Peak Oil Update

Time for another roundup of some of the better peak oil stories from the last few months:

Former BP geologist: Peak oil is here and it will ‘break economies’ (Raw Story)

US Army colonel: world is sleepwalking to a global energy crisis (The Guardian)

Peak oil theory, as originally conceived by Hubbert and his followers, was largely governed by natural forces.  As we have seen, however, these can be overpowered by the application of increasingly sophisticated technology.  Reservoirs of energy once considered inaccessible can be brought into production, and others once deemed exhausted can be returned to production; rather than being finite, the world’s petroleum base now appears virtually inexhaustible.

Does this mean that global oil output will continue rising, year after year, without ever reaching a peak?  That appears unlikely.  What seems far more probable is that we will see a slow tapering of output over the next decade or two as costs of production rise and climate change — along with opposition to the path chosen by the energy giants — gains momentum.  Eventually, the forces tending to reduce supply will overpower those favoring higher output, and a peak in production will indeed result, even if not due to natural forces alone.

Such an outcome is, in fact, envisioned in one of three possible energy scenarios the IEA’s mainstream experts lay out in the latest edition of World Energy Outlook. The first assumes no change in government policies over the next 25 years and sees world oil supply rising from 87 to 110 million barrels per day by 2035; the second assumes some effort to curb carbon emissions and so projects output reaching “only” 101 million barrels per day by the end of the survey period.

[T]he third trajectory, the “450 Scenario,” ...assumes that momentum develops for a global drive to keep greenhouse gas emissions below 450 parts per million — the maximum level at which it might be possible to prevent global average temperatures from rising above 2 degrees Celsius (and so cause catastrophic climate effects).  As a result, it foresees a peak in global oil output occurring around 2020 at about 91 million barrels per day, with a decline to 78 million barrels by 2035.

Michael Klare: Have the Obits for Peak Oil Come Too Soon? (Naked Capitalism)

The world supply of crude oil isn’t going to run out any time soon, and we will be producing oil for decades to come. However, what we won’t be doing is producing crude oil – petroleum – at the present rate of around 30 billion barrels per year. For a global civilization that is based almost entirely on a plentiful supply of cheap, crude oil, this is going to present some considerable challenges. If we look over a 40 year period, from 1965 to 2005, we see that by the end of it, humanity was using two and a half times as much oil, twice as much coal and three times as much natural gas, as at the start, and overall, around three times as much energy: this for a population that had “only” doubled. Hence our individual average carbon footprint had increased substantially – not, of course, that this increase in the use of energy, and all else, was by any means equally distributed across the globe.

From the latest document that I can find – the B.P. Statistical Review – we see that the majority form of energy used by humans on earth is crude oil, accounting for 33% of our total, closely followed by coal at 30%: a figure that is rapidly catching up with oil, as coal is the principal and increasing source of energy in developing nations such as China and India. Natural gas follows in a close third place, at 24%; nuclear and hydroelectric power at 5-6% each; and the tiny fraction of our overall energy that comes from “renewables”, is just 1.6%. Thus, we are dependent on the fossil fuels for 87% of our energy. Now, such a comparison is almost misleading and naïve, because it tacitly presumes that if our oil supply becomes compromised, we can make a simple substitution for it using some other energy source.

However, this is not so readily done in practice, because oil is a particular and unique substance, having both a high energy content, and that it is readily refined into liquid fuels – effectively by distillation – to provide the petrol and diesel that runs practically all of the world’s transportation. Moreover, everything we depend upon - literally everything: food, materials, clothes, computers, mobile phones, pharmaceuticals etc. – for our daily existence is underpinned by a plentiful supply of cheap crude oil. So, the loss of this provision is going to have a profound, and shattering effect on human civilization.

What Happens When the Oil Runs Out? (Oil Price) and see: Oil can never be replaced with alternative energy (Energy Skeptic)

What is correct way to model the future course of energy and the economy? There are clearly huge amounts of oil, coal, and natural gas in the ground.  With different approaches, researchers can obtain vastly different indications. I will show that the real issue is most researchers are modeling the wrong limit.

Most researchers assume that the limit that they should be concerned with is the amount of oil, coal, and natural gas in the ground. This is the wrong limit. While in theory we will eventually hit this limit, because of the way fossil fuels are integrated into the rest of the economy, we hit financial limits much earlier. These financial limits include lack of investment capital, inability of governments to collect enough taxes to fund their programs, and widespread debt defaults.

One of the things I show in this post is that Economic Growth is a positive feedback loop that is enabled by cheap energy sources. (Economists have postulated that Economic Growth is permanent, and has no connection to energy sources.) Economic Growth turns to economic contraction as the cost of energy extraction (broadly defined) rises. It is the change in this feedback loop that leads to the financial problems mentioned above.  These effects tend to lead to collapse over a period of years (perhaps 10 or 20, we really don’t know), rather than a slow decline which is easily mitigated.

Gail Tverberg: How the EIA, IEA, and Other Researchers Are Modeling the Wrong Growth Limit (Naked Capitalism) In contrast:

Interestingly, according to BP, irrespective of whether the Opec cartel is busted or not, energy intensity of GDP (or how much energy it takes to create $ units of GDP) is likely to keep decreasing regardless:

As they note:

    Global energy intensity is improving rapidly, converging across countries at lower and lower levels. We project it to decline by a further 36% by 2035 (-1.9% p.a.), with differences across countries the smallest since the Industrial Revolution. Decline and convergence are both the outcome of market forces and global competition, promoting the most efficient use of energy everywhere.

All of which is relatively good news for carbon emissions:

    The widening gap between GDP and energy consumption illustrates the impact of falling energy intensity; and the gap between energy and CO 2 emissions reflects changes in carbon intensity, brought about by changes in the fuel mix. Without the projected decline in energy intensity, CO 2 emissions in 2035 would be more than 40% higher than our forecast, given the projected economic growth. The effect of the expected change in the fuel mix is much smaller – about one fifth as large – though bigger than in the past.

The question is, are inflation-concerned central bankers watching these trends? And if so, are they ready to adapt their models to a new, less-energy-intensive type of growth?

Energy is gradually decoupling from economic growth (FT Alphaville)

Conventional oil production actually peaked in 2006 and has been declining slightly since that point. Unconventional oil is largely keeping us on the 'oscillating plateau' but many sources consider this to be a short term phenomenon due to the rapid decline rates of tight oil, and geological and capital constraints.

What happens post peak largely depends on what the total decline rates of conventional fields are. Typically an conventional oil field declines at about 6%/a but unconventionals and substitution may flatten this out to a long term plateau or mild decline. The IMF released a policy paper on peak oil and considers a 2%/a decline an unlikely scenario. However in their model this would produce an unsustainable 800% increase in oil prices. Since the economy could not sustain that price Kumhoff speculates the system would become nonlinear and demand destruction would drive the price down. In the scenario they consider most probable the IMF team projects a doubling of oil prices with the decade. This is close to what other modelling approaches have shown including this one that uses network models to examine sectorial vulnerabilities

Other authors expect that because of the lack of easily substitutable at scale alternatives to oil and oil's energetic importance to the economy declining oil production will lead to shrinking discretionary spending. You can see this in an interactive model here. Since discretionary spending is what finances new technology and infrastructure this would have a negative effect on transitioning to alternatives (ie. it's hard to buy a $35,000 electric car when you've just been laid off).

Mostly we don't really know. A lot depends on decline rates and how rapidly transition to alternative energy sources can take place. The Hirsch Report states that we would need at least 20 years before the start of peak oil to make a smooth transition to alternatives. Since we are already post peak we are clearly too late for that. Additionally workhorse economic substitution models don't perform terribly well against the data so there isn't much guidance there. Historically it has taken energy systems at least 30 years to go from proof of concept to the point where they can scale exponentially. We might be there with solar but the total percentage of solar capacity is still rather small and our timelines are rather short. In most transition scenarios we are tracking the more pessimistic projections rather than the optimistic so it makes sense to shade on the side of negativity. Another very open question in this field is the role of finance and how to integrate the financial system into the fairly well studied biophysical systems.

Additionally there is the issue of climate change and whether high oil prices will drive substitution to green technology or cheap but carbon intensive brown coal.

What will happen to the economy when global oil production peaks? (Reddit)

There were a few things I didn't get to in that post. I also tried to steer clear of anything controversial or speculative. I'm going to give you my actual opinion here.

1.)    Peak oil in real terms will probably come from flow rate constraints rather than the size of the reserves or stocks. If you look at the rate of flow unconventional oil can produce it's not enough to supply 90 mbl/day. Right now about a third of total production in unconventional.

2.)    Energy in general and oil in specific has been steadily declining in energy quality. At some point we hit the net energy cliff and most of the energy we produce goes back into producing more energy. This means that there is little left over for the productive use of society. This is theoretically between EROEI 10:1 and 3:1. Right now most conventional oil is somewhere between 20:1 and 6:1 and unconventionals range from about 10:1 to 4.5:1.

 3.)   I like Kumhoff (the IMF's resident Mr.Bean impersonator) a lot and i think he's really brave but i also don't think he's being completely honest. The IEA says the average decline rate on conventional fields is 6%. The decline rate on tight oil is 60%. Tar sands have a steady flow rate but aren't going to expand that much (maybe a doubling of production rates). Deep water mostly behaves like conventional but it's still not enough to close the gap. I have a hard time seeing how you get 2% average decline as an outlier scenario in a 15 year time series. Rather I see 2% decline as being fairly probable. I don't think Kumhoff could come out and say that but I've read his sources and it's pretty likely. Hirsch states that a 1% decline rate is probably manageable but anything past 3% and we're in some dark territory.

So to answer your question my best guess after studying this stuff for years is decline is going to come sometime between 2015 and 2030. Most pessimistic predictions tend to be early but accurate so I'd shade more towards 2017 to 2020 as where I'd really put my money if i were a betting man. Most likely things will start out slow and get nonlinear really quickly (so wild oscillations in prices). Whether that crashes the systems or not i really don't know (it's uncertainty not risk, therefore is by definition unknowable) but it will mean big changes.

How much time do we have before peak oil? (Reddit)

For the better part of two centuries, the American oil and gas industry drew its treasure from porous underground formations where hydrocarbons moved comparatively easily to the surface. The best of those resources began to dry up in the 1970's and imports began to rise. Enter hydraulic fracturing and horizontal drilling, technologies that allow developers to extract oil and gas from much deeper, tighter and far-less-porous rock formations, including shale.

The problems arise when you look at how quickly production from these new, unconventional wells dries up. David Hughes -- a 32-year veteran with the Geological Survey of Canada and a now research fellow with the Post Carbon Institute, a sustainability think-tank in California -- notes that the average decline of the world's conventional oil fields is about 5 percent per year. By comparison, the average decline of oil wells in North Dakota's booming Bakken shale oil field is 44 percent per year. Individual wells can see production declines of 70 percent or more in the first year.

Shale gas wells face similarly swift depletion rates, so drillers need to keep plumbing new wells to make up for the shortfall at those that have gone anemic. This creates what Hughes and other critics consider an unsustainable treadmill of ever-higher, billion-dollar capital expenditures chasing a shifting equilibrium. "The best locations are usually drilled first," Hughes said, "so as time goes by, drilling must move into areas of lower quality rock. The wells cost the same, but they produce less, so you need more of them just to offset decline."

Is the U.S. Shale Boom Going Bust? (Bloomberg) But see: North America to Drown in Oil as Mexico Ends Monopoly (Bloomberg)

U.S. production of oil from tight formations is up 3.5 mb/d since 2005, and yet total global field production of crude from all sources is only up 2.3 mb/d. In other words, more than all of the increase worldwide over the last 8 years is attributable to U.S. tight oil production. Without U.S. tight oil, world oil production would be lower today than it was 8 years ago.

If the U.S. continues to be the only source of global growth in oil production, and if the world economy continues to expand at the pace it has over the last decade, oil prices are headed further higher. But how much promise does fracking hold outside the U.S.? The EIA believes Russia may have even more potential than the U.S., and Russia produced 120,000 b/d using horizontal fracturing methods in 2013. China may have about half the potential as the U.S. in shale oil and even more with shale gas, and is working hard to make that promise a reality. Argentina also has potential, but good luck with any capital you invest in that country. And turmoil in Libya is preventing shipment of even the easy-to-obtain conventional crude, let alone trying to go after the potential shale deposits.

Quantities aside, producing oil from tight formations remains an expensive proposition. Most of the companies in this business have negative cash flows, sinking more money into the operations than they are getting out. And it’s not the case that the companies are acquiring an asset that will continue to pay off for years to come– decline rates from individual wells remain quite impressive.

Oil and gasoline prices: many still missing the big picture (Econbrowser)

Here’s my thesis: As a society, we are entering the early stages of energy impoverishment. It’s hard to overstate just how serious a threat this is to every aspect of our current way of life. But the problem is hidden from view by gross oil and natural gas production numbers that look and feel just fine—good enough to crow about.

President Obama did some crowing in his most recent State of the Union address, where he touted “More oil produced at home than we buy from the rest of the world—the first time that’s happened in nearly twenty years.” It’s true: US crude oil production has increased from about 5 million barrels per day to nearly 7.75 mb/d in the past five years (we still import over 7.5 mb/d). And American natural gas production is at an all-time high. Energy problem? What energy problem?

While these gross numbers appear splendid, when you look at net things go pear-shaped, as the British say.

The Gross Society (Richard Heinberg)

The UK will run out of its own gas, coal, and oil within the next five years, according to a report released by the Global Sustainability Institute at Anglia Ruskin University. And France, which continues to rely heavily on nuclear energy, could run out of its remaining fossils fuels within the next year, reports the BBC. This means that the two countries could soon become completely reliant on global fossil fuel suppliers such as Russia, Norway, and Qatar.

The report, which outlines worldwide fossil fuel vulnerabilities, paints a varying picture of Europe's natural resources. Given the UK's current rate of fossil fuel consumption and its current known reserves, the country is said to have 5.2 years of oil, 4.5 years of coal, and three years of gas left. In contrast, Germany — a country that's willing to bulldoze a village to get at its coal reserves — has 250 years of coal left. And Russia, the report says, has more than 500 years of coal at its disposal.

"Much of the discussion about ‘Peak Oil' overlooks the fact that oil is unevenly distributed globally," the researchers write in the report. They note that Kuwait has more than 700 years of oil left, but countries like Japan have very little, which means they are highly vulnerable to market fluctuations. Overall, however, "the clearest conclusion to be drawn is the vulnerability of Europe," the researchers write, because current oil reserves and consumption rates indicate that the region has the lowest number of years left.

France and the UK will run out of fossil fuels within the next five years (The Verge)