Guestblog: Will high oil prices delay peak production?
- 28 Apr 06, 08:30 AM
John Busby, who runs a website with the grand title took issue with comments by my colleague Stephanie Flanders on Tuesday's programme. Her thesis was that high oil price will delay the so-called "peak" of production by dragging previously expensive resources like tar sands into the market. He's sent us a detailed contribution on this and, as "peak oil" is a very interesting debate I am pasting his guest contribution below...
Guest blogger John Busby writes:
Many economists believe that rising crude oil prices will mean remote or poor quality oil reserves that would otherwise be uneconomic will be able to be exploited. If prices remain at $75/barrel it could mean that peak oil would be delayed until the end of the century. The concept is that increased prices allow more remote and expensively developed reserves to attract investment.
The problem of this is that oil is of value principally as an adaptable source of energy. The more remote and difficult it is to extract, the more energy is required to produce it. If the energy needed to produce the oil exceeds that in the oil, the field is abandoned.
The oil majors: If you study the annual reports of the major oil companies it is evident that their investment has moved to the acquisition of stakes in already active fields. A good example is BP鈥檚 stake in TNK. In a period when prices have continuously risen, the investment in exploration and development of new reserves has been hugely overtaken by participation in joint ventures and takeovers.
A study of Shell, BP and Exxon/Mobil reports also shows that the reserve 鈥渂ank鈥 of all these companies has been incremented predominantly by gas, stated in barrels of oil equivalent. Their 鈥渂ank鈥 of oil reserves has meantime declined. Shell鈥檚 鈥渂ank鈥 includes its LNG project in Sakhalin, but the coming production of 9.6 million tonnes represents only 2% of the US demand. When this is set against the North American annual gas reserves depletion rate of 10%, it is evident that LNG supplies will never succeed in maintaining the status quo, let alone expand usage. If the policies of the oil majors are taken as a guide, the peak in oil production will not be delayed by oil price hikes, which are the symptom of it, not the cure.
Hubbert: The root of the peak oil philosophy goes back to 1956 when Hubbert published his . Hubbert accurately forecast the Lower 48-US oil production peak in 1970, since when production has declined in spite of rising oil prices and improving technologies. The USA now imports 65% of its oil demand.
He also unwittingly forecast the end of nuclear power, as he assumed that uranium production would follow a Hubbert curve, but nuclear power would survive by breeding new fuel. The fast breeder has failed to be developed in a commercial form and although the nuclear lobby still claims that fast breeders will allow the industry to continue, research is now directed to nuclear fusion.
ASPO (Association for the study of peak oil and gas): The latest ASPO newsletter can be downloaded . It now includes heavy and deepwater oil and gas in its production plot. The author, Colin Campbell, does not believe that rising prices will extend his date for peak oil. In fact he claims that the peak in regular oil production was passed last year, as can be seen in the table below the set of curves.
Production of tarsands and heavy oil will stall when there is insufficient gas for its extraction and processing, whatever the price of the synthetic crude oil produced, so the delay of the overall oil peak is in his view just 5 years.
Gold and uranium: It might be expected that for non-energy commodities that rising prices will ensure increased or maintained production. Gold prices have risen by 50% recently, but gold production passed its Hubbert peak in 2001. See .
The reason for this is that the gold ore grade is in decline and at only 3 to 10 ppm, enormous quantities of material have to be shifted and processed, requiring huge energy inputs. In 2004 it cost $11,000/kg to extract.
It is argued that uranium can be extracted from even lower grades, but the current price of uranium at $108/kg would have to rise to an uneconomic level for use in generation and the mining and milling energy expended would exceed that obtained from the nuclear fuel cycle. In Australia, rising costs of net imported oil will scupper plans for mining low grades of uranium.
A better lifestyle is coming?: I started researching energy supply after the government threw in the towel to the fuel protesters in 2000. If you look at my you will see that I have investigated every possible source of energy and have come to the conclusion that we have to adjust to a lifestyle consuming only 25% of the energy we use now.
Far from seeing this as a doom scenario, I think a more localised life will be better, but this means a fundamental change in the direction of our economy. We need to complete the rail electrification; we need a water grid to allow irrigation to make agriculture more productive. We need to stop the building of air and road transport infrastructure, especially huge distribution depots. Farmers will get their local markets back when their products compete with costly transported imports. Fortunately the communications revolution will enable more home working.
Projects like Olympics 2012 will fail because the travel to it will be too expensive. The Wembley stadium is overspent because of rising energy costs and should have been a football-pitch sized audio-visual studio.
A change of political direction?: My purpose in maintaining my website is to encourage a political change of direction. It will in any case be forced on us, so we might as well get on with it.
Paul Mason writes: Thanks John - right, you lot, hit the comment button and let us have a civilised debate over this highly relevant topic. Of course I should add the disclaimer that neither I nor the 大象传媒 necessarily agree with him!
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There have been many forecasts of this more localised life emanating over the years from the various Internet sages too. Bascially the thesis is that advanced telecommunications can remove much of the need to travel, especially commuting travel.
To some extent this is happening but very few businessman pass up the chance to fly to new York for a meeting they could do via desktop video conferencing. Life is very rich when you have all these experiences and I am not sure everyone will happily give them up.
Another problem is that most bosses dont trust their workers to work at home and in fact most people in cities now have a social life that revolves around work.
Also, living in London, we are keenly aware that things like the congestion charge is purportedly used as a way of getting us off the roads. However it has been so successful that revenue has dropped so the price goes up... (in other words its a tax. At the same time, the price of public transport is rocketing (拢3 or $5 for a single zone 1 undergound ticket) giving us no incentive to get off the roads...
There are millions of examples of things such as these above - none of which help in terms of sorting out the issues raised.
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Interesting but the conclusions are way too far-reaching.
For example, the new Wembley stadium certainly shouldn't be a "football pitch sized audio-visual studio". Not only does that beat the point (kill the atmosphere etc), it fails to recognise that the increasingly rich population will pay for transport just like it pays for everything else it really wants. Even if transport costs were to triple, that wouldn't come close to the ticket prices, and they don't even reflect the true market price as can be seen on eBay or with ticket touts re-selling for huge profits. Transport is only a small part of most costs, and people will accept the price hike.
Localism is here and it will remain, it's nothing new. People always want convenience and a local life, and pay a premium on house prices for areas they like. However, tourism will remain popular. People paid and travelled back when people dressed up smart to fly, and while price rises will reduce some demand it will never eliminate it.
You're also I think underestimating the sheer size of the universe and the ingenuity of humans. Yes we're running out of oil, but there are other ways to get energy, and it's all too easy to see doom and gloom around the corner. Energy doesn't mean oil and oil doesn't mean energy, it's just the best source at the moment. Perhaps more notable will be the impact on "disposable" plastics and other oil-derived substances which we rely on but which don't have obvious substitutes at the moment.
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It is to the 大象传媒's credit that Newsnight addressed the subject of high oil prices last week including the input from economics editor Stephanie Flanders. Unfortunately the concept presented - that high oil prices would push peak production rate to the end of the century - is complete rubbish.
To extract oil first one must discover oil. Discovery of oil peaked in the early sixties and has been declining ever since. Since the early eighties we have been extracting more oil each year than has been discovered. There is no doubt that the extraction rate of regular oil has hit the limit and must now decline, no matter what the price does. That is geology and physics, not economics.
We are left then with unconventional oil, tar sands, oil shale and extra heavy oil. Potential reserves may be large but are not comparable to regular oil. These unconventional reserves require large amounts of energy to extract, decreasing the net energy available. They require large amounts of natural gas (also limited) and water. But the most significant point is that they are slow to extract.
Peak oil is all about the rate of extraction. Unconventional reserves have a slow rate of extraction. To suggest as Flanders did last week that such reserves will provide 140 million barrels per day in 2100 is fanciful.
I urge the 大象传媒 to address the subject of peak oil in a rigorous manor.
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Stephanie is approaching the subject from the point of view of pure economics. Unfortunately what she is saying is totally disconnected from reality. The resources neccessary to support her $75 projections DO NOT EXIST. They have NOT been found so cannot be produced. Oil is found in very specific geologies, and the major multinationals have had a good look round the world since the oilshocks of the 1970s. Discovey of supergiant fields peaked in the 1960's and only ONE has been discovered in the last 25 years.
Non-conventional oil sources such as the Canadian tar sands and Venezuelan Extra heavey crude (in reality more of a thick gunk rather than anything which can be pumped untreated) are theoretically large but involve an enormous cost in infrastructure and processing inputs to provide even modest production flows. Production will ramp up slowly, and at some point will no doubt be limited by environmental factors. I doubt Albertans will want to see literally half their state turned into a to toxic swamp.
Its all about what rates of production are possible, not the reserves available. Oil is becoming progressively more expensive and difficult to produce, as all the low hanging fruit has now been picked.
Most of the oil producing countries have passed their peak of production and and are now in irreversible decline. the lower 48 states of the USA went passed it peak of production in 1971, and despite a frenzy of drilling ( many more wells drilled than the rest of the world put together) has never recovered.Its oli production has declined year on year ever since.
Quite soon - according to petroleum geologists who unlike economists do understand this subject - the same will apply to the world as a whole. I suggest Stephanie reads up on the subject a bit before she comes up with another 'everything in the garden is rosy' contribution. She needs to grasp a few basics of oilfield physics, prodcution technologies and the concepts of depletion and decline rates, which produce the production curves seen in reality - unlike her economic fantasy curves.
I suggest she reads Mathew Simmons (a multi-millionaire investment banker from Houston who has been involved with the oil business since the late sixties) "Twighlight in the Desert"
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I second Chris Vernon's call for the 大象传媒 to properly address peak oil and the issues that surround it.
I have no doubt that Richard A. is right to say people won't happily give up air travel, or other trappings of the early 21st century. But the point is that it doesn't matter whether people are happy about it or not; change will be forced onto everyone. It is vital people understand that our way of life is not a right, but a fluke that depends entirely on oil (and gas and coal) which is a finite resource that we are nearly half way through using.
And it's not just about travel and transport. Global food production relies heavily on oil - for fertilisers, for pesticides, for the mechanical equipment used on modern farms. The African famines of the last 20 years will fade into insignificance compared to the global starvation that scarce oil is likely to bring.
Look around your desk - all that plastic. All from oil.
For my money, peak oil is overwhelmingly the key issue for our generation to focus on. We can't stop it, but we can attempt to mitigate the consequences. If we fail to act, and soon, then frankly no other policy issues are going to matter much anymore.
Come on 大象传媒 - fulfill your public service mandate! Get peak oil on the agenda, put it at the forefront of everyone's mind, and don't let the policians ignore the issue - as the government did in its latest energy review.
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I agree with John Busby and Paul Mason. I might add that one basic problem with economics is that it creates all its theories as if the only limitations are those of the market (or lack thereof), and thus it has built an entire ediface of theory without serious acknowledgement of the laws of thermodynamics which underlie all systems of motion: physical, biological and social. Economists and more generally industrial society would do well to take a lesson from the anthropologist Leslie White, who a half-century ago identified energy as the basis of cultural development -- including the cultural institution of the market -- and break out of their never-never world of a social theory that basically has been a product of and handmaiden for the fossil fuel age. Unfortunately, the petroleum age has committed us to an immense technological, cultural, social and biological infrastructure and ecology centered and dependent on oil, while dismantling the tremendous variety of localized cultural-knowledge forms of human adaptation, their previously associated biodiversity, and the ecosystems of which both were a part. Humans and the planet thus find themselves emerging out of the petroleum age tremendously impoverished compared to what they entered it with, this without consideration of the exhausted mineral and petroleum resources. This poses a challenge for human survival that extends far beyond simply shifting to localization, as the cultural forms and biological foundations for localization -- which themselves represented tremendous energy investments over very long periods of time -- have been destroyed and liquidated, very often in the name of economic rationality and development. Pre-petroleum agriculture, with its great variety of techniques, biodiversity and genetic heritage, and adaptions to every possible environment and micro-environment across the globe, for example, had a 20,000-50,000 year legacy, which market and development theory sneered at without understanding as "primitive" and "irrational" and set about to devalue, steal, destroy and liquidate wherever they came across it. The amount of energy represented in the now lost accompanying genetic heritage is out of reach of humans, even were we still to have all the original oil at hand -- indeed, petroleum itself represents a small portion of this energy which happened to have been trapped from a fairly limited time frame out of the whole process of evolution to be preserved in its fossils. Market economics and development theory recognized nothing as capital, either physical, biological or social, except that which had been entered into the market place and reduced to the measure of accounting ledgers. If humans have any hope of meeting the imperative of localization, it will require abandoning our economics ledgermania. It will furthermore have to be done using the complement of fossil fuel resources left to us, something for which, as demonstrated by Stephanie Flanders, the currently dominant market economics ideology has not a clue.
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Why is it that Peak Oil is not on the 大象传媒 agenda?
If you look at the data, particularly the rates of discovery, its not a matter of will it happen but When! The alternatives to Oil cannot be developed anywhere near fast enough at the current rates. The assumption that as prices rise alternatives will be found is half baked at best. Its not that there are not alternatives its just when oil producing areas peak like the US did in the 70's and North Sea is starting to and as the Middle East will do one day , the rates of decline can be very steep.
I would of expected a whole Television series on this subject by now, but what do we get odd bits of news, not even a Panorama or Horizon programme on it.
This is a serious failure of the 大象传媒's public service mandate. The debate is taking place on the Internet, if the 大象传媒 is not carefully it will become irrelevant to debates like this and therefore why should we pay a licence fee.
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I am very relieved that this subject has been addressed by the 大象传媒 and have confidence that it will be an increasingly talked about subject. The peak in oil production will change the way our society works forever. I feel it is important that we as a society are educated as to the consequences of a huge increase in the cost of extracting oil and hope that this matter is brought into the mainstream consciousness. When you look at the evidence it is very easy to take a negative view but feel that the changes that are to come will ultimately have a positive effect on our society. I have made dramatic changes to my lifestyle over the last few years because of an awareness of the need to consume less energy. I first heard about the consequences of peak oil very recently and have all of a sudden become politically active and the changes I am making are becoming much more extreme and my friends are starting to question my behaviour. Get out of debt, consume less energy, grow your own food, buy locally produced goods and get to know your neighbours.
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I agree a proper treatment of peak oil is needed ,from a hard science outlook
There is the fallacy from economist that waiving wads of banknotes around will make oil appear in the ground ,this is juju magic.
The public at large ,if concerned at all ,believe that those clever dorks in the lab coats will mumble together and make some new clever gizmo
presto ,no problem
The reality is starker ,energy is the life blood of civilized society ,
Personal freedom is based on personal energy consumption .
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The Western world is addicted to oil and gas, our lifestyles are totally dependent on them. In the UK we now have to import most of our oil and gas because our supplies have peaked. We can manage for a while, despite the increase in prices and the uncertainty of supplies. But what happens when the World oil and gas supplies peak? Where will our energy come from then? We should be using the existing supplies of gas and oil to build the infrastructure for a solar, wind and biomass based system. Also, I recommend learning to grow and cook your own food and using less energy. It will make things easier before it is forced on you.
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