Tim Worstall

Oil Doom and Gloom

Something for the peak oil crowd:

THE world lacks the means to produce enough oil to meet rising
projections of demand for fuel over the next decade, according to
Christophe de Margerie, head of exploration for Total and heir
presumptive to the leadership of the French energy multinational.

The world is mistakenly focusing on oil reserves when the problem
is capacity to produce oil, M de Margerie said in an interview with The Times.
Forecasters, such as the International Energy Agency (IEA), have failed
to consider the speed at which new resources can be brought into
production, he believes.

His basic point is that the reserves really are there, we’re not actually hitting the supposed disaster of peak oil.

However, we do have something which, in economic terms, would be the same as peak oil (not that the proponents of the peak oil hypothesis seem to understand the economics). That is that we cannot build the wells, pipelines and refineries fast enough to drag the oil up out of the ground.

For the doomsters predictions this should be the same thing. It doesn’t matter whether the oil doesn’t exist or whether it is still stuck underground for western civilization, as we are told it will, to fail.

However, two things that make me worry a great deal less than some others.

1) He states that the world will never be producing 120 mbd, even if the demand is there. Great, but what price? We might have a demand of 120 mbd at $10 a barrel and much less at $80. Or $120. What ever the number is prices will (as long as some damn fool doesn’t decide to try rationing or something) adjust so that supply balances demand.

2) From The Economist:

FOR China’s disgruntled taxi drivers, these are worrying times. The
government, long reluctant to raise fuel prices for fear of a backlash,
has recently shown signs of yielding to the complaints of loss-making
refiners beset by the high price of crude oil. In late March it
announced the first retail-price increases in eight months. But is
there a serious risk of protest?

Since March 26th the retail price of diesel has risen by more than
3% and gasoline by 5%. Increases were twice as high in Beijing, because
of better fuel quality there. But the government is still being
cautious. Prices remain well below international levels.

Now this big surge in global oil prices, isn’t it being said that it is driven by a rise in demand in China? As you can see, retail prices for oil products in China are not set by the market but by the government. Actually, refiners over there have been making huge losses as they have to buy at world prices and sell at the lower fixed ones. So, the rise in global prices is not actually feeding through into the reduction in demand we would expect in China.

So what happens if China stops price fixing?  Or fixes prices at world levels?  That extra demand that is driving the global market falls doesn’t it?  So even our current prices are, in part at least, driven by price fixing.

 

In

7 responses

  1. Tim Newman Avatar
    Tim Newman

    That is that we cannot build the wells, pipelines and refineries fast enough to drag the oil up out of the ground.
    Not quite. It is politics which is blocking the production expansion, not technological restrictions.
    The Middle East is pretty much hamstrung by its refusal to allow Western oil companies significant access to uts reserves, instead demanding that all production takes place through cumbersome and inefficient national oil companies. The North Kuwait fields, for example, still remain off-limits to Western consoria because a handful of dinosaur Kuwaitis in parliament think allowing Western oil companies access would be tantamount to theft of their resources. Even when Western companies are allowed in, they are not allowed to move freely and quickly as they must negotiate the mountains of bureaucracy, just like everyone else.
    Russia is doing its best to make sure that no Western production technology comes to the party by altering the tax laws willy-nilly, making politically motivated attacks on oil companies already there, jailing oil company directors who get too uppitty, and carrying out a process of slowly nationalising the industry so that all future production will have to go through murky state behemoths where nobody is accountable. Ditto Kazakhstan.
    West Africa is riddled with political corruption and violence, preventing any right-minded Western oil company from setting foot in the region. South America is going down the route of nationalising its oil fields with the hope that somehow the US will be pissed off.
    And the Far East is a combination of all three, whilst Gordon Brown is determined to make sure the North Sea production is minimised by slapping windfall taxes on anyone producing there.
    Yeah, the obstacles are political. Get rid of the government interference and let the specialist companies and their engineers loose on the world’s oilfields, and we’d have the required production figures in no time at all.

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  2. Matthew Avatar
    Matthew

    “So what happens if China stops price fixing? Or fixes prices at world levels? That extra demand that is driving the global market falls doesn’t it? So even our current prices are, in part at least, driven by price fixing.”
    Well yes, but not in the way you think. Global taxation on gasoline, particularly in Europe, easily outweighs any Chinese subsidy.

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  3. Tim Newman Avatar
    Tim Newman

    So even our current prices are, in part at least, driven by price fixing.
    It has been this way since the formation of OPEC, the cartel which in effect fixes the price of oil.

    Reply
  4. dearieme Avatar
    dearieme

    At some point it becomes economically logical to stop all the pissing about and genuinely have a war “for oil”. Of course, if such a war were organised by a President of the calibre of Clinton or W, it would be an ignominious failure.

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  5. David Mathews Avatar
    David Mathews

    The problem with oil is not that costs too much, but rather it is too cheap. A substance which has served to power humankind’s conquest (i.e., destruction) of the Earth and global scale warfare (i.e., the 20th Century, Mutually Assured Destruction, and now the Iraqi Defeat) should not cost $67 a barrel. Based upon all of the curses of oil ought to cost $169,000 a barrel.
    How much is a living planet worth? How many tens of millions of people have died from the violence which oil has powered?
    Oil is a curse and a scourge upon the Earth. Oil has magnified the very worst traits of humankind and served to destroy the only planet hospitable to human life in the Universe.
    There’s a pretty good chance that humankind will ride the oil train right down into the pit of extinction. I’d say that the Homo sapiens have exhausted the one and only opportunity that we had for greatness in the Universe.
    Our time is up. Maybe in some far distant age another intelligent animal will dig up our fossils and wonder about what sort of creature formerly populated the Earth. Fortunately the fossils will not reveal the extent to which humans were foolish, destructive, violent and suicidally reckless.

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  6. Chris Vernon Avatar
    Chris Vernon

    His basic point is that the reserves really are there, we’re not actually hitting the supposed disaster of peak oil.

    No, that’s not the basic point at all.
    Yes we’ve got a trillion barrels of conventional oil left and probably another 1 or 2 trillion barrels in heavy oil, tar sands and oil shale. People tend to say that since we’ve got the best part of 3 trillion barrels of oil and only use 30 billion barrels per year we haven’t got a problem.
    That thinking is wrong.
    The point the Total guy is making is that the amount of oil isn’t the point at all – the point is the extraction rate. He’s saying extraction rates can’t possibly live up to the IEA projections. This is what peak oil says.
    The most important thing to understand is that we are not running out of oil in that there won’t be any left. But we are running out of the ability to increase the rate of extraction – a rate of extraction which will subsequently fall.
    Call it a logistics problem? I call it peak oil. Peak oil is due to the logistical problem of trying to extract oil at faster and faster rates from a diminishing reserve. Once upon a time 5 guys in a truck could erect a derrick, drill a few hundred feet and have 50,000 barrels per day spurting into the air. These days it takes billions of dollars to produce oil.

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  7. Patrick Malone, Nixa, MO Avatar
    Patrick Malone, Nixa, MO

    The 2 and 3D seismographic, gravimetic, satellite, and magnetic analysis that companies such as Exxon produced in the early 70s are beginning to surface publically, and it is known exactly what oil producing countries do and do not have, and anyone; journalist, economist, politician, or geologist who says we are unsure about total global deposits remaining have simply never seen the actual data, or don’t have the technical knowledge to understand what it means.
    Prior to hurricane Katrina, OPEC nations told the world that they are pumping faster and that it is the refineries that slow the process of distribution, and therefore the reason for expensive gas. If, in truth, oil was coming in faster than refineries could handle, there would be tanker trucks waiting in line, their bellies swollen with oil. Alas, those trucks were not there, ships were not waiting by the pier to unload oil into a backlogged system, and while the refineries were producing at a fast pace, they were certainly not responsible for creating any bottleneck. In fact, in consideration of humanitarian efforts in the American south, OPEC made an about face by stating, “Some OPEC countries that have export refineries, like Kuwait … and others, are looking if they can help … maybe by operating their refineries at full capacity…”
    If those refineries were not operating at full capacity, then there was no refinery shortage. Very simple.
    No other place in the world matches the U.S. ability to distil raw crude, or further downstream process for diesel, gasoline, and kerosene, yet the gap between supply and demand is growing. Here are the facts, straight and simple, and I suggest that you feel free to check and double-check them:
    Ö We have pumped approximately 900 billion barrels of easy-to-pump, liquid crude from the ground (not counting natural gas and other fossil fuels). Aging wells become progressively less attractive as less gas comes to the surface, replaced by high sulfur, clay-like tars, best suited for fixing your roof and patching the roads, or sending straight into the rubber/plastics/synthetics industry.
    Ö Chevron indicates the world is currently burning 2 bbl. of oil for every barrel of new oil discovered. ExxonMobil stated that 1987 was the last year that we found more oil worldwide than we burned. In 2005 non-OPEC countries only just brought enough new oil on-stream to compensate for declining output from mature fields. Decline rates in non-OPEC as a whole are accelerating.
    – Individual countries have already peaked (America, Norway, Venezuela, UK, Indonesia etc.)
    – Individual companies have peaked (Chevron, Exxon, Shell, Total…)
    – Individual grades of oil have peaked (light sweet crude – from which we get gas, diesel, and kerosene)
    Ö There is approximately 750 billion barrels of easy-to-pump crude left in the ground (not counting the various “sands” – “shales” – “tars” all of which require horrendously more energy to process than they provide, and therefore should not be part of any reasonable discussion, including “hydrocarbons” which those who’d like to paint a rosy picture by obfuscating with impossible estimates from biofuels, and even recycled tires).
    * Do not confuse the issue with obfuscating language such as “hydrocarbons” which makes up all petroleum, as well as the fatty tissues in whales, oil resins like pine pitch, and bee wax, all the old tires in the world buried in land fills, and even the membranes of your own body cells.
    Ö We cannot access all of that 750 (some will remain in wells that have watered over after using high pressure/high temperature steam extraction units for too long – some lay too deep below the oceans’ waters – some is simply in pockets too small to justify the cost of drilling).
    Ö If our fairy godmother showed up to present us all with that 750 billion barrels of crude, we could, under best circumstances, refine 60% for fuel (gasoline, diesel, kerosene) which leaves us 450 billion barrels of fuel.
    Ö The world is consuming something between 75-85 million barrels a day (the U.S. consumes approximately 537,640,000 gallons of fuel a day).
    Ö If we use 80 million for our numbers…that leaves approximately 15 years of fuel left, assuming there is no increase in the rate of consumption, and again that assumes we can actually have ALL 750 billion barrels of crude left in the ground.
    Ö Within the next decade, the rate of consumption could nearly double due to the world’s quest for modernization and “Westernization,” unless global economics weaken and strangle the petroleum market, or a concerted political strength of character immediately mitigates global demand.
    Ö When considering the increasing rate of consumption, and comparing that to cost/benefit analysis for further oil production from the remaining deposits, the real numbers would suggest that there is something less than 5-10 years of easy-to-pump, liquid petroleum left, and when it’s gone, mankind will have forever lost his great and only supply of cheap fuel to provide power to the wonderful technology he has developed.
    This isn’t debatable, unless you want to debate arithmetic. In “science-speak” it works out something like this …
    Industrial Civilization is beholden to electricity. Namely: In 1999, electricity supplied 42% (and counting) of the world’s end-use energy versus 39% for oil (the leading fossil fuel). Yet the small difference of 3% obscures the real magnitude of the problem because it omits the quality of the different forms of end-use energy. With apologies to George Orwell and the 2nd Law of Thermodynamics — “All joules (J) of energy are equal. But some joules are more equal than others.” If you just want to heat your coffee, then 1 J of oil energy works just as well as 1 J of electrical energy, because you can burn petroleum directly to generate heat. However, if you want to power up your computer, then 1 J of electricity is worth 3 J of oil because you must generate electricity from burning the fuel – then send it down the wire (which isn’t free – it actually costs more energy) – then become mechanical energy (disk/hard drives) and even power that giant light bulb you call a monitor. Therefore, the ratio of the importance of electricity versus oil to Industrial Civilization is not 42:39, but closer to 99:1. Similar ratios apply to electricity versus gas and electricity versus coal.
    So, what about alternative forms of power?
    Petroleum is required to manufacture solar panels and the parts necessary to build, maintain, and operate wind generators, hydro-electric, and even nuclear power. There is no mining for uranium (or even plain coal) if you don’t have gas or diesel for the big machines, and you need oil for machine lubrication, wire insulation, insulation varnishes for electric motor/generator windings, the computers and control equipment, etc. What is worse, since most do not understand the implications of the laws of Thermodynamics, the typical person in the world does not grasp why electric vehicles cost the world an even greater dependency on oil. First, the plastic body parts which are of course made from petroleum, but most importantly because the exchange of oil to electricity – transmitted through wires to a battery – to wires to a motor – robs you of more than 70% of the energy originally contained in the fossil fuel. Less expensive to operate does not equate to greater energy efficiency – these vehicles seem to “look” cleaner and are only dollar efficient after you’ve paid it off. If you charge the battery from a plug-in, the energy cost is less when the power company burns the fuel, than it does when you do from the gas pump, but fuel must be burnt nonetheless. Most find, almost immediately, that if they disconnect the electrical charging system from their hybrid vehicles, they suddenly get even better mileage. Why? Because the energy it takes to turn any arrangement of generator windings, regardless of orientation and design, comes from power spent by your engine. On major freeways, where traffic transforms into parking, and in stop-and-go town use, the hybrids minimize the extreme loss of energy spent accelerating a vehicle from a complete stop, and while this would seem of great significance, simply maintaining proper tire inflation could save the nation more gasoline every day, without expending even more energy, and material resources, to build new cars.*
    If we should choose to place massive spending into alternative forms of power, what would result? The most optimistic estimates by the Global Wind Energy Council show that, at best, the actual energy produced would approximate 6% of global capacity and 3% of America’s by 2020 due to increasing demand. What about solar power? This technology is being brought to the desert taking up 7 square miles to produce 500 MW of energy 70 miles north of Los Angeles. Thus far this only seems capable of large production in the desert. Other projects using this technology that are not in the desert are designed to produce less than 10 MW. The environmental impact of these massive installations on the fragile ecosystem of the desert is uncertain, which will likely depend largely on how many of these installations are constructed. This is decent technology, but quite limited as you need one very important thing: an awful lot of sunlight, which isn’t so great when the northern hemisphere is in winter. It will ultimately hold a similar capacity to that of wind power generation at best. If we are extremely lucky, solar, thermal, and wind combined could account for a true 10% of society’s energy capacity by 2020 if we pursued both with great ferocity starting last year. Our petroleum based economy, and the energy to power its technology, will be bankrupt long before then.
    Beyond all of that, there simply is no infrastructure in place to attempt to get wind, hydro, and solar power to 6 billion people. Here in the U.S. it would take a generation to build, sell, and properly install solar panels and windmills to power everyone in the country – assuming you had enough technicians to handle it – assuming the government could mobilize such an effort – assuming someone could pay for it all – assuming you had enough energy and petroleum-based products to manufacture all the parts and equipment – assuming you had all the energy and petroleum-based products to then maintain them over … how long? If you could pull it all together before we run out of fossil fuels and petroleum products, solar panels for electricity are really only good for a couple decades on the outside, and then what? The cruelest of all myths concerning renewable energy is known as “the hydrogen economy.” Producing enough hydrogen requires generating massive amounts of electricity (burning fossil fuels or nuclear power) to pass a powerful spark through water, liberating the hydrogen from the oxygen, with a net loss of no less than 70% of the total original energy before the hydrogen is stored, shipped, distributed, shipped, distributed, and MAYBE into your vehicle … so you must still burn fossil fuels, or accept the massive stupidity of producing more nuclear waste, which of course must still be hauled away to a distant location to store in a deep hole you must dig and fortify using massive machinery to do so, powered by fossil fuels.
    So, what about bio-fuels? We again return to thermodynamics; you must burn fuel to plow the fields, AND till the soil, AND plant the seed, AND power the pumps for irrigation, AND manufacture AND spay the pesticides, AND power the pumps for irrigation, AND manufacture AND lay down the fertilizer, AND power the pumps for irrigation, AND harvest the crops, AND transport the crops, AND process the crops for production, AND power the distilleries (for the alcohol) or the massive pulp presses (for the vegetable oil), AND – AND – AND… Unfortunately, you ran out of fuel back before you harvested your crops; 27% more fossil energy is required than the resulting biodiesel produces, and 29% more fossil fuel energy to produce ethanol from corn than the energy it replaces. Keep in careful mind that this is only to produce biofuels, not to then ship, AND distribute, AND pump, AND store, AND distribute, AND pump, AND store, and MAYBE find its way into your tank. What makes things worse is that biofuels can break down the gaskets and seals within your engine, unless you blend them with more fossil fuels. No currently used technique for farming the crops, and producing the fuel, can achieve more than about the 28% return on the energy invested.
    Now, it’s very easy to immediately start singing praises to recycling, research and development into fuel efficient machines, and advances in new technology, but you must remember the most critical ingredient to the problems outlined above; this is a world where literally everything is made from petroleum, powered by fossil fuels, or mined from the ground for processing with gasoline/diesel driven machinery. When the oil stops – everything stops. Agriculture, fertilizers and pesticides for crops, the meat industry and its ability to feed animals on those crops, plastic tools and appliances, plastic wrap, rubber for tires and the wire insulation in every electronic device, Plexi-glass, basic road tar, water proofing, auto parts, the housing on your computer monitor, materials for aircraft maintenance, wood varnish – wood stains – paints, synthetic fibers for clothing, shoe soles, furniture, skateboard wheels, draperies, ropes and fasteners, camera film – digital tape, CD’s and DVD’s, plastic coating on boxes of dried goods in the grocery store, sponges and scrub brushes, soap – detergent – shampoo – cleansers – disinfectants, plastic bags and bottles filled with foods and beverages, the millions of miles of power and telephone lines, medication, and even the power to filter and purify drinkable water … everything will stop.
    This isn’t about politics or active environmentalism – that time has finally past, and the very best that frame of mind can produce is a slower tug at the Bandaid. The question is not IF peak oil will occur, or even WHEN, but more importantly how soon will the economics of global demand outstrip the world’s ability to produce? Five years? Ten years? Those 60-120 months will probably come quicker than you think – consider how fast the last 5 years years of your own life have passed. Even if we could stretch it all out for 15-20 years, for each 1-cent rise in gas prices sucks $14 billion a year from consumer spending. At gas prices one dollar higher than in 2004, that’s $1.4 TRILLION gone from American wallets. Gas Is Gone modeling suggests that once the national average price of gasoline remains above $3.50 – $4.00 a gallon for longer than two pay periods, those beneath middle-income will quickly lose their ability to obtain their basic needs … and that’s when the people’s voice will no longer be heard in the ballot boxes, but in the streets. The very real truth that few are considering, is that the politics, and economics behind petroleum production, will cause the pumps to shut down long before depletion occurs – when motorists can’t afford gas at the pump, producers can no longer afford to harvest the resource.
    Many believe that moving to the country is the best plan, but please consider for a moment; if things became intolerable for highly urbanized communities, they will bring their troubles to your rural doorstep, and possibly more than once, assuming you actually know how to properly fit the missing draft horses into plow harnesses that your farm doesn’t have, to pull plows almost nobody manufactures in this age, to attempt to plant crops you don’t know anything about, and then irrigate them without electric pumps powering your city water or well. This is not a time to panic or move into the hills – this is the time to enjoy life to its fullest, while keeping both eyes open, both ears alert, and your mind actively engaged in long-term planning for the security of yourself and your loved ones. The truth is, civilization will NOT collapse all at once … but crumble slowly, at different speeds all across the globe. Where one city in one country may be shaken to its foundations in a matter of days during socioeconomic/political revolt, another town half-way round the globe may do just fine for decades to come, so what this site brings to you it the ability to make decisions, when they are needed, to keep you and your loved ones safe.
    Learn. Think. Read. Vote. Make phone calls. Write letters. Speak up and speak out. Spread the word, not just to others with similar thoughts, but to all around you – wake them up. Shake them from their televisions and maybe together we can all make changes that will matter to us now, and to the children still to come.
    * See Saturday, October 29, 2005 for the truly charming story of 12 year-old Savannah Rose Walters speaking before the Capital Building in Washington, D.C.

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