesterify lipids to biodiesel. Hydrocarbon chemistry does not require a solvent. Fermentation must be carried out in water, and yeast generally can only produce an ethanol concentration of 10% or so. The ethanol must then be separated from a large excess of water. Transesterification to make biodiesel is an equilibrium process that will not go to completion without a large excess of the small chain alcohol. That means large equipment for separation and recycle. While a hundred or so refineries provide all the transportation fuel America uses, many thousand fermentation or biodiesel facilities would be needed to produce the same amount of fuel.

The new investment required to convert from a hydrocarbon economy to one involving either ethanol or biodiesel is going to be very high. Why bother? Use hydrocarbons. Hydrocarbons such as gasoline or diesel are global warming neutral if produced entirely from biological materials.

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2) What defines a Climate Change / Hubbert’s Peak solution.

Four precepts should guide our work in solving the world’s Climate Change and Hubert’s Peak problems.

a) These are world problems. An expensive solution that works for the United States but not for China, India or Kenya is not a valid solution. America might be the Saudi Arabia of coal, but coal is not a solution for the Hubbert’s Peak problem because it exacerbates the climate change problem. Where is China going to get the land to grow corn to make ethanol? Solutions that depend on local conditions such as desert sunlight or constant high winds are not solutions to the global problem. Venture capitalists who want to get rich selling high investment solutions are part of the problem.

b) Consumers should not have to change anything.

The precept needs to be considered separately for electricity and transportation fuels.

Electricity is easy. Consumers don’t care whether the electrons that power their lights, televisions or computers come from falling water, burning coal, or splitting atoms. An electron is an electron.

Transportation fuels are harder. Hybrid cars like the Prius come closest to meeting the criterion. Consumers fill up their gas tank and don’t have to worry about the battery until it wears out. The cost of the replacement battery has not sunk in yet. A typical battery pack costs $5000 and will last five years. Thus during the life of the electric car, owners will have to pay $10,000 to replace their battery twice. You can buy a lot of expensive gasoline for that amount of money.

Plug-in hybrids WOULD be different. Suppose you live in an apartment and park 100 feet away. That’s an awfully long extension cord. A better option is to continue making gasoline and diesel, only from renewable resources. Cars powered by fuel cells or hydrogen are even more far out. People like personal transportation. Walking is not a solution. Shutting down the airline industry is not a solution.

c) Use existing investment when at all possible and minimize the need for new investment.

This is where most of the pundits get it wrong. Venture capitalists love high investment projects because they earn their fees as a percentage of the capital required. The November cover story of Scientific American is about sustainable fuels. It limits the discussion to Big Physics projects. Only toward the end do the authors offer an estimate of the capital investment required: $100 TRILLION. Ain’t gonna happen. Many of the proposed remediation projects are also horribly capital intensive and will never fly.

Many physics solutions claim they will be competitive with oil “soon.” But oil at what price? In the Middle East, countries can pump oil to the surface for a COST $5 a barrel. Americans VALUED that oil at $150 a barrel in 2008. Europeans and Japanese are willing to pay twice that, including taxes. So what is the free-market PRICE of oil? OPEC can set it anywhere within that range. If photovoltaics become competitive with oil at $100 a barrel, OPEC can lower the price to $90 a barrel until the venture capitalists give up. They then buy up the investment for pennies on the dollar, destroy it, and raise the price again. I don’t see any way to compete with $5 a barrel Middle East oil. I would be hopeful that biofuels could compete with $25 or $30 a barrel oil.

d) Biofuels should not compete with food production or cause land use issues.

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3) The algae Botryococcus braunii can potentially meet all my criteria for a solution to the Climate Change / Hubbert’s Peak problem.

Nobel Prize winner Melvin Calvin discovered a shrub growing in the Brazilian rain forest related to rubber tree in the 1970s. When tapped, this shrub exuded a latex. Calvin collected the material, (a mix of isoprene trimers) broke the emulsion, dried the organic layer, poured it into the fuel tank of a diesel powered car and drove off. No refining necessary! He correctly realized there was not enough land in the Brazilian rain forest to grow this crop. Genetic engineering did not exist back then.

Calvin made a bad mistake when he attempted to breed a modification that would grow in the desert. Making hydrocarbons needs more water than making carbohydrates. He should have been experimenting in a swamp.

Later, Calvin found the pelagic algae genus Botryococcus and studied the hydrocarbons they produce.

A summary of his work is available online, but cannot be accessed directly. You have to link through a bridge site. Here is it’s URL.


http://www.osti.gov/bridge/product.biblio.jsp?osti_id=7286

Click on the 1 MB PDF file icon. The discussion of algae begins on page 15.

Calvin reports that 86% of the dry weight of the algae is hydrocarbons, isoprene oligomers averaging n = 6 degree of polymerization. The structures include linear oligomers and cyclic structures related to steroids. They are not directly useable as transportation fuels.

The algae Botryococcus is among the slower growing breeds. It has a reported doubling time of two days. Presumably, producing hydrocarbons is harder than producing carbohydrates. Nevertheless, it is an interesting exercise in powers of 2 to calculate how quickly 1 g of algae can turn into the 100 million barrels of oil needed each day. Once you have the ocean surface carpeted with the algae, you can then harvest half the crop every doubling period in a self-sustaining manner.

One of your discussions (RR: e.g., this one) laments the fact that useful algae cannot generally compete with trash species. True, but farmers have learned how to grow crops and eliminate weeds. Farmers of the ocean will have the same incentives. Agricultural chemical companies have been very successful at finding selective herbicides for important crops. If growing algae becomes important, they will attack this problem as well.

Another possibility is to begin with an invasive species and modify it genetically to produce the hydrocarbons we want. Caulerpa taxifolia is an algae that escaped from a Monaco aquarium and now carpets the northern edge of the Mediterranean sea. When it also got loose from the Monterrey aquarium outside San Francisco, the U.S. government spent $8 million chlorinating the Pacific Ocean to eliminate the infestation. While it doesn’t make useful hydrocarbons, it does make a toxin caulerpenyne, which presumably is the secret to it success. The structure is available in Wikipedia. As the name suggests, it includes both double and triple bonds. It also has 2 acetates which according to biochemical studies are added last. The main chain contains 15 carbon atoms arranged in a way that suggests derivation from an isoprene trimer. Inhibit the acetylation steps and you have a precursor to diesel fuel. Adding the gene sequence to produce the hydrocarbons or disabling the genes that acetylate the product and you have another way to get at hydrocarbons from algae.

I believe conventional oil refineries could process this hydrocarbon mix to produce gasoline and diesel. Refineries could shut down much of their catalyst guard investment because these hydrocarbons have no nitrogen, sulfur, phosphorus, metals, or ash. This is an extremely sweet crude. These hydrocarbons should be able to replace coal as a fuel in electricity generating plants. Similarly, because it is a high quality fuel, much of the pollution abatement equipment at the back end could be shut down.

Check out the MIT Website Whatmatters for more details The URL is:

http://alum.mit.edu/news/WhatMatters/Archive/200111/

January 17, 2010 Posted by | algae, guest post, reader submission | Comments Off on Energy Policy and Renewable Hydrocarbons

Events in Venezuela

I have seen a number of interesting stories on Venezuela this week. First was:

The Chávez Spiral

With petroleum prices down around $71 a barrel from a high of $147 the Venezuelan government is struggling to make up for the revenue shortfall to save programs that placate the poor by providing cheap food, fuel and other government giveaways.

Making matters worse, the once mighty Venezuelan petroleum industry has been laid low by politicization, corruption and mismanagement; rather than producing 3.3 million barrels per day, industry analysts believe the production is closer to 2.3 million. Instead of maximizing profits by producing its quota, Venezuela’s state-run oil fields are either underperforming or have collapsed altogether.

I have warned numerous times about the risks Chavez was taking by siphoning off oil revenues to fund other programs. If you are going to do that, you must do is to make sure you aren’t siphoning off too much, as the oil industry is capital intensive. If you pull out too much, then you kill the goose laying the golden eggs. Norway has a very successful model for how the oil industry can be used to benefit society as a whole. One thing they didn’t do was siphon off all of the oil companies’ revenues.

But because reelection is coming up, don’t expect Chavez to shift course:

Venezuela’s Devaluation a Boon for PDVSA in Short Term

Venezuela’s currency devaluation should give state oil company PdVSA an immediate and much-needed boost to its budget. But President Hugo Chavez is likely to procure a large part of that windfall for social spending ahead of this year’s congressional elections.

Then there was the story about Chavez searching for scapegoats when his decisions start to have consequences:

Chavez sacks energy minister after rolling blackouts

Venezuela President Hugo Chavez has indefinitely suspended rolling blackouts in capital city Caracas just a day after they began, and sacked his electricity minister.

Chavez said that the minister was responsible for mistakes in the way the rationing plan was applied.

Mr Chavez’s announcements were a significant strategic shift in his attempts to prevent a widespread power collapse in the coming months through rolling blackouts of up to four hours a day across the country.

But no worries. He believes that after stealing the assets of oil companies, he can invite them back in and they will come running:

Venezuela Expects $8.3 Billion Field Investment, Universal Says

Jan. 15 (Bloomberg) — Petroleos de Venezuela SA, Venezuela’s state oil company, said it expects bids today totaling $8.3 billion to develop the Mariscal Sucre offshore natural-gas project, daily El Universal reported.

The company known as PDVSA seeks partners to take stakes of as much as 40 percent in the project, Eulogio del Pino, vice president for exploration and production, told the Caracas-based newspaper.

PDVSA and the Energy Ministry asked companies including Russia’s OAO Gazprom, Norway’s Statoil ASA and Japan’s Mitsubishi Corp. to participate in the bidding, del Pino said.

I don’t know. I will be surprised if these companies trust Chavez enough to put serious money down on any of these projects. As he has shown before, if the profits start to look good, he will change the terms. Who wants to take risk only to let Chavez reap the reward? On the other hand, these aren’t the same companies Chavez cheated the first time around, so maybe they will be a little more trusting. But if so and they lose their investment, shareholders shouldn’t be the least bit surprised.

January 15, 2010 Posted by | Hugo Chavez, Venezuela | Comments Off on Events in Venezuela

Iraq Oil & Gas Production: Geopolitical Compromises and Kurdish Autonomy

The following guest essay is by Kevin Kane. Kevin is a market analyst, economist, Asia political affairs strategist, and Korean language linguist living in Seoul, South Korea. Kevin previously published American Freedom from Oil: A Bipartisan Pipedream.

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Iraq Oil&Gas Production: Geopolitical Compromises and Kurdish Autonomy
By Kevin Kane

As Royal Dutch Shell and other majors increase their investments in Iraq, some oil market analysts argue that Iraq could export over 12 mb/d (million barrels per day) within a decade, significantly shifting global production closer to 100 mb/d from the present 83.5 mb/d inventory supply. Are Iraqi oil production estimates too ambitious or perhaps, not optimistic enough?

The northern Kurdish-governed territory of Iraq situated between Iran, Turkey, and Arab-Iraq is of particular importance to these expected Iraqi oil production estimates. The Kurdistan Regional Government (KRG) publicly claims to possess oil reserves greater than half the cumulative value of all the oil reserves within the Organization of Economic Cooperation and Development (OECD) community. Kurdish-Iraqi production may reach 250,000 b/d by the middle of this year and up to one mb/d before 2012.

As American forces draw down as a part of the U.S. exit strategy, many oil and gas uncertainties remain. Specifically, the KRG possess few incentives to accurately report proved reserves or encourage oil investment while the U.S. hands over political and military control to the Iraqi people—meaning that Kurdish-Iraq could possess even greater reserves than publicly stated.

Kurdistan Sovereignty over Oil Reserves

When some in the U.S. were encouraging partitioning Iraq several years ago, one could only imagine that the Iraqi-Kurds were not exactly disappointed at the prospect of having sovereign control over the future of their nation, including its oil reserves. Thus, one would be rational to assume that many Iraqi-Kurds had little intention and few incentives to cooperate with the Iraqi Central Government after liberation in 2003 from Saddam Hussein’s control of Kurdish territory Iraq.

After 2003, 7.5 million Iraqi-Kurds immediately secured their own perimeter within Iraq and set up a visa system requiring Arab-Iraqis to obtain permission to enter KRG-governed territory. The KRG then asserted themselves as an autonomous international power by establishing diplomatic channels with a number of countries including the US, UK, Germany, France, Russia, and Italy via consulates and representative offices independent of Baghdad. The KRG simultaneously took control of their oil fields and signed Exploration and Production (E&P) contracts with Hunt Oil, Det Norske Oljeselskap AS, SK Energy, and countless other oil companies to explore, develop, produce, and export oil without intending to share profits with the Iraqi Central Government.

The KRG only began to take a real interest in working with the Iraqi Central Government after the U.S. started to focus on stabilizing Iraq, which included the surge as well as encouraging sectarian cooperation and parliamentary coherence. Following the success of the U.S. troop surge in 2007 and the stabilization of Iraqi’s political affairs in 2008, the Iraqi Central Government, now more organized and confident, ruled in June 2009 that all foreign investment oil contracts made directly with the KRG are illegal.

The Iraqi Central Government now takes 83% of all oil export revenue from Kurdish territory. Because the U.S. is drawing down its forces and turning internal conflict matters over to Iraq, the world should expect the KRG to ignore central government authority and revenue-sharing agreements after the U.S. is gone.

Once the Iraqi Central Government is unable to enforce their legal authority over the KRG after the U.S. exits Iraq, the KRG will likely encourage more wildcat drilling, draw soil samples, and collect the data necessary to potentially transition reserve classifications from possible and probable to proved reserves (U.S. Reserve Classification System). The Iraqi-Kurds will then both claim all, or most, of the potential oil profits and potentially increase their commercially recoverable proved reserves estimates.

Geopolitics, Intervention, and Energy Supply Compromises

Some analysts argue that the official establishment of a Kurdistan state could create a domino for anywhere from 21 to 28 million other Kurds to stand up and demand autonomy in Kurdish-dominated regions across the Middle East. Therefore, these analysts argue that Turkey and Iran might take military action to prevent the KRG from asserting autonomy over Kurdish territory in Iraq in order to prevent the dominos from falling. However, it is unlikely Turkey and Iran would undertake such military action for fear of a blowback from Kurds within their own border regions, an outcome that would only emboldened regional Kurdish solidarity. What is more, Turkey and Iran would also be wary of taking responsibility for nation building in Iraq given the very costly U.S. experience. Thus, it is unlikely any outside forces will forcefully intervene in the Kurdish pursuit of sovereign control over northern Iraq.

Moving past the domino fear, economics proves to be the true ruler of Kurdish regional relations. Insofar, Turkey and Iran appear to prioritize investment over fear of this domino theory as both countries continue to send millions of dollars in Foreign Direct Investment (FDI) into Kurdish-Iraq due the neo-liberal nature of the KRG’s economy. In fact, in June 2009, a Turkish oil company investing in Kurdish-Iraq began exporting 40,000 b/d of oil back to Turkey through an agreement with the KRG: an estimated one billion dollars worth of oil per year at $80 per barrel.

In addition to potentially becoming a significant oil import source for Turkey and the rest of the Western world, the KRG also controls strategically located natural gas reserves that could become increasingly valuable to Europe’s diversification strategy. With almost 89% of Iraqi’s natural gas reserves within Kurdish territory—an estimated 2.83 Trillion Cubic Meters (TCM)—the European Union will likely pressure Turkey to work with the KRG—even should it become sovereign—to bring this gas to European consumers.

The KRG may be able to support some of Europe’s greater strategic needs to diversify their gas import sources and supply their fastest growing energy input source—natural gas—over the next two to three decades, particularly due to the increasing use of combined cycle gas turbines to generate electricity. Thus, if the KRG asserts itself as a sovereign country by ignoring Iraqi Central Government authority, Turkey will not cease oil and gas imports from Kurdish-Iraq out of fear of a Kurdish autonomy domino theory, whether this be by dint of personal economic interest or foreign pressure. In fact, such an outcome may induce Turkish leaders to work more closely to resolve internal conflicts with Kurds living in Turkey.

With foreign investment coming into the KRG from all over the world, these nations are sending a subtle message to the KRG: “Our governments prioritize economic development and energy security over politics.” Although regional leaders make speeches discouraging a sovereign Kurdish-Iraq, their investment actions juxtapose their rhetoric, particularly in the case of Turkey. More important than the words in a leader’s speeches are the measurable actions of their government.

Kurdish Nationalism, Oil, and Power

Like Israel after 1945, the KRG have not wasted anytime to ensure they are powerful enough to never be dominated by an occupying culture or military force, including by Arab-Iraqis that once forced on Kurds their language, culture, and rule of law. The Iraqi-Kurds are securing support from the international business community, tapping into economic integration, organizing a loyal and professional military, and developing close ties with liberal nations that prioritize development over ideology.

While Kurdish-Iraq could hold one of the keys to increasing or decreasing the expected Iraqi oil production over the next 10 years, we must remember that asking the Kurds in northern Iraq to remain unified with the rest of Iraq would be like asking Koreans after 1945 to remain unified with their previous Japanese occupiers. Thus, Iraq will not be unified should the Iraqi-Kurds have their day to decide for themselves, and that day may be coming soon.

January 12, 2010 Posted by | geopolitics, globalization, guest post, Iraq, Kurdistan | Comments Off on Iraq Oil & Gas Production: Geopolitical Compromises and Kurdish Autonomy

Wood Versus Fuel

I know it has been a week since I put up something new. Some readers have also noticed that I haven’t been commenting much lately, and my e-mails are piling up. Things have just been really busy. I have a few guest posts that should be ready to go within a week or so, but I saw a topical story this morning that was worth commenting on:

The unintended ripples from the biomass subsidy program

The issue of incentives for biofuels increasing the demand for grains and thus helping drive up food prices is often called “Food versus Fuel.” There is also an incentive program (Biomass Crop Assistance Program) designed to encourage the use of biomass for heat, power, or biofuels. As is almost always the case, there were unintended consequences:

While it remains unclear whether Congress or the Obama administration will push to revamp the program, even some businesses that should benefit from the subsidy are beginning to question its value.

“It’s not right. It’s not serving any purpose,” said Bob Jordan, president of Jordan Lumber & Supply in North Carolina, even while noting that he might be able to get twice as much money for his mill’s sawdust and shavings under the program.

“The best thing they could do is forget about it. All it’s doing is driving the price of wood up.”

Sounds like “Food versus Fuel” except in this case it is the cost of wood – not food – that is being driven higher. The thing is that there are always trade-offs and always unintended consequences. We have to be wise enough to change policies in cases where the unintended consequences outweigh the benefits. But you have to look at the big picture as well. Were there also unintended benefits? Things like that must be considered.

In this case, I don’t know whether the unintended consequences outweigh the benefits. I think it is too early to know for sure. But in any case, higher cost biomass is something I expect in the future. I made this point in my presentation at the Pacific Rim Summit. If your business model is based on either tipping fees, or just free or very cheap biomass – then I doubt that model is sustainable. I think as more companies attempt to turn biomass into fuel, competition will heat up and free or negative-valued biomass will be a thing of the past.

Therefore, I think the safe bet is to plan for 1). Escalating biomass prices; 2). No government assistance. I have no objections to getting started with government assistance, but if you don’t have a clear plan for operating in a subsidy-free environment, then you may just be wasting taxpayer money up until the point that your business fails because conditions changed (in a way that you should have anticipated).

January 11, 2010 Posted by | biomass, energy policy, farm policy, politics, USDA | Comments Off on Wood Versus Fuel

The Wheels Come Off the Biodiesel Wagon

Domestic Biodiesel Production Plummets

One of my Top 10 Energy Stories of 2009 involved the actions taken by the EU against U.S. biodiesel producers. U.S. tax dollars had been generously subsidizing biodiesel that was being exported out of the U.S. European producers couldn’t compete against the subsidized imports, so the EU effectively cut off the imports by imposing five-year tariffs on U.S. biodiesel.

This was a big blow to U.S. biodiesel producers, and was one of the factors leading to a disastrous 2009 for U.S. biodiesel production. How disastrous was 2009? Per the National Biodiesel Board (NBB), here are the statistics from the past 6 years of biodiesel production:

2004: 25 million gallons

2005: 75 million gallons

2006: 250 million gallons

2007: 450 million gallons

2008: 700 million gallons

2009: 300-350 million gallons (estimate)

The NBB also reports that domestic biodiesel capacity is now operating at only 15%. There have been a number of stories in the past few days covering these developments:

Bad start to 2010 after ‘rough year’ for entire biofuel industry

A federal tax credit that provided makers of biodiesel $1 for every gallon expired Friday. As a result, some U.S. producers say they will shut down without the government subsidy.

A one-year extension of the biodiesel tax credit was included in a bill that was approved by the U.S. House recently, but it never made it through the Senate.

Politics and Energy Policy

I have often complained about the chaos that political leaders cause with inconsistency on energy policy. I will get into the wisdom of this biodiesel tax credit in a moment, but government policy makers need to send clear, long-term signals so energy producers can plan. This has long been a problem for planning energy projects. Wind and solar developers have lived with this uncertainty for years. It seemed like at the end of every year, there was a tax credit that may or may not be extended. The uncertainty often froze project developers, and created unnecessary delays.

The same has long been true in the oil and gas industry. One of the reasons that it has been difficult to get a gas pipeline built in Alaska was government refusal to commit to long-term tax rates. Imagine that you are contemplating spending $26 billion on a gas pipeline, but the government can’t tell you what your tax rate is going to be. If my state income tax doubles, I can move to another state. But it isn’t like you can pick that pipeline up and move it, so it is important that you know that the government can’t double the tax rate in the event of a budget shortfall.

A different kind of government interference – a tendency to attempt to pick technology winners – resulted in cancellation of what I believe was a promising 2nd generation renewable diesel process. I documented the saga in several posts, but the gist was that because an oil company was involved – my former employer ConocoPhillips – Congress voted to specifically deny the biodiesel tax credit for a process that was both more efficient and more cost-effective than conventional biodiesel production.

By killing the credit, COP was placed at a $42/bbl disadvantage relative to biodiesel producers who received the credit, and thus COP decided to cancel the project. I documented that sorry saga here. I also explained the differences between ‘green diesel’ and biodiesel here.

Where to Now?

So where to go from here? We now have a classic dilemma created by the government. Through government fiat, an industry was created. Investments were made and infrastructure was put in place. The problem is that the particular industry that sprang up had little hope of ever really competing without the subsidy. The reasons are alluded to in the link above:

“By the time you buy the feedstock and the chemicals to produce the fuel, you have more money in it than you get for the fuel without the tax credit,” Francis said. “We won’t be producing any without the tax credit.”

I have long believed that there is no future for 1st generation biodiesel. I wrote in an August 2007 essay: “I have said it before, and I reiterate: Biodiesel’s days are numbered.” Note that the year after I wrote that the U.S. biodiesel industry had their best year ever. But the handwriting was on the wall for very fundamental reasons, and the prediction I made in 2007 is playing out now.

There are multiple problems that will make it difficult for biodiesel to ever compete without subsidies. In a nutshell the key problem is that the feedstock costs are linked to fossil fuel prices. The feedstock is generally a vegetable oil and methanol – an alcohol typically produced from natural gas. A second big problem is that biodiesel is an inferior fuel to hydrocarbon diesel (especially in cold weather). Further, the by-product of the biodiesel process is glycerin, which has limited value (especially at the volumes produced when biodiesel production is ramped up).

But this story is worse than simply a fuel that can’t compete. As evidenced by the opposition of the NBB to the extension of the tax credit for COP’s 2nd generation process, 1st generation biodiesel isn’t even a bridge to 2nd generation biodiesel – it is a barrier. Not only is biodiesel chemically different, but 1st generation producers have pulled out the stops to protect themselves against 2nd generation competition. So now we have a 1st generation industry that was already in trouble even with the subsidies that it was receiving, and a 2nd generation industry that could have been much further along were it not for 1st generation interference (which was aided by Congress).

If instead of picking technology winners, Congress had simply raised fossil fuel taxes, we wouldn’t be in this dilemma. With the high level of embedded fossil fuels, biodiesel would have been unable to compete and an industry with no future would not have been created by the government. Green diesel, on the other hand, would start to look a lot better because of the lower level of fossil fuel inputs (particularly for gasification), and we might find plants starting up to produce green diesel from both hydrocracking vegetable oils (the COP process I described) and gasification of biomass (e.g., the Choren process).

What I expect to happen is that Congress will eventually extend the credit, and it will be applied retroactively. But there are no guarantees, so producers are once again left with uncertainty. What should happen – in my opinion – is announcement of a phaseout schedule. I wouldn’t simply eliminate the tax credit cold turkey. That would be a blow to producers who invested on good faith that government support would be continued. But they also need to receive a message that this tax credit will be phased out over the next 3-5 years. At that point, prospective investors will be fairly warned that projects whose economics hinge on continued government subsidies are to be avoided.

This, by the way, is the sort of metric I try to apply to projects. I am looking for projects that can be viable without government support and can operate with low/no fossil fuel inputs. The first item means that governments have much less ability to wreck my project by withholding support, and the latter means that the project should become more attractive in the higher oil price environment that I expect.

That doesn’t mean that initial government support isn’t often helpful, but unless the underlying economics are sound then government support is a crutch I will never be able to throw away. In my opinion this is the case for most U.S. biodiesel producers, which helps explain why industry capacity is presently at 15%.

Disclosures

I want to make two very clear disclosures. First is that as noted, I worked for ConocoPhillips, and I was very pleased at the efforts we were making to commercialize green diesel. The fact that the government caused the project to be aborted by favoring one technology over another was a bitter pill to swallow. Again, I favor projects that are viable without government subsidies, but in this particular case the competing projects did get the subsidies.

Second, as I announced previously I now work for the company that owns the majority of Choren. I came to work for this company because I believe gasification has a long-term future, and I had written favorable articles long before this job opportunity arose. I have, however, had some suggest potential bias toward green diesel because of my link to Choren. What I say to those who might feel that way is the bias toward green diesel was because of my assessment of the technology. That is what led to my link to Choren, not vice-versa.

January 4, 2010 Posted by | ConocoPhillips, energy policy, green diesel, politics, renewable diesel, subsidies | Comments Off on The Wheels Come Off the Biodiesel Wagon

Reflections on the Saudi Wars

Meet the Doomers

It was early 2007, and I was riding high at The Oil Drum. I had written a number of articles on energy policy, and a consistent theme of mine was that biofuels weren’t going to replace our current level of fossil fuel usage.  For the most part these essays were very well-received, until I turned my attention toward the topic of oil production in Saudi Arabia.

Realize that while there is a diverse readership at TOD, there are quite a few very vocal contributors who are ‘doomers.’ What exactly is a doomer? Doomers believe that peak oil will inevitably lead to a Malthusian collapse of society. Many cheer for stories that support their idea of doom (e.g., “biofuels will not save us”), but they can be downright vicious if what you are writing implies that things may not be exactly as bad as they think. The latter was the case with my Saudi essays.

Matt Simmons and Saudi

I have been highly interested in what is going on with Saudi oil production for a long time. Saudi has a tremendous amount of economic leverage because of their oil production, and if their production declined sharply, then a lot of doomer points would start to look more plausible. Thus, I am keenly interested in understanding the true situation in Saudi. This was one of my primary motivations for reading Twilight in the Desert.

Twilight was published in 2005, and argued for a near-term collapse in Saudi oil production, with an inevitable price shock to follow. Following publication of the book, Matt Simmons made a $10,000 bet with New York Times columnist John Tierney that oil prices in 2010 would average over $200/bbl (see the Simmons-Tierney bet). This bet is useful for understanding the time frame Simmons had in mind for a Saudi collapse; certainly by now we would be in the midst of a full-fledged Saudi production collapse.

Given his message, it should come as no surprise that Simmons has gained quite a following among the doomers. He is held in very high regard by many at TOD, and a number of people have used his work as a jumping off point for their own claims of a Saudi collapse. And in late 2005 when Saudi production began to fall, it seemed to many that Simmons’ analysis had been spot on and very timely. The bandwagon began to fill up; the decline had begun and Simmons’ star was on the rise.

The Saudis maintained that the declines were voluntary because the world oil markets were oversupplied. But they would say that, wouldn’t they? Or would they? I went back and forth on that point; I could see pros and cons either way. But the doomer contingent had decided: The Saudis were bald-faced liars. I lost count of how many times I saw the Saudi Oil Minister accused of lying when he maintained that the declines were voluntary, because the doomers “knew” good and well they weren’t.

I Had My Doubts

I was especially curious to get to the bottom of whether Saudi was on the brink of a production collapse. Saudi production fell from the end of 2005 through the end of 2006 by one million bpd even as oil prices were rising. But I started really trying to get my head around this issue, and the more I looked, the more I was convinced that the Saudis were not lying. The declines did appear to be voluntary.

I laid out much of my reasoning in When Will Saudi Arabian Oil Production Peak? My position had three major points. First, worldwide crude inventories were at record highs and rising when the Saudi cuts began. We had this information directly from the OECD, but I also found news accounts of this coming from important non-OECD consumers like China and India.

Second, I took a long hard look at one of the major tools being used to project that Saudi had peaked. The tool was called Hubbert Linearization (HL), and I tested it first by plugging in historical data to see if it would have predicted previous peaks. In the case that was being used as a proxy for Saudi – Texas – it would have predicted peak production 16 years too early (as shown in the previous link). It would have also had a large degree of uncertainty until about 5 years after the peak. So for 21 straight years, one could have made the argument that Texas had peaked in that particular year on the basis of the HL.

Worse, I found that it would always predict a peak even if I fed the model an infinite series of constant, or even mildly rising production rates. And as more data was fed to the model, it predicted higher and higher recoverable reserves. In the case of Texas, what was predicted to be recovered in 1960 was far lower than what has been produced to date.

HL was the mathematical version of a dowsing rod. There was so much wiggle room that you could predict peak based on very liberal criteria. For many doomers, 2005 was that year, and I received a great deal of verbal abuse and hate mail for pointing out that the technique didn’t really work. I documented some of that in Peak Oil and the Lunatic Fringe, and that led to me taking an extended leave from TOD. (I had to block two regular TOD contributors because they bombarded me with e-mails over this).

There was one final point that convinced me that Saudi production declines were probably voluntary. First, it is true that Saudi reserves are not an open book to outsiders. They have withheld detailed data on their reserves since 1982. They raised their reserve estimates by 90 billion barrels in 1990, once again leading to chants of “Liar, Liar” about their reserve numbers. Presently their reserves are estimated to be 267 billion barrels. Doomers will tell you that this is laughable. The HL technique was pointing at a remaining reserve number of only 70 billion barrels.

However, I did a little sanity check on this number (a more detailed analysis than what follows is here). It is true that Saudi stopped publishing detailed data in 1982, but prior to that their reserves were an open book. In 1982, their reserves were estimated to be 164.6 billion barrels. Even if I assumed no new discoveries and just subtracted subsequent production, I came up with 95 billion remaining barrels – already well above the HL prediction.

But of course they would have had new discoveries as well and technology has increased the amount of oil that can be recovered. Look at what happened in the U.S over that same period of time. In 1982, U.S. reserves were estimated at 27.9 billion barrels. Over the next 24 years U.S. production was 56.9 billion barrels. Yet in 2005, U.S. reserves were still 21.8 billion barrels. So over that 24 year-period the U.S. produced 57 billion barrels of oil and pulled reserves down by only 6 billion barrels. To me this was another piece of evidence that the HL technique had to be wrong about Saudi.

I also tried to put myself in the shoes of the Saudi Oil Minister. How would I manage their oil? Pretty much just as he was doing it. I wouldn’t manage oil just so American consumers could have cheap gas. I would try to maintain prices at the highest possible level that could be tolerated by the economy. That oil endowment would have to serve future generations, so I would want to maximize the value. That’s a fine line, and if you are too aggressive you can cause economic havoc. But if I saw that global inventories were rising, I would begin to cut production as well to avert a future price collapse.

So my conclusion – which I stated numerous times starting in 2006 was: The Saudi production decline was voluntary, and if global crude inventories starting dropping they would raise production.

The Critics Emerge

If you want to get a real flavor for the kind of trollish commentary I had to deal with over this issue, see the comments following Stuart Staniford’s TOD essay A Nosedive Toward the Desert (…Or, Why the Decline in Saudi Oil Production is Not Voluntary). (By the way, none of this is meant to pick on Stuart. Reasonable people can disagree about the data, and that’s how I would characterize my debate with Stuart. I think his analysis was data-based, unlike many of the others. He was not using the HL as the basis for his analysis, and he did come around to the view that the HL wasn’t useful for predicting a peak).

Stuart called me out in that essay, suggesting that my arguments for why the Saudi decline was voluntary were “completely implausible.” His argument was the polar opposite of mine. He wrote “Declines are rather unlikely to be arrested, and may well accelerate.”

But people really went after me in the comments section. I was dealing with one attack after another not only on TOD, but they even spilled over to other sites. There was this great thread as well at the Peak Oil message board. One commenter who belonged to the “I love HL” and “Saudi has peaked” fan clubs had this to say (among other snarky comments):

Robert Rapier was among the more optimistic (David Cohen being another) regulars at the Oildrum. Those two are in decendence as the very convincing argument for SA decline by Westexas, Stuart, Euran (and tons of others) continue to gain validity.

And then this one, by the same poster (responding to a comment from someone else):

“Robert is way too optimistic regarding SA. I always side with west texas on those debates.”

and so do I, and it appears the majority at the Oildrum agrees that Mr. Rapier is no longer a major player. The ball is definitely in Stuart’s court. I understand Stuart has submitted his analysis to Science magazine for publication.

I was no longer a “major player” because I took the view that Saudi was not on the verge of terminal decline, which a lot of doomers didn’t like. A major player can’t give them an opinion contrary to what they “know.” If they do, they are by definition not a major player. Well, I would just have to settle for the consolation prize of being correct.

Saudi Production Turns Around

Look at what has happened since Stuart’s post. When Stuart wrote Nosedive in March 2007, production (C+C) in Saudi was 8.6 million bpd (Data from the EIA). I predicted that the declines would stop by summer, and little did we know that when Stuart published that essay, declines had just stopped and would be stable until late summer before beginning to rise.

The Saudis had production back above 9 million bpd by December 2007, and by July 2008 they had production at 9.7 million bpd – the highest level in almost 30 years (and without the aid of some of the major new projects that were expected to bump production a little). Their production then pulled back after prices collapsed. Just the fact that production flat-lined for 7 months with no new major projects coming on says without a doubt they were sitting on spare production when I was arguing that they were. If they hadn’t been, they would have declined a bit each month and could have only reversed that by bringing new projects online.

One argument that many people made for a permanent decline was that if Saudi had spare production they would have brought it online in 2006-2007 as prices climbed. As I replied at the time “Not if inventories are full.” (Of course Saudi production rose with the price of oil in 2008, and hit 9.7 million bpd in the same month that oil prices hit $147). This argument (and I am not naming names, but many of you will know who I am talking about) goes like this: “If Saudi had just kept producing at their 2005 levels, they would have produced X billion more barrels and made XX billion more dollars. Thus, it is implausible that their declines are voluntary.”

Later, a friend sent me a paper explaining that Saudi often cuts production in the face of rising prices. That’s because they are looking at data besides prices. See Saudi Production Management.

Motivation

So what’s the point of this post? Am I just gloating? Not really, but after some of the treatment I received as a result of my arguments, I think readers could forgive me for doing so. I have to admit that it wasn’t all bad; I always had supporters as well. It is just that the kind words of a supporter have less impact than a bitter diatribe and volley of e-mails from someone whose world view you are threatening.

Anyway, three things motivated me to write this post. First, a reader commented after the previous post that they had appreciated the critiques of the HL. That planted the idea for maybe taking a look back at how Saudi production played out following the predictions of imminent doom and my counter-predictions of a production rise.

Second, I have observed that the amnesia and selective memory have really gotten bad on this point. People who made dire predictions seem to have completely forgotten about them, or they rationalize them away by saying that the declines are right around the corner. Or, they say that they knew all along that the decline would really be the plateau we have seen instead of a steep drop – and that the financial crisis would be the real story.

The level of rationalizing has been impressive; I have seen none of the vocal predictors own up to being wrong about this issue. Some people have simply stopped talking or writing about it, but others are still out there making the same sorts of predictions (some even insisting that their predictions of steep declines were correct; that the Saudis are lying about their production).

Finally, today I saw a post over at The Oil Drum by Leanan, the Drumbeat editor who really captured the mass amnesia in a nutshell:

Back then, it was a topic of much debate here. Was Saudi heading for “a nosedive into the desert”? Or would they “turn on the taps” later in the year, proving they were not yet at peak oil?

In reality…neither happened. Production did not crash, nor did it sharply increase.

I did respond by saying I disagreed; that in fact Saudi had increased production by 1.1 million bpd in the 15 months following Stuart’s essay. If over that same time period production had fallen by that amount (which was the magnitude of many predictions), I think we would have agreed that this would have been a crash. So it is hard to argue that a 1.1 million bpd swing in the opposite direction was anything but a sharp increase. But I also thought to myself “I should go ahead and write up my historical perspective on this, which I have never done.”

Conclusion

Something that was repeatedly misrepresented was that this was a debate over the actual peak date of Saudi oil production. It was not. It was a debate over a faulty methodology used to come up with a date that was being heavily promoted.

One thing is clear now in hindsight: Saudi did not go into terminal decline in 2005. Proponents of that theory have now shifted their position to “I will give up the idea that 2005 was the peak when the January-December average production exceeds that of 2005.” That’s wrong on two counts. First, production in 2008 rose hand in hand with oil prices, and by July when prices hit record levels the production rate was at the highest level in almost 30 years. If 2005 was the peak, no way would that have been possible.

Second, they seem to forget their argument. Assume for a moment that Saudi produces at only 90% of the 2005 rate, but do it for the next 40 years. Will the 2005 peakists maintain that 2005 was the geological peak? As I pointed out recently to someone who made that argument (“I am correct that 2005 was the peak until production for a calendar year exceeds 2005 production”) – Saudi production in 1980 and 1981 were both higher than for 2005. By their logic, I must conclude that 1980 was the Saudi peak.

I think ridicule and loss of credibility is inevitable if you are out making predictions based on shoddy analysis – which I felt was the basis for many of the imminent Saudi decline predictions. I believe when you are wrong about something, you try to learn from it so that future projections are better. If you simply rationalize away wrong predictions, you will likely continue to make them. But I have also learned that people using shoddy analyses to make predictions are also unlikely to own up to failed predictions. There appears to be a strong correlation between them embracing shoddy analyses that gives them the “right” answers – and rationalizing when the “right” answers turn out to be wrong.

Finally, while I feel like we won’t see the sharp declines in Saudi production right away, I still don’t like being dependent upon Saudi (or Venezuela) for U.S. crude supplies. I would rather see us proceeding with a plan that discounts their future production. Even if production doesn’t decline sharply, I think Chinese demand will keep pressure on prices, and therefore it would be a good idea if we seriously try to wean ourselves away from oil.

January 3, 2010 Posted by | hubbert linearization, hubbert peak, Matt Simmons, Saudi Arabia | Comments Off on Reflections on the Saudi Wars