How much oil will be recoverable?

This is a post of mine that is in the ASPO-USA newsletter today.

The world holds a huge amount of oil resources. Besides liquid oil, there is very heavy oil in various forms. There is also liquid oil trapped in oil shale, oil in very deep water, and oil that in not yet fully formed (still kerogen) in shale oil. Some would like us to believe that eventually, all of this can be extracted, so there is no issue with peak oil.

How do we explain that this cannot really happen? The way I think of the situation is that our resources are of varying “quality”, or ease of extraction. If we order them from highest quality to lowest quality, they would probably form something like a triangle (or perhaps the shape would be more like a rectangle, if the high quality resources are closer to equal in quantity to the low quality resources—it doesn’t matter too much for this discussion).

Figure 1. Schematic diagram of economic and non-economic resources

It seems to me that above some imaginary line, resources can be extracted and producers can make a profit selling them, and the economy can use them successfully. Below the imaginary line, the cost of production will be so high that if a price that is adequate for a producer to make a reasonable profit is charged, the high price will send the economy into recession.

What separates economic and non-economic resources? It seems to me that exactly where this line changes over time, depending on technology (tending to lower the line, as improvements are made) and tax rates (higher taxes tend to raise the line). Basically, the line separates what is affordable for the economy, and what is not.

What we think of as affordable seems to correspond in practice to what economists talk about as the level of demand. If there is high demand, then a high price seems affordable. But where does this high demand come from?

It seems to me that this high demand comes from wage-earners who have earned enough income and businesses that have earned sufficient cash flow that they can afford goods made with higher priced oil.  In terms of Professor Charlie Hall’s cheese slicer model of how energy is used, it comes from an economy that has fat red discretionary income arrows.

Figure 2. Charlie Hall's Cheese Slicer Model, showing arrows for various components of the reinvestment process. This version is theoretically for 1970.

But how does an economy get fat discretionary income arrows? These are really affected by two things:

  1. How much energy is used to make energy – the Energy Return on Energy Invested (or EROI) that we read about. The less energy that is used to make energy, the more energy there is for other purposes, and
  2. How much energy is required by society to maintain its infrastructure. The more energy that is needed for maintenance, the less is available for other purposes.

What is happening now is that we are moving to lower and lower quality resources (lower EROI resources), so the red arrows are getting thinner and thinner, leading to a smaller proportion of funds for discretionary purposes, and hence lower demand.  Also, our infrastructure is taking more and more off the top, because as we build more of it, it needs more maintenance.

Figure 3. Charlie Hall's Cheese Slicer Model, as of 2030.

If prices could keep rising higher, say to $500 a barrel, the dividing line between economic and non-economic resources in the triangle diagram at the top of this article would drop very low, and we would not have to worry about peak oil. Pretty much all of the resources in the triangle diagram would become economic.

It is the fact that demand is not high enough—that is, the red consumption arrows are not thick enough—that keeps prices from rising high enough to extract oil from all of the types of resources. This is what acts to limit oil resource use, even though to the casual observer, there would seem to be no problem in using all of the low-quality resources that are available.

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 financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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39 Responses to How much oil will be recoverable?

  1. Jan Steinman says:

    This is a very useful way of looking at things, and yet, it seems to me that the purity of the model does not reflect all the perversions found in today’s market.

    Look at what has happened with ethanol. A product that, at best, has a fractional ERoEI (and many think it actually has an ERoEI of less than unity) has taken off with the help of Federal subsidies. The same is true to a lesser extent with marginal, unconventional oil production techniques. I doubt shale oil would be attracting any money if it weren’t for subsidies.

    Subsidies of one sort or another are what causes bubbles and overshoot, no? Humans are in overshoot right now, due to the subsidy of fossil sunlight.

    The problem is that past resource extraction has created a “bank account” of paper currency. These savings can then be used to subsidize that which would ordinarily be limited by “discretionary” income.

    So it appears to me that Dr. Hall’s diagram, while enlightening and useful, is based entirely on contemporaneous flows — it appears to be missing what Donella Meadows calls “stocks” in her book “Thinking In Systems: A Primer”.

    In the case of previously harvested stocks supporting future less-than-economic extraction, it could be that more oil will be extracted than your pyramid model indicates.

    Or perhaps I’m just missing something…

    • Admittedly, the situation is more complicated.

      Subsidies are one issue, but governments can’t keep up subsidies very long, if true net energy isn’t coming back through the system. It seems like government finances are getting so bad, we are going to have to see some cutbacks in subsidies of all types.

      The way I see inventories as being an issue is the fact that we have a legacy of pipelines, roads, refineries, etc. built with cheap oil. When these need to be replaced, it will be much more expensive. I wonder whether we could build a new pipeline in Alaska, for example, if the current one needs extensive repairs.

      One issue that the cheese slicer model does not consider is debt. It seems to me that much of the investment done recently has been done through debt, under the assumption that the investment truly will be economic. But I think we are reaching the point where quite a few of these investments (especially natural gas investments, but there may be some oil investments too) may turn out to be non-economic, even though funds were advanced, thinking they would work out. Once debt for investment is cut back, the total amount of investment is likely to go way down. That could act almost like an on-off switch.

  2. John B says:

    First comment would be that from Gails post it is a reasonable conclusion to make that the argument is that each and every drop of oil (including liquids) is 100% recoverable in theory. I do not believe that theory. There will become a point at which all of the oil and liquids have been recovered. Regardless of oil price, it won’t be technically possible to recover everything. We might get close, but there will always be some left over.

    In regard to Jan’s comment, I think that if the term subsidy is included in the term ‘discretionary income’ then the models above do take in to account Donella’s Systems based thinking. I would include discretionary into stocks and vice versa.

    I would like to see an analysis done as to what price level the price of oil ceases to become affordable for the majority.

    jb

    jb

    • I didn’t intend to mean that every drop of oil would be recoverable. My point is that a lot of oil looks like it is available, and closer analysis may suggest that it really is not.

      I am not sure that it is possible to talk about “at what price level the price of oil ceases to become affordable for the majority depends on the country.” One of the things that happens, as people cut back on discretionary spending, is that many are laid off from work. Housing prices drop, because houses themselves are discretionary goods. So you have people who are poorer because they are laid off from work, and you have people who are poorer, because the value of their homes have dropped, in addition to having people poorer because of the higher cost of oil products and food. Everyone is a little worse off; a few are much worse off. Maybe a majority still have jobs, so in a sense, they are still “OK”. But it is all of the others who are really badly off.

      • Jan Steinman says:

        Housing prices drop… and you have people who are poorer, because the value of their homes have dropped.

        It seems to me that people are not “poorer” if the value of their house has dropped, because the value to them is only the rent they save by owning it.

        Now if rents go down to the point that it is competitive with the cost of maintaining a house, that’s a different story. But the person who owns a house free-and-clear is still no “poorer” than they were before.

        Also, I think the degree to which you can harvest sunlight — a function of the area of land you own or control — may well be the measure of your wealth.

        In a low-energy future… the wealth of nations will be measured by the quantity and quality of their forests.

        So I expect that the value of productive forest and farmland will actually increase, as long as there’s demand for food.

        Of course, if there’s a huge crash and a large proportion of the population “goes away,” then all bets are off. In that case, there will be lots of empty homes and not so many mouths to feed. But also in that case, if you’re able to feed and house yourself, you’ll still be relatively wealthy, no?

        • Regarding the effect of housing prices, most people have mortgages. Back when housing prices were rising, many people refinanced their house practically every year, took the additional equity out, and spent it. Now that housing prices are down, they can’t do this. In fact, they have a hard time selling, because very often, their loan value exceeds the value of the home. Eventually, some do leave the system–their homes are foreclosed, or they are able to sell their home and move in with relatives or into an apartment. But the lower value of the home at sale does affect the outcome in these situations as well.

          I agree, people who own their homes free and clear and don’t sell them are in the same condition as previously, but that is a relatively small percentage of the total.

          The big question on productive farmland is the condition of the soil without fertilizer. Also, whether irrigation is really needed to make it productive. We will need to be using crop rotation to a greater extent, but even then, it is easy to deplete the soil of nutrients.

          Forests aren’t very large in relation to the size of world population today. It would be easy to cut down too much of them.

      • On one of my blogs I like to celebrate declines in housing prices as making housing more affordable. I do this to try to adjust for the unbalanced mainstream commentary about housing prices that is written from the perspective that higher prices are better. Well, for future buyers higher prices are much worse. Lower prices are good.

        Granted, the value of a house represents savings for a lot of people. But the high price of a house represents a lower living standard for anyone looking to buy and new buyers enter the market every year.

        What matters more: If Peak Oil raises the cost of building houses (which seems likely) then construction costs will rise and supplies will become more restricted.

        • It seems like the number of new homes will continue to decrease, as materials become scarcer. If more people lose their jobs and move in with relatives or friends, we really won’t need new houses because of household formation. We can just subdivide ones we have.

          The people who are hurt by the decline in home prices are the ones who need the equity in their homes to buy a new home, and the banks who lose on foreclosures. Some people may need to move to rental housing, because their credit is damaged after a foreclosure. New buyers do come out ahead, although now they are being asked to put down a bigger downpayment, to protect the bank in case prices decline some more, so they are still being squeezed.

      • marty schoffstall says:

        in a book written decades ago, frank herbert in “under pressure” wrote about a dystopian world, where the US was sending in stealth submarines to drill and pump oil in other countries territories due to the needs of lubricants.

  3. Ikonoclast says:

    We are certainly in a bind. Our economy is dependent on cheap fossil fuels.If we stop burning fossil fuels now our economy collapses and billions die. If we burn all (recoverable) fossil fuels, we do serious damage to our climate. Then our economy collapses and billions die due to both climate change and fuel exhaustion.

    If we were a rational species (in the aggregate) we would have declared a global emergency in 1972 (Limits to Growth) and have been seeking to transition to a sustainable renewables economy since that date. This would be true even if the expected sustainable population were, for example, one billion.

    However, we are not a rational species in the aggregate and we cannot control our own mass history. These considerations might indicate that our case (once we got on to the industrial and capital revolution trajectory circa 1800) was always hopeless.

    We can only hope and expect that natural corrections will solve the problems that we can’t solve. By this I mean that first we must hope that there are not enough recoverable fossil fuels to completely wreck the benign holocene climate. Second, we must expect that a mass dieoff of humans (up to 5 or 6 billion) will occur. We must understand that this will be beneficial for homo sapiens and the entire biosphere in the long run.

    Finally, we must be pleased (as empirical and moral philosophers) to see that the pernicious and destructive system of capitalism is refuted by natural laws.

    • Jan Steinman says:

      These considerations might indicate that our case (once we got on to the industrial and capital revolution trajectory circa 1800) was always hopeless.

      Well, there’s the possibility of a second deus ex machina, like the one that made a fool of Malthus (fossil sunlight) in many people’s minds.

      What if aliens landed and showed us how to do cold fusion? 🙂

      Yea, I don’t buy it, but if fossil sunlight hadn’t arrived in the mid-1800’s, everyone would be saying how wise Malthus was.

    • My view is that once we start having major problems with the financial system, fossil fuels of all types are likely decline in supply pretty quickly (maybe up to 20 years, but still quickly in the scheme of things). If the international financial system stops working, we will soon find it difficult to get imports of all types, including spare parts for cars, and computers, and food imports. I am sure that there will still be some international trade, but it will be quite a bit less in quantity. Loans will become much less common, so it will be harder to finance new oil and gas investments. Electrical outages may become common.

      The good news is that we won’t burn anywhere nearly all of the oil and gas and coal that is in the ground, the way I see things. We need our advanced technology to get out most of the fossil fuels we are extracting today, and we will lose those. I don’t know what will happen to climate. It has never been very constant, and will continue to change. This isn’t convenient when we have optimized each area for a particular type of climate.

    • Bicycle Dave says:

      Hi Ikonoclast,

      we are not a rational species in the aggregate and we cannot control our own mass history.

      Amen! (I agree)

      And yet, look at the incredibly clever things we have done – like putting a man on the moon. One could argue about the ultimate rationality of this achievement, but it certainly represents the actions of intelligent creatures.

      So, why is it that a relatively simple concept like Limits-to-Growth is so difficult to understand? If we know the answer to that question, does that knowledge help is take appropriate action even at this late date?

      • Chester says:

        Dave the cyclist,

        The concept of limits to growth is not difficult to understand if you are taught the actual laws that govern all activity on this rock, unfortunately for homo saps (and most of our cousin spp) we are taught a completely imaginary set of beliefs that have only the one goal, support for the monetary system. Hence we are on the horns of a rather nasty dilemma, the natural laws tell us less is best and the monetary system tells us more is best (growth).

        The whole discussion of a monetary value for energy is at best foolish and I would suggest inherently dangerous. Anyone who thinks that a kWhr of electricity for 3 cents at 3am is any different than a kWhr of electicity for 17 cents at 6pm does not even begin to understand energy. The production of each will have consumed the combustion of exactly the same amount of coal/gas or the drop thru the turbines of exactly the same number of grammes of water. Price has little or nothing to do with energy let alone any other resource.

        There are no physical laws that contain the $/Yen etc sign, so while we continue to make decisions based on money we will continue to make the wrong decisions. Money is not connected to this planet except as a measure of human belief. Using money as our decision tool inevitably leads to exactly the position we are in today, it also explains why as a whole we have no chance of fixing even the simplest of problems we face.

        I would suggest that the monetary system has a shorter remaining lifespan than I do (say 25yrs), it can not handle continuous contraction, the second you charge/pay interest means there must be growth.

        The future will be based on local trade and the ability to survive on what each community can produce, the horse and sail will return full force, central govt will decline (no ff means vastly reduced ability to project power)

        But, barring the truly untidy possible outcomes, the planet will begin to recover, diversity will increase and those surviving homo saps will become much more “aboriginal” in their structure.

    • marty schoffstall says:

      Forgive me my Seminarian background but since you have brought up ration, morals and natural law I can’t but step in. Morals in my mind require teleology – design and purpose towards ends. Some such as Carrier would argue only purpose, and his purpose is evolutionary purpose. My Druid friends would have a different take on that and my orthodox christianity would take another. While John Michael Greer should speak for the druids I’ll loosely state that both for the Druids and the Christians, ration exists within a Sacred Tradition/Revelation. Part of that Sacred Tradition/Revelation is the concept of judgment, a long suffering, mercifully suspended, striving to change but ultimate judgment.

      So….. I think we are rational, but we (speaking for myself “I”), are selfish, and without a love for “the other” and a fear of “moral judgment” we will not move beyond this. Lastly, as Tillich wrote decades ago, ideologies (capitalism in your context, fascism and communism in his) become quasi-religions and they are insufficient replacements for the sacred.

    • Ed Pell says:

      President Carter tried to take us down that path in the 1970s. He created the department of Energy just for that purpose. But it was hijacked and used to fund the nuclear weapons labs instead of alternative energy. The military-industrial complex is as short sighted as everyone else.

  4. aeldric says:

    Another interesting way of looking at it Gail. Every way that we come at this, we reach the same point – some of the oil that we are counting on is just too low in quality, it will not be extracted. This new angle reinforces the painful conclusion – the future that I assumed is not the future that I face and I need to plan accordingly.

  5. robert wilson says:

    I like comparisons to the massive amounts of gold in the ocean.
    http://www.time.com/time/magazine/article/0,9171,871061,00.html

    • Jan Steinman says:

      Yea, I recently had to leave a “discussion” with a cornucopian who claimed nuclear energy was going to save us, because all we had to do was get the uranium out of the sea water.

      This sort of thinking would be hilarious if it weren’t so sad and widespread.

    • Ed Pell says:

      I was a video on a Japanese project to extract uranium from seawater. I think they are still working on it.

  6. Ed Pell says:

    When the energy cost of oil extraction reaches the level where it takes less to make synthetic oil from CO2 and H2O extraction will cease.

    Anybody know the energy cost to make synthetic oil?

    • Jan Steinman says:

      Ed, the second law of thermodynamics says that every energy transfer loses a certain amount through entropy.

      You cannot combust oil into CO2 and H2O and then re-created the oil from the CO2 and H2O without a net loss of energy.

      • Ed Pell says:

        I agree about the 2nd law of thermodynamics. But if you can use sunlight in a desert to drive the reaction and produce oil/gasoline that is used in cloudy upstate New York even if energy is lost it has value. People will pay money.

        Even taking oil out of the ground that has an EROI of 100 involves using energy and energy loose but it still pays.

        • Jan Steinman says:

          The problem is in the inefficiencies, Ed.

          Turning CO2 and H2O into synthetic petroleum is a process that surely returns no more than a few percent on energy invested.

          In fact, probably the best way to turn CO2 and H2O into fuel via sunlight is a process that developed over some millions of years: photosynthesis.

          So in your example, you’re probably better off growing fuel in Buffalo than manufacturing it in Phoenix and shipping it to Buffalo.

          This conversation reminds me of one I experienced in a Usenet Newsgroup in the ’80’s. The technophiles were out in full force: “All we need to do is use nuclear fusion to desalinate seawater and then distribute it inland.” Someone else replied, “It’s already been done — it’s called ‘rain!'”

          I’m a bit of a technophile myself, having worked in several engineering disciplines. But technology must be appropriate to the situation and the means at hand. We’re looking at diminishing means, here! We should not be looking at advanced technology in the face of diminishing means.

          When the ERoEI sinks below a certain level, we will no longer be able to afford advanced technology. No human has walked on another astronomical body since the ERoEI was at least 70:1. The space shuttles are flying their last this year, at an ERoEI of about 5:1. Some claim the most expensive fuel we can work with is at about 3:1, which is a net energy gain of just 2:1, because you need one of your three units of energy to produce the next three.

          Back to your original question: “Anybody know the energy cost to make synthetic oil? [out of CO2 and H2O]” It appears that photosynthesis manages to thrive on an ERoEI of about 1.06:1. But the plants have 300 million years of practice at it. Don’t expect humans to do better than that for quite some time…

        • Bicycle Dave says:

          Hi Ed and Jan,

          I think Jan makes an important point:

          We should not be looking at advanced technology in the face of diminishing means.

          If the global problems are even half as serious as most of us commenting here believe, then how responsible is it to gamble with the future of our grandchildren by thinking that some “advanced” or unproven technology will save the day?

          Maybe some magic like cold fusion will come along in the future and radically change the energy equation. Maybe total collapse will come first. As the old farmer would say: “wish in one hand, poop in the other and see which hand is more productive” (or something to that effect).

          A book like Plan C deals with technology that is here today and is reasonably well proven and effective. I think folks who advocate solutions should stick with proven technology – like Jan says: photosynthesis is a pretty well established technology.

    • Kitegal says:

      or – when the cost of extracting one barrel of oil costs one barrel of oil extraction will cease? Probably before that. But we know what a barrel costs….

    • Ed Pell says:

      In today’s Daily Mail
      http://www.dailymail.co.uk/sciencetech/article-1361814/Scientists-make-diesel-fuel-using-sun-water-carbon-dioxide.html
      we have this
      “Joule claims, for instance, that its cyanobacterium can produce 15,000 gallons of diesel full per acre annually, over four times more than the most efficient algal process for making fuel. And they say they can do it at $30 (£18.45) a barrel.”

      Even if it turns out to be $60 per barrel this would change the world. And be carbon neutral.

  7. Ed Pell says:

    Would be nice to have recoverable global reserves at various oil prices.

    • It would be nice, but if the analysis is done at $80 barrel, quite a bit of oil will look to be available at $90 a barrel. When we get to $90 a barrel, we discover that the oil really is still not available. Costs have gone up, and now it looks like it might be available at $100 oil. Someone has called that receding horizons, because so many costs depend on the price of oil. But there is also the issue of not knowing all of the costs of new production until you try it. Very often, the first approach tried doesn’t work, and so a second is tried, and then a third. Then the amount of oil may not prove to be what is available.

      There are other issues, too. Tax rates are important. If government are in bad shape, like they are now, oil companies look like good sources of higher taxes.

      On the other side, technology improvements can help bring costs back down. So we really don’t know, but most of the new production now tends to be high cost production, that would not have made sense economically in the past.

      • Les Denham says:

        In 1974 I was working for the Petroleum Group at the Geological Survey of Greenland. I did some very approximate estimates of costs involved to produce oil offshore West Greenland (assuming oil was discovered), running selling prices up to $100/barrel. I made an assumption about how much of the production costs scaled with the price of oil. The result suggested that even a very large field would not make economic sense at $100/barrel. That’s the equivalent of $430 today.

        Technology for oil production in arctic conditions has improved since then, but you may have noticed there aren’t many people looking for oil in Greenland even now. The technological challenges are quite possibly insurmountable, even when money is unlimited. But this is one case where there may well be oil which will never be produced, regardless of the selling price.

  8. robert wilson says:

    Cornucopian visions from the 1950’s including Alvin Weinberg and King Hubbert http://metalsplace.com/news/articles/32845/will-we-run-out-of-uranium/

    See also the computer guru John McCarthy. Jay Hanson had USENET debates with McCarthy during the latter half of the 1990’s
    http://www-formal.stanford.edu/jmc/progress/nuclear-faq.html

  9. Jorge says:

    Some people say that we have consumed about half of all the recoverable oil, but
    because the remaining oil takes more and more energy to get, it looks to me that
    the remaining oil is not about 50%, but perhaps 40% or lower. So maybe we have
    consumed about 60%.

    • I don’t think the 50% ratio you often see takes into account the different types of oil (some of which are completely exhausted, and some of which are near the beginning). I also don’t think it takes into account debt financing. So I don’t think the model fits the real world very well. The belief that 50% is left when decline starts is sort of comforting–but I don’t think there is much truth behind it.

  10. Neil Howes says:

    Hi Gail, you wrote; What we think of as affordable seems to correspond in practice to what economists talk about as the level of demand. If there is high demand, then a high price seems affordable.
    You seem to be missing the very different types of demand for oil. Some oil is being used for its BTU content for example in power plants, home heating. Already oil used for these purposes has mainly been replaced by less expensive methods of generating electricity or natural gas heating.
    Today a major use for oil is for transportation, due to its convenience and high energy density. Already considerable rail transportation has replaced oil with electricity generated from coal, NG, nuclear and renewable energy. Replacing oil used by car and truck transport by either CNG or electric/ storage batteries is just beginning, and will take 20-40 years to replace existing infrastructure, but the economics favor this conversion with oil >$100/barrel. While most of the road transportation depends upon oil, consumption will remain fairly inflexible until oil becomes so expensive that non essential driving is reduced or low mpg vehicles are scrapped prematurely long before repairs become too expensive. Once this conversion is say >50% completed we may see the transition going to near completion whatever the oil price, as oil based infrastructure(refineries, pipelines, gasoline retail outlets) becomes too expensive to repair or replace.
    The other important use of oil is for air transportation, where the only alternative is synthetic oils or biofuels. These alternatives are likely to remain expensive, so as oil becomes more expensive we will see some rationing of air transportation, with low cost economy vacations/ tourism being greatly reduced, but first-class air travel probably not greatly affected. If you think biofuels could supply most air transport then a lot of the remaining oil would say in the ground. If biofuels remain expensive or cannot supply a significant portion of air transport then most oil will be recovered, as long as first class air travel is in demand.

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