Energy Security

[Dayuhan]

Rick...

Forgot to mention: another thing that bothers me about the data on the Oil Drum link you is that the historical export data for Venezuela is simply wrong. Venezuelan exports peaked in 96, had a sub-peak in 2000, and declined steeply from 2000-2003. The Oil Drum chart shows a sharp rise in Venezuelan exports from 2000-2003. If their "country-by-country analysis" misses out on historical data that is a matter of record... how are we supposed to trust their projections?

Given the above, it seems like a near term peak is almost certain since the assumptions of the other models are unlikely, in my view, to come to pass. For instance, $170B worth of oil projects have been cancelled in the last nine months due to the credit crunch and reduced near-term oil use projections. (See the various megaproject databases for more on that.) That's why the near peakists are asserting that we will never surpass the production of last summer. The projects to do so are no longer on the books and depletion marches on.

Some oil projects were put on hold when prices and demand projections dropped. Liquidity was not an issue: Saudi Arabia, Kuwait, Abu Dhabi etc do not face meaningful liquidity constraints. They are simply limiting new investment to the level they see as necessary. They have no incentive to produce more than the market will consume.

In the medium to long term both production and consumption are responsive to pricing. Growth and energy consumption are not necessarily proportional: look at a chart for OECD economic growth from 2002-2008 and a chart for oil consumption over the same period.

The other big question is a simple one: how much expensive oil is really out there? The only honest answer is that we don't know: for most of the last 30 years there has been little to no incentive to even look for oil in places where production costs would exceed $30-40/barrel, let alone develop these resources. We won't see significant moves in this direction until prices are sustained at a level at or above the $60-70 range. A spike will not inspire the necessary investment, it needs a clear, sustained price plateau.

High prices will flatten demand growth - it may not happen overnight, but it will happen. Look for the Chinese to build a lot of nuclear plants and burn a lot of coal over the next few decades: Greenpeace will be pissed, but the Chinese don't care. NIMBY is not a problem there.

High prices will call up more production. It won't happen overnight, but it will happen. How much more? Again, we don't know.

Political and security developments will have a major impact. 10 years from now Iraq could be producing 6mbpd... or nothing. Similarly variable possibilities exist for many other producers, and are almost impossible to project or quantify.

[Rick M]

Welcome, Andre, and thanks for your list of projections re timing of peak..
The CERA graph is also useful… it highlights the fact that price volatility may be more problematic than sustained high prices, since volatility will routinely undercut the efforts to bring the more expensive (and eventually necessary) oil on-stream.

Steve, once again your observations are detailed and specific.
1. de Sousa’s graph
I am trying to contact Luis de Sousa and will invite him to join this discussion.
I assume that he will be able to defend his projections.

2. Incentives for optimism
I agree with many of your observations.
But there are many reasons for industry to present an optimistic front and these outweigh the benefits of raising the alarm (which you identified).

I am no financial analyst, but surely if potential investors believe that individual oil companies were faced with decreasing access to viable reserves, were burdened with aging infrastructure, were likely to be penalized by some sort of “carbon pricing,” and were facing an significant (perhaps government-supported) shift to alternative sources of energy, this would surely hurt their ability to retain investors, the value of their shares, and their overall financial viability.

Similarly, government bureaucrats surely have a vested interest in assuring the public and the Ministers/Secretaries (to whom they are accountable) that they are doing a wonderful job of anticipating future needs and laying the groundwork for that.
There are many other reasons to maintain the status quo: employment, royalties, safeguarding investment, retaining stock-holders, maintaining existing flow rates, etc.

Politicians are extremely reluctant to sound the alarm on an issue for which they have no credible & palatable solution. When one considers the incomparable net energy which we get from petroleum and the many benefits and comforts which we obtain from it, who on earth is likely to vote for a politician who (as you point out) is describing an unhappy scenario based on a speculative scare chart?
That politician would be characterized as a scare-mongerer, a person who lacks faith in the creative abilities of his nation, is unworthy of a leadership role, etc.
If you take a look at some of the videos of presentations by Rep. Roscoe Bartlett, you will not that he is speaking to a near-empty hall much of the time… no-one is interested.

To his credit, he doggedly perseveres, stressing always the larger points which really matter:
- fossil fuels are finite
- we are using oil at 1000 barrels a second and have become dependent on it for virtually everything
- it’s getting harder and more expensive to obtain
- our oil-related infrastructure commitments (highways, auto sector, heating, agri-food, military, etc) are enormous and will require decades to alter (to what alternative source?)
- carbon emissions are beginning to inflict serious environmental consequences
and so on… you know all of this and I presume that you would not quarrel with any of these larger points.
Roscoe (now 82) keeps on pushing, reminding people how worried he is for his grandkids.
He deserves a medal.

The details over when specific countries peaked in production or in their exports will, in the end, matter little.
I am certainly no fan of Bush, but I do think he was correct in referring to our relationship to oil as an addiction.
Despite all the info on climate change, we regularly see people addling their cars to run the A/C… 200 hp to keep someone cool on a perfectly normal summer’s day.
Most North Americans will resist any attempt to deprive them of these everyday comforts, the political perils.

Sorry for the rant.
We’ll get back to the issue of export decline, but this is enough for one posting.

--Rick

[aangel]

Hi, Steve. There is a lot in your post so I'll just address of few of your points and perhaps Rick will discuss the others.

One thing you mention is that there is little incentive for bureaucrats and industry spokespeople to hide "bad news." I see it completely differently. The incentives to keep smiling and saying there is no problem are many and very, very strong.

For industry, their company share price is directly correlated with the expected future earnings of the company. For an energy company to say that it is having or will have trouble securing future product to bring to the market would mean an immediate negative reaction by Wall Street. Businesses must be forced to disclose material adverse information on a prospectus, for instance, because the natural tendency of people is to hide the bad news so as not to risk doing business. I think it highly unlikely to expect to hear bad news from the oil industry, the incentives and penalties all line up to hide bad news not to be forthcoming about it.

For bureaucrats, they have different forces at work but the primary reason they stay silent is because no one gets credit for exposing a danger if the danger fails to come to pass. The risk of a danger not happening and looking like a fool is just too great. So bureaucrats and politicians are trained very quickly by their constituents to be very conservative. Stick one's neck out and it will get handed back to you. The public is very unforgiving on this score.

And it's not just in government. I have had many conversations with business people who understand and agree with what I am saying and when I ask them, "Will you say something about this?" they reply, "No way. What if you're wrong?"

I assure you there are many people out there currently participating in this conspiracy of silence. The background feeling is that it's ok to miss a big danger if everyone else misses it, too. After all, how could I be blamed for not speaking up when no else was speaking up?

And for both groups no one wants to be the person who shuts down the party. This is, I think, a big reason why the real estate/credit bubble we are seeing burst went on so long. Of course some participants just wanted to get their share out before the bubble pops, others actually can't see the problem and the ones who saw the problem mostly stayed silent, too, or were silenced (i.e. fired, told their opinion should be kept to themselves, etc.).

To see how people who raise the alarm are treated and why there are so few whistleblowers/alarm raisers of any sort, watch how Peter Schiff was treated in this video:
http://www.youtube.com/watch?v=2I0QN-FYkpw

Of course he was exactly right. He spotted the trends, saw the peak in the US economy and was ridiculed. How many people have the courage of their convictions to endure that? It take a lot of courage to say something in the face of no agreement and not many people have it. Researchers who examine planetary trends (Club of Rome, Limits to Growth) are regularly called fear mongers. Humans aren't wired to hear bad news and actively avoid it until it's too late.

I assert that the near-term oil models make tremendous sense when one really looks into them and the far peak models require the kind of misplaced optimism (I would actually say poor analysis) that was demonstrated by the people in the video above.

Declining top line production (64 of 98 countries already past their peak and growing), declining net exports, decreasing net energy (aka energy returned on energy invested), how late the hour is, how poor the alternative energy sources are when compared to fossil fuels, the contraction of credit that would have enabled us to kick our fossil fuel dependency: all are conspiring to make life in the next decade very difficult indeed.

-André

[Rick M]

Steve,
I think you are mistaken with respect to Venezuela in de Sousa's graph.
You said (sorry, I am such a computer klutz that I don't know how to operate the Quote function):
"the historical export data for Venezuela is simply wrong. Venezuelan exports peaked in 96, had a sub-peak in 2000, and declined steeply from 2000-2003. The Oil Drum chart shows a sharp rise in Venezuelan exports from 2000-2003."

I'm pushing 60 and my eyes are not what they used to be, but when I look closely at de Sousa's graph... VZ is in yellow, above brown which is Norway, I see what you say that I should see: the yellow widens around 1996 and then constricts between 2000-2003.
The way the countries are layered is a bit tricky... when the overall curve rises or falls, the temptation is assume that individual countries follow suit, which is not the case.

The brief export life of the UK is reflected in pale blue at the very top, with Norway in brown being very constricted by 2020.
Mexico in white is pinched off around 2012... all of this is consistent with current trends as far as I am aware.

The country that most requires explanation to me is Canada, which is barely visible.
Mind you, when net energy is considered, perhaps that is warranted, but that's another story....

I will transfer the Export Decline info from Armed Forces Journal Forum here in a few minutes, which will broaden the range of evidence/info on this topic.

[Rick M]

Warnings that global oil production would soon peak (and then decline) have been around for decades and have been the subject of some debate.
Credible warnings about the threat of export decline have surfaced increasingly during the past two years but have attracted little attention.
Here is partial list of these warnings:

Jeffrey Brown is a Dallas-based petroleum geologist who developed the Export Land Model several years ago.
In October 07 he warned that "we should base our plans on the very real possibility of a rapid decline in world net oil exports."
His ELM and some related analyses may be examined here:
http://www.theoildrum.com/tag/export_land_model

In Sept. 07 Robert Hirsch (co-author of the Hirsch Report on peak oil) warned that a decline in exports could bite much more suddenly than the larger "peak oil" decline:
"But potentially overwhelming all else, considerations of resource nationalism posits an Oil Exporter Withholding Scenario, hastening the onset of decline and exaggerating world supply decline rates."
Hirsch elaborated on this during his presentation at the October ASPO-USA conference in Houston. His 28-minute presentation is available here (video):
http://www.aspo-usa.com/index.php?op...18&Item id=93

Also in Sept. 07 Jeff Rubin (Chief Economist at CIBC, on of Canada's chartered banks) warned of export decline during his presentation at the ASPO conference in Cork, Ireland.
Rubin went on to predict that Mexico will be unable to supply the USA with exports by 2012, but his warning about the disappearance of America's #3 supplier appears to have been met with complacency.
His report, "OPEC's Growing Call on Itself" is available here:
http://research.cibcwm.com/economic_.../occrept62.pdf

In May 08 Neil King (Wall St. Journal) wrote a concise analysis entitled "Oil Exporters are Unable to Keep Up with Demand," available here:
http://royaldutchshellplc.com/2008/0...p-with-demand/

In July 08 a 40-page study was released by Chatham House in the UK. Entitled "Ending Dependence: Hard Choices for Oil Exporting States", their assessment is stark:
"Of the twelve countries in this study, oil production is in decline or at a plateau in three: Indonesia, Malaysia and Norway.
In a further seven countries, the plateau will be reached around 2010.
Saudi Arabia and Kazakhstan will reach a plateau before 2020" (p. 35).
The study is available here:
http://www.chathamhouse.org.uk/news/view/-/id/457/

I hope people will find these five studies to be of interest. I see no reason to doubt the credibility of the authors nor the reasonableness of their conclusions.

But this information surely does not fit with current political realities.
Here in Canada, energy security was not on the radar screen during last year's federal election campaign.
In the USA it is an issue, but only from certain angles and there is careful avoidance of the peak oil issue and these recent warnings re export decline.

There is never a hint about the domestic disorder which would surely result should anything seriously interfere with that steady flow of affordable imports.

Thanks for your interest.
-- rm

[slapout9]

Stewart Brand publisher of The Whole Earth Catalog on the 4 heresies
of environmentalism. Go Micro-Nuclear power

http://www.ted.com/index.php/talks/s..._heresies.html

[Rick M]

This was just posted a few hour ago at UpstreamOnline, which is very reputable:
http://www.upstreamonline.com/live/article183759.ece

These are very serious allegations... the USA currently gets almost 1 mbpd, about 18% of its domestic production from these low-output wells:
http://en.wikipedia.org/wiki/Stripper_well

This is not insignificant, and for any company to deliberately damage wells to prevent a rival company from extracting the remnants is a very serious matter.

Please keep in mind, our energy security has been largely entrusted to companies like Exxon.
This is not encouraging....

[Ken White]

Sabotage or judicious blocking due to ground water concerns?

I'm not giving Exxon a pass -- nor am I ready to agree to 'sabotage' based on the linked article. Obviously you can state your opinion but if you know more than that article outlines, I for one would be interested.