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ASPO-USA conference, second day, after lunch

This is a continuation of a series of reports on the ASPO Conference on Peak Oil that was held in Washington DC this week. I had covered the first 24 hours in three earlier posts, and return to the meeting at the luncheon on the second day of the meeting.

At the beginning of the lunch the Association presented the King Hubbard Awards for excellence in energy education. These, deservedly, went to Colin Campbell, Tom Whipple and Art Berman. They were followed by the Tom Whipple Volunteer Awards, which went to Lt. Col. Davis, Greg Geyer, and Mary Block.

The first speaker was Jeff Rubin who pointed out that although the deepest recession since the second world war has been blamed on the housing bubble and the financial problems of the American banking system, the problem was really global in nature, and it is not difficult to show the correlation with energy prices.

Historically economists have always said that when prices go up, then more oil will be released to the market, meeting demand (or substitutes will be found), and the price will fall. This time they were wrong. There was no Alaska or North Sea to provide that additional source, only tar sands. With prices escalating, oil demand declined in only the USA, Canada and Europe, which group has historically bought most of the international trade, but which now only consume half of it. That group has not dropped demand, it is just that others are now gaining in consumption (China is now at 9 mbd). OPEC now consumes some 14 mbd, and this is largely because fuel is so cheap in those countries (at around $0.20 a gallon). The OPEC internal consumption (as the Export Land Model predicts) is used at the cost of supplies to the export market.

Oil prices and demand fell during the recession, but are now growing again, as we return to $80 a barrel. As a result he is anticipating triple-digit oil prices again next year. For as demand rises, the world is no more capable of balancing supply and demand than it was two years ago. He mentioned the conundrum that since price controls supply growth, the Government cannot bring back cheap oil, and the balance between affordable general yet sufficient supply and the price of that supply is becoming a more difficult balance to sustain.

The rise in fuel costs will change the paradigm for manufacturing. For while it is cheaper to makes steel in China and ship it when transport costs are low, as those prices rise the cost of shipping will become too high. The benefits of local manufacture will become more evident. These economics will kill the suburbs. That will not be controlled by Government fiat, but rather the principles defined in Econ 101.

As the high-prices bring our entry into the Apocalypse it will not, at least initially , be that grim. The price changes will force change and this may help local manufacturing. So we may be moving to a better world, at least transiently.

The second speaker was Bianca Jagger who might, at first, appear to be a strange choice for the conference. However, as she explained, she has been following the topic for many years and initially had just planned on attending the conference, until asked to speak. She spoke of the need for a new Copernican Revolution in the use of renewable technologies. With no treaty in Copenhagen there is less than a decade before we will see dramatic changes in climate, due to greenhouse gas effects. Further the dependence on oil, and our need to get it from deeper waters and arctic regions threatens even more devastation for future generations.

The interactions of 9 billion people with the environment by 2050 will also impose increasing demands on the energy infrastructure, and have their impacts, some of which we have seen this year already in countries such as Pakistan and Russia. We must hold companies responsible for their damage, and she expressed concerns over the tar sand mining in Alberta.

She noted how the subject of Peak Oil had been considered a myth, but that the JOE Report showed that it was not, and she cited other reports that concurred. With the peak arrival we need the President to waken us from our current sleepwalking into disaster. We must democratize and decentralize energy production and if the Federal Government does not do this, then states and local government must act. We cannot compartmentalize the effort as the effects will impact us all, and we must make the investments to replace fossil fuels.

In the following question period the speakers pointed out that we should not expect the Administration to move until the point is reached where we really won’t have many choices left. But we have a greater capacity for change than the government gives us credit for. The problem is that with only 4 mbd of spare capacity, which may come at an increasing price, the balance between stability and recession will be small. We are, perhaps, at the bounds of affordable oil.

The worse the price rise, then the worse off the poorer segments of the community become, but it will become a zero sum game as oil production is bounded. It can be resolved by price – more bicycles are used in Copenhagen, for example, because cars have a 180% surcharge, and power is used economically because it costs $0.30 a kWh.

I chaired the coal session immediately after lunch, and briefly referred to my experience in hand-mining coal in a seam about 20 inches high, and the difficulties King Edward I had in banning the burning of coal. I then introduced Kjell Aleklett who paid tribute to Matt Simmons, and talked of the formation of ASPO – in which Matt played a part, before turning to the topic of coal supply prediction. In the IPCC reports there is an anticipation of coal use rising by 500% by 2100. But his group have been studying the likelihood of this happening and have written several peer-reviewed papers on the topic. (For example Dr Michael Hook nailed his dissertation on the topic to the wall last month, an Uppsala tradition.) He noted that there is a difference in the relative ranking of the world's largest coal reserve holders and those that mine and export the most coal. China, for example, has 14% of the world’s reserves and yet mines 45% of the world’s coal. (These may be a little off due to my slow transcription of his table). There are only 10 nations that can be considered, as exporters, the “drug dealers” of the planet.

Global production is dominated by the big 6 (USA, China, FSU, Australia, India, and S. Africa) but the world is changing and increasing competition and regulation is changing the use and availability of coal. It is a fuel where there is no correlation between price and reserves, but we are now seeing a decline in coal quality to the point that we are at a peak in the energy level that can be produced from American coal. There are small changes that can occur (it is possible for Pennsylvanian Anthracite, which has peaked, to recover) depending on price but in general this is true. American hopes lie in the reserves of states like Montana, but local opposition, due to the sodium content of the water, makes this mining unlikely.

He then looked at production from the other large producers, and stated conclusions on their future performance, leading to the overall conclusion that coal will peak globally in 2030. He was not favorably impressed by the chances for coal-to-liquid (CTL) plants, and they may only possibly play a part in the future. None of the IPCC models consider peak oil, gas or coal, yet we cannot assume a business as usual (BAU) future, as fossil fuels run out. Concerns at the moment in Sweden are more related to politics than geology. And while coal will remain important, it will not be an answer to the energy challenge.

In questions, one of the audience from Montana challenged the assumption that coal is unpopular in the state, and noted that it is likely that there will be considerable coal production in the future. Dr. Aleklett also noted that coal production is limited logistically and by infrastructure, rather than resource. And coal does not contribute to solving the liquid fuels problem.

David Rutledge discussed coal production in terms of the IPCC report, noting that the 2007 report showed oil production rising to 2100 in all 19 models that they ran in predicting future trends. His goal became one of reducing uncertainty in the predictions, and he began by explaining some of the statistical methods he used. He exemplified this by showing that UK coal production peaked in 1913, and is now down to what it was in Napoleonic times. Using statistical methods he was able to predict the likely total UK coal production over time, at around 27 billion tons. Future reserve estimates collapsed in the 1960-70 period as evaluators realized that reserves could only be coal that could be economically mined.

He looked at four regions, UK coal, Pennsylvania anthracite, France and Belgium, and Japan and South Korea. In all cases he found that mining will only extract about 25% of what was once considered a reserve. He tried to look at Chinese coal but had problems getting reliable statistics. While he was able to get good agreements between his plots and predictions and historic numbers his results were incompatible with IPCC coal presumptions.

Coal does not have the global fungibility that oil has and is more of a regional market commodity. He used Tom Wigley’s MAGICC computer model, but in trying to evaluate future temperatures he noted that, as a result of the Climategate incident, that the British Met Office are redoing their temperature records. He discussed some of the problems in assuring accurate temperature records. But overall he was confident of the IPCC predictions and those on the future rise in sea level, quoting Stefan Ramstorf.

Following a break, Dr Robert Hirsch chaired a session on the link between Energy and the Economy, and it was possibly the bleakest of the meeting. Chris Martenson talked about looking at the economy as a straight highway, and then hitting a bend. While models often see progress in linear terms life does not turn out that way. Money is loaned into existence and credit (and thus debt) has increased over time. Since 1970 it has doubled five times. Money and energy have been tied, but while money must continue to grow, energy cannot. Credit market growth (with an R^2 of 0.98) has an exponential relationship with time. He sees the problem not with the individual smaller bubble causes of housing, etc but rather the overall credit size itself.

He sees the problems coming in the 2014-2015 time frame when Peak Oil will be recognized and while growth may continue, prosperity may not.

He was followed by Nicole Foss- who many of us have read under the pen name Stoneleigh. She sees fossil fuels as generating the largest bubble in history. The economy has been driven up by energy, but as that declines what will take its place? In the sense that bubbles are Ponzi schemes where only early investors make a return on their investment, as this one comes to an end as the largest suckers get fleeced, so they collapse to general hurt.

Markets are driven by perception rather than reality. But by the time the general public hears of “a good thing” it is generally over. Hearing the “it’s a new paradigm” should warn you to sell the stock. But the world is driven on emotion. And when there is a collapse it is often sudden, bringing the value down below what it was before the bubble began. (And oil prices are following this model.) From this she could see nothing ahead but progress into a deflation and depression. We are already in a large debt and liquidity trap and as credit disappears the depression will develop and be sustained. The huge derivatives market may be the first to go, given its insignificant intrinsic value.

The problem is in part that it will be based on reducing volumes of oil, and with that reduction there is no possibility of a rebound, since the resource is not there to develop it. Oil has thus hegemonic power. The depression will, however, sustain its dominance since reduced demand will allow it to remain dominant.

The final speaker of the evening was Robert Hirsch, who has also recently co-authored a book – The Impending World Energy Mess which was available in signed copy at the meeting. In large measure his talk followed the book (from which you may gather that I did buy, and have half-read, a copy – and it is worth doing so, I may do a review later). He noted that the economy depends on energy, not the other way around. Further we should expect that the general public will still be surprised when oil supplies start to decline in the next 2 – 5 years. From then they will continue to decline for at least a decade, until alternate sources of fuel become sufficiently available. He covered the oil problem, including their forecast of how it will develop, and what an individual could do about it.

The story is a familiar one to the peak oil community: we are over reliant on a few giant oil fields that are depleting and not being replaced. We have been sensibly in a production plateau since 2005, something not predicted by earlier models, but there are an increasing number of reputable sources that see an end to the plateau, and the consequent decline, coming relatively soon. This will impact GDP and hurt national economies. The recent recession and drop in oil demand may have only shifted the onset of the decline by a few weeks.

It is unrealistic to expect a rapid answer to the decline from politicians. Looking at the likely rate of decline, a 2% fall could be easily handled, a 4% fall could be handled with difficulty, but at 6% it is going to be bad. They have had to guess, and think, at the moment that it will likely be at around 4%.

China, having foreseen this problem, are doing smart things to prepare for it. We in the West are not. It will lead to increased tensions – though they did not look at the potential for resource wars, or the likelihood that producers would withhold production for political or economic reasons.

Looking at individual response, we should all expect to be impacted, and because of the lack of political ability to resolve the issue (or even to address it yet) we should expect that the result will be very similar to the oil shortages of the 70s. There was a degree of panic – this will happen again. This time, however, there will be no North Sea or North Slope to come to the rescue. Nor can the oil taps be opened wider to remediate the problems. As a result he has got out of the market – since good stocks and bonds will be hurt as well as bad. He has added annuities to his portfolio, bought some gold, and moved closer to mass transit and the shops.

He reminded us that this is a liquid fuels problem, while most renewables (wind and solar and hydro) deal with the electricity supply, which is not helpful to the crisis. We also have enough food. The issue is in transportation where we need a substitute for oil.

In questions he was asked about rationing. He fully anticipates it happening, but it will be very complicated to develop and impose. Countries will respond in different ways and become more independent. The United States will have to reindustrialize, since it will not be able to rely on foreign manufacture. We increased productivity by having oil help labor. Now this must reverse.

He did not see the problem being deflation, but rather in the control of inflation. But then it is easier to write a history book than a forecast. He could only see that many people will get hurt in the coming years.

On which cheery note I went to find a drink, have dinner and retire for the evening. More later.

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