Tuesday, February 03, 2015

Why Cheap Oil Does Not Mean that Peak Oil is a Myth.

Peak oil is a fundamental tenet of the Transition Towns concept, but the current return of “cheap oil” has muddied the waters about how to discuss it: https://www.transitionnetwork.org/blogs/rob-hopkins/2015-02/transition-agony-aunt-how-talk-about-peak-oil

At a recent meeting of Transition Town Reading (U.K.), we discussed the prevailing low oil price, and the group asked me to put together some salient points on the subject, set within the context of whether or not we can now dismiss peak oil, e.g. as is currently being contested. http://peakoilbarrel.com/will-2015-peak-oil/  http://www.counterpunch.org/2015/02/02/why-the-crash-in-oil-prices-should-bury-peak-oil-once-and-for-all/

The following points are based on an article that I wrote on this blog http://ergobalance.blogspot.com which was re-posted on Resilience.org http://www.resilience.org/stories/2015-01-16/fossil-fuel-use-is-limited-by-climate-if-not-by-resources Most of the references that I have drawn from are in the links posted there, with a few more added into the text below. Some of the points overlap with each other, but hopefully expand their perspective in so doing:

(1) Peak oil is NOT when oil runs out, but it is the point at which the maximum rate of production of oil is reached, globally. Beyond the peak, global production falls relentlessly. New technologies can extend the supply, but the cost of production rises accordingly. 

(2) Peak oil is expected to happen as a result of geological/ technical/ geopolitical factors, but it may also be that a very high cost of production (mainly due to these factors), and hence selling price, makes oil less affordable, reducing consumption, so production “peaks” for this reason. 

(3) Different nations/regions will peak at different times, but “peak oil” refers to the global maximum.

(4) Over half of the world’s major oil-producing nations have passed their production peak. http://www.resilience.org/stories/2014-06-26/the-oil-production-story-pre-and-post-peak-nations

(5) The decline in production rate from existing oil fields amounts to a loss of 3.5 million barrels a day, per year. To maintain overall supply (around 30 billion barrels per year), the equivalent of a new Saudi Arabia’s worth of production must be brought on-stream every 3 years or so. http://www.theguardian.com/environment/earth-insight/2013/dec/23/british-petroleum-geologist-peak-oil-break-economy-recession

(6) This (5) means that new production has to grow relentlessly, year on year, such that by 2030 (only 15 years time) we must install new production to the tune of around 5 Saudi Arabias.

(7) It is not only the (large) total of the oil that must be produced (200 billion barrels  by 2030), but [reinforcing (6)] that the production rate of the “new oil” has to increase relentlessly to meet the decline from existing conventional fields. http://www.peakoil.net/200-billion-barrels-of-new-oil-production-is-needed-by-2030

(8) It is production rate that is critical, more than the size of the reserves. “The size of the tap, not the tank”. Of course, the oil has to be there in the first place, but it is how fast it can be got out of the ground that determines whether the overall global production rate can be maintained.

(9) The conventional fields being found now tend to be smaller than they were. The 20 largest oil fields in the world account for 25% of total global oil production, of which the majority are already in decline. “Giant” oil fields (those containing 500 million barrels or more) currently provide 60% of the world’s oil supply, but their discovery peaked decades ago. http://www.energyandcapital.com/articles/peak-oil-investments/1603

(10) This means that most of the new production has to be from unconventional “oil” sources. These are more difficult and expensive to produce from, and have a lower energy return on energy invested (EROEI) than for conventional oil. This is likely to translate into lower production rates per unit of $ or unit of energy.

(11) There is an inverse correlation between EROEI and $ price for different oil sources, i.e. lower EROEI, higher $ price. http://rsta.royalsocietypublishing.org/content/372/2006/20130126

(12) Chevron have released a presentation for their investors [emphasising (10)] which indicates an expectation that 40% of the “new oil” will come from deepwater fields, 20% from U.S. shale, 10% from increased tar-sands production, 25% from OPEC growth (Venezuelan extra-heavy oil?), and around 5% each from shale outside of the U.S. (Russia?) and “onshore and shallow offshore”. http://www.peakoil.net/200-billion-barrels-of-new-oil-production-is-needed-by-2030

(13) Chevron also stress that production from these sources will not come cheap, and will probably be of the order of $100 a barrel (“Breakeven price” or “marginal cost”).

(14) Hence at under $50 a barrel selling price, these projects will not go ahead, or they will be money-losers (cost more to produce the oil than it sells for). This year, $150 billion worth of new projects may face the axe, which are mainly from heavy-oil, deepwater, tar-sands and shale-oil.

(15) Lack of new infrastructure now will mean a reduced production rate, a year or so down the line.

(16) So why is oil so cheap? There are various contributing factors relating both to supply (production rate) and demand. The main supply factor is that production of U.S. shale oil has increased rapidly to 3.5 million barrels a day, along with the renewed oil production from Iraq and Libya. Saudi produce one third of OPEC’s output, and this time they have refused to cut production because they want to keep (grow?) their share of the market.

(17) At the same time, demand has fallen because the global economy (especially China) has slowed down. Since everything we do uses oil, when an economy is strong the demand for oil goes up, and when the economy weakens, demand goes down.

(18) The result of (16) and (17) is a glut of oil. According to supply/demand considerations, the price goes down. It only takes 1% or so, in undersupply or oversupply, to push the price of a barrel of oil to above $100 or (as we have seen recently) down to $50. http://www.resilience.org/stories/2015-01-12/the-oil-price-fall-an-explanation-in-two-charts

(19) So, can we now forget about peak oil? No. Due to (5) and (14/15), the oversupply of oil will peter out. We still have the background global decline rate, so needing to produce a new Saudi every 3 years, and from unconventional oil, which is more difficult, tends to have a lower net energy return, and is expensive. Due to the current low oil price, new infrastructure is now not being built, meaning a further loss in production a year or so ahead.

(20) Then the price will then go-up again (supply/demand). But it has to, or producing much of the oil that is left would be a money-loser. The price has to go above the breakeven price (cost of production) for new investment to be worthwhile.

(21) The only way the price could maintain a sustained low is if the global economy continued to slow, so the demand not only didn’t grow but actually fell. This, naturally would have its own adverse consequences. If the price were to rise massively, e.g. to $150-200 a barrel, oil would become increasingly unaffordable, which would also reduce demand [point (2)].

(22) So long as the selling price of oil stays above the “shut-in” price, existing production will mostly continue. If, however, it were to fall below this level (say, $20 a barrel), much global production would actually lose money, and be shut-down. This might reduce the world oil supply rapidly and massively, to the point that the world economy would stutter, and restarting both the oil production and the economy in its wider sense, might prove extremely difficult (worst case scenario!).

(23) While a low oil-price is seen by the consumers as a good thing., i.e. sales of Hummers and other SUVs are at a record high, because the full-prices are low!, it’s no fun for the oil-producers. Saudi get 90% of their GDP from selling oil; Venezuela, 50%; Russia, 35%. To balance their national budgets, all these countries need oil at $100 a barrel. At $50, Venezuela may go bankrupt. Saudi has deeper pockets, and can hold out for longer. Russia is interesting, especially as they control much of the gas-supply to Europe. If they held it back, even for a week...

(24) While the return of a sufficiently high price may encourage new investment, it is unlikely that we can grow production of new oil to equal five Saudi Arabias within the next 15 years, especially from sources that are more expensive and more difficult to produce from than the oil they must serve to replace. Therefore, we can anticipate a contraction of the global oil supply within this timescale.

(25) Once the production rate of new (unconventional) oil can no longer match the rate of decline of conventional oil, the global production overall must decline, i.e. we will be at peak oil. How exactly this happens and when, will be determined by the interplay of the factors mentioned above, but to quote Fatih Birol (Chief Economist and Director of Global Energy Economics at the International Energy Agency in Paris):
One day we will run out of oil, it is not today or tomorrow, but one day we will run out of oil and we have to leave oil before oil leaves us, and we have to prepare ourselves for that day. The earlier we start, the better, because all of our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously."

(26) There is the climate-change aspect too, since burning oil contributes around one third of the carbon emissions that are due to human activities. http://cdiac.ornl.gov/GCP/images/fuels_co2_emissions.jpg


Michael Stephenson said...

Chris Martenson lays it out pretty well here: http://russia-insider.com/en/export/1782 with some fancy graphs. Another good one of his was reposted by the Post Carbon Institute here: http://www.postcarbon.org/keep-your-eyes-on-the-prize/

Why someone would persist with such a regressive paywall system with such information is beyond my understanding, but then I fully agreed with Aaron Swartz's attempt to put the entire collection of JSTOR out on a torrent and I seem to be in a bit of a minority about that.

Professor Chris Rhodes said...

This certainly shows the extreme "volatility" that we can expect, but with the overall trend to the "down" side, i.e. to a lower available energy condition.

Did you watch his interview with Gail Tverberg (Gail the Actuary)?


Michael Stephenson said...

Thanks will download it and listen to it at the gym tonight.

What do you make of the 500 hours human labour in a gallon of oil estimate? A small car like a Citroën C1 gets 75mpg, I reckon given 21 days I could push one a lot further than that and I'm not gonna be winning any strongman competitions.

Professor Chris Rhodes said...

It's a bit depressing!

Well, there are 5.8 GJ of energy in a barrel of oil, so at 3.8 l per U.S. gallon, that's 1.39 x 10^8 J.

Dividing by 500 hours gives 278,000 J/h, and so dividing that by 3,600 s/h gives 77.2 J/s = W. I think an active person can work at a steady 200 W?

So, you're probably right!

It's more complicated than that, of course, because the fuel is petrol not oil (somewhat higher energy content), but a car loses a good 80% of the primary energy when the fuel is burned in a spark-ignition engine to actually propel a car.

Unknown said...

I don't know if this relates to peak oil but there is definitely peak oil refining capacity. As we all know gas prices have been dropping for the last several months but like clockwork one of the main refineries in Southern California experience a "major malfunction" which caused gas prices to dramatically increase. The major refinery owners always claim that government regulation hamper increasing capacity but why would they use their considerable influence to produce loosen regulations and proudce more gasoline when they make much more money in keeping supplies on a short leash? Am I a conspiracy nut to say that if there is an economic incentive to keep oil supplies tight and retard the development of alternative fuels we will always be in the grip of peak oil.

Professor Chris Rhodes said...

Hi Mark,

that's interesting. Certainly much of the oil to be recovered in the future will be of the "heavier" kind, probably containing more sulphur, metals etc., and a new swathe of refineries will need to be built to process it.

So, there may be an overall global) problem with refining capacity.

There is a field in Saudi that was mothballed for years, which has its own specific refinery, as it is full of metals and other impurities which must be removed before the oil can be refined.

Michael Stephenson said...

The Russian Energy Ministry is calling Russian peak oil for 2020.


Quite transparent of them to put a date on their oil peak. IIRC in that cafe scientifique recorded you had Russia's peak in that kind of time frame.

Professor Chris Rhodes said...

Hi Michael,

as you say it is quite unexpected to give an actual date.

2020 is not far away now. US shale production will peak before then, which is where the only growth has come in recent years.

Yes, I was looking to a global peak by 2020, with Russia a part of that production limit.

My wife and I are doing a Pemaculture Design Course, which we finish this coming weekend.

It might be useful as a means to approach the coming (looming) post oil age? But I don't kid myself it's going to be a smooth ride down Hubbert's peak!



Michael Stephenson said...

I have been reading quite a bit about permaculture techniques recently, never been much into gardening thus far, but I have been reading some of Charles Dowdings books recently and am going to implement his no dig technique this year.

I came across a BBC made documentary about peak oil and permaculture, I always presumed it BBC policy to ignore the subject, I guess it somehow slipped through the cracks


The other major concern of mine is the coming resource war with Russia the US seems intent on provoking, and looking at California drying up and the US massive debt it's not hard to see where the pressures to do so are coming from, being under 30 I'm well in conscription age and don't much fancy fighting a futile and resource wasting war against a people I have nothing against.

Professor Chris Rhodes said...

I saw this documentary when it came out, and indeed this was the first time I got an idea as to what permaculture is about.

A resource war is all we need!

I had the impression you were a much older man, probably my age! :-)

I was at a meeting yesterday about charity funding,and the thoughts came into my mind: "What will the young ones do? What must we focus on to direct our resources best?"

The only asnswer is to ficus on devising sustainable/resilient systems, but the overarching political will seems to be Business as Usual.

Certainly there is a need to hold it all together, while Plan B is made real, but there is no material thread from the government that we need to steer a new path, and sharply. But to say so outright would scare the voters off?

As the IoW talk I gave, there were a few people of around 30 or so, and they were looking toward agroecology and permaculture as a viable way to arriving at a viable future plan, while creating millions of new and sustainable jobs.


Michael Stephenson said...

I think the idea that being frank with voters would scare pepole off is incorrect, and it's clear that big all nicey nicey like the greens are trying is not working, its time go get frank and nasty. People say the greens are wishy washy and mock them, it's time for greens to call out how wishy washy the bullshit mainstream economists spout is wishy washy, that endless growth in a finite world is away with the fairies, cargo cult thinking, and that both austerity and keynesian solutions are merely raindances to the growth god performed by brainwashed zombies.
That no country is going to pay off their sovereign debt because growth (worldwide) is over.

Instead of allowing others to mock them, it is the greens that should be doing the mocking and belittling.

As far as creating millions of agricultural jobs I agree, I really admire what russia has done with it's Dashas, looking at the policies Russia has followed I find it hard to believe that they haven't been preparing for a peak pil scenario for the last 15 years. All their sovereign debt is paid down, they've been promoting small scale organic farming for years, giving citizens free land to grow crops on, resisting foreign corporate takeover of their agricultural industry, resisting the GMO corporate monopoly.

When I see the bizarro world of the British press caking Putin an authoritarian dictator I have to question what the hell these people are smoking, if being authoritarian is doing what your people want you to do against the will of foreign corporate interests, and being democratic is to be hated by your own population and going against their will and selling all their assets to a foreign hegemon's corporation empire, I'll take the "dictatorship" over "democracy" any day, and I'll take my acres of free land and my Dasha too.

Michael Stephenson said...

Whoa, I made loads of mistakes in when typing that comment, typed it on my phone, gotta remember to read through before posting.

Hopefully you get the jist, I think the most confusing mistake was big was supposed to be being.

Professor Chris Rhodes said...

OK, it came over with real passion!

Indeed, the Russians having the Dashas helped them through the post-Communist transformation period 25 years ago.

Have they anticipated peak oil? Well, maybe, but I think it's just part of hav9ng a partially decentralised system in place, and that's what we need too.

I think initially the peak oil etc. truth will scare the hell out of everyone, but once the idea begins to seed, any party that comes out with reality-driven policies will become popular.

Yes, the Greens are perceived as being wishy washy, or they don't want fossil fuels or nuclear, and think it can all be done with renewable energy... OK, partly true, but the missing piece which they ignore mention of is that we will have a future with maybe one sixth of the energy available to us that we have now, albeit that this energy must come form low-carbon sources.

Key of course, to any realistic energy policy, is that we must e.g. retrofit existing buildings, i.e.we have to work with what we have. We can;t just knock it all down and start again.

And re-localisation takes us away from the current massive demand for oil, but also into a future that begins to look a lot more sustainable.

We have to get away from degenerative practices and into restorative ways of thinking, e.g. permaculture.

Michael Stephenson said...

The thing is the Dashas are not just a soviet relic, the Russians have doubled down on Dashas and organic farming at a time when the convention wisdom would be to sell it all up to mega corporate agriculture. (As is happening now in US puppet Ukraine) Their prescience can't be entirely due to chance.

I have to say I agree with the Greens that nuclear can't be part of energy generation.
I picture in my head a future society that has to generate what little electricity it can and devote 100% of it to pumping water to cool ponds of nuclear waste. To stop it from despoiling their farmland. Or I Picture what a measly amount of sea level rise it would take to engulf hartlepool power station in the north sea and turn the tees estuary into a radioactive dump. Franticly trying to get somewhere else to take the waste and everywhere else refusing to accept it leaving the only option to just leave it for the sea to take.

I know there is talk of accelerator driven sub critical thorium reactors which produce waste with much shorter half lives, but even their boosters put it 40 to 50 years off, which in my mind puts them in the not gonna happen category.

Michael Stephenson said...

Nuclear power seems like stealing from the future in a way much worse than sovereign debt, debt can be written off, nuclear waste can not, it seems cruel to subject a society with much less than ours with the burden of it.