Energy Security

[Rick M]

Hi again, Dayuhan
Thanks very much for your detailed response.

I should pause at this point and thank you and the others for your interest in this topic…. This sort of discussion is exactly what I had hoped for, and everything that has been said so far (including the occasional bit of disagreement) has been constructive, sensible and respectful.

On to your various points:
1. I agree with your point that high prices still may not lead to investment in volatile regions. Given the volumes of accessible oil in the Middle East, your point makes this issue all the more timely… should Saudi Arabia (for example) become destabilized (or simply suffer a successful attack on Abqaiq and/or Ras Tanura), the global oil export system and the investment climate could be seriously and rapidly affected.

2. As for apocalyptic views of peak oil, I have tried to steer clear of the doomer/survivalist perspective and have repeatedly asked the mainstream media to do the same (since they seem to have difficulty simply explaining the data and the concerns without raising the apocalyptic aspect, which is not helpful).

I have dealt primarily with Energy Bulletin rather than The Oil Drum, but more for reasons of format.
I’m not sure what you are referring to at TOD specifically…
I am usually very pleased with the level of scholarship (ie. sourcing material and providing balanced conclusions) that I’ve seen so far.
As for June 08 being the peak, we’ll have to see.
Matt Simmons, whose work I greatly respect, still argues that production of crude oil (excluding NGL and refinery gains) peaked in 2005 at just over 74 mbpd.

3. On your point about the rear-view mirror (how will we know if it’s the real peak or another false alarm?), I think that Bob Hirsch has it right: he suggests that we view the peak more as a plateau and allow for up & down wiggles.
He suggests a range of 4% up and down, and that people not get worked up one way or the other by variations which occur within that range.
I think that’s good advice.
The flip side of that is that we have been within that 4% range for several years now, so Simmons may eventually be proven correct.

4. As for your final point about the US having a plan for fuel rationing buried away somewhere, you may be right, but if so, then that is probably bad news.
As the recent UK and Australian research stresses, government authorities at any level can only do what they are authorized to do.
If they are prudent, they will not only do their legislative pre-planning well in advance of an actual emergency, but they will also communicate this to the public.
In the case of the UK, the details of their Fuel Emergency plan are secret (presumably because it identifies Essential Users, which is bound to contested by those who feel that they should have been added to the list).

But the fact that their national legislation has been completely reworked and that authority to act has now been assigned to local government authorities has been highly promoted, presumably because they want the UK public to be well aware of these changes and to reduce the likelihood of legal challenges to this change in legislative authority.

If US authorities think that they can suddenly restrict citizens’ access to fuel without being challenged in the courts (and thus risk disempowering authorities just when they need to take effective action to prevent panic buying and hoarding), then they should think again.

That is exactly the scenario that planners in the UK and Australia have worked so hard to prevent, and it does require legislative changes and ongoing communication with the public and with lower-level authorities, little of which seems to be occurring in North America.

Thanks again for your insights on this topic... they are well-founded.

[Dayuhan]

Hello again...

I should pause at this point and thank you and the others for your interest in this topic…. This sort of discussion is exactly what I had hoped for, and everything that has been said so far (including the occasional bit of disagreement) has been constructive, sensible and respectful.

The topic is interesting, though as with many interesting topics constructive, sensible, and respectful discussion is hardly the rule on the internet! Hope it stays this way...

2. As for apocalyptic views of peak oil, I have tried to steer clear of the doomer/survivalist perspective and have repeatedly asked the mainstream media to do the same

I wish you the best of luck in that quest, but it will be an uphill battle. Reasoned analysis fits poorly in a 30 second sound bite, and the apocalyptic scenario draws more attention than serious discussion.

I have dealt primarily with Energy Bulletin rather than The Oil Drum, but more for reasons of format.
I’m not sure what you are referring to at TOD specifically…
I am usually very pleased with the level of scholarship (ie. sourcing material and providing balanced conclusions) that I’ve seen so far.

I get the feeling that the material that is sourced and the processes that are applied to the data are selected with the goal of supporting a preconceived view. An example might be these charts:

http://www.theoildrum.com/tag/update

Where the data selected to provide the mean and median projections seem selected to suppport the declining curve. All very well to say that "95% of the predictions sees [sic] a production peak between 2008 and 2010", but it is worth pointing out 95% of the predictions they chose to analyze see that peak occurring. Subjecting carefully selected and less than comprehensive data to rigorous analytical processes has become a very common thing, but conclusions reached through this process remain questionable.

One thing that seems consistently missing from discussions of production is the medium to long term impact of the 90s oil glut. The glut actually went well beyond the 90s: oil was below $20 by 1986. There was a brief spike around the first phase of the Iraq war, but the rapid drop after that only served to convince many producers that price rises were likely to be transient phenomena. As late as 2002 prices were still bumping along at the $20 level. By 2004 we were into a serious escalation, but it wasn't immediately recognized. The early stages of the price spurt were marked by peaks and troughs, and the rise was not fully acknowledged to be driven by a fiundamental alteration of the supply/demand equation until 2005/2006.

What that means, to make a long story short, is that for close to 20 years prices were either too low or price increases were perceived as too transient to support comprehensive investment in exploration and production.

The production increase from 2006 on seems to me to be largely driven by short-term measures aimed at improving and maximizing existing capacity, rather than serious attempts to bring new capacity onstream.

The production decline after mid 2008 seems clearly price related to me. OPEC reduced production quotas, but there's more to it than that: major producers in the middle east had been running flat out for over a year, and when prices tanked there was an obvious incentive to pull facilities off line for badly needed maintenance work.

Will add more to this later...

[slapout9]

An opposite view about Peak Oil.....there is no such thing Stuff didn't come from dead Dinosaurs at all. Link to article by F. William Engdahl
http://www.globalresearch.ca/index.p...xt=va&aid=6880

[Dayuhan]

Engdahl's theory looks to me to be as full of holes as a Dick Cheney hunting buddy (ok, a low blow, but hard to resist), but I haven't time to point them out...

Life's catching up, but to abbreviate an extensive argument:

As suggested above, I suspect that the peak we've reached over the last 5 years is less driven by absolute scarcity than by the limits of a production infrastructure constrained by two decades of underexploration and underinvestment.

Quite a few "analysts" point out that the price increases after 2004-2005 were not paralleled by production increases. The reason is simply that existing infrastructure had reached maximum output, and the time lag between the decision to invest and actual production is too extensive to allow higher prices to call up more oil overnight.

The GCC currently has about $300 billion worth of oil projects underway, aimed at raising production capacity by approximately 5mbpd. The Saudis have discussed adding another 2.5 above that, eventually raising their total capacity to 15mbpd. Some of these projects dropped to the questionable level as prices plunged, but with the fast recovery to today's levels I expect most of them to go ahead.

Note that this added capacity may not be used at any given time. The GCC has no incentive to produce more than demand requires, but they do see a real advantage in holding the bulk of the world's surplus capacity, and having the ability to use that capacity as they see fit.

Other areas are also raising capacity. Projects currently underway are expected to add 1.1mbpd in Angola. Caspian production could increase by up to 2mbpd if transport hurdles can be overcome. Libya plans to add 1.5mbpd.

Obviously none of this is guaranteed, but we are speaking here of up to 10mbpd potentially coming on line in the next decade. This is primarily a response to the recent price spike and the expectation of continued high prices, a response delayed by the reality that bringing new production onstream takes time.

There are other areas that have seen production declines, stagnant production, increases below capacity or underproduction due to political and security conditions: Venezuela, Nigeria, Russia, Sudan, Iraq, Iran, Equatorial Guinea. Some of these may stagnate or deteriorate further, but it is also possible that some will see significant production increases.

Of course there are areas where production is constrained by absolute depletion, particularly in the US, the North Sea, and Mexico (though Mexico could probably do more with additional investment and a lot less politics, and the US has sources it is not exploiting for environmental and political reasons).

The pattern of extended glut followed by abrupt shortage has ramifications on the demand side as well. One of the most striking comparisons of energy use in the developed west vs the emerging economies is in energy consumption per unit of gdp. Compare the US to China in this category, and the Chinese energy inefficiency is staggering. This is partly a function of early stage industrialization, but it's also because the physical and planning infrastructure underlying the Chinese boom was put in place during the oil glut, and built on the premise of cheap oil. The Chinese have seen exactly how vulnerable they are to price spikes, and I expect a very real effort to diversify and to improve efficiency. Demand will increase, but the pace of increase will slow.

In short: yes, there is a plateau, and yes, there are serious risks of shortage. Both plateau and risks, though, are primarily driven by political, security, and investment concerns, not by impending scarcity or the arrival of an abstract peak.

I shall return, like MacArthur... hopefully sooner, and with less company.

[Rick M]

Hi, Dayuhan
You have obviously thought a great deal about these issues and your observations are excellent.

Your choice of the Oil Drum entries by Sam Foucher is a good one to illustrate your point.
I must admit that I have difficulty understanding some aspects of both his graphs and his text.
In any case his focus seems to be on projections… anticipating the future, and I have little interest in the specifics of predictions.
His projections may be correct, in which case peaking is imminent.
His projections may turn out to be overly pessimistic, in which case the impacts may fall more on our children and grandchildren.
Personally, I am even more concerned that the burden may fall on them, so the timing of peak seems minor to me (apart from the fact that a later date affords us some valuable time to mitigate, though I doubt that North Americans would cooperate enough to make effective use of the extra time).

I agree with most of your points but the issue of oil-field depletion needs to be weighed against the potential increased production which you (correctly) listed.
I don’t think that I agree with your conclusion that our recent difficulties (possible plateau and attendant risks) are unrelated to arrival of peak. I think we are closer to peak than most mainstream analysts concede, and that the increased price volatility is a reflection of that.
I do agree that there was no impending scarcity when prices & demand peaked last summer.
I would like to consider your arguments a bit further before responding to them in detail.

Meanwhile, I should mention that my own thinking on energy security has shifted considerably over the years.
The larger Peak Oil issue was the initial focus… I wanted to learn whether it was BS or a legitimate concern. I am now convinced that it is the latter.
But both common sense and the work of Robert Hirsch, Jeff Brown, (Canada’s) Jeff Rubin and Chatham House (UK think-tank) all point toward export decline as a second and more imminent concern.
Third, both concerns then led to the issue of emergency planning (by government, not the personal/survivalist kind).

The last of these has been my primary focus for the past two years, but I would prefer to leave that aspect for now and return to the first two (PO and export decline).

Both topics are covered quite effectively in a UCSB lecture (undated) by a French analyst and by Jeff Brown, who was one of the first to raise the export decline issue.
This YouTube link takes a full minute to download and get rolling, but I believe it is worth examining:
http://www.youtube.com/watch?v=O7h4V...layer_embedded

The first presentation, “A Peak Oil Primer” is by Catherine Gauthier (4:30- 23:30).
She examines demand growth, URR, timing of peak (at 12 min), its consequences, etc.

The feature presentation is by Jeffrey Brown (25:00 –59:00) whose analysis is in three parts:
1. Peak Oil (27:00 –39:00). Please note his point at 29:00 about the minimal difference to the timing of peak which results from having additional reserves. Also, at 37:00 he points out that in post-peak Texas, a surge in drilling did nothing to stem the decline in production. He asks a very good question at 39:00.

2. Export Decline (39:00- 57:00) Brown’s central point is that global oil exports could effectively be finished around 2030 (ie. a very serious problem). Meanwhile, most of the optimists are telling us that peak production is unlikely to occur prior to 2030 (ie. no need to worry for a few decades). Yet the difference between the two scenarios is radically different: a world which has just hit maximum production versus a world with no remaining export capacity. (The next 20 years should be very interesting, especially on the energy front, and there are many reasons for Defense analysts to get involved proactively.)

3. Electric Transportation: (57:00 - 58:45)

If people don’t have an hour to spend on this (which I can fully understand), I would encourage them to at least examine Brown’s 18 minute analysis of export decline (39:00 - 57:00).
If anyone spots something which they do not feel is credible, please speak up.

Thanks again for your interest, everyone.

[Dayuhan]

Hi Rick,

More comments (there is always something...)

Your choice of the Oil Drum entries by Sam Foucher is a good one to illustrate your point. I must admit that I have difficulty understanding some aspects of both his graphs and his text. In any case his focus seems to be on projections… anticipating the future, and I have little interest in the specifics of predictions.

I don't fully understand how the Oil Drum site works... there seems to be content from a lot of different people, and I'm not sure what sort of vetting or editorial control goes on. I admit that I haven't looked all that closely: there are a lot of barrels on the Internet, and when I find a couple of rotten apples on top of one I tend to move on and look for another.

Predicting the future is an intrinsic part of the peak oil discussion: you can't talk about a peak without postulating a subsequent decline. One of the problems that I have with the projections on sites like Oil Drum is the radical divergence between the projections they cite and those that come from the big three of mainstream energy analysis: EIA, IEA, and OPEC. These institutions have access to all available data on production and depletion, and they have an abundance of analytical resources at their disposal. So why are their projections so different from those we see so often from the "peak oil" discussion? You almost have to postulate that the mainstream analysts are either completely incompetent or conspiring to collectively present baseless projections, and neither hypothesis sounds terribly credible to me.

Many years of working in the muddy ground between financial and political analysis has left me suspicious of sophisticated modeling processes, especially when they kick out results that seem questionable to me. I've seen too many people (especially in the financial world) use the sophistication of their models to validate their conclusions, conveniently failing to mention that cherrypicking the data you feed into the model will provide whatever result you want to produce. Torture the data enough and they will tell you whatever you want to hear.

I'm suspicious of the discourse claiming that the 2005-2008 plateau was "the peak" because too many alternative explanations for the observed phenomena are not considered. It has become almost a mantra in the "imminent peak" circle that from 2005 onward rising prices could no longer call up more production. The possibility that installed capacity had peaked and that high prices can call up production with a substantial time lag between investment and results, while obvious, is not discussed. Similarly, the downward production curve in mid 2008 looks terribly ominous until you put it up against a price chart, at which point the relationship becomes too obvious to ignore. All too often it is simply stated that mid 2008 marked the beginning of "the decline" in production, without discussion of the obvious connection between plummeting prices and production cutbacks.

Personally, I am even more concerned that the burden may fall on them, so the timing of peak seems minor to me (apart from the fact that a later date affords us some valuable time to mitigate, though I doubt that North Americans would cooperate enough to make effective use of the extra time).

I share this concern, which is one reason I feel that crying wolf over hypothetical peaks is a bad idea. If we announce a production peak and there isn't one, the public gets the impression that it's all hype and not an issue. The resource is finite and there will eventually be a peak. The only way I can see to maintain an impetus toward conservation and diversification is to keep prices high. The worst thing that could happen at this stage is another glut.

I don’t think that I agree with your conclusion that our recent difficulties (possible plateau and attendant risks) are unrelated to arrival of peak. I think we are closer to peak than most mainstream analysts concede, and that the increased price volatility is a reflection of that.

There may be a bit of circular logic here: we speculate that price volatility will accompany a peak, then cite price volatility as evidence of a peak. Of course a peak in production while demand is rising will create a price spike, but why should there be a difference between a situation driven by "a peak" and a situation driven by "the peak"?

We also need to consider that 2005-2008 saw intense price volatility across the commodities spectrum, not just in oil. Some of this was related to oil: higher energy costs drive production and transport costs up, and diversion of agricultural land to biofuel production did help to drive grain and meat prices up, but that's not a full explanation.

When I look at that period I see:

1. A rapid and generally unpredicted increase in demand across the commodities spectrum, primarily from East Asia, but this was a period of economic growth and demand growth around the world.

2. A substantial and rapid depreciation of the currency in which most commodity trades are denominated, supporting faster increases and creating an incentive to hedge the dollar with commodity trades.

3. The combination of inflated asset values and overextended leverage ratios created a vast pool of capital for speculation in commodities, and the rapid increase in commodity prices made such speculation attractive.

The extremely rapid spike in commodity prices in early 2008 and the extremely rapid plunge in late 2008 were too aggressive to be explained by supply and demand. The plunge in particular is very consistent with a liquidity crunch sucking speculative capital out of commodities.

I could go on, but suffice to say that there are many explanations for volatility that do not involve an absolute production peak.

I'm not trying to say that the idea of "peak oil" is BS - obviously it can't be. I do feel that the hype around the idea that the peak is imminent or recently past is baseless and may actually detract from rational planning.

Planning for abrupt scarcity is certainly necessary, but I think it's easier to justify that planning on the grounds of security and political risks than on the more nebulous grounds of "peak oil". Whether or not you believe an absolute production peak is near, the vulnerability of major suppliers is clear: I would rather argue that we need an emergency plan to deal with the possibility of a security crisis in the Middle East (Straits of Hormuz closed, instability in Saudi Arabia, nuclear confrontation... take your pick) than claim that we need an emergency plan because a production peak is imminent. It's easier to justify and the need is clearer.

Just thoughts and opinions, as always...

Steve

PS: Couldn't pull down the videos; I live on a mountaintop in the northern Philippines (while working primarily in Dubai - long story) and the connection speed is not up to it. Is there a transcript anywhere? I'd rather read than listen in any case...

[Rick M]

Hi, Steve

Thanks for your latest detailed observations, and I’m sorry that I still have not responded to all of your ideas in your previous posting.
We’ve finally had a break in the rain so I’ve been busy at the hay.

I’ll take your points in order:

1. The Oil Drum
I don’t like their lay-out… vertical with wide sidebars, hard to read because the reader is forever scrolling up & down… hard to work with.
I also don’t like the fake names, but I’ve come to learn that it’s necessary for some of the most knowledgeable contributors to remain anonymous, so that aspect no longer bothers me.
Personally, I prefer Energy Bulletin which prefers sourced info and a standard wide format in terms of presentation.
But TOD has some excellent info from credible analysts: please examine this one on export decline and let me know if there is something you are skeptical of:
http://europe.theoildrum.com/node/4179

I have no answer to the gap between what the mainstream analysts say (the three that you mentioned, plus I would add CERA and some but not all industry officials) and what the PO analysts say.
Personally, I find almost all of the main PO analysts to be credible.
Simmons is an industry insider, has done the annual forecasts for World Oil journal for many years, etc…. it’s hard to imagine that he needs book money, nor how his up-front concerns could possibly help his company win contracts.
I think the guy deserves a medal.

Likewise Bob Hirsch…. it appears that doing the research for the 2005 paper has become a bit of a life-changing wake-up call. He and Bezdek continue to push on this issue.

Meanwhile, both industry spokesmen and senior bureaucrats have many good reasons to express a “no foreseeable problem” message.
The recent WEO was a major step for the IEA but I was stunned to discover four months later that my country’s lead ministry had not shifted its position to reflect the IEA’s sudden worries. The ministry still say that “there are no imminent peak oil challenges” and that “Canada’s oil supply is secure for about 200 years.”

2. peak in 2005-08
I agree with your points, but the PO analysts have always said that we can only know from the rear-view mirror, well after the peak has occurred.
And price volatility may be worse than steady high prices since the dips subvert the efforts to bring along the next-generation liquid fuels, which sustained high prices would foster.

3. Price volatility
You may be reading too much into what I had said.
Like yourself, I am not convinced that we are at peak, though I do think we are so close that it barely worth debating, especially if we examine it from a net-energy perspective.
Is there enough oil in the ground to get over 90 mbpd? Certainly.
Will we ever see the 130 that was talked about only a few years ago? Not even close.
But how much physical energy and how much additional financial investment will it take to get us over 90?
I believe that nearing the apparent peak will cause volatility of both price and supply, but volatility alone is no proof of peaking..

4. the 2008 price spike
I agree with your three points, including the third (speculation).
The recent talk about limiting speculation on oil (same as limits re food-grains) could be helpful in containing the next spike.

5. fuel emergencies
As for your final paragraph, I agree completely, and please remember what I indicated in the previous post… my own thinking has shifted considerably over the years, from
1. becoming aware of PO and viewing it as a legitimate and overlooked concern, to
2. recognizing that pricing and export decline would be more imminent issues, especially for import-dependent regions, to
3. my current focus on government plans for fuel emergencies.
I view the stresses caused by a real (or even an apparent) peak as likely to precipitate an event which then trips a fuel crisis (rather like the shot at Sarajevo in June, 1914 which sparked WWI, meanwhile pressures had been building for years).

Meanwhile, when I began to enquire about fuel emergency plans, it became clear that this is a grossly overlooked area, especially here in North America.
It was then that I contacted the military (in my country and in several other countries), believing that this is a neglected matter of internal national security.
The military/security issues would be external as well, of course, but they have been widely acknowledged & discussed.
It’s the threat to domestic social order that so few are willing to address.

Hence the Energy Security thread on this site and at Armed Forces Journal.
Hence also two postings which I expect will be posted at Energy Bulletin within the week, both of which examine studies by US military analysts.
They will be posted here as well.

6. the export decline video
Sorry, I don’t have a transcript.
But Brown’s theory is illustrated & examined on the Oil Drum link (above).

I greatly appreciate your insights on this vital topic, Steve
--rm

[aangel]

Hi, everyone. I hope I can join the conversation...I'm happy to represent the view that oil has peaked or will peak very soon.

I think it's important to put the near peak models in context. What seems to be happening is that the far peak models are moving closer in time so that we have the following situation:

• (2010-2012) Association for the Study of Peak Oil and Gas — the people raising the alarm
• (2015) Shell Oil ("reach a plateau") — see their website for their latest scenarios "Blueprint" and "Scramble" (http://www.shell.com/scenarios)
• (2020) Neftex/Toyota — this only happens if three conditions are met: Iraq must increase its production to 8mb/d (from its current ~2mb/d), Saudi production must not decline at all and each expensive project that has been fiscally sanctioned must come in on time
• (2020) IEA — for this peak date, the oil industry must put into production the equivalent of four Saudi Arabia's in twenty years to maintain current production, six Saudi Arabias if growth resumes
• (no date) DOE — the Department of Energy does not put out peak oil models, they put out consumption models and assume the oil industry will supply the oil. People then mistake these for supply models and this is the source of untold planning errors by third parties using DOE graphs.

Then there is the CEO of Total Christophe de Margerie who has continually lowered his estimate of peak production so that it is now down to 90mb/d.

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.

There are some outlier models like CERA but they have recently backed away from their view because it was clearly untenable (peak in 2030) and they were increasingly looking "out of touch."

Once one has satisfied oneself that we will have a near peak, then it makes sense to focus on the near peak models as Samual Foucher does on The Oil Drum.

One could quibble over whether the peak is in this decade or it will show up early in the next decade but asserting that it will occur past 2020 requires some awfully optimistic assumptions.

On the matter of costs for the marginal barrel of oil, CERA has put out this graph. While it is a little dated (> one year old) it shows the relative costs well. Prices have come down perhaps 15%-20% since the graph was made.



And of course the net export problem is real and is going to cause what I call "The Great Oil Squeeze" — top line production will decrease while oil-producer consumption will go up increasingly leaving less oil available to the world market. With gasoline at 20 cents (Venezuela) or 90 cents a gallon (Saudi Arabia), there is simply no reason in these producer countries to conserve and their populations continue to rise.

-André