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The Peak Oil debate rears its head

An article in the Guardian by environmentalist writer George Monbiot has led to some really interesting debate around whether peak oil will happen, when it might happen, whether it’s happened already or whether the old adage of “the stone age didn’t end because we ran out of stones” might be true or not.

Monbiot begins by saying this:

The facts have changed, now we must change too. For the past 10 years an unlikely coalition of geologists, oil drillers, bankers, military strategists and environmentalists has been warning that peak oil – the decline of global supplies – is just around the corner. We had some strong reasons for doing so: production had slowed, the price had risen sharply, depletion was widespread and appeared to be escalating. The first of the great resource crunches seemed about to strike.

Among environmentalists it was never clear, even to ourselves, whether or not we wanted it to happen. It had the potential both to shock the world into economic transformation, averting future catastrophes, and to generate catastrophes of its own, including a shift into even more damaging technologies, such as biofuels and petrol made from coal. Even so, peak oil was a powerful lever. Governments, businesses and voters who seemed impervious to the moral case for cutting the use of fossil fuels might, we hoped, respond to the economic case.

I have found myself in the same conundrum. Is peak oil a good thing or a bad thing? In the New Zealand context, with a wealth of renewable energy options, I’ve probably found myself falling on the side of peak oil being a good thing – a resource scarcity that means we can make a start weaning ourselves off oil and all the environmental, social and economic damage having extremely cheap oil seems to wreak – particularly in the area of transport.

But Monbiot now suggests that the “peakers” might have got things wrong – with the potential for significantly more oil to be pumped out over the next few decades than we had foreseen. This is based on a report by oil executive Leonardo Maugeri, published by Harvard University. Monbiot picks up on what the report says:

[The report] provides compelling evidence that a new oil boom has begun. The constraints on oil supply over the past 10 years appear to have had more to do with money than geology. The low prices before 2003 had discouraged investors from developing difficult fields. The high prices of the past few years have changed that.

Maugeri’s analysis of projects in 23 countries suggests that global oil supplies are likely to rise by a net 17m barrels per day (to 110m) by 2020. This, he says, is “the largest potential addition to the world’s oil supply capacity since the 1980s”. The investments required to make this boom happen depend on a long-term price of $70 a barrel – the current cost of Brent crude is $95. Money is now flooding into new oil: a trillion dollars has been spent in the past two years; a record $600bn is lined up for 2012.

And it’s not just in politically difficult areas where the additional oil is coming from. In fact, much of the increase – according to the report – will be from the USA:

But the bigger surprise is that the other great boom is likely to happen in the US. Hubbert’s peak, the famous bell-shaped graph depicting the rise and fall of American oil, is set to become Hubbert’s Rollercoaster.

Investment there will concentrate on unconventional oil, especially shale oil (which, confusingly, is not the same as oil shale). Shale oil is high-quality crude trapped in rocks through which it doesn’t flow naturally.

There are, we now know, monstrous deposits in the United States: one estimate suggests that the Bakken shales in North Dakota contain almost as much oil as Saudi Arabia (though less of it is extractable). And this is one of 20 such formations in the US. Extracting shale oil requires horizontal drilling and fracking: a combination of high prices and technological refinements has made them economically viable. Already production in North Dakota has risen from 100,000 barrels a day in 2005 to 550,000 in January.

The gist of Monbiot’s article is not in the “hooray we’re saved”, but rather from a climate change perspective that we can’t depend on peak oil to save us from climate change – because (according to his article) there’s plenty of oil left to fry us all.

There have, of course, been quite a few responses to the article. Including a further piece in the Guardian by writer Jeremy Leggatt.

Ahead of the credit crunch, commentators echoed the incumbency mantras right across the media. Ahead of the oil crisis, the same is happening. Just Google “peak oil myth” and see what comes up. Yesterday George Monbiot joined this group with an article entitled We were wrong about peak oil. There’s enough to fry us all.

The many misunderstandings he relays begin with the title. There is more than enough potential oil resource below ground to create the climate disaster he refers to. Peak oil is not about that. It is about when global production falls never again to reach past levels: a disaster, if the descent hits an oil-dependent global economy years ahead of expectations. This descent depends on flow rates in oilfields, not the amount of oil left. What worries those who believe the global oil peak is imminent is the evidence that the oil industry will not be able to maintain growing flow rates for much longer.

As is noted above, there is a very important distinction to be made between the amount of oil in the ground and the rate at which that oil can be extracted. The oil industry needs to suck out of the ground a pretty big amount of oil, each and every day, in order to avoid oil prices increasing dramatically and that amount needs to grow as demand increases around the world. Much of the newer “unconventional” oil alluded to in the debates has the potential to create masses of oil, but because it’s so intensive to get the stuff out, you can’t create masses of it at any one time.

Leggatt continues:

Many within the incumbency itself are sounding alarms. Every year, when the Association for the Study of Peak Oil (ASPO) meets, recently retired oilmen queue to give their latest assessments of how their industry is getting its asset assessment wrong. The latest ASPO event was held a few weeks ago in Vienna, which I attended.

There has been “a boom in oil production” of late, Monbiot says. Wrong. Global production has been essentially struggling along a plateau since 2004, as Bob Hirsch, an ex-Exxon advisor to the US Department of Energy describes. Hirsch expects the descent to begin in one to four years.

Monbiot is correct that there has been a small increase in oil production in the United States in recent years. But can that continue, as he infers? Gas-industry whistleblower Art Berman describes how the shale gas gold-rush of recent years, now extending into shale oil, may well be a giant ponzi scheme: decline rates in wells are unexpectedly fast, meaning more and more have to be drilled at ever more expense, meaning ever more money has to be borrowed against cash flows from production that fall ever further behind. He looks at the resulting disaster in the balance sheets of oil and gas companies, and expects the bankruptcies to start any time soon. John Dizard has also warned of this particular bubble, in the Financial Times.

Even if oil production in America could somehow grow all the long way back to self sufficiency, what of the global picture, when conventional oil peaked back in 2006, as the International Energy Agency (IEA) has shown? The six Saudi Arabias of new production that would be needed to lift production to 100m barrels a day by 2030, according to the IEA, are a laughable prospect to the whistleblowers of ASPO, as many presentations in Vienna showed. The IEA clearly does not believe it is feasible. Neither do many still active in the incumbency, not least Total’s head of exploration, who recently warned that peak is just around the corner.

Further critique is available here, which looks at – in more detail – the actual study by Leonardo Maugeri, picking some pretty big holes in it.

Much of the confusion about peak oil seems to relate to a bit of a misguided assumption that it’s all about “when the oil runs out”. Higher prices and a shift into more unconventional methods of extracting oil may well mean that we don’t run out of oil for many hundreds of years to come – which is a pretty good thing considering how quite a lot of pretty useful and valuable stuff is made out of oil, we wouldn’t want to be without it.

The issue is much more around what happens if we can’t supply enough oil to meet demand, with the market response obviously being that prices increase hugely. A much higher price for oil makes little difference to whether I can still have a largely plastic laptop, whether the plastic pens on my desk can continue being made and so forth – this is real high value stuff that utilises oil very efficiently and it’s heartening to know that there will still be some oil for this really high value stuff a long way into the future. What really matters is the low value, inefficient use of oil – which I suspect is particularly in the form of private transportation. We may still have plenty of oil in the future, but if it’s twice the price that has a big impact on what our future transport planning should be looking at.

Interestingly, this process is already happening all around the world, with reduced driving being a big contributor to the fact that developed world countries are using much less oil per capita than we were a few years ago. We just need to wake up to this fact.

17 comments to The Peak Oil debate rears its head

  • Ash

    Related:

    “Oil has long been expensive, because low-cost oil producers such as Saudi Arabia have learned to demand high prices by limiting supplies and refusing to sign long-term price agreements. Coal had always been different — traded locally, on both long-term concessions and short-term spot contracts. Two years ago, China and India could supplement their domestic coal supplies with imports from Indonesia, Australia and South Africa. Some of the cheapest coal mines serving China in 2010 were in Indonesia, where India’s Adani Power Ltd. and Tata were purchasing coal mines and building their own shipping and port facilities to ensure they could supply a wave of huge new power projects.

    While coal is geologically more abundant than oil, cheap coal, close to population centers, is not. The biggest coal- producing region in the U.S. — the Powder River Basin — can get coal out of the ground for about $12 a ton. It costs roughly $60 a ton to ship it to power plants in the Ohio Valley. China’s vast reserves near Inner Mongolia can be mined for $25 a ton. But by the time it travels by rail across North China, then by sea to southern coastal cities, the cost rises to more than $125 a ton.”

    http://www.bloomberg.com/news/2012-06-19/cheap-coal-is-dead-long-live-renewables-part-1-.html

  • Mr Plod

    The sooner NZ wakes up to the need to develop an electric future based on our oodles of renewable sources and gets off the drug of imported oil the sooner we can divorce ourselves from the circular Peak Oil argument. Less imported oil would also help a fair chunk of our balance of payments issues and maybe save us from having to sell assets.
    Electric commuter trains are a core part of this and we should continue to push for the electricifcation to be extended to Pukekohe on the end of the current project.

  • Agree completely with Mr Plod there. This is clearly the electric century and NZ is well placed to take advantage of this. Last year 8 billion dollars on importing oil. Daft.

    To add to the debate here’s an analyst with a cute line down the middle:

    “I can demolish both positions in two sentences.

    Cornucopians do not know how to subtract.

    Doomers do not know how to add.”

    http://www.declineoftheempire.com/2012/06/how-much-of-a-threat-is-peak-oil.html

  • Ari

    Yay, lets burn 12 Billion dollars worth of our coal to power our electric cars… Or do what South Africa does and turn our coal/gas into liquid fuel. Kyoto Protocol be damned. Both these options are cheaper than the best option which is a renewables based solution of hydro/wind/solar/geothermal/biomass/wave/tidal etc. No one wants a wind farm blotting out their coastline.

    Shale oil/Tar Sands are a huge resource, but so expensive to extract both in terms of cost and energy. You need to burn barrels of oil to get one barrel of oil out of it. Not to mention enormous amounts of CO2 released. I don’t know if peak oil has arrived or not, but what is certain is that the age of cheap energy is over (at least until we get some magic cold fusion power source). Better overall energy use in the way we live and increasing renewables are making more and more sense.

  • lostinsuburbia

    The thing that often gets forgotten about unconventional forms of fossil fuels is that it can prodigious amounts of energy just to get it out of the ground compared to say a Saudi oil well. For instance a Saudi well has an energy return on energy investment (EROEI) of about 100:1 (i.e. one barrel of oil expended will get you 100 barrels out of the ground) whereas shale gas or oil sands is more like 3:1 or 4:1. This also has a huge impact on the usefulness of these other reserves – at least as a source of energy for transportation. And of course there are the other costly impacts of exploiting these sources e.g. water contamination and depletion, GHG emissions. And I agree that is increasingly wasteful to use oil for transportation, with dwindling reserves it needs to be used for more important things like food production, pharmaceuticals, and plastics.

  • Matt Clouds

    The term “plateau oil” is more accurate, as it recognises that achievable supply won’t fall for decades but it will become increasingly expensive to just maintain (never mind increase) current levels of production. “Peak oil” implies we’re on or approaching a downward slope to zero.

    • The ‘peak’ refers not just to production, but the relationship to demand. If production plateaus or declines but demand/consumption continues to increase, thats where you get the peak.

    • Matt, not decades, perhaps this decade. Depending on demand.

      • Matt Clouds

        Depends whether countries pursue dirty oil or not. What’s available in the shale deposits, through coal-to-oil, and from the tar sands, is an enormous quantity. Tap those and there’s quite sufficient to maintain current supply for a very, very long time. It’s not finest dead dinosaur juice, but it’s still oil and there’s metric butt-loads of it.

        • At a very low EROI. With economic decline much may be forever out of reach.

          • Matt Clouds

            It only has to be available for < USD100/bbl to be "cheap" compared to what we're currently paying, Patrick, and it most certainly is cheaper than that to extract from those various fields.
            No, we're never again going to get oil for even USD30/bbl (never mind the USD10 you suggest below), but the price has not been below USD70/bbl for quite a few years now and the world is not showing much sign of weaning itself away from oil wholesale. The tar sands are economic at USD38/bbl or thereabouts, or about half the lowest price we've seen in the last year. Shale oil is also economic at far below current prices.

            You're making the mistake of thinking that oil will have to go back to its historic low-point prices to remain viable. That's far from true. If the price stabilised to USD70/bbl, these alternative sources would remain viable for a very, very long time and a lot of the world would see fuel prices drop quite a lot from their current levels.

          • The mistake is yours; there is a big difference between the marginal cost of an existing field (self report at around USD40 in continental US) and the costs of developing new fields in very difficult geographies (arctic, ultra deep water, etc). What price is needed for these fields to be viable? Who knows, but huge damage will be done to our economies by trying to get that stuff. I don’t claim that USD10 is needed it’s just that that’s what it was at the end of last century when this global economic model was last working ok. We aren’t going back there and what is the result? Hardly happiness and joy and business as usual. My point is we in the west all have to change, and we will and we are. But the longer we spend pretending there isn’t a supply/demand problem the harder that change is going to be. Will we keep sucking every last drop out of the ground? Yes. Will our standards of living be the same? Hell no, until we learn to use what’s left better.

  • Ross Clark

    A further contribution, from Scoop‘s Gordon Campbell:

    http://werewolf.co.nz/2012/06/has-the-peak-oil-idea-peaked/

  • KLK

    Even if supply of oil was assured, the supply of available land in Auckland to tarmac in order to provide for car growth most certainly is not.

    Only option is to go underground. And if you are spending that type of money, you are better off doing it for a transport mode that can carry 10x as many people through that tunnel every hour.

  • And what do lower oil prices mean in the context of nil supply growth?:

    http://www.theoildrum.com/node/9293#more

  • Publius

    Agree completely with Mr Plod above.
    If a govt was genuinely serious about out nations financial position the best thing to start with is look at what costs our country the most.
    NZs single biggest expense item is petroleum products of $7,157,000,000 (7 billion)/year!
    Now if I was a government I would think, “what can I do to reduce this?”.

    1. Schemes to make finance available to companies/councils so they can afford machinery/whatever that might cost more but doesn’t use petroleum. (ie, give some $ to auckland council so replace diesel trains with electric).
    2. Encourage “diluting” gasoline with local ethanol. Even if the ethanol costs as much as the gas it was replacing, you now have 20% of the price staying in NZ with flow on effects. (local jobs etc)
    3. Tighter fuel efficiency standards for vehicles.
    4. Subsidise the freight train system, or encourage it’s use. Less diesel used to move freight this way.
    5. Encourage electric cars — because every one is using fuel from NZ (electricity) and not imported fuel.

    When you spend $7 billion every year with no hope in sight you would have to be a fool to not be prepared to spend even $2billion to make serious changes that could give a real reduction long term.

    What we need is more “think big”. Seriously for all his faults Muldoon at least had a vision. The fuel refinery means we enjoy cheap fuel prices (seriously – nz’s fuel is some of the cheapest in the world before taxes because we can import crap crude and refine it ourselves), we have an enormous supply of natural gas with a pipeline to our biggest population and industry centre in auckland. These assets still live on and are still giving the nation an advantage.

    National don’t sell, start building!

    • Current gov and their type all believe that fate of many of those projects has proven for ever that the state should never invest in energy infrastructure. So they face this new age as if it we’re the last. They fail to understand the differences between the 70s oil shock and our current situation. The supply constraint then was an artificial one caused by the withholding of supply by a cartel OPEC, not the much more problematic problems caused by reaching a geological limit. Furthermore the development of new non-OPEC big and accessible fields in the 80s & 90s is what really gave us the 25 years of cheap oil (North Sea, Alaska, Mexico as well as the opening up of the former Soviet fields to the global markets) and that undermined the value of many of the think big projects. Those three fields are all in decline (and the FSU ones are certainly at their peak) and the new scrappy bits and bobs that are being persued now are not game changers like those were as the oil is very expensive (energy intensive) to recover and diffuse. There will never be 10 dollar oil again, or at least there won’t be outside of total economic collapse in which case we still won’t be able to afford it.

      So what does this gov invest in?: endless highway building and a bit of broadband so we can all watch movies online and send whatever money we have to Hollywood rights holders (this is what theTPP is really about- enabling US corporate lawyers to own us). Well hopefully the later will prove useful for some knowledge businesses too. But the RoNS? What a disastrous way to piss your nation’s wealth away.

      And all because they lack the imagination or intelligence to understand that this decade will not run as a repeat of the little warning we got in the 1970s.

      At least the last gov was cautious (too cautious in some areas) and did direct the energy SOEs to invest in renewables so we have a bunch of new Geo and wind generation to balance the Hydro legacy from our forebears…. ah but now we are going to cash these assets in at the casino for a couple Tequila Sunrises……Relax, worry about tomorrow when it comes, eh John?

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