Sunday, May 25, 2008

Will the rate-of-conversion problem derail alternative energy?

My latest column on Scitizen entitled "Will the rate-of-conversion problem derail alternative energy?" has now been posted. Here is the teaser:

Many alternative energy advocates claim that it is possible to replace our fossil fuel economy with one that runs on a combination of nuclear power and renewable energy from the wind, the sun and the farm. Credible scientific estimates suggest that they are right. However, those advocates often fail to consider one critical issue that could derail their plans, the rate-of-conversion problem. How long will it take to make such a transition? And, more importantly, how long do we have?....Read more

Above ground factors: The propaganda tool of choice

So many annoying things have been said recently about high oil prices that it would be hard to rate which one is the most annoying. Could the winner be found in statements made by members of Congress while they were busy vilifying major oil company executives during recent hearings? Could it be found among the predictable responses from those executives which emphasized opening more public lands and offshore areas to oil drilling? Perhaps speculators should be blamed, or better yet, a conspiracy of speculators. There is, of course, the staple argument that the fall of the dollar is driving oil prices higher even though the dollar's decline--about 12 percent in the last year--doesn't even come close to approximating oil's rise of more than 100 percent.

My nominee for most annoying thing said about high oil prices is the catch-all phrase which incorporates the ones listed above, namely, that high prices are due to "above-ground factors." Certainly, the poor state of the world's oil infrastructure is partly to blame. And, the lack of investment in new capacity by major oil exporters such as Iran, Venezuela and Mexico is another problem.

But the oil infrastructure of the world is by definition both an above-ground and below-ground system. And, so by definition the level of oil production is influenced by technological developments, war, civil unrest, energy policy, investment decisions and a host of other human actions. But simply saying above-ground factors are limiting oil production is not the equivalent of having a magic wand that will 1) make all of these factors disappear, 2) prevent a peak in world oil production from coming earlier because of them, or 3) prevent the debilitating effects on world society that would result from a peak, whether blamed on above-ground factors or not.

So, what's motivating the frequent refrain that were it not for unfavorable above-ground factors, the world would continue to be awash in oil for many decades? Perhaps the most explicit pronouncements about above-ground factors come from Cambridge Energy Research Associates (CERA), the worldwide energy consulting firm. An example would be a 2006 press release from CERA entitled "Peak Oil Theory--'World Running Out of Oil Soon'--Is Faulty; Could Distort Policy & Energy Debate."

What is not obvious from this release is CERA's motivation for wanting to warn the world about "faulty" peak oil analysis. The release states that "the 'peak oil' argument is based on faulty analysis which could, if accepted, distort critical policy and investment decisions and cloud the debate over the energy future." In what way and for what purpose the peak oil argument might distort policy, the release does not say. But CERA's words demonstrate that stating that above-ground factors are limiting oil supply is not merely an observation. Rather, it is part of a propaganda strategy supporting a policy agenda which almost certainly reflects the views of CERA's clients, many of whom are major oil producers.

What is that policy agenda? Here is what the release says:

It is likely that the situation [i.e., limits on oil production] will unfold in slow motion and that there are a number of decades to prepare for the start of the undulating plateau [rather than a sharp peak]. This means that there is time to consider the best way to develop viable energy alternatives that would eventually provide the bulk of our transport energy needs and ensure that there is a useable production stream of conventional crude for some time to come....

The last sentence may require translation. CERA is essentially saying that because it believes that oil supplies can continue to rise to meet demand (provided above-ground factors don't interfere), the world ought to continue to power itself using oil. Not surprisingly, this would be the preferred course for many of CERA's clients who have large, existing inventories of oil in the ground which they want to be able to sell over the coming decades. However, why such a course would be particularly advantageous for the consumers of oil is not addressed.

Also behind CERA's above-ground-factors argument is a disdain for anything other than market solutions. CERA's chairman, Daniel Yergin, is author of "The Commanding Heights: The Battle for the World Economy," a paean to free-market capitalism and a critique of government intervention into the economy. The above-ground-factors argument, of course, makes liberal reference to government regulation, taxation and energy policy as obstacles to the greater flow of oil.

Finally, the above-ground-factors argument allows CERA to explain current high oil prices while making the case that these prices don't have to remain high. This is a crucial element of the argument. If the expectation that prices will remain high becomes entrenched, an analysis of their cause will do little to persuade energy users not to begin a transition away from oil.

CERA suggests that its view of future oil production--namely, a continuing rise in production into the 2030s with a decades-long plateau to follow--ought to be adopted because:

Corporations, governments, and other groups, including nongovernmental organizations, need to have a coherent description of how and when the undulating plateau will evolve so that rational policy and investment choices can be made....

Apparently, there is only one rational forecast (CERA's) and only one rational response, namely, to continue to burn oil for decades to come. How convenient for CERA's clients!

By inference then, warnings about a near-term oil peak could "distort" public policy and corporate decision-making by encouraging both government and business to move away from oil as an energy source. Both geologic constraints and above-ground factors such as instability in the Middle East (where most of the remaining oil lies); low investment in oil production in such oil-exporting countries as Iran, Russia, Venezuela and Mexico; limitation of production in Saudi Arabia; and civil unrest in Nigeria might lead oil-consuming nations to embrace government programs and subsidies for energy conservation and the deployment of alternative energy sources. Despite what CERA believes, wouldn't these policy choices actually be the rational ones given all the uncertainties surrounding future oil supplies?

Perhaps what CERA and many other members of the above-ground-factors chorus are really thinking is something like this: "If only the whole world would cooperate with our free-market ideology, then the producers of oil and other fossil fuels would have ample time to sell off their existing and anticipated future inventories of such fuels." It is this kind of thinking that simultaneously ignores the climate change implications of burning the earth's existing inventory of hydrocarbons and downplays the geologic constraints on oil and other fossil fuel supplies.

The agenda behind the above-ground factors argument is often obscured by vague and misleading language like that found in the CERA press release cited above. What propagators of this message seemingly hope to accomplish is a sort of paralysis among policymakers designed to head off any serious conservation measures or transition to a renewable energy economy. These propagators know that the above-ground-factors message plays into our desire for continuity in our lives and also into the widely, if unconsciously, held cornucopian belief that the natural world will give us whatever we want, if only we will let it. As long as energy stringency can be blamed on anything but geologic constraints and as long as above-ground constraints can be made to sound temporary, those spewing this message may succeed at achieving public policy paralysis.

On the other hand, if policymakers, businesses and the public can be convinced that geologic constraints are real and that above-ground problems may very well be ongoing, then it may be possible for the world to move more quickly toward fossil fuel alternatives. To start that journey, however, all three groups need to break through the paralyzing propaganda now surrounding the above-ground-factors argument so that they can see clearly the real risks we face in energy.

Essentially, the above-ground-factors crowd is saying that it is premature to begin a wholesale restructuring of society to run on renewable energy. But the only people who would really be hurt if the world completes such an energy transition before it absolutely has to are the purveyors of fossil fuels and the consultants they hire.

Sunday, May 18, 2008

Stop me before I fill up again!

It is a supreme irony that a wealthy Bedouin should be playing the role of a tough-love drug counselor to the world's oil-addicted consumers even as he continues to be the globe's biggest pusher. It was not the intention of Saudi Arabia's King Abdullah to take on such a role, but merely the bizarre consequence of his consent to plans by his oil minister to limit the country's oil production to no more than about 12.5 million barrels per day from 2009 onward.

It's a move that should have been on the front page of every newspaper and that should have led every news broadcast the day it was announced. The world's largest exporter, an exporter that every major oil-consuming nation had been counting on to boost production to at least 15 million barrels per day over time, had just told the world that it wasn't likely to get what it wanted. Since most of the public still has no inkling that we are approaching the peak in world oil production, the announcement came and went with little notice.

The U. S. Energy Information Agency still projects 16.4 million barrels per day of production for Saudi Arabia by 2030, though it had projected 23.8 million barrels per day in 2025 as recently as 2003. Expectations have come down to match reality, but perhaps not by quite enough.

The king's ostensible reason for the move was that he wanted to leave some oil in the ground for the benefit of future generations. It is a move long anticipated by resource economist Douglas Reynolds who told me in 2004 that government-controlled oil companies such as Saudi Aramco would increasingly see little point in generating oil revenues beyond their immediate needs for funding defense and social programs.

In Russia where production unexpectedly declined in the past year, the Putin government has been levying exorbitant taxes on oil extraction--in some cases in excess of 80 percent. The effect has been to slow extraction and save the oil for a later time. Whether the Putin government intended to do this, we cannot know for sure. But taxation is an easy way to accomplish such an objective where the government does not have direct control of all oil resources.

The practical effect of such policies by the world's two largest oil producers is to bring the peak in world oil production closer. But with supplies being held back for later development, the downslope on the production curve should be much more gradual than many expect, according to Reynolds. That suggests that our withdrawal symptoms may not be overwhelmingly severe as the oil economy wanes, possibly giving us a bit more time to adjust to a lower energy world and to find alternatives to oil. Once again the accidental drug counselors in Russia and Saudi Arabia are doing us a favor even if we don't appreciate it now. (If they were my parents, they would be telling me that I'll be thanking them for this when I get older.)

But the ranks of the accidental drug counselors don't end there. The lack of investment in Venezuela and Iran has limited production in both countries. This is true even though Venezuela is thought to have heavy oil deposits which rival the deposits of Canada's tar sands. Of course, it didn't help that the country's president, Hugo Chavez, essentially chased away private investment when he unilaterally altered contracts with major international oil companies. Beyond this, both countries have made spending on various social programs and subsidies a priority.

There is also the trouble in Mexico whose government-owned oil company, PEMEX, supplies about 37% of government revenues. The constant call on PEMEX's profits has led to severe underinvestment in oil production. And now, as production falls rapidly in Mexico's largest field, Cantarell, there is little other new production to replace that lost production.

The fear, of course, is that this lack of investment and self-imposed limitation on production will lead to a huge crisis in the not-too-distant future. I would contend that the crisis would come in time anyway and that our current path actually offers some hope that oil production will not collapse as we make our way through a very difficult energy transition. Such a path actually seems somewhat better than having cheap, plentiful supplies now that lull us into complacency for a while longer after which we might face a rapid decline in oil production. (Economists generally believe that this could not happen because prices would forecast shortages and adjust markets accordingly. For an explanation about why mineral markets do not forecast future supplies correctly, see my piece from 2004 entitled "Faith-based economics II: The case of oil's sudden scarcity.")

Also acting as a drag on current and future oil production is the lack of investment in the oil and gas infrastructure generally. Two years ago the International Energy Agency called for more than $20 trillion to be invested in the world's energy infrastructure through 2030 with about $3 trillion of that devoted to oil and gas infrastructure. Energy investment banker Matthew Simmons, who has been traveling the globe sounding the alarm about peak oil, recently produced a rather grim assessment of the state of the world's oil and gas infrastructure. He says the worst case scenario is a drop of 10 to 20 percent in oil production by 2013.

The geologic limits to oil production are now converging with economic and political constraints to bring energy stringency to the planet sooner than many had anticipated. No one, of course, knows for sure whether the scenario I suggest above is actually starting to play out. It's always possible that we could face steep production declines soon. But it's also possible that production could actually climb modestly or at least plateau after an initial drop as prices finally provide the needed incentive to invest in new capacity in those oil exporting nations that have been lagging in that investment to date. In addition, the oil that has been held back by such countries as Russia and Saudi Arabia would start to flow tending to keep production level for a time.

These latest developments should serve to remind us that we need to learn to set limits on ourselves if we expect to make it through the emerging energy transition. The fact that some inadvertent tough love from some unlikely characters is doing the job for us now strikes me as not being as bad as it seems.

Sunday, May 11, 2008

What we don't know (A response to John Michael Greer)

John Michael Greer is as intelligent a voice on the issues of peak oil and sustainability as one can find. His recent piece entitled "Not The End of World" displays his broad reading in history and his deep understanding of culture. And, while history is an excellent source for understanding human nature and the natural world, it doesn't have the predictive power which he attributes to it.

In many ways history can tell us what to expect from people when they face circumstances similar to those observed in the past. But, it cannot tell us what to expect from events which are the result of far more decisions by people and far more changes in the natural world than any individual or even any group can observe or analyze.

First let me say that I too imagine that we will experience a stair-step decline in the functioning of global societies as our energy supplies recede. Greer is quite correct that historically humans have met resource declines with struggles to adapt, and that these efforts have changed the dynamics of the decline.

But I think he is too dismissive of those who worry about a rapid, steep decline. Greer takes the catastrophists to task because of their linear thinking: high prices and short supply today mean only ever higher prices and ever smaller supply of everything tomorrow and tomorrow in a straight line. The implication is that this will lead to the rapid destabilization of modern society. But, he is correct that historically, complex societies and their markets tend to take nonlinear courses. What he omits is that nonlinear systems can sometimes turn abruptly and steeply downward.

In truth, no one can know what the future holds because there are too many unknowns. We don't know how much oil is left? We don't know how much will be extracted and at what rate? We don't know when the peak in oil production will occur? And we don't know how severe the decline from the peak will be? We don't know how quickly alternatives will be found and deployed and whether they will give us anything near the energy that oil currently does? We have guesses, some optimistic, some pessimistic. But we don't have any certainty. (Of course, similar questions are being asked about natural gas, coal and uranium as well.)

I think the more important question to ask is this: What can we reasonably prepare for? A nearby oil peak followed by a swift and catastrophic decline in oil production might very well mean a quick end to industrial civilization. And, a very chaotic and nasty end it might be. But as a friend of mine recently asked, "How can you prepare for the end of civilization?" He didn't think anyone could. Our lives are too tightly intertwined. We will either overcome the energy and environmental challenges we face together or we will all go down together.

(I suppose one could become a survivalist and with expert knowledge of plants and animals live in the forest. But how many could actually do this? And, even if all us knew how, we would quickly deplete those forests and other sources of food as well.)

I think what we can reasonably prepare for is something that provides some semblance of continuity. We can prepare for a society that retains its basic functions: agriculture, mining, manufacturing, transport, and at least a modest technical base, especially the electrical grid. We can focus on those things which will be critical to our survival and let go of those things which we won't be able to save. (See my previous piece, "Triage for the Post-Peak Oil Age.")

While we cannot be sure what the future holds, I agree with Greer that we musn't be too hasty in assuming that we are now headed for the swift demise modern civilization. I'm not sure how we could prepare for it anyway. But it may be useful for each of us to dwell on the worst scenario for a bit as a picture of what might ultimately come to pass if we don't act decisively and resolutely now.

Sunday, May 04, 2008

The just-in-time economy crumbles

Almost two years ago I wrote a piece called "Is just-in-time nearly out of time?" laying out how completely the just-in-time inventory management idea had infected businesses, governments and even nonprofit organizations. I catalogued concerns that the practice of holding razor-thin inventories of many critical items such as food, fuel and medical supplies could potentially imperil our ability to provide them in circumstances where 1) supplies grow unexpectedly tight, 2) logistical lines are impaired or cut, or 3) a large humanitarian catastrophe requires surge capacity for food aid and medical treatment.

Fast forward to 2008. Food riots are spreading across the world as soybean prices have more than doubled, corn and wheat prices have tripled, and rice prices have risen to more than five times their low of $4 in 2003. As a result of two decades of low agricultural prices, many governments became complacent and paid scant attention to food issues. They drew down grain stockpiles, neglected agricultural research and rural assistance, and generally took the attitude that market forces should increasingly dictate food production and prices. Food was becoming just another input into the world industrial system.

All that has changed as swiftly as grain prices have risen. India, which has always maintained a government stockpile of wheat, purchased several million tons in the international markets last year after six years with no imports. Malaysia announced a plan to "develop stockpiles of essential foodstuffs like rice and cooking oil." Guatemala announced plans to address food prices that include increasing food stockpiles within the country. Several countries announced bans or restrictions on rice and wheat exports.

Farm inputs, especially fertilizer, are also suffering from low inventories. The New York Times quotes one fertilizer dealer as follows: "If you want 10,000 tons, they'll sell you 5,000 today, maybe 3,000," said W. Scott Tinsman Jr., a fertilizer dealer in Davenport, Iowa. "The rubber band is stretched really far."

As much attention as food is rightly getting, other key commodities are becoming increasingly scarce for the usual reasons: strong demand from India and China and years of underinvestment in supply. Copper inventories at major exchange warehouses have dropped to just two days of global consumption. In China, coal supplies have dwindled to just 12 days, a very thin margin for power plants and other industrial users. So strained are supplies of steel that the Indian government banned steel exports recently. And, then it banned cement exports.

The realization that just-in-time methods have ceased to serve us well comes at a time when it is exceedingly difficult and expensive to build a stockpile of anything. Moreover, if every market participant decides to build a stockpile at once under tight supply conditions--as is apparently happening in the rice market--this only creates parabolic spikes in prices which encourage further hoarding.

To alleviate food shortages, several solutions are on offer. It's important, however, to see what is motivating those behind the so-called solutions. This libertarian writer complains that the market is not being allowed to work. Libertarians in general believe that government intervention is bad because it often produces perverse results and because it reduces the scope of action for the individual. When the state is involved in setting agricultural policy by, for instance, subsidizing basic grains and the production of biofuels and encouraging meat and dairy production (which require enormous amounts of grain for feed), this can have profound effects on the availability of food.

Certainly, government policy can distort food production. And, it is just such policies in North America and Europe that many advocates for farmers in poor countries decry as making it impossible for such farmers to compete. Cheap grain imports into poor countries destroy the market for grain grown locally devastating the livelihood of local farmers and leaving these countries vulnerable to shortages and price increases. But these advocates should be careful what they wish for. Do they really want to expose small, non-mechanized farmers in poor countries to all the vagaries of the world market with absolutely no protections for farmers in poor and rich countries alike?

France's agriculture minister thinks he has a better idea. Other regions in the world should create self-sufficient blocs like the European Union to administer something similar to Europe's Common Agricultural Policy. EU agricultural programs protect farmers by guaranteeing minimum prices, imposing import tariffs on certain foods, and providing direct payments for farming the land. France, as one might guess, is a significant beneficiary of such protections.

The free market advocates are in retreat for now as the European and North American models, however flawed, demonstrate that they can achieve one very important objective: excess supply of affordable food, in other words, a cushion designed to prevent shortages. It is only the interlinking of European and North American markets with the world markets that is pushing up domestic prices and draining food reserves. Of course, without those excess supplies being available for export, poor countries would be in much worse shape than they are.

But, the long-term damage to agriculture in poor countries that results from those models is a product of International Monetary Fund policy. That policy forced many poor countries to open their agricultural markets to the subsidized produce of Europe and North America in exchange for financial and development assistance. Things might not be so bad right now if these poor countries had been allowed to protect their farmers and insure adequate domestic production of basic foodstuffs as we in Europe and North America do.

In other areas such as minerals and energy, there are no alternatives in the short run except to use both of them more parsimoniously and look for suitable substitutes over time. (Ironically, many of the currently touted energy substitutes depend on the very fossil fuels they seek to replace.) Any fix will not come quickly or easily since it can take years to find and bring into production new mines and oil and gas fields. And, the lead time for building a renewable energy economy to replace the fossil fuel economy--which will recede as oil, gas and coal peak in production and then decline--is decades.

Of course, the question of where we go from here is not as simple as many experts and policymakers (who are often shilling for their corporate paymasters) suggest. First, we have to focus on immediate challenges such as food shortages, a huge task in itself. Then, we will have to focus on longer-term challenges with the urgency that such issues as peak oil now clearly deserve.

When I wrote "Is just-in-time nearly out of time?", I pondered whether just-in-time inventory management was an idea for all time or merely suited to a unique moment in history. I think we can answer now with confidence that it is the latter. It is clear that the just-in-time inventory model is increasingly responsible for much of the personal hardship and economic disruption we are now witnessing and that it ought to be discarded as an organizing principle as we build new systems for a sustainable future.