The EIA published International Energy Outlook 2011 (IEO 2011) on September 19, showing energy projections to 2035. One summary stated, “Global Energy Use to Jump 53%, largely driven by strong demand from places like India and China.”
It seems to me that this estimate is misleadingly high. The EIA is placing too much emphasis on what demand would be, if the price were low enough. In fact, oil, natural gas, and coal are all getting more difficult (and expensive) to extract. Prices will need to be much higher than today to cover the cost of extraction plus taxes countries choose to levy on energy extraction. The required high energy prices are likely to lead to recessionary impacts, which in turn will cut back demand for energy products of all types.
We live in a finite world. While it is true that huge resources of oil, natural gas, and coal are still theoretically available, we are starting to reach practical limits regarding extraction at prices that do not lead to economic contraction.
An IEO 2011 summary exhibit shows that world energy consumption will more than double, between 1990 and 2035:
It is only by drilling down into the report that we can see what the problems with the forecast really are.
Clearly oil and other “liquids” (used to extend oil) are one of the potential problem areas, since the price of oil has been rising rapidly since 2000. EIA’s liquid fuels projection is shown as follows:
The first thing a person notices when looking at the graphs is how poorly the forecasts of future production match up with recent past actual production. Non-OPEC production has recently been declining, after reaching a peak of 48.1 quadrillion Btu in 2004. Somehow, miraculously, the EIA expects that Non-OPEC production will start increasing, rising from 46.8 quadrillion Btu in 2009 to 53.9 quadrillion Btu in 2035. The text suggests this will come from ultra deep wells, from the arctic, and from enhanced oil recovery.
Oil production from individual wells naturally declines over time, by about 5% per year, so new fields must constantly be added, to keep production level. The graph indicates that since 2004, non-OPEC countries have not been able to add enough new production to keep conventional production level. What makes the EIA think that this problem can be turned around, with very high cost, risky new investments?
The forecast for OPEC conventional is even more of an enigma, because it shows even larger increases. OPEC countries claim very large reserves, but these have not been audited, and when it comes to what should be a simple task–replacing the lost oil output of Libya–they seem to have difficulty. Recently, King Abdulla of Saudi Arabia has been quoted (for example, in a WSJ an article titled, “The Next Crisis: Prepare for Peak Oil,”) as saying that new oil finds should be left in the ground for their children.
If the OPEC countries we are depending on are not planning for the big increases we are hoping for, we have a problem. I am not aware that OPEC has given any indication that their production (conventional oil or otherwise) can reach as a high level as the EIA is forecasting. Even big increases in production from Iraq would not seem to be enough to provide OPEC’s hoped-for increase.
I suppose that a person could argue that if oil prices were a lot higher, oil companies might be willing to use more expensive techniques to extract oil. But the EIA shows this graph regarding price expectations:
In the reference case, oil prices do not rise much above today’s high level between now and 2035. (The EIA does not indicate what oil benchmark is being used, but the context suggests it would be an average price level, more similar to Brent price than to today’s distorted West Texas Intermediate price level. Such prices have recently been in the $110 to $120 barrel range.)
Part of the reason that very high oil prices are needed is because governments are becoming more and more “needy,” and see oil companies as a potential source of revenue. According to the Economist, next year Russia (the world’s second largest oil exporter) will need a price of $120 barrel to meet its spending obligations. Also, President Obama keeps talking about raising taxes on US oil and gas companies. Higher taxes will mean that higher oil prices will be needed to encourage development of very deep and very risky resources. These issues mean that to have a chance of raising oil production, oil prices really need to be on the “high oil price” trajectory of Figure 3, not the “reference case” scenario.
If oil prices really rose to the high oil price trajectory, there would be huge transfer of funds from importers to exporters, and importers would be in even worse financial trouble than they are today. Food prices would be expected to rise with oil prices, so even oil exporters (who are food importers) could expect to have problems. At such high oil prices, it seems likely that we would see even more revolution and replacement of governments than we saw this spring.
The written analysis in the IEO 2011 report is based on the reference scenario, but schedules are available showing the indications of the high oil price scenario. Amazingly, with EIA’s high price scenario, energy production is even higher, and world economic growth is even higher. The world’s average annual growth in world GDP is 3.4% per year in the reference scenario (with an unrealistically low oil price), and 4.0% per year in the high oil price scenario. When people are spending a disproportionate share of their paychecks on oil and food, and road repairs are becoming increasingly unaffordable for governments, how are economies possibly going to be growing more rapidly? If a greater share of investment will need to be plowed back into the oil and liquids sector, how can this mean that there can be more growth elsewhere?
Besides OPEC and non-OPEC conventional oil, the third category is unconventional liquids. An explanatory chart gives the following breakdown:
With alternative fuels, high price is again important, because it helps make the big investment required profitable. The Oil Sands / Bitumen projection is perhaps reasonable, if prices can actually follow the high trajectory without sinking economies (a very big if). The biofuels projection depends on the development of biofuels which do not use foods as inputs. So far, technological progress on these has been slow. Even if very high prices can be maintained, the biofuels forecast seems like a “stretch”.
Some gas to liquids increase seems likely, perhaps even more than the EIA is forecasting. These plants appear to be profitable now, even without $150 to $200 barrel oil prices. Coal to liquid and shale oil would seem to be farther away economically than gas to liquids. However, if the world economy could really withstand $200 oil prices, perhaps these types of plants could be built.
Part of the issue with very high oil prices is that they imply that it makes economic sense to use very high energy inputs (and water inputs) to produce these liquids. Clearly, at some point, the cost simply becomes unacceptably high because it takes more than one barrel of oil to produce a barrel of oil, or because the pollution issues become unbearable. For example, theoretically, it would be possible to pump water uphill from the Great Lakes to Colorado to be able to produce shale oil, if the price were high enough. But it is hard to see this making sense on any reasonable terms. The assumption that prices can rise arbitrarily high is simply not true.
Natural gas indications are less clear, because the forecast is a summary of forecasts for different regions, each with different issues. Transport is more difficult for natural gas than oil also.
New techniques are now being used to extract more difficult-to-extract natural gas, but these are controversial in more than one way:
- Long term profitability is difficult to calculate in advance because a huge up-front investment is required and calculation of long-term profitability includes several assumption which can easily be “selected” to produce the desired result. Are natural gas operators claiming profitability at lower prices than is really possible? If prices were high enough to be profitable, would demand stay at high levels?
- What are the environmental consequences of such huge fracking operations? Will it be possible to dispose of all of the polluted water that comes back up in an environmentally friendly way? Are there other environmental issues? Will governments permit wide-scale use of fracking?
The EIA appears to have decided that these controversies will decided in the direction of allowing big increases in natural gas production. The IEO 2011 shows this estimate of natural gas reserves:
The indication is that North America and Europe have relatively little in reserves. There are huge reserves in locations where it is difficult to verify the accuracy of the reserves, and where transport to North America or Europe would be difficult. While ships carrying liquefied natural gas (LNG) can be used, there would seem to be a practical limit as to how much can be transported in this manner. Pipelines can be built, but it is expensive to build these pipelines, and they need the approval of all of the countries along the pipeline.
In total, the EIA sees a huge increase (52%) in natural gas use between 2008 and 2035, with the majority of increase outside OECD, according to the report’s Figure 40.
The countries that are expected to increase production tend to be concentrated in the Middle East and in lesser developed countries around the world, according to the report’s Figure 41.
One area which shows an increase in production is the United States. This is controversial, for reasons mentioned above (likely high price needed for profitability; environmental impacts). Europe shows a continuing decline in production. A number of European countries are already finding themselves in financial difficulty. If more natural gas needs to be imported, this can only add to financial difficulties.
The EIA shows continued growth rapid growth in coal production and consumption.
Is this kind of coal projection realistic? As with oil and gas, there is an issue of needing to extract ever lower-quality resources, from greater depths. Many of the seams that are left in easily accessible locations are thinner and more expensive to extract. IEO 2011 indicates that an increasing portion of the coal will be imported. Thus, the cost of shipping will add to the cost to the final customer. All of these factors mean that we can expect the cost to produce a Btu of delivered coal to rise over time. We can think of this as lower Energy Return on Energy Investment (EROEI), or as higher cost of production.
If the price of coal rises, a person would expect coal demand to fall, if coal demand is at all elastic. Because of this relationship, it will be difficult for long-term consumption to rise as much as the EIA forecasts suggest. This expected slowdown in coal production due to higher price is not very different from peak coal indications arrived at through curve fitting techniques, such as this analysis by Dr. Minqi Li.
With coal, there are also environmental issues, both from a CO2 point of view, and from the point of view of other pollutants. Will the world really be willing to put up with such high coal use, over the long-term?
Note that the issues with any of the fossil fuels is not that the resources are not there. The issue is that the cost of extracting them keeps escalating, making it increasingly difficult for society to afford these high costs. There are also environmental costs that must be considered.
Renewables are not shown in a separate section in IEO 2011. Instead, the biofuel portion is included with liquids (see Figure 4 above) and other renewables are shown as a subsection of Electricity. The Electricity subsection says:
Although renewable energy sources have positive environmental and energy security attributes, most renewable technologies other than hydroelectricity are not able to compete economically with fossil fuels during the projection period except in a few regions or in niche markets. Solar power, for instance, is currently a “niche” source of renewable energy, but it can be economical where electricity prices are especially high, where peak load pricing occurs, or where government incentives are available. Government policies or incentives often provide the primary economic motivation for construction of renewable generation facilities.
Renewables are mentioned in the summary. There, one of the key findings is
Renewables are the world’s fastest-growing energy source, at 2.8% per year; renewables share of world energy grows to roughly 15% in 2035
This graph is also provided in the summary presentation:
A backup exhibit shows that hydroelectric amounted to 85% of renewables in 2008, so the 10% of energy consumption is split roughly 8.5% to hydroelectric, and 1.5% to other renewables. In 2035, hydroelectric amounts to only 68% of the renewable subtotal, so the 14% in 2035 is roughly 9.5% hydroelectric and 4.5% other renewables. Thus, “other” renewables used in electricity production are expected to roughly triple as a percentage, from 1.5% to 4.5% of the total, by 2035.
The EIA estimates of future fuel consumption seem to be optimistic throughout. It is hard to see what benefit such a bias would have, other than to protect the careers of political leaders and to keep people from understanding that there is a real possibility of energy limits affecting the economic system in the not too distant future.
There is widespread misunderstanding of our fossil fuel problems. The belief is that the fuels will somehow “run out.” In fact, the issue is that they will become too expensive to afford, or, if you think in terms of “peak oilers,” the Energy Return on Energy Investment (EROEI) will drop too low. High energy prices will likely lead to reduced energy consumption, which in turn will lead to recession, reduced economic growth, and eventually lower energy prices (as we saw in late 2008). At these lower prices, the high cost (low EROEI) resources will no longer be profitable to extract, and the extraction of these high cost resources will disappear.
Thus, the issue is really that high price / low EROEI is the limiting factor on resource extraction. That is what the EIA missed in their forecasts.
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An update on my earlier comment.
I’ve just read an excellent piece by Chris Skrebowski over on the Energy Bulletin.
A brief economic explanation of Peak Oil
He seems to be saying something similar to my earlier comment, on a Governor Range of prices
‘homing in’ on a point in time where oil (can only) be produced, at a price which the world (unfortunately), cannot afford.
His piece is obviously much more considered and with more detail than mine, but the conclusion appears to be the same. On his piece (Graph 2) His Stalemate Point seems to be about $130 around the first quarter of 2014. My admittedly, wild guess!! Was $117 by 2015.
I’m boosted in my opinion by his piece, whereby we are looking at a point in the very near future where the ‘modern’ economy will effectively grind to a halt. Please note, that I say the MODERN economy will halt, and NOT all forms of economic activity!
When we speak of EROEI, generally, we mean that there is no point in producing oil if it takes one barrel of oil to produce one barrel of oil.
Extending this logic, we can say surely, that there is no point in bringing to market, oil that no one can afford? No Customers for Oil Produced. (NCOP).
Indeed NCOP could arrive long before EROEI.
Using Chris’s Graph 2 as a more accurate base, we can say that by mid 2014, it doesn’t matter a jot if the EROEI still works. If the Oil company needs $130 to make a viable profit, and the world is saying ‘we cannot afford and maintain a modern economy’ on $130 oil, then, it’s game over.
Again I make the important point, that it is,’ a modern global economy’ that cannot function when the price stabilises around, (Chris’s much better estimate!), of $130.
There may still be the odd purchaser of oil at $130, for specialist uses, but it will not be a for use, within anything that looks like a global economy.
Many thanks for the discussion.
I agree Chris’ analysis is very good. And related to my comment I made to Informationforager before, when oil price exceeds the level most can pay for it, we can’t count on getting as much more out as we have gotten out to date, either. The system tends to collapse. Perhaps some portions can run, but in the West, where we are dependent on oil and electricity for nearly everything, it will be a huge cutback. (I cannot see electricity continuing for more than a year or two beyond oil.)
Gail said: “(I cannot see electricity continuing for more than a year or two beyond oil.)”
Your statement is really quite profound when one considers the social implications. I greatly value your opinion and analysis Gail; thank you.
I should write another post on the connection between oil and electricity. I wrote one on The Oil Drum, a long time ago.
A major part of the connection is through the economy and Liebig’s Law of the Minimum. If we don’t have enough oil (so oil is high priced), the whole economy shrinks in size–just as the size of an agricultural harvest shrinks in size, if there is not enough of nitrogen, or phosphorous, or what ever else is required. With agriculture, you can’t substitute one type of fertilizer for another. I think it is pretty much that way with oil and electricity and the economy. A lack of either oil or electricity causes the economy as a whole to shrink–fewer workers, less tax collections, less use of oil and of electricity. This is what happened in 2008-2009.
But there are direct directions too. Workers in electric power plants need gasoline to get to work; coal is transported in trains using diesel fuel; electricity transmission lines are repaired using trucks burning diesel and helicopters burning oil based fuel; replacement parts are transported using vehicles powered by gasoline or diesel.
I hope you will write an update on electricity production. I find this particular thread (declining demand / production meets minimum threshold of operation) in your posts unique and eye opening. It’s like learning that the Alaskan pipeline ceases to be viable below 450,000 b/d even though there’s oil left in Prudhoe Bay. Thank you!
Thanks for the idea!
One of the issues with electricity is transmission. We need to keep making repairs, or the system falls apart. Vermont is a recent example, but we see this with every little storm that passes. We need someone who has the funds to pay for all of these fixes, and we need the imported parts. We also need the gasoline for the trucks (and fuel for the helicopters) making the repairs.
Also, we are working with a transmission system whose parts are mostly reaching the end of their useful lifetime. Companies have figured out that it is cheaper to wait until a part fails than to repair in advance. The workforce is aging. This is a link to a post that I wrote a while ago on transmission problems. The US Electric Grid: WIll It be Our Undoing?
I like your blog. It’s a very serious issue. The mistake of the gas tank analogy is pervasive.
When we think of oil, we picture the gas tank analogy. When the needle reaches E for empty is when we are in trouble. The world does in fact have a trillion barrels of oil left to produce. The real analogy is like a Pearl Harbor reconnaissance plane flying its mission over the ocean. The plane flies as far as it can for as high as it can. The pilot fulfils the mission of aerial photography of enemy positions. At a certain point though the pilot knows he must turn around at the HALF WAY point of the gas gauge to make it back home. When the needle reaches at half the tank the pilot MUST RETREAT and DESCEND to make it back to base. When the world has produced as much oil as it will ever can in one day (peaked), when it has flown as far as it can for as high as it can the world economy MUST RETREAT and DESCEND.
Interesting idea! If the cut off is price based, I am not sure that there is anything like 50% left after the descent starts. It is sort of like saying, after we hit the minimum EROEI, we will start our slow descent. After we hit the minimum EROEI, we may very well do something closer to crash. How long does your computer run, after you pull out the electricity cord from the outlet? Not too long, if there isn’t a battery in the computer.
Hubbert made his forecast, assuming that there would be plenty of energy from other sources (nuclear in his 1956 paper). The fact that this isn’t true makes the situation quite different.
MSM, in particular taking heads in Main Stream Business Media, frequently speak about how humanity (especially exceptional Americans) have been repeatedly challenged with adversity of one type or another and how we have always adapted and ultimately become more prosperous and successful. This success is usually attributed to inventiveness, entrepreneur spirit, technological prowess, etc. This POV tends to think in terms of an infinite linear progression achieving ever more prosperity for an ever greater human population. This mentality does not seem to have learned much about Bell Curves and Sine Waves and their relevance to many trends that occur in nature.
I recently listened to a very popular cable TV host rant for about 10 minutes about the doomsayers in past depression and war eras who have all been proven wrong by human genius, ambition, adaptability, flexibility, resilience, etc. This seems to me like a lot of hubris that ignores reality. I suggest these folks read authors like Jared Diamond for a little more realistic perspective. There is a definite logic flaw in concluding that human life will get better in the future simply because it tended to improve in the past.
Yesterday, on public radio, I caught part of a talk by some “expert” who mentioned that recent population projections have increased from 9 billion to 10 billion sometime in this century. (I guess Just like the magical energy supply increase.) He said that feeding 10 billion people was “no problem” we just needed “better food distribution systems” and it was easy to mathematically demonstrate how there was an adequate global supply of calories for 10 billion (or more) humans with equitable distribution.
It must be nice to have no real concern about future generations of humans and the many other species we share this planet with.
If things have always gotten better and better, it is easy to assume this will always be the case. But I think it is important to figure out that while we have more I-Phones and I-Pads, a lot of things aren’t getting better and better. Our young people especially are finding it difficult to find good jobs so they can afford all of the gadgets and homes and everything that seems to be available. That is where the system is breaking down–but people don’t see this as an issue.
You can postpone objective reality for most through debt but ultimately things revert to the mean… with added technology and centralization. The benevolence is that the chance for success is greater now than it has ever been for the person willing to be humble and highly ambitious, which answers where they get this increased number. Considering the human population growth is directly related to the formation of Standard Oil, if producing oil becomes unfeasible there will be a direct correlation with population numbers in my opinion… engineers and scientists will have to come up with new ways to make it work… with so many people, it’s inevitable, isn’t it? “The graph indicates that since 2004, non-OPEC countries have not been able to add enough new production to keep conventional production level. What makes the EIA think that this problem can be turned around, with very high cost, risky new investments?” Simple: More competition means more innovation. You mention the subjective WSJ viewpoint of leaving it for future generations when sustaining a way of life has created trillions in debt so this isn’t the play that will occur it is against human nature. Never underestimate hunger and entrepreneurship. That is what drives the best.
We are good at finding innovative ways to burn energy.
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the oil drum censored my comment and my 3rd account is now banned SIMPLY FOR SHARING TRUTH. If what i say is not true why not prove me wrong? why censor truth?
You should stick to one topic, and something like two or three links to support that topic in a post. Many automatic spam checking programs mark as spam any post that has too many links.
Also, antimatter comes across as a very odd topic to begin with. What does that have to do with energy? The Truth needs to be somewhat “on topic”.
Watch Free Full Documentary Antimatter: The Future is Now:
Evidence of censorship by youtube, along with SOURCE from .edu university websites .gov NASA
Documentary about antimatter, asteroid mining, space colonization, space exploration, spacecraft, space travel, sustainability and self sufficiency. There is a real serious lack of interest in sustaining civilization. The technology and science exists, except there is a lack of public interest. How long did it take scientists to develop nuclear? That sure got a lot of attention. Today’s world is very inefficient, toxic pollution is a big source of sickness and disease. Hemp products are safe, stronger, and last a lifetime. Hemp is the key to sustainability. To say the world is on the wrong track, is an understatement of the highest order.
Hemp ethanol is a lot less energy intensive compared to the alternatives. New enzyme processes can harvest 1800 gallons of ethanol per acre. Half of the cars running in Brazil are running on ethanol made from sugarcane so don’t say it can’t be done, it already has and there is a plant that harvests a lot more ethanol. Also the hemp strains with moderate THC levels produce FAR more seed and ethanol per acre in comparison to the strain of hemp with low THC currently allowed by the canadian government. Search Do it Yourself ethanol.
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The MENA countries can’t afford a 90$ oil forget 70$. Saudi Arabia is literally throwing money at it’s citizens to keep them pacified, same with Iran and other countries, due to lack of industries their entire GDP is now sustained by oil. They will start cutting production as soon as Brent hits 100.
Clearly these estimates are racist.
I take it you are joking.
This analysis by Gail is of profound importance. The financial economy and the productive economy are two, co-dependent sides of the same coin.
If productive activity CAN be restarted and expanded (which requires energy resources) then Keynesian stimulus measures, debt restructuring, etc. can be exactly the band-aid required to heal the financial economy and get the productive economy going again.
If oil is a barrier to ongoing expansion in productive activity then our financial economy cannot possibly recover, which will be an additional barrier to productive activity (read “unhappy spiral”). Gail has mentioned this problem frequently – depressed economic activity leads to reduced oil infrastructure investment, leads to depressed economic activity…
Neither the financial economy nor the productive economy are the coin, but the coin (as we know it) cannot exist without both sides. We desperately need to understand whether the productive side is still available.
Thanks! And if the productive side isn’t available . . .
The report probably uses the same formula for world oil price that is used here: http://www.eia.gov/dnav/pet/pet_pri_wco_k_w.htm
If you follow various links, there is a PDF: http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/appendixb.pdf
Page 43 of that PDF has a Note 1, which describes the way the price is calculated.
The last world oil price for about 4 weeks ago (update for 3 weeks ago due soon) was $105.89
Thanks! I think you are probably right. That amount is closer to Brent than WTI, if those are the two benchmarks people are used to.
The EIA estimates of future fuel consumption seem to be optimistic throughout. It is hard to see what benefit such a bias would have, other than to protect the careers of political leaders and to keep people from understanding that there is a real possibility of energy limits affecting the economic system in the not too distant future.
It would seem to me that the leaders of the developed world – elected or otherwise – are terrified of seeing what happened in the MENA countries this year, happen in the U.S., Europe, etc. (and rightfully so). While there have been some isolated events, there hasn’t yet been widespread disruption in the day-to-day lives of most people in the OECD. If the idea and inevitable consequences of declining energy really began to sink in to the public consciousness, the effects on an already struggling economy would likely be devastating. As we are seeing in Greece, a seriously declining economy would almost certainly lead to drastic cuts to social programs, or even their total elimination, which in turn would lead to upheaval. When the U.S. government checks stop flowing, things will get very ugly. So, I suspect reports such as these keep their pie-in-the-sky bent in hopes that someone somewhere will figure a way out of this mess before the general population figures out just how bad things really are.
I think you are right (although some of the leaders aren’t smart enough to figure out what is going on).
I suppose if I were an elected official, I might think that way too–not wanting to be lynched.
I choked when I saw the EIA report. I knew they could not be taking peak oil into account at all. Thanks for the post on it.
By means of a typo I created a neologism, namely “prodiction”, so here is my definition.
Prodiction – a prodigiously exaggerated and preposterous prediction generated through stupendous ignorance, malevolence or machiavellian intent.
The IEA prodictions are absurd. It is patently obvious that the IEA follow a spurious method whereby they first work out the economic answer they want and then they work out the energy equation to fit this answer. They proceed as follows.
Factor in projected world (and rehional) population growth plus projected (read “desired”) per capita income growth. Then calculate how much more energy will be required to support this growth. Apportion this growth across various energy sources in the most (seemingly) plausible way. Invoke various (superficially plauible but clearly fanciful in the light of empirical analysis) mechanisms whereby this growth will be achieved. Publish a large official looking report with lots of colourful graphs and textual obfuscations of unsupportable assumptions all written in modern managerialese terminology.
Then, wear suits, sound authorative and attend big meetings with lots of other people also wearing suits and sounding authorative, while exchanging mutually supporting reports, backslaps, bonuses and golden handshakes. Have this circus postively reported by the cooperative mainstream media and backed up by large government and corporate propaganda.. er I mean advertising campaigns, which sell the endless cornucopia vision to the (deliberately) ill-educated, innumerate and scientifically illiterate public who have no idea that the numbers don’t correspond to empirical reality and don’t add up. Marginalise competent scientists, empiricists, economists and actuaries who can point out all the many flaws and falsehoods in the official picture and refute the entire line of fallacious reasoning.
Continue this game until it all collapses and then blame the collapse on the fact that markets were not liberalised enough to allow free market mechanisms to “save the world”. Allow billions to starve and start jailing people (like physicists and climate scientists and greens ) who insist on the primacy of the laws of thermodynamics and ecology. Take control of the cultural myth making apparatus and ensure that future generations (if any) blame the whole mess on scientists and social democrats.
Minor correction–the forecast is by the US organization, the EIA, not the international organization, the IEA. The IEA has been saying things about limited oil supply (sort of).
I never pay any attention to conspiracy theories like the 9/11 building stuff. However, I think that non-conspiracies, fueled by delusion, that evolve organically are much worse. You have just described one of these. All sorts of human motivations are involved that made it unnecessary for some evil guys in a smoke filled room to orchastrate a blatant conspiracy. It is probably not possible for an actual conspiracy of this magnitude to succeed – we really need good intentions for this kind of thing to happen.
I wonder if you can drill down on this a bit? As you know, some “experts” have claimed that Iraq could produce 12 mbd (which is much more than their current production) for 10 years or more. Apparently contracts have been negotiated but lots of problems could limit actual production. What is your take on this situation? Also, if Iraq could produce something like 8 to 12 mbd why do you seem to imply that it would not make much difference? I understand that it would not really matter that much in 24 years (2035), but couldn’t it make a significant difference in the next decade?
The reasons Iraq oil wouldn’t make a lot difference:
1. We have all of the decline to offset, at least 4 million barrels a year. Without a lot of new production, total production will decline.
2. It price goes down at all, consumption will rise, briefly, until price goes back up again. With 7 billion people in the world, there is just too much demand, if the price can stay down at all.
We know it will be several years before Iraq production will be ramped up very much, because they need to build new infrastructure to support greater exports. By the time this happens, there is a substantial chance that we will already be seeing serious financial fallout from too low production. The big increase, when it comes, may be after serious financial problems have arisen, affecting international trade. Thus, countries with financial difficulties may not be able to buy it, even if it is theoretically available.
Your argument makes sense. It is getting harder to see how we are going to muddle through this.
I often think of Scarlett in “Gone With the Wind” and how her life totally changed in such a short time – except I doubt her “rebuilding” phase could be so successful this time around. I recall my own brush with nearly freezing from the cold and facing starvation in my early 20s – saved by finding a good-paying factory job. And then being drafted into the army and the GI bill that led to college and the “American Dream”. Hard to see how future generations will overcome such adversity. Neither good entry-level jobs nor social programs (like the GI bill) seem to be in the cards.
Current US citizens, who live above the poverty level, most likely enjoy material benefits that probably exceed the lifestyle of 15th century nobility. We live in a bubble of material prosperity that is unprecedented in human history. This does not, however, speak to our actual life satisfaction. It remains to be seen how many folks will have Scarlett’s resilience.
Your mention of the 15th century makes me think of something else, a couple of centuries later.
Samuel Pepys kept a detailed diary of daily life in London in the middle of the 17th century. His life as a senior public servant in many ways was not as secure as that of an average modern US resident above the poverty level. He was faced with threats of debtors’ prison, arrest for treason, destruction of his property in the Great Fire, death from the plague, and invasion by the Dutch, and had to be careful about where he went after dark. But he did manage to maintain a lifestyle well above that of an average Londoner, and had ready access to the most powerful people in the land.
An interesting aspect of his life (in view of our current government expenditure problems) was his continual struggle to get adequate funding for the Royal Navy. Naval expenditures were a low priority for most of the government, and even after funds were authorized they did not always appear, and there always seemed to be large sums of money spent with little to show for it. One diary entry comments about a discrepancy (of about 50%) between money supposedly paid to the Navy and money actually received by the Navy. At the time Pepys was (in modern terms) the CFO of the Royal Navy, so he should have known where all the money came from and where it all went. And, so close to the Civil War and the Restoration, stable government was not a given: every few months there was rumor of a disturbance which could be an armed rebellion or the start of a civil war.
Perhaps in the future we’ll be seeing live more like that: natural disasters (like the Great Fire), a large die-off (20% of the population of London died in the 1665-66 plague), and insolvent and unstable governments.
We probably need better history lessons of what things were like years ago, Thanks for the insights!
Just for some fun with numbers let’s assume world energy supply increases by 15% by 2035 and that the relative percentage of consumption in 2035 are those given (OECD 37%, ROW 31%, China+India 31%). Then we find that consumption in the OECD will decline by 12%, in the ROW rise by 18% and in China+India rise by 68%. This coupled with a population increase in the US of 25% by 2035 will lead to a net decline in per capita GPD of 37% by 2035. We will not be dead we will have only one car per family, less air travel, smaller houses (1200sqft versus 2400sqft), etc.
I am not saying we will have 15% more energy in 2035 this is just a BEST case scenario.
There is not one price the world can afford. There is a spectrum of activities each with is own maximum price. 300 $/bl might be fine for lubrication oil. Then there is the traded oil (export/import) versus internal use oil. Oil may trade for $120/bl but cost $20/bl inside the KSA.
It is not a binary situation the world does not shutdown. The question is, which is the first 10% of the world economy to go, and then the next 10%…. I see plenty of empty stores at the mall I guess they were part of the first 10%.
Thanks for the reply Ed
You said “300 $/bl might be fine for lubrication oil.” I’m not sure that stacks up. Surely if you are using 300 dollar oil to make lubricating oil, then you are also using 300 dollar oil to make gasoline?
If we assume $100 crude goes to make a $10 quart of motor oil
Then surely $300 crude would mean $30/quart motor oil. But more importantly, it would
also turn $4.00/gal gasoline into $12.00/gal gasoline? I honestly cannot see how $300 oil could work in any instance.
I understand what Ed’s getting at.
You can make biodiesel from local seed crops and producer gas. But you still need to lubricate the engine.
But Ed, I think lube oil is a poor example, being tied to combustion engines, at least in many people’s minds.
Perhaps a better example is plastics. Substitution should kick in at some point for plastics — Henry Ford reputedly made an experimental car body out of soy beans — but it may be as high as $300/bbl.
Substitution using crops (soybeans etc) is not going to work all that well, in my opinion. It would take too much of the crops, and we are already using too many crops for biofuels.
Don’t forget that lubricating oil is used in many kinds of machinery which use no fossil fuel. For example, a hydroelectric power station require lubricating oil for the bearings used in the turbines and alternators; a bicycle needs lubricating oil for chains and bearings; a wind turbine needs lubricating oil for its shaft bearings and pitch adjusting mechanism; and a sailing ship needs lubricants for blocks and winches.
For all of these purposes I can see small quantities of crude oil being sold at very high prices for lubricants. But this oil would most likely be supplied from small operations extracting the last recoverable barrels from almost-depleted fields, probably fields where a pump can be run from wind or hydro power. There are many (tens of thousands) wells in the onshore U.S. which pump a barrel or two of oil per day, along with fifty barrels or more of water. They might need to be let stand for twenty-five days a month to reduce water inflow, but they still make money at today’s prices. I can see such operations staying in business long after large scale development and exploration have expired.
I think we still need refineries to be profitable, and to be staffed with competent people. So volume cannot go to zero. I am not sure about pipelines. They seem to have minimum operating levels, but it is possible to process some oil without pipelines.
Scaling down is in some ways harder than scaling up. You can’t get along with fewer than one experienced engineer, for example.
Scaling down can be done in surprising ways. Several years ago I was given a copy of a presentation put together by an American working in Indonesia, showing how one local man had developed an integrated oil company on a very small scale. Unfortunately, I lost the presentation in a computer crash.
This man used as his oil source an oil seep, which he channeled into a pool by digging a ditch by hand. The collected oil was distilled a few gallons at a time using wood and residual oil as fuel. The still consisted of an iron tank with the vaporised hydrocarbons going to a simple water cooled condenser. The output dripped into an open bucket. By starting with a low temperature, the operator could get a gallon or two of unleaded gasoline. Then he increased the temperature to get another gallon or two of kerosene. Finally, a really hot fire boiled off some diesel fuel. The residue was suitable for caulking, or for using as fuel in the refining process.
His final step was to sell gasoline, kerosene and diesel from a table set up by the side of a main road.
The whole enterprise was without doubt a risk to life, limb and health, but provided one family with a comfortable living.
That is interesting. There probably are some things of this sort that can continue for quite a while. In the West, though, oil companies have already tapped them.
Well, the lube could be for greasing the axles of mule draw carts….
Thank you Gail.
Using your post – IEO 2011: A Misleadingly Optimistic Energy Forecast by the EIA, as inspiration, I ask the question:
Is the Oil Price Stalemate 117 x 2015? What does this mean?
In an engine, the governor controls the fuel supply. When the engine is not being used for productive work, the governor keeps it in the ‘idling’ state between over-revving and stalling.
Using that analogy it seems, to me, that we are approaching the insight, that we are in a Governor Range of oil prices.
Let me put forward two arbitrary figures to make the point. (You may of course pick your own.)
UPPER is perhaps $127 per barrel
LOWER is perhaps $73 per barrel
Above $127 pbl, No-one, not even the Chinese can buy it, and make use of it in an economic way.
Below $73 pbl, no oil company can explore, drill, produce and get it (marginal oil), to market and make it profitably worthwhile.
This does not mean that the price of oil will not go over $127 or below $73. But when the price goes outside those prices, the Governor Range will pull the world economy back into its ‘idling mode’.
Worse than this, the upper and lower ranges of the governor, will narrow, as less and less oil can be profitably supplied at the LOWER point, and less and less countries can make any economic sense buying at the UPPER point.
As the UPPER point descends, and the LOWER point rises, the contracting Governor Range would ‘home in’ (over time), on its Stalemate Point, whereby it’s economic game over.
If this is true, then notions of $200 to $300 dollar oil, is very unlikely. (Beyond a few days or weeks).
What is the Stalemate Point? Your guess is as good as mine, but let me again put (my) arbitrary (guess), on it and say that Stalemate Point is (possibly), an oil price,(say $117), at a point in time ,(say 2015) when:
Above this; there is no economic activity
Below this; there are no new finds and production.
That is an interesting idea. There are some countries that use a lot of oil, like the US, and are affected at lower prices. There are some countries, like the PIIGS, that a few months at current prices will push them into bankruptcy, it they aren’t headed there sooner.
I think there is really a time lag issue, and an issue of governments hiding huge problems through stimulus funds and more debt. I am afraid we have not really gotten through the issue of the last peak in oil prices. The new peak will just add on. The timing will be different for different countries.
The EIA and USGS at one time would include a short summary of their methodology in their reports. Essentially they forecast the demand healthy economic growth would produce and assume that production will rise to meet demand.
It should be of no surprise that they have never forecasted a downturn in production, unless it had already begun and they couldn’t ignore it. You can see the extent of such a forecast in your second graph, where they assume that the trend will continue a short while before everything turns back into sunshine and smiley faces.
Gail, is the IEO world price estimate in real dollars or nominal dollar terms?
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