The Most Important Resource for Our Future: Inexpensive Oil (but its not really available)

Our economy runs on oil. Most of the tractors used for growing food run on oil. Nearly all of today’s cars and trucks run on oil. It is popular to talk about changing to some other fuel, but the practicalities are that any such change will be very slow. There is a huge cost associated with replacing cars and trucks with vehicles using other fuels, assuming we could figure out the technology to do this.

Since 2005, world crude oil supply has bumped up against what seems to be a limit of 75 million barrels of oil a day. No matter how hard companies try to extract more crude oil, and no matter how high world oil prices rise, they seem unable to extract more than 75 million barrels a day (MBD).

World Crude Oil - Quantity Extracted and Price

Figure 1. World crude oil production has been bumping up against a limit of about 75 million barrels a day (MBD) since 2005, as oil prices have gyrated wildly. (EIA data)

The US Government is aware of this issue, and now issues data for Total Oil Supply. Total oil supply includes various other liquids that are somewhat like crude oil, including biofuels, natural gas liquids, and “refinery gain”. But even including the additional categories, growth in supply has been anemic. Oil prices started rising as early as 2004 because supply (whether defined as crude oil or more broadly) was not rising fast enough to meet increased demand around the world.

With world oil supply virtually flat, countries have had to share what oil is available. Since 1985, there has been a big shift in which countries are the “winners” in the way the world’s limited oil supply is divided (Figure 2).

Line graph of oil consumption by area, based on EIA data.

Figure 2. Growth in oil consumption has varied greatly in recent years. The Former Soviet Union’s oil use dropped off after its break up in 1991. Europe, US, Japan, and Australia showed modest growth until 2005, followed by a drop off. Consumption of countries in “Remainder” (which includes China, India, and oil exporting countries) has risen rapidly since 1985. (Based on EIA data)

Clearly the “winners” in the contest for who is able to buy the oil are the “Remainder” countries—countries like China and India and Korea, and the oil exporting nations.

Over the period 1985 – 2010, the grouping “Europe, US, Japan, Australia” experienced an average real GDP growth rate of 2.4%; the Remainder group experienced an average growth rate of 4.7%. The Former Soviet Union experienced a peak to trough drop in real GDP of 41% after its breakup in 1991. The grouping Europe, US, Japan, and Australia experienced a major dip in oil consumption and a serious recession in 2008-2009, while the Remainder countries continued to grow.

High oil prices are clearly a problem for oil importing countries, because funds that would have been used for discretionary spending suddenly need to be used for necessities—food that is grown and transported using oil, and gasoline used for commuting to work. It is precisely the big oil importing countries that have tended to have a problem with reduced economic growth when oil prices are high.

In my view, what the world needs now is inexpensive oil, and lots of it. What we need is enough inexpensive oil to bring oil prices back down to $20 to $30 dollars a barrel, like it was in the 2001 to 2003 period. If we had inexpensive oil in this large quantity, there would be plenty of oil to go around. It wouldn’t be only the oil exporters and the countries with large coal-based manufacturing industries that would be able to consume as much oil as they need for economic growth. Countries like Greece and Spain, which need low oil prices to stoke world tourism, would be able to consume their share of the oil as well.

One issue is of concern is the connection between economic growth and debt.

What happens if economy stops growing

Figure 2. Two views of future economic growth

If an economy is growing, as in Scenario 1, it makes financial sense to borrow money, even if it is necessary to pay it back with interest. Borrowing makes it possible to “pre-spend” a little of the economic growth that will be available in the future. This relationship is especially important for governmental borrowing, but it also plays a role for private borrowing.

If an economy is shrinking, it is hard to make a case for borrowing. In such a case, the future is likely to have less to offer than what we have today. This might happen if there is not enough oil to go around, and oil prices are very high (at least until recession hits).

A great deal has been said about decoupling economic growth from natural resource use. It is not clear to what extent this really is possible. We can move manufacturing to the Far East, and pretend that the resource use isn’t ours, but on a world basis, during the past decade, energy use has been rising as fast as world real GDP. This has happened largely because Asian growth in energy use has offset savings elsewhere.

Theoretically, if world oil supply is inadequate, we should be able to make substitutions that would work—either find a different liquid fuel to substitute for oil, or create new vehicles or machines that use a different source of energy than petroleum products. The problem is that making these substitutions is a slow, expensive process.

We are currently using millions of cars, trucks, trains, airplanes, boats, and machines that require petroleum products to operate. Most of them are nowhere near the ends of their normal lives, so replacing them would be expensive.

Liquid biofuels we have developed are expensive. To solve our problem, they really need to cost $20 or $30 dollars a barrel to make.

What the world really needs now is a huge supply of inexpensive oil. It is not clear where we will find it, however.

(Note: This post was written in response to a request by Business Insider that I write a short editorial in response to the question, “What is the most important resource for our future?” It covers some of the main points in my new academic article in the journal Energy, “Oil Supply Limits and the Continuing Financial Crisis.” That article is temporarily available free at this link, or this one.)

64 thoughts on “The Most Important Resource for Our Future: Inexpensive Oil (but its not really available)

  1. A “short term” fix could be to use natural gas (especially in the US). In Thailand, they have started to build CNG stations in 2007, and I now see many vehicles using CNG, mainly tricks but also cars. You don’t need to change the vehicle, but just buy a 2000 to 3000 USD conversion kit (for cars). The largest cost is the infrastructure.

  2. Perhaps very short term?? Marketed production of natural gas in the US is only slightly greater than in 1973. The US is not currently self sufficient but is a net importer of natural gas from Canada. Production might be insufficient to fuel more than a small fraction of North American vehicles See:
    http://www.theoildrum.com/node/8859#more
    especially the posts near the end of the discussion

    • I had not seen a long term chart of US production. That’s interesting. I had only seen a 10-year chart previously, and I keep reading there is so much supply (and reserves) of natural gas (that’s to shale gas) in the news, explaining that’s why the NatGas price is depressed.

      My brother (who works for GDF in France) told me that fracked natural gas is of low quality and cannot be used in power plants. I’m not sure if it could be used for transportation.

      Nevertheless, proven natural gas reserves appear to have nearly doubled since 1995 (http://energyforumonline.com/3341/proved-u-s-dry-natural-gas-reserves-1925-2009/), so increased production would most likely be a case of adding more rigs and higher price, as Natgas would have to be more expensive for shale gas to be profitable, but even if the price doubled or tripled that would be cheaper than oil per btu (assuming $0.79 per term – http://pelletheat.org/pellets/compare-fuel-costs/)

      • There is a lot of controversy about how much it really costs to extract natural gas using fracking. Part of the controversy relates to how long the benefit of fracking can be expected to last–will it need to be redone for the well to continue to produce for 30 or 40 years, or can it be done once. Also, how long will these wells produce profitably–5 years or 40 years or something in between? And part of the controversy relates to whether later drilled sites will be as productive as current sites. In other words, “Does current technology allow operators to pick out the best sites, and drill on them first?” I don’t think anyone thinks shale natural gas is profitable at US current prices.

        The question is how high prices would need to be, to be profitable. A recent price comparison shows that for the month of December, the average natural gas price per million Btus varied greatly around the world, with the US at $3.16; Europe at $11.53; and Japan at $16.50. If US natural gas prices were as high as those in Japan and Europe, shale gas likely would be profitable, even with Art Berman’s assumptions. The big increase in cost would present a price shock for US consumers, though.

  3. (Note: This post was written in response to a request by Business Insider that I write a short editorial in response to the question, “What is the most important resource for our future?”-Gail

    Given that you understand the nature of the problem as well as you do, I was a bit surprised after reading both the “short form” response to BI as well as the full article with all the appropriate Charts and Graphs.

    Its pretty clear from your own analysis that accessing cheap fossil fuel energy is not possible without some major technological improvements nowhere on the Event Horizon here for the credit problems that decreasing cheap Oil reserves manifest.

    That being the case, Oil cannot be seen as the “most important resource for our future” since in all likelihood and with the best available analysis to date (your own included) cheap Oil or synthetic liquid fuel substitutes simply will not be available. Given that knowledge, what ARE the most important resources?

    The most important Resources is seems to me are Low Population Land Masses with good Arable land and Water Resource first. After that, the presence and ability to breed up appropriate Animal Labor to replace the Tractors and the the Truck in production and local distribution of the Food resource. After that, the Human Labor and Ingenuity to build and develop more small scale Energy Harvesting through such applications as Stirling Engines, Micro-Hydro, Wind Pumping of water, etc.

    The Oil economy is clearly reaching its Limit to Growth, and it must be substituted for with what available technologies we do have which are already PROVEN to work. If some new ones come online, all to the good there, but you canot COUNT on the Techno-Cavalry riding to the rescue here in the Nick of Time. So the Resources MOST important for our Future are NOT Oil or Fossil Fuel related, they are the resources which do not need or use those technologies. Until people understand they have to be abandoned, we cannot overcome this problem. It is a false hope to put cheap Oil forth as the most Important Resource. Its not important at all, because it simply will not be available under almost any scenario you can conjure up here, and your own research SHOWS that.

    RE

    • I am sorry if my article was confusing. I meant to make it clear that we really don’t have a solution for the future of 7 billion people.

      If we had many fewer people, then fresh water and forests and soil would be what would sustain us, as they have for the last 200,000 years.

      • Its confusing because the thesis is contrapositive to the title. The Title indicates Inexpensive Oil is the most Important Resource for the Future, the body of the article (the long one in particular) establishes the opposite fact, that Inexpensive Oil is unlikely to be accessed.

        If you had had simply titled the article soemthing like “The Absence of Inexpensive OIl is the most Important Resource Constraint for the the Future”, you would have had a congruence between the Title and the Thesis.

        Anyhow, I am nitpicking here I guess. I just think it is unfortunate because many people will read this and conclude that if we just “Drill Baby Drill” we can make Oil Cheap again and thus afford an unaffordable future.

        Far as no Solution, you state the solution in the passive voice. The solution is massive population reduction. The real issue here is confronting how you reduce a population of 7B to a sustainable level over the time frame that cheap Oil dissapearance will occur. Confronting that question has so many morally repugnant pitfalls nobody want to really address it. That is why you get your Extend and Pretend.

        RE

          • One third is too few. 6 billion have to die.

            This will be deemed acceptable by the 1 billion remaining.

            If you’re an American, the best way to achieve this is via military force, with “best” being defined as yielding the highest probability of the American 300 million disproportionally avoiding the 6 billion deaths soon upcoming.

        • A Morton’s Fork. However, the fact that the solutions are all unpleasant does not mean you throw up your hands and give up. You simply have to choose the least unpleasant among bad alternatives. Just people do not want to face down the ethical questions, and won’t until they are forced into it. By that time, its too late to choose the alternative, it chooses you.

          RE

    • The IEA numbers are not comparable to the 75 million barrel a day figure because they relate to a different grouping of products, so the 75 million barrel a day limit for crude oil number still holds. (There are several different ways of counting “oil” or “liquids”. Depending on what all is included in the definition, you get very different numbers.) The point is the same, regardless of which way oil is counted. Oil price is very high, in part because we are not extracting enough and in part because much of the easy to extract oil is already gone, so we have had to move on to the expensive-to-extract oil.

      Even if crude oil should go above 75 million barrels a day, say to 76 or 77 million barrels a day, the likelihood is that oil prices would remain very high–a serious threat to the economy.

  4. If we cant see other way for our civilization then plenty cheap oil, it does not mean thath there is one.

    Imagine that in 10 years humans discover teleportation machine which use very little energy. Then the current transportation system dissapears except getting to closest teleporter.
    Heating could be realised by sending water to remote desert, and gettig heat from it.
    So we would need a small fraction of oil/coal/etc.
    Bussiness as usual could go almost forever after conquest of the galaxy:)
    I know that this is Science Fiction but there can be other revolutionizing things discovered.

    The thing is if we will have no such revolution before crushing on energy deficit(or other limit) then the Maya scenario seems probable.

    • I think what happens is that we are reaching Limits to Growth in many ways. If we manage to bypass one limit, then another limit will hit us much more quickly. More cheap oil is likely to mean more climate change issues and more pollution issues, for example. The amount of soil for food does not go up either, so that is another limit, if population continues to rise. All of irrigation we do leads to greater soil salinity, and less productivity.

  5. Gail, how does this issue dovetail with the reality that the U.S. has been subsidizing the growth rate of the least educated and least valuable members of society (welfare) for what, seven decades now? Or is it longer?

    Seems to me that a realistic conversation needs to be had about why the heck supporting the growth rates of the lower and skill-less, value-less class is good policy. Doesn’t seem like it’s helped many get out of poverty…no, it seems like it’s just created MORE poor. Come see Oakland or go to North St. Louis if you want examples.

    Of course, the extremely religious on the right and the “social justice” on the left will both scream bloody murder. Neither of them really live in the real world though and are both equally unrealistic and ignorant. Oh, I know, I’m racist. That’s the popular, rhetorical and emotional claim, right?

    • Our medical system has definitely done its best to put an end to “survival of the fittest,” and I think that this may be a problem. I am not sure least educated is necessarily a problem, in and of itself. This may simply reflect a problem of circumstance. Furthermore, today’s education may be close to worthless in some respects.

      It would be a lot easier to have enough resources for everyone if there were fewer people. I don’t have a good solution for the general overpopulation issue, though. Our parents thought they were doing the right thing, having as many children as they did.

  6. “It would be a lot easier to have enough resources for everyone if there were fewer people. I don’t have a good solution for the general overpopulation issue, though. Our parents thought they were doing the right thing, having as many children as they did.”-Gail

    Agreed, solutions become more possible the fewer the people you deal with in the total system.

    I do realize I am pretty much the only person here at the moment who is taking the Morton’s Fork at its face value and presents this problem not as an Energy Resource problem, but rather a Population Reduction problem. I myself am Tiptoeing around the problem because of all the “Monster” issues you get when you try to conjure up ways to do efgfective population reduction over fairly short timespans.

    This is not my Blog and I will not examine this issue unless its the direct Topic of a post here, rather than just a tangential issue. There are however choices that can be made which are fair and equitable. Unpleasant choices to be sure, but less unpleasant than some other choices in the Morton;s Fork. If you cannot discuss them, you cannot examine the whys and wherefores of why these choices might be better or worse.

    There are solutions. Just not solutions people are comfortable talking about.

    RE

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