My Mind's Ink

An interesting article in The Walrus about The Coming Oil Crisis.

Heartless Earth Killing Bastards

The basic premise of most bitching and complaining about gas prices is that oil companies make huge (gouging, ridiculous, overpriced) profits selling gasoline. People seem to feel that if the oil companies were not such greedy heartless earth killing bastards they could stand to make a little less and give us reasonable priced gasoline.

Assuming those are the facts of course reduces the whole price system down to Bob the oil executive coming in on Monday and calling in his colleague John and explaining that he had an epiphany on the weekend. “You know what would be better than making 10 cents on every litre we sell? Making 20 cents!”. John agrees this is brilliant and they race for the red phone on the desk that will change prices throughout the land. If only we had some way to show Bob and John that we think this is bullshit and we are not going to stand for it anymore.

Bring on the email revolution

If we would all just ban together and do as outlined in the following email we are sure to see gasoline prices plumet. We have all received emails like this. The plan varies, the promise is always the same: organized consumer revolt resulting in lowered prices. There are three fundamental failures in these plans.

Psst! Pass it on

Truthfully we do not need to move on to problem two because number one is entirely insurmountable. It is this: you can not motivate nor coordinate the actions of millions of people by forwarding an email to 10 of your friends. You can annoy your 10 friends, but that is all you will accomplish.

This is Stupid

Maybe it is a fervent faith in democracy and the power of a single vote, but many a person moves beyond problem one and still thinks “But if only people would do something”. This brings us to problem two. These plans are silly on a base level. They run counter to the basic laws of supply and demand. The plan might as well be: Everyone lie down on the ground and throw a tantrum about gas prices on Friday. The effect would be the same.

How low can you go

This brings us to the last issue. It is this: prices are as low as they are going to get. This contradicts much ingrained belief in price gouging and the inherent evils of oil companies. It is never the less true. Selling gasoline is one of the most price competitive industries there is. Huge amounts of petroleum is pumped into automobiles every day. Competition for those dollars is fierce. The commodity, from the consumer point of view, is basically the same everywhere. The producers quality, production methods, additives, environmental record largely mean nothing. If the consumer can save a penny going across the street they will do exactly that. You do not need any experience in economics to understand that Company A generates a big advantage if they can set their price a couple of cents below their competitors. Company B must follow suite. The result is the lowest possible price that will sustain the business.

It is more interesting to believe in a giant global conspiracy aimed to screw the little guy out of his cash. The reality is that capatilism works, at least in the sense that competition and consumer pressure results in the best possible result for the consumer. In this case that means the lowest price.

What can be done

The solution is simple, and not very popular. Reduce the impact petroleum prices have on you by using less of it. Buy a more fuel efficient car. Move closer to work. Ride a bike. Take the bus. Honestly, that is all that you can do to head of the coming oil crisis. All the foot stomping and hand wringing in the world is not going to make a difference.

What Oil Crisis

There is much debate regarding the coming Oil Shortage, or more specifically whether there is going to be one or not. Studies by many different organizations are available and countless books on the subject have been written. The sum of which appears to be scientific and rhetorical data to support positions throughout the spectrum of opinion.

When you strip away the excess what you are left with one certainty and one unknown. The certainty is that we will extract and use the last available drop of oil. The unknown is when it will happen and what will be the impact.

The Certainty

Oil is a simple and powerful source of energy unequaled by any other option. Oil has been the single most powerful catalyst to human advancement in our history and is the direct cause of unprecedented astronomical growth. We have a complex world wide network of infrastructure and technology to find, extract, refine, transport, and use petroleum products. It is the largest single industry in the world and it is woven into every aspect of our lives from how we get our food to why we don’t sit in the dark. It is inextricably tied to the economies of the first world and drives the growth of emerging nations. Petroleum accounts for approximately 65% of our energy needs. We will continue to use this resource until it is no longer a feasible option. That is a certainty.

The Unknown

So when do the taps run dry? The question is a complex one, but the three major properties dictate the answer:

1. How much oil do we have

2. How fast can we get at it

3. How fast do we use it

The simplest analogy would be a tank with a tap attached to it. The tank is our oil reserves, the tap is an amalgamation of everything that gets the oil out of the ground so we can use it (exploration, production, refining). We then have access to all the oil that comes out of the tap.

Item one, the size of the tank, is the only major unknown in the equation. World wide oil production and consumption is a tracked accurately, so we know how much we can get out of the tap and how much we use. Oil production world wide is running at approximately 98% which means that we have the tap open to nearly its capacity and we are using everything that is available to us.

Admittedly that is a simplistic analysis of a complex problem. There are many factors that factor into that analogy. Still, it is the problem in a nut shell and we will come back to it.

The Facts

You can get lost in the sea of opinion on this. It helps to filter out the fact from the rhetoric. Here are several concrete items we can work with:

• The vast majority of our energy consumption is provided for by non-renewable resources.
• The amount of energy we use continues to climb each year
• The amount of new oil reserves we find each year is declining
• Those we do find are largely problematic sources

Non-Renewable Energy

The graph on the right represents the sources from which energy was derived in the United States in 2004.¹ Non renewable energy accounts for 89% of the total. Actually Nuclear is technically non-renewable as well, but we can say there is a healthy supply and exclude it from the current crisis. Likewise we can be generous and say the same of coal. This still leaves us with 65% of the US energy mix that relies on petroleum. Global usage varies, and North America are certainly not the poster children of alternative energy, but we can use the US numbers as a yard stick since the US is the largest energy user in the world.

Reducing consumption is not a simple matter. Moving to alternative fuels sounds like the silver bullet, but it is not that easy. We will discuss technologies further along, but alternative energies all have their limitations, and most importantly, switching technologies takes time. It takes decades. The average passenger vehicle for instance stays on the road for more than 10 years, so even if they were available and everyone bought an alternative energy efficient vehicle we are looking at a transition period of at least a decade. To date SUV sales continue to significantly outpace hybrid sales, so the process hasn’t even really begun. The story is the same for other energy uses. A world wide infrastructure is in place to use petroleum products and it will take decades to transition to alternatives where they are even available.

Climbing Consumption

Our rate or oil consumption is currently increasing at approximately 2% a year and are estimated to continue to increase at an average of 1.4% world wide through to 2030.². Some pundits would argue that the current trend may be altered in the future. However, even to level off our energy consumption over the coming decades is going to be a gargantuan effort, there are a billion Chinese just beginning a major industrial and life style ramp up. The Chinese are now the number two importer of oil in the world.

What this really comes down to is that the proof is in the pudding. Our use of petroleum products has risen meteorically, it continues to climb in the present tense and there seems to be no indication of a reversal in this trend. We are going to demand not only our current level of consumption but expect annual increases. In our analogy what that means is that we are going to want to open that tap farther than it is currently capable of operating.

Declining Reserves

We extract oil from the earth from the sources we know about. As we use up those known sources we have to continually look for new ones as replacements. The problem is that the more we find the harder it is to find. The low hanging fruit is all gone. There are no huge fields left to find. Those that are known about often have difficulties associated with them like being in a politically unstable region, or residing under a mile of ocean. The days of poking a hole straight down into the dirt and having oil gush out have been gone for some time and the situation is getting progressively worse.

The Canadian tarsands serve as an excellent example. The tarsands have oil reserves that are second in the world only to Saudi Arabia. Given that they are in a very politically stable region they are doubly attractive. Our use of oil sands as a significant resource is a very telling indicator of how close to a crisis we are. There is no more inefficient and energy intensive source than the tar sands. The very fact that it has become a viable alternative is a good indication of how near the peak we may be.

Without imports, the USA’s domestic oil reserves would be exhausted in three to four years at the current rate of consumption.

Whatever the reserve number is, exploration and production costs are increasing and will continue to do so. Eventually no amount of money and effort will keep up the flow. This is a certainty. Petroleum in a limited resource, so the question is not if this will occur, but when.

Problematic Sources

Not all oil is created equal. How much oil is in a reserve is not the only thing that affects its value. Ideally what we want is light sweet oil (low impurities) in a highly porous rock located in an easy to reach, politically stable region. Trouble is, there are no more of these fields left. New reserves have one or more of the following problems:

Recovery rate in places like Saudi Arabia is around 50%, in tighter geology with higher viscous oils it is closer to 15%

• location – politically unstable areas such as the Middle East and geographically difficult regions such as the deep water in the Gulf of Mexico
• geology – increasingly additional effort is needed to extract oil from geology such as tar sands
• quality – oil varies in quality. Thick sour oil requires additional effort to both extract and refineThese factors combine to make most new sources of oil and many existing ones troublesome to develop. This translates into higher price requirements for these fields to be economically feasible to develop.

Technology to the rescue

Surely there are bright young scientists in crisp looking white lab coats that will get this straightened out. Certainly there are armies of people working on technology solutions to our energy needs. Well there are indeed plenty of people trying to fix the issue, but a panacea is not forthcoming.

New Technologies

Advanced technologies like fusion are being pursued, but producing energy from a technology that operates at a few million degrees is, as you can imagine, a little tricky. Moving technology from testing and experimental phases to wide spread commercial use is a long arduous process with many hurdles.

Liquid fuel substitutes (tar sands, coal-to-liquids, oil shale, ethanol and biodiesel) likewise will take long term effort to scale up to large scale application.

Hydrogen and fuel cell technology are promising ideas, again, however, the technology itself has a long way to go before it can be used on a large scale and an entirely new supply chain would need to be developed to provide the hydrogen. It currently takes 3-6 gallons of gasoline to create enough hydrogen to travel the same distance that you could on one gallon of gasoline.

There is no single answer to the energy problem coming from new technologies. Any emerging technology has to be proven viable and capable of large scale implementation and even then the ramp up for new alternatives is measured in decades.

Existing Technologies

Renewable technologies like wind and solar power are extremely attractive and certainly these sources will expand in the coming years. We run into a significant scale problem here as well however. It takes around 1500 wind turbines to produce the same electricity as a single nuclear power plant. As much as people want to support new green technologies to supply their energy, no one wants to replace their ocean view with thousands of turbines.

To replace our oil use with nuclear energy you would need to produce 10,000 of the largest plants available. However at that rate uranium shortages would emerge long before 2030. Nuclear energy also faces environmental, social and political hurdles as an accepted alternative.

Hydro-electric generation requires a river and a suitable valley in which to harness it. There are few potential significant dam projects remaining.

Adoption of these types of renewable energy sources are subject not only to the technological and scale ramp up that can take decades, but also requires some shift in our lifestyles. These factors will combine to ensure that as our oil supply fails the gap can not be filled by these options.

The pesky environment

Exacerbating all of our growing energy problems are our growing environmental concerns. Many of our options for expanding our petroleum production or replacing it with alternatives have significant environmental tolls.

Liquid fuel substitutes (tar sands, coal-to-liquids, oil shale, ethanol and biodiesel) are carbon intensive and will only exacerbate global warming.

The Canadian tarsands also come with huge environmental problems.

• The area currently leased for underground operations in the Alberta tar sands will create an industrial sacrifice zone the size of Vancouver Island((Calgary based energy watchdog the Pembina Institute)). The National Energy Board of Canada states it is unsure if land reclamation methods will be successful.
• The energy investment to extract and process oil from tarsand is approximately one barrel to produce two barrels of petroleum. This compares to a ratio of 1 to 100 in the more conventional sources of yesterday.
• Much of the energy used in the tarsands is provided by consumption of natural gas. By 2012 the tarsands will consume enough natural gas to heat every home in Canada.
• The tarsands also consumes a massive amount of water. Two to Five barrels of water are required to produce each barrel of oil.
• The tarsands is the fastest growing point-source of carbon emissions in Canada. Clearly this flies in the face of efforts to reduce green house gas emissions like the Kyoto accord.The environment will form the other half of the vice that we are caught in. We will need to find alternative sources for our energy. Many of these potential sources are harder on the environment than petroleum is. So on the one hand we will have our insatiable need for energy, on the other is our desire to keep sea levels from rising twenty feet. Failing on either front is going to result in significant human disaster.

So How Screwed Are We?

Part of the reason I have been researching this subject is that I was hoping to answer that question for myself. The result, however, has been somewhat dissapointing. There are still too many question marks.

The Big Question

The largest question in the equation is: How much oil is there?

We can not just peer into the earth and see what is available. The situation is aggravated by the fact that much of the world’s oil supply is controlled by nationalized industry that have no requirements to report their known reserves, and when they do report them their motivations for doing so must be questioned. For instance in 1985 Kuwait added 50% to its estimate of reserves. in 1987 Venezuela doubled its estimates overnight. The primary cause of this is simply that the amount that OPEC allows its members to produce is dependent on their reserves. More reserves means more allowed production. Moves like this from some member countries of course produced reciprocal increases in estimates by other members. In the intervening decades since these large increase of course the countries have continued to pull oil out of the ground but their estimates of reserves have not decreased. It is prudent to treat estimates of oil reserves with extreme skepticism. The reality is that there are currently about 50 different nations that are producing less today than they did yesterday.

Troublesome Answers

The other variables are easier to form an opinion on:

Our consumption is growing, and by all indications will continue to do so. Moves toward alternative fuels will be slow, and are not likely to offset growing consumers like China. Our demand for oil will be greater in the future and will put significant pressure on the industry to find replacements for the elephant fields that are peaking or in decline.

There is no doubt that oil is getting harder and harder to find. We are expending ever increasing resources to fill the production gap. This is a trend that can not reverse. Once you begin to go to the ends of the earth to find a limited resource there is no chance of finding a vast supply in your backyard that you overlooked. The cost and effort to extract the remaining oil we have will continue to climb, and it will likely do so at an ever increasing rate.

That last bit is an important point. The mathematical models I’ve seen on this can be pretty scary. All the numbers involved are exponential not arithmetic. In some of the models I have seen, like the vastly popular Hubbert’s Peak, the result means we don’t gradually run out of oil, we run off a cliff. Once things begin to decline they do so rapidly.

Pretty Screwed

My opinion on the matter is a combination of a couple of things. Firstly, the data that is available. Secondly, our history as human beings. As I have said repeatedly, the question is not if we run out, we know we have a finite amount of oil, but when we run out, and how hard the transition to that post-oil period will be.

In the first case we do have some numbers, which I have given a broad overview of above. The solid numbers that we can depend on are not encouraging. The numbers that have significant question marks attached to them, like the amount of reserves we have, are only scary depending on who you believe. Politicians and oil companies tend to be more optimistic, but I think you have to look pretty hard at that source. No politician looking to get re-elected has any interest in listening to alarmist reports and raising gas taxes. Oil companies likewise have shareholders and it would seem to contradict their interests to take extremists views, although many major private producers are beginning to quietly raise the concern level.

Which leads me to my second considerations. If you look back at our track record as a race for proactively solving problems it is difficult to be encouraged. We solve issues as they arise. “Necessity is the mother of invention” as they say. Which is all well and good, that is an effective system, and certainly in this case, economic factors will continue to push exploration, extraction technologies, and alternative energy. The problem, as I have outlined, is that infrastructure and technology have a terminal velocity. We can only move so fast no matter how much money we throw at the problem, and the problem of replacing the single most powerful driver of human expansion is significant. What I believe is that the obvious benefits that have led oil to be such a major source of our energy will continue to drive us to aggressively seek out the last drop of oil, and that the landing on the other side of that line is going to very hard.

The Peak

A significant event is still in our future. It is the peak of oil production. Oil production follows a very simple pattern an example of which you can see in the graph to the right. The graph depicts an estimate Marion Hubbert made in 1956 regarding US oil production. This picture is typical of graphs for world oil production. It is characterized by an exponential ramp up in both oil production and oil use culminating in a peak and followed by a mirror exponential drop in oil production.

Many areas of the world including the US have peaked in oil production. The world as a whole has yet to reach that critical point but it is ultimately inevitable. One of these years we will simply be unable to produce as much oil as we did the previous year. When that does happen all the current debates about reserve estimates will become obsolete in the face of that very simple fact.

The stark reality is that if that peak occurs within the next ten years the results will be nothing short of cataclysmic.

What happens when we run out

It is impossible to overstate the potential effects of a rapidly declining petroleum source. Every conceivable aspect of our modern civilization is tied to a requirement for cheap available energy. Petroleum is the primary engine that drives all modern human endevors. Even if you take an opptimistic view of our ability to make the transition to a non-oil world there is no denying that significant and fundamental change will be the result.

Population

This is certainly one of the most fundamental areas of concern. Estimates of how many people the planet can support in the absense of oil vary widely, however none of those estimates even remotely approach our current population.

Government Rationing

Inevitably the government will need to take a more active role in reducing our reliance on petroleum. There are many forms this influence may take: increased taxes on fuel, regulations governing consumption such as mandating minimum fuel efficiencies for vehicles, incentives to explore or use alternative energy, penalties for over use, and just straight forward rationing.

Government intervention is subject to the focus of the current administration, the significant influences of industry lobbyists, the balancing, but less powerful environmental lobbies, taxpayer pressures, and economic pressures to name but a few. As a result, how involved the government gets, and what the timing will be, is highly variable. Some of this influence will be proactive programs designed to prevent future issues, but a great deal will simply be reactionary, and therefore, too late.

Agriculture

Agriculture is an energy intensive operation. Mechanized farming is a necessity in supplying modern populations. It also requires pesticides and fertilizers to achieve the significantly improved yields developed between the 40′s and 60′s. Petroleum is a key ingredient in fertilizers and pesticides. Our food is flown and transported primarily from external sources. Very few of the items you find in your local super market are grown locally.

Shortages in petroleum products and rising oil prices will certainly push food prices higher and limit choices. Should we experience rapidly falling petroleum production food shortages are certainly possible.

Roughly a billion people live on $1 a day³. Fuel prices and the government sponsored push to convert corn into bio fuels in the US helped exacerbate a world wide food shortage in 2008.((World Wide Food Shortages, partly due to rising oil prices – Al Jazeera, March 12, 2008)) The poor of the world are hit first and hardest, but in the long run even the first world is not immune to the agriculture industries need for petroleum.

Automotive

Seventy percent of petroleum is used directly in the transportation industry and ninety percent of all energy used for transportation is derived from petroleum. The single largest consuming sector of petroleum resources logically will see the most changes. Changes in our approach to personnel transportation are going to come about inevitably as a result of growing petroleum supply issues.

The typical automobile stays on the road for at least ten years. Although changes in personal vehicles will come about it will largely be as a reaction to a growing petroleum problem, and the lag time between the need that provides the economic and political incentive to make the changes and the actual fulfillment of that need through changes in the infrastructure will result in drastic alterations to current lifestyles.

Aviation

Commercial airlines and air freight obviously require petroleum. Although alternative technologies and energy are beginning to show headway in areas like automobiles, there is no equivalent to replace the jet engine. The lag in turning over technology in sectors like personal automobiles is amplified in industrial industries where assets have life spans in the decades. For the foreseeable future aviation is entirely tied to oil. Price fluctuations and pressures due to petroleum supply problems will affect this industry directly and immediately. An absence of petroleum means an end to commercial flight all together.

Industry

Industry is a term covering a broad spectrum of endeavors, all of which are tied to the petroleum economy in one way or another. Heavy industry in particular is going to face significant problems in transitioning to alternative fuels. In the same way that the aviation sector has no replacement for the jet engine, there is no simple alternative for the diesel engine. Powering heavy machinery with alternative fuels or technology poses a much larger hurdle than making the transition from the light gasoline engine in the auto industry. Impacts to these industries could have significant consequences to all aspects of the energy cycle and the economy.

Manufacturing

In addition to providing energy to various industries, petroleum also provides feedstock for a large variety of manufacturing processes. Styrofoam, plastics, food products, pesticides, fertilizers, paints, inks, medical products, cosmetics, asphalt, electrical components, synthetic rubber and fibers are all examples of products that use petroleum as a key ingredient. Without petroleum as feedstock a huge number of products essential to modern life are simply not possible.

References

A Crude Awakening: The Oil Crash – Basil Gelpke & Ray McCormack

1000 Barrels a Second – Peter Tertzakian

International Energy Outlook 2007 – Energy Information Administration

Twilight in the Desert – The Coming Oil Shock – Matthew Simmons

World Oil Market Analysis to 2030 – Energy Information Administration

Who Killed the Electric Car

Hubbert’s Peak Theory

Crude Oil, Uncertainty about future oil supply makes it important to develop a strategy for addressing a peak and decline in oil production – United States Government Accountability Office

Hydrogen Cars Won’t Make a Difference for 40 Years – wired.com

The Peak Oil Dancer – youtube

An Inconvenient Talk – The Walrus

Related News

The Big Thirst – NY Times, April 20, 2008

World Wide Food Shortages, partly due to rising oil prices – Al Jazeera, March 12, 2008

Over a barrel – Canadian Business magazine, February 12, 2007

Get ready for $4 gasoline – CNN Online, May 15, 2007

Oil-Rich Nations Cutting Exports – NY Times, December 9, 2007

Oil prices at all time high – Al Jazeera

Chavez threatens to cut off US oil – Al Jazeera

Venezuela breaks ties with Exxon – BBC

Footnotes

1. 1000 Barrels a Second – Peter Tertzakian [↩]
2. World Oil Market Analysis to 2030 www.eia.doe.gov/emeu/international/oilother.html [↩]
3. The silent tsunami – The Economist, April 17, 2008 [↩]