Sunday, December 30, 2012

Five possible energy surprises for 2013

Many people trot out their predictions for the coming year right about now. I'm generally allergic to predictions and think rather in terms of probabilities. Naturally, the world we live in is far too complicated to yield anything approaching certainty concerning such matters as the future price and supply of energy, future economic conditions, and future political developments. In the end, the future is simply unknowable. So, I've tried to think of some developments which conventional wisdom has judged rather unlikely and which would therefore significantly alter our lives and perceptions should they occur--precisely because we are not prepared for them.

I don't think any of the following is likely to happen in 2013. But, any one of them would certainly surprise most people and most experts and upset the plans and expectations of many governments, businesses, investors and consumers. Here are my five possible energy surprises for 2013:

  1. U.S. natural gas production falls. There has been so much talk of the vast resource of natural gas now available to America in the form of shale deposits that it is practically unthinkable that U.S. natural gas production would actually fall. Of course, very low natural gas prices have led drillers to cut way back on drilling until the current glut is worked off and prices rise. What most people don't know is that U.S natural gas production has essentially been flat so far in 2012.

    One person I know who is tracking natural gas production closely believes that drillers will wait too long to ramp up drilling again leading to a plunge in supply--and here's the real kicker--one from which we cannot recover. The annual production decline rate for U.S. natural gas wells taken as a whole has reached 32 percent. That means that if we were to forgo drilling any new natural gas wells in the coming year, production would fall by one-third. The production decline rate for shale gas wells is considerably higher than that of the average natural gas well--above 50 percent in the first year with many shale gas wells declining by more than 60 percent from initial flow rates. By the end of the second year, shale gas wells are often down 85 percent from initial flow rates. This means that by the end of the second year of operation, 85 percent of the production from any given set of shale gas wells must be replaced just to keep shale gas production level.

    The logistical challenges of shale gas are daunting, i.e., getting enough rigs and workers quickly enough in the field along with the necessary millions of gallons of fracking fluid needed for each well. But perhaps even more important, investors who took a shellacking in the previous drilling boom may be reluctant to part with more capital to drill wells until they are absolutely certain that prices will stay high enough long enough to reward them. That will mean further delays in reviving drilling once it becomes apparent that supply is shrinking in earnest.

    All this adds up to not enough rigs, not enough personnel, and not enough capital to keep up with the ferocious production declines in shale gas and even conventional fields. It will nevertheless be a surprise to most people if U.S. natural gas production actually falls in 2013. But, it'll be an even bigger surprise if production then fails to rise or recovers only marginally once prices get high.

  2. Oil production from the America's most prolific tight oil region, North Dakota, falls. Tight oil (often mistakenly referred to as shale oil) is typically extracted using the same method as shale gas. But, as a result, tight oil wells experience the same types of declines. Wells drilled into the Bakken formation in North Dakota show an annual production decline rate of around 40 percent. As the rate of production grows from this deposit, more and more effort will have to be devoted to simply replacing production from wells that are swiftly declining. Already production increases are slowing. But almost no one expects oil production in North Dakota to decline in 2013 which is why it will be a surprise if it does.

  3. Oil prices plunge to $30 a barrel and stay there. This is really a macroeconomic scenario based on plunging oil demand. And, the reason for plunging demand might be that Europe finally implodes under the pressure of its slow-motion financial crisis; the United States goes into a recession, perhaps because Congress fails to agree on reducing hefty tax hikes now scheduled to go into effect automatically; and China has a hard economic landing and stays economically moribund. All these events coming together imply essentially a deflationary depression. In such circumstances, commodity prices in general would decline because of both excess capacity and falling demand. Oil won't be the only commodity whose price plunges under this scenario.

  4. Oil prices go to $200. This scenario is based on the idea that the civil war in Syria spills out into other Middle Eastern countries and becomes a general conflagration that hampers oil exports throughout the Middle East. Of all the scenarios I'm mentioning here, this one seems the least likely. But, if it does happen, look for scenario 3 above to take hold within a few months as the world economy, shocked by extremely high oil prices, goes into a profound economic contraction. If the fighting continues to rage throughout the Middle East for the entire year, we may get the economic contraction, but prices won't come down nearly as far as in scenario 3.

  5. The U.S. Congress forbids additional natural gas exports. Even though the United States remains a net importer of natural gas--imports constituted 12.7 percent of consumption in 2012--the country currently exports small amounts of natural gas to Canada and Mexico. This is because the North American gas pipeline system connecting all three countries makes it economically sensible to do so in a few instances. If it becomes clear that America's natural gas endowment is actually quite limited, Congress may be keen to keep natural gas produced in the United States at home in order to keep prices low.

    If Congress doesn't act, the Federal Energy Regulatory Commission may simply continue to grant permits for more liquefied natural gas (LNG) export terminals from which special refrigerated tankers will carry natural gas overseas to importing nations. With LNG prices in Europe and Asia three to four times pipeline prices in the United States, there is no doubt that natural gas drillers will spend prodigious amounts of time and money trying to prevent any export restrictions. If such a measure is introduced in Congress, it will result in a battle of corporate titans as the natural gas producers come up against large, well-funded users of natural gas such as utilities, chemical companies and fertilizer manufacturers. And, if such a fight does arise, it's not at all certain who will win.

    My money, however, would be on the users of natural gas including the 50 percent of those who heat their homes with natural gas. These consumers represent an enormous number of votes, perhaps enough to overcome the lobbying acumen of the country's powerful natural gas producers.

As I said, all these developments would be surprises because so few people believe they are even within the realm of possibility. I will, however, not be surprised if we get through all of 2013 without any one of them coming to pass.


Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, December 23, 2012

There's no such thing as energy independence in our globalized, fossil-fueled world

Anyone who tells you that energy independence can be achieved based on globally traded commodities such as oil, coal and natural gas is either trying to mislead you or doesn't understand the structure of energy markets. As of 2011 fossil fuels produced 83 percent of the world's energy according to the U.S. Energy Information Administration (EIA). Because fossil fuels can be transported anywhere in the world, producers seek out the highest price unless they are constrained by law or infrastructure from doing so.

This means that energy independence for a country is something of an optical illusion when it is based merely on the domestic production of fossil fuels. Here's why:

  1. Events far away such as wars; embargoes; strikes; and mine, oilfield and refinery disasters affect the level of domestic prices for fossil fuels in all countries where these fuels are freely exportable regardless of whether that country produces enough for its own consumption. In such countries consumers of these fuels including domestic industry and transportation, commercial establishments, households and government agencies are all subjected to fluctuating world prices that can be unrelated to anything happening in the host country even if the country extracts enough fossil fuel from its own soil to meet domestic demand.

  2. Even fossil-fuel exporting countries that subsidize purchases of fossil fuel energy by businesses and consumers are affected by events outside those countries as prices for their exports are largely determined by external events. The revenue they forgo by keeping domestic prices low is a hidden cost to the energy sector of the economy. Those subsidies mean reduced investment both in new production and in the maintenance of the existing energy-producing infrastructure. That hidden cost grows as energy prices rise if subsidized domestic prices do not rise as well.

  3. Unless fossil fuel companies are owned by a government, those companies focus on maximizing both returns for their shareholders and compensation for their managers. They seek out the highest prices for their products worldwide (adjusting for transportation costs) regardless of the effect on the energy security or energy independence of the country in which the oil, natural gas or coal is produced--unless, of course, those companies are prevented from doing so by law or by the infrastructure. It is disingenuous, therefore, for such producers to tell the public in any country that they are focused on energy independence. On the other hand, government-controlled fossil fuel companies such as those in China actively seek acquisitions in other countries that can serve as suppliers to the home country regardless of the needs of the country those companies operate in.

Let's see how this is playing out in the United States where the oil and gas industry and its financial backers on Wall Street have lately been touting in the media the notion that the United States will soon become energy independent. That same industry is currently seeking permission for oil exports even though U.S. crude oil production of 6.3 million barrels per day (mbpd) this year remains far below U.S. consumption of finished petroleum products including gasoline and diesel of 16.2 mbpd. (To be precise we should subtract U.S. exports of finished petroleum products of about 2.5 mbpd to come up with a net U.S. consumption figure of 13.7 mbpd which is still far above U.S. crude production). Yes, it's possible for the United States to become free of oil imports; but, the most likely course will be a drastic reduction in oil consumption made possible in part by the electrification of the nation's transportation system and by aggressive conservation measures.

As for the supposed natural gas boom in the United States, U.S. natural gas imports were 12.7 percent of U.S. consumption so far this year, according to the EIA. That's down from an average of 15.7 percent for the 20 years prior. It's progress, but it's not energy independence. Nevertheless, the natural gas industry is pushing ahead with plans for U.S.-based natural gas export terminals which must be approved by the Federal Energy Regulatory Commission (FERC). One terminal in Sabine, Louisiana has already been approved and is under construction. Many more applications are under review.

Naturally, the industry will tell you that it is seeking permits for these terminals in anticipation of the day when U.S. natural gas production exceeds U.S. needs. Does that mean they'll hold off exporting gas until that day? Not a chance. Not when liquified natural gas (LNG)--the form in which natural gas is transported by ship--is selling in Japan for $17.30 per million BTUs and $11.83 in Europe (both as of November 30). Compare that to $3.42 for spot natural gas in the United States (the Henry Hub price as of December 21). The profit potential for U.S. producers is too great to pass up.

So, what does this mean for manufacturers, especially those chemical and fertilizer companies that rely heavily on natural gas as a feedstock? They have been moving operations back to the United States because of cheap natural gas prices. If the natural gas industry gets all of its currently planned export facilities approved and built, that would mean 22 percent of current daily production of U.S. natural gas could be exported. This is certainly enough to bring U.S. prices much closer to world prices. If we include all projects identified by sponsor companies but not yet under review by the FERC, the percentage rises to 37 percent of current daily production. Of course, natural gas producers tell us that U.S. production will rise significantly from here even though production has been essentially flat for a year. That's only temporary, they will say. But should we take their word for it?

And, even if production grows significantly, can we not assume that the producers will simply ask for more export terminals to be permitted so that these producers can capture world prices for natural gas?

So, U.S. manufacturers are in for a surprise if they believe natural gas prices in the United States will stay low because America is moving toward "energy independence." It is the duty of U.S. natural gas producers to seek the highest price for their product. Only two things could stop them: If the FERC ceases issuing permits for export facilities or if the U.S. Congress passes a law preventing the export of LNG. Both seem unlikely.

On the other hand, it may be that there will simply not be enough natural gas produced to justify very many export terminals which require extremely long-term delivery contracts, on the order of 30 years. If American natural gas producers cannot guarantee adequate production to fulfill such contracts over their full period, it seems unlikely that those interested in receiving the gas will be willing to make the necessary commitment to and investment in import facilities. With all the talk about America's vast shale gas deposits, this may seem an unlikely scenario. But a growing number of skeptics have outlined plausible reasons why shale gas will turn out to be much more expensive and much more limited in its production than is currently believed. Keep in mind that it is NOT the size of the resource that matters so much to the daily functioning of society, but rather the rate at which we can extract gas on a daily basis.

So, is there anything that really could make a country energy independent? The answer is yes, and the method is two-fold. First, vast reductions in energy use can be had through retrofitting buildings to the so-called passive house standard. This almost eliminates the need to burn fuel to heat most buildings. Those reductions could also come from changes in the transportation system: more emphasis on public transportation including rail and on ridesharing for drivers. The electrification of most transportation would almost surely be part of any such independence plan. And, we need to reconfigure the way we live so that our cityscapes allow us to work, socialize, and shop nearer to where we live.

Second, we would need to build a distributed energy system, allowing people to gather energy at the individual household and business level. Much of this would have to be renewable energy from wind and solar. Expanding hydropower where possible is another way, particularly small hydropower utilizing the myriad smaller dams which either used to generate electricity or which have never been exploited for this purpose.

This path would require a sustained effort over decades to achieve. But once it is achieved, the country that undertakes this path would never be subject to disruptions of energy supplies in faraway places. And, that country would never have to worry about the inevitable declines in the production of fossil fuels which must come someday because they are finite.

This alternate route to energy independence is rarely discussed as the world continues to fixate on increasing production of fossil fuels as the path to energy independence. But in truth, these fuels only put us further in thrall to fickle global markets and unstable exporting nations while exposing us to the ever present threat that fossil fuel supplies will begin to decline before we've made adequate preparations for an energy transition. Already worldwide crude oil production has been on a plateau since 2005.

If any country really wants to be truly energy independent, a feasible, durable path is already available. All that country has to do is look away from the false advertising of the fossil fuel industry and look toward the future of energy that is already unfolding before us.


Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, December 16, 2012

Previous long-term government, industry oil forecasts badly overestimated supply; why should we listen now?

[I]f you're still operating under the assumption that the earth's petroleum--or at least the cheap stuff--is about to run out, you're not going to thrive in the new oil era. Technology is making it possible to find, produce, and refine oil so efficiently that its supply, at least for practical purposes, is basically unlimited.

The writer of the above sentences was reacting to oil prices hovering around $11 a barrel. He could not have known then that we were about to embark on a bull market that would take oil to its highest price ever--even adjusted for inflation--just 10 years later. And so, after oil's run, it's all the more astonishing that as Brent Crude--now the true worldwide benchmark price--stands above $100 a barrel, we are hearing a similar message about the future of oil both from official agencies and the oil industry.

The reverence accorded each new forecast of future energy supplies from international and government agencies and from major oil companies seems to go far beyond that accorded to the oracle of Delphi in ancient Greece. That oracle's record may be lost in the mists of time, but we can check the record for these modern energy oracles.

The U.S. Energy Information Administration (the statistical arm of the U.S. Department of Energy), the Paris-based International Energy Agency (a consortium of 28 countries), the National Intelligence Council (an advisory body to the U.S. Director of National Intelligence) and the oil giant ExxonMobil, all regularly release long-term forecasts for world energy supplies. The last three have released their latest forecasts this fall. The U.S. EIA updated its world projections in 2011.

Looking back at forecasts made in the year 2000 by the U.S. EIA, the IEA, and the NIC, it becomes obvious that drawing an upward line on a chart does not make an oil forecast magically come true. All were considerably off the mark. ExxonMobil's oldest forecast available online dates back to 2006. It, too, has proved wide of the mark.

First, let's see by how much each forecast missed. Reports issued in the year 2000 by the U.S. EIA and the IEA contained similar projections. The U.S. EIA forecast that total world liquid fuel supplies would reach 93.2 million barrels per day (mbpd) in 2010. The IEA forecast 95.8 mbpd. Though the NIC report did not provide an explicit forecast for 2010, the implied forecast was around 92 mbpd. All those numbers include not only crude oil and lease condensate which constitute the proper definition of oil, but also natural gas plant liquids (only a fraction of which can be substituted for oil) and refinery processing gain (which is the result of applying energy to break oil into its components, causing the final volume to expand). We can now check those numbers. Actual total worldwide liquid fuel production for 2010 was 87.1 mbpd.

All three groups overestimated production by a considerable margin. This helps to explain the colossal miss on prices. The U.S. EIA report included a price projection for crude oil of about $28 a barrel for 2010 (adjusted for inflation). The actual average price for oil traded on the New York Mercantile Exchange in 2010 was $79.61. The 2000 IEA report forecast an inflation-adjusted price for oil in 2010 only 25 cents higher than the U.S. EIA forecast. The NIC report did not provide an explicit price forecast for oil, but did say this: "Meeting the increase in demand for energy will pose neither a major supply challenge nor lead to substantial price increases in real terms." All three groups failed to anticipate the plateau in worldwide crude production that began in 2005. All failed to gauge properly the pace of growth in oil demand in Asia, particularly China and India, which put upward pressure on prices.

Of course, it's easy to pick apart long-term forecasts when the actual data become available. But, the point here is not that the forecasts were wrong, but that they were all wrong in the same direction, namely, overestimating actual production. Taking an average of all three would still have resulted in a substantial overestimate. That's a serious concern because the forecasts provided by these groups are used worldwide for government and corporate planning and policy purposes. They are extremely influential. And, yet experience should have taught us by now that long-term energy forecasts by anyone--even people whose job it is to study energy markets and supplies--are a poor guide to policy and planning.

There is a basic asymmetry in the effects of energy supply forecasts. If an oil production forecast promises a business-as-usual future (i.e., continually growing production) as all three forecasts mentioned above did and that forecast turns out to be too low, the mistake is benign for most people. Extra supply means lower prices and therefore more money available for other things. If, however, such a forecast turns out to be too high, the consequences can be severe because the global system we now have is acutely sensitive to changes in the price and supply of energy, especially oil. We have seen just how sensitive it can be as we've watch oil prices reach historic highs in the last decade and remain high. Negative supply surprises have the potential to undermine the very stability of our global system, and the only way to prevent that is to prepare for scenarios that these official reports refuse to contemplate.

Now keep in mind that the comparisons made here between forecast and actual production and prices are for a 10-year period. The latest U.S. EIA and IEA world forecasts extend out 23 years to 2035. The newest NIC forecast purports to know the state of the world in 2030. The accuracy of any forecast deteriorates rapidly the further it goes into the future, and these forecasts go out about twice as far. We are taking many more times the risk if we rely on them. This is because energy transitions can take up to 50 years. Waiting until the last minute to begin the inevitable transition away from fossil fuels could cause terrible discontinuity and possibly disaster.

Imagine how different government energy policy and corporate planning would have been had all three forecasting groups predicted in 2000 that oil prices would rise above $100 a barrel by late in the decade. Imagine if all three groups had predicted a plateau in the worldwide rate of production of crude oil proper (defined as crude oil including lease condensate) starting in 2005. Imagine further if all three groups had predicted that global net exports of petroleum liquids--the petroleum fuels available for import by such importers as the United States, China, India, Japan and most of Europe--were going to decline consistently starting in 2006, leading to intense competition for supplies among importing nations.

There were voices warning that such things might happen. But the entrenched institutional prejudices in all three groups prevented them from contemplating these outcomes. So deep are those prejudices that none of the three seems yet to have picked up on the issue of shrinking global net exports even though it is now clear in the data. Of course, it is safer to be wrong when the vast majority are wrong with you. That way you can say, "Nobody could have seen it coming."

As the realities of constrained worldwide oil supply have become apparent, all three groups have gradually lowered their long-term oil supply forecasts. But, all three continue to believe that supply will be there to match projected demand, a dubious assumption given the experience of the last decade.

It's true that forecasts can miss by being too pessimistic as well. None of the three groups foresaw the shale gas phenomenon back in 2000. It was assumed that North America would be importing a considerable amount of liquefied natural gas (LNG) by now as domestic supplies declined. Having missed the rise in gas production, it is possible that all three groups are now simply following the trend and projecting it forward with little skepticism--much as they did for oil in 2000.

One thing they all seem to be missing is that production of large amounts of shale gas will depend on much higher prices as drillers move from the easy-to-get gas--which is currently flooding the North American market at prices that are below the cost of production--to the difficult-to-get gas that will flow at slower rates and be much more costly to extract. They also seem to be missing the fact that high decline rates for such wells mean that rig counts and infrastructure will have to expand almost geometrically to keep supplies growing. That expansion will hit a wall at some point when the price of natural gas rises to reflect this reality and forces some consumers to cut back on natural gas use. Already U.S. natural gas production has been essentially flat since December 2011 as prices have vaulted from multiyear lows. This comes after years of persistent growth in supplies from the low seen after Hurricane Katrina in 2005.

Because ExxonMobil has recently released its 2013 Outlook for Energy with projections to 2040, I had hoped to find the company's report from 2000. The oldest I could find came in the form of a slide show from 2006. Even at this late date, ExxonMobil's forecast was predicting consistent, uninterrupted growth in the worldwide production of crude oil proper and assuming that North America would need considerable LNG imports in the coming decade. The report shows that the conventional wisdom remained intact well into the period when underlying events made them no longer tenable.

ExxonMobil's latest report, not surprisingly, concludes that fossil fuels will continue to provide the bulk of the world's energy well into the future and that there will be plenty of them. With the media repeating what will inevitably turn out to be a flawed forecast, they are forgetting to point out the obvious. The company has an interest in convincing consumers and shareholders that oil and natural gas will be the dominant fuels of this century--which is all the more reason to be skeptical about the company's projections.

When the U.S. EIA, the IEA and the NIC made their long-term forecasts in 2000, supposed game-changing technology was going to make it possible to extract oil in the Arctic and in deepwater "at improbably low costs." The NIC even prophesied that natural gas from methane hydrates, essentially methane trapped inside ice crystals in the deep ocean, would become an increasing part of the natural gas supply. No commercial production of methane from methane hydrates has so far taken place.

And, with regard to oil, even though prices have risen from an average $30.26 in 2000 to an average of $94.60 this year on the New York Mercantile Exchange, we are told again by all three groups that a new miracle technology called hydraulic fracturing is going to make future oil supplies plentiful. (By the way, that technology is 60 years old.) Given their record on such pronouncements, we would be wise to be cautious.

Long-term forecasts are inherently unreliable. In the case of the U.S. EIA, the agency does provide three forecasts based on various price assumptions. But price is not the only variable, and among those forecasts, even the most conservative in 2000 was still too optimistic about supplies and wildly wrong about prices. At the very least, all long-term forecasts should have wide error bands around them. Those error bands would aid us in understanding the risks. No one can know the future. So, we are left with evaluating scenarios that help define the risks we face.

When it comes to policy, it is not the benign energy supply scenario which should guide us, but the most severe because it has the potential to undermine the very stability of global society. It may be for political reasons that statisticians who plot the data for such projections choose to leave out the error bands which they know ought to be there. If policymakers and planners understood just how big the uncertainty about future fossil fuel supplies is, they might panic. But, they might also do something else; they might quickly wean society off finite fossil fuels wherever possible in favor of energy sources such as wind and solar which won't be running out any time in the next few billion years. And, they might also require deep reductions in energy use starting now to guard against the day when fossil fuels decline.

It comes down to whether it is wise to continue with a system of energy, the stability of which is entirely dependent on highly uncertain long-term forecasts for fossil fuel supplies. I repeat: History tells us that it can take up to 50 years to complete an energy transition. Previous transitions gradually moved us to new fuels having increasing energy densities--wood to coal, coal to oil and natural gas, oil and natural gas to uranium. But coal, oil, natural gas and uranium are all finite, and we will someday--perhaps very soon in the case of oil--find that their supply cannot grow any more and will even begin to decline.

When long-term forecasts promise energy that is both cheap and plentiful as the U.S. EIA, the IEA, and the NIC reports did in 2000, governments, businesses and individuals do little to prepare for scarcity. Wouldn't it be wiser to build an energy system which would free us from the inherently risky and unreliable racket of long-term forecasts? Wouldn't it be wiser to build an energy system that is forecast-proof because the energy that powers it is constantly renewed?


Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, December 09, 2012

The one chart about oil's future everyone should see

When people read about a long-term forecast of world oil supply--say, out to 2030--they often believe that the forecasters are merely incorporating our knowledge of existing fields and figuring out how much oil can be extracted from them over the forecast period. Nothing could be further from the truth. Much of the forecast supply has not yet been discovered or has no demonstrated technology which can extract or produce it economically. In other words, such forecasts are merely guesses based on the slimmest of evidence.

Perhaps the best ever illustration of this comes from a 2009 presentation made by Glen Sweetnam, a U.S. Energy Information Administration (EIA) official. The EIA is the statistical arm of the U.S. Department of Energy. The following chart from that presentation will upend any notion that we know exactly where all the oil we need to meet expected demand will come from.



The chart shows that by 2030 world output of oil and other liquid fuels from current fields is expected to drop to 43 million barrels per day (mbpd), some 62 million barrels below projected demand of 105 mbpd. (Though prepared in 2009, the chart takes into account known projects expected to be producing by 2012.) This drop is consistent with the observed decline in the worldwide rate of production from existing fields of about 4 percent per year. Certainly, there will be more projects identified in the 18 years ahead. And, many people will say that we already have a large new resource of tight oil (often mistakenly referred to as shale oil) which can be extracted through hydraulic fracturing or fracking. But even if the optimists are correct--and there can be no guarantee that they will be--this source of oil will only add 3 to 4 million barrels of daily production. What Sweetnam's chart tells us is that we must find and bring into production the equivalent of five new Saudi Arabias between now and 2030 in order to meet expected demand even if the volume of tight oil reaches its maximum projected output. (The Saudis currently produce about 11.7 mbpd of oil and other liquids.)

Because Sweetnam's chart is for total worldwide "liquid fuel supply," it's worth noting that in recent years something called natural gas plant liquids (NGPLs) have been included in world oil supply based on the assumption that these hydrocarbons are 100 percent interchangeable with oil. NGPLs are components of natural gas other than methane such as ethane, propane, butane, and pentane, and their production grew recently with the natural gas drilling boom in the United States. Only a small portion of NGPLs can directly substitute for oil, and ramping up production of that portion independently is impossible since it is mixed in the methane.

But oil proper--defined as crude oil including lease condensate--continues to trace out a plateau in production that began in 2005.This makes the oil situation all the more concerning. It is true that rising and ultimately record high oil prices in the last decade have prompted oil companies to increase capital expenditures including those for exploration and drilling to their highest level ever. But, the vast effort represented by those expenditures has failed to boost true crude oil production definitively above the current bumpy plateau.

Some will point to vast deposits of so-called oil shale in the American West and suggest that production from these can fill the gap in the coming years. But right now commercial production of oil from this source is exactly zero. And, current reserves are also exactly zero since reserves are defined as those underground resources that can be produced profitably at today's prices from known fields using existing technology. (For a more detailed discussion, see my recent piece on unconventional oil resources.)

Perhaps most important is that Sweetnam's chart shows not how much oil we must discover, but the rate of flow we must achieve from any discoveries in order to match supply with projected consumption. Huge discoveries mean little if we cannot extract the oil profitably and at rates that are commensurate with our desired rate of consumption. With conventional oil in decline since 2006 according to the International Energy Agency, a consortium of 28 mostly importing nations, we will now be forced to rely increasingly on sources of unconventional oil such as the tar sands of Canada and the heavy oil of Venezuela, both of which are difficult and costly to extract and refine. So far the flows of unconventional oil have only just offset declines in the rate of production of the cheap, easy-to-get, free-flowing conventional oil which has powered modern civilization to date.

The global economy is entirely dependent on continuous flows of energy and raw materials. Oil is absolutely central because it provides one-third of the world's energy and more than 80 percent of its transportation fuel. Unless oil production rises from here, global economic growth will eventually stall (if it hasn't already).

With the EIA projecting oil production from oil shale of 140,000 barrels per day by 2030, we should not expect to close Sweetnam's deficit of 62 mbpd from this source. Even if the EIA is too pessimistic on oil production from oil shale by a factor of 10, such production would barely put a dent in the anticipated supply gap by 2030.

It should be apparent that energy policy around the world is essentially based on the idea that Sweetnam's gap will be filled in time and comfortably. And yet, there can be no assurance of this. In fact, the ongoing plateau in the rate of world oil production in the face of record high prices ought to give us pause. If seven years of very high prices can only marginally move the rate of production of all liquids (which includes crude oil, natural gas plant liquids, biofuels, and refinery processing gains) up about 3.15 percent and if crude oil proper can only stay flat during the same period, how can we expect that the next seven years and the next seven after that will be filled with nothing but good news on supply?

If the answer to this question is that technology will unlock new resources and overcome the declines in existing fields, keep this is mind. If that technology is not on the shelf and ready to deploy today, it will make almost no difference in the 18 years between now and 2030. For those who point to hydraulic fracturing as a recent technological breakthrough, they need to do a little research. Hydraulic fracturing was first used in 1947. More than 30 years later in the early 1980s, building on government research, George Mitchell and his company Mitchell Energy and Development began pursuing natural gas in deep shale deposits. It took Mitchell 20 years of experimentation, government help and government incentives to perfect the type of hydraulic fracturing which is now used to release both natural gas and oil from deep shales. It took another 10 years for his methods to be widely deployed by the oil and gas industry.

So, here's the timeline on hydraulic fracturing. It took 60 years from the time the technique was first deployed until it was refined and widely adopted by the industry for the specific purpose of extracting natural gas and oil from deep shale deposits. Don't look for any new miracle technologies to make a significant difference in oil production between now and 2030 unless they are already in the field performing their magic today and have not yet been widely adopted.

The effects of hydraulic fracturing on oil production are already in evidence. And, while the technique has allowed us to recover oil from previously inaccessible deposits, it has not allowed us to grow oil supplies worldwide as declines in production elsewhere have offset increases in production of oil from shale deposits (properly called tight oil).

With high oil prices and the hottest new technique unable to move the needle on worldwide production of crude oil, we should look at Glen Sweetnam's chart with considerable concern. We should ask ourselves whether it is wise to base energy policy on the fantasies of industry and government forecasters. Perhaps we should focus instead on the trends and data we can verify and prepare ourselves and our economies for a world that may not have the copious amounts of oil that the industry is promising.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, December 02, 2012

Taking a short break--No post this week

I am taking a short break and expect to post again on Sunday, December 9.

Sunday, November 25, 2012

How the myth of fossil fuel abundance actually impedes progress on climate change

The great fear among those working to address climate change is that the seemingly vast resources of fossil fuels waiting to be burned will send the world hurtling toward certain catastrophe. By invoking fossil fuel abundance, climate activists believe that their argument for a rapid transition to alternative energy is made more persuasive. But, it is poor strategy to reinforce the myth of fossil fuel abundance when doing so actually makes many people less open to such an argument. And, as it turns out, the abundance argument is also contrary to the available data, logic and prudent risk management principles.

Here is what I mean. First, despite all the hype about marginal gains in U.S. oil production, world oil production has been on a plateau since 2005. Small gains in U.S. production have been offset by declining production in the rest of the world. The news for coal production is only slightly less discouraging as one study suggests that the rate of coal production worldwide could peak as early as 2025. In the United States, while coal tonnage has remained essentially flat from 1998 through 2011, energy content has actually declined. Has the available energy from U.S. coal production already peaked? We can't be sure. But the trend suggests caution. One recent study even concluded that world coal production from existing fields may have peaked last year. But, even if the authors are 10 years early, the prospects for creating a coal economy to follow the oil one are poor at best.

And finally, natural gas--much touted as a less polluting "bridge fuel" to a renewable energy future--may not be so plentiful as we are led to believe. Natural gas derived from deep shale deposits was first portrayed as so abundant that wells could simply be drilled anywhere in the vast shale basins of North America. But the record of drilling to date suggests that such deposits will yield far less than anticipated and be far more costly to develop.

Simple logic and prudent risk management suggests that we should already be making a rapid transition to renewable energy. No one--not the fossil fuel industry, not government, not private forecasters--can know for certain what our future supplies of fossil fuels will be. If those supplies are constrained as current trends and data suggest, then we will be forced to make an energy transition whether we want to or not. If fossil fuels turn out to be more abundant than current trends portend and we make a rapid transition to renewable energy starting now, the worst that can happen is that we will have completed that transition a little earlier than was absolutely necessary. But, if fossil fuel supplies begin to decline in the near future and we've made little additional progress on deploying new energy sources, we will surely be in for considerable economic and social pain, pain that might be so severe as to challenge the very stability of our global system. That's how central fossil fuel energy is to our society.

Many climate activists continue to believe, however, that the above data will make people less concerned about climate change. These activists think that the danger from supposedly overflowing fossil fuel abundance will somehow make it clear that we must move away from such fuels. But, I would contend that the current public relations campaign by the oil and gas industry designed to convince us that oil and natural gas will be abundant for decades to come is actually making the public less supportive of a transition away from fossil fuels. And, I believe that if the public understood the true risks to our energy supplies that come from relying so heavily on fossil fuels, it would be more inclined to support a rapid transition to alternative energy and increased efforts in conservation and efficiency.

Let's look for a moment at the public the way a political campaign does. Every campaign starts with basic triage. First, there are the people who are going to support you no matter what. These people need to be nurtured and encouraged to spread the word about your candidacy to those who can be persuaded to vote for you. Then, there are those who are never going to vote for you. You can't persuade these people, so you shouldn't spend any time on them. Your job is simply to beat them and their candidate on election day. Finally, there are those who can be persuaded to vote for you. Perhaps these people haven't made up their minds. Perhaps they are leaning toward your opponent, but can still be persuaded to vote for you with the right argument.

Naturally, those who support addressing climate change aggressively will be especially concerned about the amount of carbon-based fuels left to burn. But, those who are on the fence--or who, more likely, haven't really put much thought into the issue--are currently being bombarded with the industry's abundance message. Without much commitment one way or the other, their path of least resistance is to accept the industry position. It's an easy path that requires no changes in behavior. And, after all, isn't the fossil fuel industry promising to bring us cleaner burning natural gas in copious quantities? Won't that help use reduce our carbon emissions? And, what about "clean coal"? That should address our concerns about coal, shouldn't it?

Of course, activists will immediately spot the problems embedded in these assertions masquerading as questions. But, none of this would seem relevant to a persuadable member of the public if the myth of abundance hadn't already infected his or her mind. Once the abundance myth is undermined, it follows that we must move quickly to alternative, noncarbon-based energy. All the promises of clean natural gas and clean coal don't matter if their supply is in question. It's dead certain that all fossil fuels will at some point peak in their production and then decline irreversibly. Nobody knows for sure when, and that's a good enough reason to make an energy transition sooner rather than later.

Sowing doubt about the claim of fossil fuel abundance is the surest way to move the persuadable public toward supporting many of those actions which are consistent with addressing climate change. Those so persuaded don't even have to believe that climate change is a problem (though it would certainly help if they did). Why concede the abundance argument--an argument the fossil fuel industry is using like a club against climate change activists--when we don't have to?

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, November 18, 2012

Did oil decide the last three American elections?

Was the most recent American election outcome determined by the presidential debates, changing demographics, voter views on issues, Hurricane Sandy (and the president's reaction to it) or voter turnout? Probably all of these contributed to the result. Energy was actually one of the issues discussed during the campaign, particularly domestic production of oil and natural gas. But, it's not the debate over energy issues that interests me here so much as the price and supply of oil and their effects on voter attitudes.

Let's go back to the summer of 2008. The price of oil had been climbing all year reaching its highest level ever (even adjusted for inflation) at $147.27 a barrel on July 11. From there the price began to decline. Though few people knew it, an economy beleaguered by years of rising oil prices was already in recession. The financial markets eventually crashed that fall. And, the worst slump in the world economy since the Great Depression followed.

The bursting of the U.S. real estate bubble in the previous year was frequently cited as the cause of the crash. And, there is little doubt that stresses in the financial industry combined with the real estate collapse to create a financial meltdown. But, the work of economist James Hamilton suggests that high oil prices were also a significant factor in precipitating the bust and therefore the economic pain felt by American voters. All of this implies that the solid victory of Democrats and Barack Obama in 2008 resulted at least in part from discontent among voters over high oil prices. The conclusion seemed obvious even then.

After dipping into the $30 range in late 2008, oil prices rebounded to around $80 by the beginning of 2010 and remained in the $70 to $80 range through election day that year. If we accept Hamilton's work, then high oil prices produced a significant drag on the economy and may have caused swing voters, frustrated by a slow economic recovery and high unemployment, to hand the party out of power a huge victory. They gave Republicans control of the U.S. House and of many additional governorships and state legislatures.

Fast forward to 2012. Oil prices spent much of the year between $90 and $110 a barrel. As high oil prices continued to put a drag on the still slow economic recovery, the year seemed designed to give Republicans a decisive victory--but only if voters perceived that the Republican Party was still the party out of power. In fact, the flamboyance of the Republican-dominated U.S. House and its defiance of the president combined with the swift passage of the Republican agenda in a large number of states may have made the Republican Party seem to many voters like the party in power--put there to solve the problems not adequately addressed by Democratic politicians which voters had only just installed during the 2008 elections.

As I indicated, there are certainly other factors besides oil prices that determined this year's election outcome. But I can't help thinking that many voters--still frustrated by slow growth due in part to high oil prices--decided that Republican politicians had not acted to address their economic anxieties. So, those voters simply went the opposite direction and voted for Democrats.

If the pattern I see holds, then continuing high oil prices would lead to a resurgence of the Republican Party in the 2014 elections. Naturally, if prices decline and stay down, oil will not be a central issue. But here is the problem. If oil supplies are going to be constrained in the long term, as I believe they will be, then waiting for supply to rise and for prices to fall will not be a useful strategy for either party. Neither will touting the temporary and overhyped gains in domestic oil production that are, in any case, being offset by declines abroad. Keep in mind that oil is a worldwide market, so Americans will continue to pay world prices whether or not domestic production rises.

The party that addresses constraints in worldwide oil supplies by intensifying efforts to reduce U.S. consumption and speeding a transition to alternative energy would probably likely break the cycle of rapid swings from one party to the other every two years--but not in the way that that party would like. Broaching the subject of limits with voters and acting to address those limits could spell political suicide for the party that does it. Surely, during the next election the opposition party would say that we have plenty of oil and offer a vague plan, however preposterous, to overcome production constraints.

It is true that Democrats have emphasized renewable energy and conservation more than Republicans. And yet, President Obama has repeatedly asserted that he is working to increase permitting of oil and natural gas exploration on federal land as quickly as possible. That's hardly the equivalent of grasping the nettle and giving the voters the bad news, namely, that world oil production has been stagnant since 2005 and that there is little prospect that world production--which is what determines the oil price--will grow much from here.

It's possible that the myth of oil abundance and the powerful oil industry lobby behind it has locked us into a politics which will provide neither party with the decisive majority needed to enact the difficult agenda that would move us toward a more sustainable energy economy. But then, that's the way the oil industry must like it--high prices with promises that eventually, someday, perhaps just around the corner, prices will come down. All you have to do is trust us!

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, November 11, 2012

Does the IMF believe we have a peak oil problem?

Does the International Monetary Fund (IMF) believe we have a peak oil problem? The precise answer is that the IMF is currently studying how constraints in world oil supplies might affect economies around the world in two so-called working papers, "The Future of Oil: Geology versus Technology" and "Oil and the World Economy: Some Possible Futures."

We are admonished by the IMF that opinions expressed in working papers are "those of the author(s) and do not necessarily represent those of the IMF or IMF policy." But the fact that the organization has produced two papers on the subject this year gives some indication of how seriously it is taking the issue. One of the co-authors for both papers, Michael Kumhof, a senior researcher and deputy division chief for the fund, hasn't been keeping his concerns secret. In a presentation, he outlined his reasoning for why the price of oil would have to nearly double in real terms in order for oil production to increase the measly 0.9 percent per year projected by the U.S. Energy Information Administration between now and 2020.

Part of the problem is that we have already extracted the easy-to-get oil. Now comes the hard stuff: deepwater drilling, tar sands, arctic oil, and tight oil (often referred to erroneously as shale oil) which is produced by expensive hydraulic fracturing or fracking, something that typically costs millions to perform on a single well.

The new model presented in "The Future of Oil" takes into account both geologic constraints and the effect of price changes on oil production. The model has proven much better at explaining trends in oil production and prices than conventional economic analysis which assumes no long-term geologic production constraints. Standard economic theory--in which oil supplies always increase in response to high prices--has been unable to explain the apparent plateau in world oil production from 2005 onward in the face of record high oil prices.

(IMF researchers are interested in the global picture for oil production and have therefore not been taken in by the hype over recent marginal gains in U.S. oil production, gains that have been offset by declines elsewhere in the world. Because oil can be shipped to wherever the price is highest, it is world output which matters.)

All of this begs the question about how record prices and oil supply constraints are affecting the world economy. Kumhof and his IMF colleague Dirk Muir modeled several scenarios in which oil supplies actually fall for the next 20 years in their paper, "Oil and the World Economy: Some Possible Futures." In their baseline scenario they assume a small, but persistent decline in oil supplies from year to year. As a result oil prices rise by 200 percent in real terms over a 20-year period. GDP shrinks at a rate of 0.2 to 0.4 percent per year in the United States and the Euro area. Surprisingly, the declines are steeper in oil exporting countries. It is a situation that is difficult but not impossible to manage.

The authors then imagine a world economy much more capable of adjusting to declining oil supplies through, for example, switching to other fuels. That scenario would be less distressing for all economies and could lead to continued economic growth in countries other than oil exporters, the United States and Euro area countries.

A third scenario posits just the opposite, an economy which has increasing difficulty substituting other fuels and feedstocks for oil. The assumption is that the easy and obvious substitutions will be made first and subsequent substitutions will be harder to find and deploy. Under these conditions, oil prices increase by 300 percent in real terms over 20 years.

A fourth scenario assumes that oil is so intertwined with the world economy that its contribution to world output is far higher than the 5 percent its cost contribution suggests for what are called "tradeables," items that are easily exchanged in trade (which is most of the things we make) or the 2 percent cost contribution for what are called "nontradeables," items not easily shipped across an ocean for trade. (Public drinking water supply would be an example.) Instead, Kumhof and Muir assume that oil's true contribution is 25 percent and 20 percent respectively. The authors argue that "oil is an essential precondition for the continued viability of many modern technologies." They believe that many processes simply won't work and many devices can't be produced below a minimum supply of oil. They also assume that substitutes are difficult to make. This outlook spikes the price of oil by 400 percent in real terms over 20 years.

The negative economic effects of scenarios three and four are indeed profound. But, the authors recognize that such price increases are probably not realistic, even under the scenarios they posit. They assume that such extreme price outcomes imply "nonlinear effects on GDP" which the model cannot express. Translation: The world economy crashes before prices ever get that high.

There are other scenarios, each more grim than the previous, as problems detailed in earlier scenarios are essentially added to one another and to some new scenarios.

The point of the exercise is not to predict a specific outcome. Rather, the authors want to explore just how sensitive the world economy may be to oil supplies and highlight the uncertainties surrounding those supplies. While there has been much talk about how the world economy is becoming less oil-intensive per dollar of output, the researchers turn this observation on its head:

[I]f it really only takes a one third of one percentage point increase in oil supply per annum to support additional GDP growth of one percentage point, then it must also be true that it would only take a one third of one percentage point decrease in oil supply growth to reduce GDP growth by a full percentage point. And the kinds of declines in oil supply growth that are now being discussed as realistic possibilities are far larger than one third of one percentage point.

The IMF researchers also note that while an energy transition away from oil certainly seems possible, the extent to which oil is critical in the functioning in the world economy implies that such a transition will be costly and may require several decades. They wonder whether we have that kind of time, given that oil supplies have essentially been stagnant since 2005 and that some analysts believe a persistent decline in world oil production may begin within this decade.


Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, November 04, 2012

Burning Picassos for heat: Why we need to electrify transportation

An oil executive once observed that burning oil for energy is like burning Picassos for heat. Oil is extraordinarily valuable as the basis for so many products we use every day that the thought of simply burning it ought to be unthinkable. So versatile are oil molecules that they can be transformed into substances that serve as clothing, medicines, building materials, carpet, skin care products, sporting goods, agricultural chemicals, perfumes, and myriad other products.

Increasingly, when we make oil-based products for homes and businesses, we are finding ways to reuse those products or recycle the materials they are made from (think: recyclable plastics). But, burning oil is always a one-time, irreversible act that leaves nothing of value behind and produces greenhouse gases and pollutants that harm us. And yet, because oil remains the most cost-effective and widely available source of liquid fuels, we are hooked on it for transportation with little prospect of substitutes on the scale we would require--unless we consider electricity.

It is worth remembering that electricity was a strong contender for powering automobiles at the beginning of the last century and that it ran the trolleys of the era (and still runs many today). Electricity was actually preferred over gasoline for powering cars at the time, especially cars that were used exclusively for local trips. Battery exchange was already available as a quick way to "charge" a car. But improvements in the internal combustion engine and the increasing availability and affordability of gasoline led to the extinction of the electric car no later than the 1930s.

More recently, despite all the hand waving about marginal gains in U.S. oil production, we have been experiencing a plateau in worldwide oil production since 2005. Ongoing tightness in oil supplies has led to high prices for gasoline and diesel, and so the world is turning once again to electricity to power transportation. Of course, many hybrid gas-electric vehicles are already in use, and some all-electric vehicles are now being produced for the mass market. But in a world increasingly faced with energy constraints and climate change, continuing to rely on the automobile as the main source of transportation may be a poor policy choice.

First, astute observers will note that electric vehicles of whatever kind are actually powered primarily by fossil fuels. According to the U.S. Energy Information Administration two-thirds of all electric power worldwide is generated using fossil fuels. That means coal and natural gas are being burned to produce the lion's share of electricity. Some oil is still used, especially in countries that export it and so have cheap supplies available to them.

To reduce overall greenhouse gas emissions, we would have to burn less overall fossil fuel. Only one-third of the heat energy produced in a typical fossil-fueled power plant actually gets turned into electricity. The rest is expelled as waste heat which is why we see huge volumes of steam coming from cooling towers wherever fossil-fueled generating plants operate. Were it not for the fact that renewable energy can be employed to make electricity, electric-powered vehicles on a mass scale would provide little advantage when it comes to pollution and greenhouse gas emissions. These vehicles would, however, still reduce dependence on petroleum.

There are two obvious moves that would substantially reduce our reliance on fossil-fuel produced electricity. One already mentioned would be vastly expanding renewable energy sources such as wind, solar and hydroelectric. Naturally, there are the problems of load-balancing and storage related to intermittent power sources such as wind and solar. These problems would have to be overcome in the long term in order to allow the electrification of transportation based primarily on renewable energy. But, there are plausible paths to such an outcome, especially if overall reductions in energy use are part of the path, something I'll discuss below. Naturally, nuclear generated electricity can also be used to power vehicles. But I am doubtful that in the post-Fukushima era, nuclear power will be a viable option for increasing nonfossil fuel-based electricity production, both for political and technical reasons.

A second move that would reduce our reliance on fossil-fuel based electricity would be a vast expansion of our mass transit systems. Done properly, this expansion would reduce overall energy use in transportation by moving people from energy-intensive automobiles into more efficient mass transit. An overall reduction in energy use is important because, for many reasons, it is unlikely that renewable energy production will be able to match the huge quantities of energy we currently get from fossil fuels. The expansion of mass transit would need to be executed in a way that would make such systems so ubiquitous, convenient and inviting that people would prefer them over cars as many do in major American and European cities.

Much of the mass transit infrastructure can run on electricity and already does including electric-powered subways, commuter trains, buses and trams. To that infrastructure we would need to add electric-powered, high-speed passenger rail service between major cities. That's already in place in Europe and Japan. In the United States such a high-speed rail system would reduce the need for short-haul air travel and thus reduce jet fuel use. And, we'd want to expand and electrify freight traffic over rails, something that would lessen the need for long-haul trucking. Even in trucking, hybrid trucks are starting to appear in commercial fleets, something that can further reduce use of diesel and gasoline.

Of course, some modes of transport are not going to be amenable to electric power. Electric-powered planes are not impossible, but would probably not be able to carry much weight given the current state of battery technology. Ocean-going freighters will likely continue to need liquid fuels, though sails are starting to appear on some to reduce fuel use.

On land we will almost certainly need some liquid fuels for four categories of vehicles: rural transport, farm machinery, heavy equipment and emergency vehicles. It probably isn't cost-effective to string wires in rural areas for local transportation because population densities are too low. Some people are working on electric farm machinery charged using solar cells. But, the work needs to progress further before it can be widely adopted. For some farm tasks, liquid-fueled engines may continue to be the most practical approach for a long time to come. Where construction and mining take place away from sources of electricity, heavy equipment will have to operate using liquid fuels. Emergency vehicles could use electricity, but would have to have liquid-fuel capabilities in case the electricity is unavailable.

In the United States 71 percent of the petroleum products consumed are used in transportation. If the country were able to run its transportation system entirely without oil, the United States would not only cease to import oil, but would have significant surplus oil production. Of course, such a change could only take place over many years. But the advantages to such a transition are so numerous that we should not dismiss it as too difficult or costly.

Only 5 percent of all oil is used to produce petrochemicals--chemicals which form the basis for the almost miraculous materials and substances that we now take for granted. By ceasing to burn the bulk of our oil to move goods and people, we could sustain the production of these products for a very long time. And, properly formulated, many could be recycled almost indefinitely. That seems like a much better use of an energy source that doubles as the "renaissance man" of the chemical industry.

When you add in the reduction in greenhouse gas emissions and air pollution; an end to oil imports for the United States and possibly many other countries adopting the same strategy; and the financial boost of keeping funds previously spent on imports at home, it's hard to see why electrifying transportation would not be a good idea--so long as it is done with any eye toward increasing renewable energy production while reducing overall energy consumption in the transportation sector.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 28, 2012

Why the U.S. is NOT the new Saudi Arabia

Last week's energy news included a piece from the Associated Press with a headline reading: "U.S. poised to become world's top oil producer; may soon overtake Saudi Arabia." If the reporter had actually examined figures available from the U.S. Energy Information Administration (EIA) website carefully instead of simply parroting oil industry sycophants, he would have ended up with a headline more like this: "Marginal gains in U.S. oil production mean continuing high prices and imports for Americans."

As it turns out, U.S. crude oil production is averaging 6.2 million barrels per day (mbpd) so far this year compared to Saudi Arabia's 9.9 mbpd. So, how did the reporter and his sources end up with a production number of 10.9 mbpd for the United States?

The problem results from the deceptive redefinition of oil supply by the oil industry itself, one designed to obscure the true oil supply picture and one that, unfortunately, has been adopted by some government agencies. Within the last decade the industry began to count something called natural gas plant liquids (NGPL) as part of oil supply. Here's how I've explained NGPL previously:

NGPL are hydrocarbons other than methane that are separated from raw natural gas at a processing plant. They include ethane, propane, butane and pentane. The amounts vary. For example, raw natural gas extracted off the coast of Malaysia contains 11 percent ethane, 5 percent propane, 2 percent butane and about 2 percent of something called natural gasoline or drip gas, a low-octane fuel that is used today primarily as a solvent. Raw natural gas from the North Slope of Alaska contains a higher percentage of methane and correspondingly smaller percentages of ethane (7 percent), propane (4 percent), butane (1 percent) and other components including carbon dioxide and pentanes (2 percent). In these two cases you can see that ethane makes up about half of the NGPL, propane makes up about a quarter, butane makes up 10 percent of Malaysian NGPL and 7 percent of Alaskan slope NGPL.

As you will note, these products all come from natural gas, not oil. While it is true that propane and butane are used as vehicle fuel in a very limited way, most of the volume of NGPL cannot easily be used as a substitute for oil. And, it is doubtful that either propane or butane could become major vehicle fuels since they make up only a small fraction of natural gas and are limited in their supply by the amount of natural gas extracted. Some NGPL are used as feedstocks for chemical production, just as petroleum is. But the likelihood that NGPL would significantly displace oil in this market as it is currently configured is small.

Also included in the definition of oil supply are biofuels, namely ethanol and biodiesel. While these are direct substitutes for oil, they make up only a small fraction of total liquid fuel, about 1.9 mbpd as of 2010 in a world that consumed 86.8 mbpd of all liquid fuels the same year. In the United States biofuels production reached 0.9 mbpd in 2010. But, there is little reason to believe biofuels will be able to substitute in a big way for oil-derived transportation fuels. Here's how I've described the situation previously:

As for biofuels, America is already approaching the current limit of its ability to absorb the supply of ethanol. Most cars can only run with a 10 percent mixture. Above that engine parts in the vast majority of vehicles start to degrade. Of course, we could continue to increase the ability of automobiles to burn ethanol. But the scale problem is the deciding factor. In North America it would take 1.8 billion acres to grow enough corn to supply enough ethanol to run the North American vehicle fleet. That's four and one-half times the amount of arable land available. And besides, corn ethanol takes more energy to produce than it provides. It's not an energy source so much as an energy carrier. Similar limitations apply to biodiesel which is made from vegetable oil.

If biofuels or NGPL were good substitutes for petroleum-derived liquid fuels, the United States would not still depend on petroleum for 93 percent of its transportation fuel. And, keep in mind that copious amounts of petroleum are needed to grow the crops used to make biofuels. Petroleum products run the farm machinery, are used as feedstocks to make the herbicides and pesticides sprayed on the crops, and power the vehicles that transport those crops to the refinery. Natural gas and coal are typically used to power biofuel refinery operations. And so, biofuels might better be described as a way to transform fossil fuel energy into liquid fuels using crop materials as a medium.

So, what is the real situation in the United States, if it is not as the reporter and his sources describe? First, recognize that the EIA defines crude oil production as "crude oil including lease condensate." Lease condensates are very light hydrocarbons that turn from gases into liquids when released from the pressure of an underground reservoir and are "recovered as a liquid from natural gas wells in lease or field separation facilities and later mixed into the crude stream (my emphasis)." The importance here is that these are the only liquids from natural gas wells that become part of the crude oil supply. NGPL, on the other hand, are separated at natural gas processing plants and therefore do not become part of the crude oil stream.

Production of crude oil including lease condensate has, in fact, been growing in the United States. The key fact, however, is that U.S. production only just recovered last year to levels not seen since before 2005 when Hurricane Katrina badly damaged many offshore oil production facilities in the Gulf of Mexico. This year production has grown further to an average of 6.2 mbpd through June. But that's a far cry from the 10.9 mbpd quoted in the article which includes NGPL, biofuels and something called refinery processing gain--which is the result of the well-known fact that the total volume of products made from crude oil such as gasoline, diesel and kerosene always exceeds the original volume of the crude oil used--hardly something to write home about.

The EIA projects that production of U.S. crude oil (using the proper definition) will rise to 6.7 mbpd by 2020 and begin a gradual decline thereafter. It's certainly possible that the EIA projection is too conservative. But it is worth keeping in mind that U.S. consumption of finished petroleum products this year has averaged 14.1 mbpd. U.S. oil production would have to more than double to meet U.S. needs.

In two previous pieces--"The Oil Industry's Deceitful Promise of American Energy Independence" and "Oil and Gas Industry Uses Deceptive Energy Independence Message to Push U.S. Exports"--I explained why the oil industry wants Americans to believe that we are in the midst of an oil boom that will somehow free us from imports and bring declining average prices for petroleum products. But continuing high prices for crude oil and petroleum products across the world demonstrate that small gains in American production are no match for worldwide depletion which has kept crude oil production range bound between about 72 and 74 mbpd from 2005 through 2011. One should keep in mind that oil is a worldwide commodity that can always be shipped to the highest bidder. So, it is worldwide supply and demand that ultimately determine prices (once transportation costs are taken into account).

The media have become unwitting accomplishes in an oil industry propaganda machine that seeks to soften up the American public for an orgy of drilling--one that will only drain America's limited oil resources more quickly while achieving neither energy independence, nor lower prices, nor an urgently needed transition away from finite petroleum, a transition that would free us from the tyranny of oil and the companies that control it.


Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 21, 2012

Canadians could free themselves from oil imports, but will they?

You are not alone if you think it's odd that Canada--the world's ninth largest exporter of crude oil and petroleum products and the main supplier of oil imports to the United States--is itself a longtime oil importer, importing more than 40 percent of its oil needs this year.

The situation results from historical pipeline development which has left Canada without a major east-west pipeline to bring the huge surplus of oil produced in the western provinces--now primarily from tar sands--to the eastern part of the country. The country's provinces from Ontario eastward currently import a little more than 60 percent of their oil needs from overseas. That may be set to change.

Winston Churchill once said, "You can always count on Americans to do the right thing--after they've tried everything else." It seems he could have been talking about the Canadians and their oil predicament. Earlier this year TransCanada, a major pipeline company, proposed expanding the current pipeline system known as Keystone to carry more western Canadian crude to America's Gulf Coast. But, the pipeline giant was rebuffed by the Obama Administration in an election-year gambit to satisfy environmentalists concerned about the impact of tar sands development on climate change and water quality. Enbridge, another Canadian pipeline company, has proposed the so-called Northern Gateway pipeline route from the tar sands to the British Columbia coast. From there the oil would be exported to satisfy growing Asian demand. But practically everyone along the Northern Gateway route has lined up against it including the British Columbian premier.

Now, yet another route is being considered, one that would allow TransCanada to live up to its name. The company's latest proposal would take an east-west natural gas pipeline which is now being underused and convert it into an oil pipeline to bring western Canadian crude to currently import-dependent eastern Canada. The plan, which will require regulatory approval, may not face the stiff opposition that the other two projects faced since this pipeline is largely complete. It would require only some additional work to convert it and link it to refineries and storage depots.

The result would be a flow of up to 1 million barrels per day of oil to eastern Canada, more than enough to displace all of Canada's current imports and possibly allow for exports of crude oil from the eastern seaboard. Canadians would still be subject to world oil prices since oil would remain a global commodity that can be shipped to the highest bidder. But, the country would no longer be vulnerable to supply disruptions from abroad and would be in a position to prevent exports if a national emergency warranted it.

With this change Canada would move closer to true energy independence. It currently exports electricity to the United States and imports only a tiny amount of U.S. electricity due to historical infrastructure or regional rate differentials. Canada is the world's second largest producer of uranium, providing 17 percent of global supply in 2011. Therefore, the country does not need to import any for use in its own nuclear power plants. In 2011 Canada was the world's 14th largest producer of coal and exported about 30 percent of its production. Some imports were recorded. The long border with the United States, a major coal producer, sometimes makes U.S. imports more economical depending on the type of coal and the shipping distances. When it comes to natural gas, however, Canada's National Energy Board reports that while the country produces 70 percent more than it needs, it still imports the equivalent of 31 percent of its consumption--even as it exports the equivalent of 100 percent of Canadian consumption to the United States. As with oil, historical pipeline infrastructure dictates this unusual arrangement. But that is a story for a future piece.

The oil industry has been working on a way to get growing volumes of oil out of western Canada cheaply for some time. And, the cheapest way is via pipeline. Producers have been suffering steep discounts to world prices with Western Canadian Select crude oil futures trading in New York at a discount of about $20 per barrel compared to American Light Sweet Crude which itself has been trading at approximately a $20 discount to Brent Crude in Europe. So, the total discount to prevailing world prices for western Canadian crude is currently around $40. It's easy to see why the industry is anxious for a pipeline that will allow it take advantage of higher world prices.

With opposition running strong against the two alternatives, the oil industry may be forced to consider the TransCanada pipeline conversion proposal to ship oil to eastern Canada, a proposal that happens to coincide with Canada's national interest. But don't expect to hear industry executives whistling "O Canada" at their desks just yet. It's not clear how much support the project will find among those executives.

That support will be critical because the current Canadian government, which must approve the project, has shown itself congenitally incapable of distinguishing between the national interest and the interests of international oil companies. Therefore, the government isn't likely to force the project on the industry even if the pipeline would be a good idea for Canada as a whole. However, if the oil industry ends up embracing the project, the Canadian government will almost certainly rubber-stamp it. And thus, the government and the industry may inadvertently end up doing what has for a very long time been within Canada's grasp and in its best interest, namely, to free the country from imported oil.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.