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Having been referred to on several occasions as a propagandist for nuclear energy, I hesitated to begin this paper. The dilemma for me is that unlike many students and observers of OPEC, I have always been positive to that organization. As in Irving Berlin’s great song (from the musical ‘Annie Get Your Gun’), they are only “doing what comes naturally”, and according to the economics that I teach, deserve to be awarded an Adam Smith merit-badge for choosing prosperity instead of poverty.
As Mr Robin West – chairman of the consultancy PFC energy – recently pointed out, the full effect of the nationalisations that took place in the l970s are now being realised. Several decades ago I informed friends and neighbours that this was certain to happen, although according to the neo-classical economic theory that I was heavily involved with at the time, it should have taken place just before the turn of the century. If it had, the fantasy that the most important commodity in the world should sell for bargain-basement prices would be passé, or confined to the mostly unread learned journals of economics that are still occupy an exorbitant amount of space in our academic libraries. Moreover, comparatively inexpensive alternative motor fuels and synthetic oils might already be available in sufficiently large quantities to put a cap on the oil price – i.e. prevent it from suddenly spiking to levels that could jeopardize the international macro-economy, and in addition inflate dangerous or potentially dangerous social and political tensions.
Macroeconomic considerations having to do with oil price movements play only a minor role in this paper, but there is definitely one thing that all readers of the present offering should comprehend. Regardless of the cheerfulness that often characterizes connoisseurs and calculators of the real price of oil – i.e. the inflation adjusted price – it is an indisputable economic reality that energy-intensive production activities that were state-of-the-art when oil cost $26/b, are unprofitable (or unproductive) with oil at $60/b unless there are major reductions in the remuneration of employees. This explains why many employees in the US and Europe are facing the prospect of working harder for the same income. It also clarifies the preference by many employers for immigrant labour, since in every country these men and women tend to be more upset by unemployment than by lower wages, salaries and social benefits.
The part of OPEC that I am principally concerned with in this paper are the countries of the Middle East. Dermot Gately (2004) has chosen to call three of these – Saudi Arabia, Kuwait and the United Arab Emirate (group of countries) the OPEC “Core”, which is an artificial and largely irrelevant designation that I tell my students and anyone else listening to studiously ignore. Like my teacher of mathematical economics, the late Karl Vind, I have found it useful to believe that in economics, empirical work cannot take the place of theory, and this is especially worth remembering when confronted with Professor Gately’s tortuous econometrics. Aside from that, I want to use this opportunity to claim that despite their shortcomings, Gately’s models deserve more respect than those he has elected to cite in his many papers, the majority of which have been revealed by current developments in the oil markets to be without an iota of scientific value.
When on the subject of OPEC, one fact stands front and center for all thoughtful researchers: Saudi Arabia is going to do everything possible to avoid establishing more than 10 or 11 million barrels of oil per day (= 10-11 mb/d) of ‘sustainable’ production capacity (to which can be added about 2 mb/d of ‘surge capacity’ – or capacity that can only be used for a short time without subtracting from the ultimate output of a deposit, where the “ultimate amount” is perhaps best thought of as the total quantity that could be produced over time with an optimal extraction program.)
The 15 mb/d that Saudi oil minister Al-Naimi once suggested that Saudi Arabia could indefinitely supply was a careless oversight, though not to the extent of the 20 mb/d of Saudi output that are implicit in the forecasts for the year 2030 of the International Energy Agency (IEA) and the United States Department of Energy (USDOE), and which – before nationalisation – the foreign oil firms operating in Saudi Arabia foolishly wanted to establish as a production goal.
It has also been suggested that there might be a more melodramatic background to the OPEC oil story than is immediately apparent. According to Francisco Parra (2004), the basic reason for the Second Gulf War turns on the desire of the United States to have Iraq available as a source of incremental oil supply – i.e. a ‘swing’ producer – in case of a reduced commitment by Saudi Arabia. This of course is possible, and perhaps even likely, because Iraq might be the richest oil country in the Middle East after Saudi Arabia, and in addition there are claims that it has not been explored to the extent of others in that region. Some question must be put however as to the conditions under which the government of Iraq would be willing to assume that role, particularly in the light of what is taking place in the their part of the world at the present time. The patrolling of pipelines and pumping stations by thousands of heavily armed soldiers might make military sense, especially if they are supported by armoured vehicles and helicopters, but politically this scenario could turn out to be a fiasco.
Although not widely known, the forerunner of OPEC was the Texas Railroad Commission, referred to on at least one occasion by J.R. Ewing – the main character in the soap opera Dallas – as “The Cartel”. That organization consisted of 3 men who met once a month in a public room at the Commodore Perry Hotel in Austin (Texas), where they decided how much oil should be produced in the ‘Lone Star State’ the following month, and according to Professor Eric N. Smith of Tulane University, they also trained the Venezuelan gentleman who was a co-founder of OPEC. One reason why the general public and media did not concern themselves with the deliberations of the Commission was the minor effect that they had on the price of oil in the US or anywhere else. (The US government was also strangely passive, since the laws of that country do not encourage the formation of monopolies or cartels). OPEC has generally been regarded in a different light, because regardless of the actual oil price, the threat of a ruinous escalation was always present.
In addition, since the attacks on the World Trade Towers and the Pentagon, there is a slight though noticeable belief that the countries of the Middle East are avid supporters of terrorism. The thing that needs to be understood here is that the events of 9-11 were arguably the result of a massive intelligence failure in the US, which has been confirmed and described by a former director of the CIA, Mr George Tenet. As for the copious rhetoric about terrorism that we have been subjected to for the last few years, this is mostly – though not entirely – the “cynical con” that Petronella Wyatt termed it, because it is insignificant as compared to the cheapening of human life and traditional morals that has been brought about by Hollywood and the less reputable elements of the entertainment industry. This might also be the place to mention that according to conventional economic logic, increasing prosperity generally reduces the inclination to participate in or espouse violence, although admittedly there are exceptions in the case of both individuals and countries.
OPEC AND ITS COMPETITORS
Professor Gately (2004) says that “rapid increases in OPEC output would increase OPEC’s revenues and profits”. This is almost certainly wrong, due to his use of the word “rapid”. But he adds that “the key question is whether slower increases in OPEC output would increase their profits even more”. Slower increases is the correct answer to this riddle, as I attempted to make clear in both my oil book, and to a lesser extent my previous energy economics textbook (2000).
Theoretically, in terms of mainstream development economics, the principal issue for OPEC exporters is not to deplete too rapidly their reserves of irreplaceable oil until they are in possession of replacement assets of one type or another – preferably of physical capital, as well as an appropriately educated workforce. Furthermore, as discussed below, oil and this capital can be a main input for various production activities. Saudi Arabia, Kuwait, Qatar and the United Arab Emirates (UAE) appear to be showing the way here, and it is very likely that Venezuela and Libya – and perhaps others – will follow in their footsteps. OPEC’s production of oil is now close to 30 mb/d, but to my way of thinking they will never, willingly, double their output, which is what both the IEA and USDOE implicitly believe to be both desirable and feasible, especially if the peaking of the global oil supply is to be postponed for another decade or two.
In some very advanced course at a university of great renown, this might be the place in a highly abstract discussion of the topic being treated in this paper at which an energetic teacher of energy economics would introduce a computable general equilibrium or econometric model that was painstakingly crafted – perhaps at great expense – to explain most of the economic forces influencing the price of oil. At the same time this exquisite construction might be augmented to describe how the oil price influences the prices of other energy resources, as well as the macroeconomic price level in the most important oil importing countries. From there a discourse on employment and exchange rates might be launched.
I have encountered many departures of this sort in my work on electric deregulation, and I never hesitate to describe them as overblown bunkum. Moreover, I know that paradigms of this nature are constantly proposed and/or discussed in relation to the oil market, which is one of the reasons why I informed energy economics students of mine in Sweden, France and more recently in Thailand that they are strictly taboo in any classroom where I make the rules. I also took the liberty of declaring that any reference, regardless of how trivial, to the work of Professor Harold Hotelling on natural resources, will be rewarded with a failing grade or something close to it.
If we assume that the OPEC countries mentioned above are increasingly reluctant to do their part in keeping our Volvos and Saabs in the fast lane, then the logical next step is to ask whether something might happen to make them change their minds. A serious reduction in their export prospects is one of the first things to come to mind, and here the expression “demand destruction” has turned up in several recent articles that have been brought to my attention. In plain language this means a drastic reduction in the consumption of oil! What we could have here is a new kind of motor fuel (e.g. ethanol, or low-emission diesel or bio-diesel), an improvement in an old technology (e.g. hydrogen and fuel cells), a new technology where less fuel was used in motoring (e.g. ‘hybrids’ and especially ‘plug-in’ hybrids), or even a sharp decrease in aggregate miles driven due to a rise in fuel prices together with a greater resort to public transport, bicycles, rickshaws, etc.
We are going to see increasing amounts of all of these items – with the possible exception of rickshaws – but while they have been approved by the president of the United States, many observers are sceptical. For example, this topic has been discussed in great detail in many non-technical and easily read articles on the site EnergyPulse (www.energypulse.com), and more important almost all of them are followed by invaluable comments by knowledgeable observers. For instance, I would like to recommend the recent article of Alice Friedemann (2007). This is in three parts, and dozens of comments on her work are attached.
What was not brought out in those comments is that it appears that diesel automobiles are capable of overtaking hybrids in the US, because the newer generation of diesel vehicles are at least as clean as the best hybrids, and also at the present time have a cost advantage. This is a situation in which growing concern over global warming and the desire to reduce the dependence on foreign oil have led to tighter fuel economy and emissions standards, which in turn impact on consumer choice. On a more abstract plane, there have been claims that the emphasis on biofuels (e.g. ethanol) has raised some questions about the future profitability of (conventional) oil refineries, and this has had a negative influence on the new investment that is essential if enough gasoline is to be produced to prevent the already high gasoline prices from increasing.
There is still a great deal of talk in some quarters about making greater efforts to find and produce more conventional oil in non-OPEC countries. Mexico and the Caspian region seem to be the most relevant countries here. Mexico was mentioned at some length in my oil book, and I think that I was correct when I concluded that it would never live up to the expectations that were constantly floated as to its ability to provide a large-scale source of reserves that can be accessed by US consumers.
In any event, the study of Mexican oil is in some respects fascinating. The Cerro Azul Number 4 in Mexico was one of the world’s great oil wells, however after yielding 60 million barrels, it suddenly began to produce only salt water. Here I can say that there is no price system of the kind presented in your favourite economics book that can deal with this kind of phenomenon. Had a statement of this nature been made to the late Milton Friedman, he would have laughed and called its author a fool: in his world conscientious and knowledgeable geologists and profit maximizing managers would have determined the exact capacity of that well, and it would have been valued accordingly. As it happens however, in every respectable microeconomics or price theory textbook at the intermediate level or higher, it is made clear that uncertainty prevents the formation of theoretically correct ‘scarcity prices’, unless a comprehensive system of futures and insurance markets are available. Such a system has never existed on the face of this earth, nor should one be expected, and uncertainty is the name of the oil exploration game. (Perhaps the best ‘pedagogical’ approach to scarcity prices is via the dual of a linear program.)
The Gulf of Mexico is the home of the Cantarell oil field, which may still be the third largest in the world. Unfortunately though it has peaked, and is in rapid decline. There has ostensibly been another very large ‘strike’ in the Gulf of Mexico that has been given the name “Jack”, but according to Fredrik Robelius of Uppsala University, and other commentators, that discovery can be classified as a “bluff” – in other words a flagrant humbug or scam. If Dr Robelius is correct, which seems likely, it means is that this large body of water is just about played out where the oil future is concerned. (Eric Smith however believes that it is too early to write off the US deepwater portion of the Gulf.)
Interestingly enough, Professor Maureen Crandall of the United States Defence University has unexpectedly advanced a pessimistic conclusion about the Caspian (2006). I feel pleased to note that so did I, and much earlier than Ms Crandall. The Russians and some foreigners have been producing oil in that general area for many years – or perhaps decades – and it was quite clear to me that had as much oil been present as some people either think there is, or want us to believe there is, they would have discovered and begun to produce it long ago. Despite their almost unbelievable blundering in some matters, those of us who had the opportunity and motivation to study the Russian armed forces at fairly close range know that when it is absolutely necessary, they can be surprisingly efficient. In considering the actions and claims of certain oil companies in places like the Gulf of Mexico and Caspian, some words of the billionaire Canadian investor Stephen Jarislowsky are highly applicable: “It’s absolutely unbelievable what’s going on. We’re living in just about the most dishonest time in the history of man.” He also notes that “the crooks have more weapons than the good people in the fight. They can play fair and unfair.” What he means is that a take-no-prisoners mendaciousness is sweeping the world, and those well dressed and presentable ladies and gentlemen in the CNN advertisements have learned how to choose the most favourable occasions to tell the truth or to lie in order to make sure that their dance cards remain filled.
We can conclude this section with a brief look at unconventional oil, which might be called ‘the great black hope of the motoring world’. Many oil optimists now claim that much of what is generally called unconventional oil should be upgraded to conventional. If they are talking about modest amounts of tar sand oil and perhaps heavy oil, this might be correct, but despite the good press that shale oil often receives, it will be decades before the exploitation of large amounts of that resource makes even the slightest economic, environmental or technical sense. (Here it might be noted that oil shale does not contain oil and, strangely enough, is not even a shale. Oil is produced by destructive distillation of the organic matter in this material, and this organic matter is called kerogen.)
Whenever I hear talk about shale oil I remember my initial enthusiasm for this expedient, which was quenched for good when an American business executive brusquely informed me that water requirements for processing shale made it certain that only a small amount would ever be produced in the United States. A few months ago I heard shale praised to the high heavens by a Swedish commentator, but if its environmental disadvantages in Europe and probably elsewhere match those in the United States, it could be the 22nd century before a large of amount of it is exploited anywhere in the world. For example, processing shale rock causes it to expand by more than 20 percent, and thus volume-wise it produces more waste than the hole from which it originated. Energy requirements on the input side are of course enormous. The CEO of at least one major oil company has taken what amounts to a sacred oath that his firm will develop the technology required to make a winner of tar sands and heavy oil, but I doubt whether he would be so confident in the matter of shale.
The principal bonus of tar sand oil and heavy oil is quantitative, and thus at face value they are tremendous morale builders for oil optimists. The quantity of tar sand oil that can eventually be obtained from Canada has been compared favourably with the known reserves of Saudi Arabia, and assertions have been made that Venezuelan heavy oil more than matches that of Canada and Saudi Arabia combined. Being aware of the official estimates of tar sand oil production (as compared to reserves), I see no reason to be particularly relieved. This topic is often considered by the very reliable Oil Depletion Analysis Centre (ODAC), which can be reached via GOOGLE, and they provide the following figures: 2mb/d of tar sands oil for 2015, and 3mb/d for 2020. The Financial Times has from time to time provided slightly higher estimates, and these can be compared with a present output of 1.2mb/d. According to Professors Kjell Aleklett of Uppsala University and Douglas Reynolds of the University of Alaska, the production of oil from tar sands will only exceed the decrease in the production of conventional oil in Canada by a relatively small amount.
Heavy oil was mentioned in my paper ‘An applicable update on the world oil market’ (2007), but I forgot to note that this resource has the consistency of molasses, as well as a high sulphur content, and it features a much smaller net energy output than any grade of conventional oil. Moreover, it is so viscous that less than 10 percent of a typical deposit will flow to the surface if conventional pumping is employed. Refining heavy oil is also an expensive activity, especially if obtaining a large amount of light products (e.g. gasoline) from a refinery slate is desired. As indicated above, Venezuela is the undisputed world leader in heavy oil, but Major Chavez is apparently in no hurry to speed up its exploitation. Why should he? His agenda is better served if the price of oil remains high, which would not be the case if very large quantities of heavy oil could be produced and then dumped on world markets.
A year or so ago the Major reputedly came out in favour of OPEC defending an oil price of at least $60/b. I find this easy to believe, because he and other OPEC decision-makers have very likely come to the conclusion that a price on this level will not lead to the kind of macroeconomic distress in the oil importing countries that would restrain demand. Whether this is a correct assumption, or not, cannot be taken up in this article.
SOME OPEC DEVELOPMENT ECONOMICS
At one time – particularly when I taught at the African Institute for Economic and Development Planning (IDEP) – I was an enthusiastic student of development economics as it was presented by Hollis B. Chenery of Harvard University. Unfortunately the Nobel Prize that Chenery should have received was given to another gentleman, but a reason for this was probably Chenery’s close association with certain movers and shakers in Washington D.C., and perhaps elsewhere. In any event, Professor Chenery was a great believer in the theory of comparative advantage, and occasionally I attempted to make it clear to students and colleagues that for countries that were rich in oil and/or gas this meant commencing or expanding, as soon and to the greatest extent possible, the transformation of crude oil into oil products and petrochemicals.
In my oil book – which was written in l978-79 – I made the following singularly unpopular statement about the petrochemical goals of Saudi Arabia (page 192): “These are ambitious targets, and it will be interesting to see whether they are realized or even partially realized, because if they are, it signifies an important breakthrough on the development front: the ability of a less developed country (although a rich LDC) to mobilize, in less than a decade, the capital and skill necessary to challenge some of the industrial giants of Europe on their own turf”.
I can still remember the offence that remarks of this kind generated when I gave a series of lectures in Australia in the l980s – particularly during one acid-like exchange at the Australian National University. But a few years later a Shell Briefing Service document found it possible to make the following statement about some of the petrochemical projects of the Saudi Basic Industries Corporation (SABIC): “These plants, based on the latest chemical technology, have been completed on or ahead of schedule, which is a considerable technical achievement.”
And that was only the beginning. Middle Eastern ethylene – which is the largest- volume petrochemical and the basic building block for plastics – appears to be on its way to 30 million metric tonnes (= 30 mt) by 2010, which would mean a market share of about 20% of predicted world consumption. Its output in 2000 was 6 mt.
Jenny Luesby (in the Financial Times, September 21, 2005) examines this important topic, but according to Professor Smith she makes a serious mistake in not recognizing the importance of natural gas and natural gas liquids on the US petrochemical scene. She is however aware of the value of cheap gas for the countries of the Middle East, which is something that I emphasized in a talk that I gave at the Copenhagen meeting of the International Association for Energy Economics l5 years ago, calling attention to activities in which natural gas liquids and the heavier components of natural gas – propane and butane – can be ‘cracked’ to become important inputs in the production of base chemicals known as olefins (which includes propylene and butadiene, as well as ethylene). Plastics, paints, fibre/textiles, pesticides, synthetic rubber for tires and pharmaceuticals are among the end products from olefins.)
It cannot be overemphasized that since energy costs are the key burden for chemical industries, the combination of inexpensive energy and state-of-the-art technology will ensure that the center of gravity of the global petrochemical industry will move toward the ‘least-cost’ Middle East, and probably sooner rather than later.
“Center of gravity” though does not mean complete domination. At any time this industry is a mixture of small and large, low and not-so-low cost, new and old, etc, and the price will be high enough to keep some of the less favourably endowed plants in business in order to supply total demand, but even so firms that sell large amounts of e.g. ethylene are finally waking up to the new realities brought about by proficient and cheaper methods of production at the disposal of countries that no longer want to be a hostage to unfavourable oil or gas prices.
Exactly how traditional firms will react to this challenge is uncertain, particularly in the short run. In the long run, of course, many of them have no choice but to cut-and-run, to use one of President George W. Bush’s favourite expressions. Here it is interesting to cite a contribution of Professor Morris Adelman – who is no friend of OPEC – and his co-author Martin B. Zimmerman (1974). “Petrochemical prices (or margins) will move downward. Secondly, in the production of petrochemicals, most LDCs are at a severe and permanent disadvantage for lack of know-how, and the high opportunity cost of capital and feedstocks. Other countries, particularly OPEC members, who do not face these obstacles are expanding their petrochemical capacities. This too will drive prices down, lower the profitability of all plants built today, and force losses on many investors. Few can compete with those that get their feedstocks at a fraction of world prices, and are willing to earn low or negative rates of return.”
Earning “low or negative rates of return” is not (and probably never was) the intention of the new OPEC petrochemical giants, particularly since the first large scale methane-to-ethane plants may be moving into the starting blocks. As the McKinsey consultant Jens Riese makes clear, this process constitutes a technological breakthrough that could inflate the outlook for petrochemicals, although if it doesn’t, given the huge quantities of methane at the disposal of OPEC, acceptable margins should be available for a very long time. And even if this technology does not provide the desired effect right away, the major oil producing countries should eventually be able to enjoy lovely profits if they have the capacity to transform inexpensive refinery products into higher-priced petrochemicals.
Adelman and Zimmerman also provide a theory of investment that is intended to explain why there has been so much investment (or overinvestment) in this industry, despite the constant disappointments of managers and investors. “If a new plant made enough money in the first few years, and then lost money, it would still be a profitable plant to build. High near-term profits followed by moderate profits or even losses add up to a good present value, greater than the investment needed to get the required return.”
The pivotal term above is “present value” – or better, expected present value. What these authors are talking about is the economy of mass or large volume production. It can then be shown that (ceteris paribus) an increase in volume obtained by lengthening production runs while holding the rate of production – i.e. output – constant will often (though perhaps not always) reduce unit costs, since bad news in the distant future will be outweighed by earlier gains. In the classroom a little algebra works well here.
A few words about refining might also be appropriate before moving to the next section. As pointed out in the Financial Times (September 29, 2005) “Although soaring demand has lifted margins in the downstream end of the industry to record levels, oil companies are reluctant to invest in new capacity.
That certainly sounds right to me, because I can remember an important refinery executive describing refining as “misery on stilts”. In my recent lectures however I spent a great deal of time pointing out why of the five largest refineries in North America, four are owned by major oil companies, and also why the good fortune enjoyed by these large and prosperous enterprises will almost certainly be available for the oil exporting countries. Where the oil majors are concerned, when things went bad on the refining side, they had their profits from crude output to fall back on. Some of the OPEC refiners are in an even better position, because they have large supplies of inexpensive natural gas that be used as feedstocks and also provide the energy required for the production activities of both refineries and petrochemical installations. This is an unbeatable combination, and the icing on the cake is that the expanding refinery sectors in OPEC countries can install the absolutely latest technology in these new installations.
As Nancy Yamaguchi (2007) correctly noted, the increased revenue gained by OPEC countries over the last few years due to high oil prices have made an expansion in hydrocarbon processing eminently possible. The word that I have always used here is inevitable! Iran, for example, has apparently already commenced a refinery expansion and upgrading program that was indirectly referred to by the last Shah of that country, and I have heard that Bahrain, Kuwait, Qatar, Saudi Arabia and others have now accepted one of the basic lessons in their Economics 101 textbooks, which is that comparative advantage is a concept that it is expensive to disregard.
Part 2 of this article will be published tomorrow on EnergyPulse.
For information on purchasing reprints of this article, contact sales. Copyright 2013 CyberTech, Inc.
Ok, assuming premise widely accepted (that eg. N America can no longer count on exclusive advantages of cheap energy + high-tech workforce to maintain the lifestyle) , then what will likely be the more appropriate path? a) Reduce the lifestyle (the neo-con approach, everything to the top 5% and forget the rest) b) Become an exporter of world peace, eg. tax others to support an unbeatable military which enforces a (fairly fuzzy and partly unpublished) standard set of rules worldwide. I've actually seen this promoted by some one or more, forgotten who, inside-the-beltway. c) identify another advantage (difficult that). Required empathy and understanding of potential customers......
Ferdinand E. Banks 7.20.07
Somewhere in this article there is a suggestion that, macroeconomically, oil at $75/b would be very bad news. I believe I wrote that when the oil price was on its way down, and I was trying to explain that it was doubtful whether OPEC would allow it to fall below $60/b.
Well, they don't have to worry about that now. The oil price has been in or close to the mid 70's during the last week, and we are the ones worrying whether it will spike to the $95-100/b that some people are predicting. What would be nice now is for persons interested in this topic to read the article by Major Daniel L. Davis in the Washington Times, July 17, 2007. Major Davis points out that according to an official estimate in the US, the global production of oil is expected to exceed in the next 23 years the amount produced in the last 23, and by a fairly large amount. What he did not point out was that (on the average) the productivity of oil fields has steadily decreased over those last 23 years, and as a result in even the best of conditions those assets are incapable of duplicating their past performance.
What about new oil sources? They exist, but at the present and future levels of demand they are inadeqaute. Nobody is more certain of that than the ladies and gentlemen in the executive suites of the oil majors and minors, regardless of what they say when the TV cameras are turned in their direction.
About bad macroeconomic news. The big issue now (for everyone) is the strength of the US economy. There are many persons who know more about this than I do, but if by some chance it contains some of the defects that various observers say are present, then $75/b puts that economy in the middle of the danger zone.
Jim Beyer 7.20.07
As I as told by a professor at UofM (can't remember his name right now) Iraq is the only country with substantial, provable, untapped oil reserves. If these reserves could be brought on-line, then the pending production deficit could be pushed off for several more years. At least that's how I understood it. I think Iraq has something like 3-4 Mb/day of untapped production potential (even when it was producing substantially more oil than it is producing now).
I'd guess that an answer to Len above would be to work on alternative energy solutions because first, they are more competitive as oil gets more expensive, secondly, because their technology can be exported, and thirdly, because their USE will likely be domestic, given the costs of moving energy. Since Toyota has blinked on PHEVs, this is a huge opportunity for Detroit to recover some lost ground, if they can move fast enough. Smart grid technologies could lower costs and use existing resources more efficiently.
If you don't have money, and you don't have brawn, then you gotta use your noggin. (Only thing left.) A big problem with alternative energy development are all the bad ideas being chased that will never work. These need to be pursued without mercy and dispatched immediately. This hit list includes Hydrogen/Fuel Cells, E-85, biodiesel (for widespread use), and clean coal. The list of things to be persued includes PHEVs, nuclear power (fission and fusion), smart grid, renewable methane from biomass and synthetic sources, advanced water filtration and management (water is starting to equal energy at this point) and, hmm, let's see.... oh yeah, non-PV solar energy exploitation technologies.
(Just my read....)
Ferdinand E. Banks 7.20.07
Where your hit list is concerned, I'll accept without an argument the clean coal entry. The Swedish 'utility' Vatenfall has proposed/started a clean coal scam, but unless I'm mistaken the Germans have caught on to that one. However is it really true that we can't have a hydrogen economy some day if we really and truly want one, and wouldn't it make econoic sense to have a modest amount of those other things available in case the oil prices heads off the Richter scale?
As for the things you want pursued, all of those worth pursuing will more than likely come about some day. But it may happen that 'some day' is too late. One of the difficulties here is that while it may be true that Iraq is the 'New Prize', that refers to reserves and not to production. You seem to be thinking about a possible 6-7 mb/d of output if the shooting stops, and the government in that country forgets about OPEC and OPEC quotas and swears allegiance to the oil-price reduction team. It could happen but I doubt it, and as a result the present upward march of the oil price will probably continue, regardless of what happens in Iraq.
Jim Beyer 7.20.07
I will by no means question the practical reality of getting 6-7 mb/day out of the ground in Iraq. If anything the war has made that even less likely. I was mostly going through the thought process at the time (in my opinion). I speculate that when Cheney had his energy pow wow back in the Spring of 2001, they were faced with the choice of either finding a way to increase oil production or move strongly into alternatives. They chose the former route (in hindsight, they should've chosen both routes) and when 9-11 happened, saw an opportunity to further that effort. For what it's worth, I don't even think the notion is all that sinister, just hopelessly naive.
With respect to Hydrogen, I've just re-submitted a paper to Energy (Elsevier) which hopefully will help clarify the situation with hydrogen. In any practical reality, hydrogen makes no sense, and never will. Let me try to explain why in as few words as possible.
First, if you are using biomass as input, hydrogen makes no sense, as it is easier to produce methane (a better, denser fuel) than hydrogen. No issue there, but there really isn't enough biomass to go around, you need to look elsewhere as well.
That leaves some kind of electric input, such as from a solar panel, wind turbine, or nuclear power plant. (As I've stated elsewhere, I prefer to leave lumps of coal in the ground where they belong.) So what is the best use of the electricity, if you don't use it immediately? If you can make use of it in a very short period of time (a few days after storage) then some kind of battery storage makes sense economically. If the needed duration of storage is a bit longer (3 days to a week) then hydrogen storage begins to be more economical than batteries. After about a week to 10 days, you are better off synthesizing methane from the hydrogen (by grabbing some CO2 from the air) using the Sabatier reaction: 4H2+CO2 -> CH4 + 2H2O. This is preferred due to the reduced storage costs. In addition to producing a fuel in common use and with an infrastructure already in place, this media uses half the water compared with the water input needed for a hydrogen economy. Unfortunately, that may play more a role in the future than we appreciate at this point.
So, by establishing a heirarchy of energy storage media (use, batteries, hydrogen, methane, heavier hydrocarbons, etc.), and noting their overall costs (energy input + storage costs) over time, we can determine the lowest cost method of storing energy overall. Because hydrogen occupies a narrow band of optimality, it is more heavily affected by changes in marketing assumptions, and presents huge risks without requisite rewards. (This might be different if hydrogen was easier to store, but it's very difficult to store at this point). I think this is why hydrogen has confused people for so long, as it is an effective storage media compared with batteries, but not so compared with many other media.
To reduce overall costs, a hybrid strategy (battery storage and methane) makes more sense than a hydrogen economy alone, or even a hydrogen economy plus batteries. It should be pointed out that reasonable people could also debate the merits of methonal, and to a less extent ammonia, but ethanol is looking highly problematic as it is simply too expensive to produce from biomass compared with methane. In any of these cases, this storage strategy dovetails wonderfully with the current prospect of PHEVs which would use both electrical input, as well as some fuel to power a vehicle.
Anyway (sorry this is so long) if one wanted an energy economy that was low cost, non-fossil fuel derived, and carbon neutral, what would it look like? My guesstimate is that our electric use would go up, so that 80% of our overal energy use would be from electric power. This points to PHEVs and other technologies to reduce stored fuel use. The other 20% would be evenly split between biomass-derived fuel and totally synthetic fuel (electricity used to make hydrogen from water and then combined with CO2 to make methane/methanol or perhaps combined with N2 to make ammonia). The synthetic fuel would be quite expensive, but I don't know how else to close the circle as biomass has its limits, as does electricity. Even with the expense of synthetic fuel, the overall cost of the energy is reasonable -- competitive with gasoline today, for example.
Obviously, oil would still play a role (perhaps that 10%) but this is how it could be done if coal and oil were off the table. Anyway, that's the deal with hydrogen as I see it. I guess it ran a little longer than I would've have liked, but it's a subtle issue that has confounded quite a few people over the years, myself included.
Len Gould 7.20.07
Jim: Here's an interesting new input on hydrogen-fueled autos.
The thing which caught my interest is not the high-pressure cryogenic hydrogen storage, but that the car appears, from my quick scan, to be powered by the standard Toyota engine, not a fuel cell. Now that's a step that has always made sense to me.
Jim Beyer 7.20.07
Ford has been working with hydrogen IC engines for many years. It's their way of keeping their foot in the hydrogen pool without spending significant funds, because they don't really believe in hydrogen either.
With a standard IC engine, your efficiency is much lower compared with a fuel cell, which makes hydrogen even less favorable, not more. If you read between the lines in your citation, you can see they only stored about 10 kilograms of hydrogen (roughly equal to 10 gallons of gasoline) with a 40 gallon tank holding liquid hydrogen. That's a completely impractical setup on a number of levels: the cost of a cryogenic tank for automobiles, the lack of infrastructure for liquid hydrogen fueling stations (and the time needed to fill a consumer product with a fuel at -400F), and the energy costs associated with liquifeying (not producing, liquifeying) hydrogen in the first place. Hydrogen advocates do all this crazy, impractical, and inefficient stuff behind the scenes, and then proclaim "Look! 65 miles per gallon!" or "Look! No carbon emissions!"
I dare say that I am beginning to believe that energy technology is the dismal(ler) science, consisting primarily of trotting behind the facade of the latest innovation and pulling out the "gotcha!" that renders it impractical and useless. (I shouldn't be in such a sour mood -- it's a Friday.)
Let me try to make this clear. If PHEVs can be made to work, and that seems likely, then what you want is a dense fuel for them, not a bulky, hard to contain one. The cost of this fuel can be high, as it is used with less frequency (perhaps much less frequency) than the electricity in the batteries (which can be recharged daily). For the same reason, the efficiency at which this fuel is used is a secondary consideration, because this part of the powertrain is used so infrequently. The cost of this part of the powertrain is a much higher consideration. It should be as low as possible, because its overall utility is so low. The overall value/purpose of this fuel is to give the vehicle adequate range for the rare situations where longer range is needed, and thus render it a practical vehicle for our society. (Range limitations, more than anything else, killed the electric car, not GM.)
Ferdinand E. Banks 7.20.07
Jim, I don't have an original thought where hydrogen is concerned, and that applies to a lot of the other things discussed in your comment. Strictly a babe in the woods. But when somebody says that one toilet flush will take you 30 miles (or kilometers or something) if the hydrogen in that flush were transformed into motor fuel, it attracts the attention of amateurs like myself - people who are completely without any basic insight into the science that is involved. I've also been encountering the expression 'hydrogen economy' for the last twenty or thirty years, and for some inexplicable reason have been impressed by it.
Aside from that, the problem that might - might - have to be faced is filling the supply-demand gap that an increasing number of serious observers say is coming - rather than having that gap closed by a traumatic price rise. I mean, can we really handle oil at $90-100/barrel, even if we are talking about spikes. That is what my work is all about, and only that. I suspect that few people interested in this forum believe that the oil in Iraq will save our bacon, but there are probably plenty of people with a different opinion, and these are the people that I am trying to reach. Admittedly, I could be wrong, but I think that my heart is in the right place on this issue.
$90-100/b !. Think about it. We've got a gap that might have to be filled, and it might have to be filled sooner rather than.
Jim Beyer 7.21.07
Regarding toilet flushes. It's true that a single flush might take you 30 miles or more if that hydrogen was converted to fuel. But the hydrogen or water in that flush is just a medium -- you have to put a lot of electrical energy into that medium in order for it to be a fuel. Assuming you have one of those european low flush toilets, then the flush is about 2 gallons, or about 8 kilograms of water. That would equal about 7.0 kilograms of oxygen and 1.0 kilograms of hydrogen. But to get that kilogram of hydrogen into a usable fuel, you need to add nearly 40 kiloWatt-hours of electricity to it. Given the efficiency of electrolyzers (70%), your over draw would be more like 57 kiloWatt-hours. That's just to get your gallon of gasoline equivalent in fuel. Somewhat expensive, I'd think. Given that a gallon equivalent of gasoline using batteries is about 10 kiloWatt-hours in storage (because the electric power is used more efficiently) then you could "fill" your batteries almost 6 times over with the same electrical power. I do think synthetic fuel has a role, but it needs to be used carefully.
I don't think we are handling $70/barrel oil very well, so we certainly won't do well with it at 90!
I think the attraction of these alternative energy strategies (to me, at least) is the greater degree of independence afforded to the user. Everyone has access to water, and some electrical power. So it a simple (ok, not so simple) matter of figuring out a system that affords this independence, and at the same time is affordable. I think we are close to that with $70/barrel oil, maybe have even reached that.
Len Gould 7.21.07
Jim: "draw would be more like 57 kiloWatt-hours." of course is horrendous if one is paying retail electricity prices. But it's only about $1.45 if one has access via smart metering to wholesale off-peak energy, and it's $0 if one's solar system is over-supplying in a region where the utility refuses to market you excess. I also note that Proton Energy's electrolyser does the hydrogen generation at the full pressure of the tank, eg. by simply pumping the water up to 5000 psi prior to separation. It's very cheap to pump water up to that pressure.
Jim Beyer 7.21.07
Well, then, if electricity can be had so inexpensively, why not expend another 20% and create methane? Then your tank size goes down to 20 gallons, your pressure down to 3600 psi, and your range is still nearly 300 miles.
Arvid Hallén 7.22.07
I can only agree that hydrogen makes no sense what so ever, and that batteries and or methane are far superior energy carriers. The hydrogen economy is a scam even bigger than the "clean coal" one.
Fred wrote, "What about new oil sources? They exist, but at the present and future levels of demand they are inadeqaute. Nobody is more certain of that than the ladies and gentlemen in the executive suites of the oil majors and minors, regardless of what they say when the TV cameras are turned in their direction." This reminds me of an event that professor Aleklett once told me of involving certain gentlemen from a certain energy agency, but sadly I can't reproduce it here, or I would have to kill all of you. ;)
Todd McKissick 7.22.07
Jim and Len, The problem with expending another 20% to create methane as I see it is the capital equipment. Many new electricity sources are coming about now and in the very near future and most have the same set of issues. It is easier and cheaper to oversize the system to cover 98% of the peaks throughout a year, but it's not as easy to make good use of the excess in periods of overproduction. It seems to me that breaking hydrogen out from water requires only a modest additional investment, whether on a home DG scale or a larger utility scale, but not so with the next step. My proposal to send excess hydrogen into the existing NG lines was an attempt to marry this problem with the economics needed to get to the next step.
The existing NG pipeline contains an extremely large volume, even in just the distribution legs. It would be fairly simple to inject this opportunity hydrogen into it as a means of storing excess renewable-generated (or cheap off-peak) energy. This is usually at fairly low pressures too so energy used and pipe leakage would be nearly non-existent. That's half the equation.
To control the mixture of H2 and NG, various locations could be chosen to install the equipment to keep it at tolerable limits. Just filter out some pipeline H2, capture atmosphere or industrial CO2, react them together to make NG, and re-inject that back into the line.
Obviously, the larger your H2 production, the more consideration must be given to where you can tap in. However, given the large volume of the pipe relative to the potential opportunity H2 and the large NG flow, I wouldn't think a mixture of more than a few percent could even be reached.
It wouldn't even be a big step to conceive of filtering your pipeline tap to choose between NG or H2 for specific uses.
I think you nailed the idea behind the PHEV a while back. Use batteries for small short term trips and leave the hydrogen for longer commutes. Conversion to methane makes the energy useable for even longer more dense storage. Why can't our day to day commuter cars be H2 PHEVs and our heavier/special use autos be methane PHEVs. They can coexist.
Jim Beyer 7.22.07
(I think we are drifting from the theme of this paper, but oh well....)
Sometimes I feel like I'm playing "Whack-A-Mole" when debating this hydrogen stuff. You address one issue and then another one tries to pop up. This one is "capital investment". Hmm....
I will try to be brief. There would be little or not significant capital investment to synthesize methane versus just creating hydrogen. Why? Sabatier reactors are relatively simple (if less well-known) gadgets. They can routinely run at or near their theoretical efficiency limit of 80% (or thereabouts). Also, since you are handling pure hydrogen for a relatively small part of the time, the rest of the system (storage, fittings, compressors, etc.) need not have to deal with hydrogen, but lower pressure methane.
If you are worried about capital investment, worry about the electrolyzer. Hydrogen from electrolysis is already expensive enough as it is; just think about how much MORE it will cost overall, when you are not using the equipment 24/7. This is a big problem when considering electrolysis for sporatic use only.
Let me try to put this another way. A battery can hold about 250 watt-hours per liter of volume (That's a bit high of a number, but not too bad). Compared with hydrogen, which is about 1300 watt-hours per liter (at 5000 psi) [I think this is about right.] But you can't use most of that, like you can with a battery, so when accounting for the engine efficiency (25%) you are down to 320 watt-hours.
So you are willing to give up 30% of your original energy to increase your density by 28%. OK, then by the same token, why wouldn't you want to spend another 20% to increase your density a further 230%? It doesn't make any sense, except for highly specialized applications, and even then, I'm not sure.
I realize that batteries vs. fuel is not a one dimensional comparision, and issues such as cost, weight, etc. are other factors. But the point remains that electrolysis of water is a huge energetic step to take, which should probably be avoided in most cases. But if its a given that you have taken that step, it makes little sense not to take the additional smaller step of synthesizing methane (or methanol, I suppose) to a create a fuel that is much denser and practical.
I guess hashing these things out at the foot of this paper does make sense. Because Dr. Banks is saying "The party really IS over, boys and girls", so we should probably be looking seriously for another caterer....
Malcolm Rawlingson 7.22.07
Professor Banks - than ks once again - a very good article and I look forward to your next one.
You are absoltely right the only thing that will drive oil prices DOWN is the western countries - especially the US - not using it. To think that any Middle eastern Country would want to pump more oil out of the ground so that western governments could get rich from the taxes imposed is pure bunk.
I recall Sheikh Yamani of OPEC making such a statement in the 1970's. I don't think their view has changed at all. Why would it?
And of course you will want to use your natural resource to make other products in great demand and use your oil revenues to bring in the best technology available. And of course that is exactly what they are doing.
So how does the west counter that. It is really simple but the anti nukes will of course despise me for it - but then what's new.
The petrocheical economy must change from one where oil is broken down into its various hydrocarbons to one where Hydrogen and Carbon are synthesised into methane, ethane, propane, butane and then into plastics and other materials.
Unfortunately there is only one large scale energy source capable of producing the massive amounts of hydrogen that will be required and it is nuclear power. Putting it into existing methane lines seems impractical to me but making methane and putting THAT into methane gas lines does.
As Jim Beyer points out the technology already exists to make methane from hydrogen and once you have that (although I am no chemist) I think you can make just about anything else.
This is ideally suited to nuclear generated electricity since nuclear plants are best operated at base load and there is only so much base load. With the production of hydrogen added to a nuclear plant it really does not matter what the load does - you just make more hydrogen and more methane (which you CAN easily store).
With standardised designs and mass production nuclear plant costs will fall making nuclear methane a viable competitor to the burgeoning Middle Eastern petrochemical industry.
That sort of scale of competition is the only way you will get the price of oil to go down and I would suggest is the best way for the Western Countires to wean themselves off of oil permanently.
Just make the petrochemical industry work in reverse.
"Petroleum production is expected to decrease significantly by 2025, the year that AAN concepts and force structures are scheduled to be operational. Current oil production is 25 billion barrels of oil per year; by 2025, annual oil production most likely will be between 18 and 19 billion barrels—less than the annual production during the oil shortages of the 1970's. The predicted decrease, as well as possible interruption of imported oil due to political instability in the Middle East, will result in increased petroleum prices. "
Andrew Dodds 7.26.07
Professor Banks -
Good article. Never quite worked out why an oil rich country should export crude oil for long..
As far as hydrogen goes; I have to agree with the commentators, it's a superfically attractive idea but laden with practical difficulties; as a shot term fix, battery electric has far better prospects, having the unique advantage of having a refuelling infrastructure already in place.
Malcolm - Methane is certainly better than hydrogen, but I think that if you can make methane, you can easily make methanol, which is an even better fuel on account of being liquid at room temperature.
Arvid Hallén 7.26.07
Except it's toxic.
Jim Beyer 7.26.07
Yeah. I didn't want to be the first to mention that. But methanol is pretty toxic. If you drink a teaspoon of it, or even less, you have to be treated at a hospital, or face liver damage and other problems. It's also bulky and does not burn super clean.
I think reasonable people can argue for and against the merits of methanol. I'm not as charitable about ethanol.
Andrew Dodds 7.27.07
Actually, Methanol is about twice as toxic as standard gasoline.. the trick is not to drink either. As long as hand/mouth siphoning is discouraged you should be OK.
Bulk is not too much of a problem as far as I can tell; most cars can pretty easily be designed with larger fuel tanks (50-70%); the increased octane rating of methanol - drag racer fuel - should help improve efficiency.
Jim Beyer 7.30.07
According to my reports, the LD50 for methanol (oral rat data) is 0.4 - 2.0 gm/kg, compared with gasoline which is 9.0-10.0 gm/kg (higher than you might expect). Maybe that's OK, I don't know what that means in practical terms.
Methanol has never really caught on as a fuel, and I'm not sure why. Less than 10,000 methanol vehicles on the road today in the U.S. Obviously not lobbied as fiercely as ethanol has been. Methanol produced by processing natural gas is a really bad idea, though it is commonly done. Not enough nat. gas as it is.
Malcolm Rawlingson 8.6.07
I agree that methanol is a better fuel than methane is for vehicles. Much more transportable. While it is indeed toxic - so is gasoline if you were daft enough to drink it so perhaps the solution is don't drink the fuel before it goes into your vehicle.
The point of my piece above is that oil is more than just a fuel - it is the feedstock for almost all our plastics industry. Therefore we need to come up with a method by which we can replace not only the fuel uses of oil but also the chemical feedstock uses of oil. We keep talking in terms of the energy supply but it is the petro-CHEMICAL industry that we lose if we have no oil. That means solvents, greases, lube oils, detergents and plastics and all the other good stuff that oil delivers.
How do we make polyester, nylon, ABS, polyethylene, poly methyl methacrylate (perspex) and all the other stuff we take for granted if there is no oil.
That to me is a MUCH more serious problem than oil as an energy source.
The only thing I can think of to replace that is the manufacture of hydrogen and the synthesis of it into hydrocarbons or turning coal into oil.
If you opt for the former method then I think you need alot of H2 to do that and that means a very large source of electrical energy to create it from water.
I just do not see PV, Wind or any other source except fossil and nuclear coming close to meeting that energy demand and if we don't want to burn coal then there's only one thing left.
As I have said many times.... the only long term alternative (if you refuse to burn coal) is nuclear energy. You either decide to build nuclear now or you decide later. But for certain you will be building nuclear. It is safe, it is reliable, it is clean and has enough fuel supply for millennia. It works.
Kenneth Kok 8.7.07
If your concern is building organic chemical structure from the ground up all you have to do is read the German Organic Chemistry literature prior to 1940. That is the way they did it starting with coal. To me the key is to preserve the petroleum and natural gas supplies for agricultural and chemical feed stocks and use coal to provide transportation fuels. Electricity would come from nuclear as you suggest and also renewables.
Craig Mead 6.30.08
Thank you for the paper (back when oil was $60/bbl) - ummm...how does the collapse of the entire world-economy, banking systems and the devaluation of petro-dollars to worthless wallpaper for the bathroom play into this?