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Not too long ago I had the great pleasure of giving a long lecture on oil at the Royal Institute of Technology in Stockholm, where I once studied mathematics in a building that is still known as ‘Sing-Sing’ (after the US prison of the same name.) And once again I discovered, to my great surprise, that even at this late date the realities of the present world oil market have not been absorbed to a desirable extent by the future engineering elite.
The major dilemma is simple and widespread, and cannot be referred to often enough: Mr and Ms consumer are still unable to comprehend that we are moving toward a world in which we are not going to have access to the inexpensive oil to which we believe we are entitled. Eleven years ago the Energy Journal presented a special issue called ‘The Changing World Petroleum Market’ (1994) in which the future oil and gas scene was systematically misrepresented by a number of prestigious energy economists. In their vision of the 21st century, not only was oil “plentiful”, but OPEC was a fragile construction due to the enormous amount of oil and gas that could or would eventually be discovered in the unexplored or only partially explored regions of the globe. In terms of mainstream geology, this kind of thinking hardly deserved to be labelled bizarre, but even so it attracted a sympathetic audience.
A basic difficulty was and is the inability of many observers to accept that technology cannot discover or produce oil that does not exist; and where it does exist, it may not be what many students of this subject think that it is. A perfect example here is the tar sands of Northern Canada, whose resources have now been officially added to proved Canadian reserves of oil, thereby turning that country into a rival to Saudi Arabia in the oil reserves league.
Professor Douglas Reynolds has examined the realities of Canadian tar sands in the latest issue of the OPEC Review (2005). As he makes clear, “Physics, economics and engineering management all point to one thing – oil sand is not the same as crude oil. By defining oil sand bitumen as proven reserved of crude oil, we are setting up the oil and energy markets for a large price spike – a shock.” A version of this comment could probably be applied to the heavy oil of Venezuela, along with a reminder that from a thermodynamic point of view, both heavy oil and oil from tar sands do not have a great deal to offer.
Another important issue in these matters concerns attracting investment dollars to non-profitable undertakings, which is something that I touched on in my energy economics textbook (2000) and several recent papers, but which apparently was not appreciated by a number of influential readers. However Professor Maureen S. Crandall of the United States National Defense University, in a discussion of the huge resources that ostensibly will be made available by extensive exploitation of the Caspian region (2005), makes the following unwelcome observation: “But this producing region as a whole, while accounting for billions of dollars in investments, is unlikely to be a large and sustained future producer and contributor to the world’s energy supplies, and cannot be considered of strategic energy importance to the US.”
The same judgement applies to other ‘oil producing regions of great promise’, but it is best at this time to sum up the situation introduced above with a quote from Craig Bond Hatfield (1997). “The coming era of permanent decline in oil-production rate and the economic and social implications of this phenomenon demand serious planning by the world’s governments.” This decline is not certain, but it might be useful to remember that the major part of today’s oil production – at least 70% – comes from deposits discovered before 1970. This is hardly worth pondering, given that global oil discovery peaked about 1965. Similarly, rumors have started making the rounds that the relatively new discoveries in Russia and West Africa may not live up to expectations.
SOME BASIC ECONOMICS
Recently the International Energy Agency (IEA) published its latest ‘World Energy Outlook’, in which the conclusion was advanced that the availability of oil in terms of reserves and production will not be a problem as long as a few trillion dollars can be mobilized to finance new wells and pipelines, as well as capital intensive items such as refineries and tankers.
In addition, that organization has postulated an increase in the world oil demand from the present 84 mb/d to 121 mb/d in 2030. Normally, I would express some curiosity as to the scientific background for that estimate, however I have heard it a number of times, and it is almost the same as a recent estimate of the United States Department of Energy (USDOE). At the time when this 121 mb/d is supposed to be produced, OPEC is pictured as being responsible for about one-half (as compared to approximately 38% just now). This suggests an OPEC production of approximately 60 mb/d. At the present time Saudi Arabia supplies almost a third of OPEC oil, and given their reserve situation relative to the other OPEC (and non-OPEC) countries, this fraction will hardly decrease. (Saudi Arabia has proven reserves of 260 billion barrels, while second place Iraq has 120 billion barrels.) Accordingly, it seems that IEA experts believe that Saudi Arabia will supply about 20 mb/d in 2030.
It will not be easy for Saudi Arabia to supply 20 mb/d in 2030, or at any other time in the near or distant future. A high-ranking Saudi official recently stated that 15 mb/d should be possible, which undoubtedly sounded lovely to motorists in the large oil importing countries – if they were listening; but although my knowledge of geology is limited, the energy economics that I have taught left me with the belief that the 12.5 mb/d recently promised by the Saudi Arabian king to President George Bush is a more realistic goal. This particular output is supposed to become available by 2010.
There is also some question as to what OPEC as a whole will be able to achieve. A report from the consulting firm PFC Energy (as mentioned in the Petroleum Economist, October 2004) states that OPEC is producing about 8 billion barrels a year more than it has been finding. This situation might change if e.g. Libya and Iraq intensify their exploration activities, however there is little or no reason to believe that this will be of other than marginal significance for the IEA and DOE targets mentioned above.
During the question and comment phase of the lecture mentioned in the first paragraph of this paper, I was cheerfully informed that OPEC producers are increasingly aware that erratic behavior on their part might result in their being confronted by a deluge of synthetic liquids, with natural gas being the most popular input. This kind of situation sounds consistent with the approach taken in a mainstream intermediate microeconomics textbook – assuming that you and your teacher did not confine your reading to the first few chapters – but even so it has no basis in reality: there is not enough natural gas to bring this about except in the fantasies of journalists, and for various reasons coal is no longer a contender. Of course, even if it were possible, the producers of conventional oil might – in theory – merely dump their prices when the new oil comes on the market, and therefore wipe out the profit of the intruders. I can also note that your favorite book on game theory probably suggests that the mere threat of dumping prices should suffice to keep potential suppliers of unconventional oil from listening to advice from economics professors with a deficient knowledge of what Ernest Hemingway would call “their craft”.
Almost thirty years ago Crown Prince Fahd of Saudi Arabia informed the large oil importing countries that their best strategy was to moderate their consumption of oil, while introducing as rapidly as possible alternative sources of energy. (Similar thoughts were expressed by the very visible and highly respected oil minister of Saudi Arabia, Sheikh Zaki Yamani.) Prince Fahd also emphasized the need to preserve his country’s petroleum wealth for future generations, and made it clear – by actions as well as words – that Saudi Arabia recognized its position as a critical component in the global oil supply nexus – both present and future – and would do everything possible to maintain an adequate margin of spare capacity that could be used in the event of an unforeseen escalation in global demand. A large part of this is forgotten or overlooked by many journalists and pseudo-scholars in the consuming countries, however it is an undeniable part of the history of the past thirty or forty years.
THE IRON LAWS OF GLAMOUR
One of the experts mention in the Energy Journal survey, Professor Morris Adelman, began his contribution by informing us that “Glamour robs people of their common sense.” This is not completely certain, because the German megastar, Marlene Dietrich, once noted that glamour is the thing that makes us equal to the occasion.
The lapse in common sense that is relevant here involves what Adelman identifies as a “mistake”, by which he specifically means the OPEC countries assuming control of the oil in their countries. Instead of showing foreign enterprises the door, the professor believed that the host countries should have “left the companies in place, to invest and produce efficiently, and to compete on the narrow margins left to them.” I have heard this kind of thing at a number of energy conferences during the last few years, and in its ad-hoc versions it sounds even more looney-tune than coming from a leading academic oil economist. As one of the most astute observers of the 20th century energy picture – the petroleum scientist and executive Donald E. Carr – remarked, Aramco (i.e. the foreign company exploiting Saudi Arabian resources) had a “fond” idea of producing 20 mb/d, which for reasons given in my textbook and elsewhere is not the kind of ambition that could be associated with the most common use of the term ‘efficiency’.
Last year the French oil company Total, and Shell, were awarded the first oil exploration contract in Saudi Arabia since l974, however this was limited to gas. As Business Week (October 25, 2004) pointed out, it gave those enterprises “a foothold in the world’s richest oil patch”, but even so it is dubious that they are there as major players, because the simple truth is that they are not needed. They are needed even less than the foreign owners, bureaucrats, propagandists and busybodies who are gradually taking control of the Swedish economy.
In the last few years, Sheikh Yamani (who was mentioned above) has become a favorite with the oil optimists – or ‘flat-earth economists, as they are sometimes labelled. Sheikh Yamani has gained a considerable following by comparing oil to the stones of the Stone Age, saying that there were plenty of stones remaining when the Stone Age came to an end. The point here, I suppose, is that it would not be a good thing for a major oil producer to have large reserves of oil remaining when the oil age is over (and, e.g. the hydrogen age was moving into high gear).
With all due respect, I am afraid that the kind of economics and finance that I teach prevents me from understanding this kind of reasoning. Oil age or no oil age, the resources of the large oil exporters will continue to be valuable as an input for the energy intensive industries that are being constructed or could be constructed in e.g. the Middle East. Saudi Arabia, for instance, should eventually be able to construct a petrochemical industry of the absolute top rank. If a country like South Korea could build a viable petrochemical export industry although it lacks domestic petrochemical feedstocks, or perhaps more important, inexpensive energy for running these facilities, then a country like Saudi Arabia should have an unbeatable competitive advantage. Moreover, something that is seldom appreciated is the value of petrochemicals in modern life. Preserving oil for this purpose is one of the reasons why the price of oil should not be allowed to fall to the level where persons like Professor Adelman and his Greek chorus once wanted to see it.
Although not remembered any longer, there was a time when Sheikh Yamani had a very different point of view where Saudi oil is concerned. He presented this at the Stockholm meeting of OPEC in l977, although only a few people bothered to listen to him, and many of those who did failed to comprehend his meaning.
What he said was that if consumption and reserve augmentation trends continued to hold, then the market and not OPEC would determine the price of oil, and that price could rise to a very high level. Furthermore, even consumer friendly OPEC members like Saudi Arabia would be unable to interfere to an extent that would depress the price. This is precisely what has happened, with the OPEC Secretary General, Pumomo Yusgiantoro, calling present oil prices “crazy”, while admitting that it was the market rather than OPEC which is responsible for this situation. Yamani’s superb presentation was intellectually far ahead of the kind of thing that we were receiving at that time from the Nobel Prize winner Milton Friedman, who assured his adoring audience that OPEC would collapse, and the price of oil would end up well under ten dollars a barrel.
CONCLUSION: GENIUS AT WORK
Recent estimates of limited oil resources as constituting a constraint on the future of oil, lack validity. The issue unimportant for the oil market for 50 years. Similarly fears for the adequacy of annual additions to reserves are unfounded: the world is running into oil, not out of it.
– Peter R. Odell (1994)
The above statement by Professor Odell was repeated many times later, in many countries, to include Sweden, where it was warmly appreciated by the local movers and shakers, as well as anyone else to whom the words of Samuel Johnson apply: “The mind that has feasted on the luxurious wonders of fiction has no taste for the insipidity of truth.”
The most important question to ask then is how could anyone repeatedly make this kind of mistake, because the scarcity of oil was crystal clear long before the above lines were written. In every corner of the globe bell shaped production curves could be drawn for very large oil deposits, and from these curves and the geological and economic explanations for their appearance, it should have been possible to understand that the oil optimists were (and are) working the wrong side of the street.
Unfortunately, in the soap opera about oil that featured Professor Odell’s words, there were other prophets. Professor Adelman has already been mentioned, and now Professor James M. Griffin of Texas A & M University deserves some attention. Professor Griffin is a conspiracy theorist who constantly talks of cheating by OPEC members, and whose knowledge of game theory leans heavily on what is known as a tit-for-tat strategy which, to his way of thinking, has something to offer for “deterring cheating”. This probably is true in theory, but dubious and irrelevant in fact, because the “enormous OPEC reserve base” that Griffin (like Odell) attributes to OPEC has actually not existed for many decades: given the actual and potential economic growth in the world economy, there is no such thing as an enormous reserve base!
There is instead a limited amount of oil in the crust of the earth that it is in the interest of both buyers and sellers to preserve for many more years in both the stock and flow sense – that is, not just as petroleum in the ground, but available as inputs for the durable items that were purchased by consumers and producers in the belief that they would not be kept from using them because of the lack or extremely high price of a critical input, where by “critical input” I mean what George Monbiot calls “the resource on which our lives are built”.
One final point. Professor Griffin makes heavy weather of what is known as the ‘backstop fuel’, by which it is meant ‘a higher priced fuel with high availability that can replace current popular fuels when they run out or become too expensive.’ I displayed the same naiveté when I began to teach energy economics, but eventually I found out that this famous ‘backstop’ is one of the most useless concepts every introduced into a class or seminar room, and probably one of the reasons why economists from some of the leading academic and financial institutions in the world once allowed themselves to believe that no harm could come to the international macroeconomy if the price of oil fell to the level of that of bottled water, and remained at that level indefinitely.
REFERENCES
Adelman, M.A. (1994). ‘The world oil market: past and future’. The Energy Journal.
Banks, Ferdinand E. (2005). ‘Logic and the Oil Future’. (Forthcoming)
______. (2004). ‘A new world oil market’. Geopolitics of Energy (December).
______. (2000). Energy Economics: A Modern Introduction. Dordrecht and Boston: Kluwer.
______. (1998). ‘World energy and the 21st Century’. The OPEC Bulletin (July).
Carr, Donald E. (1978). Energy and the Earth Machine. London: Abacus.
Crandall, Maureen (2005). ‘Realism on Caspian Energy’. IAEE Newsletter (Spring).
Griffin, James M. and Lawrence Vielhaber (1994). ‘OPEC production’. The Energy Journal.
Hatfield, Craig Bond (1997). ‘Oil back on the global agenda’. Nature (May).
Odell, Peter R. (1994). ’World oil resources: reserves and production.’ The Energy Journal.
Reynolds, Douglas (2005). ‘The economics of oil definitions’. OPEC Review (March).
For information on purchasing reprints of this article, contact sales. Copyright 2013 CyberTech, Inc.
So where do you place the upper limit, shortly to be reached imho, on a barrel of oil? What is the "backstop" replacement? Hydrogen from nuclear at US$6/gallon gasoline equivalent? Hydrogen from solar at {pick your price of solar energy}? I sure can't see natural gas holding down the price of oil, those two should logically track each other very closely separated only by the difference in their costs of processing and shipping. You're right, I really can't see any other realistic backstop unless some breakthrough in energy occurs. What percentage liklihood would you estimate that?
James Hopf 8.12.05
Len,
Well, they're saying that they can make fuel from coal (w/ some profit) at a price of ~$40 per barrel.
I also heard them say that fear of oil prices dropping back below $30/barrel is (or was) the main thing keeping these coal-to-liquids plants from being built. It's kinda like these people who make power plant decisions based on the fear/expectation that natural gas prices will once again be below $4/MBTU. What planet are these people living on?
So much for the greenhouse effect though, if we start deriving our fuel from pure coal. If we used a non-fossil energy source to create the H2 for the liquid fuels, however, we could do far better, perhaps attaining lower net CO2 emissions than burning fossil oil directly.
BTW, where does you $6 nuclear figure come from. At the conferences I've been at, they're claiming that thermo-chemical generation with HTGRs can produce hydrogen at a cost of $1.50 per gallon equivalent (before any taxes or shipping costs).
Of course, the far smarter, and more likely approach will be to use plug-in hybrid cars, and (mainly) just use the electricity directly. Nuclear's role would be to provide hydrogen to add to carbon feedstocks (like coal or various biomass sources) to create a clean, maximum H/C ratio liquid hydrocarbon fuel.
Ferdinand E. Banks 8.13.05
Thank you for your comments.
A problem here is that I have little or nothing to add, since both of you (and probably many others) are obviously more up-to-date than me on these matters. Basically what I'm doing in this and most of my other articles on oil is just repeating the kind of things that went into my oil book, which was written 25 years ago. I certainly like the observation by Len Gould though that natural gas can't hold down the price of oil, and the one by James Hopf about nuclear's role in the provision of hydrogen. These things cant be repeated too often in a world where the 'flat-earth people' still have some credibility, and these and previous comments deserve some serious attention.
A month or so ago I probably would have been anxious to put together some pithy remarks about the future production plans of Saudi Arabia and Russia, etc, but with the price of oil at $66/b and various observers talking about it reaching $80/b in the not to distant future - which would make it equal to the previous (indexed) high - I'm afraid that my concentration isn't equal to the task, because unlike the experts in the Financial Times and Economist, I don't believe that the share market can handle that price. Unless I'm mistaken, Alan Greenspan doesn't believe it either, but I doubt whether he can do much more about it than I can about it - which is exactly nothing..
Len Gould 8.13.05
James: Interesting. Insiders talking about H2 from thermal nuclear at $1.50 / gallon equivalent? My $6/gallon was simply based on standard capital costs of nuclear generation and electrolysis units with std. O&M and 15% discount rate, then x150% for contingency. Also interesting is that this morning on a British website I spotted a Volvo ad offering to "help drivers fight the BRP4.00 / gal of gasoline. At that price there can be simply no doubt that H2 can compete easily, though I don't know how much of it is excise.
Agreed on plug-hybrids. I see Toyota is planning 25% of N American sales to be hybrids by 2010. Just needs that slight combined push of fuel prices and battery technology, eg reducing the price of LION.
Mr. Banks: Agreed on economy, though I've been waiting for a long time now for price of oil to hurt stocks and doesn't seem to. Guess the hurt is that they're not going up any, and maybe that plus $ devaluation is all that will happen.
Ferdinand E. Banks 8.14.05
Thank you for the mention of stocks/shares, because it gives me a chance to climb up on my financial economics soap-box.
A few years ago some gentleman wrote a terrible review of my finance textbook, saying that I had made the simple complicated, and the entertaining dull. Actually he had it backwards, but I understood his displeasure: it is a very bad mistake in the great academic world to miss a chance to be abstruse and insipid.
But even worse is to say, as I said in that book, that in the study of financial economics, history is more important than advanced mathematics, the financial press is more important than 'learned' journals, and light reading like Michael Lewis' book 'Liars Poker', and Nancy Goldstone's 'Trading Up' are a better allocation of scarce time than trying to understand the Miller-Modiglinai hypothesis.
IF this is so, then after a small amount of reading it's easy to draw the conclusion that something is very wrong somewhere. I don't want to discuss the stock market because it hasn't been particularly kind to me over the years, but I don't really believe that bond yields can remain where they are in the light of historical averages. Sir Alan is probably of the same opinion, although as far as I know he doesn't shout it to the high heavans. He might also have more than a slight feeling that a bond market adjustment could impact on stock prices. It doesn't have to happen, but it could.
I can also mention that a dollar devaluation may not be the end of the story, but I prefer not thinking out loud about that subject.
I can close by saying that if you're considering enrolling in one of those many degree programs on mathematical finance that are now being offered, so that you can prove me wrong, save wear-and-tear on your nervous system by reading Forbes, Fortune, and Business Week on a regular basis. Maybe if I were up to date on my reading of those publications I would have a different opinion of what the macroeconomic and financial future might look like.
Joseph Somsel 8.15.05
One analysis of "oil backstops" making the rounds in the blogosphere is the Hirsch Report by a team of SAIC analysts. Their conclusion is that depletion of oil could be replaced by "non-conventional" oil like tar sands, coal-to-oil, and gas-to-liquids (GTL) but that the delay in ramp-up times could cause signficant economic disruption. Starting well before the peak would also be pricy and would have the risk that peak oil is not generally knowable until after the peak has occurred (in theory). The global capital requirements for the non-convential ramp-up is not estimated in the report but it must be huge.
One copy of the report is here: http://www.mnforsustain.org/oil_peaking_of_world_oil_production_study_hirsch.htm
Of particular interest to those in the electricity business is that gas-to-liquids is one of the most efficient and economic of the backstops to petroleum. Hence, industry plans to increase electric generation fuelled by imported LNG will see direct competition for stranded natural gas as a source of gasoline. Since alternatives to automobile fuels are fewer than alternatives to CCGTs, and the former have higher value added than the latter, GTL will win and outbid CCGT fuel. The already limited resources for LNG will probably be burned in cars, not electric plants.
jeremy bowden 8.15.05
IHS Energy Inc and CERA carry out detailed analysis of global oil and gas supply prospects on a field by field basis. IHS Inc has the world's most comprehensive and detailed databse of such information, and sees no major supply constraint within the next 10-20 years, provided sufficient investment funds are available and there are no major political obstructions. Below are two recent press releases (please contact the company for further information):
We’re not running out of oil. Not yet. (By Daniel Yergin)
"Shortage" is certainly in the air—and in the price. Right now the oil market is tight, even tighter than it was on the eve of the 1973 oil crisis. In this high-risk market, "surprises" ranging from political instability to hurricanes could send oil prices spiking higher. Moreover, the specter of an energy shortage is not limited to oil. Natural gas supplies are not keeping pace with growing demand. Even supplies of coal, which generates about half of the country’s electricity, are constrained at a time when our electric power system has been tested by an extraordinary heat wave.
But it is oil that gets most of the attention. Prices around $60 a barrel, driven by high demand growth, are fueling the fear of imminent shortage—that the world is going to begin running out of oil in five or ten years. This shortage, it is argued, will be amplified by the substantial and growing demand from two giants: China and India.
Yet this fear is not borne out by the fundamentals of supply. Our new, field-by-field analysis of production capacity, led by my colleagues Peter Jackson and Robert W. Esser, is quite at odds with the current view and leads to a strikingly different conclusion: There will be a large, unprecedented buildup of oil supply in the next few years. Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels per day—from 85 million barrels per day to 101 million barrels per day—a 20 percent increase. Such growth over the next few years would relieve the current pressure on supply and demand.
Where will this growth come from? It is pretty evenly divided between non-OPEC and OPEC. The largest non-OPEC growth is projected for Canada, Kazakhstan, Brazil, Azerbaijan, Angola, and Russia. In the OPEC countries, significant growth is expected to occur in Saudi Arabia, Nigeria, Algeria, and Libya, among others. Our estimate for growth in Iraq is quite modest—only 1 million barrels per day—reflecting the high degree of uncertainty there. In the forecast the United States remains almost level, with development in the deepwater areas of the Gulf of Mexico compensating for declines elsewhere.
While questions can be raised about specific countries, this forecast is not speculative. It is based on what is already unfolding. The oil industry is governed by a "law of long lead times." Much of the new capacity that will become available between now and 2010 is under development. Many of the projects that embody this new capacity were approved in the 2001–03 period, based on price expectations much lower than current prices.
There are risks to any forecast. In this case, the risks are not the "below ground" ones of geology or lack of resources. Rather, they are "above ground"—political instability, outright conflict, terrorism, or slowdowns in decision making on the part of governments in oil-producing countries. Yet, even with the scaling back of the forecast, it would still constitute a big increase in output.
This is not the first time that the world has "run out of oil." It’s more like the fifth. Cycles of shortage and surplus characterize the entire history of the oil industry. A similar fear of shortage after World War I was one of the main drivers for cobbling together the three easternmost provinces of the defunct Ottoman Turkish Empire to create Iraq. In more recent times, the "permanent oil shortage" of the 1970s gave way to the glut and price collapse of the 1980s.
But this time, it is said, is "different." A common pattern in the shortage periods is to underestimate the impact of technology. And, once again, technology is key. "Proven reserves" are not necessarily a good guide to the future. The current Securities and Exchange Commission disclosure rules, which define "reserves" for investors, are based on 30-year-old technology and offer an incomplete picture of future potential. As skills improve, output from many producing regions will be much greater than anticipated. The share of "unconventional oil"—Canadian oil sands, ultradeepwater developments, natural gas liquids—will rise from 10 percent of total capacity in 1990 to 30 percent by 2010. The "unconventional" will cease being frontier and will instead become "conventional." Over the next few years, new facilities will be transforming what are inaccessible natural gas reserves in different parts of the world into a quality, diesel-like fuel.
The growing supply of energy should
Ferdinand E. Banks 8.16.05
As Joseph Somsel points out, "the delay in ramp-up times (for new energy sources) could cause significant economic disruption". I hope that everybody involved with this forum both reads that opinion and gives it and its ramifications some deep thought, because it is NOT good news for basically passive individuals like myself who prefer'buy-and-hold' strategies for his family's financial assets.
As for Mr Yergin's observation that 'we are not running out of oil', well, I can go along with that. Had he said 'not running out of cheap oil', however, I'm afraid that I would have tuned out. I just pointed out to Jeremy Bowden that he could be right and I could be wrong on the whole spectrum of this oil thing, but since he admits that his researchers are "at odds with the current view", I prefer to stick to the current view.
More important, I hope that our political masters are working the same side of the street. From an economic point of view I don't think that it's very healthy for any of us if Messrs Bush and Blair, etc, somehow got it in their heads that by 2010 our oil troubles would be over - as they would be if "oil sands, ultradeepwater developments, natural gas liquids..." lived up to Mr Bowden's expectations. Moreover, I don't believe that anything is lost if the movers-and-shakers and their experts go along with me on this.
Please let me confess that I no longer do as much systematic research on the economics of natural gas as I should do, but I still find it impossible to believe that gas-to-liquids has as much of a future as Jeremy Bowden seems to believe. I think that there are a number of important contributions and comments to this forum that should be looked at when studying that particular issue, although the one by Murray Duffin is the only one that I can think about at this moment.
.
Al Jones 8.16.05
Excellent article, especially in putting more weight on the opinions of Saudi professionals who live and breathe the oil market's realities every day instead of occasionally and quite abstractly. As a marketer it's continually apparent that economists don't understand real markets behavior and how much of an impact asymmetric information and market power really have. For those looking for more on the potential for coal to crude technologies, the U.S. Dept. of Energy has a very nice 150 pp report evaluating a range of technologies it's put more than $2 billion into developing with a host of industry players between at least 1975-2000. Some were as cheap as $34/bbl for small (55,000bbl/day) refinery output/input which coupled with placing them in the relative political stability of the U.S.'s many coal-rich states seems like a more rational 10 year plan than trusting the stability of inherently unstable third-world nations. But whether it's building new pipelines from Kazakhstan and Azerbaijan to supertanker ports, introducing oil production infrastructure to Siberian islands like ExxonMobil is, or building billiions of dollars in alternative fuel refineries, conventional refineries, LNG-handling facilities...there's a 5-15 year lead time that's very hard to overcome and obviously relies on what faith one puts in a 10-25 year forecast of the market. It's also confounded by the radical greens viewpoint that the pollution created in making the fuel for their own vehicles should only occur far out of their own view, preferably in a Third World nation they'll never vacation in. That adds enormous cost and years of litigation throughout the process, making market guessing and budgetting even more uncertainty, enough so new oil refineries haven't been built in the U.S. for decades despite aging plants, lack of plants near newer fields or markets, and high utilization. If you want to think about conservation in radically effective ways rather than modest improvements, take a look at Amory Lovins' work at the Rocky Mountain Institute...it's really the lowest-hanging fruit in the whole deal for stuff we could do and roll out extensively in the next 10 years with existing companies. The U.S. Dept. of Defense hired Lovins recently to work on "less oil dependency" scenarios and Fortune devoted several pages to the results so it's already having an impact on future planning...
Tom Tillman 8.16.05
Mr. Jones - could you please provide a web address (if available) for the 150 pp DOE coal-to-liquids report to which you reference? Thanks
Mike Watkins 8.16.05
An interesting juxtaposition/rebuttal to some of Mr. Lovins' concepts can be found at:
His mention of our (and the world's) having turned from increasingly scarce whale oil to kerosene leads me to a thought. Japan is not building fuel efficient cars to solve the USA's (cheap) oil crisis, they are doint it to turn a profit and build their economy. That said, it will be market forces that bring (or not) alternative energy sources to the fore.
I believe that it will be a combination of 'all of the above' with respect to CTL, GTL, LNG, coal, nuclear, wind, renewables, and yes, even hydrogen to a limited extent.
The 'sky is falling,' hand-wringer types of the turn of the last century thought that the world as they knew it was coming to an end (actually it did-ask any buggy whip salesman) because (1) horses could not breed fast enough for every person to be assured of adequate transportation, and (2) the horses of the time created such a mess that literally barge loads of manure had to be hauled to sea and dumped on a daily basis from NYC alone.
Enter Henry Ford et al. I seriously doubt that their primary motivation was to solve the problem of the manure mess in NYC.
Cheap oil, if that bubble has truly burst, has kept other technologies from emerging because of the lack of investment funds. The potential for profits to be made in alternative fuels will drive those that have the resources, the coal, the stranded Natural Gas, a steady wind blowing, among many things, to exploit those resources if the market will bare the price.
Cheap oil may have just joined the whales in its place in history. There might even be a 'save the oil' green folks type environmental movement in the future.
I believe that those of us who live long enough will see a the same sea change that occurred when the buggy whip salesmen had to look for new work.
To Thomas Tillman: Googling "coal-to-liquids" might produce the report you seek. It sure produces some interesting reading otherwise.
Joseph Somsel 8.16.05
As to Yergn's predictions...
His analysis is correct, I think, in that technology will increase the RATE at which oil can be extracted. This is well established. Horizontal wells and 3-D seismic have been great tools for pumping oil out faster. There is another pulse of new production coming on line in the next few years. The real question is whether that new oil can balance depletion + increased demand and for how long.
But what new technology can NOT do, is create more oil. Deepwater drilling will allow an expansion of the frontier to the edge of the continental shelf but so far the increase in reserves has been minor both due to the relatively small proportional increase in area and the declining probablity of oil being trapped at these basin margins.
The net result will be a rapid extraction of the final pockets of oil to be found. There are few frontier areas left unexplored - there is no place on the planet for another Ghawar or Spindletop to hide.
One correllary of Hubbert's work is that the production peak is marked by increased volitility so a large downward price swing would not be unexpected. One can see that in North American natural gas well head prices. But after that...? Personally, I find Matt Simmons' long term analysis more persuasive but will allow for Yergin's near term production pulse. Unfortunately, that would just make matters more difficult for non-conventional liquid fuels.
A Alhajji 8.17.05
Good points. It seems we are seeing some changes in predictions. I am pleased to see that the EIA has changed its prediction regarding Saudi production and reduced it significantly in its IEO 2005. Unfortunately, the EIA have not explained why it made this drastic change.
For discussion of this issue, please see my column in World Oil:
For one more "genius at work" catch Amory Lovins' "More Profit with Less Carbon" in the September 2005 Scientific American. If nothing else, the man is persistent.
Todd McKissick 8.22.05
As I see it, the price of anything is not tied to its actual supply as much as to its perception of supply and demand. This entire 'crisis' would not only be solved from a technical perspective but from an economic perspective when the first viable renewable solution makes mainstream headlines. People would sell their oil stock in a heartbeat and buy stock in that company and the ones with supporting businesses. This will happen sooner or later, because there are many solutions out there right now. Either way, it will happen in a matter of weeks following the media support of the solution, rather than decades. This will drop oil prices and balance out the competition between the fuels based once again on the true value of that energy. To combat this loss, the powers that be will increase supply to the extent they can which will further drop the price. One problem is that the need has not surpassed the risk involved with investing the required dollars. With a new player in the energy game coming up, the demand for fossil fuels will drop corresponding to the speed that consumers can switch over to using this new source.
The main reason though for it not happening already is because of the people that are bought and paid for. If you don't believe me, then ask yourself which renewable energy option was rated as the most economical long term in the various national labs' technical reports including the A.D. Little one and others funded by DOE. Then ask yourself why that 'rating' wasn't translated to the report given to congress. Now ask where the non-government involved research is in that area. This enormous amount of non-support fully translates to the private sector investment community. The net result is that the DOE and the big energy suppliers are all supporting the renewables that will only supply a pittance of our entire needs while the most likely path doesn't even get mentioned anywhere.
I think nuclear power has a major role to play in this as a continuing baseload supplier. The other fossil fuels are limited in supply though. If we're this dependent on oil now and it publicly peaks, driving people to coal, what is that going to do to coal? We don't have the transport capacity to move anywhere near that amount of energy around. This will spike coal prices like crazy. When people look to the next in line, NG or LNG, the same thing will happen. This continued demand shift will be continually followed by price spikes. Unfortunately, we'll be stuck with this higher price on each as we move on. All fossil fuel sources have some sort of bell curve, I'm sure. The problem with this leapfrogging, is that as we move to the next source, it will depleat at a faster rate relative to its smaller capacity to start with.
I have no idea how long all this will take, but it just seems inevitable to me. Where's all this going to lead us? Exactly. We'll end up short on every fossil fuel source, mandating dependence on nuclear and/or solar. Those are the only two sources with the capacity to satisfy our entire future demand for both electricity and hydrogen. With those two, we can power everything with no negatives. Why not move toward that direction now and leave the world's other supplies in existence for the future. Who knows what future needs we'll come up with for them. On top of that, every little bit we transfer off of oil now would translate to that much lower demand from now on. It's like paying extra on your mortgage priciple.
Ferdinand E. Banks 8.23.05
I have a paper coming out in EnergyPulse next week on nuclear energy in Sweden, the upshot of which is that I buy everything you say on nuclear. As for solar, well, when I hear that word I remember a short course that I gave at the Australian School of the Environment many years ago, in which several of the Canadian students not only told me that I was completely wrong about that subject, but emphasized their opinions by using the first gutter language that I heard in a university classroom. Since then, I leave that particular topic alone, however let me say that I hope you are right.
Turning to oil, I am not sure that the economics and finance that I teach allow me to go along with what you say. I sold my oil stock/shares 4 or 5 years ago in order to buy a larger amount of something that I considered more attractive, and up to now this has been the case. Still, I consider that move the dumbest of the many dumb moves that I have made since I began buying equities. You are absolutely right when you say that the price of many commodities have to do with the perception of supply and demand, but the day is past when Joe or Josephine Blow can stand up in front of a conference and grandly predict an oil market meltdown, and almost everybody starts nodding their heads. Oil shares may crash, but this is because a sustained oil price at about the present level, or maybe a little higher, will result in...I think that it's best for me to drop that subject..
Graham Cowan 8.25.05
Todd McKissick's second paragraph points to part of government's fossil fuel tax revenue-driven behaviour, which once you begin looking for it soon comes to appear to be the only thing on their minds in any energy-related decision-making. But in pointing to a conspiracy never to mention the most promising renewable, I don't see why he had to refrain from mentioning it himself.
Professor Banks: I wouldn't claim to know anything about economics that could be termed insightful, but I wonder if you could expand further on what specifically you're referring to that you cannot 'go along' with. IMHO the oil market is daily proving it's limitations to the public. This has generated conversations with non energy current people that nearly always leads to the question of "what should we go to next". I see utility plants pushing for a move to NG and coal. When confronted with the dirty issue of coal, they give the standard hopeful news on clean coal tech. Do you not agree that these are also limited like oil is? Oil may be limited at it's source where coal really isn't, but I've heard too many reports stating that we don't have the rail system to transport enough to support us on mostly coal. I'm not sure I have to explain NG's upcoming peak. If this is not the accepted future of these energy sources' use, then I am very interested in your take. For clarity, I am also wondering if you are referring to a world calamity as the subject you chose to drop. I believe that oil will not crash until another source attains the public perception of beating it economically. If that source truly is better, then why would this calamity happen? Regarding Mr. Graham Cowan's comment, I can only attest to my personal experience here on this very site. It follows the experience of Professor Banks when he mentioned solar. The source I referred to is solar and specifically solar thermal. Mention of other alternatives regularly brings intelligent discussion but this issue brings apathy. I don't understand it. Concentrated solar thermal in a medium distributed and on a large scale are both economical and source unlimited. One quote that I would have to hunt for stated that usable wind has the max potential of supplying 1-2% of our total needs while USABLE solar has the max potential of supplying 1400% of our needs. A bit of a difference, don't you think? And hey, it's free and contains no drawbacks. To drive my point home, note that Professor Banks refrained from writing any opinion on even solar in general even when his classroom story was "many years ago".
Ferdinand E. Banks 8.30.05
Your comment is very complicated, and the same might be true of my reply. Let me start out by saying however that no matter how many times I hear people say that economics is a science, I will never believe it. It's LIKE a science, however, and if you are lucky and work hard you can come up with the right answers to some important questions some of the time.
I work hard and have been lucky when dealing with the academic aspects of energy economics - much luckier than most. If you examine my recent papers on oil, to include those in this forum, and the papers I wrote 20 or 30 years ago, it is always the same tune: oil IS scarce given the demand for it, and for both geological and economic reasons the major oil producing countries are not going to provide as much as the optimists think they can and/or should provide. Perhaps I'll expand on this in the next oil paper that I write, although frankly I dont see why another paper is necessary. What's needed now is some action on the part of our political masters to keep the oil wolf away from the door, because it really is a wolf. Anybody who thinks that the oil price can go to $100/b before the bad news arrives - as a charming young thing at Morgan Stanley suggested recently - has completely lost touch with reality.
One thing though is certain: neither Alan Greenspan nor the brilliant economists he works with believe it, nor does Wall Street. They know that the international macroeconomy is skating on thin ice. And when Sir Alan says that he can't understand the financial markets, what he is really saying is that he cant understand why the bad news hasn't arrived.
I can now mention that I once wrote a book on coal, and probably could write another, but my knowledge on that subject at the moment is zilch. I do know however that the largest Swedish electricity producer says that they have a coal-project that should be able to provide environmental friendly power, but its testing will take a few years. This is probably part of a scam, because if they were as honest as they want us to believe, they would forget about coal and try to push the government to build another nuclear plant in this country. They would also forget about gas.
Wind and solar are subjects that I stay away from, but I have an opinion here. Economics is not an experimental (so-called) science, but in truth experiments are taking place all the time. I have heard electricity deregulation in California, Sweden, and Brazil called experiments, and I'm delighted to say that in these cases and elsewhere the experiments confirmed mainstream economic theory. Electricity deregulation was fruitcake. As for wind and solar, they have been experimenting with these in Sweden for about 20 years, and if technological skill, political will, and subsidies could have made power generated from these items a success, it would probably be a success in Sweden. Probably, because maybe e.g. Spain or the US (below an extended Mason-Dixon line) are better places to experiment with solar, and Tierra del Fuega with wind. And before I forget it, let me mention that neither wind nor solar can compete with nuclear: in Denmark wind is widely used because it is an alternative to high cost coal, and in Germany the 'greens' insist on it if they are to play footsies with the Social Democratic government. In neither countries does it make economic sense - at least, according to the kind of economics that I teach.
