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These days I make it my business to take for granted that just about everyone understands the situation with oil. I assume that with the oil price occasionally exceeding seventy dollars a barrel, the more vulgar forms of optimism will be discarded. Amazingly enough however, there are still persons with a passable background in energy matters who are unable to deal with the new oil realities. One of these harbingers of good news made herself known to me recently, and at almost the same time the (official) Swedish Energy Agency released its long awaited report on the world oil situation.
Where this impressively educated young lady is concerned, seismic technology is a “guess and a gamble”. Furthermore, she assured me that even when drilling you can miss a mega-sized oil field by a matter of “feet”. With all due respect, I interpret this kind of information as one of two things: a complete lack of knowledge about the most important commodity in the world, or possibly contempt for mainstream science and technology, as well as the men and women who have devoted their lives to it.
I was informed by the same person that the attempt to assess oil reserves should be characterized as “guesswork” – which to a certain extent it is; and so “the stuff written today about peak oil is a bit like the usual nonsense about climate change. It is written by people who know nothing about it.” I have reason to believe that this is an indirect reference to the first chapter in my forthcoming textbook (2007), which for good or evil I circulated extensively.
The elite of oil geologists and petroleum engineers now accept the peak oil thesis, while well over 90 percent of acknowledged climatologists have attached a high probability to a large part of present and future changes in climate having their origin in human behaviour. Where the latter is concerned, right or wrong, I prefer the opinions of experts to conjecture by the rank and file of sceptics working the other side of the street, most of whom are non-climatologists trying to make the most of a gut feeling. As for the matter of peak (conventional) oil, I fail to understand how we have peaks in e.g. huge land areas like North America or the former Soviet Union, without recognizing that a global peak is a distinct possibility, and perhaps in the near future.
Daniel Yergin of Cambridge Energy Research Associates (CERA) created an interesting stir recently by the provocative remark that there would not be an oil output peak, but an “undulating plateau”. Although a peak does not imply an undulating plateau, an undulating plateau implies a peak. Of course, it doesn’t really make any difference, because if demand continues to expand the effect on prices of an undulating plateau will be almost the same as a distinct summit. There has also been some suggestion that the present high oil price is the result of speculation by hedge funds rather than a supply-and-demand phenomenon. The thing to remember here is that there are more than 8000 hedge funds in this old world of ours, and in 2004 more than 1000 of them went out of business. Many of the remainder will probably be gone in a few years, although unfortunately there is no shortage of replacements nor blissfully unenlightened clients.
When I lecture on this topic I say that it’s possible to learn everything that you need to know about what is going to happen with global oil production by spending an hour or two examining what happened in the United States. Modern oil history is generally considered to have had its beginning in the U.S., and as you can find out from the topic heading ‘Oil Fields’ in Google, oil was produced in many states. The really big strike in the lower ’48 was in East Texas, and for many years a large percentage of the population of the U.S. did not believe that production in that rich basin would ever peak.
But it did peak, and so did production in the lower ’48 about the end of 1970. However a huge structure (Prudhoe Bay) had been discovered in Alaska in l968, and when it came on-stream in l977 the (total) production curve in the U.S. rose for a while. Unfortunately though (U.S.) output never reached the l970/71 level, and in 1986 the production curve turned down again. The Prudhoe field peaked in l987/88, and for all practical purposes that was the end of the widely circulated fantasy that the U.S. could function without large and growing imports of foreign oil. Today imports are much larger than domestic output, and with production falling and demand increasing that situation cannot be reversed. There are persons who claim that exploitation of the North Slope of Alaska will reveal perhaps the largest oil bonanza experienced in North America, but I have decided to believe that if this were likely, there would already be a record amount of drilling taking place there, regardless of the environmental and political costs.
In addition I’ve decided to e.g. reject the hypothesis that the UK North Sea peak is due to excessive taxation, as is occasionally claimed. My argument here would be based on what is happening in the Norwegian North Sea, which I know something about. I was also told by the person mentioned above that 80% (or more) was the correct figure for the recovery factor of oil. Unfortunately, even if this were true, our oil worries might not be over, given that only about 1 barrel of new oil is discovered for almost every 3 produced, although some people say that 1 for every 4 is closer to the truth. I wouldn’t advise anyone to spend valuable time mulling over this alleged recovery statistic though, because when I gave my first lectures on oil in Australia, the actual recovery factor was about 32%, while globally the present average is reckoned to be about 35% by oil business insiders who would like nothing better than to believe something quite different.
Both this young lady and the Swedish Energy Agency have great faith in the tar sand reserves of Alberta. I don’t have any faith in them at all where changing the international oil picture is concerned, at least not for many years. Here the thing to focus on is production rather than ‘reserves’. Tar sands and heavy oil can drastically increase the nominal reserves figure, but this is a distraction that, fortunately, at least some of our political masters have been warned not to accept by important and experienced oil company executives and their geologists. It might also be wise to be careful where ethanol is concerned. As was pointed out recently in EnergyPulse (email@example.com) by Alan Jenkins and Jim Beyer, the economics of ethanol in e.g. the U.S. does not make as much sense as many observers believe, except possibly as a fuel additive.
If ex-post (actual) production and/or discovery ‘rates’ continue to fall, which is likely, while ex-ante (expected) demand continues to rise, which is certain, oil prices could spike to levels that are well above the danger level, which in turn raises not only the prospect of macroeconomic and financial market chaos, but the initiation or extension of small or large scale military action. This is not a new idea, and I suspect that topics of this nature are being treated at great length in the corridors and restaurants of power in at least several of the main oil importing countries by persons who are prepared to back their theories with marines and gun ships.
Finally, a few words about the report of the Swedish Energy Agency. As yet it is in Swedish, and as far as I know not generally circulated (or even discussed), however on the basis of a two minute presentation on Swedish television the day it was finished, I know that it asserts that there is no need to be concerned about oil in the foreseeable future. Such being the case, it would hardly make a difference if that crank document were available in every civilized language, and in addition was passed out on every street corner between Lapland and the Cape Town naval yard, because there isn’t a serious decision maker in Sweden who finds this kind of news plausible, regardless of what they might say when TV cameras are pointed in their direction.
The simple and inescapable fact of the matter is that the money that the major oil producing countries have been making over the last year or so, and which will continue to roll in during the next few years (because of the actual shortage of oil in the ground in relation to the demand for this commodity), has provided them with some remarkable options when it comes to choosing strategies for the great oil game. I see no reason to speculate on this topic since almost everything we need to know about the trouble that we might be in was presented in unambiguous language by the petroleum scientist and executive Donald E. Carr (1978): “The clock of stupidity is attached to a bell, and it tolls for your descendants”. It probably tolls for us too, but I prefer waiting until later in the year before thinking about that.
Banks, Ferdinand E. (2007). The Political Economy of World Energy: an Introductory
textbook. Singapore, London, and New York: World Scientific.
Carr, Donald E. (1978). ‘Energy and Earth Machine’. London: Sphere Books Ltd.
For information on purchasing reprints of this article, contact sales. Copyright 2013 CyberTech, Inc.
A dumb question: In discussing "peak oil", am i correct in assuming that means "maximum rate of production regardless of price"? (eg. physical constraint)
A better corollary: Any guesstimate (in current US dollars) of what that price might be?
Ferdinand E. Banks 7.10.06
This is where you put a nice integral on the blackboard and explain how the maximization/optimization problem in this case refers to the maximizing of profits over some time horizon. Geology is a constraint. Now, where does price come in. If you 'think' that Lord Browne is right and the price will eventually drop to between 25 and 35 dollars, you produce now - that's plan B; while if you think that Browne doesn't know what he's talking about, then you nod your head, thank him, and stick with plan A. The beauty of it is that these days they are teaching graduate students in the better universities to take this kind of thinking, account for things like non-linearities and irrationalities and greed and stupidity and all that, and to put it into symbolic form. Once that is done, solving the aforementioned integral is a piece of cake.
Unfortunately I failed college algebra twice in engineering school, and so I'm not sure that I can help you, but I know some people who can: Lord Browne of Madingly and his friends at Big Oil to be exact. They know just how every integral since Adam and Eve having to do with oil can be solved. For instance, when the good Lord Browne says that the price will fall to 25-30 dollars, that's for the chumps. That's suppose to tell Little Oil to produce now, and to think about selling to Big Oil; and the consumers to stop buying hybrids because at some point in the future they can get all the motor fuel they need at bargain basement prices. I mean, put yourself in his place. The oil market at the present time is what he's been waiting for since the lovely moment that he first pushed his nines across the threshold at Shell Centre. It's as good as it gets, and he's going to do everything he can to keep things like they are. If that means solving integrals then so be it.
Browne is talking about 25-30 dollars now, but a month or two ago he mentioned the possibility of $100/b. As for me I dont think it impossible that we'll see a price of eighty dollars a barrel before we see sixty, but I'm afraid that I can't connect the price and the peak, even if some serious money changed hands. Better drop in and have a talk with his Lordship - I'm sure that he'll be glad to see you.
Glenn Andersen 7.17.06
1.) I could be wrong, but I think the Swede's are talking about their own needs for oil, not the global condition. Sweden has declared its intention to be energy independent within a certain amount of time. In this context, the statement makes sense.
2.) For what it is worth, I think we should look at the price of oil against some benchmark other than the dollar. The dollar has fallen in value over 50% since the current administration has claimed dominion over American politics. In terms of what the dollar was worth in 2000, a barrel of oil today would cost about $45, not $75. One should not expect the oil exporters to lower their prices just because of massive deficit spending by the current U.S. government. If one looks at the price of a barrel of oil in terms of Euros or gold, the rise is much less than the 250% that it has been in the American market.
Tom Tanton 7.18.06
The main reason (only?) that lower 48 state oil production 'peaked' was that cheaper to produce oil was found elsewhere.
Ferdinand E. Banks 7.18.06
Your first paragraph (1) is completely wrong Glenn. Everything that the Swedish government or its official organs have said about energy is gobbledygookl. Those people and their 'experts' are hopeless - although there are plenty others in this old world of ours who are worse. And if you think that they want to be "energy independent", try doing your skiing in northern Sweden next winter.
Your second paragraph though is very important for the elementary energy economics textbook that I am writing. It will go into my book tomorrow as a comment on my article. I think that Len Gould said something like this, but seeing the figure $45 rings a bell. In any event, it's higher than the $40 that I was trying to sell a few years ago as the danger level.
The statement by Thomas Tanton bothered me at first, but it makes sense in an Econ 101 sort of way. Unfortunately though, where this subject is concerned, Econ 101 doesn't cut it. If the oil price goes to the $100/b level that some people - NOT ME - say that it's heading, there will be a lot of exploration and drilling in the U.S., but they are NOT going to be able to regain their peak output, or anything close to it. If you don't believe me, drop in on the people at Exxon and kindly ask them for an explanation. By the way, until recently I relied completely on Big Oil when I was asked where the world oil train was going. I'm not so sure any longer.
Tom Tanton 7.18.06
The world price of oil has nothing to do with the disparity in costs of lower 48 state oil and that elsewhere. The price can be $12/bbl or $120/bbl and domestic costs will continue to be higher than elsewhere until our resources are opened.
John Plodinec 7.18.06
To answer Gould's question directly, peak oil refers to a peak in economically recoverable oil. In many parts of the US, the recovery factor has been less than 20%, primarily based on state tax policies (e.g., MS), but sometimes because of technical difficulties. There are two prime ways to increase this, 1. better free the oil from the rock, and 2. better separate oil from water injected to remove the oil. Apparently, CO2 enhanced oil recovery does the first rather effectively. In fact, DRI in Houston is making major investments (expecting major rewards) to use CO2 to recover the oil in wells in the lower Gulf Coast region. Interestingly, though, there is virtually no investment in technologies to improve oil/water separations. That is one of the wild cards that might yield a huge bonanza - and as implied by Gould's question, could drastically increase the supply of economically recoverable oil, pushing out the peak perhaps another 20 years.
Ferdinand E. Banks 7.19.06
Thomas Tanton, I don't remember saying or even thinking that U.S. resources shouldn't be opened. What I have said in my work is that if there were really huge resources 'out there', they would probably already be opened. But let's understand something here - I could be very wrong and you could be very right. In fact, if these people who keep saying that oil is on its way to $100/b are correct, then it is a drastic mistake not to go after - or at least think about going after - every barrel of oil that is available. I'm not sure that we can live with oil at $100/b, even if that means fifty or sixty dollars once exchange and inflation rates are taken into consideration. You should however understand that going after this oil will have to start soon, because with the consumption of oil increasing at its present rate, and the supply of conventional oil showing its present tendencies, another million or so barrels per day isn't going to do much good ten years from now.
I also see where you are coming from John Plodinec, but on at least one plane I don't agree with you. Yes, the efficient use of CO2 might help to increase the output of oil, and also the profits of the firms that are involved with developing and using this technology, but this is not the same as supplying the extra millions of barrels of oil per day that are needed to put our energy house in order. To bell that cat a lot more oil in the form of exploitable or nearly exploitable reserves will be necessary. Too many in fact to "push out the peak", as you put it. If the U.S. peak couldn't be 'pushed out' when the Alaskan reserves became available, I strongly doubt whether enhanced recovery will make the grade.