Monday, January 26, 2009

Solutions #1: Bakken Oil Field

If you haven't noticed, I am skeptical of much of the technology that has come up in this class. To explain the pitfalls of optimism, I want to travel back in time to a year called 2007. Oil prices were high (and boy were we complaining!) and people started to discuss the possibility of oil being SCARCE in the future (imagine that!). But then we were saved by a little thing called the Bakken Formation. Investment emails (buy an interest now!) and conservative web forums (liberal whining disproved again!) all crowed about this discovery of "super massive 200 billion barrel oil field." Oil reserves were said to be five-hundred billion barrels, making the U.S. the next Saudi Arabia.

The U.S. Geological Survey report came out. Mean Estimated "Technically Recoverable" Reserves: 3.65 Billion Barrels. And remember that's "technically" recoverable. "Technically" Toyota could build cars that go 275 mph. "Economically," however, they cannot. So the reserves that will be "economically" recoverable will be much smaller than this number. We also must consider the costs associated with extracting oil contained in pockets surrounded by shale oil, so this oil will cost MORE to produce than the oil from Saudi Arabia it replaces.

But let's see what has happened since 2000. Production from this field primarily occurs in Montana and Nebraska, and production in these states has increased 90,000 barrels per day. Since that time, California's production has decreased 113,000 barrels per day. So, Bakken Oil rigs have ALMOST made up for the loss of oil production of ONE PART (not the largest) of ONE COUNTRY (not the largest). The proof is in the metaphorical pudding: U.S. oil production keeps falling. Bakken oil and other developments may help to decrease the rate of this decline, but they have not yet managed to stop it all together (over the long run).

So, what have we learned? We learned that energy rarely gives us a free lunch. We cannot expect to find a "second Saudi Arabia;" in fact, energy problems will more likely largely be solved by an increase in prices that promotes fuel-switching and energy efficiency. We cannot expect the transition to be painless; if we do, we can expect some... unpleasant surprises over the next thirty years.

For the figures I mentioned:

Saturday, January 24, 2009

Interesting Polling:

Thirty-one percent of OIL EXECUTIVES (and, trust me, no companies deny Peak Oil more vociferously than oil companies) believe that oil will peak in less than ten years. That is quite scary, as ten years is essentially no time to do anything.

Peak Oil Post #2: Question of Economic Scale

The next question is: what does a shortfall mean for the price of oil? The question depends on the price elasticity of oil demand; in other words, it depends on how much oil prices change for a change in the quantity supplied. Let's try to use some real world data (this is a total simplification, but it is still worth considering). In 2004, the average cost of a barrel of oil was $42.35 and world oil demand was 82.41 million barrels per day. Then, oil began a steady rise, and by the second quarter of 2008, oil prices were constantly around $100 per barrel. That's a 159% percent RISE in price. Did oil demand plummet by 40%? 25%? 10%? 5%? 1%? Actually, it didn't decrease at all; world oil demand during that period was higher than it was is 2004 by around 3%. So, huge rises in price (at least in the short term) don't decrease the demand for oil at all. If a 159% rise won't decrease demand, how much will prices rise if oil production falls by 6.7%? Quite a lot.

Oil demand in the United States is significantly more elastic, but there are still limitations. First, there is the delay; oil prices started to rise after 2000 but behavioral changes only started occurring eight years later. Second, cutbacks were relatively small. It would be easy for the U.S. to cut demand by 5% without hurting our standard of living, but a cutback of 15% would be far more difficult for most people. Third, because the United States uses so much oil, it is far harder for everyone else in the world to cut back on oil consumption. In Europe and Japan, people do so much conservation that it would be difficult to make any more significant cutbacks; once you drive a 40 mpg diesel car less than half as much as the average American and take public transit for 10% of your trips, there is not much more you can do. It is even harder for countries like China to reduce oil consumption; again, if you consume 1/3 of the oil as the U.S. per capita, it is far harder to find ways of making cuts without hurting economic growth. I guess I am trying to say that it would be hard for us to extrapolate the U.S.' decline in oil consumption with a worldwide decline for the reasons stated above; America's situation is fundamentally different.

Plus, all of this is ignoring the economic harm done by high oil prices, which makes any transition quite different. Consider that rising gas prices were the force that originally began hurting the Detroit Big Three and the economic damage that would be done by a loss of the automobile industry if it were to happen again.

If Peak Oil happened rapidly enough, it could lead to economic harm that would be far more destructive. Many policy experts did a "war game" involving oil production: While they were assuming that violence and political activity would disrupt oil supply, a sharp drop in oil production would essentially do the same thing. Their predictions were double-digit inflation and a 28% fall in market prices (for the record, the current 1 year decline of the markets is around 35%), and all of this was done with TEMPORARY POLITICAL CRISES. Peak oil is not a temporary phenomenon; it implies a decline in fuel production that will last for far longer than any political crises.

Tuesday, January 6, 2009

Peak Oil Post #1: Geological Scale

350 is a scary number, but the scarier number than no one knows is 6.7%. That figure is the observed decline rate for oil fields past peak. The "peak" of an oil field, remember, is the moment when the field produces the largest amount of oil that it will produce during its lifetime; after this point, fields begin to decline as it becomes harder and harder to extract the remaining fuel from them. And this ratio is increasing, because off-shore oil rigs tend to decline much faster than on-shore production (some off-shore oil fields decline faster than 10% a year!)

Taking this to account, if we do not discover or develop any new oil or any new alternatives, oil production will decline by 4.5% a year. Combine this with the simple fact that we are on the cusp of reaching the economic "tipping point" for car ownership in China/India. Once China's average per capita income reaches a certain level, HUNDREDS OF MILLIONS of people will want access to automobiles (consider the meteoric rise in automobile ownership seen in the United States as we got richer). Let's use the EIA's (Energy Information Administration, a department of the Department of Energy) projection for world oil demand in 2030: 118 million barrels per day. Currently we are around 85 million barrels per day produced. So current oil production (assuming we don't discover/improve anything) will be.. carry the three... 32 million barrels per day. So, we need to develop new sources of oil that produce the shortfall, which is roughly equivilant of trying to find everything we've found over DECADES of searching in twenty years.

Another way of putting it is to say that we need to put six million addition barrels per day of oil into production EVERY year to avoid crisis. If we wait two years, we need to find 6.5 million barrels per day. SIX MILLION FREAKIN' BARRELS EACH DAY! More than TWO BILLION barrels produced each year. 62 BILLION GALLONS PER YEAR. Study the problem, and nothing seems to be able to describe the scope of the problem.

There are other methods of producing oil, other fuels, yadda yadda yadda, and I will describe them in the future. But my next post will be on the economic implications of shortfalls.