Sunday, November 27, 2011

Debunking "Peak Oil" in all of its forms

The theme of this post is: it is unlikely that the production of oil and natural gas will peak in the next half century because an upward shift of the demand curve will likely offset any downward shift in the supply curve. The net effect will be a slight increase in oil prices, but largely no change in the rate of production of conventional+unconventional oil. There are plenty of economically-recoverable hydrocarbons reserves available for us to use in our power plants and transportation vehicles. And given that the use of gasoline currently has more benefits on average than environmental costs, I am led to the conclusion that it is unlikely that there will be a sharp decrease in the production of oil unless we invent a technology can achieve higher rates of return on investment than oil in all its diverse applications, such as cars, trains, planes and the production of plastics.

Those people who are making peak oil a big deal on the internet generally fall into one of the following camps:
1) Energy insiders like the former Matthew Simmons, who are pessimistic by nature (and tend to forget either about technology advancement, growth in demand, or the fact that proved oil reserves increase when the price of oil increases.)
2) Those who want us to stop using fossil fuels regardless of whether there is peak oil. This group is a) typically concerned about the environmental impact of fossil fuel use, b) probably unaware of the short-term positive economic impact of CO2 emissions, and c) possibly just anti-technology.
3) Those people who look at data from today's well, and conclude that decreasing oil output from many of today's wells implies the onset of peak oil in the near future.

When you take a step back from the peak oil paranoia and take a look at the data available on oil production and proved reserves, you can take deep sigh of relief. There's plenty of proved global reserves to meet current global consumption for the next 50 yrs. Now, this isn't to say that there won't be peak oil production for individual wells or for individual countries, it's just that there is plenty of global proved hydrocarbon reserves to supply today's demand for the next 50 years. And interestingly, global proved hydrocarbon reserves are increasing with time...not decreasing.
If you look at any one well, or even the output from whole countries, like the Mexico & England, there is often a peak in oil production. And this can have significant effects on the economy in those countries, but not on the overall global growth rate. It's important to focus on global statistics when making predictions about peaks in global production of oil. For example, as Saudi Arabia developed its oil fields in the 1950s and 1960s, they were able to produce oil cheaper than most oil produced in the US. So, the production of oil in the US reached a local maximum in 1970, even though there were and still are plenty of hydrocarbon reserves in the US. And now that the price of oil is significantly higher than the 1990s, production of oil in the US once again increasing.

The question is: what would cause the overall production of oil to peak?
Answer: a downward shift in both the supply and demand curves. Below are the reasons why I don't expect to see a downward shift in both the supply and demand curve.

1) I expect the demand curve for oil to increase because I expect society to grow. The reason I expect society to grow is that we have the capability of building new electricity generating power plants in the US and China that can achieve >20%/yr rates of return on investment (coal power plants in China and natural gas combined cycle plants in the US.) In the US, we could still achieve ~20%/yr RROI even if the power plants have to pay between $15 and $30 per ton of emitted CO2. So, I expect to see the global GDP continue its trend of 2-4%/yr grow in GDP and this will shift up the demand curve for oil.

2) I expect that there will be a slow gradual shift from oil to electricity in some personal vehicles, but that this trend will not over take the upward shift in the demand curve due to growth. There will still be applications that demand oil rather than electricity, such a aircraft, long-haul trucks, trains, and the production of plastics.

3) While I expect to see the supply curve for light-sweet crude oil to shift downward as we tap the conventional sources of oil, I expect to see the supply curve for unconventional sources of oil (or oil-like products) to increase. Unconventional sources include natural gas liquids from tight sand formations, tar sands, heavy/sour oil reserves, and deep offshore reserves. Overall, though, when you include the fact that these unconventional sources of oil are more expensive on average, I expect to see a slight downward shift in the supply curve. (Supply vs. production rate curve probably will shift downward)

So, if the demand curve slightly shifts upward and the supply curve slightly shifts downward, the net effect will be that the price of oil will increase, but the production rate will stay nearly the same. Therefore, I do not expect to see any large change in the production rate of oil.

The problem with the typical Hubbert's Peak analysis is there's no mention of supply and demand curves. If demand is increasing for other reasons (such as a growing society), then this increase in the demand curve can offset a downward shift in the supply curve as it becomes more expensive to produce oil.

So what I want to point out now is that there are plenty of proved resources of economically recoverable fossil fuels. The following graph shows the ratio of Global Proved Reserves to Global Production as a function of time for each of the major fossil fuels. The data for the plot comes from the 2011 BP Statistical Review of World Energy. (Note that the amount of fossil fuel chemical energy in the ground is orders of magnitude larger than the 'proved reserves.')



Here are some major points to be taken from this graph: 1) The global ratio of "proved oil reserves" to "yearly production of oil" has increased nearly every year since I have data (back to 1980.) 2) This ratio is now close to 50 years, which means that proved reserves are much greater than current year production. 3) The Proved Reserves to Production ratio of natural gas is and has been greater than 50 yrs for the last twenty years. 4) The ratio for coal has dropped dramatically between 2000 (which is as far back as I have access to) and 2010. 5) The coal ratio is still greater than 100 yrs. The major cause of the drop of proved coal reserves is the fact that China has not updated its proved coal reserves since 1992, but in the meanwhile their production has increased three-fold.

In summary, we have over half a century worth of proved reserves for each of the fossil fuel exergy sources: oil, natural gas and coal.

Given that this is data of economically-recoverable resources at the average price of fuel in the year of the graph, this means that the amount of technically recoverable resources will be even greater if the price increases. Estimates of technically-recoverable resources (which still have positive rates of return on work [kWh] invested) are even larger than 50 years of today's production rates.

While it is true that we have largely tapped into all of the low hanging fruit as far as oil production is concerned, this doesn't mean that society is going to come crashing down. As I mentioned above, we still have our electricity generating power plants, and these are the real drivers of growth in our society. And given $3/GJ natural gas in the US, we will continue to achieve high rates of return on investment from our power plants.
And what is often forgotten is that we can achieve growth (even if the price of oil and natural gas increase) if we decrease our consumption of luxuries and increase our investment into the production of energy. Luxuries are those items that have significantly negative rates of return on work [kWh] invested. (Examples of luxuries are: vacations, gambling, yachts, mansions, sports cars, and many more objects that consume work without generating a positive return on that work.) Luxuries are like the peacock's feathers. As I've stated before, it's not that luxuries are necessarily bad...it's just that in order to get back to real growth rates of 4%/yr in CO2 constrained world with high oil prices, we will need to decrease our consumption of luxuries and increase our investment into techologies and processes with positive rates of return on work [kWh] invested, such as oil and gas production, electricity power plants, etc... In order to return to real growth, we need to remember that consuming just luxuries is not sustainable.

A return to growth is something that we should all be concerned with. Since the goal of life is to grow life (both here and on other planets), then we all need to be focused on growing life and investing in projects that have positive rates of return on investment. This means investing in energy production as well as investing your time and effort increasing the population of life (including human life.)

On a final note, I'll leave you with a video from Jon Stossel debunking peak oil, as well as a video on the oil boom in North Dakota, in case anybody is interested in moving there for a job in the oil industry.



10 comments:

  1. OK, so your points are that:

    1) There are large reserves of oil which are not going to run out anytime soon.
    2) That so long as there is a positive Energy Return on Energy Invested (EROEI) we will keep using oil
    3) That so long as another energy source doesn't have a more positive EROEI we will keep using oil
    4) That so long as we wish to continue growing, we will at least attempt to do so (growth philosophy).

    I agree with you on all of these points, however, they are not the main point of peak oil. Peak oil is a shorthand for peak production rates of crude oil.

    I agree with the points you have made, they are correct, but it is the rate at which we can pump oil out of the ground that matters, in terms of the number of millions of barrels of oil a day required to keep the global economy running.

    Yes, there are massive quantities of hydrocarbons available in the earth. We are not going to run out of them anytime soon, but this is not what peak oil is about. Take for example the Canadian oil sands in Alberta. There is probably enough oil there to run North America (US, Mexico & Canada) for about a century at current consumption rates. However, because the sands need to be harvested (using Trucks!) washed with hot water to separate the tars and then processed to make conventional oil, the production rate will never be anything like Saudi arabia or conventional oil sources.

    So, the problem with peak oil production is not that there is not enough oil in the ground, or that the oil in the ground cannot be extracted to be a net energy source, or that we don't want to use it, but simply that we cannot pump it out of the ground fast enough to grow the global economy.

    As the larger fields, with very high production rates deplete, we may not even have enough to maintain the global economy at its current size.

    Tar sands, shale gas, renewables and other energy sources in all forms are a good thing. They are preventing the problem from being much, much worse than it otherwise would be. It also means that future generations will still have some oil available to use (there will still be some oil left in 100 years or so, no doubt) but this does not take away from the fact that we are approaching the point at which oil cannot be produced quickly enough to meet global demand, at a price that is affordable to global economies.

    When this happens, economies are unable to grow fast enough to pay off debts, which triggers financial crisis (the consumer defaulting on his mortgage, the sovereign being unable to finance its debts).

    This means that the first effects of a slowing, peaking and/or decline in oil production manifests as a financial crisis.

    Incidentally, I found your blog on Google searching for "peak oil paranoia" but unfortunately, pretty much everything I've found trying to debunk the idea is based on a somewhat flawed understanding of the concept.

    Its all about production rates.

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  2. Tom,
    Thanks for the comment. I consider myself to be a 'short seller' against companies just selling hype (like Enron did.) But I get concerned with what seems to be a growing fear on the internet of a collapsing global society due to 'peak oil.' I don't want to live in a society with people "who've got the fear." I want to live in and I want my kids to live in a growing society.

    I think that many people are worried about the wrong variable: production rates. The variable that matters is the rate of return on work invested, RROI. [%/yr]
    The rate of production of oil (or of any other global-traded commodity) is simply where the supply curve intersects with the demand curve.

    As long as we have a growing society and as long as there is oil/gas in the ground with an EROEI of >4 (or perhaps a RROI of >7%/yr), then the demand curve will shift upward. The question is: how quickly will the supply curve shift downward due to a decreasing EROEI? How quickly the supply curve shifts downward is a function of a) the EROEI of the oil/gas remaining in the ground and b) the price of labor.

    What many 'peak oil' advocates fail to understand is that the price of labor in the oil/gas industry is extremely high right now. There are thousands of unfilled positions in the oil/gas industry and this is driving up the cost of labor. If more of us decided to become geologists rather than history majors or petroleum engineers rather than english majors, then the price of labor in the oil/gas industry would fall. This probably would keep the supply curve from shifting downward, and hence, we could see an increase in the production rates of oil/gas even if the energy return on energy invested for the oil/gas wells decreases with time.
    Stated another way, the total production rate is a function of the number of wells times the average production at a given well. As long as the RROI is positive and above ~7%/yr, then we can always drill more wells in order to meet increasing demand.

    If we all want a growing society, we can achieve it. The question is: are we going to create that growing society or are we going to spend our time worrying about a collapsing society that will only occur if we all decide that it's 'uncool' to work for the oil/gas industry?
    I don't know what path you will take after your PhD, but I hope that you chose a path that helps build a growing society. It doesn't have to be in the oil/gas/electricity business, but it hopefully helps our society grow and hopefully doesn't impede those of us who do work in the oil/gas/electricity business.

    On a side note, your PhD research in cognitive Psychology/Neurology seems really interesting and something that I have a little or no background in. Though, I wrote a blog post awhile ago that reviews the book 'Where Mathematics Comes From.' It's a great book to read if you haven't already.

    Best,
    Eddie

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  3. Hi Eddie,

    I've had to post this in a few parts, as I have written a long reply which it won't allow me to post in one go.

    Thanks for the thoughtful response. I took the time to comment on your blog earlier because most of the "debunking" peak oil critiques I've read have been by people connected to the oil industry, whereas yours was a well written one by a person with a hard science background.

    I also agree that the paranoia/worry is not helpful. I've spent quite a long time reading about the peak oil production problem, and have been very anxious about it myself on occasion. Hence I try to read sites which critique peak oil just to check that I am being reliably informed and considering both sides of the argument.

    I agree with your growth philosophy, and consider life itself to be a form of "reverse entropy", in that living things grow by consuming things with low entropy (food and fuel) and excrete things with higher entropy (CO2 and human waste). This allows us and our techonological society to grow. I too want to continue living in a growing society. Unfortunately, perpetual exponential growth on a planet with finite resources is impossible (see physicist Albert Bartlett here: http://www.youtube.com/watch?v=F-QA2rkpBSY)

    This is another reason why if we want to carry on growing, eventually colonising other worlds is a necessity. I hope this becomes possible in the future, starting with other planets in our solar system, and eventually extra-solar planets that are being discovered via the eclipsing and gravitational wobble methods.

    Getting back to peak oil though, this is still a very serious problem which needs to be addressed. You make a couple of good points here, which I have not encountered elsewhere, but I feel that these points make the problem less bad, rather than getting rid of the problem in its entirety.

    For example, when you talk about return of work on energy invested, I totally agree. We are not really interested in the waste heat from our petrol/diesel engines, but rather the useful mechanical work they can do for us. For this reason, more efficient engines and lighter cars/trucks will mean that we can extract more work, and hence more economic value, out of a given barrel of oil. Getting more work out of the same barrel of oil is great for the economy, and is something we should be pursuing already with utmost priority. Unfortunately, as an engineer/physicist, you will appreciate that there are limits to efficiency, and that these are much lower than 100% if only for reasons of thermodynamics. We can gain some net work/economic value by efficiency, but it will not make the problem go away completely. It will give us a few more years of economic growth though, so long as the financial costs of upgrading to energy efficient vehicles and homes do not exceed the financial costs of continuing to use less efficient ones.

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  4. On your second point, I only partially agree:
    "The rate of production of oil (or of any other global-traded commodity) is simply where the supply curve intersects with the demand curve."

    You are correct here, as long as there is excess potential production available. Historically, this has been the case for oil. As more potential production has been available for oil than has been demanded, cartels such as OPEC have artificially lowered the supply of oil in order to keep the prices higher. Its possible that this is still being done today, and is one reason why oil prices are high.

    However, the point about peak oil is that it is by definition the point at which there is no longer any spare production capacity. This means that even if there is more demand for oil, it physically cannot be pumped out of the ground fast enough to meet demand. This leads to very high prices (think summer 2008) which eventually leads to demand destruction (a recession, as in autumn 2008) which lowers prices again.

    Now, I understand that global oil production doesn't just depend on the geology of oil fields. As oil prices increase, more money is available to use to produce oil, and so companies invest in production capacity, which should increase production. However, as you point out, if the EROEI falls, the production costs increase (think Tar sands) meaning that the price of oil must be at least equal to the production costs. For Canadian tar sands I think this is about US $80 or so.

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  5. In your next point, you say that so long as the EROEI is positive, we will keep demanding more oil. Here I respectfully disagree. Although oil will still be a useful energy source at lower rates of EROEI, and will hence still be wanted, this is not the same as economic demand. Economic demand is when something is both wanted, and the consumer is willing and able to pay the price. Petrol/diesel from oil with a lower EROEI will have a higher price at the pump. Consumers may still demand $4/gallon gas, or $6/gallon gas, but may not be able to afford $12/gallon gas.

    More accurately, *some* consumers will not be able to afford $6/gallon, although other consumers will still be able to afford $12/gallon gas. What is important here is the net energy (or as you point out, useful work) available to the global economy. So even though oil can have a positive EROEI, it can still be uneconomical for the consumer.

    Its hard to work out exactly how the EROEI and RROI relate to $/gallon, let alone how these relate to the economic value the consumer gets out of the gasoline. Could I ask where you got your EROEI > 4 and RROI > 7%/year from? I'd be very interested to know, as well as any estimates as to how long you/others think our oil supplies will stay above these levels.

    I don't think we're headed for immanent economic collapse on the basis of oil prices and supply, but I do think that once we have less energy available per year, there will literally be less power available for industrial society.

    Physicist friends I know suggest that changing over to an electric economy, using nuclear power (including Thorium reactors) and renewables should help to offset the problem of eventually decreasing crude oil supply. The problem is that it is too hard to predict the point at which peak oil production will become economically not possible to avoid, or the rate at which oil supply (or more practically, energy supply from crude oil) will decline.

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  6. In my opinion (which I am happy to change if I learn of some data that contradicts what I currently know) the best we can hope for is that:
    1) The peak in oil production is still some years away, or at least that the end of the "bumpy plateau" i.e. the point at which the supply of crude oil actually begins to decline is still some years away. This should give us some time to adapt and prepare.
    2) That when decline begins, it is not too rapid a descent, meaning that we can use alternative technology to mitigate (or even overcome) the problem without too much economic upheaval.
    3) That efficiency in the use of energy/oil means that we can get more useful work out of the same or falling amounts of oil, offsetting the decline somewhat.

    My major worry is that this problem is not being debated publicly by our governments (although they may be discussing it behind closed doors). The other worry I have is that the currently very high crude oil prices suggest that the peak of conventional oil supplies is already past (2008 perhaps?) and that although we are able to replace these supplies with unconventional oil supplies, the age of cheap oil (consistently lower than $80/barrel) is over.

    What's more, if this is the case, then conventional oil supplies will continue to decline, meaning that oil prices will continue to increase in price (except when high oil prices cause demand destruction and temporarily lower the prices).

    I do also agree with you on labour costs. Once more people start working in the oil/energy industries, the costs will reduce somewhat. I also agree with you on luxuries. Once people start consuming less luxuries, the costs of living as a whole might reduce a little as well. However, the more people working in oil/energy and less people working in luxury industries are an example of the human costs of peak oil approaching/happening. Clearly 100% of humanity cannot work in oil/energy, and there is probably a maximum % that can work in these fields in order to still have a functioning society as we know it. I have no idea what this % might be though.

    Lets hope that nuclear fusion starts working commercially before the oil problem starts to get bad :)

    Tom

    PS - I'll have a read of your book review post :)

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  7. Tom,
    I agree with most of what you've stated above, especially your comment about setting up colonies on other planets.
    I just think that I'm looking at today's so called 'energy problems' from a different perspective.

    The first question I ask myself is: what technology can yield the highest rate of return on investment? (even if there is a price of emitting CO2 of $15-$30/ton of CO2)

    For electricity generation in the US, the answer is Natural Gas Combined Cycle. (Right now, NGCC can achieve a RROI well above 20%/yr even if we tax CO2 emissions based off of the expected economic damage of climate change. Whereas as the RROI of nuclear is sitting around 7%/yr. The RROI for coal depends greatly on the type of plant and the price of CO2, but it never gets above 20%/yr for new power plants.)

    For vehicle transportation in the US, the answer is really complicated to answer because it really depends on a lot of factors.

    But what's driving our potential for growth is not our vehicle transportation system. What is driving the potential for growth in the US (as well as actual growth in China) is the high rate of return on investment of our power plants. I should have been a little bit more clear in the post above and separated our use of oil for vehicle transportation versus our use of coal/gas for electricity generation. (I'm thinking about making some changes to the post in order to make this more clear.)

    Today in the US, our potential for growth is mostly due to the large rate of return on investment of a coal power plant(non-CO2 capture) or natural gas combined cycle power plant (NGCC). In a CO2 constrained world, our potential for growth will be from NGCC or perhaps from from really advanced coal gasification power plants with CO2 capture (i.e. much better than today's technology.) While I like the idea of nuclear fission or fusion from a physics point of view, I am skeptical of whether these technologies will ever achieve RROI of 20%/yr. After all, the point of a power plant is to produce more power plants, and as quickly as possible. The real point of a power plant is not to 'make electricity' or to 'make us happy.' The real point of a power plant is to grow society.

    Our potential for growth in the US depends on this high rate of return on investment on our electricity generating equipment. Cheap gas helps maintain our current standard of living, but cheap gasoline and cheap transportation are not the main driving force behind our potential to grow.

    Our potential for growth (even in a CO2 constrained world) will probably comes from mostly use of natural gas in combined cycle power plants. As we grow, we will demand more oil for driving as well as more oil for in the form of plastics and other crude-oil derived materials.

    Meaning, the demand curve for oil will shift upwards. The real question is: what will happen to the supply curve for oil and natural gas liquids?

    My guess (just an educated guess) is that the increase in the demand curve and the increase in supply of natural gas liquids will offset any decrease in the supply curve, so that what might happen will be a slight to moderate increase in the price of oil, but at nearly the same rate of production per year. (Hence no peak in oil production rates)

    So, I expect to see continued global growth (perhaps 2-4%/yr), a slight to moderate increase in the price of oil, and a near constant production rates for total oil (crude oil/natural gas liquids/heavy oil.)

    In a future post, I'll discuss a graph I've made of the RROI for electricity generating technologies in the US as a function of the price of CO2. And I'll make some changes to this post to make my arguments a little bit more clear.

    Thanks again for your comments.

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  8. I agree with your comments about natural gas (isn't it great when scientists discuss stuff, instead of people arguing about politics?). However, using liquified natural gas instead of gasoline doesn't mean that peak oil production will not occur, it means that peak oil production will cause us to change to other fossil fuels like LNG.

    The Picken's plan is to replace some gasoline/diesel vehicles, particularly trucks and trains with LNG vehicles, to reduce dependency on expensive imported foreign oil. However, this will lead to a rise in the cost of LNG (which is currently very cheap) and an increase in the cost of electricity (a large proportion of which comes from natural gas Picken's then proposes building a very large volume of windfarms in Texas, to produce electricity, to ofset the electricity rise because of the increase in use of LNG.

    So there are some solutions to peak oil production, some of which are not economical yet, but might be should oil production start to decline. This would also help the US to be more energy independent, and less effected by political problems in oil producing countries (currently Nigeria and Iran).

    We use a bunch of natural gas in the UK, for electricity and to heat our homes. Worryingly though, we get much of our gas supply from the Russians.

    Anyway, the point is that peak oil production is real, but that its not necessarily the same as peak energy production, or peak work production (which are the important things for our economy). I just hope that these alternative energy sources can produce energy at a price affordable to the consumer, as there are lots of technologies which physically work, but are not economically viable.

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    Replies
    1. Things in the UK are certainly different than in the US.
      Drilling for shale gas is really booming all around where I live. It's starting to pick up in the UK, but not as much as Texas, Pennsylvania, Arkansas, Colorado, and Northern BC. It should theoretically take off like wild fire in China. Getting China to move from coal to NG will be a great thing for the environment and for the global economy.
      Europe is in a tough predicament now that the North Sea wells are peaking or have peaked. Now they are reliant on oil from the Middle East and gas from Russia, as you've said.
      In my article I stated that I expect global production of liquid hydrocarbons to stay relatively flat for the next decade or so, but given that most of the North Sea wells are peaking, I'm guessing that we've seen the peak in European oil production. This is having a significant economic effect that can't be solved by creating feed-in tariffs for wind & solar. In my opinion, the only European country with a sane energy policy is France. But nuclear power can't achieve a 20% RROI, so it's unlikely that France (carrying along the Euro with some help from Germany) can compete in the long run against the US, China, and India. (This is just my educated guess from following the news.) I'd be glad to continue this discuss by email or through the comment sections.

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  9. Hi Eddie,

    Sorry for the late reply. For some reason I never get emails when people reply to me on blogspot blogs. I'll keep following your blog and twitter and am happy to continue our conversation via email. I'll have a think about what you have written and reply properly at some point in the future.

    Tom

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