This is Part 2 of a two part commentary. Read Part 1 here.
Sunset in Texas image via swisscan/flickr. Creative Commons 2.0 license.
Understanding how we use oil and where it comes from provides many reasons why Americans should be worried about the future of oil supplies. The outline below presents the essential information. More about each section will be available through the www.peak-oil.org website.
ENERGY, ESPECIALLY OIL, IS KEY TO THE ECONOMY
- Nothing gets done without energy. The economy as a measure of real-world activity is based on energy and natural resource use, not finance. Whenever oil prices have risen sharply since the 1940’s, a recession has almost always followed. Attempts to manipulate the economy with fiscal and monetary policy cannot succeed if affordable real resources are not available. In particular, our water supplies and agricultural economy are very dependent on oil and other fossil fuels, while energy production requires a lot of water.
- We have two energy systems, not one. Nearly all transportation around the world is powered by petroleum, and most petroleum is used for “transportation energy.” Other sources – coal, natural gas, nuclear, hydropower, wind, and solar – are mostly used for “process energy,” meaning electricity, heat, and manufacturing. Advances in the non-oil sector have done little to satisfy the demand for transportation energy.
- High-priced oil tends to reduce other economic activity before slowing oil consumption directly, because there are few substitutes for oil. People do not drive 85% of the way to work, so they have to cut other spending to pay for expensive gas. The economic benefit from a gallon of gasoline or diesel is often greater in China and other developing economies than in the US and Europe, so they can afford to pay more than we can. Our economic growth has slowed when prices have risen rapidly, especially as oil prices exceed $100 per barrel.
- Despite large increases in the price of gasoline, American consumption has remained nearly level at about 9 million barrels per day for the last ten years. Diesel consumption, the second largest use of oil, dropped briefly due to the economic slowdown, but has now fully recovered, growing since 2009.
THE COST OF OBTAINING OIL IS RISING
- “Energy Return on Energy Invested” (EROEI) is an important concept showing how much energy (not just money) we get for the energy used in the extraction process. During much of the twentieth century, US oil extraction enjoyed an EROEI ratio of 50 or more, which meant that only 2% of the energy was consumed in the production process. Current estimates of oil from fracking and tar sands show an EROEI well below 10, which means we use 10% or more of the energy from that oil simply getting it out of the ground.
- Low oil prices tend to reduce oil extraction, because the newest oil sources tend to be the most expensive – tar sands, tight oil, deepwater fields, and so on. If oil prices fall too far, investors will not get the return they need to justify new drilling efforts, so many new projects will be abandoned or delayed.
- The rate of growth in conventional oil extraction around the world has slowed markedly since 2005, despite massive ongoing investments by oil companies in exploration and production efforts, because new oil is hard to find and hard to extract. Global oil extraction rates outside of the US grew only 3% in the eight years between 2004 and 2012, even though oil prices tripled during that period.
- Another factor has reduced the amount of net exports of oil in world trade and thus contributed to higher prices: oil exporting countries often increase their consumption levels faster than extraction rates, and consumption may continue to rise even if extraction falls. China, Indonesia, Great Britain, Egypt, Vietnam, Argentina, and Malaysia have all changed from exporters to importers in the last twenty years increasing the competition for oil in world trade.
NEW SOURCES OF AFFORDABLE OIL ARE NOT AS ABUNDANT AS IS COMMONLY CLAIMED
- In the last decade, two substantial new sources of oil have emerged in North America. One is the Canadian Tar Sands in Alberta, which currently yields about 1.5 million barrels per day of bitumen, a product that can be refined into oil. However, the growth rate of extraction has been slower than forecast as costs are rising, the environmental impact of tar sands oil production are substantial, and transportation and pipeline decisions could affect the economics of future production.
- The other new source has been “light tight oil,” extracted from shale deposits with fracking technologies, mostly in a few counties in North Dakota and Texas. While this oil has dramatically reversed the long trend of declining American extraction rates, studies analyzing the histories of individual wells show rapid decline rates (often 40-60% per year, compared to a few percent with traditional wells) and relatively small areas (or “sweet spots”) where fracking efforts are economic, leading to the prediction that the shale oil “boom” will be short-lived. More money is being spent on new wells than is being generated by cash flow from the oil, requiring a steady flow of outside capital to keep development going. Efforts to use fracking technologies for oil extraction in other states and countries have not yet been economically successful on a substantial scale, and government estimates of the size of the Monterey Shale in California have been cut by 96%. We agree with the International Energy Agency in expecting growth in US “tight oil” to end during this decade, while conventional extraction amounts will continue to decline.
- Oil extraction from deep water sources, especially in the Atlantic Ocean near Brazil, and from the Arctic is proving to be more difficult, more expensive, and slower to happen than many expected (or promised). The Macando (Deepwater Horizon) blowout in the Gulf of Mexico in 2010 was the result of the complexities that are a necessary part of pursuing difficult oil. The cost of cleanup and damages from that event has been almost equal to the total revenue from all Gulf of Mexico extraction in 2010. It now looks doubtful that Brazil will ever become a net exporter of oil. After Shell’s bad experience off Alaska, no major public oil company is currently drilling for oil in Arctic waters.
- While oil extraction rates have increased in the United States, this growth has been largely offset by declines in extraction and exports in other nations. Mexico’s oil extraction is one-fourth lower today than in 2005. Brazil and Kazakhstan are having great trouble starting major new projects. Nigeria, Libya, Venezuela, Sudan, and Iraq are all facing domestic unrest that challenges export levels.
- Fracking is also a major technology for the extraction of natural gas, and has reversed a long-term decline in American gas production. It appears that this growth and “abundance” may be limited, as the initial fields in Texas and Louisiana went into decline after only a few years of drilling. American gas production has increased less than 4% over the last two years. Fracking also creates many environmental concerns around water use and costs to communities. This paper deals primarily with oil supplies, but we are concerned with predictions about future natural gas production that we feel are overly optimistic, particularly those that suggest natural gas could be a major substitute for oil as a transportation fuel. Reports published by Art Berman, the Post Carbon Institute, and others have dealt with these issues in detail, and we must simply refer readers to those sources for now.
THE IMPACTS OF HIGH OIL PRICES AND LIMITED SUPPLIES ARE ALREADY CLEARLY VISIBLE
- High oil prices contributed significantly to high food prices and the global financial crisis. The effects are still being felt, resisting central bank efforts to boost the economy:
- US employment did not return to pre-2007 levels until May 2014.
- Europe seems stuck in a long-term recession. The countries most dependent on oil for energy were the hardest hit in the recent crisis.
- Pakistan (which generates much of its electricity from oil) now has only a few hours of electricity per day in its cities.
- The Arab world is full of unrest and conflict partially traceable to the end of Egyptian oil exports, as well as the worst drought in Syria in over 2000 years, record high wheat prices, growing populations, and other environmental factors.
- China’s economy is subject to challenges from high energy prices, water problems, and the need to combat pollution caused in large part by the combustion of fossil fuels.
- The large international oil companies are faced with major challenges, despite their resources and technological strength. The total oil extraction by the seven “majors” has declined by over 10% since 2009, even though they have raised their capital expenditure levels by 40-70% during that time. Their share of global production has fallen from 12.7% to 10.4%.
- In the face of claims of oil abundance, the world (Brent) price of oil has remained stubbornly higher than $100 per barrel since 2011. Since the US still imports almost half its daily usage of oil, those prices directly affect us.
HIGH PRICES AND DIFFICULTY IN INCREASING EXTRACTION RATES CALL FOR CREATIVE RESPONSES
- Conventional oil extraction has been generally flat or declining since 2005, and current unconventional extraction methods are more difficult, growing more slowly (US tight oil excepted), and more expensive than expected. Any significant future growth in oil availability – and therefore, growth in the global economy – depends on sources that are not currently identified or under development. Existing oil fields deplete by more than 5% per year, so new sources are constantly required.
- America’s current optimistic oil policy seems based on the hope that “somebody will come up with something,” and that what has worked in a few areas can be extended to many others. A more realistic policy would be based on assuming that we are at or near the maximum rate of production of affordable oil for a modern economy, and develop responses appropriate to that future. If we find marginal new supplies equivalent to shale oil, we should treat them as a one-time bonus to be used to pay for the transition to whatever is next.
- Many opportunities exist for creative responses to these challenges. Some responses, like more efficient automobiles, support our current way of life, while others, like localization of food production, community building, and information technology, help transition to a new economy.
- Since high oil prices make transportation more expensive, there are advantages to changing our transportation systems and functions, including electrification, mass transit, and transit-oriented development. These actions require capital, vision, and lots of time to have their fullest impact.
- Contrary to some claims, there is little evidence that the demand for oil is declining for reasons unrelated to price, or that we are moving away from oil. The need for moving people and goods remains active, as shown by the number of new airports around the world, the increase in car sales in China, India, and the Middle East, and the doubling of the size of the Panama Canal. There has been much discussion but little action toward electric cars and natural gas-powered trucks and trains, and those technologies remain more expensive than gasoline and diesel-powered vehicles.
- We should create a standby mechanism in the US for protecting society while rapidly reducing the use of gasoline and diesel fuels if an absolute shortage should appear. As noted above, high prices have had a very minor direct effect on oil demand, but impacts spill over into other parts of the economy. The Strategic Petroleum Reserve could help cushion a crisis, but it is not clear how the US would deal with the need to reduce the use of gasoline and diesel by 5 to 15% that seemed likely to persist for a long time without major impacts on the economy and society.
OIL SUPPLIES ISSUES ARE CRITICAL, AND INTERACT WITH OTHER RESOURCE CONCERNS
- The expertise of ASPO-USA centers on energy issues, especially those relating to supplies of oil and natural gas. Our nation faces many other issues from the use or availability of natural resources, and many of these are related to the availability or past use of cheap and plentiful energy or expectations of endless economic growth. Among these are:
- Climate change
- Availability of water for people and agriculture
- Population growth
- Soil quality
- Ocean acidification
- Phosphorus for agriculture
- Debt levels and other financial concerns
As we develop responses to energy constraints, we need to assure that we are not making other problems even worse. Notably, efforts to accelerate fossil fuel development could adversely impact climate change and the availability of water.
WE CONTINUE TO LEARN ABOUT THESE ISSUES
Over the last two years, presentations and conferences discussing energy constraints have included:
- Oil Wildcards conference, NYC, June 2012
- ASPO-USA conference, Austin, November 2012
- American Geophysical Union conference, San Francisco, December 2012
- Biophysical Economics/US Society for Ecological Economics, Burlington, June 2013
- Geoscience conference, Denver, October 2013
In addition, major articles have appeared in Scientific American, Science, and Nature magazines, as well as more specialized scientific journals.
Prepared for ASPO-USA by Richard E. Vodra ([email protected]). Information used in this two-part report came from writings, conversations, and emails from many people, including the following (and others): Art Berman, Jan Lars Mueller, Tad Patzek, Kurt Cobb, Jim Baldauf, Ron Swenson, Charles Hall, Colin Campbell, Jim Hansen, Doug Hansen, Nancy Deren, Troy Jones, Gail Tverberg, Jeff Brown, Mark Lewis, Richard Heinberg, David Hughes, Chris Nelder, Steven Kopits, John Howe, Steve Andrews, Ron Patterson, and Tom Whipple and the ASPO Peak Oil News and Peak Oil Report. None of them may agree with everything that appears here, but most or all would concur with the major themes.