tag: Peak oil

Dec 2014

Low oil prices – a threat to the dollar

I’m on an email discussion list that includes a bunch of people in the oil industry. On an average day the ratio of shop-talk to global conspiracy stuff is 10:1… and really, there’s only so many times you can read the same impassioned arguments about the merits of different fluid injection methodologies. But every now and then a discussion about a wider political issue gains traction. By and large these are sober, conservative (small ‘c’) engineers not taken to flights of fancy. So when they start saying things like “there’s only a 60% chance the US dollar will still be a viable currency in 18 months”, it piques my interest.

For the past couple of months there has been an almost complete consensus among these people that the Gulf States are driving down the price of oil in order to destabilise Iran. There’s even a guy who – having spent some time chatting with a staffer in the UAE oil ministry – claims that Saudi Arabia, Kuwait and the UAE are targeting $40 per barrel by the middle of 2015 and they intend to keep it there for a year.

As an aside, I read a message from a guy who said he expects 5 year oil futures to drop below $85 any day now. That there… that’s as close to a sure thing investment as the modern financial industry is capable of. What’s more, given the short-sightedness of the financial industry, I wouldn’t be surprised if you could buy November 2020 oil futures for less than $70 by this time next year. Pretty crazy.

Anyway, there’s no doubt that Iran’s economy is utterly buggered if this continues for much longer. Even if the $40 for a year thing is exaggeration, this is presenting Tehran with very serious problems.

Thing is, Iran isn’t the only place this is hitting hard. The Gulf States can weather this storm, but almost no other major oil exporter can. And while oil importers are quite enjoying this period of temporary price-fixing, places like Venezuela and Nigeria are suffering. The fracking industry in the United States is also in trouble (though this price drop is only one of the reasons for that) but America isn’t too worried about that because they like seeing the squeeze put on Iran, while the damage being done to the Russian economy is being seen – curiously enough – through the lens of Ukraine, the Malaysia Airliner disaster and what’s being viewed as Putin’s increasingly aggressive stance towards the west. So the Americans are offering their explicit support to the Gulf States in order to put Russia under pressure.

Now, let’s be under no illusions here… Putin is a dangerous man. I’ve noticed more and more western liberals buying into the Russia Today narrative and viewing Putin with a kind of grudging, “enemy of my enemy” respect. Which is madness, because this guy should be viewed as at least as big an enemy as western capitalist imperialism. Anyway, it’s simply inconceivable that Russia won’t respond dramatically to this very real threat to their national economy. And what response will that be?

Well, according to the mailing list people, Putin is getting ready to announce a major shift in policy. Early next year he will be switching all of Russia’s petroleum trading to roubles. That’s what they’re saying on the grapevine anyway.

A lot of people – even economically literate ones – don’t fully understand the important link between the US dollar and the global oil trade. The pricing of oil in dollars isn’t just a matter of convenience. All trade in oil actually takes place in dollars. Dollars get exchanged for oil. Not euro, or roubles or yen. This ensures a constant demand for dollars as anyone who wants oil… i.e. everyone… needs to buy dollars before they can buy that oil.

Not sure if you’ve noticed the huge collapse in the value of the rouble in the past week? And the huge Russian interest rate hike? Well, according to some people Russia has deliberately torpedoed their currency in order to buy back roubles, from anyone who has them, at a bargain price. Because if Putin goes through with this and demands roubles in exchange for oil and gas? He will instantly make the rouble into a European reserve currency. Demand will rocket and the dollar flight will begin.

Unlike other countries, the US will not be able to intimidate Russia into backing down on this. Especially given the huge hardship being caused to Russia by this US-supported Gulf strategy. And if it turns out to be a success for Putin (which I think it will do) then there’s really nothing to prevent other countries doing the same.

The Saudis, with the support of the US, are playing a very risky game right now. And one that could result in the end of the dollar as global reserve currency. Sleep tight.

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Nov 2014

Oil at 80 dollars

Those who keep an eye on such things will know that something very strange has been happening with the oil price over the past few months. Saudi Arabia, Kuwait, Qatar and the Emirates have been aggressively driving down the price of oil (and have just signalled their intent to continue doing so). This fall has not coincided with an equally precipitous drop in demand, and it is not – except tangentially, in a manner I’ll discuss in the fifth paragraph – related to the “unconventional oil” coming out of America thanks to the fracking boom. That whole fracking thing is smoke and mirrors of the first order by the way.

No, what’s happening with the oil price right now is geopolitical. What’s more, it heralds an era of increased geopolitical tension.. something that’s only starting to filter through into the mainstream. There’s a big wake-up call coming folks.

What do I mean when I say the price drop is geopolitical? Well, it’s important to understand that when it comes to oil, the Saudis (and the other Gulf Kingdoms) are very astute. Right now they possess a large enough share of the oil export market to effectively drag the global price any direction they choose. And this has a massive effect on the global economy. However, it is extremely unlikely they will still possess this influence in 20 years (even 10 years from now there’s no guarantee). Based on depletion profiles that they take very seriously (even if the western media does not), they will never possess as great a global influence as they do today.

Saudi Arabia is taking the lead on this, and is being backed by Kuwait and Qatar (with the United Arab Emirates a more reluctant fellow-traveller… this hurts their economy more than it hurts the others for a bunch of reasons). It’s important to realise that it is not an OPEC thing. In fact… OPEC is bloody furious. And with good reason; a number of OPEC nations are going to end up as collateral damage in all this (Venezuela and Nigeria are both being crucified).

Russia is also feeling the pinch. And the fracking boom in America is being hit very hard. That entire industry is a pipe-dream. It can only exist thanks to massive government subsidy in tandem with a very high oil price. Both of which can be arranged, it’s true, but more importantly… there just isn’t as much of it as has been suggested. Nowhere near as much. And ramping up production to cover the drop in conventional crude production simply isn’t going to happen.

Now, it’s unlikely the Saudis are willing to take such a large economic hit themselves simply to undermine the US fracking industry. That Financial Times article suggests that the low price could put a strain on US / Saudi relations, but as an overall economy the United States benefits from a low oil price. So I don’t see that being the case. Besides which, the US and Saudi Arabia are firm allies and they share a common enemy… Iran.

The real reason the global oil price is low* right now is because Saudi Arabia is waging economic warfare on Iran.

When a country gains a large proportion of its income from oil exports, it is possible to calculate a “breakeven oil price” for that country. That is, the price at which they must sell oil to cover government spending. Different economists tend to come up with different numbers (no surprise there) but if you see them as a guideline rather than an absolute value then they can be illuminating. CitiGroup say Saudi Arabia’s breakeven number is $89. The IMF says it’s $80. Deutsche Bank say $78. So you can see that having oil down below $80 per barrel is going to hurt the Saudis, but it’s something they can live with – this is not a nation that finds credit hard to come by. Qatar’s down in the mid-70s. While Kuwait’s breakeven is between $54 and $75 depending on who you listen to.

Not so Iran. According to CitiGroup they have a breakeven price of $130. The IMF suggests it could be as high as $140. And if you hear an analyst on the news try to explain the current fall in oil prices in terms other than an outright economic assault by Saudi Arabia against Iran, they simply do not know what they’re talking about. Because this is shattering the Iranian economy. It’s also giving a proper kicking to a bunch of other oil exporters. Nigeria and Russia both have notional breakevens above $110 and Venezuela is right up there with Iran when it comes to exposure to low oil prices. As for Iraq… if the country is to have any chance of surviving as a united entity it needs a reliable income stream, and with a breakeven price around the $100 mark, it doesn’t have that right now.

The effect on Russia is particularly concerning, especially if you’re a European like me who has just witnessed Putin sign a contract to sell a whole bunch of gas to the Chinese and can see the spectre of European gas shortages should this looming Cold War escalate (when the normally taciturn Finns start complaining about something, it’s a good idea to listen). The notion that “they need our money as much as we need their gas” has simply never been true (the Russian capacity for belt-tightening far surpasses the capacity of European governments to survive power-cuts and cold winters… so European governments will always cave first). And it’s especially not true now when the Asian economies can provide an alternate source of income. Falling oil prices puts additional pressure on Russia and is likely to drive Putin towards a more aggressive foreign policy (in my view).

But Iran is the target, and while nobody outside Gulf aristocracy knows how long they plan to keep up this assault, it is likely to only be the first in a series of oil price manipulations over the next few years. And as a result, we’re likely to see the kind of geopolitical brinkmanship that has the potential to end very very badly indeed.

* Incidentally, describing $80 as a “low” price for oil would have been dystopian madness just a decade ago.

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Jan 2012

One hidden sign of an energy crisis (tar sands)

TransportIn my previous post (Against High Speed Rail) I questioned the wisdom of investing in a High Speed Rail (HSR) system in a world facing an impending energy crisis. Ultimately, if we wish to maintain a society in which travel is relatively easy and affordable, then we need to be investing in the most energy-efficient transport infrastructure available. And while HSR is more efficient than private cars or air travel, it is less efficient than conventional rail or coach travel (and significantly less efficient in the case of coaches).

In the comments to my post, both John B and Ryan disagreed with my position. Knowing them from their web writing over the years, they are both intelligent and fair-minded people. I believe they accept the logic of my argument (broadly speaking) but disagree with the initial premise; that we face a serious energy crisis; which of course rather undercuts the whole thing. Indeed, Ryan says quite clearly:

I really don’t see too many signs of this energy crisis arriving any time soon. With the massive quantities of tar sands, shale gas, arctic oil etc which suddenly look economically viable […]

It’s this specific statement I wish to address right now. You can read my response to the rest of Ryan’s comment beneath the previous post (here). Also, I should be clear that while Ryan posted the comment to my blog, he is essentially putting forward a widely held view. So my response is not necessarily directed at him personally but is intended to counter that mainstream position… that the decline in conventional crude oil can be offset by a rise in non-conventional oil production (or other energy sources). It’s a position that cuts right to the heart of peak oil theory and one where the technical issues are not widely understood.

Let me start by suggesting that if someone doesn’t “see too many signs of this energy crisis arriving any time soon”, it may be because they’re not actually looking for the signs. I have been looking for them and I can confidently say that they are there. Quick survey: raise your hand if you have read any feasibility study carried out into the exploitation of tar sands and their ability to mitigate a decline in conventional crude oil? I’m fairly confident that you don’t have your hand raised, dear reader, though perhaps I’m doing you an injustice?

The reason I ask is because that’s the sort of place where “signs of this energy crisis” can be found. They tend not to show up in the mainstream media (on the rare occasions they do, they’re well-disguised) and even when they appear in market signals they are dismissed with inaccurate explanations because they fail to fit an existing narrative. But I want to avoid media and market analysis in this post as much as possible, and concentrate on the technical details, so I’ll just say that if you’re not reading the technical literature on the subject (like almost everyone on the planet) then it’s no surprise you don’t see the signs.

Conventional Vs. Non-conventional oil

Before I get into the details of tar sands (which I will take as my basic case study, but a very similar post could be made about shale gas, while Arctic oil has problems of its own), let me say a few words about the difference between conventional oil and non-conventional. Because it’s pretty important to get your head around it if you want to understand why it is that although the “massive quantities of tar sands” may exist, they are not quite what they seem.

Over the past hundred years or so humanity has consumed a lot of oil. At a rough estimate, about 1.5 trillion barrels of the stuff. That’s a huge quantity make no mistake. And of that, the vast majority has been what we call “conventional” oil. Unfortunately that’s a bit of a slippery term as it’s used both as a classification of oil, and also to describe the source of the oil. So, in the first instance conventional oil is a combination of crude oil and condensates which can be fed directly into conventional oil refineries to produce petrol, diesel, jet fuel, etc. Generally this stuff is sourced from shallow water (less than 180m) and land-based wells.

Unconventional oil is stuff that cannot be fed directly into conventional refineries and requires pre-processing of some kind. So we’re talking about tar sands, shales, gas-to-liquid products and coal-to-liquid products.

Complicating matters a bit, however, is the fact that the term “unconventional” is sometimes applied to oils that are sourced in deep water wells and Arctic regions despite the fact they can often be fed directly into conventional refineries. The thinking behind this classification is that both deep water and Arctic wells involve levels of expense (both financially and in energy expenditure) that place them closer to unconventional sources from both an economic and energy-return perspective than they are to – for example – crude oil from a Saudi land-based well.

Complicating matters even further is the fact that deep water oil is sometimes chemically different to shallow water oil due to the additional pressures involved. Therefore, to simplify matters it is normal to classify deep water and Arctic oil as unconventional along with tar sands, etc. Whether you agree or disagree with that classification isn’t really important so long as we clearly define our terms up front so everyone’s speaking the same language.

Peak oil (We are here)And it’s important because when we talk about peak oil, we are talking about an initial peak in conventional oil production followed by a subsequent peak in overall production. This detail almost never makes it into the occasional peak oil stories that appear in the mainstream media because… well, because the mainstream media has a pathological aversion to covering anything of importance in enough depth to actually explain the issue properly. The assumption is that the public is basically a bit thick and possesses the attention span of a gnat. And given the reading habits of the public and the way they vote… that may not be an entirely unjust assumption. But I digress.

If you read the more scholarly of the peak oil theorists (such as Dr. Colin Campbell of ASPO) you’ll find they tend to suggest that we can expect a peak in overall oil production between 10 and 15 years after a peak in conventional oil production. And given we now believe the peak of conventional oil was in 2006 or thereabouts (the International Energy Agency suggests it was 2009, but their optimism is renowned) we should prepare ourselves for the peak in conventional plus unconventional*. The reason for the lag of course, is because unconventional sources – such as tar sands, gas-to-liquids and biofuels are indeed coming on stream to meet a rise in demand that can no longer be met by conventional oil.

“But why”, you may ask, “can unconventional sources not continue to rise in line with a decline in conventional production? And why does conventional production need to decline right now anyway?”. After all, don’t peak oilers admit that we still have as much conventional oil underground as we’ve used in the past 100 years? Well, that’s true. A peak in conventional oil production means we probably still have about 1.5 trillion barrels of the stuff accessible to us. And when you add that to the new unconventional sources just coming on-stream now (those “massive quantities of tar sands” for example) it seems absurd to suggest that we’ve reached one peak and are nearing the next. And yes, it does seem absurd. That is, unless you know something about petroleum geology and the engineering challenges surrounding the pre-processing of unconventional oil sources. Most people don’t. Through a quirk of fate, I know a little.

Massive quantities of tar sands

Let’s take tar sands as an example. Ryan uses the phrase “massive quantities of tar sands […] which suddenly look economically viable”. Now, it’s worth pointing out that strictly speaking I dispute the notion that they are economically viable, though they can be made look that way (in the same way as sub-prime mortgages looked economically viable for a while) but I’m going to ignore that in this post. For the sake of discussion, let’s concede that they are indeed “economically viable” (i.e. some people might make a profit out of their exploitation, which – when all is said and done – is what that phrase means). It’s neither here nor there really, because they suffer from two huge flaws which makes them completely inadequate for filling the gap left by diminishing conventional oil production.

You see, despite having only extracted half the conventional oil from the ground, we cannot produce the remaining half at a rate of our choosing. As much as some economists might like to dispute this fact, oil production capacity is not exclusively determined by market demand. A drop in demand will certainly see a drop in production. But a rise in demand is not necessarily followed by a rise in production. Historically speaking that has been the case; and economics – of course – is essentially the mapping of past behaviour onto the future, so it’s no surprise economists believe rising demand will lead to rising production (for years the IEA merely relabelled demand forecasts as production forecasts!) However, when circumstances change within the physical systems upon which the economic system is based, then the historical model no longer applies and economics as a discipline gets blind-sided. This also explains why the markets are so bad at relaying the signs of the looming crisis… on the rare occasions those signs manifest, they get relabelled as something else.

But the physical systems have changed, and this has not been incorporated into the models used by economists, and by extension, those used by policy-makers. The geology of oil fields combined with the physics of fluid dynamics place certain limitations upon how fast we can pump the stuff. And crucially, once we have extracted roughly half the oil from a given field, the rate at which the rest can be extracted begins to steadily drop. This is simply down to internal field pressure. And while this pressure can be increased to an extent by pumping gas into the field, it should be noted that, with very few exceptions, Enhanced Oil Recovery (EOR) techniques** are already being used in every major oil field where they might be helpful, and have been for the past couple of decades at least.

Interestingly (and perhaps worryingly) while EOR can sometimes increase the amount of oil recoverable from a field, it also succeeds in recovering the stuff faster. So once half the oil has been extracted from a field without EOR, it might see a 2% per annum decline due to a drop in pressure. But for fields that make intensive use of EOR (i.e. almost all of them) that decline could be as much as 6% per annum post-peak (it varies from field to field). This is not a trivial point when it comes to the question of how far unconventional sources can make up for a drop in conventional.

So that’s one half of the picture… sometime between 2006 and 2009 (depending on whose figures you accept) we reached a peak in conventional oil production. That global peak may one day be represented as a 3 year plateau, or a 5 year plateau, or something like that… by definition the height and length of the peak can only be accurately described in retrospect. What we do know, however, is that during this peak in conventional oil production, unconventional sources are having great difficulty meeting additional demand. As a result, oil prices are rising once again.

Of course, oil price is determined by myriad factors of which production levels is but one. However, it is my contention that the situation in Iran – as one example of what’s being blamed for the price volatility – is, in part at least, an example of the “relabelling” I mentioned. In November 2011 OPEC increased output marginally – mostly down to Libya’s production coming back up to speed – but still managed to squeeze out less than a million additional barrels per day despite a huge effort and despite rising demand – the world is currently consuming about 90 million barrels per day (mb/d). And we know that this increase failed to meet demand because global industry stock (strategic reserves of already-produced oil) declined steeply in October and November.

So why are unconventional oil sources not ramping up to meet increased demand?

The two fatal flaws in tar sands

Pollution from tar sands production

Image courtesy of National Geographic

Let’s assume we don’t give a damn about the environmental consequences of our resource consumption. We do, of course, because the species that destroys its environment destroys itself. But for a moment let’s forget the fact that tar sands have been (accurately) described as the most environmentally damaging source of oil known to man. This photograph is of one of the numerous “tailing ponds” springing up in the Alberta region of Canada as they exploit their massive reserves. These lakes of effluent are growing rapidly and nobody seems very sure what to do with them (best not to do an Image Search for “tar sands” if images of ecological madness freak you out).

But for now, although we don’t care about that, it might be worth bearing environmental consequences in the back of our minds as we compare the processes of producing a barrel of oil from Canadian tar sands to the process of producing a barrel of Saudi crude oil.

In the case of the Saudi oil, we drill a hole into the ground above the oil field. The internal field pressure then pushes the oil up to the surface where we catch it and send it to refineries. After a while the pressure drops a little and we expend energy to pump gas into the field and keep the oil flowing. Ultimately we get far more energy from the oil gushing out of the ground than we consume during the drilling and refining processes. If it weren’t for the crap produced when we burn the stuff, it’d be free energy near as dammit.

With tar sands, the first part of the extraction process generally consists of chopping down a forest. After that’s been done, we begin the extraction not by drilling, but by mining. It takes approximately two tons of tar sand to produce every one barrel of oil. And in order to access the two tons of tar sand, we must first excavate roughly two tons of soil and peat. We then need to heat three to six barrels of water (this heat tends to be generated by burning natural gas) which is passed through the tar sand to remove the bitumen. That polluted water is what makes up the growing tailing ponds. Three to six times the volume of the oil produced.

So I’m sure you can see the fatal flaws, right?

Firstly, the mining and pre-processing of the tar sands cannot be done at anything like the rate that conventional oil gushes from the ground. According to one peer-reviewed feasibility study (A Crash Program Scenario for the Canadian Oil Sands Industry) from Uppsala University,

Unfortunately, while the theoretical future oil supply from the oil sands is huge, the potential ability for the Canadian oil sands industry to meet expectations of bridging a future oil supply gap is not based on reality. Even if a Canadian crash program were immediately implemented it may only barely offset the combined declining conventional crude oil production in Canada and the North Sea. The more long-term oil sands production scenario outlined in this report, does not even manage to compensate for the decline by 2030. […]

The study goes on to point out that the IEA (who are nothing if not optimistic about future projections) forecast that the drop in global conventional oil production means unconventional sources will need to make up a shortfall of 37 mb/d by 2030, and that

Canada has by far the largest unconventional oil reserves. By 2030, in a very optimistic scenario, Canada may produce 5 mb/d. Venezuela may perhaps achieve a production of 6 mb/d. Who will be the producers of the remaining 26 mb/d? It is obvious that the forecast presented by the IEA has no basis in reality.

Graph showing impact of Canadian tar sands production on global peak oil

Likely impact of Canadian tar sands (in red) on global oil peak.
Image courtesy of ASPO.

As if that weren’t enough, it’s worth mentioning that the ERoEI (Energy Returned on Energy Invested) for tar sands currently tends to be between 1.5 and 4 (industry forecasts suggest it might rise as high as 7 when the process is running at maximum efficiency). That’s as compared with between 30 and 100 for conventional crude. So even taking a best-case tar sand versus a worst case crude, the net energy content of a barrel right now is between 7 and 8 times less. And even if industry forecasts are correct, that number won’t dip much below five.

And then there’s the second fatal flaw with tar sands. Exactly where is all the fresh water and natural gas required to process the stuff going to come from? These are not superabundant resources. Not any more at least. And a significant acceleration of tar sands production will have a very serious impact on Canadian water tables and gas supply. When Uppsala University describe Canadian tar sand production as reaching 5 mb/d as being “very optimistic”, they are being very generous. Alberta’s natural gas production has already peaked. So in order to ramp up production of tar sands – even by a little bit more than the current 1.5 mb/d – Canada will have to export less gas to the United States. And this presents serious economic and legal problems given the terms of NAFTA and the long-term contracts into which Canada has entered.

And natural gas supply may not even be the major constraint. Currently (at 1.5 mb/d) the Canadian tar sands industry is draining in the region of 50 billion gallons of water from the Athabasca River every year. That accounts for about 10% of the total water consumed by the North American oil industry. From a water perspective it is staggeringly inefficient, and is roughly 30% of the water that environmental surveys suggest is available for use and for which they are licensed to use. So there are very good reasons to suggest that Canada’s tar sands production can never rise above 4.5 mb/d and is likely to remain significantly below that level.

So don’t believe the mainstream media hype about the “massive quantities of tar sands” and their role in making up for losses elsewhere. It doesn’t matter if there are 1.7 trillion barrels of the stuff in central Canada. The fact is that due to well-understood if under-publicised physical constraints, it seems extremely unlikely those sands will ever be capable of providing more than about 4% of current demand (and a far smaller proportion of forecast demand). And given how much hope is being invested in those sands to mitigate our looming oil shortage, I would suggest, that’s a pretty clear sign “of this energy crisis arriving soon”.

* My reading, incidentally, is that non-geological factors will ensure the overall peak happens a little earlier than 10-15 years after the conventional peak. For about 12 years I’ve been calling the overall peak at 2015 (plus/minus 5 years) and in principle I stick to that. But I’m now suggesting that estimate can be refined a little and believe we can say it’ll be plus 3 /minus 4 years. Sometime between this year and 2018.

** Gas injection is just one of a variety of EOR techniques.

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Dec 2011

Join up your thinking, Mr. McWilliams

Today I was reading an article (There is Another Way) on David McWilliams‘ website and I found myself mentally stumbling over a particular line. It’s about halfway through the piece… “economies grow because of the human capital of the societies”, he says.

Now, I like David McWilliams. He’s probably the most famous of Ireland’s celebrity economists, but don’t let that put you off. I certainly don’t agree with everything he has to say. And if, for example, we were to reduce things to the simplistic left/right dialectic that I generally try to avoid on this blog, then it’s safe to say that I’d be a good deal to the left of McWilliams. Beyond that, although he is one of the most vocal opponents of the current austerity orthodoxy, he still retains far too much of the dogma of mainstream free-market economic theory for my liking. Nonetheless, he was one of the very few economists to publicly warn of the financial crisis quite a while before it hit… a fact that – along with his likeable media persona – has garnered him the celebrity status he currently enjoys. He also organises the Kilkenomics Fesital which, although I’ve not been to it myself, sounds like a splendid idea (high-profile economists and well known stand-up comedians are invited to take part in performances, public interviews and conferences… a most appropriate combination of participants).

Earlier this year, at a conference called European Zeitgeist 2011, McWilliams was asked about the “bail-outs” that have been received by three (so far) EU members. His response succinctly sums up the sensible position on the subject…

However, regardless of his likeability and sensible views on the current financial crisis, David McWilliams still falls into the great trap that pretty much every economist of note succumbs to… to use the language of Systems Theory, he confuses the map with the territory. That is, he tends to see economic analysis as descriptive of the real world as opposed to merely being a model of it… and a flawed one at that. The distinction may be a subtle one, but it is massively important.

A couple of months ago, McWilliams hosted an online seminar (or “webinar” to use the parlance of our times) in which he gave a short lecture on the European crisis and then responded to questions from the disembodied audience. I put my question to him. Now, regular readers of this blog could probably guess what I asked with a fair degree of accuracy, but for the rest of you, it went something like this… “David, while acknowledging that the current financial and economic crisis is a real problem, what do you say to people who suggest it is but the tip of the iceberg; that a far more serious issue is that of resource depletion – in particular, but not limited to, peak oil – and that this will result in a near-term crisis that will make the current one look positively modest in comparison?”

To his credit (and my surprise), his response essentially acknowledged that there was a lot of truth in my suggestion and that the global economy may well experience very serious shocks as a result of resource depletion in the not too distant future. The reason for my surprise was not simply the fact that most economists fail to make that map / territory distinction and therefore completely forget that economics is no more than a conceptual model of a physical world and that economic laws and theories are only accurate insofar as they tally with the laws of physics. That they are essentially descriptions of past events and cease being at all relevant when the physical conditions of the world they describe change radically. No, I was also surprised because McWilliams makes little or no reference to the notion of resource depletion in anything he writes.

This is why I get frustrated when I read statements like “economies grow because of the human capital of the societies”. McWilliams is a very smart man and appears to acknowledge the near-term possibility of a radical change in the physical conditions within which human society – and therefore economics – must exist. The depletion of oil and other petroleum products is a complete game changer. And it makes statements such as the one about human capital completely redundant. While the statement may be (indeed, is) relevant in a world where the availability of cheap energy is a given, it is nonsense in a world of diminishing energy supply. In that world, economic growth is entirely dependent upon access to that diminishing supply of energy.

This is because an economy is – in very rough terms – the amount of work occurring within a society. Some would insist that should be restated as “the amount of productive work occurring within a society”, but that’s not the case because, in practice, many people are paid for unproductive work and that money is still part of the economy. But what is “work”? Well, a definition from a Business Studies course might claim that work is “paid employment at a job or a trade, occupation, or profession”. And that’s all well and good for passing your end of term exam, but if economies are built on physical systems (which in the final analysis, they are) then it’s really the physical definition of work that’s important. And while the most mathematical of definitions is the somewhat abstract “work is the product of a force times the distance through which it acts”, we only have to wander as far as the First Law of Thermodynamics to find work equated with energy. Indeed energy is defined as “the ability to do work”. Therefore, with decreasing energy resources comes decreasing work.

This is something that cannot be avoided and something we desperately need to start facing up to. Every available piece of data seems to point towards the fact that we have already passed peak oil (2006 seems to be the agreed year for a peak in conventional crude oil). Indeed, this is playing a not insignificant role in our current economic problems, and yet we are still at the very beginning of the resource depletion crisis. Each moment we continue to wilfully ignore this issue is a moment spent making the problem worse. Which is why people like David McWilliams; intelligent people with a public platform who are apparently aware of the looming crisis; should be talking about it. They should be shouting it from the rooftops until they’re hoarse.

What they shouldn’t be doing is insisting that despite the current downturn, despite the currency problems and despite the issue of unsustainable debt, the underlying structure of the world is the same as it ever was, and that a return to growth is just around the corner if we simply make better economic and financial decisions. Because ultimately that is what “economies grow because of the human capital of the societies” translates into. It is a statement that reflects a deep economic orthodoxy and that’s something we just can’t afford right now.

Disclaimer: I’m off down to Cork to spend the Yuletide with my family tomorrow but wanted to get this piece done while David McWilliams’ article was still relatively fresh. In truth it’s a bit of a haphazard blog entry. It’s a bit hurried and could definitely have done with gestating a while longer. But what can you do?

For those who don’t immediately see the link between oil depletion and a reduction in available energy, check out my most recent article on Peak Oil which may (or may not) explain things. See: Peak oil revisited (part 1).

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May 2011

On hearing the news from Greece

The dream of a united Europe is one I share. Hell, I’d extend it further… a world without borders would be a glorious thing. Imagine there’s no countries.

But sadly that original European dream, first envisioned after two world wars had ravaged the continent, has been hijacked by financial institutions and the forces of the free market. It has become simply a mechanism by which the rich and powerful use the sweat and blood of the masses to lubricate the machinery of capitalism and further entrench their wealth and power. Some have said that it was ever thus. That the European dream was always just a way for the few to prosper at the expense of the many. But I don’t believe that. The remnants of my erstwhile idealism still provide enough of a reminder that sometimes we people do things for the right reasons. That it’s not always craven and manipulative self-interest that drives us.

But who today can still place their faith in the European dream? As our governments collude with private capital to heap unearned debt onto the shoulders of the masses, who can now believe that this once great project still has The People at heart?

Greek 2 euro coinWhich is why I do not lament the first fractures appearing in our continental unity. The past few days have heard furious denials from Athens that the Greek government is considering withdrawing from the single currency. Our political classes don’t seem to realise that we have become familiar with the pattern… first the denials (that there’s a problem, that the banks are in trouble, that we need an IMF bailout) and then the reluctant embrace of that which was denied.

The Greeks deny any such idea is being considered or has been discussed. Others suggest that it has been discussed but that it’s merely a negotiating ploy to put pressure on the IMF and ECB to soften the terms of the bail-out. Either way, it’s causing problems for the single currency and we’re hearing rumours of frantic secret talks aimed at holding the Euro Zone together.

I know people who will gleefully cry “I told you so!” And hey, let them have their whoop. Those who predicted the single currency would fail look like being right. Though the sad thing is… it wasn’t inevitable. Just as with the European dream as a whole, I kind of like the single currency idea. I think it would work better in tandem with ultra-local currencies built on a date-limited model, just as I think government works best as a combination of the ultra-local and supranational with little need for the middle tier. But sadly, although it was not inevitable, it looks as though we are fast approaching the fragmentation of the euro. I imagine it will be retained by a smaller “inner circle” of nations, but those of us on the periphery (Greece, Portugal and Ireland to start with) will find ourselves forced to withdraw unless an agreement to write-off the vast majority of our debt is reached. And while that’s still a possibility, I’m not holding my breath.

Put simply, the repayment of our debt (especially when you chuck in the massive bank debts run up here in Ireland that have been immorally thrust onto the public) will be impossible without massive economic growth, akin to that experienced in the late nineties / early noughties. And that’s not coming back. In fact, we are entering a period of long-term economic contraction which will be caused by resource depletion. By 2015 (and probably a lot sooner) economic growth in Portugal, Greece and Ireland will be at an end for the foreseeable future. The only possible way to repay our debt at that point will be to withdraw from the single currency and rapidly devalue our local currency.

This need not lead to massive social problems in itself (if done right) though the root cause of the trouble – resource depletion (particularly but not limited to peak oil) – inevitably will. I still see Ireland as a better place to weather the coming storm than most other places… but only if we grasp the bull by the horns and begin a massive peak oil mitigation strategy in the near future. Our current government don’t possess the vision or the competence to journey that particular road, but I don’t expect them to last the full term. We may have another roll of the dice sooner than we think.

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May 2011

Here comes the future

If you know me at all, you can probably imagine that I keep a watchful eye on energy related news stories. And what with google alerts and RSS feeds, that’s not all that difficult to do. Over the past few weeks, however, a difficulty has arisen. Put simply, there’s just not enough hours in the day to keep up with the recent flurry of activity in the sector. In fact, there are considerably more “peak oil”, “renewable energy”, “tar sands” and “gas pipeline” stories right now than at any time I can remember. More even than when oil prices were rising towards $150 per barrel a couple of years back. So what’s the reason for all this activity?

Well, it seems as though the reality of peak oil is finally beginning to sink in. Not that it’s made it onto the front page of The Sun yet… but while the popular media is obsessing about the Royal Wedding, furrowed brows are appearing elsewhere as what was once a fringe theory preached by a handful of lunatics has finally been accepted by those who once derided it.

Ugly as the words may sound and however petty they may make me seem, I’m going to say this once and then move on… I told you so!

Ahhh… it feels good to get that off my chest, even if it implies some terrible things.

Welcome aboard: IEA

IEA logoThe International Energy Agency has been hmm’ing and hah’ing about their forecasts over the past couple of years. Roughly three years ago, even as oil prices rose to unprecedented levels, the IEA was predicting a steady rise in oil production until at least 2030. Careful analysis of their production forecasts seemed to suggest, according to ASPO (the Association for the Study of Peak Oil and gas) that the IEA was essentially relabelling oil demand projections between now and 2030. Think about that… the international agency that advises the majority of major governments on energy policy was simply asking “how much oil do we want?” and then telling everyone that’s how much oil would be produced. There was apparently no attempt to match their production forecasts to the real-world capabilities of the oil industry. Their projections were based purely on economic data rather than geological or engineering data. And unsurprisingly these projections turned out to be even more optimistic than those coming out of BP, which if you’ll recall are little more than political artefacts designed by OPEC nations to maximise oil revenue.

Recently this has begun to change. And now the IEA is back-pedalling furiously and seems to be sounding alarm bells – albeit rather quiet and diplomatic alarm bells. Dr. Fatih Birol is the Chief Economist at the International Energy Agency. In a recent interview, Birol stated that he believes global crude oil production peaked in 2006. Yes, you heard that right. We passed peak about 5 years ago according to the the IEA.

An Australian TV company made a short film (it’s a shade over 12 minutes) about peak oil which includes that interview. I recommend you take the few minutes to watch it; it’s sobering stuff. I’m particularly gob-smacked by his final remark, right at the end of the film, when asked how urgent the problem is. He responds by suggesting that “time is running out […] I think it would have been better if governments had started to work on this at least ten years ago”. This from a man who was insisting, up until three years ago, that there was no problem!

Don’t get me wrong, I’m happy that the man and his agency have seen the light, but frankly I think a Mea Culpa might be in order given that plenty of people were arguing this very point ten years ago and the IEA was lambasting them as fools while cautioning governments to ignore them.

And welcome aboard: IMF

IMF logoYes indeed. It’s not just the IEA who has suddenly realised “whoops!” During the past seven years or so we’ve had an acknowledgement of a serious problem from the US Department of Energy (see the graph on this page for their latest projections), the US Defence Department and at least two specific branches of the US military. The Irish and Swedish governments both received comprehensive reports detailing the problem (the Swedes acted on it, the Irish built a motorway system and had a property bubble) and about a dozen other non-fringe organisations have sounded caution. A few days ago these organisations were joined by one of the heavy hitters… the International Monetary Fund.

In the April 2011 World Economic Outlook report, the IMF have starkly stated that they expect global oil shortages “within a year”. This tallies with the predictions of the US Defence Department who claimed that we would see “significant supply constraints” by the middle of 2012. The IMF report tries not to sound too downbeat and claims that so long as the oil supply falls gradually it won’t be too big a problem. I have two points to make regarding this claim… first, it won’t drop gradually. Once the reality of the situation kicks in there will be a variety of dramatic responses (producer nations hoarding, rich importing nations trying to buy up available supply on long-term contracts, invasions and wars) which will prevent a gradual reduction in supply. I would suggest that this has already begun in some quarters and we’ve not seen the half of it. Second… even if it did drop gradually, it would still be a big problem.

So although – like over at the IEA – some of this is starting to sink in at the IMF, they still can’t see beyond their free market ideology. And I’m afraid it simply does not work in the arena of essential non-renewable resources. Future generations will view the free market in natural resources as possibly the single most stupid thing ever to have emerged from the human mind. I know some intelligent, decent people who read this blog and subscribe to the notion that a free market in non-renewable natural resources is a good idea. It’s perfectly possible for smart people to have some stupid ideas. And selling natural resources into the open market for profit is a stupid idea.

Anyway you can read more about the IMF’s eleventh hour conversion over at crudeoilpeak.com (IMF warns of oil scarcity and a 60% oil price increase within a year). And here’s a link to the original (and lengthy) World Economic Outlook report (PDF, see Chapter 3).

And joining us tonight: GMO Capital

GMO Capital logoIf you thought the IEA and IMF were surprise guests at the peak oil awareness gig, an even bigger surprise – in its own way – is GMO Capital. These guys are a global investment management firm controlling over a hundred billion dollars in assets. While the IEA and IMF are international agencies that advise governments and proselytize about the wonders of the free market, GMO Capital pretty much are the market. Or a bit of it anyway. In a sense. Oh, you know what I mean.

Anyway, one of the most remarkable essays I’ve read over the past while comes from Jeremy Grantham, the Chief Investment Officer of GMO Capital. Not because of what is says per se, but because of who is saying it. You can read the article at the GMO website (PDF). In essence the article claims that the past 100 years of market-led growth and prosperity is about to come to a crashing end. It’s remarkable stuff considering who wrote it and the audience it’s aimed at (GMO Capital’s investors). Well worth your time to read, or even just skim.

And so it goes

Elsewhere in the news we read about wind farms being paid to shut down because the national grid cannot absorb the power they are producing. The first thing to be said about this is that these payments represent a clear failure in grid management and this needs to be addressed. The second thing that needs to be said is that the BBC should be ashamed of itself for allowing almost half the article to be dominated by the REF. The REF (Renewable Energy Foundation) is a lobbying organisation founded by… wait for it… Noel Edmonds, and has been described as “an anti-wind lobbying organisation”. It’s been suggested that “they actually exist to undermine Renewable Energy – in that respect their name is a deceit”.

In reality we have two choices… we can either embrace a mix of renewable energy solutions (wind, wave, tidal, solar, etc.) or we can resign ourselves to a life without electricity. Whatever George Monbiot and others might claim, nuclear power is simply not the solution to our energy problems. The reasons for this are outside the scope of this blog post, but essentially it is not a sustainable solution, and replacing one unsustainable energy system with another unsustainable energy system is sheer madness. Especially given the massive energy expenditure it would take to do so. We have one more roll of the dice with regards to building a new electricity supply system (the problems of transport and the other uses of petrochemicals still seem insoluble to me, but we can at least keep the lights on and the refrigerators running) and wasting our remaining fossil fuels building a network of nuclear power stations destined to fail is a recipe for disaster.

Instead we need to rethink our consumption patterns. We need to build far more storage into the grid to cope with excess production. We need to massively increase the geographical spread of our renewable energy infrastructure to reduce the “calm day” effect. And we need to ignore the petty grievances of TV presenters with a personal axe to grind. I accept that, aesthetically speaking, wind farms aren’t to everyone’s taste (I think they look great, but that’s just me). But if we want to keep the lights on in a world faced with Climate Change and fossil fuel depletion we need to get past that.

The last thing I want to say here is that I expect to be hearing a lot more about “shale gas” over the coming months. Already China is looking towards it (PDF) as a solution to a decline in global oil supplies (once again, the notion that replacing one unsustainable resource with another, albeit a slightly more abundant one, is being described as “a solution” dismays me). Few things, however, give me the screaming heebie-jeebies as much as the thought of a massive expansion in shale gas production. It may well be the only fossil fuel that’s ecologically worse than tar sands from an extraction and production standpoint. Both tar sands and shale gas production have the potential to massively accelerate fresh water depletion, as well as lay waste to vast areas of the planet.

Fact is, in the face of peak oil we need to start looking at reducing our energy consumption. Every other option leads to disaster.

8 comments  |  Posted in: Opinion

Mar 2011

An aggressive response to tyranny

Over in the UK the climate and energy secretary, Chris Huhne, has given a speech in which he warns of a “possible 1970s-style oil shock“. Meanwhile here in Ireland, as Labour and Fine Gael continue their coalition negotiations, rising oil prices look certain to provide the new government with its first serious challenge, even as the IMF/EU “bail-out” drags us into bankruptcy.

On the subject of the “bail-out”, German chancellor Angela Merkel insisted a couple of days ago that there was little room for renegotiation. There’s a hint that interest rates might be reduced very slightly, but it would be a token gesture and one that will have no real impact on Ireland’s future (though you can bet that Enda Kenny will be hailing it as a massive success… it’ll be his “Peace In Our Time” moment and it’ll happen right at the start of his leadership). Instead, the financial institutions of Europe, backed by the most powerful governments, are demanding that the Irish people pay for the reckless behaviour of private institutions over which they had no control. It’s beyond the merely unjust and enters the territory of tyranny. An aggressive response isn’t merely appropriate, it is damn near obligatory.

But what should that response be?

The first thing that should be done is the Irish Central Bank should begin printing large numbers of new banknotes. Or rather, old ones… the Irish punt. These should be held in reserve in the event we need them. The government should then send a negotiating team to Strasbourg, Paris and Frankfurt and explain that the Irish people will not accept the tyranny being imposed upon them. We have run up a large sovereign debt and will repay that, as we should. However, we simply refuse to force private debt onto public shoulders. The choice then lies with Europe…


They can accept our position, in which case Ireland will endeavour to reduce the public deficit — which will still involve hardship for the Irish people, no question about it — and repay the sovereign debt in euros. Meanwhile the institutions of capitalism which made disastrous bets on the Irish property boom will have to accept their losses. As is morally and legally right.

Or they can reject our position; in which case we will unilaterally default on the bank debt anyway, and repay our sovereign debt in punts.

I’m not suggesting that the transition out of the euro would be painless. Far from it. It would be bumpy and involve a hell of a lot of obstacles. But I genuinely believe that the alternative — accepting the legitimacy of transferring private debt into the public domain — will be far worse. I also believe, were we to adopt the aggressive position I suggest (a position that merely mirrors the tyrannical position being adopted by Europe towards us, let us not forget) there’s a better than average chance that Europe will acquiesce to our demands. A unilateral decision to default on the debt and pull out of Europe will ultimately, especially in these rather skittish times, do plenty of damage to the European project, as well as to Ireland.

Again, let me stress that I take no pleasure in suggesting this course of action. If you’ve read my piece on The Maastricht Treaty, you’ll know that I am very much in favour of the spirit of the European Project. But it also seems to me that so long as Europe is being run in the interests of financial institutions rather than the citizenry that an oppositional stance is required.

And the oil price?

Ah yes, the added wrinkle. The price of oil is on an upward trajectory again. Instability in the Middle East and North Africa is certainly contributing to this, but that’s far from being the whole story. The truth about exaggerated reserves in OPEC nations is finally beginning to filter out, while other countries are also seeing a faster than expected fall in both reserves and production capacity. On top of that (and not entirely unrelated to it), global food prices have now reached record highs.

Both of these developments suggest a clear strategy for the incoming Irish government who will simply not be able to rely upon the economic growth forecasts it is basing its already absurdly optimistic figures on. Firstly, the Irish agriculture sector needs to be expanded. This should not be rocket science for a country that was primarily agricultural up until very recently. Given that rising oil prices will make the mechanisation of farming more expensive, farmers should be given incentives (perhaps in the form of employer tax breaks) to hire additional labour.

At the same time, significant incentives should be provided to companies to set up wind and wave energy projects. These incentives could include things like employer tax breaks (again) and even tax-free profits for the first year after the farm repays its set up cost. On the one hand, yes, this would be loss to the treasury (though I prefer to see it as a non-upfront investment in the project) but the gains — in terms of employment / getting people off the dole and training them, plus the long-term advantages to the national infrastructure — will more than pay for this.

Our government should be doing all of this, as well as announcing a national emergency strategy that is ambitious and infused with real vision. It should commit itself to an Ireland that can feed and power itself, without recourse to imports, by the time it leaves office. Which is definitely not to say that Ireland should be looking to remove itself from global trade. Merely that Ireland should accept that in a world where the global markets in food and energy resources have become impossibly volatile and are likely to put even the wealthiest nations under strain, that as a small, fertile, sparsely-populated island we are in an almost unique position to take control of our own destiny. And far from trying to weather the approaching storm, we should be looking to disembark the leaky ship of international capitalism and take shelter before it hits.

Of course, our government hasn’t got the intelligence, the vision or — let’s face it — the balls to pursue such plans. Will the next one? I can only hope so.

4 comments  |  Posted in: Opinion

Feb 2011

Wikileaks on Peak Oil

If you’re even vaguely familiar with my blog, you’ll be aware that I bang on about Peak Oil quite a lot. One of the things I repeat again and again (and again) is that since the mid-1980s we have been comprehensively lied to about the size of global oil reserves. I won’t go over the issues surrounding overstating reserves again, as I covered them quite recently (the second of those “agains”), but I will stress the incredible importance of this issue. Official reserve estimates predict production capacity will be unable to meet demand in somewhere between 20 and 40 years. Almost everyone who has tried to look beyond those official estimates comes to the disturbing conclusion that production shortfalls will be upon us pretty much any day now.

Petrol prices

Today, as more Wikileaks cables were made public, comes confirmation that Saudi Arabia has been overstating reserves by as much as 40%. This is one of those cases where being proved right brings no satisfaction, but rather a deep sinking feeling. Especially since it’s worth pointing out that there’s very little doubt that this revelation also applies to every other member of OPEC. It’s very grim news indeed and pretty much puts an end to any chances of “a return to growth”.

Given that, in practical terms, economic growth is now a thing of the past*, we need to focus on three things. And we need to do so urgently.

  1. What resources remain need to be poured into sustainability projects. Renewable energy infrastructure, localisation of food production, radical scaling back of consumption;
  2. The replacement of a growth-centric economy and debt-driven financial system with a system that can cope with — even thrive in — an environment where economic activity is minimised rather than maximised;
  3. We must actively pursue ecological wisdom as an absolute priority — both in the obvious sense of environmental protection, but more importantly in the sense of understanding and acknowledging our place within the natural systems of our planet. The world is barrelling towards a crisis, and if we do not wake up to our grievously flawed epistemology, we simply will not survive it.

* which is not to say there won’t be anomalies and brief spikes on the downward trend.

6 comments  |  Posted in: Opinion

Jan 2011

Where’s the rest of the oil?

Yesterday an article appeared in The Independent over in the UK with the title, Where’s the rest of the oil? As is the case with so much written in the mainstream media about this subject, it’s yet another piece riddled with misunderstandings, factual errors and untenable conclusions by a business journalist with little or no insight into the oil industry. Not that everything in it is wrong, but there are enough basic mistakes and research failures to cause one to despair that this should have appeared in the “Analysis and Features” section. If this is the best analysis that The Independent can muster, it calls the entire publication into question.

The article begins thus:

When BP first formed an alliance with Rosneft in 1998 to develop the Sakhalin fields in the Pacific Ocean, the UK oil giant estimated Russia’s oil reserves at 56 billion barrels.

When BP agreed its share-swap with the Moscow-based energy group last weekend, the estimate was 75 billion barrels, and development of Rosneft’s licences inside the Arctic Circle could increase production enormously.

Such advances undermine the pessimists’ predictions that the world’s oil will imminently run out. In 1956, when the concept of “peak oil” — the point at which production starts falling — was formulated, US output was expected to fall from the late 1960s. But new discoveries have constantly pushed that date back. BP was estimating world oil reserves at 1 trillion barrels 20 years ago: now, despite record consumption, the estimate is 1.333 trillion.

Richard Northedge | Where’s the rest of the oil?

Three paragraphs in and already three problems; one glaring factual error, one obvious misinterpretation and one example of questionable judgment.

One example of questionable judgment

Firstly there’s the issue of Reserve Growth (first and second paragraphs plus the end of the third). Now, this is something I’ve covered several times before but it’s something that bears repeating as it cuts right to the heart of the oil depletion issue.

Every year BP publish their “Statistical Review of World Energy” (link to 2010 edition). This publication — or collection of publications — tends to get picked up by journalists and economists and taken at face value. This is a terrible mistake on their part and illustrates the “questionable judgment” I mentioned. It reveals a failure to investigate the methodology behind the Statistical Review of World Energy and a blind acceptance of data presumably by virtue of it having a corporate source. One wonders whether these journalists believe everything they see in advertising too… for instance, does Richard Northedge actually think BP have moved “Beyond Petroleum”?

For those who haven’t read my previous stuff on the Statistical Review of World Energy (Energy Review), let me explain why it’s not to be taken at face value. The data within the Energy Review is broken down by country. And it is generated not by some kind of geological analysis but simply by asking the governments of each country to state their oil reserves without any independent audit or verification. This might be an accurate enough method if countries had an incentive to be honest about their reserves, but in fact the opposite is true and the majority of oil producing countries have a massive incentive to inflate their stated reserves. This fact alone should make any journalist hesitate before basing their analysis on the BP Energy Review, even before they take the time to investigate the effect this incentive has had on the reporting of historical reserves.

In the early 1980s OPEC introduced production quotas based upon “proven reserves”. This sounds solid enough until you realise that “proven reserves” actually means “stated reserves” in countries that have not implemented an independent auditing system (i.e. most of them). In effect, the more oil an OPEC member claimed to have, the more it was permitted to sell and consequently the more money it made. If you download the historical reserve data (Excel Workbook) you can clearly see the result this had on the stated reserves of OPEC nations. Check out the page in the workbook entitled “Oil – proved reserves history” and pay particular attention to what happened in the 1980s just after the new quota system was introduced.

Some examples… in 1986 Iran’s reserves jumped from 59 billion barrels (bb) to 93bb. They then remained identical for the next 7 years (implying that Iran somehow managed to discover exactly the same amount of oil per annum as they were producing) before starting to creep up again. A couple of years later, Saudi Arabia’s oil reserves leapt from 170bb to 255bb and has remained pretty much constant ever since. The same pattern can be seen across most OPEC nations. Venezuela doubled its reserves in 1985. Yemen doubled in 1986 and again in 1987. In 1986 UAE trebled their reserve estimates. And in the subsequent 25 years, no OPEC nation has significantly revised their reserves downwards (in fact many of them, as with Iran, simply report identical reserves for years on end).

If you believe that every OPEC nation somehow managed to discover as much new oil as they already possessed in a two year period in the 1980s just at the precise moment they gained a huge financial incentive to overstate their reserves, then may I suggest a certain level of naivety on your part. Particularly as there’s no actual evidence for a massive series of discoveries at the time and no parallel discoveries outside the OPEC nations.

As well as the OPEC nations, in recent years Russia has also found itself with an incentive to overstate reserves in the form of inward investment in oil and gas infrastructure that naturally increases in direct relationship with their claimed reserves. Tellingly, there is also no official independent auditing of Russian reserves.

What this means is that while I cannot say with any certainty that Saudi reserves (for example) are significantly lower than those stated in the BP Energy Review, I can state with confidence that relying on the accuracy the BP Energy Review is a very foolish thing to do. When Richard Northedge says that “BP was estimating world oil reserves at 1 trillion barrels 20 years ago: now, despite record consumption, the estimate is 1.333 trillion” it’s not a revelation of growing reserves but of the complete nonsense of reserve reporting.

An examination of the reporting of those nations with transparent reserve auditing procedures reveals a telling contrast. Norway’s reserves grew gradually in the 1980s, hit a peak in the year 2001 and then entered decline. This completely tallies with what we would expect given a basic understanding of petroleum geology. There are no sudden doublings and treblings of reserves. No decade-long periods of unchanging reserves. Just a gradual rise, a peak and a gradual decline. Only two weeks ago, in fact, Norway announced a further reduction in reserves based upon falls in new discoveries and a downgrading of existing fields. The fact that every nation with transparent reserve accounting demonstrates this behaviour, while nations that lack independent auditing and have financial reasons to lie demonstrate the complete opposite should surely ring alarm bells for any half-decent journalist or analyst.

One obvious misinterpretation

In the third paragraph Richard Northedge writes of “pessimists’ predictions that the world’s oil will imminently run out”. I’d challenge him to provide one example of a serious analyst who makes such a prediction. In reality no such analyst exists. The claim that we are approaching peak oil is not a claim that we are about to run out of oil. The clue is in the name… peak oil. To suggest that those of us who have been banging on about peak oil for the past 14 years are predicting “the world’s oil will imminently run out” is a complete failure to understand what peak oil means.

Peak oil (We are here)

Peak oil is quite simply the point at which oil production peaks and enters terminal decline (see, I told you the clue was in the name). What’s interesting is that it actually occurs at around the point that half the oil has been extracted from a given well, field, nation or planet. So when I say we have passed the peak of global oil production (which I believe probably happened about 4 years ago), I’m not saying we’ve run out of oil. I’m saying we’ve used up half of our oil.

The reason this is important is because once you reach the halfway point, the flow of oil drops off. This is down to the basic physics of oil reservoirs and there’s just not much that can be done about it. It’s also important because from that point forward, every barrel takes incrementally more energy to produce. This is one of the things that so many people fail to realise about “non-conventional oil sources” such as tar sands, oil shales, deepwater and polar oil reserves… just like crude oil from a post-peak well, they require far more energy to extract than the oil we get from a pre-peak conventional well.

Take, for example, a relatively young field in the Saudi desert. From extraction through to the refinery and beyond, we might get a hundred barrels out for every one barrel (energetically speaking) we put in. In energy terms this is known as EroI (Energy Return on Investment) or sometimes NER (Net Energy Ratio). Clearly as the ERoI of a given energy source falls, the less economically useful that source becomes. So peak oil not only means there is physically less oil available, but that more of the oil that is available is going back into producing oil (as opposed to fueling our cars, our factories and our farms).

Because oil is by far the most economically important fuel available to us (and not just in terms of fuel, but also as a raw material for a vast array of products), a reduction in available oil ultimately translates to a reduction in economic activity*.

Now, in fairness to Northedge he does correct this misinterpretation later in the article when he discusses the idea of peak oil in more depth, but the way he expresses himself in that third paragraph does a massive disservice to the entire debate around this vital issue and is sloppy at best, and at worst is biased. Even the word “pessimist” is value laden and has no real place in this discussion. There are low reserve estimates (usually produced by petroleum geologists) and there are high reserve estimates (usually produced by economists and politicians). To suggest that the low estimates are “pessimistic” is to imply that there isn’t a coherent methodology behind them, and that they are at least partly the result of personal disposition.

This is not the case. Indeed the “coherent methodology” is all but denied by Northedge when he writes: In 1956, when the concept of “peak oil” — the point at which production starts falling — was formulated, US output was expected to fall from the late 1960s. But new discoveries have constantly pushed that date back.

One glaring factual error

The concept of “peak oil” was first proposed by M. King Hubbert in the 1950s. He was a respected petroleum geologist working for Shell Oil in Houston and his position gave him access to US oil reserve data. Hubbert first observed the rate of oil production for a specific oil well and graphed this data. This became known as the Hubbert curve and has been verified as accurate hundreds, if not thousands, of times with respect to individual wells. He then extended this model to a given oil field where it was also verified as accurate. Ultimately, taking the data from every US oil field (excluding Alaska) he extended the model to the entire continental United States. The curve predicted a peak in US oil production “around 1970” (there’s always a small margin for error when dealing with massive amounts of geological data).

What’s remarkable is just how small that margin for error actually was. US oil production in fact peaked in 1971/72 contrary to Northedge’s puzzling claim that “new discoveries have constantly pushed that date back”. That’s just plain wrong and is the sort of thing that any fact-checker should be able to find in a matter of minutes. In fact, US per annum oil production today is roughly half of what it was in 1971 despite the fact that entire new areas have been added (Alaskan and major off-shore fields) which were not part of Hubbert’s original calculation. And the decline has indeed been roughly in line with the Hubbert curve. It’s mind-boggling that a piece of analysis should appear in the business pages of a serious newspaper that contains such a blatant error.

And on it goes

The rest of the article is less contentious, but the tone has already been set. It points out that the current recession has resulted in a significant drop in oil consumption, though fails to acknowledge the high probability that the recession was partially** caused by high oil prices resulting from supply constraints. The article mentions the dramatic increase in reserves during the 80s, though fails to investigate why such a dramatic jump should have happened within OPEC and other nations without transparent reserve auditing, but nowhere else. Right when financial incentives were introduced in those countries to overstate reserves.

The article informs us that “Saudi Arabia has sufficient supplies to meet its needs for 66 years and Iraq has enough for 142 years” without really making it clear that these figures are essentially meaningless given that these nations are responsible for a fairly insignificant proportion of global consumption. In fairness, it does point out that “the US would run out [of oil] by 2018 if it did not import”.

But even that is dreadfully misleading. If the United States ceased importing oil, the economy would collapse immediately, not in 2018. You cannot simply divide reserves by time in this way. That fundamentally misunderstands the nature of oil production, which as I’ve said, occurs at a rate determined by the geological properties of the oil field. It’s not determined by demand. The United States currently consumes about 18 million barrels of oil per day. It produces about 7 million. What precisely would happen if you were to take 11 million barrels of oil per day out of the US economy? Anyone think it would keep ticking over until 2018?

This is why BP’s claim that we have enough oil left for 45 years is a recipe for dangerous complacency. Not only is that estimate based upon unreliable data, but it completely fails to acknowledge the physical constraints involved in oil production.

Then the article highlights recent oil discoveries. Now, there’s no question that 2009 and 2010 have been fantastic years in that regard. But they are anomalies. Spikes on a downward trend. In 2009 we discovered roughly half as much oil as we consumed. And that was the best year in a decade. In 2010, thanks to a major discovery near Brazil, we discovered even more. But it’s vital to get your head around the fact that not only were these bucking a clear trend, but they were largely offshore, deepwater discoveries. The ERoI of deepwater oil is nothing like as high as with the monster fields of the past. And I hope I’ve made it clear that ERoI is just as important as sheer volume.

Based upon these new discoveries, Richard Northedge finishes with the statement that “The day the world’s energy sources run dry is thus being pushed even further away…” It’s a shamelessly misleading conclusion and one that completely ignores the reality of the looming crisis we face as a result of falling oil production. A crisis that the Pentagon (that hotbed of fringe radicalism) suggests will be upon the world within the next 12 to 18 months.

* I’m not, incidentally saying that economic growth cannot theoretically continue in a post peak oil world. It is simply my position that in practical terms it will not continue.

** Please note that I said “partially”. I’m not exactly unaware of the credit crunch, property bubbles and banking crisis.

10 comments  |  Posted in: Opinion

Dec 2010

The gulf between press release and reality

Remember the Gulf of Mexico oil spill? Remember we were told it wasn’t as bad as “the environmentalists” were making out? And remember we were told that the well had been capped and the problem solved?

Apparently we weren’t told the whole story.

Dr. Tom Termotto is the National Coordinator for the Gulf Oil Spill Remediation Conference. He’s been reading and collating the various studies and reports produced about the BP / Deepwater Horizon explosion and subsequent oil spill in the Gulf of Mexico. Last week he released a report that calls into question the notion that this disaster has been successfully contained. Indeed, it appears that even the worst case scenarios being discussed when the disaster was at its most prominent fail to convey the seriousness of the situation.

Now, I’ve just read his report (republished on the Phoenix Rising from the Gulf blog), and have not independently verified any of his facts. I’m stressing this because, while I’ve feared for some time that we are being comprehensively lied to about the Gulf of Mexico oil spill (there were numerous discrepancies in the media reporting of the story that rang alarm-bells for anyone with a knowledge of petroleum geology), the conclusions reached by Dr. Termotto are startlingly extreme.

He alleges that large sections of the seabed beneath the Gulf of Mexico have been destabilised by the extensive oil and gas drilling operations taking place there. Furthermore, the Deepwater Horizon explosion created numerous fractures in the already unstable rock strata and now, in his words, “the Gulf of Mexico is slowly but surely filling up with oil and gas”.

On top of that, because of the depth of the oil and gas deposits, they contain high concentrations of radioactive isotopes. To add to the problems, the chemical dispersants — which he claims are still being used underwater near the well head (see image, below) — are making a very serious problem a lot worse. These chemicals are themselves highly toxic, but even worse… they are reducing the oil droplets to a “micronized or nano-sized state”. This significantly increases the likelihood that large quantities of mildly radioactive crude oil is entering the food chain. As Dr. Termotto says, this is turning “an extremely serious regional disaster into an unmitigated global catastrophe”.

Gulf of Mexico chemical pollution

And there’s more. The leaking of gas from beneath the seabed is producing large build-ups of methane hydrates on the floor of the Gulf of Mexico. Given that the area is seismically active, this has the potential to spark a disaster should this build up be dislodged en masse.

The entire Gulf of Mexico has become an environmental timebomb that threatens the health of the world’s oceans. A complete moratorium on drilling in the area is the only sane response to this information, if it is shown to be valid. However I suspect that in the face of peak oil, neither the US government nor the oil companies are interested in examining Dr. Termotto’s findings, let alone acting on them. The rush for short-term profit is killing our world.

4 comments  |  Posted in: Opinion