A Letter to My Family on Peak Oil
On Christmas Day, a group of us were gathered
around the table, and the talk turned to energy and economics... finally, I
felt, we were starting to discuss real issues rather than the partisan
Democrat-Republican distractions du jour. This led to a letter that I wrote
after Christmas, reproduced here with links and annotations.
Christmas night those of us in the dining room at
Pat and Di’s house started to discuss something that I feel is very
important. Last summer I gave Uncle Jim a copy of James Howard
Kunstler ’s [1] “The
Long Emergency ,” which is a book that lays out the case that
our civilization, and especially our American culture, is about to become very
vulnerable to the end of cheap fossil fuel. Kunstler’s [3] thesis [4] is that the global peaking of
petroleum and natural gas will mean the end of globalization, and the
catastrophic decline of our car-centric culture of
suburbia.
I have wanted to bring this up for discussion within the larger family for quite some time now. For people who are paying attention to this, the warning signs are flashing red. And there are more and more people paying attention: Congress recently held its first-ever hearing [5] with the words Peak Oil in the title. Fortune magazine recently interviewed billionaire Richard Rainwater [6], who has made his money on being attuned to shifts in real estate and capital, and Rainwater has essentially concluded that peak oil is real, and it is upon us in the next few years, if not already happening. Web sites and blogs (like www.theoildrum.com ) have sprung up, where technically literate people familiar with the oil industry and sociology have begun to debate whether the Peak is imminent, and what its effect on our lives is likely to be. Out where I live, grassroots groups with names like “Oregon Oil Awareness” have begun forming, and holding meetings.
So, what is this Peak Oil? Peak Oil is best explained by analogy to the United States’ peak in oil production. Oil was first commercially produced in the United States [7], and the United States oil industry has essentially led the world in technology, discovery, and production. To produce oil, you must first discover where it is located, and map out the size of the reserves in order to know whether it is profitable to invest in the infrastructure. Discovery in the United States peaked in the middle years of the Great Depression, the 30’s, when the great fields of Texas [8] were added to the list of known producing fields.
Production, or more accurately, extraction, follows discovery. Production peaked in the U.S. [9] in the early 70’s at a high of about 11 million barrels per day of oil. We now produce between 4 and 5 million barrels per day domestically (out of a domestic consumption of about 20 million barrels a day), so it is a historical fact that depletion is real, and technology cannot reverse the decline of an oil producing area once it begins in earnest. If there had been any way to reverse this kind of trend, which by the way has been replicated in a dozen major oil-producing countries, it would have been in the United States, the leader in technology, governed by a series of oil-friendly administrations.
Christmas night I related the story of Dr. Marion King Hubbert [10], who was a prominent Shell geologist who correctly forecast the peaking of U.S. oil production fifteen years before the event. Hubbert also predicted a peaking of world production, with a target date of around the year 2000. His prediction for the global peak was likely not far off, for an increasing chorus of oil industry insiders have started to come forward and talk about difficulties in their industry. In the past year we have learned that production from the world’s second largest field, Burgan in Kuwait, has ‘collapsed' [11]; production from the third largest field, Cantarell in Mexico, has peaked [12] and is likely to enter steep decline [13]. The world’s largest field, Ghawar in Saudi Arabia, is anticipated to enter decline at any moment, and that will be a major shock to an already fragile system. Indeed, the whole Saudi oil industry is the subject of a skeptical book by industry banker and insider Matthew Simmons called ‘Twilight in the Desert.’ Simmons went back and dug out data from American petro-geologists from the era prior to Saudi nationalization of their industry, and he concludes that a peak in Saudi production is imminent and inevitable. Simmons, by the way, is no wild-eyed enviro-Leftie: he is a Republican investment banker who served on Cheney’s Energy Task Force in 2001.
So, why aren’t we hearing more about this Peak? Well, there are three groups of people who tend to be heard on these issues. The first group is politicians, who never like to announce bad news. Bad news, especially bad news in which there is likely no magic fix, doesn’t get anyone re-elected. The second group is economists, Daniel Yergin [14] for example, who believe either that increased drilling will always lead to increased production, or that the market can solve any problem that arises. However, the experience of the United States peaking disproves the first hypothesis, and no amount of money is going to make a hot dog materialize in a bank vault (as one wag points out): the depletion phenomena is a discontinuity that markets are likely to be poor at managing. Or, they will manage it, but at great social cost.
Finally, there are the geologists and former oilmen, whose voices are finally starting to break into the mainstream. One of Hubbert’s proteges, Dr. Kenneth Deffeyes [15] of Princeton, forecast a peak in oil [16] for Thanksgiving of 2005 (later adjusted to mid-December 2005); he ws being facetious, for the peak in production will likely not announce itself, nor be so pronounced as to be obvious except in looking back several years hence. Another Hubbert colleague, Colin Campbell, founded The Association for the Study of Peak Oil and Gas (ASPO), and he continues to advocate tirelessly for the point of view that we have a problem, and it is serious and imminent. ASPO forecasts a peak in production of around 2007-2010, but with the caveat that some of the numbers that they get from OPEC nations are suspect. Then you also have oil insiders like Jeremy Leggett [17] and T. Boone Pickens [18] adding to the chorus.
Like anything else, there are conflicting points of view. One point of view, which I will call cornucopian, holds that the Peak is decades away, either because there is still lots of oil we have yet to find, or because oil is not finite but rather replenishes deep within the earth’s crust (‘abiotic’ oil). It is true that there are still places where we have not thoroughly explored yet, but the list of these places is small, and the places themselves (primarily the polar regions and deep-water areas of the oceans) are inhospitable and expensive to drill in. Abiotic oil [19] is a fairly fringe concept that has been around for years, yet no company has ever based any investments on it. Nor has there ever been a clearly demonstrated proof of its existence. Even if abiotic oil were real, it has not refilled any of the wells in the U.S. to any significant degree, and is very unlikely to play a part in the peaking of global oil production. The cornucopian point of view is expressed through the EIA (Department of Energy) and IEA (OECD-affiliated) and CERA (Cambridge Energy Associates) organizations. When you dig into this you find that none of these organizations correctly predicted the currently demonstrated peak in North American natural gas production [20], which is already being expressed in our soaring natural gas prices (for a real laugh, check out this archived article [21] in which The Economist predicts $5 per barrel oil for the period of 2001+). Nor was the EIA very accurate in 2001 forecasting supply in three major basins (North Sea, Mexico, Argentina [21]). The EIA and IEA are apparently of the ‘the Market will provide whatever oil and/or gas is needed to satisfy demand’ mind-set, and CERA is too closely tied to the producing companies to ever be able to create a report that doesn’t assume a long series of unlikely successes (‘if the decline is existing fields is only 3 to 5%, and we find one more major field in each of the successive years 2007 through 2012, etc, etc’). The trouble is, we haven’t found a single major field since 2002, and every piece of news about existing fields has been dramatically worse than expected; major fields like the North Sea and Cantarell are declining much, much faster than projected (-17% and -8% for just those two). It seems that our technology has turned a gentle bell curve of production into a higher and steeper pulse function, in which we suck oil out of the ground at a maximum rate for profitability, followed by a dramatic decline. For an overview of these issues, see this article posted on TheOilDrum [22].
A more interesting and difficult to refute point of view is that Peak Oil is real and likely not too far off, yet the free market will correctly discern and transition our society to new energy sources. This was the point of view that cousin Steve was expressing around the Christmas dinner table. Technically, Steve is right: as a civilization, we have had the technical tools to transition to new energy sources for years, if not decades. The trouble is, we haven’t done it. A book called “The Limits of Growth [23]” appeared in the 70’s, and generated an intense debate over energy and resource policies, yet 30 years later very little concrete has been accomplished. We could have passed laws mandating higher fuel mileage standards - instead, car companies found that the gas-guzzling SUV niche was far more profitable. We could have modernized our railroad infrastructure as a vastly more energy-efficient means of moving goods than diesel trucks- but instead we have neglected much of our railroad beds, and Congress has flirted annually with killing off Amtrack. NIMBYism has killed off our nuclear industry, and stands in the way of liquid natural gas terminals for importation of overseas gas. And so on... it seems to me that our political system is in gridlock and incapable of rational response to the impending crisis.
Earlier this year, a company under contract to the U.S. government issued a report on the need to mitigate Peak Oil. Known as the Hirsch report [24] (PDF here ], it examined three different scenarios: preparations begin 20 years before peak, preparations begin 10 years before peak, and preparations begin when peak becomes evident. The basic conclusion was that a minimum of 10 to 15 years of energetic mitigation work is necessary before Peak Oil in order to avoid decades of difficulty and economic hardship - this is the time necessary to change our transportation infrastructure from one that is 90% based on liquid fuel to one based on something else. And should the peak overtake us before we begin any meaningful response, we will be in for hard times that rival anything that our parents or grandparents saw in the 30’s.
Right now, discussion of Peak Oil is working its way through the financial markets. One of the analysts at Goldman-Sachs has issued reports saying that $100+ oil is to expected in the near future [25], with no return to $40/bbl oil ever, much less the $25/bbl oil that has been the norm for the last decade or so. Billionaire oil man T. Boone Pickens has spoken openly that we are in the era of Peak Oil. I mentioned Richard Rainmaker in the opening paragraphs of this letter as another example of a member of the financial elite that ‘gets it.’ Right now, oil is a fungible commodity, freely traded throughout the world. As knowledge about Peak Oil percolates through the financial markets and through governments, oil may cease to be fungible [26]: futures contracts may become meaningless as governments institute controls on consumption and production that render oil a ‘strategic asset’ to be hoarded and carefully controlled. This scenario is not at all unrealistic, and if there is suddenly a tipping point of recognition that generates a large price spike we will see a financial crash of markets and currencies.
Financially, Peak Oil is a large ‘out-of-context’ problem: no one (well, few people have) ever contemplated the end of endless growth. Our monetary system [27] was born out of the mists of the Middle Ages, and it mirrors our growth in energy consumption. The monetary system has survived several major shifts in the energy paradigm (wood to coal, coal to oil), but there is no clear successor to oil. The hydrogen economy has been talked about for years, but technically hydrogen is a loser [28]: energy, like electricity, is an energy carrier, not an energy source. As an energy carrier, energy is lost when converting from some other source of energy (gas to hydrogen, or nuclear to thermal to electrical to hydrogen). And then there is the efficiency of converting hydrogen back into electricity, which is then converted to work via electric motors. Multiplying all those efficiencies out you find that a tiny, tiny fraction of the energy you started with actually comes out the pipeline at the other end as useful work. Will we see hydrogen-driven cars? Probably, for the same reason that we have triple A batteries - energetically, triple A batteries are not efficient, but they are convenient. But at a significant cost, especially if you try to scale up to solve the problem [29].
This brings me to one of my central points on the market solutions: individually, they won’t scale [30]. Even collectively it isn’t clear that solar, biomass, nuclear, wind, and other exotic technologies will allow us to keep the ‘party’ we’ve enjoyed going indefinitely. There are just too many cars, too many people, too many houses to allow us to keep going the way that we’ve been going. A Denver professor, Prof. Albert Bartlett, has recorded a lecture on growth and sustainability [31] that is well worth watching. He claims that humankind’s failure to understand the exponential growth function is our greatest problem. In a particularly illuminating section of the lecture he talks about doubling of yeast in a bottle. At a relatively constant growth rate, such as our society has enjoyed for decades, the yeast never know that there is a problem until the very last doubling, when things start to get really tight in the bottle. Up to that point, everything looks just peachy. To me, it looks like we’re in that last doubling.
There are several other problems with the “The market will solve the problem” scenario. One is that there is a lack of transparency in the data needed. The oil-producing nations are not open books, and many of the OPEC nations mysteriously raised their reserve estimates [32] in the mid-1980’s as part of a bid to increase the amount of oil that they were allowed sell under cartel rules. Some nations, like Saudi Arabia, may be actually in decline but cannot reveal the fact for fear of causing political instability. There is not a lot of reason to be optimistic about the size of reserves, and quite a few reasons to be skeptical.
I’ve already alluded to the lead time problem with respect to the Hirsch report. In my mind, this is the second largest problem with letting markets determine the response to Peak Oil and Peak Gas. The financial system simply doesn’t do a great job of forecasting very far into the future - companies are focused on the present quarter, or at most next year. You can also see the lack of foresight in markets when you consider that power companies like Calpine, currently entering bankruptcy, built their entire power generation infrastructure around the idea that natural gas was cheap and clean and was going to last for the foreseeable future. Yet now, only a few years later, natural gas is seen in hindsight to be a very poor choice for powering electrical generation.
It is also important to realize that markets are not driven by the common good, they are driven by profit. So long as the downslope of Peak Oil is profitable there will be little incentive to change systems - and the changes that occur may be short-term profitable and long-term disaster. One such possible change is a reversion to coal; our coal reserves are indeed vast, though not so vast as we might think under constant growth. Environmentally, coal has various grades that cause greater or lesser pollution. And while coal can be liquified, or reprocessed to yield liquid fuels, the overall process takes significant amounts of energy to achieve the desired result. There is a metric that is used to evaluate this quality: Energy returned on energy invested [33] (ERoEI). Oil has been useful primarily because its ERoEI has been high (early drilling yielded 100 barrels of oil for every barrel of oil-equivalent energy invested), it is energy-dense, and because its liquid nature allowed for easy transport and pumping. All of the coal conversion technologies are likely to suffer from poor ERoEI, and thus contribute significantly to CO2-induced climate change as vast amounts of carbon are burned for modest returns in fuels.
Canada’s tar sands, which are often cited as a possible solution to our liquid fuels problem, provide a clear picture of the ERoEI problem [34]: currently Canada extracts about 1 million barrels a day of oil from its tar sands in Alberta. However, it takes about the equivalent of a barrel of oil going into the process in the form of precious natural gas to get out three barrels of crude oil [35]. This works out crudely to an ERoEI of 3:1, but ignores the energy used to build the infrastructure. Contrast this with oil, which even today has an ERoEI in the neighborhood of 20:1. The tar sand conversion process also requires 2 barrels of fresh water, and leaves behind environmental devastation in the form of strip-mined terrain and oily lakes. Because the Alberta tar sands are profitable we will undoubtably see an expansion of up to five-fold in production, but the environmental cost will be considerable, and the ERoEI is low.
In summary, letting markets decide will probably result in a patched-together solution or no solution, very late in the game. It will probably lead to environmental considerations being thrown out the window. The market solution, to the extent that there is a solution, will likely come very late and will have a huge social cost. There is also a very real risk that Peak Oil will destroy markets before markets themselves have a chance to work.
Richard Heinberg [36], author of “The Party’s Over: War, Oil, and the Fate of Industrial Societies [37]” and “Powerdown [38],” posits that there are four responses to Peak Oil. One he calls ‘Waiting for the magic elixir,” and it consists of the belief that markets will somehow produce a technological fix before our culture descends into a spiral of inflation and chaos. However, in the book he ruthlessly examines each of the possible alternatives, and concludes that none of the possible successors to oil will be as convenient or cheap or energy-dense as oil has been. Solar-generated electricity? ERoEI is close to unity (it takes as much energy to make as you get out of it in its lifetime). Biomass? The world uses several hundred times as much carbon in transportation as the natural plant world fixes as carbon each year. Nuclear? Get ready for dozens of new nuclear plants, all built very hurriedly. Fusion? Still decades away. Hydrogen? Lousy efficiency. And so on.
The second possible response he outlines as ‘Plan War,’ or the military guarantee of resources. Unfortunately, this is the path that I believe our political elite has chosen. We have set up a large garrison in the Middle East, and I believe that we are there primarily to ensure that the oil keeps flowing. It was none other than Jimmy Carter, a Democrat, who outlined the ‘Carter Doctrine [39]’ in 1977: The United States will will use military force if necessary to protect its national interest in the Middle East. Likewise, the continued bi-partisan support for the Iraq, I believe, illustrates that both Republicans and Democrats understand that losing strategic control of Iraq will result in immense harm to the United States’ and the world economies. We will not be leaving Iraq anytime soon, if ever, regardless of the cost.
The third response Heinberg calls Powerdown. This might be called the rational, common good approach, in which First World nations agree to limit and then reduce energy consumption, in line with a protocol similar to the Kyoto Protocol [40]. The only problem with this response is that it is at odds with the powerful economic interests that want business as usual. However, an increasing number of individuals and households have begun to implement their own Powerdown procedure: driving less, consuming less, replacing appliances with more efficient models, and installing solar power and how water heating systems. Our family is firmly committed to doing all of these things, and I encourage you to look into them, too.
The fourth response is something that Heinberg calls Building Lifeboats. Many people, myself included, look at the system as it exists today and conclude that once we get seriously past Peak Oil the dominant paradigms of our life will not survive unchanged. Very likely there will be a popping of the real estate bubble [41, 42], a stock market crash [43], a series of unending wars in resource-rich countries [44], increasing inflation [45], and a highly dysfunctional political system [46]. If that is true, it makes sense to start position ourselves and our families for a future in which we retire without 401-k plans and big box stores and SUVs that carry us everywhere. We should think seriously about how and where we are going to get our food, water, and shelter, and most importantly, which group of people we want to ally ourselves with in deep community. For us, in Portland, this is likely our Catholic Parish, which has been hosting Peak Oil community meetings.
This letter is far too long, so I will end here for now, and invite your comments.
In love and respect,
Kurt
References
[1] http://www.kunstler.com/
[2] http://www.powells.com/biblio/1-0871138883-0
[3] http://www.financialsense.com/transcriptions/Kuntsler.html
[4] http://www.rollingstone.com/news/story/7203633/the_long_emergency/
[5] http://www.globalpublicmedia.com/events/585
[6] http://www.energybulletin.net/11695.html
[7] http://en.wikipedia.org/wiki/History_of_the_petroleum_industry_in_North_America
[8] http://en.wikipedia.org/wiki/Spindletop
[9] http://en.wikipedia.org/wiki/Hubbert_peak
[10] http://en.wikipedia.org/wiki/M._King_Hubbert
[11] http://www.energybulletin.net/10878.html
[12] http://www.fcnp.com/550/peakoil.htm
[13] http://www.oilcast.com/Audio_Files/show28final.mp3
[14] http://www.washingtonpost.com/wp-dyn/content/article/2005/07/29/AR2005072901672.html
[15] http://en.wikipedia.org/wiki/Kenneth_Deffeyes
[16] http://www.princeton.edu/hubbert/current-events-06-02.html
[17] http://www.energybulletin.net/12226.html
[18] http://www.energybulletin.net/2066.html
[19] http://www.museletter.com/archive/150b.html
[20] http://www.pastpeak.com/archives/2005/06/exxon_natural_g.htm
[21] http://www.energybulletin.net/11370.html
[22] http://www.casi.org.uk/discuss/1999/msg00181.html
[23] http://www.greatchange.org/ov-simmons,club_of_rome_revisted.html
[24] http://www.energybulletin.net/12772.html
[25] http://news.bbc.co.uk/2/hi/business/4399537.stm
[26] http://deconsumption.typepad.com/deconsumption/2005/03/the_most_import.html
[27] http://www.zerra.net/WizardsOfMoney/
[28] http://www.fromthewilderness.com/free/ww3/081803_hydrogen_answers.html
[29] http://dpodbori.livejournal.com/3005.html
[30]http://dpodbori.livejournal.com/3590.html
[31] http://www.globalpublicmedia.org/lectures/461
[32] http://www.peakoil.ie/newsletters/513
[33] http://www.eroei.com/
[34] http://www.rigzone.com/news/article.asp?a_id=30703
[35] http://www.energybulletin.net/7331.html
[36] http://www.museletter.com/
[37] http://www.alternet.org/story/17312/
[38] http://www.amazon.com/gp/product/0865715106/002-3057345-3867252?v=glance&n=283155
[39] http://en.wikipedia.org/wiki/Carter_Doctrine
[40] http://www.museletter.com/archive/160.html
[41] http://news.google.com/news?q=%22real+estate%22+bubble&hl=en&lr=&sa=X&oi=news&ct=title
[42] http://www.fool.com/news/commentary/2005/commentary05102606.htm
[43] http://www.urbansurvival.com/
[44] http://www.commondreams.org/views05/0411-21.htm
[45] http://www.321gold.com/archives/archives_authors.php?author=Richard+Daughty
[46] http://www.lewrockwell.com/roberts/roberts158.html
I have wanted to bring this up for discussion within the larger family for quite some time now. For people who are paying attention to this, the warning signs are flashing red. And there are more and more people paying attention: Congress recently held its first-ever hearing [5] with the words Peak Oil in the title. Fortune magazine recently interviewed billionaire Richard Rainwater [6], who has made his money on being attuned to shifts in real estate and capital, and Rainwater has essentially concluded that peak oil is real, and it is upon us in the next few years, if not already happening. Web sites and blogs (like www.theoildrum.com ) have sprung up, where technically literate people familiar with the oil industry and sociology have begun to debate whether the Peak is imminent, and what its effect on our lives is likely to be. Out where I live, grassroots groups with names like “Oregon Oil Awareness” have begun forming, and holding meetings.
So, what is this Peak Oil? Peak Oil is best explained by analogy to the United States’ peak in oil production. Oil was first commercially produced in the United States [7], and the United States oil industry has essentially led the world in technology, discovery, and production. To produce oil, you must first discover where it is located, and map out the size of the reserves in order to know whether it is profitable to invest in the infrastructure. Discovery in the United States peaked in the middle years of the Great Depression, the 30’s, when the great fields of Texas [8] were added to the list of known producing fields.
Production, or more accurately, extraction, follows discovery. Production peaked in the U.S. [9] in the early 70’s at a high of about 11 million barrels per day of oil. We now produce between 4 and 5 million barrels per day domestically (out of a domestic consumption of about 20 million barrels a day), so it is a historical fact that depletion is real, and technology cannot reverse the decline of an oil producing area once it begins in earnest. If there had been any way to reverse this kind of trend, which by the way has been replicated in a dozen major oil-producing countries, it would have been in the United States, the leader in technology, governed by a series of oil-friendly administrations.
Christmas night I related the story of Dr. Marion King Hubbert [10], who was a prominent Shell geologist who correctly forecast the peaking of U.S. oil production fifteen years before the event. Hubbert also predicted a peaking of world production, with a target date of around the year 2000. His prediction for the global peak was likely not far off, for an increasing chorus of oil industry insiders have started to come forward and talk about difficulties in their industry. In the past year we have learned that production from the world’s second largest field, Burgan in Kuwait, has ‘collapsed' [11]; production from the third largest field, Cantarell in Mexico, has peaked [12] and is likely to enter steep decline [13]. The world’s largest field, Ghawar in Saudi Arabia, is anticipated to enter decline at any moment, and that will be a major shock to an already fragile system. Indeed, the whole Saudi oil industry is the subject of a skeptical book by industry banker and insider Matthew Simmons called ‘Twilight in the Desert.’ Simmons went back and dug out data from American petro-geologists from the era prior to Saudi nationalization of their industry, and he concludes that a peak in Saudi production is imminent and inevitable. Simmons, by the way, is no wild-eyed enviro-Leftie: he is a Republican investment banker who served on Cheney’s Energy Task Force in 2001.
So, why aren’t we hearing more about this Peak? Well, there are three groups of people who tend to be heard on these issues. The first group is politicians, who never like to announce bad news. Bad news, especially bad news in which there is likely no magic fix, doesn’t get anyone re-elected. The second group is economists, Daniel Yergin [14] for example, who believe either that increased drilling will always lead to increased production, or that the market can solve any problem that arises. However, the experience of the United States peaking disproves the first hypothesis, and no amount of money is going to make a hot dog materialize in a bank vault (as one wag points out): the depletion phenomena is a discontinuity that markets are likely to be poor at managing. Or, they will manage it, but at great social cost.
Finally, there are the geologists and former oilmen, whose voices are finally starting to break into the mainstream. One of Hubbert’s proteges, Dr. Kenneth Deffeyes [15] of Princeton, forecast a peak in oil [16] for Thanksgiving of 2005 (later adjusted to mid-December 2005); he ws being facetious, for the peak in production will likely not announce itself, nor be so pronounced as to be obvious except in looking back several years hence. Another Hubbert colleague, Colin Campbell, founded The Association for the Study of Peak Oil and Gas (ASPO), and he continues to advocate tirelessly for the point of view that we have a problem, and it is serious and imminent. ASPO forecasts a peak in production of around 2007-2010, but with the caveat that some of the numbers that they get from OPEC nations are suspect. Then you also have oil insiders like Jeremy Leggett [17] and T. Boone Pickens [18] adding to the chorus.
Like anything else, there are conflicting points of view. One point of view, which I will call cornucopian, holds that the Peak is decades away, either because there is still lots of oil we have yet to find, or because oil is not finite but rather replenishes deep within the earth’s crust (‘abiotic’ oil). It is true that there are still places where we have not thoroughly explored yet, but the list of these places is small, and the places themselves (primarily the polar regions and deep-water areas of the oceans) are inhospitable and expensive to drill in. Abiotic oil [19] is a fairly fringe concept that has been around for years, yet no company has ever based any investments on it. Nor has there ever been a clearly demonstrated proof of its existence. Even if abiotic oil were real, it has not refilled any of the wells in the U.S. to any significant degree, and is very unlikely to play a part in the peaking of global oil production. The cornucopian point of view is expressed through the EIA (Department of Energy) and IEA (OECD-affiliated) and CERA (Cambridge Energy Associates) organizations. When you dig into this you find that none of these organizations correctly predicted the currently demonstrated peak in North American natural gas production [20], which is already being expressed in our soaring natural gas prices (for a real laugh, check out this archived article [21] in which The Economist predicts $5 per barrel oil for the period of 2001+). Nor was the EIA very accurate in 2001 forecasting supply in three major basins (North Sea, Mexico, Argentina [21]). The EIA and IEA are apparently of the ‘the Market will provide whatever oil and/or gas is needed to satisfy demand’ mind-set, and CERA is too closely tied to the producing companies to ever be able to create a report that doesn’t assume a long series of unlikely successes (‘if the decline is existing fields is only 3 to 5%, and we find one more major field in each of the successive years 2007 through 2012, etc, etc’). The trouble is, we haven’t found a single major field since 2002, and every piece of news about existing fields has been dramatically worse than expected; major fields like the North Sea and Cantarell are declining much, much faster than projected (-17% and -8% for just those two). It seems that our technology has turned a gentle bell curve of production into a higher and steeper pulse function, in which we suck oil out of the ground at a maximum rate for profitability, followed by a dramatic decline. For an overview of these issues, see this article posted on TheOilDrum [22].
A more interesting and difficult to refute point of view is that Peak Oil is real and likely not too far off, yet the free market will correctly discern and transition our society to new energy sources. This was the point of view that cousin Steve was expressing around the Christmas dinner table. Technically, Steve is right: as a civilization, we have had the technical tools to transition to new energy sources for years, if not decades. The trouble is, we haven’t done it. A book called “The Limits of Growth [23]” appeared in the 70’s, and generated an intense debate over energy and resource policies, yet 30 years later very little concrete has been accomplished. We could have passed laws mandating higher fuel mileage standards - instead, car companies found that the gas-guzzling SUV niche was far more profitable. We could have modernized our railroad infrastructure as a vastly more energy-efficient means of moving goods than diesel trucks- but instead we have neglected much of our railroad beds, and Congress has flirted annually with killing off Amtrack. NIMBYism has killed off our nuclear industry, and stands in the way of liquid natural gas terminals for importation of overseas gas. And so on... it seems to me that our political system is in gridlock and incapable of rational response to the impending crisis.
Earlier this year, a company under contract to the U.S. government issued a report on the need to mitigate Peak Oil. Known as the Hirsch report [24] (PDF here ], it examined three different scenarios: preparations begin 20 years before peak, preparations begin 10 years before peak, and preparations begin when peak becomes evident. The basic conclusion was that a minimum of 10 to 15 years of energetic mitigation work is necessary before Peak Oil in order to avoid decades of difficulty and economic hardship - this is the time necessary to change our transportation infrastructure from one that is 90% based on liquid fuel to one based on something else. And should the peak overtake us before we begin any meaningful response, we will be in for hard times that rival anything that our parents or grandparents saw in the 30’s.
Right now, discussion of Peak Oil is working its way through the financial markets. One of the analysts at Goldman-Sachs has issued reports saying that $100+ oil is to expected in the near future [25], with no return to $40/bbl oil ever, much less the $25/bbl oil that has been the norm for the last decade or so. Billionaire oil man T. Boone Pickens has spoken openly that we are in the era of Peak Oil. I mentioned Richard Rainmaker in the opening paragraphs of this letter as another example of a member of the financial elite that ‘gets it.’ Right now, oil is a fungible commodity, freely traded throughout the world. As knowledge about Peak Oil percolates through the financial markets and through governments, oil may cease to be fungible [26]: futures contracts may become meaningless as governments institute controls on consumption and production that render oil a ‘strategic asset’ to be hoarded and carefully controlled. This scenario is not at all unrealistic, and if there is suddenly a tipping point of recognition that generates a large price spike we will see a financial crash of markets and currencies.
Financially, Peak Oil is a large ‘out-of-context’ problem: no one (well, few people have) ever contemplated the end of endless growth. Our monetary system [27] was born out of the mists of the Middle Ages, and it mirrors our growth in energy consumption. The monetary system has survived several major shifts in the energy paradigm (wood to coal, coal to oil), but there is no clear successor to oil. The hydrogen economy has been talked about for years, but technically hydrogen is a loser [28]: energy, like electricity, is an energy carrier, not an energy source. As an energy carrier, energy is lost when converting from some other source of energy (gas to hydrogen, or nuclear to thermal to electrical to hydrogen). And then there is the efficiency of converting hydrogen back into electricity, which is then converted to work via electric motors. Multiplying all those efficiencies out you find that a tiny, tiny fraction of the energy you started with actually comes out the pipeline at the other end as useful work. Will we see hydrogen-driven cars? Probably, for the same reason that we have triple A batteries - energetically, triple A batteries are not efficient, but they are convenient. But at a significant cost, especially if you try to scale up to solve the problem [29].
This brings me to one of my central points on the market solutions: individually, they won’t scale [30]. Even collectively it isn’t clear that solar, biomass, nuclear, wind, and other exotic technologies will allow us to keep the ‘party’ we’ve enjoyed going indefinitely. There are just too many cars, too many people, too many houses to allow us to keep going the way that we’ve been going. A Denver professor, Prof. Albert Bartlett, has recorded a lecture on growth and sustainability [31] that is well worth watching. He claims that humankind’s failure to understand the exponential growth function is our greatest problem. In a particularly illuminating section of the lecture he talks about doubling of yeast in a bottle. At a relatively constant growth rate, such as our society has enjoyed for decades, the yeast never know that there is a problem until the very last doubling, when things start to get really tight in the bottle. Up to that point, everything looks just peachy. To me, it looks like we’re in that last doubling.
There are several other problems with the “The market will solve the problem” scenario. One is that there is a lack of transparency in the data needed. The oil-producing nations are not open books, and many of the OPEC nations mysteriously raised their reserve estimates [32] in the mid-1980’s as part of a bid to increase the amount of oil that they were allowed sell under cartel rules. Some nations, like Saudi Arabia, may be actually in decline but cannot reveal the fact for fear of causing political instability. There is not a lot of reason to be optimistic about the size of reserves, and quite a few reasons to be skeptical.
I’ve already alluded to the lead time problem with respect to the Hirsch report. In my mind, this is the second largest problem with letting markets determine the response to Peak Oil and Peak Gas. The financial system simply doesn’t do a great job of forecasting very far into the future - companies are focused on the present quarter, or at most next year. You can also see the lack of foresight in markets when you consider that power companies like Calpine, currently entering bankruptcy, built their entire power generation infrastructure around the idea that natural gas was cheap and clean and was going to last for the foreseeable future. Yet now, only a few years later, natural gas is seen in hindsight to be a very poor choice for powering electrical generation.
It is also important to realize that markets are not driven by the common good, they are driven by profit. So long as the downslope of Peak Oil is profitable there will be little incentive to change systems - and the changes that occur may be short-term profitable and long-term disaster. One such possible change is a reversion to coal; our coal reserves are indeed vast, though not so vast as we might think under constant growth. Environmentally, coal has various grades that cause greater or lesser pollution. And while coal can be liquified, or reprocessed to yield liquid fuels, the overall process takes significant amounts of energy to achieve the desired result. There is a metric that is used to evaluate this quality: Energy returned on energy invested [33] (ERoEI). Oil has been useful primarily because its ERoEI has been high (early drilling yielded 100 barrels of oil for every barrel of oil-equivalent energy invested), it is energy-dense, and because its liquid nature allowed for easy transport and pumping. All of the coal conversion technologies are likely to suffer from poor ERoEI, and thus contribute significantly to CO2-induced climate change as vast amounts of carbon are burned for modest returns in fuels.
Canada’s tar sands, which are often cited as a possible solution to our liquid fuels problem, provide a clear picture of the ERoEI problem [34]: currently Canada extracts about 1 million barrels a day of oil from its tar sands in Alberta. However, it takes about the equivalent of a barrel of oil going into the process in the form of precious natural gas to get out three barrels of crude oil [35]. This works out crudely to an ERoEI of 3:1, but ignores the energy used to build the infrastructure. Contrast this with oil, which even today has an ERoEI in the neighborhood of 20:1. The tar sand conversion process also requires 2 barrels of fresh water, and leaves behind environmental devastation in the form of strip-mined terrain and oily lakes. Because the Alberta tar sands are profitable we will undoubtably see an expansion of up to five-fold in production, but the environmental cost will be considerable, and the ERoEI is low.
In summary, letting markets decide will probably result in a patched-together solution or no solution, very late in the game. It will probably lead to environmental considerations being thrown out the window. The market solution, to the extent that there is a solution, will likely come very late and will have a huge social cost. There is also a very real risk that Peak Oil will destroy markets before markets themselves have a chance to work.
Richard Heinberg [36], author of “The Party’s Over: War, Oil, and the Fate of Industrial Societies [37]” and “Powerdown [38],” posits that there are four responses to Peak Oil. One he calls ‘Waiting for the magic elixir,” and it consists of the belief that markets will somehow produce a technological fix before our culture descends into a spiral of inflation and chaos. However, in the book he ruthlessly examines each of the possible alternatives, and concludes that none of the possible successors to oil will be as convenient or cheap or energy-dense as oil has been. Solar-generated electricity? ERoEI is close to unity (it takes as much energy to make as you get out of it in its lifetime). Biomass? The world uses several hundred times as much carbon in transportation as the natural plant world fixes as carbon each year. Nuclear? Get ready for dozens of new nuclear plants, all built very hurriedly. Fusion? Still decades away. Hydrogen? Lousy efficiency. And so on.
The second possible response he outlines as ‘Plan War,’ or the military guarantee of resources. Unfortunately, this is the path that I believe our political elite has chosen. We have set up a large garrison in the Middle East, and I believe that we are there primarily to ensure that the oil keeps flowing. It was none other than Jimmy Carter, a Democrat, who outlined the ‘Carter Doctrine [39]’ in 1977: The United States will will use military force if necessary to protect its national interest in the Middle East. Likewise, the continued bi-partisan support for the Iraq, I believe, illustrates that both Republicans and Democrats understand that losing strategic control of Iraq will result in immense harm to the United States’ and the world economies. We will not be leaving Iraq anytime soon, if ever, regardless of the cost.
The third response Heinberg calls Powerdown. This might be called the rational, common good approach, in which First World nations agree to limit and then reduce energy consumption, in line with a protocol similar to the Kyoto Protocol [40]. The only problem with this response is that it is at odds with the powerful economic interests that want business as usual. However, an increasing number of individuals and households have begun to implement their own Powerdown procedure: driving less, consuming less, replacing appliances with more efficient models, and installing solar power and how water heating systems. Our family is firmly committed to doing all of these things, and I encourage you to look into them, too.
The fourth response is something that Heinberg calls Building Lifeboats. Many people, myself included, look at the system as it exists today and conclude that once we get seriously past Peak Oil the dominant paradigms of our life will not survive unchanged. Very likely there will be a popping of the real estate bubble [41, 42], a stock market crash [43], a series of unending wars in resource-rich countries [44], increasing inflation [45], and a highly dysfunctional political system [46]. If that is true, it makes sense to start position ourselves and our families for a future in which we retire without 401-k plans and big box stores and SUVs that carry us everywhere. We should think seriously about how and where we are going to get our food, water, and shelter, and most importantly, which group of people we want to ally ourselves with in deep community. For us, in Portland, this is likely our Catholic Parish, which has been hosting Peak Oil community meetings.
This letter is far too long, so I will end here for now, and invite your comments.
In love and respect,
Kurt
References
[1] http://www.kunstler.com/
[2] http://www.powells.com/biblio/1-0871138883-0
[3] http://www.financialsense.com/transcriptions/Kuntsler.html
[4] http://www.rollingstone.com/news/story/7203633/the_long_emergency/
[5] http://www.globalpublicmedia.com/events/585
[6] http://www.energybulletin.net/11695.html
[7] http://en.wikipedia.org/wiki/History_of_the_petroleum_industry_in_North_America
[8] http://en.wikipedia.org/wiki/Spindletop
[9] http://en.wikipedia.org/wiki/Hubbert_peak
[10] http://en.wikipedia.org/wiki/M._King_Hubbert
[11] http://www.energybulletin.net/10878.html
[12] http://www.fcnp.com/550/peakoil.htm
[13] http://www.oilcast.com/Audio_Files/show28final.mp3
[14] http://www.washingtonpost.com/wp-dyn/content/article/2005/07/29/AR2005072901672.html
[15] http://en.wikipedia.org/wiki/Kenneth_Deffeyes
[16] http://www.princeton.edu/hubbert/current-events-06-02.html
[17] http://www.energybulletin.net/12226.html
[18] http://www.energybulletin.net/2066.html
[19] http://www.museletter.com/archive/150b.html
[20] http://www.pastpeak.com/archives/2005/06/exxon_natural_g.htm
[21] http://www.energybulletin.net/11370.html
[22] http://www.casi.org.uk/discuss/1999/msg00181.html
[23] http://www.greatchange.org/ov-simmons,club_of_rome_revisted.html
[24] http://www.energybulletin.net/12772.html
[25] http://news.bbc.co.uk/2/hi/business/4399537.stm
[26] http://deconsumption.typepad.com/deconsumption/2005/03/the_most_import.html
[27] http://www.zerra.net/WizardsOfMoney/
[28] http://www.fromthewilderness.com/free/ww3/081803_hydrogen_answers.html
[29] http://dpodbori.livejournal.com/3005.html
[30]http://dpodbori.livejournal.com/3590.html
[31] http://www.globalpublicmedia.org/lectures/461
[32] http://www.peakoil.ie/newsletters/513
[33] http://www.eroei.com/
[34] http://www.rigzone.com/news/article.asp?a_id=30703
[35] http://www.energybulletin.net/7331.html
[36] http://www.museletter.com/
[37] http://www.alternet.org/story/17312/
[38] http://www.amazon.com/gp/product/0865715106/002-3057345-3867252?v=glance&n=283155
[39] http://en.wikipedia.org/wiki/Carter_Doctrine
[40] http://www.museletter.com/archive/160.html
[41] http://news.google.com/news?q=%22real+estate%22+bubble&hl=en&lr=&sa=X&oi=news&ct=title
[42] http://www.fool.com/news/commentary/2005/commentary05102606.htm
[43] http://www.urbansurvival.com/
[44] http://www.commondreams.org/views05/0411-21.htm
[45] http://www.321gold.com/archives/archives_authors.php?author=Richard+Daughty
[46] http://www.lewrockwell.com/roberts/roberts158.html
Posted: Mon - May 1, 2006 at 12:28 PM
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