Saturday, May 09, 2015

Chris Rhodes on "Why are Oil Prices so Low?" An interview by Rob Hopkins for the Transition Nework.

The following is a transcript of Rob Hopkins interviewing me for the Transition Network. Since this was prepared by me, any errors are mine alone.

CR. “I’m Chris Rhodes. I’m currently Chair/Coordinator of Transition Town Reading. I’m actually an independent consultant. I deal with energy issues, of various kinds. I’m a former academic, but I decided to branch out and do some other things with my life, including getting involved with Transition, prompted actually by some research I was doing into the origins of petroleum. And then I came across “peak oil” in the middle of all this, and that rather changed my thinking about a lot of things basically.”

RH. “It does tend to do that!”

CR. Laughter. “Yes indeed.”

RH. “You wrote a piece that was on Energy Bulletin recently, that came from your blog, reflecting on what seemed to you to be the causes behind the spectacular recent plummeting in the oil price, and something that you then wrote up under the guise of a “Transition Agony Aunt” recently . Could you just give us your thoughts on why we’ve seen a fall from a hundred and forty eight dollars a couple of years ago, down to less than fifty now?”

CR. “Mm. It’s been an astonishing journey really. The original hike up to practically a hundred and fifty dollars for Brent Crude was amazing. It was to do with a combination of factors, but really the demand was ahead of supply, and you don’t need much actually, of supply over demand or demand over supply. One percent either way can really shove the price up or down. And the U.S. dollar was in a certain situation too, it was weak at the time, and a combination of these factors shoved the price of oil right up. Then we had the economic catastrophe, and as always, when you have an economic problem, a great slowdown because everything that we do requires oil, and then that demand for oil falls, and the price plummets.

And then we had a recovery, the Chinese economy was ramping ahead, and a combination of various factors preserved the demand for oil, and that sort of drove the price up above a hundred dollars, and kept it going that way. Of course there was the fall in the output of oil from Libya, and that certainly had an impact on the whole equation. And things seemed to be trotting along quite happily. With a tight market, the oil was above a hundred... I think it was a hundred and fifteen dollars a barrel in June of last year. And then something really started to go pear-shaped, in terms of the oil price. And there are various conspiracy theories around, about people trying to destroy other people’s economies. I try and steer away from conspiracy theories, but the most sensible explanation I can come up with is that indeed, the world economy is slowing.

The Chinese economy has slowed considerably, and things aren’t so good in Europe, so the demand for oil has actually fallen, but yet supply is way up. The Oil has come back out of Iraq and out of Libya, the U.S. production of shale oil is about three and a half million barrels a day, and the Saudis, who produce a third of OPEC’s oil, have said “well no. Right, OPEC is not going to pull back on oil production", so we’ve got an oversupply against demand, and the force – the supply/demand force – has pushed the oil price way down. And it’s not until that glut has been absorbed that anything will happen. But I don’t believe that we’re going to have this situation for too much longer. Because the oil price is so low, this has caused a lot of oil companies to pull back on their investment in new production.

So if they’re not investing now – they’ve pulled back a hundred and fifty billion worth of production this year – then a year or so down the line, the overall global oil production is going to be decreased accordingly. And what we’ve got to look at is that the world existing oil production is falling by about three and a half million barrels a day, which means that we’ve got to find a new Saudi Arabia’s worth of production about every three or four years, and mostly from unconventional sources. So it really does have to absorb that glut, and fairly rapidly, so I would predict that the price of oil is going to go back up again. How high is hard to predict, probably impossible to predict, but I think this is a temporary situation. Peak oil is real, and the existing conventional production did peak probably the best part of ten years ago now, so I think that is where we are standing at the moment.”

RH. “So the fact that, um, oh what was he called, oh God my brain’s gone completely, Matthew – Simms?”

CR. “Simmons.”

RH. “Simmons, yes Simmons, who wrote his book about the Twilight of the oil in Saudi Arabia.”

CR. “That’s right.”

RH. “And the fact that production has been able to ramp up and they feel they have reserves to hold out as long as it takes, do you think that some of those forecasts in terms of peak oil and lack of availability of oil were maybe slightly overdone?”

CR. “It’s not played out exactly as was anticipated. I mean, the original idea was, of course, well, due to the difficulty increasingly in getting the stuff out of the ground it would peak, but it’s been more complex than that. I know the Saudis – I’ve forgotten the name of the field, but it’s a field that’s full of pretty filthy oil, which is full of metals and all kinds of stuff. This was mothballed - you know - decades back, but now they are producing from that, and I think a lot of production has been possible because the price of oil did go up so high, so what’s happening there, but also the whole of the fracking industry. If the price of oil hadn’t gone up to a hundred dollars and then more than that, then nobody would have invested money – no oil companies would have invested in production, because it would have been a money loser.

Now, apparently with the low oil price, so I read yesterday, 97% of all shale fracking projects are now basically money losers, so I can’t see that that’s going to continue for too much longer. And I think that what we can say is that we’ve seen the oil price plummet because of this oversupply against demand, but production costs are still high, and we’re not going to continue to produce oil until the price goes back up above the breakeven cost of production. And the unconventional oil sources tend to be more expensive to produce from. They cost more energy, they’re a lower net energy return, they’re more difficult, they require more advanced technology, and it’s overall a really less – I was going to say beneficial – it’s a poorer investment really than conventional oil. So we’re trying to fill up this great hole – as I say, one Saudi Arabia’s worth of production every three years, which would sound to me like five Saudi Arabias worth of production by 2030. Because time’s moving on. It’s 2015 already. 2030’s not so far away, is it, from as it seemed from not that long ago. And it’s going to be a more difficult and expensive procedure.

So we are using up, quite naturally, the easy to get stuff. The cheaper to produce stuff. And we’re trying to fill that hole with more difficult and more expensive stuff. I mean the Saudis can still produce oil for – oh, ten dollars a barrel, but of course they need it to be a hundred dollars to balance their national economy. And this is true of many countries, but Saudi at least has deep pockets, so they can actually weather this for some time. Whereas somewhere like Venezuela, they get about fifty percent of their GDP from selling oil, but of course they don’t have deep pickets, so their economy, I think, is likely to suffer... well, badly, and soon.

RH. You mentioned, when we’ve talked before, that you’ve been to some seminars around fracking over the last few weeks. I wonder what your sense, with the infrastructure bill having gone though, and the government talking about a green light, a go ahead for fracking, of the reality of whether we’ll see large scale fracking in this country.”

CR. “It’s a very interesting  question. I mean, the only place that fracking has been done on the grand scale so far is America. And really, however people may feel about hydrocarbons, what they’ve accomplished in terms of production is astonishing. Something like 30% of domestic oil production now comes out of shale. This is tight oil – shale oil produced by fracking shale. Not kerogen, that’s another story altogether. And about 45% of American domestic gas production also comes out of shale, at the moment. So, it’s astonishing. So, the only other place we can look to beyond America is Poland, where there’s been some significant attempt to produce gas, at least. And it’s really not played out as well as was hoped. Poland was looked at as something that was going to be the European giant, because they had apparently more reserves than anybody else did. And then the Polish Geological Institute revised those reserves down to about 10% of what they thought they had originally. Chevron and other majors have pulled out of Poland.

They’ve drilled 66 wells, and I don’t think any of them gave a decent production rate, the geology is more complex and more difficult in Europe from in America, and even in America, where – OK, naturally they’ve drilled into the sweet spots, where they’ve got the good production, both for oil and gas, for drilling elsewhere, it seems that the energy returns are becoming poorer, so I think that if we’re going to start doing this in Britain – ah well, it may not play out as well as hoped. People I was talking to, at some of these workshops, um, they were very interesting in what they said. These were people who were on the edge of the industry, at least, were saying that it was a great big gamble, but of course, if it comes off, then there is money to be made, but, again, nobody is going to seriously invest with very low oil and gas prices. Because the oil and gas prices tend to be connected. If one is low, so is the other, and vice versa. So, I think that unless the oil price goes back up again – and I think it has too, for the reasons I’ve said – supply and demand – then we’re not likely to get much serious investment.

But there was a report out – the parliamentary bill – the environmental audit, came out last Monday, and their conclusion – well, you’re probably well aware of it – but basically what fracking we do should be very limited, mostly because of the CO2 emissions aspect, but we’re not likely to have a U.K. shale industry for about ten to fifteen years. Now, by that stage, if that’s true, then we will be way down in the likely production of oil across the world. And people have various views as to - even in America - how long that production is going to play out for. Um, you know, there’s David Hugues, who came out with a report for the Post Carbon Institute, didn’t he, and he is somewhat less optimistic, shall we say than some of the other figures than have come out - for example, the U.S. Department of Energy... who are they? The Energy Information Administration. I always confuse them with the French counterpart. But, yeah, basically that there’s no guarantee that there will be sustained production out to 2040, because even that assumes there’s going to be better technology developed along the way, and the geology will be better understood. I found an interesting – I discovered quite recently – a presentation by Chevron for their investors. And basically they were saying that, well, we need to find another 200 billion barrels of oil by 2030.

Well, that’s interesting in itself, and then on a slide they show, as I say, the decline rate of production of conventional oil, which is this needing to find a new Saudi every 3 years worth of production. But, of course, it’s not only that they’ve got to find 200 billion barrels more oil, they’ve got to find more of it, and produce more of it, year on year. And then they go on, and they look at where that oil’s going to come from. Well, a little titsy-bit is going to come from conventional oil, they reckon about 40% is going to come from deepwater drilling, maybe 20% from shale fracking, and a few other things to make the whole lot up. Some tar sands increase, but if you look at the amount of oil that’s reckoned to be produced over time from fracking, even the EIA’s figures, there’s not as much oil to be had, so they reckon, as Chevron does. And you start to think, yep, there are a lot of uncertainties about how much of it there is to be had, and of course, what the production rate is likely to be. 

You don’t know what the production rate is going to be until you start drilling. Neither do you know the quality of the material that you’re going to recover. So, I think there’s a lot of uncertainty, and I do have my doubts that we’re going to have a massive scale shale industry in Britain any time soon. And what I fear is that if we really go out for this, and it doesn’t work, and we’ve ignored renewables, and other ways of doing things which, basically, involve cutting the amount of energy that we use, then we may have backed the wrong horse in the race.”

“Mm. Mm. And you wrote recently about the Ekins and McGlade study about keeping fossil fuels under the ground. What does that add and bring to these discussions, do you think?”

“Mm. It’s interesting. I mean, the discussions really, so far are right, OK, can we maintain oil production. If, yes, how can we do it? Then we start to see, yep, it’s going to have to be unconventional oil, it’s going to be expensive to do, difficult, maybe it’s not going to be possible to maintain overall production. Because it’s the old adage, isn’t it, that it’s the size of the tap, more than the size of the tank, that matters, and these are more difficult to produce from. And you’re trying to maintain or grow production from them, to maintain overall production, in the face of what you’re losing from conventional oil. But, of course, yeah, the paper in Nature that you refer to, concluded largely that we’ve got to stop burning about, um, well basically that we’ve got to leave about two thirds of our fossil fuels in the ground.

I looked at it in terms of production rate, but it seemed to me that we have to reduce our rate of burning coal by about two thirds, and the oil supply they reckoned would only need to go down by 5% or so, the production, but the gas supply, the gas supply would have to increase by maybe 60 or so percent. So, for that to work - the analysis they presented – it seemed that we would need to grow our gas supply, which sounds quite reasonable to me. Of course, where is the gas going to come from? Shale presumably, and coal bed methane, but again other unconventional sources which are more difficult to produce from.

So, we really are in the scales of a great balance, between what might be done in terms of production, and of course whether that actually is desirable to do – to grow that production, rather than reducing it anyway, because we are going to proverbially “fry the planet”, It’s interesting that if you look at the, uh, the B.P. Statistical Review, although they reckon that there will be some substitution of coal by gas, still, um, by 2035, we will have increased our carbon emissions by something like 30%. So that seems to be totally – diametrically - opposite to the proposals of what needs to be done, according to the analysis published in Nature.”

“And, uh, that gap that you mention, and the challenge that the paper presents, what is it that you think – I mean, you know, you’ve been involved in consulting around energy, and now you give some of your time to Transition Reading, as, you know, the Chair of the group. What’s your sense of what Transition brings to those conversations – to those discussions?”

“I think what Transition brings, among many things, to these discussions is that, while mostly, popular discourse centres around where are we going to get our energy from? How are we going to grow supply?, Transition starts to say, OK, well accepting that if we are going to grow any supply, but even to maintain what we have, we have to move over to lower carbon energy sources. But then Transition focuses on ways of reducing energy – focuses on localisation . I mean that really came in implicitly with looking hard and firmly in the face of peak oil, but there are so many other aspects. 

So, we have local community activities, producing more of what we need at the local level, establishing resilience, as we use the word, but really, it’s about, in a growing way, um, managing to use our resources more efficiently, and in fact, in terms of energy, it’s facing up to the fact that we are going to be in a situation where we will have less energy available to us, whether that may come from carbon-free or carbon-emitting sources. I think Transition is about a completely different paradigm, um, really, for how we go about our lives in the future. But, it’s also about drawing people together and finding the strengths that we have within communities, and at the local level.”

“And the last question I had was, as somebody who – you’ve been an academic for a long time, and a writer, and a researcher and a consultant, what has getting involved with Transition brought to your sense of your ability to affect these issues or respond to these issues, that might not have been there before? I’m wondering what that involvement has brought to you personally, either that the previous responses and approaches might not have done?”

“Well, I, for many years used to do terrible things. As you said, I was an academic, I used to fly around the world working on particle accelerators, and things like this, so my carbon footprint must have been – well, I wouldn’t like to think about it – but I really wasn’t thinking in these terms, and what really, uh, changed my attitude and my outlook, as I said, was in my researching into the origins of petroleum – biotic, abiotic etc. – coming across a page, um, on the internet – it might have been by Matt Simmons actually – but peak oil, and I was just transfixed as the implications slowly started to drop in my head, like the proverbial penny. 

And immediately it became obvious that we needed to relocalise, and then that naturally caused me to gravitate, um, beyond my writing on the subject etc, to getting involved with the local Transition group. But what Transition has given me is a sense of hope, actually. That by – I feel that we either all stand or all fall together, as a human society. And I think that from this grass roots, getting together and sharing skills and hope and resources, we may actually get through what is likely to be quite a testing time, however it unfolds.”


Michael Stephenson said...

You did well in this interview, I look forward to meeting you some day when our schedules conspire to make it happen.

Professor Chris Rhodes said...

Hi Michael,

I'm glad it came over OK. Rob is a good interviewer.

Indeed, I would like to meet you when fate so determines!


Unknown said...

Thank you very very much for this insight into the oil business. China will have an impact in our economy I just hope that things do not crash significantly as my business depends heavily on the price of fuel. We do a lot of long haul freight across the country so it would have a serious impact on us financially.

Abraham Yates @ Apache Oil Company

Professor Chris Rhodes said...

Hi Abraham,

I think that the oil price must rebound at some point, and that depends in part on when the oversupply vs demand for oil slackens. Hard to say when that might be, but I am guessing that the price will be heading upwards by the end of 2017?

However, this will also depend on how the global economy (especially China), i.e. demand for oil, plays out. It is very uncertain territory.



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