Bashing the oil industry

Bashing the oil industry seems to be popular. The most recent example is the New York Times’ editorial They haven’t learned.

I don’t think any industry is perfect, but I also have a hard time seeing that any industry should be singled out for uniquely harsh treatment. Things are going to go wrong whenever human decisions are involved, so we need to figure out ways to make systems as idiot-proof as possible.

With respect to blow-outs, a Joint Industry Task Force was put together shortly after the Deepwater Horizon blow out to take steps very quickly that would reduce the likelihood of blowouts and improve the possibility of control if such blowouts do take place. I don’t think that it is possible to completely eliminate blowout risk, but steps such as this task force is taking would seem to go a long ways. Stopping work elsewhere doesn’t really help the situation.

One of the big issues with oil is our tremendous need for it, just to keep current systems operating. It is fashionable to think that wind, or solar PV, or biofuels can somehow substitute for oil. Wind and solar PV don’t substitute for oil. What they do is create intermittent electricity, which is not at all the same. Biofuels don’t scale well, and unless they are “chemically equivalent” tend to cause problems in the machinery that use them, if they are added as more than a small percentage of the fuel mix.

Another big issue with oil is its cost, especially when it is imported from around the world. There is a huge advantage in producing oil in this country if we can–in terms of local jobs, and in terms of keeping the funds in our own economy.

Oil from abroad may not always be as available as everyone expects, either. The New York Times editorial talks about the US controlling only 3% of the world’s known reserves. In fact, OPEC reserves used in calculating the 3% ratio seem to be greatly overstated, so the US likely does control far more than 3% of the world’s productive capacity. But a lot of folks have stuck their heads in the sand, thinking that OPEC has a great deal more productive capacity than it likely really has. Overstated OPEC oil reserves are an issue the New York Times should be bringing to its readers, but it has not.

Oil production in the US is not something that one can just turn on and off at will. People who work in the industry depend on stable job situations. If trained workers in the oil industry can’t find jobs in the oil industry, they will move on to other industries, where they can find jobs. If one stops and restarts drilling, the danger is that there will be fewer workers with experience later, making the risk of accidents higher.

Government oversight of the oil industry (and probably a lot of other industries) has not been very good. It is hard to see how this is going to change in the near future, because it takes a lot of training to understand appropriate procedures, and this really can only be learned by working in the industry. It may be that the oil industry itself will need to be involved with more aspects of regulation, and the government will need to play a more limited role. But halting drilling while all of this is sorted out doesn’t really help the result.

It seems to me that business can and should go on as usual, while all of the details of regulation and preventing future blowouts is sorted out. The industry had a good safety record prior to the Deepwater Horizon blowout, and it is taking steps now to prevent future blowouts. After seeing the high price that BP is having to pay for its spill, companies clearly have a financial incentive to make certain that they are operating safely. So it seems to me that the harsh position of the New York Times is unnecessary.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
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13 Responses to Bashing the oil industry

  1. Don Millman says:

    I think the future of oil production in the U.S. is in nonconventional oil. As imports become scarcer and more expensive, I think the U.S. is likely to turn to coal-to-liquids production in a big way. Also, I think shale oil will be exploited even if the EROEI is less than one. We can use electricity from various sources (coal, nuclear, some hydro) to develop oil from shale. Also, as long as we have enough natural gas, that could be used directly to cook oil (or an oil precursor) from shale. This nonconventional oil will not be cheap, but it could be relatively abundant. Of course, nonconventional oil is very hard on the environment, but preserving the environment will take a political back seat to increasing domestic oil production.

    Thus, it would not surprise me to see greatly expanded nonconventional oil production keeping Business As Usual going for at least another twenty years in the U.S.

    By the way, in case somebody has not yet figured it out, I’m “Don Sailorman” from The Oil Drum.

    • I figured out you were Don Sailorman.

      It seems to me that very heavy oil will be exploited before oil shale, and maybe before coal to liquid. It all depends on cost, which I will admit I haven’t really researched. But very heavy oil is economic in several parts of the world now, and deposits of heavy oil seem to be very wide spread, including some in the US.

      It is less clear to me whether oil shale and coal to liquid will really be economic. Both of the latter technologies also have water requirements, which may make them unsuitable for the very arid areas where the oil shale and Western coal is located.

  2. Don Millman says:

    I agree that heavy oil will be exploited much more than at present–and deepwater oil too. Nevertheless, I see a big and expanding future for CTL and the development of oil from shale. If necessary, the water can be piped in from a thousand miles away, and I think it will be. The environment will take very heavy hits, but as oil goes over $100 per barrel I think environmentalists will be politically impotent.

  3. Joe Clarkson says:

    Back in 2009, Peter Kirkham posted some great articles on oil market fundamentals on the Sunov Petroleum site. One of the most important insights relates to oil prices v demand…..

    “Therefore in order to ensure that demand is met, the price must be sufficiently high enough to ensure that the most expensive barrel needed to meet that level of demand can be produced.”

    This means that the world market price of oil will be set by the highest marginal cost that anyone is willing to pay. Marginal costs of production have been rising at exponential rates for much of the last decade, so as long as anyone in the world is willing to pay those increasing costs, prices will continue to rise until someone drops out of the market.

    Another post on the same site estimates that demand destruction in the US begins when oil costs reach 5% of average household expenditures or at about $95 per bbl in 2008 dollars.

    Of course if average US household expenditures decline due to recession and US demand destruction does not rapidly decrease the price of oil in the world markets (as happened in 2008-2009), the US economy could enter a period of severe turmoil that will not be mitigated by rapid declines in oil prices, since other countries’ demand for oil would keep prices high. Thus, if oil prices ever do stay over the US demand destruction threshold because of sufficient non-US demand, the US economy could enter a “death spiral”, where demand destruction caused recession in the US lowers household income and lower household income increases demand destruction.

    • I think the issue with high marginal cost oil is essentially related to too low Energy Return on Energy Investment, or something closely related to it. If it were not for a limit of that type, a price of say, $300 or $400 barrel would make sense. But if oil price is so high that it essentially covers the cost using more than one barrel of oil to extract a barrel of oil, it doesn’t make sense. (This could only happen if tomorrow’s oil price were a lot higher than today’s.) But you see what I am getting at–oil can be used to produce only so much goods and services. At some point, the oil price gets too high, relative to what it can produce. Then I expect oil prices will drop, and oil production will drop more rapidly than peak oil models suggest, because it is no longer economic to add high-priced new production. I think this may start a fairly rapid downward spiral.

  4. majorian says:

    Gail,
    You should hold off your judgement on oil shale and see how the process plays out in China where it is taken seriously. They estimate that they have 350 Gb of shale oil(48 billion tons) which is more oil than Saudi Arabia claims at 262 Gb but less than is in Colorado 400-600 Gb.

    http://en.wikipedia.org/wiki/Oil_shale_in_China
    http://www.ceri-mines.org/A02c-JialinQianpaper.pdf.pdf

    US oil companies are aging behemoths, not leaders in technology and are being run into the ground by bean countering managers.
    They are wedded to the oil well model and that technology is about at its end(how deep can you drill?).
    Frankly they deserve to be bashed a lot more but they still are hugely profitable in part because we haven’t reduced our oil addiction–so why should they change?

  5. Joe Clarkson says:

    Decreasing EROEI is just another way of saying that more equipment and more effort is required to pump the next barrel of oil and get it to the refinery. If the embodied energy in exploration, production and delivery of the next barrel even comes close to the net energy in that barrel, the thermodynamic limit will have been reached and then, regardless of price, oil production from new fields will stop.

    This graph shows how rapidly exploration and production costs have been rising. It shows that from 2007 to 2008, E&P costs for US majors went up over 40%. If E&P costs continue to rise at anywhere near that rate, it will not be long before marginal oil costs will exceed the price that most of us can pay. So I do agree with you that it is likely that we will reach an economic limit before we reach a thermodynamic limit. Huge amounts of oil may be left in the ground because we can’t afford the cost of getting it out.

  6. Joe Clarkson says:

    I was agreeing with Gail. I posted after majorian.

    As far as majorian’s point about shale oil….

    If shale oil could be produced at a price that could easily compete with conventional liquids (which are near the demand destruction price threshold in the US), why isn’t it being produced in huge quantities?

    If you say that production has not yet had time to “ramp up” (now that prices are so high), how likely is it that the huge capital expenditures required will be made in time for shale oil to take the place of conventional liquids production declines? I think it less likely than even the poor prospect of making similar huge capital expenditures for renewables. But, if we are to make one last-ditch effort with all the capital we can muster, I would prefer to see it go to renewables and transportation electrification, rather than more carbon fuels.

    • majorian says:

      You assume oil shale isn’t developed because it is too expensive except it has been developed and maintained in Estonia, hardly a rich country. Before the invention of seamless steel pipe most oil came from oil shale such at Lothian in Scotland and Autun in France. Similarly before pipelines and drilling technology was developed ‘town gas’ was produced from coal, not gas wells.
      Oil shale is very low tech. Oil/gas pipeline technology works well with large
      oilfields which are running out of but not with shale or oil sands. In the 19th century whalers were skilled at hunting whales but the whales died out–did the whalers become rock oil drillers?
      The oil companies have perfected their drilling technologies and are still producing lots of oil but in the near future they’ll have to change.
      Oil shale is more like tar sands which produces 1.3 mbpd or 1.7% of world petroleum production. Tar sand production is to reach 6.3 mbpd in 2035 according to CERA.
      The unconventional oil resources are there.
      We get 83% of our energy is from fossil fuels.
      Is it conceivable that we won’t try to develop unconventional FF?

      • I can’t see that the Estonian oil shale is actually being converted into oil. Instead, it is being enriched a bit, and burned directly, sort of like a coal substitute.

        Our oil shale is in such a remote location, I can’t see that shipping the large volume to areas who might burn it like coal would be worthwhile. We would actually need to process it to oil first.

        • Joe Clarkson says:

          Estonia’s shale has up to 77% organic matter, unlike the Green River and most other shales, which are 11-13%, so it is a special case.

          Coal to liquids and gas to liquids are both much more likely to be more economic that shale oil, but even with the past several years of high oil prices, they have yet to make a real impact in the global liquids supply. I can only suppose that they still cost even more than oil does.

        • majorian says:

          Gail,
          All it takes to turn kerogen into oil is lots of heat. Of course shale oil has to go to the refinery, so does regular crude oil. In the 1980s the Old Colony mine in Parachute Colorado produced 100000 barrels of shale oil which was shipped direct to Chicago oil refineries for processing.
          ——————————————————–
          Oil derived from shale has been referred to as a synthetic crude oil and thus
          closely associated with synthetic fuel production. However, the process of retorting
          shale oil bears more similarities to conventional refining than to synthetic fuel
          processes.

          For the purpose of this report, the term oil-shale distillate is used to refer
          to middle-distillate range hydrocarbons produced by retorting oil shale. Two basic
          retorting processes were developed early on — aboveground retorting and
          underground, or in situ, retorting. The retort is typically a large cylindrical vessel, and
          early retorts were based on rotary kiln ovens used in cement manufacturing. In situ
          technology involves mining an underground chamber that functions as a retort. A
          number of design concepts were tested from the 1960s through the 1980s.
          Retorting essentially involves destructive distillation (pyrolysis) of oil shale in
          the absence of oxygen. Pyrolysis (temperatures above 900°F) thermally breaks
          down (cracks) the kerogen to release the hydrocarbons and then cracks the
          hydrocarbons into lower-weight hydrocarbon molecules. Conventional refining uses
          a similar thermal cracking process, termed coking, to break down high-molecular
          weight residuum.
          OTA compiled properties of oil-shale distillates produced by various retorting
          processes (Table 1). In general, oil-shale distillates have a much higher
          concentration of high boiling-point compounds that would favor production of
          middle-distillates (such as diesel and jet fuels) rather than naphtha.19 Oil-shale
          distillates also had a higher content of olefins, oxygen, and nitrogen than crude oil,
          as well as higher pour points and viscosities. Above-ground retorting processes
          tended to yield a lower API gravity oil than the in situ processes (a 25° API gravity
          was the highest produced).20 Additional processing equivalent to hydrocracking
          would be required to convert oil-shale distillates to a lighter range hydrocarbon
          (gasoline). Removal of sulfur and nitrogen would, however, require hydrotreating.
          http://www.fas.org/sgp/crs/misc/RL33359.pdf

          It’s true that you need hydrogen to turn tar into syncrude but that’s a different kettle of fish.

  7. Nona Mills says:

    You assume oil shale isn’t developed because it is too expensive except it has been developed and maintained in Estonia, hardly a rich country. Before the invention of seamless steel pipe most oil came from oil shale such at Lothian in Scotland and Autun in France. Similarly before pipelines and drilling technology was developed ‘town gas’ was produced from coal, not gas wells. Oil shale is very low tech. Oil/gas pipeline technology works well with large oilfields which are running out of but not with shale or oil sands. In the 19th century whalers were skilled at hunting whales but the whales died out–did the whalers become rock oil drillers? The oil companies have perfected their drilling technologies and are still producing lots of oil but in the near future they’ll have to change. Oil shale is more like tar sands which produces 1.3 mbpd or 1.7% of world petroleum production. Tar sand production is to reach 6.3 mbpd in 2035 according to CERA. The unconventional oil resources are there. We get 83% of our energy is from fossil fuels. Is it conceivable that we won’t try to develop unconventional FF?

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