Peak Oil Confusion - a Game Whose Time is Up

Peak Oil Confusion - A Game Whose Time Is Up
By Chris Nelder | Wednesday, July 9th, 2008

Pain at the pump is finally putting energy on the front burner in this
election season, but media coverage of the issue has been fraught with
misinformation.

I hate to say it, but I am beginning to think some of the confusion is
intentional. From the news that Cheney's office has interfered with
reporting on climate change science (what a shocker!), to the
assertions of some pundits that there are 12 trillion barrels of oil
yet to recover out there, to assertions by politicians that we can
drill our way to energy independence, it's tough for the average
person to get a real grip on the issues.

Confusion breeds apathy, and that's not something we can afford
anymore. I believe that the impending energy crisis is too urgent to
allow misinformation about peak oil to go unanswered.

So I am attempting to set the record straight.

For this week's Energy and Capital column, I am publishing a formal
rebuttal to a May editorial on peak oil in Investor's Business Daily,
which got the facts about peak oil-as I understand them-badly wrong.

It refers to a companion piece which has just been published, a "Peak
Oil Media Guide" that I developed for the Association for the Study of
Peak Oil - USA.

I hope my readers will find these two pieces helpful in separating
fact from fiction about peak oil.

Until next time,



Chris


To the editors of Investor's Business Daily:

I feel compelled to respond to your editorial of May 28, 2008,
entitled "Peak Oil: An Idea Whose Time Is Up." For a respected
financial publication such as yours, I found your coverage
reprehensible and rife with errors. I have to wonder if it was
deliberately designed to confuse the public, or if the authors were
merely deeply misinformed.

Our nation urgently needs to get up to speed on the realities of
energy before we can have any sort of intelligent conversation about
reforming energy policy. Articles such as yours do the public a grave
disservice.

First, peak oil is a study, not a "theory." That is why the name of
the world's top authority on peak oil is the Association for the Study
of Peak Oil (ASPO), not the Association for the Theory of Peak Oil.
The peak oil study is simply a scientific analysis and modeling of
available data. More data might correct existing models, but there is
no theory to prove or disprove. Likewise, politics plays no role in
the scientific assessment of the ASPO's respected petroleum
geologists.

Second, peak oil is not about "running out of crude," it's about the
rate of oil production. You are correct "that one day the crude supply
will effectively dry up," but that day, perhaps 100 years in the
future, is not what the study of peak oil is about.

I will refer to the "Peak Oil Media Guide" as I address your remaining
statements.

To begin with item 1, "It's not the size of the tank which matters,
but the size of the tap."

Talking only about the number of barrels of oil that might exist
somewhere, without also talking about the rate at which that oil can
be produced, and when, is utterly meaningless.

You stated:

U.S. production is trending down again, but it's not because there's
no oil. It's due to shortsighted policies that prevent the industry
from drilling for the almost 100 billion barrels of crude known to be
under Alaska's Arctic National Wildlife Refuge and beneath the oceans
just off of America's coasts. It's because politics and political
correctness block the development of Big Sky state oil shale fields,
where as much as 2 trillion barrels of crude, by some estimates, sit
idle.

Here's the reality.

Right now, the world is producing between 86 and 87 million barrels
per day (mbpd) of oil, just 2 mbpd more than it did in 2005. The world
has reached a bumpy production plateau, and will likely continue on it
for another three to six years before beginning the terminal decline
of global oil production.

Your numbers on oil are also questionable:

But the impact of those nations on crude prices in recent months is
suspect. Global oil consumption grew 2% in the first quarter of this
year over the first quarter of 2007, while production increased 2.5%
over the same period. On a daily basis, roughly 85 million barrels of
oil are consumed across the world, almost exactly matching the amount
produced each day.

You don't state your sources, but according to the IEA Oil Market
Report of May 13, the most recent publicly available global data I am
aware of, the numbers are quite different:

Global oil consumption grew 0.81%, not 2%, from 85.9 mbpd in Q1 2007
to 86.6 mbpd in Q1 2008.
Global oil supply in the grew 1.81%, from 85.6 in Q1 2007 to 87.2 mbpd
in Q2 2008. However, April supply fell 0.4 mbpd to 86.8 mbpd, due to
declining output from OPEC and the FSU, plus North Sea outages.
Average demand in 2008 is projected to be 1.2% higher than 2007.
According to this data, supply is a scant 0.6 mbpd higher than
demand.
If you will refer to "Figure 3 - US Oil Production 1900-2005," which
shows the historical peaking of U.S. oil production, perhaps you can
explain why you would dismiss the U.S. peak with a comment like "Yes,
domestic output has peaked. But it peaked at a level 13% above what
Hubbert predicted. And the peak wasn't followed by a falling-off-the-
table decline. Output rose after a temporary slide."

Yes it did...and then resumed its downward course on a relentless, 38-
year history of decline, as the chart clearly shows. Who are you
trying to fool?

As for the fact that U.S. production peaked 13% above Hubbert's
prediction, I say, "close enough." Hubbert also found that if the
recoverable amount of oil in the U.S. were increased by one-third, it
would only delay the Lower 48 production peak by five years. A similar
calculation for world production would produce similar results. Again,
when it comes to the question of peaking, flow rates are far more
important than reserves.

The decline of U.S. oil production was not the result of politics, nor
can any political decisions now significantly alter its future course.
It is simply the nature of petroleum extraction that it ramps up to a
peak and then declines, in a rough bell-curve shape. This observation
has been made in thousands of oil fields (and oil producing nations)
worldwide, which is why Hubbert's model continues to be respected.

If you will refer to item 2, "We are now at, or ‘close enough' to the
peak," you will note that global oil production has plateaued. It may
continue to rise at a negligible rate for the next couple of years,
but no major increases are possible.

You seem to be among those who are laboring under the mistaken belief
that the U.S. can somehow drill its way out of dependency on foreign
oil, and that increased domestic production could the relieve today's
"high" prices.

Nothing could be further from the truth.

In fact, the U.S. uses about 20 mbpd of petroleum, and produces about
7 of that. The other two-thirds is imported because there is no
possible way that we could produce another 13 mbpd domestically, even
if we drilled every single place that might have oil.

Regarding the potential of oil shale, please refer to item 4, "Oil
shale: the fuel of the future...and it always will be." After four
decades of fully authorized, commercial, even subsidized attempts to
develop oil shale into a usable fuel, no one has ever been able to
make it economically feasible. Part of the reason for that is that
it's not even really oil-it's kerogen, an immature precursor to oil,
and it takes an enormous amount of energy to turn it into something
usable.

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It remains to be seen if the energy returned on the energy invested
(EROEI) for oil shale is high enough to even make its production
worthwhile. Even if it does prove to be viable, it is unlikely to ever
produce more than a modest flow (though perhaps a very long-lived one)
of extremely expensive, synthetic oil. It is not some quickly
available "two trillion barrels" of "crude," as you asserted, and it
will require an enormous amount of energy, probably from coal, to
produce.

As for the oil reserves of ANWR and the continental shelf, please
refer to item 5, "ANWR and the continental shelf are no panacea." The
flow rates from these resources cannot be known until they are
produced, but we can make ballpark estimates.

Preliminary estimates by the USGS indicate that ANWR would likely only
produce around 750,000 barrels per day at peak. More importantly, it
would take 10-20 years to achieve that peak production level.

If all limits on domestic drilling were removed, including ANWR, it
could only increase US oil production by a maximum of 2-3 mbpd. It
would come online slowly, and given the loss in global oil production
by the time it arrives, the additional production from these remaining
domestic reserves will be underwhelming. Together, they could amount
to perhaps 12-15% of our daily usage today, or about 3% of world
production.

However, if we are currently on the peak/plateau of global oil
production, and production starts to fall within the next five years,
then 10 years from now, at a reasonable average 2.0% rate of net
depletion, world oil production will be down 11 mbpd-about 12%-from
where it stands today. Therefore any additional domestic production
could only offset perhaps one-quarter of the global production that
will be lost!

It should be obvious, after a close look at the data, that at the rate
that the U.S. currently uses oil, the chance of producing all of our
own needs domestically is zero.

The potential impact of increased domestic drilling on oil prices is
also minimal. Since oil is traded globally, and the U.S. imports about
two-thirds of the oil it consumes, the price of the oil we produce
will always maintain parity with global prices. With the global supply
and demand balance as tight as it is for oil, natural gas, and coal,
increased production in the U.S. would make a negligible difference in
U.S. gasoline prices.

The U.S. Department of Energy estimates that drilling in ANWR would
only reduce the price of gasoline by less than four pennies per
gallon-20 years from now!

The slight declines in petroleum consumption over the past year in the
U.S. and Europe have been more than offset by the increasing
consumption of countries in Asia, South America, Russia, and the
Middle East. Net global consumption is expected to increase another 1
mbpd this year.

Indeed, we should recognize, as the Saudis have, that the oil we still
have will only become more valuable as time goes on, and it makes
sense to save some for future generations. Oil is incredibly useful
and energy dense, and we use it altogether too profligately today.
Burning every last bit of what remains as quickly as we can makes no
sense at all. I further submit that it is irresponsible and immoral to
attempt it.

One of the most glaring errors in your analysis was in
misunderstanding depletion. I refer your attention to item 7,
"Depletion is relentless."

The concept is simple: Oil production first must make up for the
depletion of mature fields before any net additional oil can be
counted. It's like pouring water into a bucket with a hole in it. The
background global decline rate is generally accepted to be 4.5 - 5%.

Anyone familiar with a balance sheet should understand this concept,
but you missed it when you said:

Production over the next two quarters is projected to continue rising
(3.3% and 4.1%, according to estimates from Citigroup), while demand
is expected to grow at a slower 1.6% pace over the next six months.

A net global production increase of 3-4% has not occurred in several
decades, nor is it conceivably possible in the future, let alone the
next six months, given what we know about the projects that are under
way.

Clearly, you confused "production" with net production. The world's
net production over the next six months would be lucky to manage a
0.6% increase, after accounting for the background decline rate.

You point out: "World output is expected to rise from 85 million
barrels a day today to 110 million barrels by 2015, according to the
International Energy Agency," but your information is out of date.

Surely you are aware of the Wall Street Journal's article, "Energy
Watchdog Warns of Oil-Production Crunch," published on May 23, 2008,
about a week before yours? It previewed the IEA's upcoming report in
November, which will announce the results of their first detailed
study of the depletion rates of the world's top 400 oil fields. That
study has prompted them to reduce their estimate to 100 mbpd by 2015.

I should also point out that the IEA has lagged well behind other
knowledgeable analysts who have consistently demonstrated why the
IEA's past projections could not be obtained, and who are now of the
opinion that global oil production is unlikely to ever exceed 90 mbpd.

I must emphasize that no political considerations, or faith-based
economics, are needed to understand the available data and the models.
The mathematics are quite clear.

Finally, I must address your quote from Peter Jackson of CERA, who
said, "The 'peak oil' argument is based on faulty analysis which
could, if accepted, distort critical policy and investment decisions
and cloud the debate over the energy future."

I respond that CERA's projections of future oil production have been
far off the mark for about the last five years straight. If anyone's
analysis is faulty, it is theirs. The ASPO's has come much closer to
reality. ASPO-USA has directly challenged CERA to back their
projections with real money; so far, they have declined to respond.

CERA is correct, however, that faulty analysis could "distort critical
policy and investment decisions and cloud the debate over the energy
future." I beg you to consult more reliable authorities than CERA for
that very reason. They have a lovely story to tell; unfortunately,
it's wrong.

I hope you will explore the information I have provide here, and avoid
making such fundamental errors in your future coverage of the oil
markets, and of the study of peak oil.

Sincerely,

Chris Nelder
Energy Journalist
.

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