Peak Generation

With oil and food costs rising, it looks like 2008 all over again

2011-02-18T10:20:00.000-08:00

History repeats itself: food riots are breaking out across the poorer nations, the Middle East is in turmoil and Brent crude has passed the $100 mark – 2011 is opening just like 2008 did.

It was a significant year in terms of the global economy: social unrest around the world over a spike in the cost of staple foods, and the runaway price of oil that eventually triggered the worst global economic crash since the Great Depression. While there were undoubtedly other factors behind the downturn, 2008 stands as a benchmark in terms of oil and economics – a shorthand for high oil prices and economic turmoil. We don’t want another 2008, especially with the faltering recovery that has yet to turn substantive cash injections into jobs.

Now, it may be just coincidence, but it looks suspiciously like the issues that shaped the first half of 2008 are back: oil demand is surging, its price is rising, and people in the poorer nations are consequently finding the cost of staple foods out of reach. There is a direct link between the cost of oil and food – which I’ll return to in a subsequent post – and so the first to suffer from a rise in oil prices are people in developing countries living on a couple of dollars a day who cannot absorb rising costs.

If the cost of oil goes on rising – and all indicators suggest it will – then we will see a growing humanitarian disaster around the globe. Neither are our industrial economies immune: based on the assumption that $150-per-barrel oil breaks the machine, how much space do we have before we see oil prices triggering another global recession?

First, a flashback to 2008 is in order. The year opened with food riots which gathered momentum in the first half of the year. There were riots in India, Burkina Faso, Cameroon, Senegal, Mauritania, Cote d’Ivoire, Egypt, Yemen, Morocco, Haiti, Senegal and Somalia. Varying levels of unrest were also reported in Mexico, Bolivia, Uzbekistan, Bangladesh, Pakistan, Sri Lanka and South Africa.

The International Energy Agency (IEA) website archives monthly oil market reports, so we can see that oil began the year on a high, crossing the psychological $100 barrier, and projected global demand for oil rising:

NYMEX light sweet crude futures breached $100/bbl in early January and remain near record highs, lifted by falling stocks, cold weather and tight fundamentals. Tensions in Nigeria and the Middle East and fund positioning remain important supportive factors.

2007 world oil demand is revised up by 150 kb/d to 85.8 mb/d on stronger-than-expected deliveries in Asia and the Middle East and cold OECD weather.

You can follow the surging prices through the first half of 2008, each month setting a new record: $105 per barrel by early March, $110 in April, $126 in May, around $140 in June (“following comments by an Israeli official that an attack on Iranian nuclear facilities was ‘inevitable’ and. . . against a tight supply background with no clear sign of the usual second-quarter crude oil stockbuild”) to an early July peak just above $145 per barrel. Then came the recessionary fall from $147 a barrel in July to $32 in December. (It was back up to $85 within five months, despite the global economic collapse.)

Now, jump forward to 2011. The year opened with the UN announcing that food prices“surged to a new historic peak in January, for the seventh consecutive month,” and further price increases could trigger upheaval and riots in developing countries. We have already seen protests over food prices in Niger, Guinea, Burkina Faso, Mexico, Tunisia and Yemen this year. Protests linked to prices of staple foods are currently sweeping across the Middle East: Bahrain, Libya, Yemen, Iran, Iraq and Egypt are aflame.

Now, oil: the IEA’s Oil Market Report for January 2011, published February 10, shows Brent crude reaching the psychological $100 barrier and demand increasing:

Crude prices were propelled higher at end-January by political unrest in Egypt, with Brent crude reaching $100/bbl on fears that the turmoil might disrupt Suez canal and SUMED pipeline flows or spread in the region. Although prices have since eased, Brent futures remain around $100.50/bbl and WTI [West Texas Intermediate] at $87.20/bbl at writing.

Global oil product demand for 2010 and 2011 is revised up by 120 kb/d on average on higher-than-expected submissions in non OECD Asia and improved economic prospects for OECD North America. At 87.8 mb/d in 2010, global oil demand rose by 2.8 mb/d year-on-year, and should reach 89.3 mb/d in 2011 (+1.5 mb/d year on-year).

World oil supply rose 0.5 mb/d in January, to 88.5 mb/d, on higher OPEC crude and NGL output.

(Canadian oilsands output is already flooding parts of the US market, driving down West Texas Intermediate crude oil prices, while Brent is now more of a bellwether for international price trends.)

So, according to the IEA, global demand for oil is set to reach 89.3 million barrels per day in 2011; supply is stated at 88.5 million barrels per day, with Opec effective spare capacity – its ability to open the spigots and produce more at a moment’s notice – offering an additional 4.7 million barrels per day.

The assumption, then is for another year of tight oil supply, with Opec’s spare capacity dwindling – possibly as low as 3 mb/d.

Looking back over the IEA reports for 2008 we see some interesting price-related snippets, from “falling stocks, cold weather and tight fundamentals” in January to the fear of an imminent attack on Iran and observation of low Opec spare capacity (“Higher output and field commissioning delays push [Opec’s] effective spare capacity below 2 mb/d”) in June’s report.

So, we are starting 2011 with high demand after a particularly cold winter in Europe, turmoil and revolution across the Middle East including agitation from Iran which might or might not be sending two warships through the Suez Canal, and speculation of Opec spare capacity dropping low despite their subsequent investment.

Back in 2008 Opec – and many Western commentators – pinned the blame for runaway prices squarely on the shoulders of commodity speculators. Speculators are in the news at the moment, being blamed by both the UN and the European Union for pushing up food prices and setting the stage for a humanitarian disaster across the developing world. It leads to the question: do speculators have that much influence over the market for oil, or are they a handy scapegoat?

When interviewed in June 2008, billionaire investor Warren Buffet said supply and demand, not speculation, was driving oil to record heights. As reported by USA Today:

Buffett said he disagrees with the idea that speculation was driving oil prices higher. At least nine bills proposing limits on that oil speculation have been introduced in Congress in recent weeks.

"In my adult lifetime, up until the last year or two, there's been a huge amount of excess supply available," Buffett said. "We don't have excess capacity in the world anymore, and that's why you're seeing these oil prices."

A Wall Street Journal item from July that year, Restricting Speculators Will Not Reduce Oil Prices, considered “wild assertions” of commodity price manipulation that were “completely unsupported by reliable evidence.” It states:

For the most part, speculators do not demand physical oil the way thirsty Chinese refiners do. There is no evidence that speculators are accumulating large and rising inventories of physical oil. But to cause prices to be above their competitive level, speculators would have to take physical oil off the market -- the way that governments have done in the past with agricultural products, amassing mountains of grain and cheese to prop up their prices.

The role of the futures market in oil is explained in an item, Oil Politics and Commodities Speculation: Myth and Fact, again from July 2008, which explains the nature of speculation:

Oil refineries like Exxon-Mobil or Shell or British Petroleum must ensure that they have a supply of crude oil for their refineries, not just for today, but for next month, next quarter, next year. Similarly, an auto manufacturer or a farm both depend upon fuel oil and other commodities and also have the choice of buying them on the spot market or the futures market.

Think now of supply and demand. The commercial business entities which truly need the commodities represent one portion of the market and make up a good deal of the demand. Another part of the demand is made up of people who need to make profit for themselves and their investors. They see an opportunity in rising oil prices and decide to guess that the upward trend in price will continue. They bought 100,000 barrels of oil two months ago at $120.00 per bbl. and can sell it today for $135.00 per bbl. These speculators make up another portion of the "demand" segment. The unusual thing about oil or any other commodity is that most speculators never take delivery on the commodity; they merely trade and cash in on the paper contract backing the commodity. Yet, they have become a large part of the demand market.

This concludes that investors are drawn to a market with rising prices – “speculation is fueled by market fundamentals” – and may in turn push the price higher – “the farmer and the manufacturer must compete with these speculators to buy fuel, accounting for higher prices” – but the oil “profit bubble” has more to do with demand from India and China, government policy and the claims of peak oil hyping everything up.

(Of course, many media outlets took a different route, squarely blaming Chicago and New York mercantile exchanges – NYMEX pictured, left.)

Blame who you want, but the price of oil relates to supply and demand. Speculators may push the price upwards - and last year a Reuters industry poll suggested they were raising the price by $10 to $30 a barrel - but clearly are not drawn to a buyer’s market. When hedge funds ride in to place their money in oil, it can only mean that the oil market is superheating. They are adding extra dollars to the cost of a barrel, but are not wholly to blame.

The problem lies in our expectation that a finite resource can be extracted at an exponential rate.
The IEA’s World Energy Outlook 2010, published late last year, included the suggestion that oil demand, excluding biofuels, will continue to “grow steadily, reaching about 99 million barrels per day (mb/d) by 2035 — 15 mb/d higher than in 2009.” (The document hedges its bets by talking in terms of various scenarios; one suggests demand for oil could fall away a little ahead of 2020.)

Over the past five years, China has spent more than US $713 billion on a 46,000-mile road expressway system that’s just a little short of the US interstate system. It’s hard to imagine these roads not in use over the coming years.

China, the most populous country in the world, has the world’s fastest growing major economy, becoming the world’s largest exporter, second largest economy and largest energy consumer in 2010. The US still has the world’s largest economy and one of the world’s highest GDP per capita, but it’s China that is driving global markets, maintaining high global prices for raw materials and energy imports through the level of its demand, and rewriting the geopolitical order in its attempts to guarantee future oil and gas supplies. China is leading the charge for more and more oil.

There are a couple of differences between now and 2008 – essentially the output of Iraq (expected to reach 2.75 million barrels a day) and Canada, which is set to show an increase of between two and seven per cent and is already pushing down West Texas Intermediate crude oil prices - but not Brent. But when all is said and done, the same big picture factors are in place – voracious demand, market jitters about the ability of the oil producers in a strife-torn region to deliver and a price feedback loop due to commodity trading.

Believing that prices will rise is a matter of market fundamentals, and does not require one to believe in peak oil, the notion that the world will reach a time of maximum output for geological reasons – although many suggest that the world is at or around its production limits, with oil producers regularly lying about reserves. I happen to believe the world cannot go on increasing oil output year after year, and that we will very soon see peak oil hypothesis become an accepted scientific fact. Even if doesn't happen this year, I think we’re still in for a bumpy ride.

Peak oil, climate change, political turmoil: the lesson from Egypt

2011-02-15T09:12:00.000-08:00

Were the Egyptian people that bravely took to the streets to overthrow a tyrannical regime taking part in the world’s first peak oil revolution?

It seems like out and out hyperbole at first. Hosni Mubarek ran the country in a permanent state of emergency in which he blocked free speech, intimidated anyone perceived as a threat, and operated a blatantly corrupt system that left millions of Egyptians impoverished. Tyrants get overthrown in the end, and the protesters on the streets of Egypt were clearly exercising their right to make a political choice – to remove Mubarak. After all, it’s such a romantic story that we want to buy into it: the disenfranchised youth who outsmarted the government’s spies by tweeting on Facebook to organize a brief, remarkably peaceful rebellion.

Right now, with the country securely in the hands of the military, who have pledged elections in six months’ time, media commentators are talking of happy endings - depending on how happy you are about martial law, that is. But what if there is more to it than that? And what if Egypt’s problems go much deeper? Without wanting to spoil the party, some additional statistics put events in a different light:
* Egypt’s oil peaked in 1996, and with output diminishing 26 per cent since then, the nation is now a net oil importer
* The nation’s debt is around 89.5 per cent of GDP
* Its population – 27.8 million in 1960 and currently estimated at 79.94 million – is set to double each 35 years
* Self-sufficient in food in 1960, the nation is dependent of food imports, which are currently at a record high price
* Prices in Egypt have surged 17 per cent following this worldwide leap in commodity prices (while around 40 per cent of Egypt's citizens live off less than $2 a day).

Here, then, we have a collision between diminishing government revenue, population pressures, poverty, rising food costs and a corrupt political system that was indifferent to anyone outside of the elite. Egypt, formerly an oil exporter that was self-sufficient in food, now imports both – and cannot afford to feed itself.

A telling item in Le Monde Diplomatique, headlined Tunisia, Egypt and the protracted collapse of the American empire, expands on this:

[Egypt’s] oil production peaked in 1996, and since then has declined by around 26 per cent. Since the 1960s, Egypt has moved from complete food self-sufficiency to excessive dependence on imports, subsidized by oil revenues. But as Egypt’s oil revenues have steadily declined due to increasing domestic consumption of steadily declining oil, so have food subsidies, leading to surging food prices. Simultaneously, Egypt’s debt levels are horrendous – about 80.5 per cent of its GDP, far higher than most other countries in the region [the more recent figure is 89.5 per cent]. Inequality is also high, intensifying over the last decade in the wake of neoliberal ‘structural adjustment’ reforms – widely implemented throughout the region since the 1980s with debilitating effects, including contraction of social welfare, reduction of wages, and lack of infrastructure investment. Consequently, today forty per cent of Egyptians live below the UN poverty line of less than £2 a day.

With politicians and the media sticking to the fairytale story, recent comments by US Secretary of State Hilary Clinton about a "perfect storm" of unrest running through the Middle East seem particularly frank. Referring to protests in Tunisia, Jordan, Yemen and Egypt, she spoke of the “strategic necessity” for democratic change. According to the BBC:

She said that with water shortages and oil running out, governments may be able to hold back the tide of change for a short while but not for long.

"Some leaders may believe that their country is an exception - that their people will not demand greater political or economic opportunities, or that they can be placated with half-measures.

"In the short term, that may be true; but in the long term that is untenable."

Egypt is also in the midst of a dispute over the waters of the River Nile, which flows through Ethiopia, Uganda, Kenya, Tanzania and Rwanda before reaching the Aswan High Dam where it is required for Egyptian agriculture.

Water is short and oil is running out – and I never thought I’d hear a senior US politician admit that – while food prices are at an all-time high. The UN's Food and Agricultural Organization, which charts a food price index, charted costs going above “the previous record of 2008 that saw prices spark riots in several countries.” The group’s economist, Abdolreza Abbassian, cited that "unpredictable weather" means prices could go on rising.

Freak weather around the globe has slashed global food production: wildfires in Russia last year (and subsequent grain export ban), drought in Argentina, flooding in Australia, a snap freeze in Mexico and the Southern US, and Canada’s washed-out harvest. The predatory commodity markets, a growing taste for meat across Asia and competition from biofuels are also driving up costs, but it seems the main problem has been climatic. (Speculators only jump in when supply is getting tight, as there is no money to be made betting on a buyer’s market. Commodities futures speculation can be blamed for making things worse for billions of people around the globe, but did not instigate the problems.)

So, is this a run of bad luck, or are we seeing climate change at work? Back to the item in Le Monde Diplomatique:

So much of the current supply shortages have been inflicted by increasingly erratic weather events and natural disasters, which climate scientists have long warned are symptomatic of anthropogenic global warming. Droughts exacerbated by global warming in key food-basket regions have already led to a 10-20 per cent drop in rice yields over the last decade. By mid-century, world crop yields could fall as much as 20-40 per cent due to climate change alone.

Writing in the New York Times last week, columnist Paul Krugman addressed the issue in a wonderfully written item, Droughts, Floods and Food. He observes that the “global food crisis — the second in three years” may not be having a huge impact on US inflation but is making “a brutal impact on the world’s poor.” He cites the current anger at repressive Middle Eastern regimes – saying the question isn’t so much why it’s happening as why now – as largely triggered by rising food prices. He continues:

So what’s behind the price spike? American right-wingers (and the Chinese) blame easy-money policies at the Federal Reserve, with at least one commentator declaring that there is “blood on Bernanke’s hands.” Meanwhile, President Nicolas Sarkozy of France blames speculators, accusing them of “extortion and pillaging.”

But the evidence tells a different, much more ominous story. While several factors have contributed to soaring food prices, what really stands out is the extent to which severe weather events have disrupted agricultural production. And these severe weather events are exactly the kind of thing we’d expect to see as rising concentrations of greenhouse gases change our climate — which means that the current food price surge may be just the beginning.

He writes that there is no single weather event you can attribute to man-made climate change, “But the pattern we’re seeing, with extreme highs and extreme weather in general becoming much more common, is just what you’d expect from climate change.”

Of course, there are always politically opportunistic commentators lining up to deny any aspect of climate change you care to mention - - which, strangely enough, has all been traced back to big oil. It’s their job to make the issue as confusing and politically loaded as possible.

Egypt is a lesson in unsustainability, but not the only one, right now. (I’ve seen speculation on the future of Mexico, another oil producer that’s passed peak, along with questions about the long-term future of the House of Saud). Chris Martenson, of Crash Course fame, wrote that events in Egypt were “emblematic of what we might expect elsewhere, especially in the financial markets.” He continues:

My intent here is not to point out the future difficulties that Egypt faces, no matter who is charge, but to use the change that happened there as Egypt simply reminds us that anything that is unsustainable will someday change. It is an emblem for the world.

With abundant energy and food, we are treated to expansive and stable economies in which everyone stands a chance of gaining. Not that everyone will, mind you, but the possibility is there In an energy-constrained world, what was formerly possible is no longer do-able, things don't work right, and there seem to be persistent shortages of everything from growth, to money, to food, to goodwill. What used to work doesn't. It is at these points that the prior stresses and imbalances are most likely to snap and suddenly change the world.

If it’s hyperbole to call events in Egypt a peak oil revolution or a climate change event, it’s no more twisting the facts than turning the story into a fairytale about democracy. Rage over food costs played a major role in getting people out into the streets. Egypt’s oil has peaked, which cannot be denied. Neither can the role of climate change in soaring food prices, as far as I’m concerned. Clearly there are other factors operating here beyond peak oil and climate change, but all the same you have to ask yourself if the protests would have begun in an oil rich Egypt that was importing cheap grain.

And if you believe there is space for peak oil and climate change in the account of events in Egypt, then that turmoil truly is emblematic of what to expect elsewhere. With the global population surging to seven billion, the UN warning of riots around the world if food prices don't come down, oil prices rising again on the back of growing worldwide demand, and global warming making problems worse, the elements are in place for a humanitarian disaster. Despite the actions of all the deniers, I believe the next few years will see results of peak oil and climate change. The warnings are all in place.

Oil ‘demand has met supply’ – Saudi Arabia (via Wikileaks)

2011-02-11T20:12:00.000-08:00

Wikileaks may have told us what we already knew – that Saudi oil reserves are greatly inflated – but the reports also portray leaders of the highly secretive petro-state feeling “under the gun” as they strive to move their economy away from dependence on oil.

Four diplomatic cables made public earlier this week, reporting meetings between Saudi oil officials and representatives of the US between 2007 and 2009, have generated headlines that reserves have been overestimated by as much as 40 per cent. But taken as a whole, the documents are particularly interesting because they show leaders of both nations know “sufficient challenges” lie ahead. The Saudis appear increasingly fearful of the future – in turn, unsure of their ability to produce enough oil to maintain the price system, concerned about a runaway market for oil that does not follow the economics of supply and demand, and then worried about their own lack of diversification into other areas. Between the lines you can sense the growing dilemma: having to deal with the increasing costs of flushing oil out of mature fields just to keep in the game and the expenses of a ballooning, energy-hungry population, while all the while they would rather be investing in new industries – not to mention agriculture – that can take the kingdom into a sustainable future.

Over this period the Saudi officials go from worrying about other people’s demand destruction to asking for US help moving their industry away from oil dependence. That’s quite the turnaround.

As those that deny the importance of the releases strive to point out, suggestions of hyped reserves are nothing new. The late, great Matt Simmons had been saying just that ever since the 2005 publication of Twilight in the Desert, which despite occasional bursts of hyperbole cited an array of incontrovertible engineering reports. Yet anyone denying the importance of this Wikileaks information must overlook both the both the level of detail and the theatrical timing of their release – coinciding with Egyptian demonstrators overthrowing their own dictator, speculation over what is the next Middle Eastern domino to fall and recriminations about US intelligence failure regarding the region. The markets are jittery enough about oil supply as it is.

But first, a look back in time. Taking the cables in chronological order, we first read of a November 20, 2007 meeting between US Consul General John Kincannon and Dr Sadad al-Husseini, recently retired executive vice president for exploration and production at Saudi Aramco. This states:

Al-Husseini, who maintains close ties to Aramco executives, believes that the Saudi oil company has oversold its ability to increase production and will be unable to reach the stated goal of 12.5 million b/d of sustainable capacity by 2009. While stating that he does not subscribe to the theory of ‘peak oil,’ the former Aramco board member does believe that a global output plateau will be reached in the next 5 to 10 years and will last some 15 years, until world oil production begins to decline. Additionally, al-Husseini expressed the view that the recent surge in oil prices reflects the underlying reality that global demand has met supply, and is not due to artificial market distortions.

According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described and the timeline for their production not as unrestrained as Aramco executives and energy optimists would like to portray.

It’s interesting to note that al-Husseini felt demand for oil could only push prices higher, as “recent oil price increases are not market distortions but instead reflect the underlying reality that demand has met supply (global energy supply having remained relatively stagnant over the past years at approximately 85 million barrels/day).” He appears to have seen the 2008 price spike coming.

He also apparently wanted the American leadership to know the full story, and begin to make a transition away from oil:

He stated that the IEA's expectation that Saudi Arabia and the Middle East will lead the market in reaching global output levels of over 100 million barrels/day is unrealistic, and it is incumbent upon political leaders to begin understanding and preparing for this ‘inconvenient truth.’

The next diplomatic cable in the batch, written about a May 6, 2008 meeting with Prince Abdulaziz bin Salman bin Abdulaziz Al-Saud in the light of runaway oil prices, contains a telling Saudi refusal to open the spigots. “Contrary [to] a few months ago, Prince Abdulaziz promised no relief on production or pricing. He told the Energy Attache that the Ministry was ‘extremely worried about demand destruction’ in the U.S. as a result of the latest financial crisis indicators.”

Next up on Wikileaks is a report following a meeting in June of that year, reviewing that the oil market was not responding in the way that traditional economics would predict through the mechanism of supply and demand. This is because governments around the world are forced to subsidize petroleum costs in the wake of food inflation:

Market analysts in Riyadh point out widespread petrol subsidies in China, India, and the Middle East ensure price feedback mechanisms are broken; they therefore predict crude demand will continue to rise there. Governments are abandoning plans to roll back petrol subsidies in the face of escalating food inflation. Our contacts are concerned languishing refining margins are driving down refinery utilization. Recession may be the one brake on crude prices in the near term, but our contacts are divided on its impact. Their crude price forecasts range between $90 and $150/barrel.

By November 2009 the world had fallen into recession, and the Saudis found themselves “confronting a number of difficult challenges,” according to the fourth diplomatic cable.

While it has managed to weather the international financial crisis, Saudi officials are keenly aware of the need to foster economic development quickly to provide jobs for its rapidly growing population (more than 2% per year). They are also anxious to diversify the base of the economy away from its current predominant reliance on hydrocarbons, which directly provide close to 50% of GDP and indirectly account for much of the rest of Saudi industry. Saudi officials understand the challenges they face, including the need to make Saudi education more relevant to today's workplace and the need to increase the role of women in the economy, both of which are controversial in the socially conservative Kingdom. Saudi officials are looking to the U.S. to help them meet these challenges, both through increased engagement at the government level, including educational exchanges, and more Foreign Direct Investment, particularly in energy, high tech, and manufacturing. Saudi officials strongly welcomed the President's Cairo speech and its promise of greater outreach, which provides a good context for your visit.

Saudi officials feel under the gun, as they are aware that a number of other countries are years ahead of them in pursuing the same strategy.

Putting it all together, then, we have the Saudis saying in 2007 that oil “demand has met supply” and prices would climb. When this apparently came to fruition the following year, they were unwilling (probably unable) to increase production, saying this would not work as “price feedback mechanisms are broken.” They clearly link the world’s need for oil-at-any-cost with the soaring price of food.

Speaking in 2008, they foresaw a coming recessionary drop in the price of oil, but forecast future prices getting back to $90 - $150 per barrel. By the following year, they felt even this price would not guarantee the kingdom’s future, and actually appealled to the US for investment in “in energy, high tech, and manufacturing” to overcome their reliance on oil.

The Saudis are holding onto a rising balloon, and they know it. Their state is being crushed between parasitical princes enjoying an unbelievably lavish lifestyle and a growing population burning through oil like there’s no tomorrow. The playboy princes lack the wherewithal to lead the transition, while the masses can are now begining to realize that autocratic regimes across the Middle East are not as resistant to change as their own royal family would have them believe. According to Iranian President Mahmoud Ahmadinejad, there is “a new Middle East materializing,” free of the United States and Israel – of course, said while trying to block protest in his own country with house arrests and intimidation.

And it appears Opec cannot pump more oil to take the heat out of the situation. As the Canadian Globe & Mail newspaper reports, “With political tensions in Egypt roiling global crude markets, Opec producers are unwilling to boost supplies until bulging global inventories are reduced, a tough stance that will provide little relief from prices that have hit two-year highs.”

(This report goes on to mention that al-Husseini has been distancing himself from the Wikileaks reports, “saying he was merely distinguishing between proven reserves and the broader category of ‘resources in the ground,’ and that he proved to be wrong in his pessimism about Aramco’s ability to increase production.”)

All this points to an uncertain immediate future for oil prices, according to an insightful report in Foreign Policy. It contrasts two Saudi Arabian oil estimates from 2007: the public statement that the kingdom has 388 billion barrels of recoverable crude oil reserves, and al-Husseini’s private view that “the country's figures in general are wildly overblown, and that it is headed for a production peak around 2020, followed by a slow decline.” (He actually reportedly suggested "a global output plateau will be reached in the next 5 to 10 years.") The item continues:

The issue is pivotal. Put simply, the price of oil -- the price you are paying at the pump, indeed the cost of everything in your home -- is wholly determined by what oil traders think Saudi reserves and production capability really are. As an example, oil plunged yesterday to its lowest price of the year -- $87.87 a barrel -- when Saudi Arabian Oil Minister Ali al-Naimi suggested that the kingdom will put new oil supplies on the market to compensate for any uptick in global demand.

The question of Saudi Oil reserves, even if we think we know the answers, remains central to our own economies. It’s more than just the physical size of reserves, as the matter includes how fast the Saudis can bring oil to market, and whether they even do – oil set aside for home consumption never makes it that far, for example. It is also linked to the cost of food, and with it, the security of governments across the globe.

Oil be back!

2011-02-10T14:44:00.000-08:00

It started with a glut of freelance work, followed by a bout of soul-searching about the blog that could have been confused with acute laziness. . . essentially I’ve taken a four-month vacation from writing here.

Yeah, paid work comes before Peak Generation every time. I owe that to my wife and children. (And right now I’m about to launch my own communications business, while working full-time and pulling in whatever freelance work I can get.) But I just can’t walk away from this blog, although I’ll freely admit that I did try, and that for a time I never wanted to see it ever again.

I questioned why I was blogging in the first place. To be honest, the only way I can really understand a given topic is to write about it. While it might be painful watching me struggle with basic concepts – writing garbage like demand exceeding supply – at least I don’t believe I can save the world or blog my way to riches, fame and drinking after hours.

But the more I come to understand, the more I believe that the availability of natural resources is going to be the key issue of this century. I can’t walk away from the concept of peak everything.

But there’s nothing in the media to suggest we face any resource issues. Stepping away from the blog brought this home to me. If you aren’t typing the term peak oil into Google news every day, then you would believe that nothing more than the occasional democratic change of government would solve everything.

I read through the whole Wikileaks thing: all those media commentators saying how irresponsible it all was, while repeating the juiciest allegations. But why was there nothing until recently of peak oil in all this? We got weeks of headlines about the foibles of foreign politicians.

More recently the media has been dithering about change sweeping through the Middle East. Right now Egypt is on the brink of regime change. Most likely it will be a military coup (or a leader otherwise appointed by the military) or else a handover to a Mubarak lackey, but the US media in particular is in terror of an outbreak of democracy or, worse still, a popular Muslim regime. Will Saudi Arabia be the next domino to topple? What would this mean to oil supplies? Would we face an energy shortage like that which followed the 1979 Iranian revolution, might it be more like the 1991 collapse of the Soviet Union, or could we see another frenzy of speculation driving up prices like in 2008? (The Canadian dollar is soaring on that speculation right now, with the overhyped oil sands becoming boosted as a strategic resource. But I don’t see much discussion of any of this.)

So, back to the blog. I can’t walk away from it. I tried, believe me, I tried.

Military reports leading the charge in peak oil debate

2010-10-01T08:22:00.000-07:00

Another military report is targeting future oil supply concerns.

Fueling the Future Force: Preparing the Department of Defense for a Post-Petroleum Environment, published September 27, is the third military consideration of a future of scarce oil published so far this year. It states that 77 per cent of the US Department of Defense’s “massive energy needs” are met by petroleum – but “given projected supply and demand, we cannot assume that oil will remain affordable or that supplies will be available to the United States reliably three decades hence.” To remain as an effective fighting force, the entire US military must transition from oil over the coming 30 years.

It’s a notable publication for a couple of reasons – being co-authored by lieutenant colonel (Ret.) John Nagl (left), who literally wrote the book on US counterinsurgency operations, and for being the second report produced for the American military this year to consider the strategic importance of oil. It also follows on neatly from a German military report that squarely addresses the issue of peak oil.

As such, it’s hard not to compare all three military documents.

Back in February, the United States Joint Forces Command published The Joint Operating Environment 2010. Written by the military for the military, this was seemingly intended as a discussion document to guide “future force development.” As such, it was concerned with probable “future trends and disruptions” – a variety of geopolitical issues: demographics, globalization, US debt, the global recession, water shortages, food supply, climate change and dwindling oil supply.

It projects an image of a chronically unstable world, with the high probability of “revolution or war, including civil war” ripping through the Middle East and Sub-Saharan Africa over access to food and water. While it puts oil on the list of dwindling resources, it cannot be called a peak oil report, stating: “The central problem for the coming decade will not be a lack of petroleum reserves, but rather a shortage of drilling platforms, engineers and refining capacity.”

But then it continues that despite technological innovations and non-conventional oils, “by 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.”

But The Joint Operating Environment’s main concern is not fueling the US military machine so much as funding it:

Another potential effect of an energy crunch could be a prolonged U.S. recession which could lead to deep cuts in defense spending (as happened during the Great Depression). Joint Force commanders could then find their capabilities diminished at the moment they may have to undertake increasingly dangerous missions.

(More about this report here.)

Then in late August, a German military report came out that directly targeted peak oil. Sicherheitspolitische Implikationen knapper Ressourcen (or Implications of Resource Scarcity on National Security - translation here) was leaked in Der Speigel, a German weekly with a long and fine track record of creating scandals. It was written by the Future Analysis department of the Bundeswehr Transformation Center, a “think tank tasked with fixing a direction for the German military,” and was still in draft form as it “has not yet been edited by the Defense Ministry and other government bodies.”

Like The Joint Operating Environment, it envisions an unstable future – except oil is front and centre of this. While not offering a view on the likely timing of peak oil, it states the most severe consequences will come about “15-30 years after the peak has hit.” While “resources have always triggered conflicts, mostly of regional nature,” this will be different – a “global problem, as scarcity (mainly of crude oil) will affect everybody.” Probable geopolitical shifts will include a move away from democracy and human rights, and the decline of free market mechanisms in favour of “protectionism, exchange deals, and political alliances between suppliers and customers.” There will be an overall reduction in the standards of living across the globe, but it will be felt worse in countries “that are a) highly dependent on imports and b) are susceptible to price-increases of food products, particularly affecting Africa, parts of Asia and Latin America, and the Middle East.” Meanwhile, Western nations face “systematic risks”:

In addition to the gradual risks, there might be risks of non-linear events, where a reduction of economic output based on Peak Oil might affect market-driven economies in a way that they stop functioning altogether, leaving the possibility of a relatively steady downward trajectory.

Investment will decline and debt service will be challenged, leading to a crash in financial markets, accompanied by a loss of trust in currencies and a break-up of value and supply chains – because trade is no longer possible. This would in turn lead to the collapse of economies, mass unemployment, government defaults and infrastructure breakdowns, ultimately followed by famines and total system collapse.

(More here.)

The latest military report, Fueling the Future Force, was published Sept. 27 by Washington, DC “national security and defence” think tank, Center for a New American Security (CNAS). Although it was not written by the military, CNAS has big-time political connections, with several former employees being picked for key posts by the Obama administration. Indeed, a June 2009 Washington Post opinion piece, The 'it' think tank: when CNAS talks, people listen, stated that “In the era of Obama...the Center for a New American Security may emerge as Washington's go-to think tank on military affairs.”

If nothing else, the fact that the report was co-written by Dr. John Nagl (along with Christine Parthemore) guarantees it a reading in both political and military circles. A 2008 Washington Post report, High-Profile Officer Nagl to Leave Army, Join Think Tank, introduces him as “one of the Army's most prominent younger officers, whose writings have influenced the conduct of the U.S. troop buildup in Iraq.” It continues: “Lt. Col. John Nagl, 41, is a co-author of the Army's new manual on counterinsurgency operations, which has been used heavily by U.S. forces carrying out the strategy of moving off big bases, living among the population and making the protection of civilians their top priority.”

Fueling the Future Force is written with an understanding of frontline operations, and that these are fuel intensive. But it constantly repeats that the military must find a way to transition from a dependence on petroleum within 30 years. This is how the report begins:

The U.S. Department of Defense (DOD) must prepare now to transition smoothly to a future in which it does not depend on petroleum. This is no small task: up to 77 percent of DOD’s massive energy needs – and most of the aircraft, ground vehicles, ships and weapons systems that DOD is purchasing today – depend on petroleum for fuel. Yet, while many of today’s weapons and transportation systems are unlikely to change dramatically or be replaced for decades, the petroleum needed to operate DOD assets may not remain affordable, or even reliably available, for the lifespans of these systems.

To ready America’s armed forces for tomorrow’s challenges, DOD should ensure that it can operate all of its systems on non-petroleum fuels by 2040. This 30-year timeframe reflects market indicators pointing toward both higher demand for petroleum and increasing international competition to acquire it. Moreover, the geology and economics of producing petroleum will ensure that the market grows tight long before petroleum reserves are depleted. Some estimates indicate that the current global reserve-to-production (R/P) ratio – how fast the world will produce all currently known recoverable petroleum reserves at the current rate of production – is less than 50 years. Thus, given projected supply and demand, we cannot assume that oil will remain affordable or that supplies will be available to the United States reliably three decades hence.

The report does not contain the term peak oil – the hypothesis that oil production will soon reach its ultimate limit due to geological considerations – but the above is a clear reference to it. The background is all here: increasing demand, geological constraints and resulting supply-and-demand price shocks.

Fueling the Future Force has already been perceptively criticized by journalist Mason Inman for focusing on reserves-to-production ratios (R/P ratios) and making misleading claims about biofuels, on the Failing Gracefully blog. While I accept that R/P ratios may indeed be “one of the favorite argumentative tools used by people who do not understand oil production,” being prone to simultaneously overestimate extractable oil and underestimate future demand, using them does at least enable the report authors to replace all those oil depletion charts with a good ole’ map. Seeing the countries of the world coloured different tones is a more immediate visual than bell charts and wavy lines on a graph. Above all it enables the writers to hammer home some stark geopolitical realizations:

Ominously, many major suppliers to the United States could produce their current proved reserves in fairly short time horizon if they continue at the present rate: For example, the R/P ratio for Canada (the top supplier to the United States in 2009, providing more than 20 percent of total oil imports) stands at about 28 years today. For the United States itself, it is 11 years. The only countries with current R/P ratios longer than 75 years are Venezuela, Iran, Iraq, Kuwait and the United Arab Emirates.

What it’s really saying, then, is pick your allies carefully. Senior military and politicians reading this report will be all too painfully aware that China is building close relationships with Venezuela – expecting to import 1 million barrels a day by 2012, the same as the US does right now – and Iran, and is currently investing heavily in Iraq, with long-term investments throughout Kuwait and the United Arab Emirates. Meanwhile, the main US oil ally is Canada which, according to R/P thinking, is only good for three decades. . . But forget the wonky R/P math and see the big picture. China is strategizing over the long term while Western leaders are looking at their feet and beginning to mutter about a coming spike in fuel costs.

This is not an attempt to rehabilitate reserves-to-production ratios so much as observe that the authors possibly used them for tactical reasons: to sidestep the entire notion of peak oil – which is tough to explain at the best of times – and deliver a visually strong message (right) about the last remaining oil being in the hands of the bad guys. Even if it does involve the frankly bizarre suggestion that, based on current usage the world would entirely run out of oil in 45.7 years. (Any peak oil writer would get laughed out of town for making that kind of suggestion.)

The authors of Fueling the Future Force are smart enough to know that when you are delivering a message no-one wants to hear you have to choose your battles very carefully – so out goes peak oil.

And what it has to say is quite stark: the Department of Defense’s “petroleum dependence” is a “long-term vulnerability.” Basically:

DOD cannot be assured of continued access to the energy it needs at costs it can afford to pay over the long term. Today DOD meets its energy needs primarily through petroleum, which accounts for more than 77 percent of DOD’s total energy use. However, both demand and supply trends are likely to raise the price and perhaps even limit the availability of petroleum.

The military is an intensive petroleum user, accounting for “132.5 million barrels in petroleum sales in fiscal year 2008, totaling nearly 18 billion dollars.” As it currently stands, “every dollar increase in the price of petroleum costs DOD up to 130 million additional dollars.”

I've taken a table from the report, DOD Energy Consumption by Fuel (left), which breaks down US military fuel use. It shows that the military is beginning to use renewable energy and other fuels, but that petroleum is king. I'm sure the percentage figure for petroleum would be much higher if the chart was to focus on operational matters.

It gets worse when you consider that petroleum use is structurally built into the system. “The majority of the vehicles, aircraft and weapons systems that DOD purchases in the near term will be designed to be fueled by petroleum, as are most of DOD’s current assets. Most of these systems will remain in commission for decades before replacements are seriously considered.” And even more technically complex when you consider that half of the military’s petroleum use is aviation fuel, for which no completely renewable alternatives exist. (The airforce is working on a 50/50 alternative fuel blend.)

What the US military needs is a direct replacement for gasoline, “drop-in fuels” that can be used in its existing vehicles. Preferably something homegrown, but also universal enough that it can be sourced overseas, and something that its allies also use. With that in mind, Fueling the Future Force turns its attention to biofuels – and becomes downright cornucopian:

There is an array of reliable, renewable fuels that should be considered as alternative supplies to petroleum, including multiple generations of biofuels. Biotechnicians have long proven the technical ability to produce hydrocarbon equivalents to fossil fuels, including the jet fuel blends that DOD requires. Efforts by the National Laboratories, academia and the private sector are focusing on basic science that will enable more efficient use of second-generation biological fuel sources (made from non-food crops) by increasing efficiency in processing plant materials while retaining net energy gains, and by overcoming other technical hurdles. Others are leap-frogging beyond second-generation biofuels to fuels derived from algae. Still other options include displacing petroleum by using electricity or natural gas to power transportation, and using distributed renewable energy at overseas and forward operating bases to displace petroleum in powering generators. It is encouraging that growth in renewable energy supply availability frequently outpaces expectations. Ethanol production grew 164 percent between 2002 and 2006, and biodiesel production expanded from 1 trillion Btu to 32 trillion Btu over the same period.

Fueling the Future Force is quite rightly, if a little indirectly, critical of the so-called first-generation biofuels, created from food crops, which it states increase food prices and, in the case of “corn-based ethanol” may well lead to more greenhouse gas emissions than current fuel sources – a roundabout way of calling it an energy-loser.

But the second-generation alternative is not "reliable," as Fueling the Future Force claims, and not all that different from the first attempt at biofuels. Second-generation biofuels may sound ideal, being made from biomass – stems, leaves and husks, various non-food crops, and industry waste such as wood pulp and the residue from fruit pressing – that is fermented into alcohol. But, really, it’s just moonshine. A 2007 Biofuel Watch report seems to sum it up, Second Generation Biofuels: An Unproven Future Technology with Unknown Risks. It reviews the technology as unworkable, and notes it would require an unsustainable level of highly intensive farming that would “put intense pressure on land both for food production and communities, and for natural ecosystems. . . [it] is not close to becoming commercially available, and faces technical barriers which may not be overcome in the foreseeable future.”

It’s a tough sell to suggest that the 132.5-million-barrel-a-year US military can maintain its imperial adventures on alcohol made from waste plant products. It’s too good to be true. Frankly the report authors should know better than to make that suggestion, although I suggest it was through desperation rather than inspiration.

The German report, Implications of Resource Scarcity on National Security, is far more direct. I get the impression that Fueling the Future Force is written for the Obama administration, as a public way of moving the energy debate forward. It contains the following plea for leadership:

It is important to note that this challenge is not distinct to DOD: Due to relatively (and often artificially) cheap energy and the normalization of consistent and abundant supplies, the country broadly undervalues the true cost of energy and therefore faces few incentives to change its behavior. Change will take time, and it will involve consistent leadership and public education. A culture that recognizes the cost of failing to change the energy status quo will help facilitate DOD’s smooth transition to more sustainable longterm energy use. It will also have ripple effects for the country.

After all, it’s not just the US military that will need to transition away from oil as we lurch towards a decidedly uncertain future. It’s time for some leadership.

Oil analyst tells Forbes: Peak oil by 2017

2010-09-29T21:02:00.000-07:00

Respected oil analyst Charles Maxwell has told Forbes – and with it the North American business establishment – to brace itself for peak oil by “2017 or 2018.”

Maxwell (left) is rapidly becoming the new Matthew Simmons, an establishment peak oil whistleblower. Simmons, present when the term peak oil was coined, went on to obtain a degree of mainstream respect for the concept, based on the pioneering work of M King Hubbert. In the Forbes interview, Maxwell suggests “around 2015, we will hit a near-plateau of production around the world,” with peak oil experienced within two to three years of this.

Much of the reaction to this isn’t over what was said – Maxwell has voiced similar peak oil warnings previously – so much as where it was said. Forbes is not noted as a friend of the peak oil hypothesis, which states geological restrictions mean there will be a time of maximum oil output and that, despite investment and innovation, production will subsequently diminish. Unconventional oil supplies such as Canadian oilsands will not be able to prevent this, despite the hype. Canada’s Prime Minister may claim “Alberta's tar sands are second only to Saudi Arabia as the world’s largest oil reserve,” but these are “energy- and capital- and time-intensive” and have lousy flow rates – output cannot be scaled up to meet the ravenous global demand for oil.

An item in Oil Price, with the clear headline Respected Oil Analyst Forecasts Peak Oil by 2017, notes with surprise that:

Respected oil analyst and oil industry veteran Charles Maxwell (nicknamed the ‘Dean of Oil Analysts’) has forecast peak oil by 2017or 2018:

His prediction is not so remarkable, as is where he made his prediction. The prediction was in Forbes, which has often scoffed at the notion of a near-term peak.

But a number of disparate commentators, working independently, are predicting a tightening in oil supplies perhaps as early as 2011. Reports published this year by a UK business consortium, the US military, insurers Lloyds, Kuwait University engineers, the German military and an Australian think tank collectively point to a coming supply crunch between 2012 and 2015. Together, they refer to a list of issues including oil industry underinvestment, declining new discoveries and aging oilfields - at a time of surging global demand.

According to the International Energy Agency’s Sept. 10 Oil Market Report, global demand is predicted to reach 86.6 million barrels per day in 2010, and then 87.9 million barrels per day in 2011 – passing the all-time high of 86.9 million barrels per day established in 2008 before the global economic downturn. Soaring demand is being pushed by China, the world’s fastest growing major economy and its largest energy consumer, and India, the world’s second-fastest growing economy.

The IEA’s chief economist Fatih Birol who, as I’ve mentioned previously, has been repeating the phrase the era of cheap oil is over at any chance he gets, was recently quoted talking about non-Opec oil “reaching a peak” and saying that “strong real demand growth and lack of investment in production [suggests that] in 2013, 2014 we may well see higher prices than we have seen in the recent past.”

And UK Energy Secretary Chris Huhne earlier this month spoke of a possible doubling in the price of oil, and a subsequent oil shock.

It’s hard to escape the impact of the repetition of the same few projected dates for the onset of peak oil by independent commentators. Which adds credence to the comments of Charles Maxwell, Weeden & Co.’s senior energy analyst - he's clearly not going out on a limb, after all. The Forbes interview, Bracing For Peak Oil Production by Decade's End, quotes him saying:

A bind is clearly coming. We think that the peak in production will actually occur in the period 2015 to 2020. And if I had to pick a particular year, I might use 2017 or 2018. That would suggest that around 2015, we will hit a near-plateau of production around the world, and we will hold it for maybe four or five years. On the other side of that plateau, production will begin slowly moving down. By 2020, we should be headed in a downward direction for oil output in the world each year instead of an upward direction, as we are today.

And at around 2015, we will be unable to produce the incremental barrel in the global system. So a tightness of supply will begin to be felt. Let's say in 2013, we may produce 1% more oil than we did the year before and then if we have a demand growth of 1¼% in 2013, we'll be very slightly tightening the system.

The difference between supply and demand is not going to be very much at first. It would not normally cause a big rise in price. On the other hand, in 2014, that tightness begins to grow and it is now a trend. By 2015 perhaps we're only able to produce 0.50% more with about 1.25% higher demand, so that we're 0.75% short. And now we have to raise prices enough to stop some people from using that oil because it is actually not available.

He suggests that oil “supply and demand are now in rough equilibrium and that means that prices are in a range between about $69 on the bottom and about $86 on the top,” but supply will most likely begin to turn tight “around 2013 or 2014.” It will naturally be followed by a price spike – and, he suggests subsequent windfall profit taxes on oil companies – and a global scramble to find alternatives to oil.

That begins to scare people, since they can look ahead and see that the issue is not going to be resolved quickly, since you have to find the oil many years in advance of being able to produce it. We just haven't found enough oil for a number of years, so this problem is now beyond the reach of some big, major discovery that suddenly would provide us with a sufficiency. And so far, we have no technological breakthrough to assist us.

So we're going to have to make a switch from using oil to using more coal or more natural gas or more nuclear or other alternatives. But most alternative supplies (such as hydropower) can't be expanded quickly. Solar power is too small to be meaningful. Wind power, again, is too small, and most of the good places for wind have already been taken.

UK government's oil shock warning

2010-09-28T13:01:00.000-07:00

A UK government minister is preparing for a coming global oil shock – a possible doubling of the price of oil.

As Monday’s UK Daily Telegraph newspaper reported, "Energy Secretary, Chris Huhne, told the Liberal Democrat conference last week that in a world facing economic "shocks" it was possible that the price of oil would double from its current level of about $75 a barrel and that he had ordered his officials to look at the impact of a Seventies-style oil price spike on the British economy."

According to Huhne (right), the UK government is creating an internal report on "what the impact. . . might be in terms of British business, businesses that have nothing to do with energy." This evaluation of the likely economic fallout of oil price volatility follows on from reports that the UK government has been "canvassing views from industry and the scientific community about peak oil," stated an August 2010 item in the Guardian newspaper. This stated that the Department of Energy and Climate Change was refusing to comply with a Freedom of Information request for peak oil "policy documents," possibly relating to a 2009 secret "peak oil workshop" involving government, Bank of England and Ministry of Defence officials.

A slew of reports published this year have pointed to a coming tightening of global oil supplies. I recently considered six reports written by groups as wide ranging as UK business leaders, the US military, insurers Lloyds, Kuwait University engineers, the German military and an Australian think tank. Taken as a whole they refer to aging oilfields, oil industry underinvestment, the limited output of unconventional sources such as oil sands, increasing global demand and the possibility of the world being close to peak oil, the geological natural maximum output. The point is, you don’t have to believe in peak oil theory to see a coming oil supply crunch. These reports didn’t all agree on the issue of peak, but nevertheless pointed to a supply crunch between 2011 and 2015.

Against this, the International Energy Agency is forecasting record world oil demand, and warning that the “era of cheap oil is over.”

It is no coincidence, then, that the leaders of China and Russia celebrated the completion of a 999-kilometer cross-border oil pipeline, on Monday. According to Xinhua, the official news agency of the government of the People's Republic of China: "The pipeline is part of a bilateral loan-for-oil deal reached in February 2009 between the two countries. Under the deal, China makes a $25-billion-long-term loan to Russia while Russia supplies China with 300 million tons of oil through pipelines from 2011 until 2030."

It’s a mutually beneficial relationship between the two countries. (Russian President Dmitry Medvedev and Chinese Vice President Xi Jinping pictured left.) Russia needs new markets for its crude exports and investment – while China’s growing energy requirements are clear for all to see. In March 2010 the New York Times reported that “Saudi Arabia exported more oil to China than to the United States last year,” and in July the Wall Street Journal announced that China had overtaken the United States to become the world’s number one energy consumer.

China’s oil imports were reportedly up 22.6 per cent, year-on-year, in the first eight months of 2010, with the entire Asia Pacific region predicted to increase its oil use "to around 30.21 million barrels per day by 2014." (It was 21.42 million barrels per day in 2001, and expected to be 27.15 in 2010.)

I'll look at the changing geopolitics of oil use in my next post.

Book review: Peak of the Devil

2010-09-23T11:01:00.000-07:00

It has the greatest title of any peak oil publication I’ve yet come across – but does Peak of the Devil live up to the promise?

The 232-page book will be published by Satya House Publications in October 2010, retailing at $14.95. Chip Haynes, longtime online peak oil writer, has taken the unusual step of creating a beginner’s guide, broken down into 101 chapters of between 400 and 500 words. With at least one cheesy gag in each chapter.

But then, as the book states: “Never lose your sense of humour.”

From the outset, I have to say that “artist, writer, juggler and cyclist” Haynes has produced a decidedly eccentric publication, even in a field so acquainted with the aluminum foil hat brigade. But I must make it clear that there are no wacky ideas in Peak of the Devil. It’s exceptionally well thought-out and balanced: while observing that the world is “over-populated” for an immediate future of less available oil – and consequently less food – it reassures us that life and indeed culture will go on. “Every symphony Beethoven ever wrote can be played without using a drop of oil. . . people really did have lives, full happy lives, before oil.” Evaluating cornucopian claims of energy alternatives and the doomer Mad Max outlook, Haynes suggests “. . .read all you can and don’t forget, the truth is probably somewhere in the middle.”

Haynes succinctly states a couple of peak oil points that I’ve been struggling to articulate for a long time: the best place to be when oil supplies get tight is where you are living right now, and to look to the past for clues of what to expect in the future. Peak oil “will not be, as some have predicted, a return to the Dark Ages,” he writes, suggesting we should work with our neighbours rather than think about moving to the countryside or even attempting to live, survivalist-style, in the woods – albeit with hints about those out in the ‘burbs being advised to move closer to town. So it’s a case of make friends and prepare for a life of low energy and hard physical work. Haynes observes that probably the safest assumptions we can make about a future of diminishing oil availability come from looking back to the past. As he calls it: “. . . the end of the 21st century is going to look a lot like the end of the 19th, but with better healthcare and stronger child labor laws, if we are lucky.”

It’s not the content but the telling that’s eccentric. The gags, short chapters and repetition of phrases like “no, really they did” to make a point can be most politely described as a love-it-or-hate it approach. At times it is laugh-out-loud hilarious. Sometimes it’s like being cornered by a drunk.

To quote from a representative paragraph:

The very best we can hope for is a smooth and orderly transition from the modern oil powered world we have now to a stable world of little or no oil in the next hundred years or so. Human nature being what it is, I don’t look for that smooth and orderly part to happen so much. It would be comforting to think that we can change our lives without disruption and conflict; that we can all work together toward this one common goal and put aside our differences and minimize the trauma and drama. It would also be nice if there were no calories in chocolate and we could eat all we wanted without gaining weight. Again, don’t look for that to happen either. Peak oil, and the aftermath of that peak, is going to cause traumatic shocks that will unsettle virtually every aspect of our lives, no matter where you live.

You either think the chocolate reference brings the topic down to earth or else should have been fixed at the editing stage. Haynes is a great writer, but humour is probably the toughest gig in town. Humourists like PJ O’Rouke adopt more of a detached air; it’s impossible to be both earnest and funny.

This is all stylistic oversensitivity on my behalf. My main criticism is the book’s opening. Haynes (right) does not adequately describe peak oil. He refers to it as “the point where the world’s oil supply, well, peaks.” While he does subsequently talk about M King Hubbert, he holds off on more extensive definition of peak oil for the conclusion. I’d suggest the book should have opened with the conclusion, and built from there. And while we’re at it, the first few chapters would benefit from a few more facts and figures to back up the author’s claims and give the reader a sense of the urgency of the peak oil problem.

His publicist bills the book as “Chip Haynes answers 100 of the most significant questions about peak oil with an educated and quirky sense of humour. . .” And yes, he does. Peak of the Devil should be in every public library and recreation centre. It’s a great introduction to the topic. For all its flaws there is much genius within the pages, a great deal of perceptive and subtle thinking. It’s just that being the contrarian that I am, I’d say that it works more as an argument against the doomer mindset than as a peak oil primer – read it with that in mind and you will be impressed. Above all it’s refreshing not to have to read suggestions of moving to a small market town to avoid the worst of the post-peak meltdown.

Peak of the Devil has both a blog and a static website, and both are worth a visit.

I’ll give Haynes the last words: “Peak oil changes everything, and few things will change for the better. We’re looking at a long, painful transition period as we are all forced to adapt to new lives of much less oil, energy, food and resources.”

Battle of the think tanks in peak oil reports

2010-09-10T15:02:00.000-07:00

Two think tanks, on different sides of the world, published peak oil reports earlier this month – generating very different levels of media and web coverage.

A draft study prepared for the German military was leaked at the same time Australia’s “most influential progressive think tank” published its own findings. Needless to say, when words like leaked, military and peak oil are put into a headlines, you can guarantee a degree of interest – meanwhile, the Australian report came out shortly after the nation’s August 21 federal election, too late to shape the debate.

Both were published on September 1, but it’s only the German report that seems to have received global attention (it actually came out in German-language media the on August 31, but translation apparently took a day). It would be a pity if the Australian version is overlooked, as it provides a remarkably balanced overview of the whole peak oil debate.

The German report comes from the Future Analysis department of the Bundeswehr Transformation Center, a “think tank tasked with fixing a direction for the German military,” according to the account in Der Speigel. This continues:

The team of authors, led by Lieutenant Colonel Thomas Will, uses sometimes-dramatic language to depict the consequences of an irreversible depletion of raw materials. It warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the "total collapse of the markets" and of serious political and economic crises.

The study. . . was not meant for publication. The document is said to be in draft stage and to consist solely of scientific opinion, which has not yet been edited by the Defense Ministry and other government bodies.

Of course, it’s interesting to note that it hasn’t been edited by the government, which leads to a great deal of speculation and possible comparison with a recent report published by the US military. The Joint Operating Environment 2010, created by the United States Joint Forces Command in February sidestepped the peak oil issue to suggest a supply shortfall possibly as early as 2012 due to underinvestment in the oil industry. That, of course, had been edited by the government!

The Bundeswehr report states:

In the past, resources have always triggered conflicts, mostly of regional nature. For the future, the authors expect this to become a global problem, as scarcity (mainly of crude oil) will affect everybody.

The authors confirm multiple views on Peak Oil timing and concede that there will be Peak Oil eventually. The study isn’t about positioning the problem on a timeline, but instead about the consequences of a peak. They expect major consequences with a delay of 15-30 years after the peak has hit.

It considers the instability of the Middle Eastern oil producing nations, shifting geopolitical strategies, and likely coming reduction in free market mechanisms with a coming “rise in more protectionism, exchange deals, and political alliances between suppliers and customers.” We will subsequently be seeing a very different international picture, with a likely “reduction of the importance of ‘Western values’ related to democracy, and human rights in the context of politically motivated alliances, which increasingly are driven by emerging economies such as China.” Meanwhile, there will be a global crisis in transportation, both personal mobility and shipping goods. This means “food particularly might become a critical issue for countries that are a) highly dependent on imports and b) are susceptible to price-increases of food products, particularly affecting Africa, parts of Asia and Latin America, and the Middle East.” Reduced standards of living will make many countries less stable. It all adds up to “systematic risks”:

In addition to the gradual risks, there might be risks of non-linear events, where a reduction of economic output based on Peak Oil might affect market-driven economies in a way that they stop functioning altogether, leaving the possibility of a relatively steady downward trajectory.

Such a scenario could develop through an initially slow decline of trade and economic activity, combined with higher stress on government budgets from lower tax income, higher social cost and growing investment into alternative technologies.

Investment will decline and debt service will be challenged, leading to a crash in financial markets, accompanied by a loss of trust in currencies and a break-up of value and supply chains – because trade is no longer possible. This would in turn lead to the collapse of economies, mass unemployment, government defaults and infrastructure breakdowns, ultimately followed by famines and total system collapse.

(It's available in its original, unstranslated, form here.)

Meanwhile, the “policy brief” published at the same time day by the Canberra-based Australia Institute strikes a less geopolitical, but not contradictory, tone. Running on empty? The peak oil debate provides a valuable overview of diminishing oil reserves, presenting a fair, balanced and accurate précis. Its great strength is its balance between “what the optimists say” and the views of “peak oil doomsayers,” representing all viewpoints. (See chart, right, of historical oil prices.)

The report begins by defining peak oil, “the point in time at which the worldwide production of crude oil extraction will be maximized” and stating that the whole debate is really over when this will happen and what, if anything, should be done ahead of time. It states:

Moreover, as the IEA has argued, the world is currently embarked on a fossil-fuel future that is patently unsustainable from an environmental perspective, quite apart from the fact that rates of extraction will exhaust fossil-fuel resources far too quickly, thus ignoring the needs of future generations.

World economies are built on oil. The question is what will happen when it runs out, or merely becomes difficult and very expensive to procure. The probable answer is not an acceptable one.

As occurred in response to the OPEC oil shock of the 1970s, skyrocketing oil prices are likely to result in severe disruption to economies, with central banks raising interest rates to slow runaway inflation, people out of work, famine, hunger and serious civil unrest. It is a scenario that governments and their constituents should be attempting to avoid at all costs but so far very little has been done to prepare for or contend with the eventuality.

The report’s background on oil discovery and projected future extraction is essential reading for anyone following the debate. As ever, you get a concise overview of the facts, followed by a fair account of varying interpretations of where it’s all going:

World oilfield discoveries peaked in the 1960s at around 55 [gigabarrels] Gb a year, but since then the rate of discovery has fallen and between 2002 and 2007, fewer than 10 Gb a year have been discovered. To put that in perspective, current demand is 31 Gb a year. Oil is being used at a faster rate than new supplies are being found, although improvements in the conversion of resources into reserves, due to a better understanding of resources and the use of better extraction technologies, is helping to offset this. Production first surpassed new discoveries around 1985.

This leads to considerations of economists “sanguine view that when the price is high enough, investment in both exploration and extraction will become more profitable, allowing more oil to be found and extracted.” Thus we keep hearing that the world essentially has limitless oil, an opinion “based on experience gained with conventional metal resources like copper or gold, where progressively lower grades of the resource become economically exploitable as prices rise.” But we should not assume this applies to oil, as it continues:

However, recent circumstances have determined that even an enormous increase in the oil-drilling effort may not lead to increased production in a mature oil-producing region like the US. In addition, the average recovery factor (the amount recovered as a percentage of the resource), currently around 35 to 40 per cent, has proved very difficult to increase, although in some fields, recovery factors can be as high as 70 per cent. A further fundamental limitation on the capacity to increase supply by relying on lower-quality sources is the deterioration in the energy balance—that is, the extraction of these lower-quality stocks ultimately uses more energy than the end product can deliver.

The gap between discovery and production is illustrated, left.

This report gives a brief overview of unconventional sources of oil such as oil sands and shale oil (“Oil from these sources is more difficult and more expensive to extract than conventional oil and is often highly viscous with a thick, glutinous consistency that does not flow readily. Shale oils are a precursor to oil and need further treatment.”) and deepwater. Personally, I’d like to have seen more here, considering how central unconventional sources are to any argument that puts back the onset of peak oil. Too many times I’ve seen statements suggesting that Canada has oil reserves second only to Saudi Arabia, which fail to consider the flow rates and considerable investment required. This is an area that deserves further consideration.

It also gives a few paragraphs to the growing concern that “major exporting countries are reserving oil for domestic use.” While it gives useful information about government subsidies around the world leading to such concerns (“In 2007, energy-related consumption subsidies in 20 non-OECD countries, which account for over 80 per cent of non-OECD energy demand, amounted to $310 billion”) it fails to mention demographic issues such as the population explosions in many oil producing countries – a rare oversight in such an otherwise well considered report. For instance, there are many that see the Saudi Arabian nation as economically weak and beset with serious domestic political problems.

While I’m being critical, its section looking at a likely date for the onset of peak oil also deserves more space. It cites the view of “peak-oil advocates” that that the world’s super-giant oilfields are mostly “in decline with an average depletion factor of half; that is, half the extractable resource is already used up,” and then goes on to list a number of contradictory official suggested dates for peak oil. But the section would really benefit from a few paragraphs summarizing the whole area. Having said that, there is no editorializing in this report – it’s about presenting the arguments in a fair and balanced way, and leaving the reader free to reach their own conclusions. The danger of this is that the urgency of the issue can become overlooked and the debate muddied quite cynically with organizations that have a political agenda. (The asbestos industry came up with this, big tobacco perfected it, and now the tame scientists are working for the climate change deniers.)

Having said that, Running on empty? is an impressive publication that has much to recommend it. I am being inconsistent in praising it for being so concise, while criticizing it for not giving more coverage to some areas – after all, it’s not as if it misses out any major aspect of the debate. Its great strength is the listing of the various opinions on future oil production – from cornucopians to doomsayers – complete with counterarguments. It’s very useful for someone looking for an overview that offers a précis without being a tabloid oversimplification. As such, Running on empty? is an excellent introduction to the field that is also useful to more knowledgeable people looking for a concise précis of the various issues.

Exponentially on purpose: a century-and-a-half of ignored warnings

2010-09-03T11:20:00.000-07:00

The peak oil debate is a case of history repeating itself: people have been ignoring warnings about exponential use of finite resources for a century and a half.

The concept of peak oil, based on the pioneering work of geologist M. King Hubbert (right), states that world oil production will one day reach a natural limit due to geological factors. As he observed, “although production rates tend initially to increase exponentially, physical limits prevent their continuing to do so.” In other words, oil is a finite resource, and regardless of technology and investment, output cannot go on increasing year after year. Geology trumps economics, although the latter explains what will happen to oil prices once output begins to decline.

But no-one wants to hear the argument. Even International Energy Agency forecasts of record world oil demand, and warnings that the “era of cheap oil is over” made barely a ripple in the media. (In fairness, they are not talking about peak oil so much as the lack of investment in the oil industry causing spare capacity to slump – but it still means economy-busting oil prices are just around the corner.)

It would seem to be wholly sensible, conservative even, to suggest that exponential growth cannot go on forever. But whenever anyone does say this out loud, they find themselves routinely disparaged and outright misrepresented in the media. But then, the naysayers are well practiced. The arguments go back to the Victorian era.

I was trying to put together a peak oil theory timeline, and found that kept coming up against some core ideas. Similar arguments about resource depletion, and rebuttals, keep coming around.

In 1865, economist William Stanley Jevons posed The Coal Question; an Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of Our Coal Mines. At the time, the United Kingdom administered the world’s largest empire, some 9.5 million square miles; its industries led the world, and the nation set the standard for the international monetary system. Jevons made the then startling revelation that despite all the patriotic fervor, one factor was behind the UK’s global dominance: cheap coal. Take that away, he conjectured, and the nation’s factories and navy would lose their competitive advantage. Coal, after all, is a finite reserve. Jevons noted (left) that as demand for coal was growing every year, a point would soon come when faltering output would push prices up. He calculated that with annual coal output at 100 million tons in 1865, and increasing at the rate of 3.5 per cent per year, the nation would have to produce more than 2.6 billion tons a year by 1965. It’s simply not possible.

He also linked the nation’s growing population, rising at 10 per cent each decade, to increasing coal production, rising at 40 per cent each decade, and suggested that a slump in coal output would lead to a slump in prosperity. He was promptly accused of being Malthusian. (The Reverend Thomas Malthus published six editions of An Essay on the Principle of Population between 1798 and 1826, observing “the increase of population is necessarily limited by the means of subsistence.” He saw population as prone to grow faster than the means of producing food, which he saw as somewhat static. Clearly, food production has changed out of all recognition since his day.)

Although Jevons considered other energy sources, he clearly missed the coming rise of oil, for which he has subsequently been ridiculed. (UK coal output actually peaked in 1913, earlier than he conjectured, and its oil in 1999.) But what is often missed is that Jevons opened the energy debate, transformed the field of political economy and, while he was at it, made a striking observation for which he will likely always be remembered: efficiency measures drive up consumption. Jevons noted that innovations in steam technology actually enabled greater use, particularly in industrial applications like smelting iron. Improvements enable bigger engines, which in turn require more fuel. This, known as Jevons paradox, can be seen today, in every SUV and oversized luxury sedan on the road. His observations that cheap energy put the UK ahead, rather than day’s officially sanctioned notions of racial superiority, can be traced through to recent publications such as Jared Diamond’s Pulitzer-prize-winning masterpiece Guns, Germs, and Steel.

In turn, geologist M. King Hubbert made his name by using similar methodology to look at his era’s dominant sources of energy.

Hubbert’s 1949 paper Energy from Fossil Fuels (pdf of original here) considered oil, natural gas and coal, “an essentially fixed storehouse of energy, which we are drawing upon at a phenomenal rate.” It states that plotting production against time produces a curve: "Thus we may announce with certainty that the production curve of any given species of fossil fuel will rise, pass through one or several maxims, and then decline asymptotically to zero. Hence, while there is an infinity of different shapes that such a curve may have, they all have this in common: that the area under each must be equal to or less than the amount initially present."

Reading this 60-year-old paper today, it’s hard not to be struck by how modern it sounds, with references to the Athabasca Tar Sands and shale oil, the role of fossil fuels in enabling an unsustainable population, the future decline of fossil fuel and mineral resources, and a hope that the world can one day harness solar power. Or that while our use of fossil fuel energy seems normal to us, it actually constitutes “but a moment in the total of human history”:

The release of this [fossil fuel] energy is a unidirectional and irreversible process. It can only happen once, and the historical events associated with this release are necessarily without precedent, and are intrinsically incapable of repetition.

. . . [T]he events which we are witnessing and experiencing, far from being “normal,” are among the most abnormal and anomalous in the history of the world. Yet we cannot turn back; neither can we consolidate our gains and remain where we are. In fact, we have no choice but to proceed into a future which we may be assured will differ markedly from anything we have experienced thus far.

Among the inevitable characteristics of this future will be the progressive exhaustion of the mineral fuels, and the accompanying transfer of the material elements of the earth from naturally occurring deposits of high concentration to states of low concentration dissemination. Yet despite this, it will still be physically possible to stabilize the human population at some reasonable figure, and by means of the energy from sunshine alone to utilize low-grade concentrations of materials and still maintain a high-energy industrial civilization indefinitely.

Of course, in 1949, the world’s energy resources appeared limitless and he was ignored. By 1956 Hubbert had the mathematical formula to back it all up, published as Nuclear Energy and the Fossil Fuels (available in an easier-to-read format here) This is immediately striking for the “approximations of the future production curves for the various fossil fuels,” the bell charts dismissively referred to at the time as Hubbert’s pimple. (It’s also worth noting that this report avoids mention of global population growth, presents mathematical formula to back up the claims, and ends on an upbeat note, praising the future prospects of nuclear power – it needn’t have languished for the best part of two decades before people took note.)

Nuclear Energy and the Fossil Fuels begins with a lesson on the nature of exponential growth: “Goal production in the United States from 1850 to 1910 increased at a rate of 6.6 percent per year, with the production doubling every 10.5 years. Crude-oil production from l880 until 1930 increased at the rate of 7.9 percent per year, with the output doubling every 8.7 years.” Meanwhile, world coal and oil demand ran a little slower, doubling ever 16 and 10 years, respectively. Hubbert continues:

These facts alone force one to ask how long such rates of growth can be kept up. How many periods of doubling can be sustained before the production rate would reach astronomical magnitudes? That the number must be small can be inferred from the fact that after n doubling periods the production rate will be increased by a factor of 2n. Thus in ten doubling periods the production rate would increase by a thousandfold; in twenty by a millionfold. For example, if at a certain time the production rate were 100 million barrels of oil per year - the U.S. production in 1903 - then in ten doubling periods this would have increased to 100 billion barrels per year. No finite resource can sustain for longer than a brief period such a rate of growth of production; therefore, although production rates tend initially to increase exponentially, physical limits prevent their continuing to do so.

This rapid rate of growth shown by the production curves makes them particularly deceptive with regard to the future length of time for which such production may be sustained. For example, coal has been mined continuously for about 800 years, and by the end of 1955 the cumulative production for all of this time was 95 billion metric tons.

It is somewhat surprising, however, to discover that the entire period of coal mining up until 1925 was required to produce the first half, while only the last 30 years has been required for the second half.

Similarly, petroleum has been produced in the United States since l859, and by the end of 1955 the cumulative production amounted to about 53 billion barrels. The first half of this required from 1859 to 1939, or 80 years, to be produced; whereas, the second half has been produced during the last 16 years Based on estimates of coal, natural gas and oil reserves, Hubbert suggested dates for “the ultimate peak of production” for each.

With regard to global crude oil production, Hubbert postulated that “the ultimate potential production is taken to be the 1250 billion barrels,” and that “the maximum rate of production will be about two and one-half times the present rate, which places the date of the peak at about the year 2000. As in the case of coal, variations of this assumed maximum rate will advance or retard the date of the culmination.” Hubbert suggested domestic US oil production would peak in either 1965 or 1970, depending on estimates of the amount of reserves (150 billion barrels versus 200 billion, respectively.)

Clearly, despite what the critics claim, Hubbert was not dogmatic about global peak coming in 2000, because he stated it depended on the rate of production. Also, despite what I’ve read elsewhere, the paper considers “Oil Shales and Tar Sands,” and that coming technological advances may mess around with the symmetry of his charts. “Improved methods of secondary recovery will probably make the rate of decline of the oil production curve less steep than is shown here, but are not likely seriously to postpone the date of the culmination.”

Hubbert’s message seem to have been deliberately marginalized in subsequent media accounts. I'd suggest his key points are:
1. Demand for oil is growing exponentially, and output cannot go on at this rate forever;
2. Based on current estimates of reserves and demand, you can plot the likely peak of production (but this is a model based on moving variables, and so liable to change);
3. Because of exponential production, even finding an extra 50 billion barrels of oil in the US (“an amount equal to eight East Texas oil fields”) only postpones “the date of culmination” five years.

This misrepresentation is nothing as to what has befallen the 1972 publication of The Limits to Growth, a best-selling paperback that grew out of meetings of an obscure global think tank, the Club of Rome. Limits to Growth is based upon computer modeling of global population, industrialization, pollution, food production and resource depletion, which, once again, shows that finite natural resources cannot endure indefinite exploitation. It sold 12 million copies in more than 30 translations, making it the best-selling environmental book in world history. And the most unfairly reviled.

It was the late, great Matthew Simmons who connects peak oil theory and the equally controversial Limits to Growth. His essential 2000 ‘energy paper' Revisiting The Limits to Growth: Could The Club of Rome Have Been Correct, After All? contains stark observations about the ongoing vitriolic media misrepresentation of Limits to Growth that can subsequently be applied to peak oil theory. The same process of vilification is at work. As he states:

Over the past few years, I have heard various energy economists lambast this "erroneous" work done. Often the book has been portrayed as the literal "poster child" of misinformed "Malthusian" type thinking that misled so many people into believing the world faced a short mania 30 years ago. Obviously, there were no "The Limits To Growth". The worry that shortages would rule the day as we neared the end of the 20th Century became a bad joke. Instead of shortages, the last two decades of the 20th Century were marked by glut. The world ended up enjoying significant declines in almost all commodity prices. Technology and efficiency won. The Club of Rome and its "nay-saying" disciples clearly lost!

The critics of this flawed work still relish in pointing out how wrong this theory turned out to be. A Foreign Affairs story published this past January, entitled Cheap Oil, forecast two decades of a pending oil glut. In this article, the Club of Rome's work was scorned as being the source document which led an entire generation of wrong-thinking people to believe that energy supplies would run short. In this Foreign Affairs report, the authors stated, "....the "sky-is-falling school of oil forecasters has been systematically wrong for more than a generation. In its dramatic 1972 The Limits to Growth report, the group of prominent experts known as The Club of Rome wrote that only 550 billion barrels of oil remained and that they would run out by 1990."

Simmons came to read it after producing papers suggesting a coming oil shock due to logistical supply problems, and the Insatiable Energy Needs of China. He naturally began wondering what would happen if the poorer people of the world improved their standard of living, as his research showed “energy growth always goes hand in hand with countries switching from being poor to becoming even slightly affluent.”

But actually seeing Limits to Growth for himself was something of a shock:

Nowhere in the book was there any mention about running out of anything by 2000. Instead, the book's concern was entirely focused on what the world might look like 100 years later. There was not one sentence or even a single word written about an oil shortage, or limit to any specific resource, by the year 2000.

The members of the "Club or Rome" were also not a mysterious, sinister, anonymous group of doomsayers. Rather, they were a group of 30 thoughtful, public spirited-intellects from ten different countries. The group included scientists, economists, educators, and industrialists. They met at the instigation of Dr. Aurelia Peccei, an Italian industrialist affiliated with Fiat and Olivetti.

Simmons's report Revisiting The Limits to Growth is so important because it brought things up to date – as of its 2000 publication anyway. He noted that the world was “almost one-third of the way around The Club of Rome's 100 -year track” and the global population was rising, and energy demand was still expanding at an exponential rate.

He found that it’s then 30-year-old conclusions remained as valid as ever: “if present growth trends continued unchanged, a limit to the growth that our planet has enjoyed would be reached sometime within the next 100 years. This would then result in a sudden and uncontrollable decline in both population and industrial capacity."

Simmons also identifies the trend, which he returned to later through his career, of increasing oil demand from within Opec exporting nations:

Saudi Arabia had only 6 million people in 1970. By 2000, their population grew to 22 million. 43% of Saudi Arabia's 22 million people are 14 years old or less. The country's fertility rate is 6.3 children per female. If these trends continue, Saudi will have 45 to 50 million people by the year 2030.

Saudi's demographics are not an exception to the rest of the OPEC countries. A careful analysis of the OPEC countries' population, their current electricity use (as a proxy for total energy use) and the age and "fertility" rate for each country portrays the possible energy squeeze the world could experience if the population of these countries continues to grow and eventually narrow the gap between the rich and the poor.

Throughout this paper, Simmons is drawn repeatedly to the imagery used in Limits to Growth, The French Riddle of the Lily Pond. This considers a virulent lily that can double in size each day, and will choke out all other aquatic life if left to grow. But if you wait to take action until it’s taken over half of the pond, it’s too late. The next day it will have taken over the pond. He applies this to both increasing demand for oil and pollution, referring to the role of fossil fuel emisions in man-made climate change.

That’s the thing about exponential growth. As Simmons puts it: “the closer we got to the material limits to the planet, the more difficult this problem would be to tackle.”

But instead of taking action, politicians and economists responded to the publication of The Limits to Growth by devoting “their precious hours attacking the few voices of energy sanity.” Simmons observes:

Over the years, the energy economists' incorrect dismissal of this important work was not only a mistake but their criticism also turned somewhat mean-spirited and at times even shrill! What a sad conclusion for such a well-intended work to finally produce.

Lurking in the backdrop of this silly, misinformed chirping was a body of statistics, all in the public domain, that were proving that many of the key issues raised by The Limits to Growth were not only serious, but the magnitude of the problem was growing as the gap between the rich and the poor widened and the poor population expanded at a much faster pace than the rich.

Perhaps the ultimate irony capping all the other mistakes which too many energy planners made as the 20th Century came to an end is that the work they lambasted so viciously turned out to be true.

As an aside, the recent ASPO international tribute to Matthew Simmons makes it clear how pivotal his role was in getting the peak oil message out. Along with Colin Campbell, Simmons turned the first international workshop on the subject, held May 2002, into an international event that apparently introduced the term peak oil to the world: “We had managed to interest Bruce Stanley of AP, Associated Press of London, in attending. He came to Uppsala and wrote about our workshop. When Matt awoke on Saturday morning in Houston he could read on the first page of his local newspaper that he had been and spoken in Uppsala. It was in that article that the expression “Peak Oil” was used for the first time in the international press.”

According to his National Academy of Sciences obituary, Hubert was dismissed by the media until “February 1975, when America was laboring under an oil shortage that took most of the country by surprise, a National Academy of Sciences report confirmed the Academy's acceptance of King Hubbert's calculations on the rate and extent of oil and natural gas depletion and its rejection of more optimistic estimates.”

Bringing things up to date, Limits to Growth is still ignored, overlooked and misrepresented. Outside of a few business reports, the peak oil debate still has not been given serious consideration. Jevons is a joke for calling doom over declining coal reserves when an oil boom was around the corner. . .

No-one, it seems, want to hear the message. Talk about peak oil in general terms, and you are a Chicken Little. Use science to suggest an actual date for peak, and you will be presented as the next in line of a group of aluminum foil hat people that make predictions that consistently fail to come true. Aspo has itself revised dates for the suggested peaking of oil – which has been presented as failed predictions rather than an attempt to make calculations on changing data relating to reserves and demand. Meanwhile, the basis of their work, that oil will one day peak, is not discussed.

Ultimately it all goes back to Jevons: we didn’t get to where we are because we are racially superior, smarter, or work harder than other nations; it’s just that we got access to cheap sources of energy first. Energy equates to economic development. As Hubbert observed, our hydrocarbon-enabled riches and grand schemes are “but a moment in the total of human history.” But no-one wants to hear this.

Instead, most people would snicker that Jevons couldn’t see the coming switch from coal to oil – but that doesn’t make his message less important. We have switched from exponential use of one finite resource to another, merely postponing the eventual problems. The world will still face the issues Jevons envisioned, albeit later than he would have thought, and involving a wider range of declining resources. Hubbert said the same thing, as did the Club of Rome, Matthew Simmons and other peak oil writers.

Exponential growth is highly dangerous. Something has to give. But if no-one wants to hear the message, no-one will begin the transition process to a recessionary world of higher energy prices.

Plotting the coming oil shock

2010-08-27T07:30:00.000-07:00

A study based on the Hubbert model of peak oil suggests a coming global oil shock may begin as early as 2014 – which ties in with the timeline suggested in a variety of other reports and statements.

Peak oil, the concept that geological constraints dictate a time must come when oil production reaches its natural limit, makes it clear a diminishing supply will soon be on a collision course with soaring demand. Despite getting a showing online, and in the occasional business report, it’s yet to break into the mainstream media.

I recently considered three major energy reports published so far in 2010 which take a number of different views on the issue:
• The Oil Crunch: a Wake-up Call for the UK Economy (published by UK Industry Taskforce on Peak Oil & Energy Security in February) that suggests oil is currently at or near peak and so output “cannot rise significantly above 92 million barrels per day;”
• The Joint Operating Environment 2010 (United States Joint Forces Command, published a little later in February), stating the world has vast reserves but has not invested enough to keep increasing supplies;
• Sustainable Energy Security: Strategic Risks and Opportunities for Business (published by insurers Lloyds with Chatham House, June), which manages to take both sides, stating: “Even before we reach peak oil, we could witness an oil supply crunch because of increased Asian demand.”

Three independent reports, one consistent prediction – the world will be entering into a period of oil supply turmoil sometime between the beginning of 2011 or 2013. These findings are based on subtlety different assumptions about oil production: it’s at peak, it’s underinvested, or that both are true. (There's more about this in my original post, of course.)

But I overlooked an academic report published February 2010 and only given cursory attention in the media. Which is a pity, as it’s an attempt to quantify things from a purely peak oil perspective and bring the pioneering work of geologist M King Hubbert up to date. Forecasting World Crude Oil Production Using Multicyclic Hubbert Model, written by two Kuwait University engineers and a representative of Kuwait Oil Company, used the Hubbert model of peak oil, along with some fancy mathematical formula - and, no doubt, a few assumptions about reserves - to model future output. Their prediction for non-Opec oil is presented left.

(I have to hold my hand up and admit that at the time, I could only find a two-paragraph abstract – or pay $30 for the full text. I very recently stumbled over the above link to what I guess, from the term presspac in the url, was put together for media use. I’m presenting it here under the terms of fair dealing.)

Forecasting World Crude Oil Production appears to focus solely on conventional crude reservoirs, and not refer to sources of unconventional oil as far as I can tell. This would be a weakness to someone with a cornucopean view, who might tell you that Canada has reserves second only to Saudi Arabia - but the issue here is flow. Oil sands and shale oils are extracted through a lengthy, complicated and expensive process, as opposed to being simply pumped out of the ground, and, as such, cannot be brought to the market quickly enough to have any great impact on peak oil.

The report itself begins by reviewing the 2008 oil price “fluctuations,” the burgeoning demand from industrializing countries and the realization that “rapid growth in fuel demand has forced the policy makers worldwide to include uninterrupted crude oil supply as a vital priority in their economic and strategic planning.” It then states:

The objective of this study is to develop a forecasting model to predict world crude oil supply with better accuracy than the existing models. Even though our approach originates from Hubbert model, it overcomes the limitations and restrictions associated with the original Hubbert model. As opposed to Hubbert single-cycle model, our model has more than one cycle depending on the historical oil production trend and known oil reserves. The presented method is a viable tool to predict the peak oil production rate and time. The model is simple, accurate, and totally data driven, which allows a continuous updating once new data are available.

This should not be taken as a criticism of “one of the most renowned statistical models for the prediction of oil and gas production,” because it goes on to state that Hubbert's process works now just as well as it did back then:

However, time had shown that Hubbert forecasts were remarkably accurate; [US] oil production did indeed peak in 1970. Since that time, the Hubbert model gained worldwide popularity because of its simplicity and availability of required data and was extensively tested and used to forecast oil production worldwide. Having compared the forecast results of various methods to those of Hubbert, Cleveland and Kaufmann praised the Hubbert model, stating that, despite its lack of theoretical basis, its symmetric parabola predicts production more accurately than regression curves, economic models, or Delphi techniques.

It states Hubbert progressed from empirical observation to providing a “mathematical foundation for his model.” According to the authors, the only issue with it is that “recent studies have shown that most worldwide oil producing countries display more than one Hubbert production cycle.” (I would hazard a guess this relates to the variety of non-geological factors involved in actual production quantities.)

Using such a multi-cyclic model, the report suggests:

Saudi Arabia's production rate is anticipated to increase from 9.4 MMSTB/D [million stock tank barrels per day] in 2005 to 12.2 MMSTB/D in 2015, and it is estimated to peak in 2027, at a production rate of 14 MMSTB/D.

OPEC crude oil reserves are being depleted at an annual rate of 1.25%.

OPEC crude oil production will peak at 53 MMSTB/D in 2026. The production is expected to decrease to 29 MMSTB/D by 2050.
Non-OPEC countries have already reached their peak production rate of 39.6 MMSTB/D in 2006.

Non-OPEC crude oil reserves are being depleted at a rate of 5.6% per year.
World production will peak in 2014 at a production rate of 79 MMSTB/D, and then it will start declining to reach about 30 MMSTB/D in 2050.

Forecasting World Crude Oil Production's model for the predicted peaking of Opec oil in 2026 is presented here (left). It states Opec will remain the world's main supplier of oil throughout the century.

As an aside, International Energy Agency chief economist economist Fatih Birol reportedly told the annual forum of the Organization for Economic Co-operation and Development earlier this year that non-Opec oil “is reaching a peak and the bulk of oil predication growth will have to come from a few countries in the Middle East.” He continued that if the world continues to under-invest in oil production, and if global demand continues to rise, there will be a price spike: ". . .in 2013, 2014 we may well see higher prices than we have seen in the recent past."

Of course, any forecast of this sort is fraught with danger – and many, many peak oil writers have gone before with dates of global peak oil that have come and gone, and all the time output has continued rising. But despite the perils of prediction, Forecasting World Crude Oil Production is still an interesting and worthwhile document, particularly as it does not claim to be infallible:

Forecasting is not accomplished by consulting a crystal ball or amystic of some sort, but by appraising the past, inspecting present conditions, and projecting these into the future based on the best available information. It is well-known that the ultimate oil recovery of any field in the world is only determined when the production management decides to abandon the field for good. This does not occur until the projected oil revenues fall below expected costs and human ingenuity is unable to reverse this relationship.

The Forecasting World Crude Oil Production prediction model" for global peak oil in 2014 is presented here (left). As stated above, the model suggests world conventional crude production will peak in 2014 at 79 million barrels per day, and promptly enter decline. It is predicted to drop to 30 million barrels per day by 2050, which is a colossal decline by anyone’s standards, suggesting output will be reduced by a half in a little over 30 years. The report claims that, as of 2005, the world had reserves of 1161 billion barrels, of which 78 per cent is held by Opec members. Oil is being depleted at an annual rate of 2.1 per cent.

In addition, Forecasting World Crude Oil Production gives a worthwhile background to oil production, considering the rise of Opec, and oil becoming a geopolitical resource. It also provides a whole slew of output, production and suggested dates for peak oil for each country that produces oil.

I'm not qualified to pass judgement on this particular report, other than to say that it appears to contain a lot of rigorous mathematical work but probably rests on the strength of the reserves data its built on. But what interests me is the culmulative picture that's emerging. Many different groups and agencies are talking about a coming oil supply crisis – whether they use the term peak oil or not. These disparate groups, spread across the globe, have considered various possibilities and probabilities – but are still talking about very similar possible outcomes. According to the various reports, we likely face an oil crisis as early as 2011, or as late as 2014. We have only four years to prepare for a new energy world. And, if Forecasting World Crude Oil Production is correct about the decline in crude output, it is going to be very different from the world we know now.

Major reports point to oil supply turmoil and price volatility

2010-08-23T08:21:00.000-07:00

Major energy reports published this year are pointing to a significant rise in the price of oil due to supply constraints sometime over the next three years – the only disagreement is how soon.

So far 2010 has seen three international reports considering the future of oil production, demand and prices. These were published by high profile groups that command widespread respect – in turn, a collection of UK industrialists, the US military and a joint effort between Europe’s most recognized insurance company and a politically connected think-tank.

Largely ignored by the media, and considered separately online as they came out, it is interesting to do a compare-and-contrast between documents produced for widely different audiences on each side of the Atlantic.

In early February a group calling itself the UK Industry Taskforce on Peak Oil & Energy Security presented The Oil Crunch: a Wake-up Call for the UK Economy, an “independent, business-minded” view of a coming decline in oil production. Representing six UK companies – Arup, Foster + Partners, Scottish and Southern Energy, Solarcentury, Stagecoach Group and Virgin – the group called for immediate government action to help overcome potential economic turmoil relating to oil demand versus production (see graphic, left, from the report).

The report begins with a clear definition of peak oil, before suggesting that “global supply rates are currently at, or near, their peak and cannot rise significantly above 92 million barrels per day.” Or, in more detail:

There are now serious concerns that the free flow of relatively low cost oil, which has underpinned OECD countries economic growth since 1945, may not be sustainable for very much longer. . . low-cost (under $25/b) oil supplies effectively ended in early 2005 and are unlikely to return. The actual global supply of oil is now expected to be limited to 91-92Mb/d (million barrels per day) of capacity that will be in place by end 2010/early 2011. Global capacity will then remain in the 91-92Mb/d range until 2015 from which time depletion will more than offset capacity growth from then onwards. . .

The next major supply constraint, along with spiking oil prices, will not occur until recession-hit demand grows to the point that it removes the current excess oil stocks and the large spare capacity held by OPEC. However, once these are removed, possibly as early as 2012/2013 and no later than 2014/2015, oil prices are likely to spike, imperilling economic growth and causing economic dislocation.

It makes some interesting observations about demand destruction arguments that suggest prices above $120 per barrel kills the market and brings oil down again. Nowadays world economic development is “systematically different from the past,” it suggests, with the growth coming from developing countries whose “economic systems are currently evolving in a climate of higher oil prices and therefore might be relatively immune to it.”

Later in February the United States Joint Forces Command published The Joint Operating Environment 2010 as an “intellectual foundation upon which we will construct the concepts to guide our future force development.” Essentially, it sets out to consider likely “future trends and disruptions” that will affect the US military over the next 25 years. This list includes a series of global issues familiar to readers of any liberal-minded publication: demographics, globalization, US debt, the global recession, water shortages, food supply, climate change and dwindling oil supply (graphic, left).

It points to a chronically unstable world. Massive population growth across the Middle East and Sub-Saharan Africa may lead to significant potential for “revolution or war, including civil war,” alongside rising tensions over dwindling resources as basic as water and food both between nations and different groups within individual countries. The authors may have an interest in saying this, but it will involve a great deal of work for the US military – the report considers its role in combat, policing and aid delivery. But the Joint Operating Environment is also clear that the burgeoning US debt suggests military spending cuts may be coming: “Interest payments, when combined with the growth of Social Security and healthcare, will crowd out spending for everything else the government does, including national defense.” The point is that the military will most likely have to do more with less.

Although stating that global energy production would have to rise by 1.3 per cent each year to maintain the economic growth required to hold things together, the Joint Operating Environment contains the term peak oil precisely once. (It appears as a heading, over an item that discusses likely coming energy shortages, but not from a peak oil perspective.) The report clearly states the main concern is underinvestment in the oil industry at a time of increasing global demand. Its view is:

Assuming the most optimistic scenario for improved petroleum production through enhanced recovery means, the development of non-conventional oils (such as oil shales or tar sands) and new discoveries, petroleum production will be hard pressed to meet the expected future demand of 118 million barrels per day.

A severe energy crunch is inevitable without a massive expansion of production and refining capacity.

While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India. At best, it would lead to periods of harsh economic adjustment. . .

By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.

In June, insurers Lloyds (which reported 3.9 billion UK pound profits in 2009) teamed up with Chatham House (a think tank with a history of working closely with the UK parliament) to produce Sustainable Energy Security: Strategic Risks and Opportunities for Business. This examines energy issues – availability, cost and political climate change initiatives – from a business perspective. (See chart of various oil future price estimates, left, taken from the report.)

It sugars the pill with a consideration of opportunities to proactive leaders who are first to “transition to a low carbon economy,” but also states that “failure to do so could be catastrophic.” Underlying this is the stark message that “the bad times have not yet hit.” The world faces “dramatic changes” as it has “entered a period of deep uncertainty in how we will source energy for power, heat and mobility, and how much we will pay for it.”

Once again the term peak oil is largely absent, occurring three times in a densely written 44 page document. Although it gets a fair hearing, with a study quoted that suggests “there is a significant risk of a peak before 2020,” the report suggests the world faces more immediate concerns relating to oilfield investment not keeping pace with rising demand:

Even before we reach peak oil, we could witness an oil supply crunch because of increased Asian demand. Major new investment in energy takes 10-15 years from the initial investment to the first production, and to date we have not seen the amount of new projects that would supply the projected increase in demand.

While the report itself does not enter into speculation about exactly when all this could come about, it does present the following quote – you aren’t meant to miss it as it’s in a vivid purple colour a couple of point sizes larger than surrounding text – from Professor Paul Stevens, senior research fellow for Chatham House: “A supply crunch appears likely around 2013…given recent price experience, a spike in excess of $200 per barrel is not infeasible.”

Sustainable Energy Security provides an overview of the world’s declining hydrocarbon and nuclear “extractive energy sources.” It presents an overview of the whole energy debate: growing domestic oil use producing nations, increasing demand from the developing world, geopolitical considerations, questions over the availability of coal and gas for transition fuels, and the inherent problems associated with output from deepwater, oil sands and shale gas sources. (More here.) Findings include:

Modern society has been built on the back of access to relatively cheap, combustible, carbon-based energy sources. Three factors render that model outdated: surging energy consumption in emerging economies, multiple constraints on conventional fuel production and international recognition that continuing to release carbon dioxide into the atmosphere will cause climate chaos.

Energy markets will continue to be volatile as traditional mechanisms for balancing supply and price lose their power. International oil prices are likely to rise in the short to mid-term due to the costs of producing additional barrels from difficult environments, such as deep offshore fields and tar sands. An oil supply crunch in the medium term is likely to be due to a combination of insufficient investment in upstream oil and efficiency over the last two decades and rebounding demand following the global recession. This would create a price spike prompting drastic national measures to cut oil dependency.

So, three quite different reports, independently written for different audiences on either side of the Atlantic – and all with very similar views of energy supply over the next few years.

The Oil Crunch is a more typical peak oil report, calling for political action to mitigate a coming plateau in global oil production; The Joint Operating Environment, written by the military for its own leaders, states a “severe energy crunch is inevitable” because of oil industry underinvestment even though the world has large reserves; Sustainable Energy Security also states projected demand for oil is greater than our ability to bring it to market.

Only the first of these is a peak oil report – the others do not outright dispute the peak concept, but suggest a variety of issues are more urgent, from supply disruption due to warfare to a technical inability to get sufficient oil to consumers. Terms such as “energy crunch” or “supply crunch” may at first appear to be a conscious decision to gain political acceptance through the use of more neutral language, but this less specific terminology allows a more wide-ranging view of energy supply.

Anyway, the terminology is of less interest than the suggested timelines for resource disruption:

The Oil Crunch: The world will experience peak oil at 91-92 million barrels per day “by end 2010/early 2011. Global capacity will then remain in the 91-92Mb/d range until 2015 from which time depletion will more than offset capacity growth. . .”

The Joint Operating Environment: “By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.”

Sustainable Energy Security: “A supply crunch appears likely around 2013…given recent price experience, a spike in excess of $200 per barrel is not infeasible.”

Taken together, then, these reports suggest the world will be entering into a period of turmoil due to oil supply issues as early as the beginning of 2011 or as late as 2013. This will be marked by a time of rising oil prices, simply due to demand. By 2015 oil output will be in decline and the world will collectively have to make structural changes, or else face outright economic decline, because less oil will be coming to the market at any price.

(For comparison, the IEA’s latest Oil Market Report, published August 11, predicts global demand reaching 86.6 million barrels per day in 2010, and then 87.9 million barrels per day in 2011, assuming a continuing global economic recovery. As I’ve written previously, this will overtake the all-time high of 86.9 million barrels per day established in 2008 before the global economic downturn. I’ve also looked at the views of economists writing online recently, suggesting “we are in a lot of trouble in energy in the United States and around the world by about 2012-2015.”)

IEA: ‘Cheap oil is over’ as demand approaches new record

2010-08-15T20:59:00.000-07:00

The International Energy Agency (IEA) is forecasting world oil demand will set a new record next year when is smashes through 2008’s pre-recession high – and warning that the “era of cheap oil is over.”

According to the IEA’s latest Oil Market Report, published August 11, global demand will reach 86.6 million barrels per day in 2010, and then 87.9 million barrels per day in 2011, assuming a continuing global economic recovery. This means demand is set to pass the all-time high of 86.9 million barrels per day established in 2008 before the global economic downturn.

The figure has been given significance by those that say oil peaked midway through 2008. Peak oil refers to the time of maximum production – the high point of the oil output bell chart, after which, as geologist M King Hubbert showed, output will diminish even though much oil remains to be extracted. If oil did peak at 86.9 million barrels per day, then demand would be expected to overtake supply early in 2011. (Personally, I don’t believe oil has peaked – but this will soon be put to the test.)

Another significant figure bandied around relates to oil’s mid-2008 price spike: it traded at $147 a barrel in July of that year. People that believe oil peaked will tell you this was a simple matter of supply and demand, while Opec has all along blamed speculators for pushing the prices up. Another factor, as reported at the time by Reuters, was the then tension between Israel, the US and Iran, including Iranian missile tests and rumoured Israeli air force drills in Iranian airspace that “left the oil markets worried about a potential supply disruption.”

There were clearly many market forces pushing oil prices up at the time – so, unlike more accomplished peak oil writers, I don’t see oil’s passage through the 86.9 million-barrels-per-day threshold as guaranteeing triple digit figures. Anything is possible, of course, but to my mind the key figure to watch is Opec’s spare capacity. This is the amount of mothballed production that can quickly come online to cushion against oil supply and demand shocks. Periods of tight capacity are associated with high oil prices; zero capacity indicates peak oil, or at least supply failing to keep up with demand.

Bloomberg reported that Opec’s “spare capacity was as low as about 2 million barrels a day in July 2008, when oil prices peaked.” Opec, which supplies 40 per cent of the world’s oil, currently claims a 6.6-million-barrel-a-day spare capacity, but this figure has been questioned. A June IEA report predicts this falling to 3.6 million barrels per day by 2015. Markets get jumpy around that point.

It’s perhaps with this in mind that the IEA’s chief economist Fatih Birol (pictured, above) has been repeating the phrase the era of cheap oil is over at numerous interviews recently. He told German TV on August 10 that:

“The era of cheap oil is over. Each barrel oil that will come to market in the future will be much more difficult to produce and therefore more expensive. We all - governments, industry and consumers - should carefully choose the type of car we want to buy in the future and should be prepared for oil prices being much higher than several years ago.”

Three months previously Birol told the annual forum of the Organization for Economic Co-operation and Development in Paris that this is indeed the end of an era:

Birol said that oil production in non-Organization of Petroleum Exporting Countries is reaching a peak and the bulk of oil predication growth will have to come from a few countries in the Middle East.

If there is a lack of investment in production and a stronger-than-expected economic recovery in such oil demand centers as China, India and the Middle East, prices will rise significantly, Birol said.

"If these two marry in two years' time--strong real demand growth and lack of investment in production--in 2013, 2014 we may well see higher prices than we have seen in the recent past," he said.

Back in August 2009, he told the Independent newspaper:

“The market power of the very few oil-producing countries, mainly in the Middle East, will increase very quickly. They already have about 40 per cent share of the oil market and this will increase much more strongly in the future," he said.

"If we see a tightness of the markets, people in the street will see it in terms of higher prices, much higher than we see now. It will have an impact on the economy, definitely, especially if we see this tightness in the markets in the next few years," Dr Birol said.

The interview, Warning: Oil supplies are running out fast, reports that the world’s biggest oil fields have already peaked and are declining faster than previously thought, as has non-Opec oil. In addition, the indusry as a whole suffers from under-investment, which will lead to an “oil crunch” in five years’ time that. The item states:

In its first-ever assessment of the world's major oil fields, the IEA concluded that the global energy system was at a crossroads and that consumption of oil was “patently unsustainable,” with expected demand far outstripping supply.

Oil production has already peaked in non-Opec countries and the era of cheap oil has come to an end, it warned.

In most fields, oil production has now peaked, which means that other sources of supply have to be found to meet existing demand.

Even if demand remained steady, the world would have to find the equivalent of four Saudi Arabias to maintain production, and six Saudi Arabias if it is to keep up with the expected increase in demand between now and 2030, Dr Birol said.

It’s interesting to note that the above is contradicted by Opec, which published its global oil demand forecast on August 13. This, the Monthly Oil Market Report, August 2010, states that coming “oil demand growth will remain moderate” because of uncertainties about the pace of recovery. Demand will be driven by China, India, the Middle East and Latin America.

Opec states global demand for oil works out at 85.5 million barrels a day throughout 2010 (from 85.01 in the first quarter to 86.62 million barrels a day at year’s end). This will rise to 86.56 million barrels a day in 2011 (dipping in the first half of the year to 85.49, then rising in the second half to 87.71 in the final quarter).

Not only is Opec’s estimate for 2011 oil consumption around one million barrels a day lower than that of the IEA (86.56 versus 87.9 million barrels per day, respectively), but the Monthly Oil Market Report also sees increased output from Non-Opec countries:

Non-OPEC supply in 2010 is expected to increase by 0.8 mb/d, following an upward revision mainly due to higher-than-expected supply from the US, Russia and China as well as some historical adjustments. In 2011, non-OPEC oil supply is forecast to grow by 0.3 mb/d, supported by projected increases in Brazil, Canada, Azerbaijan, Colombia, and Kazakhstan.

To contrast, the IEA is stating that just the delays on deepwater projects following BP’s Gulf of Mexico disaster will dampen non-Opec output. According to the Daily Mail:

Fatih Birol, Chief Economist of the International Energy Agency, said 90% of non-OPEC oil production growth was expected to come from offshore drilling over the next decade, but this growth is now under threat in the four leading basins: the Gulf, the North Sea, Brazil and Africa.

The IEA says global oil output may suffer a 500,000-barrels-a-day hit by 2015 because of the White House ban alone.

If things continue to move in the wrong direction, the world will become increasingly reliant on state-owned oil companies from the Middle East and Russia, he argued. ‘That will have implications for the oil industry, oil markets, and oil prices.’

Clearly, the era of cheap oil is gone – although market volatility may well bring episodic price collapses. It seems safe to assume that demand for oil will continue to grow all the time the world can stave off ecomonic collapse; and that the output of Non-opec countries cannot itself be increased fast enough to meet this rising demand (it may even have peaked and be set to diminish, as the IEA suggest). Deepwater and oil sands cannot be relied on to pick up the slack, despite the media hoopla. Either way, Opec is becoming more and more central to our way of life. More to the point, Opec’s spare capacity is of prime importance. If this begins to dwindle by 2013, as the IEA suggests – which Opec denies – then expect a period of extreme market volatility, soaring prices and, most likely, a marked downturn in the rather fragile global economic recovery.

Peak predictions: mixing water and oil as global resources dwindle

2010-08-12T08:38:00.000-07:00

Oil and safe drinking water are on parallel courses to depletion – a scarcity that will lead to starvation, disease and warfare.

It sounds counter intuitive to compare the two, considering the constant global cycle of evaporation and precipitation that means the amount of water on Earth remains remarkably constant over millions of years. But the issue here is drinking water. And there is a lot less of that than seawater. Due to a number of management issues, made worse by climate change, drinking water is fast becoming a geopolitical resource to rival oil – a flashpoint at various places around the globe. There are currently calls for international mediation over the flow of the Indus (India and Pakistan), Ganges (India and Bangladesh), Nile (Egypt, Sudan and Ethiopia), Jordan (Syria, Israel and Jordan), Tigris-Euphrates (Turkey, Syria and Iraq) and the Mekong (Cambodia, Laos, Thailand and Vietnam), and less aggressively stated diplomatic tensions between many other nations (Canada, US and Mexico spring immediately to mind) over shared access to drinking water. In addition, a report published July 2010 states that one third of US counties in the Lower 48 will face a water crisis by mid century shows this is not a developing world issue, but something every bit as insidious and universal as soil loss.

Water is essential for food security and sanitation, not to mention the fact that humans die after three days without it. And with 80 countries and 40 per cent of the world's population currently facing chronic water problems, billions around the globe arguably regard the availability of water as more critical than that of oil.

But can the two be compared in this way? The concept of peak oil, based on the work of M King Hubbert, is simple enough: a bell chart curve plotting the point at which half of the world’s oil will have been extracted; it marks the time of maximum production of this non-renewable resource that can only be followed by a slump in output. But peak water? At first, it sounds laughable. Three-quarters of the Earth’s surface is water, and most people would place the stuff top of the list when asked to cite renewable resources.

But don’t forget the issue here is drinking water – 97.5 percent of all the Earth’s water is not suitable for human use. Freshwater makes up the remaining 2.5 per cent, but the vast majority of this is inaccessible – 99 per cent of it is either frozen in the ice caps of Greenland and Antarctica, present as soil moisture, trapped deep underground or in the form of atmospheric water vapor. Only about one percent of the world’s fresh water, less than 0.01 percent of all of the world’s water, is available for human use. And it is not fairly distributed. A 2005 Wired magazine article on peak water observed:

Like oil, water is not equitably distributed or respectful of political boundaries; about 50 percent of the world's freshwater lies in a half-dozen lucky countries.

Freshwater is the ultimate renewable resource, but humanity is extracting and polluting it faster than it can be replenished. Rampant economic growth — more homes, more businesses, more water-intensive products and processes, a rising standard of living — has simply outstripped the ready supply, especially in historically dry regions. Compounding the problem, the hydrologic cycle is growing less predictable as climate change alters established temperature patterns around the globe.

Much of the world’s drinking water is extracted from underground aquifers or lakes and is a finite resource that’s being depleted. I’d argue that the terminology of oil depletion can be used to describe access to drinking water, along with other declining natural resources, and that it is fair to consider the point at which a renewable supply will be outstripped by demand.

And it’s happening right before our eyes. According to the United Nations Human Development Report 2006:

Access to water for life is a basic human need and a fundamental human right. Yet in our increasingly prosperous world, more than 1 billion people are denied the right to clean water and 2.6 billion people lack access to adequate sanitation. These headline numbers capture only one dimension of the problem. Every year some 1.8 million children die as a result of diarrhoea and other diseases caused by unclean water and poor sanitation. At the start of the 21st century unclean water is the world’s second biggest killer of children. . .

At any given time close to half the people in the developing world are suffering from one or more of the main diseases associated with inadequate provision of water and sanitation such as diarrhoea, guinea worm, trachoma and schistosomiasis. . . These diseases fill half the hospital beds in developing countries.

What's more, it's going to get worse. According to the UN’s Global Environment Outlook:

By 2025, about 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world population could be under conditions of water stress – the threshold for meeting the water requirements for agriculture, industry, domestic purposes, energy and the environment. . .

Ismail Serageldin, a World Bank official, famously warned in 1995: “Many of the wars this century were about oil, but wars of the next century will be over water.”

A current flashpoint is the Indus (left), which flows some 2,900 km from Tibet to the Arabian Sea through India and Pakistan. The source of the conflict between these two countries dates back to colonial times, when British engineers constructed an irrigation network that turned the Punjab into the Subcontinent’s “breadbasket.”

This fertile region was divided between India and the newly formed Pakistan in 1947, with both countries agreeing to maintain water supplies at pre-independence levels. The first water dispute arose as early as 1948, with India cutting off the flow of canals flowing to Pakistan. A treaty was signed in 1960, but this is becoming an increasingly tense issue, with Pakistan accusing India of stealing its water and India accusing Pakistan of attempting to hide its own mismanagement behind this angry rhetoric.

An item in the Globe & Mail newspaper of July 2010, Pakistan’s drinkers of the dust, expands on the issue:

Water scarcity in the Indus basin may be the world’s most dangerous environmental phenomenon. If anything will cause a civil war in Pakistan, or a conflict with its nemesis, India, many analysts believe that it will be water.

Civilization in this region depends on snow melting from the Himalayas, feeding tributaries that join the Indus. These pour into the largest continuous irrigation system on the planet, transforming the desert into fields of rice and wheat.

But the system is breaking down. Dry conditions in the past few years have prompted bitter conflicts: Southern Pakistan accuses the north of grabbing more than its share of water; many in the northern regions, in turn, blame their upstream neighbours in India for stealing water. In the mountains that give birth to the rivers, struggles over hydroelectricity are spurring rebellion in Kashmir.

This looks at the causes of the conflict, citing global warming, mismanagement and over population (“Pakistan’s irrigated lands have almost doubled since the country’s birth in 1947; during the same period, its population grew fivefold. Populations have also exploded across the border, in Indian states that rely on the same rivers.”) It also considers the ecological damage being done to the waterway, with the consequent loss of diversity.

The Wall Street Journal of reported March 2010, under the headline India and Pakistan Feud Over Indus Waters, that:

The latest dispute revolves around India's plans to build a 330-megawatt hydroelectric power project on the Kishenganga River, a tributary of the Indus. India says it is well within its rights to build the dam. The project has been on the drawing board since the late 1980s and is expected to cost about $800 million.

Pakistan says New Delhi's plans to divert the course of the river will reduce its flow by a third in the winter. That would make it unfeasible for Pakistan to move ahead with its own plans for a hydroelectric dam downstream.

The current ongoing flooding in Pakistan, which the UN believes has affected an estimated 3 million people, is for now obscuring the long-running tensions over water supply in the area – but it hasn’t gone away. Climate change is bringing in weather extremes, with droughts getting longer and floods more severe. Over the next few decades, drought will threaten millions across Asia; snowmelt from the Himalaya feeds the areas major rivers – Indus, Brahmaputra, Ganges, Yangtze and Yellow rivers – which in turn supply drinking and irrigation water to 1.4 billion people. These glaciers are retreating due to global warming. According to the latest thinking, cited in a June 2010 New Scientist report, suggestions that these glaciers will have vanished completely by 2035 are inaccurate – they will probably last a little longer than that. However, according to a recent study, “the five rivers will be able to water crops for almost 60 million fewer mouths by 2050.”

That’s less food for 60 million people, in an area of rapidly growing population. Food scarcity is already a major concern during an ongoing period of extreme weather; in August, the Russian government banned the export of wheat to protect home consumers, following drought. In addition, China is reportedly “proceeding with plans for nearly 200 miles of canals to divert water from the Himalayan plateau to China’s thirsty central regions” and planning “the world's biggest hydro-electric project on the upper reaches of the Brahmaputra,” which will, of course, be diverting water currently flowing into India and Bangladesh. This would be a major geopolitical issue – but then, China is running out of water, too. The water table beneath Beijing has dropped by nearly 200 feet in the last two decades, and the city is predicted to completely run out of water in five to 10 years’ time.

Meanwhile, African nations are reportedly drawing up battle lines over the River Nile, in an attempt to overturn colonial-era treaties that promoted British interests in Egypt and Sudan at the expense of upstream countries. Essentially, these two countries were given rights to nearly 75 percent of the Nile’s annual flow. In May 2010, five upstream countries - Ethiopia, Uganda, Kenya, Tanzania and Rwanda - signed a Cooperative Framework Agreement giving themselves equal access to the water; Egypt and Sudan refused to sign.

The Nile flows through 10 nations, and 300 million people depend on its waters. The upstream nations need the water for irrigation, hydro and industrial uses – but the people of Egypt cannot afford to go without their allocation, which they control via the Aswan High Dam (right).

A July Boston Globe report, headlined The threat of a water war, calls for international intervention to “forestall hostilities between the countries,” while an Online Opinion essay, Does Egypt own the Nile? A battle over precious water, looks at the issue of sustainability in more depth. It states:

Yet as the nations of the Nile bicker over its future, nobody is speaking up for the river itself - for the ecosystems that depend on it, or for the physical processes on which its future as a life-giving resource in the world’s largest desert depends. The danger is that efforts to stave off water wars may lead to engineers trying to squeeze yet more water from the river - and doing the Nile still more harm. What is at risk here is not only the Nile, but also the largest wetland in Africa and one of the largest tropical wetlands in the world - the wildlife-rich Sudd.

It continues that the Nile’s “entire annual flood is captured behind the High Aswan dam,” and released as required for agriculture. The river’s silt, which historically kept the Nile delta fertile, is accumulating behind the dam. “Most years virtually no water reaches the sea,” and Egypt’s rapidly eroding farmland is maintained by fertilizer.

And water is “an ever-present source of tension” between Israelis and Palestinians (Palestinain youth seen collecting water, left), according to a report aired on Canadian television, Water shortages frustrate Palestinians in West Bank, which claimed:

As a result, the executive director of Jerusalem-based human rights group B'Tselem says most of the water goes to the Israeli population.

“About 70 per cent of all water resources are being used by Israel, and as a result there simply isn't enough water for the Palestinian population,” Jessica Montell told CTV News.

So, while the World Health Organization recommends daily access to 100 litres of water a day per person, Palestinians come closer to an average 70 litres per day. In the neighbouring Israeli settlements daily consumption is up to four times higher.

A July commentary in Lebanon’s Daily Star speaks of the Middle East in apocalyptical tones as “a region heading toward collapse and irrelevance” with problems including: “creeping ecological disasters; water scarcity and poor water management; high urban density; heavy pollution; economic torpor while the rest of the of the planet progresses exponentially.”

The lower reaches of River Jordan, flowing 251 kilometres (156 miles) between Israel, Syria and Jordan – with the flow diverted by all three countries – is too polluted for Biblical-style baptisms, according to Israel's health ministry and various environmental groups. According to an AFP report:

In recent years the flow of the river has slowed to a dirty trickle as fresh water running into the river has been replaced with sewage.

"Sadly, the lower Jordan River has long suffered from severe mismanagement with the diversion of 98 percent of its fresh water by Israel, Syria and Jordan and the discharge of untreated sewage, agricultural run-off, saline water and fish pond effluent in its place," the statement said.

(Neither would you want to be doused in the holy waters of The Ganges, for two millennia a symbol of spiritual purity, due to its sheer level of pollution. “In Varanasi, India's most sacred city, the coliform bacterial count is at least 3,000 times higher than the standard established as safe by the United Nations world Health Organization, according to Veer Bhadra Mishra, an engineer and Hindu priest who's led a campaign there to clean the river for two decades.”)

Some of the world’s largest cities – those exceeding 10 million people – are experiencing water shortages: Mexico City, Calcutta, Cairo, Jakarta, Beijing, Lagos, Manila. But don’t go thinking water scarcity is solely a developing country problem. The Natural Resources Defense Council (NRDC) issued a report in July 2010 stating that the Western and Southwestern United States is facing urgent water shortages. (See the graphic, left, illustrating the nation's water sustainability index; essentially the areas that are going to suffer water shortages in coming years.)

Their release stated:

“Global warming will make it harder for farms and cities to find water,” said Barry Nelson, study co-author and co-director of NRDC’s western water project. “The latest global warming science is clear: drought-like conditions are likely to increase. This means that conservation and water use efficiency will become our most important sources of new water supply.”

Concern over droughts and global warming is increasing across the West. Over the past eight years, the Colorado River, which supplies water to parts of Arizona, California, Colorado, Nevada, New Mexico, Utah and Wyoming, has received just over half its average flow. Southern California is experiencing its driest year on record. The Department of Water Resources predicts that every river in the southern Sierra Nevada will receive less than half of normal runoff this year.

Civil engineering website publicworks.com, in the article Report: More Than One Out Of Three U.S. Counties Face Water Shortages Due To Climate Change, stated:

Washington — More than 1,100 U.S. counties — a full one-third of all counties in the lower 48 states — now face higher risks of water shortages by mid-century as the result of global warming, and more than 400 of these counties will be at extremely high risk for water shortages, based on estimates from a new report by Tetra Tech for the Natural Resources Defense Council (NRDC).

The report uses publicly available water use data across the United States and climate projections from a set of models used in recent Intergovernmental Panel on Climate Change (IPCC) work to evaluate withdrawals related to renewable water supply. The report finds that 14 states face an extreme or high risk to water sustainability, or are likely to see limitations on water availability as demand exceeds supply by 2050. These areas include parts of Arizona, Arkansas, California, Colorado, Florida, Idaho, Kansas, Mississippi, Montana, Nebraska, Nevada, New Mexico, Oklahoma, and Texas. In particular, in the Great Plains and Southwest United States, water sustainability is at extreme risk.

Activists in Canada have long been lobbying to protect their water supplies from the US, which, it is feared, could accessed under the NAFTA free trade agreement. As an aside, Canada’s claims to 20 per cent of the world’s freshwater, just like its claims to have oil reserves second only to Saudi Arabia, are questionable. An Innovation Canada article, The Myth of Abundant Canadian Water, suggests:

The true measure of water that we can use sustainably is the annual runoff from land. If we exceed that value, our water use is unsustainable. Canada has seven percent of the world’s land mass, and produces seven percent of the world’s terrestrial runoff. In other words, we have just an average supply of sustainable freshwater by global standards

Putting international politics aside, reports on diminishing drinking water tend to contain the following common strands:
· Population pressure: demand is increasing all the time, with the global population set to pass 8 billion by 2025
· Increasing pollution: contamination that is effectively decreasing the amount of available drinking water
· Poverty: it’s incredibly expensive to tap new sources of water, and it’s the world’s poorest that are suffering water shortages
· Climate change: many parts of the world are getting dryer
· Mismanagement: much of the water tapped for irrigation leaks or is lost to evaporation.
· Conflict between domestic users: power generation, industry and agriculture – all heavy consumers. This is going to become more of an issue, with hydro being promoted as a clean power source.

Respected – and greatly missed – peak oil guru Matthew Simmons made, as ever, penetrating observations about declining global resources. His February 2010 presentation, Twin Threats to Resource Scarcity: Oil & Water, noted the “historical irony” of the intertwining of oil and water. “The two do not mix and we can not get along without both.”

Having noted the global importance of oil, the long-time energy investor notes “water is even more priceless” – as it is central to both food growing and energy generation. “For a century mankind ignored depletion of both precious resources.”

Matthew Simmons: a tribute

2010-08-09T14:15:00.000-07:00

Energy Investment banker and leading peak oil proponent Matthew Simmons died suddenly on Sunday [Aug. 8], following an apparent heart attack.

While Simmons (left) did not come up with the idea of peak oil – geophysicist M King Hubbert first published the theory in the 1950s – he arguably did more than anyone to publicize it.

It was Simmons’ 2005 classic Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, that turned discussion of peak oil from a fringe environmental concern into something with business pages credibility.

Much of this was due to the sheer level of research behind Twilight, not to mention the fact that Simmons was a highly successful investment banker, and longterm oil industry insider who was involved in Bush’s 2000 election campaign energy plan.

Fortune magazine observed in 2008:

Matt Simmons is as perplexed as anyone that it has fallen to him to take on OPEC, Exxon, the Saudis, and all the other misguided defenders of conventional wisdom in the oil patch. Why should one investment banker with a penchant for research be required to point out what he regards as the obvious - that from here on out, oil supplies can't meet demand, and if we don't act soon to solve this crisis, World War III could be looming?

Why should a man who scorns most environmentalists have to argue that locally grown produce and wind power are the way of the future? Why should a lifelong Republican need to be the one to point out that his party's new mantra - "Drill, baby, drill!" - won't really fix anything and that his party's presidential candidate is clueless about energy? That the spike in oil prices earlier this year wasn't a temporary market anomaly and the recent retreat in prices is just a misleading calm before a calamitous storm? That we're headed toward $500-a-barrel oil?

"I find it ironic that here we have the biggest industry on earth, and I'm one of the few people to figure out that we have a major problem," he says, in his confident if not quite brash way. "And I did it all in my spare time. How stupid and tragic is that? I shouldn't be one of the only folks that actually has a handful of ideas of how we can keep from blowing each other up and get through this."

The above stands as a perfect epitaph. Tributes to Simmons, 67, have tended to repeat terms such as “innovative thinker” and “visionary.”

Simmons was uncompromisingly critical of British Petroleum's handling of the Gulf oil spill and predicted the company would file for bankruptcy, and claimed cleanup costs could top $1 trillion. (Some of his more outlandish theories following the blowout have been quite rightly ridiculed, but he was one of the first to talk about the flow rate being many times higher than BP was at the time claiming.)

As a final act of irony, Simmon's death was announced on the same day that BP announced it has successfully inserted a cement plug into the well’s casing. Further procedures remain to be completed to ensure a longer lasting solution, but it seems that the well has been killed. The oil giant’s website states:

· The MC252 well has been shut-in since July 15; there is currently no oil flowing into the Gulf.
· The pressure testing following the cementing operations indicates we have an effective cement plug in the casing which was the desired outcome.
· The DDIII relief well is currently at 17909 ft and is preparing to drill ahead 30 ft followed by another ranging run. Intersection of the MC252 well annulus is expected towards the end of the week.

I am personally saddened by the passing of Simmons, especially the timing of his death – which is being put down to entirely natural causes; he seems to have suffered a heart attack in his hot tub. I personally believe he had the grace and charm to admit to some of his erroneous statements about BP’s runaway well, and the courage to stick to his guns and demand the oil giant remains focused on the environmental disaster, which will go on for years.

Anyone who writes about peak oil owes a great debt to Matthew Simmons who, in my, opinion, produced one of the new century's most outstanding items of investigative journalism. In order to test the Saudi’s claims of vast oil reserves, he bypassed the state's legendary secrecy to unearth 50 years of technical papers submitted by Saudi oil geologists to the Society of Petroleum Engineers, and uncovered what he called “the biggest energy illusion ever in the world.” That's how Simmons should be remembered - for cutting through the lies and secrecy.

Different takes on peak oil, same result – price spikes predicted

2010-08-06T07:35:00.000-07:00

Two must-read interviews with energy market investors both point to a coming demand-driven spike in oil prices, despite professing differing views on peak oil.

Rick Rule, founder of Global Resource Investments, Ltd., speaks of “sharply higher world oil prices in the next 5 years,” and Charles Maxwell, senior energy analyst for Weeden & Co. that “oil will reach at least $150 a barrel around 2015.” It’s interesting that, despite professing different takes on the concept of peak oil, they end up at remarkably similar conclusions about demand outstripping supply within the next few years.

Peak oil relates to the seemingly reasonable notion that output of a non-renewable resource will someday decline, with the ‘peak’ being the time of highest production that cannot subsequently be beaten. Shell geoscientist M. King Hubbert (left) beginning in the 1950s, showed that oil output can be plotted as a bell curve; this relates to individual wells, regions and the world as a whole. It becomes a political issue over the questions of when this will happen, and how the world’s remaining oil should be handled. Nevertheless it’s an economic argument as much as anything, as the notion of peak oil essentially relates to peak cheap oil, as there will be a great deal of hard-to-reach oil still underground for centuries to come.

Currently, the global demand for oil is approaching its 2008 high of 86.6 million barrels a day, with the International Energy Agency (IEA) predicting it will reach 90-92 million barrels per day by 2015. Meanwhile, output is falling outside of Opec, and the IEA speculates that Opec spare capacity – their ability to quickly bring extra oil onto the market – is also dwindling. According to the IEA, “Effective OPEC spare capacity in this scenario begins to decline again as soon as next year, reaching 3.6 mb/d by 2015.”

Both Rick Rule and Charles Maxwell see oil as unsustainable, even though Rule is looking more at lack of investment and geopolitical instability, and Maxwell more at the restricted oil supply. Ultimately, neither view opposes the other.

The Gold Seek item, Interview: Rick Rule on Oil & Gas vs. Green Energy, contains a wealth of information about likely future demand for, and supply of, hydrocarbon energy sources.

Rule makes keen observations about the national oil companies, operated by sovereign governments, that are in the main “diverting substantial amounts of the cashflow from their domestic oil industries into other domestic spending programs that aren’t oil related, thereby starving their domestic oil industry of sustaining capital.” He sees this as the reason for declining output:

The consequence of that is that several countries, particularly Mexico, Venezuela, Peru, Indonesia and perhaps Iran, will cease to be oil exporters within 5 years, even if they start spending now, which they aren’t able to do. The impact of that is that as much as 20% of world export crude will come off of export markets and that could lead to a truly precipitous increase in price. The only hope that oil import countries have is that sustaining capital investments have increased in Saudi Arabia, the United Arab Emirates and Kuwait. These three countries, with the help of a resurgent Iraq (if it does resurge), are the importing countries’ only hope for moderated oil prices in the next 5 years. It’s my belief that production declines as a consequence of a lack of reinvestment will be greater than the production adds and I suspect we will see sharply higher world oil prices in the next 5 years.

Neither can he see the above named countries constraining their own domestic demand “in time to prevent an oil price shock.”

Notably, Rule regards the Canadian oil sands as a “geopolitical benefit,” while noting the barriers to massively ramping up production – essentially the supply of energy and water, as steam must be pumped into the reservoirs to force the bitumen out. He observes that the industry is currently riding high on historically low North American natural gas prices and leniency over its water use. As he sees it, “The industry has to address the fact that it has improperly treated water for a long period of time and it consumes much more water at lower input prices than it ought to.” It will also have to pay more attention to recycling water used in the mining process. He continues:

In an ideal world, one would build about 2 GW of nuclear capacity at the Athabasca oil sands in Northern Alberta, which is the largest oil sands basin in the world, because the byproduct of a nuclear power plant is steam. The steam from 2 GW of nuclear capacity would be worth about a quarter of a billion dollars annually. In other words, you would sell your waste product for a quarter of a billion dollars and the cash flow from the waste (steam) would amortize most of the construction cost of the power plant and the power that would be generated would back out all of the natural gas fired power used in the province of Alberta, freeing all of that gas for export or other uses (other than generating steam for the oil sands). Unfortunately, that set of circumstances isn’t politically appropriate. Right now, what happens in the oil sands business is that, because oil commands a higher premium as a consequence of its easy conversion into a motor fuel compared with natural gas, the process involves an arbitrage between high oil prices and low gas prices. Enormous amounts of energy are consumed to produce energy.

Rule cannot see North American natural gas prices remaining at such low levels for long, mostly due to the deepwater drilling embargo, but he can imagine a time when vehicles are run on natural gas. (As an aside, an interesting study published on The Oil Drum, Europe and Natural Gas - Are Tough Choices Ahead?, suggests that – for Europe at least – there “may be a shortfall in supply very soon, especially if sufficient new sources of supply are not found, or if natural gas is used as a substitute for other energy sources.” Many peak oil writers are beginning to question whether gas reserves are enough to make it the logical transition fuel that it first appears.)

Having said that, Rule sees the coming transition away from oil as an expensive process, with both gasoline and natural gas set to get much more expensive. As he sees it: “Oil prices will move up dramatically in the next 5 years. The transition from a hydrocarbon economy to some other type of economy will require massive investment in new technologies and I don’t think we will adapt quickly enough to avoid an escalation of oil and gas prices.”

Yet it’s interesting to note that Rule gives the following answer when asked what he thinks about “peak oil theory”:

Peak oil is more an economic and political phenomenon than it is a geological phenomenon. I think we’re past $40 peak oil but I don’t think we’re past $200 peak oil. There are technologies, as an example, miscible CO2 flooding to recover oil from allegedly depleted oil fields. There are new basins, albeit remote, frontier basins. There are new technologies that allow dry gas or LNG to be substituted for liquid oil. It’s an economic function because these technologies and substitutions require higher energy prices. At $200 oil, we’ve got lots of oil.

It’s quite disingenuous, really. He’s smart enough to know that peak oil theory does not postulate that all the world’s oil is about to run out: essentially, it’s the half way point, the end of cheap oil. While technology is making more oil accessible – more than Hubbert could have dreamed about – it doesn’t change the essential geological facts that a non-renewable resource cannot be extracted forever. Increasing use of technology did not prevent US domestic oil production from peaking, as predicted by Hubbert.

Meanwhile, the Seeking Alpha interview with fellow energy investor Charles Maxwell, Why We'll See $300 Oil by 2020, gets straight to the point about peak oil.

Maxwell starts off by talking how the US stockpile of petroleum products is high right now, probably as financial institutions are looking for a sound investment – which itself indicates that people consider it’s likely to rise in value – but that he sees a “tightening in the oil market” beginning around 2013. Led by driving demand from China, he sees oil demand passing supply by 2015.

He states that he still maintains his Business Week prediction from May this year of a coming dramatic spike in the price of oil:

Wall Street hasn't accepted yet that the oil reserves are so limited. I think oil will reach at least $150 a barrel around 2015; it could go to $300 by 2020. In the short term, my forecast for 2010 is $77 a barrel. (For 2011, my forecast is $75 a barrel.) I can't see an apparent good reason why oil rose from $67 last September to $87 this April. I'm not surprised oil prices are back down—the market was self-correcting.

(Many peak oil writers consider that demand destruction will keep the price of oil somewhere in the $150 to $200 range, just as the 2008 economic collapse drove down oil prices – the key term here is volatility, as the price of oil is likely to ricochet around.)

Maxwell regards Canada's Athabasca Oil Sands as a far greater source than US shale oil (“my geological research indicates that these fields are not perhaps as good as some people suggest.”), with this shale oil likely to peak within the next nine to 12 years. He does not regard that as immediate as it sounds:

Well, that's a good long time, because, as I calculated, we are in a lot of trouble in energy in the United States and around the world by about 2012-2015. That's where we can see the waves coming towards shore, and now we're scared. Then they hit shore around 2015, and I think we will have peak oil for three or four years—a plateau in the late ‘teens.

But by 2020, I expect that we will actually slip off the edge of that plateau, and as a world, we will have started slowly downwards. Each year we'll have some tiny percentage lower production than the year previous. At first it will start with maybe a 0.25 percent decrease. But in theory, we'd still have say, 1 percent per year increase in population and in wealth (as defined by trucks and cars), and so on.

So we'll have a theoretical demand for more oil, but we won't have the equivalent supply.

He sees the peaking of oil followed by that of gas and, hundreds of years later, of coal. The greatest dangers are psychological, he believes. However, he’s positive: “By 2025, people will begin to start understanding.”

It's interesting that both economists predict similar outcomes, despite taking different routes to get there. Either way we look at it, we are looking at a coming transition.

Gulf of Mexico reconsidered: building your house on salt

2010-07-29T07:27:00.000-07:00

A strategically timed item in the New York Times presents an overview of the geology that makes the Gulf of Mexico so rich in oil, how new technology has enabled us to track these deposits - and the risks we run to extract them.

It was published Wednesday [July 28], one day before a special judicial panel in Boise, Idaho began to consider “how to bring order to the hundreds of civil lawsuits” stemming from BP’s Gulf of Mexico oil disaster. The seven judges will “consider which U.S. court, or courts, should oversee hundreds of spill-related suits by injured rig workers, fishermen, investors and property owners,” reports Reuters – as oil companies themselves begin to count the cost of an offshore drilling ban. It states:

Potentially adding its name to the line of claimants, Royal Dutch Shell Plc idled seven rigs and took a $56 million charge related to the drilling ban on Thursday. Saying the ban would reduce its production by almost 3 million barrels this year, the company did not rule out reclaiming the cash from BP.

Shell, one of the biggest oil producers in the Gulf of Mexico, said it had idled rigs rather than move them elsewhere because the ban's six-month duration meant it was not profitable to redeploy them to other areas.

Coincidentally, the New York Times item happily sugests that the Gulf’s reserves, which 25 years ago seemed exhausted, could postpone peak oil.

Even if you discount such hype, it provides a fascinating and balanced account of how industry dismay at test drills producing little more than salt turned to feverish excitement once everyone realized that salt, in fact, indidicated large oil reserves. It states:

Do you know the old Bible reference, don't build your house on sand?" said William Galloway, a geologist at the University of Texas at Austin. "Well, building your house on salt goes beyond anything in the biblical expression."

Gulf geology is not only about salt, of course, but scientists' improved take on the rock is one of the best examples of how, for 50 years, the Gulf has served as one of the world's foremost geology labs. Backed by society's endless thirst for oil, geologists have guided drillers to ever deeper and riskier oil reservoirs.

So the good news is that there is more oil down there than we earlier thought – the bad is that, as the ongoing Gulf of Mexico disaster is proving, getting at it is a risky business. One blowout can put an oil major into a desperate fight for survival.

But the industry needs to follow the oil, and the item continues with some bullish quotes from Clint Moore, vice president at ION Geophysical Corp:

Moore, while at Anadarko Petroleum Corp., was one of the earliest geologists to probe beneath the Gulf's salt, helping discover the Mahogany oil reservoir, the region's first producing subsalt field, after burrowing through 3,825 feet of salt in the early 1990s. The productivity of these salt-based fields could prompt a re-evaluation of peak oil's arrival, he said.

"If the volumes are there, this will be a significant addition to the world's resources," he said.

Of course, there are complications. Deeper wells sit at higher pressures, increasing the risk of blowout. The deepest exploration well, drilled by the ill-fated Deepwater Horizon, is 35,000 feet down, several times the depth of BP's Macondo well. And further oil production will only add to the greenhouse gases humans pour into the atmosphere each year, slowly increasing global temperatures.

A New York Times item from 2006, Drilling Deep in the Gulf of Mexico, suggested: “According to the most optimistic estimates, there could be 40 billion barrels of undiscovered reserves in the deep water, which starts at about 1,500 feet, enough to satisfy American consumption for more than five years.”

Clearly, five years’ domestic consumption will not do much to deter the onset of peak oil. And that is the optimistic best. A June column by longtime peak oil writer Tom Whipple, The peak oil crisis: the real gulf crisis, that suggests the Gulf may not live up to this hype. He writes:

The international oil companies that are drilling in deep water certainly are not about to connect the dots for us, but independent observers say it is looking like our new deepwater oil wells are only going to be producing some 10 or 20 percent of initial estimates. Deep water oil is a whole different game with which no one has much experience. None of the deepwater fields have been producing long enough to have established any track record as to just how much oil can ultimately be recovered from deep beneath the sea where temperatures and pressures are extreme.

This details declines in output at the Thunder Horse (“instead of production increasing to the rated 250,000 b/d, production began to drop at 2-3 percent each month so by the end of 2009 production was down to 60 or 70,000 b/d”) and Neptune projects (“It now looks as if the platform that was supposed to produce 150 million barrels of crude will produce on the order of 33 million”).

Meanwhile, global consumption of oil is reported to be currently close to its 2008 high of 86.6 million barrels a day. In June the International Energy Agency (IEA) presented two “oil demand cases for the next five years,” essentially predicting that by 2015 the world will be burning 90-92 million barrels per day, depending on factors including growth rates and conservation measures.

It’s interesting to note that the IEA presentation suggests that at the higher levels of demand, “OPEC spare capacity. . . begins to decline again as soon as next year, reaching 3.6 mb/d by 2015. . . we anticipate a tightening global balance, with surplus capacity falling below 5% of global demand. This could lead to more jittery markets ahead, after what has been a prolonged period of relative price stability over the past year.” This could be taken as a reference to peak oil – what better way to chart the arrival of peak production than charting the decline in Opec’s spare capacity? Surely, peak oil can be defined as the time of zero surplus production capacity.

An while I'm on the subject of the Gulf of Mexico, there’s an excellent overview of Matt Simmons’ apocalyptic claims which is worth a read over at Business Insider. It’s worthwhile because it pulls them apart on their science, and although critical, does not become a personal attack on Simmons himself. It shows how an expert in one field – investment banking, in this case – should not attempt to speak with authority on someone else’s area. It also allows us to be critical of Simmons’ recent comments about BP’s oil disaster but also regard his earlier book, Twilight in the Desert, as a masterpiece of investigative journalism. (Perhaps slightly overstated in places, it was the first attempt to peer through the Saudi’s obsessive secrecy.)

Tony we hardly knew ye

2010-07-27T07:36:00.000-07:00

To no-one’s great surprise, BP has fired chief executive officer Tony Hayward – while reporting record losses.

Pausing just long enough to negotiate a hefty financial package, said to include a $1.6 million payout in lieu of notice, a $1-million-per-year-pension and shares, he leaves a company fighting for its survival. According to the Guardian newspaper, BP is reporting “the largest losses in British corporate history”:

In its second-quarter results the company has set aside $32.2bn (£20.7bn) to meet the cost of the clean-up, far higher than the City had expected and plunging the company into a $17bn loss, compared with a profit last year of $3.1bn. The dramatic loss means that BP will be able to slash its tax bill by about $10bn, in a move likely to infuriate politicians on both sides of the Atlantic.

To pay for the mounting costs of the spill created by the explosion on the Deepwater Horizon rig on 20 April, BP plans to sell $30bn worth of assets – predominantly oil and gas fields – over the next 18 months.

As CEO, you don’t expect to keep your position after steering your company into a $17 billion loss and a hornet’s nest of legal action. The media may talk about Hayward’s PR gaffes costing his job, but it’s the bottom line that counts. This has the potential to be far, far greater than the losses just reported – BP’s legal woes are just starting, and stretch ahead for decades, so they urgently need to get things on the right track. President Barack Obama said back in June that Hayward (right) should have been fired, and Congress is gung-ho for pulling BP to shreds. The latest issue is BP’s 2007 lobbying of the UK government for the release of Lockerbie bomber Abdelbaset Ali Mohmet al-Megrahi.

As summarized in the Guardian:

BP is the subject of a US Department of Justice investigation to determine whether US civil or criminal laws have been violated; a US presidential commission to examine the causes of the incident; a joint investigation by the US Coast Guard and the Bureau of Ocean Energy Management, Regulation and Enforcement (which until June 2010 was named the Minerals Management Service); an inquiry by the Securities and Exchange Commission and other investigations by US state and federal agencies including the US Chemical Safety and Hazard Investigation Board as well as the US Congress.

Having said that, an interesting Harvard Business Review post, headlined Leadership Tips from Tony Hayward (or Not) suggests “The Case of Tony Hayward and the Gulf Oil Spill will be fodder for business school discussions for years to come, as a how-not-to-do-it guide for leadership when disaster strikes.”

It cites failures to follow the rules of media communications, suggesting Haywood minimized problems and failed to apologize, which I can agree with, but also alleges that he emphasized his own power and importance and made the story about himself – spun from another angle, you could say the guy stood up and took it on the chin, rather than trying to hide behind the team.

(My take on it: I’m a journalist turned communications person, and wondered all along what was going on with BP’s handling of the issue. Maybe Hayward’s hands were tied because he was told not to alarm shareholders, but if he’d been more forthcoming from the beginning he’d have prevented much of the press mauling and end-of-the-world-is-nigh online speculation – or just got the US government onside. If he’d have spoken of the urgent need for deepwater drilling because of the looming specter of peak oil, while admitting to BP’s own mistakes in how the Deepwater Horizon was operated, he’d have emerged as an unlikely hero. Being cynical, in my opinion the corporation as a whole handled the issue like it did the African spills and deaths – it’s a horrible cliché, but life over there is cheap; just ask anyone who’s worked on the continent for a time. An incident off the coast of the most litigious and powerful nation on Earth needs a different response. )

After a 28-year career with BP, including three years as CEO, it appears Hayward is going because of his response to the Gulf oil disaster rather than for allowing it to happen in the first place. Maybe it’s just coincidence that Haywood’s replacement, Robert Dudley, was born in New York and raised in Mississippi – but it looks to me like his departure was to appease the American government. (And that’s fine with me; one of the functions of a CEO operating at that international level is to smooth over issues at governmental level. Hayward is damaged goods in the US, and it’s on this continent that the future of BP will be determined.)

A close reading coverage of this changeover suggests Hayward is better thought of in Europe than his replacement Dudley. According to an Associated Press report, Haywood boosted BP's bottom line but not safety:

Dudley was forced to flee Russia in 2008, running the company in absentia until that became untenable, after a row with Russian shareholders. That history means that Hayward, who is still well-regarded in Europe, will be a key negotiator for his new boss.

"It's recognizing that this is a very smart guy and has good contacts," said Stephen Pope, the chief global equity strategist at Cantor Fitzgerald. "He will very good at smoothing the way."

Phil Weiss, an oil analyst with Argus Research in New York, said BP thinks highly of Hayward, "but they have to get him away from this situation."

It will be interesting to observe how much of a different company BP will be in five years’ time, if it still exists. Hayward, in his three years as CEO, managed to focus on improving refinery efficiency and other cost cutting measures to put the firm on a stronger footing. What he didn’t – and in fairness probably didn’t have time to achieve – was focus "like a laser" on safety, which he promised when taking the job.

I’m going to stick my neck out and suggest that this kind of corporate change only comes about as a result of legal expenses. My experience is in the newspaper industry, and I’ve seen that verbal apologies are just so much breath – and the most humble of printed apologies are forgotten by the next edition. It was when we got sued that things were shaken up. Any court action is potentially ruinous, with the legal costs always dwarfing any actual payouts. It’s when accountants get involved, and when transgressions become part of the cash flow calculations that senior management regard things like safety or staffing levels as a business model rather than the first thing to be cut.

This is not a tirade against BP, because to do that I have to believe they are the only oil company to behave badly. A recent must-read Newsweek item, sarcastically titled Boycott BP! Because it’s much better to give your money to Exxon, looks into oil majors across the board. It states:

In other words, pick which malefactor or criminal—environmental or human—you’d like to support when you gas up. And the list above doesn’t even include the fact that what the oil companies sell is one of the major contributors to catastrophic climate change. So unless your boycott of BP extends to all oil companies—oh, and throw in coal companies and natural-gas utilities—you get points for symbolism and self-righteousness but not much else.

As it stands, all the oil corporations are on borrowed time in this era of peak oil. Non-opec oil is in decline, and the majors face some stark choices: their only opportunities for future growth are essentially the over-hyped oil sands and increasingly controversial deepwater options – and both are expensive, high risk ventures, requiring long-term capital investment at a time of fluctuating oil prices. Right now they have the money and the power, but many commentators can see a time when oil development is nationalized; the BP case tends to lend credence to this, considering that one blowout might bring the company down. Nationalization would be for military, geopolitical reasons, as much as anything because global oil supply is becoming increasingly dependent on a small group of deeply unstable countries and downright rogue states.

That is not to suggest Hayward is a victim of peak oil, but that his departure is systematic of what is likely to be a growing trend. Expect more persuit of environmentally contentious oil supplies, each with a greater potential for disaster.

It’s a race to failure between rogue states and global oil output

2010-07-23T07:28:00.000-07:00

Dwindling global oil supplies are leaving the world ever more reliant on a group of unstable countries – many of which are themselves facing major domestic problems right now.

Believe it or not, many of the world’s major oil exporters cannot maintain their own domestic energy requirements. Venezuelan consumers endure electricity blackouts of “seven or eight hours a day,” but less well known is the situation in the Middle East, where residents are facing rolling power outages just as summer temperatures soar, and with it, the demand for air conditioning.

Furthermore, a report in Forbes this month points to growing fears about the stability of Saudi Arabia, for decades the swing producer maintaining the world’s oil exports at a steady level. While any upheaval in any of the main oil exporting nations would be felt across the globe, Saudi is a special case, as its reserves are acquiring an ever more geopolitical significance due to the decline of non-Opec oil. The West is becoming more reliant on the health of this highly secretive nation – essentially, if Saudi Arabia sneezes, the rest of the world catches cold.

It’s a fact of life that oil tends to come from unstable places – the very term petro state is shorthand for a country with “weak institutions and a malfunctioning public sector,” and an economy based around imports,
not exports, due to exchange rates. Power is in the hands of the few, essentially the government, that control the petro-rent, and these are essentially violent, unhappy places for much of the population.

The reality is that seven of the countries currently listed by the US Energy Information Administration as the nation’s current Top 15 sources of crude oil are also on the State Department’s Travel Warning List, for their “long-term, protracted conditions that make a country dangerous or unstable.” These are: Saudi Arabia, Mexico, Nigeria, Iraq, Columbia, Algeria, and the Democratic Republic of the Congo – with Saudi Arabia, Mexico and Nigeria being respectably second, third and fourth most important source of US imports. (Of course, Canada, the US’s largest single source of oil imports, is a model of staid stability – but many observers question the future expansion of its oil sands output which has arguably been overhyped for years.)

Oil fuels our industry, maintaining our lifestyles – and is as addictive to the West as it is to the producing nations. As US president Barack Obama said, when addressing the nation on June 14 in the immediate aftermath of BP’s Deepwater Horizon oil disaster, “Each day, we send nearly $1 billion of our wealth to foreign countries for their oil.” This is all money that isn’t being invested at home. It’s going on a product that is causing global climate change, which is making many unstable parts of the world more desperate, with geopolitical commentators now talking of coming wars over resources as basic as water. So addicted are we to oil that we apparently have little money left over to prepare for the transition to a future based around renewable energy. Instead, buying vast amounts of imported oil is taking money out of the US domestic economy and funding, in the main, rogue states that are adding to global security risks.

Read the State Department’s travel advisory about Nigeria for an idea of the kind of regimes that oil is maintaining:

Violent crime committed by individuals and gangs, as well as by persons wearing police and military uniforms, is a problem throughout the country.

Since January 2009, over 111 foreign nationals have been kidnapped in Nigeria, including 18 in 2010. Six foreign nationals were killed in connection with these abductions; two U.S. citizens were killed in separate abduction attempts in Port Harcourt in April 2010. Local authorities and expatriate businesses operating in Nigeria believe that the number of kidnapping incidents throughout Nigeria is underreported. Since March 2010, five improvised explosive devices (IEDs) have been detonated in the Niger Delta region with no reported casualties.

It’s the same situation in Algeria, Columbia and the Congo – yet the remaining, more stable petro states are in turmoil of some sort, albeit less headline grabbing. An item in Abu Dhabi English language newspaper The National earlier in July, Gulf braces for power shortages, is worth quoting at length:

The big heat has come early to the Gulf, and residents opting to stay are settling in for another summer of discontent punctuated by power cuts.

All Gulf states except Qatar face electricity shortages that intensify during the airconditioning season. Already this year, the emirate of Sharjah as well as Kuwait and Saudi Arabia have suffered disruptions.

On May 10, a 90-minute power cut grounded flights at King Abdul Aziz International Airport near Jeddah.

Last month, a series of electricity disruptions afflicted cities in the north and west of Saudi Arabia, including Mecca, Medina, Jeddah and Taif, amid temperatures reaching 52°C. Some schoolchildren taking exams passed out from the heat.

It goes on to state that other than in Iraq, where war destroyed much of the grid, these electricity blackouts are due to “rapid industrialisation and population growth.” Underpinning it are low domestic energy prices that attract energy-intensive industries and “wasteful consumer habits,” with the national focus on obtaining expansion as quickly as possible that overlooks any form of long-term energy efficiency. (This manic drive to have something to show for the oil bonanza is common to all petro states.) The article gives, as example:

Karim Elgendy, an architect and sustainable design researcher based in San Francisco, also believes the style of architecture has played a role. “Rapid urbanisation in the UAE, as well as in other GCC member states, has been characterised by forms of imported western architecture which were not environmentally responsive to the region’s climatic conditions,” he said. “High-rise buildings with large areas of glass facade, and huge demand for electricity for air conditioning can be seen in all new urban centres such as Dubai and Abu Dhabi, as well as other cities such as Riyadh and Doha.”

Saudi Arabia is the classic example of how striking oil can be a blessing and a curse. An item in Forbes earlier in the month, Saudi Arabia's House Of Cards, peels back the veneer. It cites an open letter to Saudi royals allegedly written by dissident prince Turki bin Abdul Aziz Al Saud, a prominent exile in Cairo. In this the prince supposedly states the government is no longer able to contain grassroots discontent, and that his fellow royals would be advised to flee before the masses "cut off our heads in streets." (A June 14 edict by the Saudi Press Agency claims the prince told them this letter was “fabricated by enemy parties wishing to spread confusion and excitement” – which seems, as far as I can tell, to be an implicit warning to the domestic media that reporting on the item will result in a rather swift visit from Saudi security forces.)

The Forbes article quotes from Matthew Simmons’ peak oil classic, Twilight in the Desert, with questions of just how much longer the highly secretive state can go on as the world’s major oil producer considering “no major new energy fields have been found in Saudi Arabia since the 1970s, and the chances of such discoveries are now, in Simmons' words, ‘remote.’” But, stark as this may be, it’s followed by the sucker punch: Saudi Arabia doesn’t have to run out of oil to face collapse, “thanks to the country's ballooning entitlement class.” It states:

The actual size of the Saudi royal family is subject to some debate, but informed estimates a few years ago placed the number at more than 30,000 members, with some 4,000 princes each afforded a luxurious monthly stipend of tens of thousands of dollars apiece. And because of officially sanctioned polygamy, their ranks are swelling exponentially, projected to reach 60,000 or more by 2020. Needless to say, their allowances, and the attendant extravagant indulgences, are possible solely because of Saudi petrodollars. All of which has prompted an insatiable appetite for ever greater production and consumption of the Kingdom's lifeblood.

Meanwhile, life is getting tougher for “an impoverished underclass” – essentially, everyone else outside the royal elite. It states: “Since the oil boom of the 1970s, per capita income in Saudi Arabia has constricted precipitously, falling from $28,000 in the early 1980s to below $7,000 in 2001.”

According to a separate Bloomberg item, “Saudi Arabian inflation accelerated to a 13-month high in June as housing and food costs increased in the largest Arab economy.”

The Saudi government cannot afford for the global economy to slip further, cutting both the volume of its own oil exports and prices per barrel. Theirs is a very expensive place to run.

The geopolitical implications of all this are staggering. Saudi Arabia, which has been accused of having a greater involvement in the 9/11 attacks than most realize and has shown subsequent “indirect troublemaking in Iraq and Afghanistan,” has long been a source of regional instability. But that will be nothing as to the turmoil that will unfold from any domestic upheaval, such as an Iranian-style revolution (upheaval in that country, in 1979, caused the second energy crisis of the decade, mitigated somewhat by the Saudis increasing output). Groups like al-Qaeda have long been “highly critical of and violently opposed to western influence within the country,” especially its close relations with the US, and are reportedly working to bring about revolt.

What, then, would an Islamic revolution in Saudi Arabia mean to the oil consuming world? In the immediate term, supply would cease, due to the domestic turmoil. And beyond that, there’s every reason to believe the new government would be less inclined to export so much oil to the West. This, is in effect, the nuclear option. As far as the rest of the world is concerned, there is not enough alternate oil to go around; right now a Saudi oil embargo would bring the economies of many Western nations to a grinding halt. It’s all due to diminishing surplus production capacity.

A June Bloomberg report, Oil Price Swings to Worsen as Spare OPEC Capacity Shrinks: Energy Markets, stated that “OPEC’s shrinking spare production capacity increases traders’ concern about supply shortages.” This states that output of non-Opec oil is unable to keep up with global demand, putting more and more importance on Opec’s ever dwindling spare capacity. It states:

OPEC, supplier of 40 percent of the world’s oil, pumped 29.4 million barrels a day in May, with capacity of another 5.5 million barrels idled, according to data compiled by Bloomberg. The group’s spare capacity was as low as about 2 million barrels a day in July 2008, when oil prices peaked, before tumbling as the global recession crimped energy consumption.

Spare production capacity will drop as supplies from outside the group fail to keep up with demand, according to the IEA. The agency estimates world oil usage will rise 6.4 percent by 2015 to 91.93 million barrels a day, while output, excluding OPEC crude, will increase 3.7 percent. That means the world will need more of the group’s oil to meet demand.

This seems to be saying that, as world energy demand creeps up – earlier this week China was confirmed as the world's biggest energy consumer, burning more energy than the US – the key figure to watch is Opec’s surplus capacity. To which I’d add that, to all intents, the term diminishing spare production capacity can be used interchangeably with peak oil. If Opec’s surplus cannot meet demand, we will surely have passed the tip of Hubbert’s peak, and find ourselves on the downslope – which is when the market turmoil and recession sets in.

But things could get difficult a lot sooner than that. It doesn’t require the physical limits of the Earth’s oil to have been reached – reserves are now low enough that domestic turmoil at any one of the major oil producers will have the same unfortunate results to most of the world. As Bloomberg states:

Saudi Arabia accounts for almost 60 percent of OPEC’s spare capacity, according to Bloomberg estimates. The country is investing as much as $30 billion on new supplies over the next five years to keep a minimum 1.5 million to 2 million barrels-a- day of spare capacity, Oil Minister Ali al-Naimi said in a May 18 interview with consultant Petroleum Policy Intelligence.

“Markets are sensitive to when OPEC spare capacity starts getting down toward 3 million barrels a day,” according to Wittner of Societe Generale. Should supplies be disrupted from a producer such as Iran or Nigeria “there would not be much left after that,” he said.

Reading between the lines, it’s all a delicate balancing act. The rogue states that produce oil are now key players in this geopolitical game. At the same time, we are relying more and more on Opec output, as this is where the world’s largest accessible reserves are. And Opec output is more and more dependent on Saudi reserves. Even without some calamity befalling global basket cases like Nigeria or Venezuela, we are desperately reliant on two distinctly plausible possibilities not happening: Saudi output dropping, or the Saudi economy being plunged into chaos for some internal economic or political reason.

It’s a race to failure. But, then, that’s the reality of betting everything on a non-renewable source.

Oil sands cannot save us from peak oil

2010-07-15T08:04:00.000-07:00

It’s quite nearly universally accepted that the easy-to-reach, cheap oil has been extracted – but is this also the case with Canada’s much-touted oil sands?

The startling suggestion has been made by economist and author Jeff Rubin, blogging on the Globe and Mail business pages. He writes that the price of oil must rise in order for Albertan oil to be economically sustainable, as future expansion will be chasing supplies buried deeper underground and further from the available water supply.

Which comes as quite a shock to people listening to the Canadian government, whose prime minister Stephen Harper famously touted the nation as an emerging "energy superpower" back in July 2006. As Canadian Press reported at the time:

British investors, Harper told his well-heeled audience in London, "have recognized the emergence of Canada's global energy powerhouse. Or as we put it, the emerging energy superpower our government intends to build.

"This is no exaggeration."

As evidence, Harper said Canada is the world's third largest producer of gas, seventh in oil production, the biggest hydro-electric generator and the biggest supplier of uranium. Alberta's tar sands are second only to Saudi Arabia as the world's largest oil reserve.

It is widely reported that the 174 billion barrels of Canadian oil reserves are second only to Saudi Arabia, but the glaring differences between free flowing conventional Middle Eastern oil and the “energy- and capital- and time-intensive” oil sands are not so widely appreciated. Consequently, dizzy official forecasts of 4.5 million barrels-per-day oil sands output by 2030 have been constantly downgraded over the past few years.

The problem is that it’s just so expensive to get at. Oil production in the region requires vast amounts of energy and water – supposedly the region’s supply of natural gas and river water can be tapped for this, but the further away the oil deposits lie from these resources, the greater the expense.

Which Jeff Rubin picks up on in his July 14 Globe & Mail column, Oil must rise to make oil sands economical:

Even without a cost for carbon emissions or water pollution, the economics of the requisite production increases just won’t fly. Not when the cost curve lying between today’s production of a little over one and a quarter million barrels a day and tomorrow’s target of three million barrels a day is steeply ascending, driven by the need to pursue ever-deeper bitumen deposits even further away from available water sources like the already heavily tapped Athabasca River.

As energy guru Matthew Simmons once wryly observed, “In oil exploration, you don’t leave the easiest for the last.” It’s not a coincidence that two of the largest and oldest producers, Syncrude and Suncor, are located almost kitty-corner from each other across the banks of the Athabasca.

Rubin, author of 2009 peak oil book Why Your World Is About To Get A Whole Lot Smaller, makes the observation that the oil sands are not a new discovery – “As early as 1920, there was a pilot plant that first extracted oil from the bitumen” – but rather have only recently been considered commercially viable. What makes it so is the price of oil. And when this plunged from $147 to $40 per barrel in 2008, “some $50-billion of capital spending was cancelled overnight.”

And as the Globe and Mail reported in April 2010: “According to the Canadian Association of Petroleum Producers, the volume of oil previously expected by 2011. . . will now not likely flow until 2018 or later.”

A 2007 Money Week article, written by Byron King, Are Canadian tar sands the answer to our oil needs?, considers the “time, energy, capital, and other inputs to achieve deliverability” of this oil. This quotes the views of David Hughes, of the Geological Survey of Canada:

Production of “oil” from the tar sands is a very energy-intensive process. Production estimates for 2025 are that the energy input will require between 1.6-2.3 billion cubic feet (bcf) of natural gas per day, approximately equal to the planned maximum capacity of the proposed Mackenzie Valley gas pipeline (1.9 bcf/d) out of northern Canada, or about one-fifth of anticipated daily Canadian gas production.

Pipelines or no, the energy requirements of the projects planned for tar sands development already exceed the amount of available natural gas from the entire Mackenzie River project. Virtually all estimates for natural gas usage in tar sands operations by 2015, just 10 years hence, exceed the projections for available amounts of natural gas. Something has got to give.

Even under the best and most optimistic of scenarios, Canadian tar sands might yield about 3 million barrels per day (bpd) of product by 2025, or about 2.5% of forecast world demand of 120 million bpd by the International Energy Agency (IEA).

Projecting Canada’s future oil output is not a simple matter of totting up its oil reserves – with the 174 billion barrels quoted above being at the conservative end of a range of press frenzy – as it will hinge on a range of other factors, including investment, availability of water, suppiles of natural gas, and the actual price of oil, which will make the whole thing economical or otherwise. In April, Reuteurs reported that Shell's chief executive, Peter Voser, confirmed the company "has no near-term plans to expand its oil sands project,"due to cost considerations - along with rivals Imperial Oil Ltd, Total SA, Suncor Energy Inc.

Oil production outside of Opec is widely believed to have peaked and be in decline, and future Western production must focus on unconventional sources such as deepwater and oil sands/shale oil. But these are in a perilous state right now, or at least, show no liklihood of living up to the hype. Market uncertainties, including the fluctuating price of oil, the possibility of government legislation (from carbon taxes to deepwater moratoriums) and even the availability and price of credit all come into play. Such ventures into unconventional oil are expensive, risky undertakings that involve significant lead times.

According to the latest from the US Energy Information Administration, Canada "remained the largest exporter of total petroleum in April, exporting 2.486 million barrels per day to the United States." The issue here is the liklihood of ramping up this production. This seems unlikely, considering that output is already falling behind what was projected. This leaves the US, and the rest of the world, as reliant on Opec oil as ever before - according to Bloomberg, Opec's spare production capacity is constantly shrinking "as supplies from outside the group fail to keep up with demand, according to the IEA," which points to pricing volatility.

It is common for peak oil deniers to point to the vast reserves currently buried within the Earth, and suggest these will be exploited when the market deems them viable – which is true, of course, but this carries an implication of a smooth transition. The oil market over the past few years has shown extreme price volatility, market uncertainty and cycles of boom and bust. This is not a good environment for oil companies to be seeking investment for deepwater and oil sands undertakings.

Gulf of Mexico well test delayed

2010-07-14T08:28:00.000-07:00

BP has postponed critical pressure testing on its runaway Gulf of Mexico well, pending further investigation.

A new 75-tonne containment cap had been fitted to the Macondo well Monday, which is gushing an estimated 60,000 barrels of oil a day. Pressure tests were due to have begun Tuesday, and run for up to 48 hours.

This testing was to involve gradually choking the oil flow, aiming to shut off the flow of oil into the Gulf for the first time in three months – while watching pressure build up in the wellbore. Low pressure would indicate leaks, while high pressure would show it holding up. If successful, it would hold the flow of oil until the relief wells could cement the well.

According to Associated Press, engineers spent most of Tuesday conducting a seismic survey, creating a map of the rock under the sea floor to spot potential dangers. It was unclear whether there was something in the results of the mapping that prompted officials to delay testing.

An item in today’s New York Times, headlined Oil Still Spilling as Well Test Is Delayed, states:

The test would shut the well by closing off valves on a tight-sealing cap that was installed at the wellhead, 5,000 feet down and a few miles from this Coast Guard cutter. But Thad W. Allen, the retired Coast Guard admiral who is overseeing the federal response to the spill, said in a statement on Tuesday evening, “We decided that the process may benefit from additional analysis that will be performed tonight and tomorrow.”

The test, intended to determine whether the well is intact or has been damaged, could be delayed until Wednesday, Admiral Allen said.

On its Web site, BP said in a statement that the test had been postponed after a meeting with Energy Secretary Stephen Chu “and his team of scientific and industry experts.”

A separate New York Times item, U.S. Delays Test of Device That Could Seal Gulf Well, suggests that the question is whether it is worth attempting to close a possibly compromised well a few weeks ahead of the relief well operation. It states:

A technician involved in the effort said that at the center of the debate was the issue of whether shutting in the well was worth the risk. A pressure buildup might damage the well bore, making it more difficult to eventually seal the well through the relief well.

“Some of this has been a topic of discussion for a long time,” said the technician, who spoke on the condition of anonymity because he was not authorized to comment.

BP has said that the test will provide data to help in planning the relief well operation. But the technician said many relief wells had been successful without such information. “In my opinion, it’s not worth acquiring that data,” he said.

It is probably too early to speculate on whether BP is being excessively cautious – it wouldn’t want to come across any unexpected hitches after choking off the oil flow and then be in the position of having to open the valves again – or if this supports the theory that there is excessive damage to the well.

Admiral Allen alluded to this possibility when discussing the decision to halt the original May 28 "top kill" attempt, saying: “We don’t know if the well bore has been compromised or not.”

Longtime peak oil writer Matthew Simmons (left) has taken this idea further, claiming that insiders have told him that massive amounts of oil are pouring through BP’s fractured well and coming up at various points on the ocean floor, and that capping the gusher will be a long, drawn out process. (His apocalyptical comments have made the headlines, while his words about the reality of peak oil have been somewhat skipped over – like his suggestion to CNN Money when asked what lessons should be learned from the BP spill: “That oil peaked. The easy stuff is over. We have to continue drilling in shallow water, but we probably need to take a deep breath and step back.”)

Simmons is the guy the media networks – if they have any teeth at all – will be scrambling to line up for an interview today, to raise some tension ahead of an anticipated announcement about the state of BP’s wellbore.

Best possible hope in Gulf oil disaster overlies peak oil reality

2010-07-13T07:29:00.000-07:00

BP is today attempting to operate a new tight-fitting oil containment cap on its gushing Gulf of Mexico well – definitely answering all speculation about damage to its Macondo wellbore.

The oil giant has stated it will run up to 48 hours of pressure tests, which apparently began yesterday [Monday, June 12]. The best possible hope is that the new oil containment cap shuts off all emerging oil, and the well structure can handle the high pressures – and then, the whole thing be promptly cemented shut via the relief wells, the first of which has a further 30 feet (9 metres) to go. BP would like to have the disaster under control by July 27, when it is due to report second-quarter earnings and address investors.

Of course, the Gulf of Mexico clean-up operation would still require many years of work, and BP must continue to fight for its future. It must sell assets – $10 billion in "noncore, upstream assets" over the next 12 months, according to BP spokesman Mark Salt in Houston – and borrow heavily if it is to survive. Chief Executive Tony Hayward has toured the world in recent weeks in what Reuters dubbed “a quest for cash to ward off takeovers and help pay for the worst oil spill in US history.” According to the Wall Street Journal, BP has added “$9 billion in credit lines from a number of banks on top of savings made by suspending dividends and cutting capital expenditure.”

BP’s shares have rallied slightly this week on the containment cap news after hitting a 14-month low in June. According to a July 12 LA Times report:

Shares of beleaguered BP jumped 8% Monday on hopes for the latest attempt to
stop the gulf oil leak and reports that BP may be turning to Apache Corp., a
Houston-based exploration and production company, for a $10-billion asset sale.

And this, remember, is still the best possible case scenario. This is as good as it gets for BP. It’s ignoring the very real possibility of wellbore damage – the fear of which was cited by Coast Guard Admiral Thad Allen (“We don’t know if the well bore has been compromised or not”) in the decision to halt the original May 28 "top kill" attempt. And it overlooks the very real likelihood of storms delaying procedures.

Indeed, analysts are speculating that it’s the vast scope of the problem, and associated clean-up costs, that is saving BP from takeover.

Phil Weiss, a senior energy analyst for Argus Research, was quoted in the LA Times report cited above that “Neither Exxon nor another major should be willing to take on that kind of unknown liability risk.” It continues that even if BP manages to raise $10 billion in asset sales, it would have to sell more over coming months as the scale of the clean-up, along with additional legal costs, becomes apparent.

The Gulf States are facing years of environmental problems, even if the oil stops leaking today. According to a July 13 Associated Press report:

"I think we're going to see oil out in the Gulf of Mexico, roaming around,
taking shots at us, for the next year, maybe two," Billy Nungesser, president of
Louisiana's oil-stained Plaquemines Parish, said Monday. "If you told me today
no more oil was coming ashore, we've still got a massive cleanup ahead."

Tony Wood, director of the National Spill Control School at Texas
A&M-Corpus Christi said the sloppiest of the oil — mousse-like brown stuff
that has not yet broken down — will keep washing ashore for several months, with
the volume slowly decreasing over time.

He added that hardened tar balls could keep hitting beaches and marshes each time a major storm rolls through for a year or more. Those tar balls are likely trapped for now in the surf zone, gathering behind sand bars just like sea shells.

"It will still be getting on people's feet on the beaches probably a year or two from now," Wood said.

And, yes, this is still best-case scenario. One deepwater well blowout, in an accessible area rich in oil company expertise (compared to, say, Arctic waters) has set off a chain of environmental devastation that will continue to cause further clean-up costs for a minimum of two years; the oil company involved was forced to secure $9 billion in loans and sell off $10 billion of assets just to secure its short-term survival as it faced the $100-million-per-day costs of the ongoing Gulf spill.

This is one accident. That’s the reality of deepwater drilling. And, on the subject of reality, we are becoming wholly reliant on deepwater drilling - it's all the West has got left. It’s not possible to meet the world’s growing demand for energy without it.

Royal Dutch Shell’s boss, Peter Voser confirmed – in a June 27 report carried in the Guardian newspaper, Shell: deepwater drilling will go on – that: “Given the rise in the population and the rise in the developing world of energy needs, we will have to develop those resources in deep waters, so my expectation is that we will go forward with it, but it will need some changes.”

The real issue behind all this is, of course, is peak oil. The easy-to-reach supplies have gone. Tar sands and deepwater sources is all the Western world has. The very fact that such hard-to-reach, expensive and environmentally disastrous exploitation is even taking place speaks volumes about peak oil. It’s just a pity that no major media commentator has picked up on the phrase.

But for now, I'm happy to harp on about the best possible case for the Gulf region. Like many commentators, I am wilfully allowing my optimism to obscure some of the darker realities. This ongoing disaster is a symptom of peak oil, which, as it plays out over the coming years will be followed by a decline in the energy sources our lives rely on (both hydrocarbons and nuclear). It likely won't be the only deepwater leak, for that matter. But I'm still optimistic. I'm optimistic that life will go on as oil supplies dwindle, although I believe economies will tumble and there will be big changes ahead.

I truely, honestly hope and pray that the Gulf Oil leak will be contained this week and the well cemented in by the end of the month. Likewise, I believe that the coming changes forced on us by changing energy supplies in the near future will, while painful in the short-term, be something I and my children will live through. I wouldn't be human otherwise.

Apocalypse watch: BP’s Gulf disaster as reality TV

2010-06-30T07:34:00.000-07:00

If French intellectual Jean Baudrillard were still alive to deconstruct the unfurling Gulf oil disaster, I’m sure he’d marvel at the hyperreality of it all. Me, lacking the vocabulary, I’m going to call it reality TV.

True to the genre a dysfunctional cast – Tony Hayward, Barack Obama and Martin Feldman – must coexist in an unlikely situation, promoting themselves while being constantly upstaged by video footage from robots 5,000 feet (1,500 m) below sea level. Watch as they try to cope with reality, each other, and their investment portfolios! Squirm as they star in their own tragedy! Gasp as Hayward, left, reassures you that there’s nothing toxic about the dispersal chemicals!

Want drama? The Gulf of Mexico is becoming toxic, poisoned by both the crude oil surging out of BP’s ruptured well and the million-plus gallons of chemical dispersant, Corexit 9500, being dumped on the slick. Oil is making landfall along the area – if whipped up by a hurricane, it would likely be sprayed over communities along that seaboard – and, it is claimed, a mixture of oil and Corexit seems to be raining throughout the region causing widespread crop damage. People helping clear the oil are coming down with a range of symptoms that suggest poisoning, just as they did after the Exxon Valdex cleanup.

How about some tension? The oil is still gushing out, and the poison is still being sprayed. The blowout preventer is widely believed to be on the verge of collapse, and relief wells might be facing an impossible task, depending on what is left of BP’s wellbore – we don’t know much about this, because no-one will tell us. But then, that’s reality TV for you.

But viewers, I’m jumping ahead of myself – let’s go back to the start of this sorry mess.

BP had problems with its Macondo well long before the Gulf disaster, according to documents and emails released by the House Energy and Commerce Committee. As Bloomberg reported, cracks in the well date “as far back as February”:

On Feb. 13, BP told the minerals service it was trying to seal cracks in the
well about 40 miles (64 kilometers) off the Louisiana coast, drilling documents
obtained by Bloomberg show. Investigators are still trying to determine whether
the fissures played a role in the disaster.

The company attempted a “cement squeeze,” which involves pumping cement to seal the fissures, according to a well activity report. Over the following week the company made repeated attempts to plug cracks that were draining expensive drilling fluid, known as “mud,” into the surrounding rocks.

The problems continued. Rumours from industry professionals writing on The Oil Drum have suggested that BP experienced numerous blowouts over this period. Again from Bloomberg:

On March 10, BP executive Scherie Douglas e-mailed Frank Patton, the mineral
service’s drilling engineer for the New Orleans district, telling him: “We’re in
the midst of a well control situation.”

[We let the scene on the Deepwater Horizon fade out, and cut to Hayward. We see him putting in a vital telephone call in mid-March – to his stockbroker.]

According to the UK Daily Telegraph newspaper, in an item headlined BP chief Tony Hayward sold shares weeks before oil spill:

The chief executive of BP sold £1.4 million of his shares in the fuel giant
weeks before the Gulf of Mexico oil spill caused its value to collapse.

Tony Hayward cashed in about a third of his holding in the company one
month before a well on the Deepwater Horizon rig burst, causing an environmental
disaster.

Mr Hayward, whose pay package is £4 million a year, then paid
off the mortgage on his family’s mansion in Kent, which is estimated to be
valued at more than £1.2 million.

This alleges Hayward “disposed of 223,288 shares on March 17.” It clearly states he did nothing legally wrong. They were his shares to sell.

Then the showstopper: the April 20 Deepwater Horizon explosion, killing 11, and sending tens-of-thousands of barrels of crude oil surging into the Gulf every day.

The next cast member featured is Obama, who addressed the nation on June 14, and, by default the rest of the globe: his take on the world’s worst environmental disaster was of interest to billions. His 18-minute address contained more military metaphors than the average sport report – his government’s "battle" against the "siege" in the Gulf of Mexico (we will fight it on the beaches, we will fight on the fields and in the streets, we will fight in the hills. . .) – but no real content.

He had the opportunity to mention peak oil – the reality behind the need to drill in 5,000 feet of ocean, around the depth of the Titanic’s resting place. But, of course, Wall Street would never allow Obama to do that. He did enough to let a knowledgeable audience know he’s no fool, but he worded it in terms that would not alarm Joe Sixpack. From the transcript:

After all, oil is a finite resource. We consume more than 20 percent of the
world's oil but have less than 2 percent of the world's oil reserves. And that's
part of the reason oil companies are drilling a mile beneath the surface of the
ocean: because we're running out of places to drill on land and in shallow
water.

For decades, we have known the days of cheap and easily accessible oil were numbered. For decades, we've talked and talked about the need to end America's century-long addiction to fossil fuels. And for decades, we have failed to act with the sense of urgency that this challenge requires.

This was wrapped up in notions of energy security, fears of foreigners (“Each day, we send nearly $1 billion of our wealth to foreign countries for their oil”) digs at political adversaries (“. . . the path forward has been blocked, not only by oil industry lobbyists, but also by a lack of political courage and candor”) and good old pork barrel hoopla that “the transition to clean energy has the potential to grow our economy and create millions of jobs.” (Which it has, in theory, although transition should not be presented as something to do in addition to plasma TVs and SUVs; it’s a willful downsizing of the supposedly non-negotiable way of life.)

Just another politician’s speech – but it got the ratings – watched by 32 million US viewers.

Next in our production, some intrigue. . . The man who, to most of the media is Mr. Peak Oil, Matthew Simmons lurches to centre stage. With a rumpled shirt and flushed face, he tells how insiders have told him that massive amounts of oil are pouring through BP’s fractured well and coming up at various points on the ocean floor, and that the chances of capping the gusher are so slim Obama may as well nuke it. The allegations make more impact online, going viral. Simmons, putting his money where his mouth is, seizes the opportunity to short some 8,000 BP shares.

At this point in the broadcast, we need some glamour if we want to get the ratings back up, and what beats a yacht race to bring together the rich and the beautiful? A quick edit will switch the scene to Hayward’s June 20 yacht jaunt around the Isle of Wight. After all, the waters, around the Isle of Wight, were clear of oil. What a great day out on the ocean; what a great photo op for our gaffe-prone star. . .

He’s in the role of a charming, lovable rogue. What this reality TV show needs is a villain. Enter the activist judge.

Obama wanted a six-month freeze on deepwater drilling, presumably along the lines that this is how long it will take the news media to go on to a new topic, allowing him to safely hand the drilling permit rubber stamps back to the industry. But that’s not how Judge Martin Feldman sees it.

Part arbiter of justice, part energy investor, Justice Feldman acted deftly to sell his oil stock and overturn Obama’s drilling moratorium – all in the same morning. According to Associated Press:

A statement released by U.S. District Judge Martin Feldman's chambers in New
Orleans says the judge instructed his broker to sell his stock in Exxon and a
subsidiary as soon as the market opened June 22. That was the day after the
hearing.

Feldman says his broker told him his stock was sold several
hours before he struck down the Obama administration's drilling moratorium. The
judge also said he didn't know if he made a profit or loss on the sale.

Exxon isn't a party in the case, but the company had one of the 33
existing exploratory rigs shut down by the moratorium imposed because of the
Gulf spill.

No-one is accusing the judge of letting his energy investments colour his judgment – he is a judge, after all – but if nothing else, it’s normally considered good manners to declare an interest. Memo to Feldman: suggesting that you might have made a loss on the deal is not the same thing.

Meanwhile, viewers, the blowout preventer deathwatch continues. . . how far is it leaning today? How much of BP’s compromised wellbore will it take with it when it collapses? Can the relief wells get in place before the whole thing goes? Don’t forget to tune in tomorrow, folks.

[Fades out on shots of Obama looking like he wants a cigarette, Hayward on his yacht, and Feldman standing up for the poor downtrodden oil execs.]

In terms of entertainment, is this scraping the barrel? Actually, yes. Millions of them, all told, from the beaches, wetlands and waters of the Gulf of Mexico. An estimated 35,0000 to 60,000 barrels have been gushing out every day since April 20, according to the government – and many more according to Simmons – but the current containment system can only handle up to 28,000 barrels per day.

Despite Gulf disaster deepwater oil is all we have left

2010-06-28T20:43:00.000-07:00

The race is on: can we extract the last remnants of Western oil from such unlikely places as the ocean floor before the global economy picks up enough to test out the hypothesis that supplies have already peaked?

Never mind the ongoing environmental and economic carnage in the Gulf of Mexico, rapidly reaching Biblical proportions – a poisoned sea allegedly spewing toxic rain across the US which, if whipped up by a hurricane, just might lead to a mass exodus from an entire seaboard – the industry is frantically promoting its right to continue with deepwater exploration.

And never mind that a single accident on a single well can be enough to bring the world’s third largest oil company to the verge of insolvency – BP’s problems are such that the British Prime Minister reportedly had to lobby Barak Obama for clemency – the majors are so desperate for oil that it’s a risk worth taking.

An insight into this level of need was given at the Fortune Global Forum in Cape Town, which ran June 26 – 28 to essentially hitch a ride on World Cup soccer media coverage and “demonstrate issues and opportunities in the developing world.” According to an item in the Guardian newspaper, Shell: deepwater drilling will go on:

Royal Dutch Shell’s boss, Peter Voser, insisted that today it was not
possible to satisfy the world's growing energy demands without drilling for
oil in deep-water reserves, despite the ongoing environmental disaster in
the Gulf of Mexico.

At a conference in South Africa, Voser defended the oil industry's push into deeper oil reserves and said Shell would continue to play its part, even as a tropical storm
threatened to disrupt BP's efforts to clean up oil off the coast of Louisiana.

"Given the rise in the population and the rise in the developing world
of energy needs, we will have to develop those resources in deep waters, so my
expectation is that we will go forward with it, but it will need some changes,"
Voser told the Fortune Global Forum in Cape Town.

BP is currently spending $100 million per day on its Gulf of Mexico oil spill response which has so far cost $2.65 billion. It has had to set aside set aside $20 billion in an escrow fund, as the company market value tumbled by around 50 per cent. And yet it remains hopeful of picking up more deepwater operations off the coast of North Africa, according to the Guardian:

It appears BP will be given the go-ahead to drill in deep-water sites off the
coast of north Africa. The head of Libya's National Oil Company said today that
the "accident" in the Gulf of Mexico would not mean that BP lost its contract to
drill for oil in the Mediterranean Sea.

"Accidents happen all the time. If an air crash takes place, we don't stop air traffic," said Shokri Ghanem. "So we have to continue but we take this step to learn more lessons."

In its March 20 Strategy Presentation document, published a month before the Deepwater Horizon disaster, BP outlined its commitment to deepwater oil. “Expanding deepwater” was cited among its “key sources of growth” beyond 2015.

And that’s pretty much the way rival oil producers see it. The future is offshore, for all its attendant risks. Right now there is a scramble to drill in Arctic waters off the Canadian Coast, not to mention Alaska – without regard for the fact that, bad as the Gulf of Mexico oil leak is, an Arctic leak is inaccessible for most of the year.

In addition, much industry excitement followed this week’s announcement of new reserves on the UK continental shelf, 110 miles east of Aberdeen. From the BBC:

EnCore Oil said the Catcher prospect is thought to hold up to 300 million
barrels of oil, and further investigations could add to this.

It would make Catcher among the largest discoveries since the billion barrel
Buzzard reservoir off Aberdeen in 2001.

EnCore - whose shares rose sharply - said the find was "exceptional".

Clearly, the world’s oil companies are only searching for oil in the depths of the ocean because that’s the last place available to search. The easy-to-obtain oil is gone. Anyone looking for official confirmation of just why deepwater is so important to us all of a sudden could take a look at the International Energy Agency’s June report, Medium-Term Oil and Gas Markets 2010. Although an exercise in studied blandness that was greeted with mild derision by many with an interest in peak oil, it contains an interesting aside about dwindling Opec spare capacity and subsequent market volatility. From the IEA’s press release:

Under higher growth, even with ongoing energy efficiency improvements, oil
demand increases by an average of +1.2 mb/d annually (1.4%), reaching close to
92 mb/d by 2015. Oil demand recovers to pre-crisis 2007 levels again by 2010.
Effective OPEC spare capacity in this scenario begins to decline again as soon
as next year, reaching 3.6 mb/d by 2015. While new OPEC capacity should come on
stream in 2014, we anticipate a tightening global balance, with surplus capacity
falling below 5% of global demand. This could lead to more jittery markets
ahead, after what has been a prolonged period of relative price stability over
the past year.

This has been expanded on in a June 28 Bloomberg item, Oil Price Swings to Worsen as Spare OPEC Capacity Shrinks: Energy Markets. This states: “Swings in oil prices may widen over the next five years as OPEC's shrinking spare production capacity increases traders' concern about supply shortages."

It cites Opec stating idled capacity is vital to “avoid a repeat of the price swings of the past two years, when oil slumped from a record $147 a barrel in July 2008 to $32 in December of that year.” But the declining spare capacity is due to the ongoing decline in non-Opec production:

This has geopolitical implications. When Opec spare capacity drops to 3 million barrels a day, any disruption in supplies from “a producer such as Iran or Nigeria” will have an immediate global impact.

OPEC, supplier of 40 percent of the world’s oil, pumped 29.4 million
barrels a day in May, with capacity of another 5.5 million barrels idled,
according to data compiled by Bloomberg. The group’s spare capacity was as low
as about 2 million barrels a day in July 2008, when oil prices peaked, before
tumbling as the global recession crimped energy consumption.

Spare production capacity will drop as supplies from outside the group fail to keep up with demand, according to the IEA. The agency estimates world oil usage will rise 6.4 percent by 2015 to 91.93 million barrels a day, while output, excluding OPEC crude, will increase 3.7 percent. That means the world will need more of the group’s oil to meet demand.

“There is good OPEC spare capacity today that should get whittled
down as demand increases over the next few years,” Ian Taylor, chief
executive officer of Vitol Group, the world’s biggest independent oil trader,
said at a conference in London June 24. “The big issue is what the demand
increase is going to be. Most people would feel that the market is unlikely to
fall but could rise.”

But then, that’s the essence of peak oil – market volatility, a dependence on the world’s most unstable regions, and increasing pollution as really rather untenable reserves are exploited.

And putting it all together, it's difficult not to conclude that oil has already peaked, or is very close to doing so. The major oil producers are acting as if that's the case.

BP's deadline to give facts on Gulf oil spill

2010-06-25T07:26:00.000-07:00

BP has been given until Friday, July 2 to provide documentary evidence establishing exactly what is happening behind the scenes at their ongoing Gulf of Mexico oil spill.

This material would answer current worst-case scenario speculation about the state of BP’s Macondo wellbore – whether it is structurally compromised – and the ongoing attempts to dig relief wells. There is currently a 2,500-square-mile-and-growing oil slick in the area that is spreading to the shorelines, but little is publically known about the state of things under the surface, and the issue is rife with speculation.

The demand comes in a letter written by Congressman Edward J. Markey, chairman of the Energy and Environment Subcommittee (pic, left). It was Rep. Markey who oversaw the June 15 congressional hearings that criticized CEOs of the world’s largest privately owned oil companies – BP, Exxon Mobil, Chevron, Shell and ConocoPhillips – for their “zero disaster planning.” His response back then was:

BP said they didn’t think the rig would sink. It did.

They said they could handle an Exxon Valdez-sized spill every day. They couldn’t.

BP said the spill was 1,000 barrels per day. It wasn’t. And they knew it.

This time around Rep. Markey is demanding information from BP that would provide the full picture of what’s going on deep below the surface of the Gulf of Mexico. This includes the truth about the condition of BP’s wellbore, reports of seabed oil leaks, the design and timeframe of relief wells and the size of the oil and gas reservoirs in question.

Addressed to BP’s controversial CEO Tony Hayward, Markey’s June 23 letter opens with:

I write to request information related to the integrity of the wellbore and
casing at the Deepwater Horizon leak site, as well as to request further
information on the design, testing, timeframe and likelihood of success for the
relief wells being drilled today. While BP has repeatedly stated that the relief
well would be completed by mid-August, I am concerned that possible damage to
the wellbore and casing and the difficulty of the operation itself could result
in more weeks or months before the flow of oil and gas is finally stopped.

This gets straight to the heart of a speculation, spearheaded by Matthew Simmons, that BP’s problems might be much greater than we could imagine. This line of thought, which ranges from the technical to the frankly apocalyptical (using a nuclear device to fuse the seabed and stop the leak) is that the Macondo wellbore has been so badly damaged that it has spawned multiple leaks from the seafloor – or at the very least that the extreme fragility of the well casing is behind the abandonment of the top kill procedure. This has a bearing on how much oil is gushing from the well – itself a matter of controversy – and what chances the relief wells have of success, as the more damage there is to the wellbore, the trickier and slower a proposition it will be. While Simmons’ more extreme comments have made the headlines, his more regular views about the reality of peak oil have been, at best, buried at the end of interviews with him. For example, when asked by CNN Money what lessons should be learned from the BP spill, Simmons replied: “That oil peaked. The easy stuff is over. We have to continue drilling in shallow water, but we probably need to take a deep breath and step back. Until we develop a new generation of equipment that can respond to these accidents, just don't go into the ultra-deep water and deep formations because it's just too risky.”

Rep. Markey, in his letter, cites this “speculation that the wellbore and casing at the Deepwater Horizon leak site may have been damaged and that leaks of oil and gas may already be coming through the sea floor or through the pipe itself,” then goes on to state:

In fact, in his June 17 press briefing, Admiral Thad Allen stated that “I think
that one thing that nobody knows is the condition of the wellbore from below the
blow out preventer down to the actual oil field itself. And we don’t know, we
don’t know if the wellbore has been compromised or not. One of the reasons we
did not continue with top kill at higher pressures, there was a concern that if
we increased the pressure too hard it might do damage to the casings and the
wellbore. What we didn’t want was open communication of any oil from the
reservoir outside the wellbore that might get into the formation and work its
way to the sub sea floor and then result in uncontrolled discharge at that
point.”

In a June 18, 2010 article in the Times Picayune, Bob Bea of the
University of California at Berkeley indicated that there is reason to believe
that oil and gas is leaking from places other than the containment cap. BP
officials said that a disk that is part of the subsea safety infrastructure may
have failed in the initial April 20th explosion, which may have contributed to
the failure of the “top-kill.” As reported by the Wall Street Journal, people
familiar with BP’s “top-kill” attempt have speculated that some drilling mud may
have escaped the well into the surrounding rock.

He continues with questions about the relief wells – is the August timeline too optimistic, and just how structurally similar will these be to BP’s original, and deeply flawed well? He asks BP’s Tony Haywood about the volume of oil still underground:

In the June 17, 2010 hearing of the Oversight and Investigations Subcommittee,
you testified that you believed the reservoir contained 50 million barrels of
oil. The damage that such a quantity of oil could do, should it all leak into
the Gulf of Mexico, would be staggering. It is imperative that the efforts to
permanently halt the flow of oil are successful.

Again, no-one knows for sure how large the oil reserve in question is – which is an important issue if BP is not able to contain the leak, with the assumption being that it will run until it is at least half empty. Just asking this question, Rep. Markey seems to be hinting at some of the worst-case speculation.

Rep. Markey goes on to demand BP provides to-the-minute technical information, including “all measurements, images, and other documents related to the condition of the wellbore” and anything relating to “hydrocarbons leaking from anywhere other than the containment cap.”

This information, when it comes in from BP in early July, should silence the ongoing speculation – because we will then be dealing with facts, rather than having to take what BP’s publicity department wants us to believe (who, to recall, initially stated no oil was leaking, and then that only 1,000 barrels a day, then, that the figure might be 5,000 - while Rep. Markey is of the opnion that "the rate could be as high as ~ 100,000 barrels per day up the casing"). This is technical information – and it has a good chance of subsequently being published, considering Rep. Markey’s track record in that area – that means we don’t have to blindly accept what BP’s spin machine puts out.

And recall that Markey, in his response to the June 15 hearings stated that the five major oil companies involved were guilty of a “kind of Blind Faith” that such a disaster “could never happen to them.” It was this thinking “that has led to this kind of disaster,” he stated. Markey illustrates this corporate approach with the following:

What we found was that these five companies have response plans that are
virtually identical. The plans cite identical response capabilities and tout
identical ineffective equipment. In some cases, they use the exact same words. . .

We found that all of these companies, not just BP, made the exact same
assurances.

The covers of the five response plans are different colors, but the content is ninety percent identical.

Like BP, three other companies include references to protecting walruses, which have not called the Gulf of Mexico home for 3 million years.

Two other plans are such dead ringers for BP’s that they list a phone number for the same long-dead expert.

The American people deserve oil safety plans that are ironclad and not
boilerplate.

(I’m not going to comment on the use of the phrases “Virtually identical” and “ninety percent identical.”)

BP does not have to reply, but all the same, it is essentially in a bind. Failure to provide this information would likely lead Rep. Markey to suggest they have something to hide, and possibly land BP in front of a congressional hearing to defend their handling of this ongoing environmental disaster. Basically, if BP is silent on this, it would give mainstream credence to the web speculation that their wellbore is fatally compromised and that the relief wells may not be the immediate fix that we all so desperately want to see. And that would cause even more damage to BP’s share price, currently in freefall.

Gulf drilling freeze lifted as oil disaster worsens

2010-06-23T07:44:00.000-07:00

A U.S. federal judge has blocked the six-month moratorium on offshore oil drilling, just as more credence is being given to the notion that the Deepwater Horizon disaster has resulted in multiple leaks on the seafloor - due to well casing damage - making containment a munch lengthier process.

New Orleans Judge Martin Feldman made the ruling Tuesday, June 22 to reverse a ban imposed by U.S. President Barack Obama May 27 in response to the massive on-going oil spill in the Gulf of Mexico.

The temporary ban suspended suspended drilling of 33 exploratory wells in the Gulf, with critics saying it would put thousands of oil employees out of work and further devastate the Gulf region's economy. According to Associated Press coverage, Judge blocks Gulf offshore drilling moratorium:

Several companies that ferry people and supplies and provide other services to
offshore drilling rigs asked U.S. District Judge Martin Feldman in New Orleans
to overturn the moratorium, arguing it was arbitrarily imposed.

Feldman agreed, saying in his ruling the Interior Department assumed that because one rig failed, all companies and rigs doing deepwater drilling pose an imminent
danger.

"The Deepwater Horizon oil spill is an unprecedented, sad, ugly
and inhuman disaster," he wrote. "What seems clear is that the federal
government has been pressed by what happened on the Deepwater Horizon into an
otherwise sweeping confirmation that all Gulf deepwater drilling activities put
us all in a universal threat of irreparable harm."

The White House has announced that it will appeal the decision. (As an aside, while a number of bloggers have alleging that Judge Feldman “has investments in several companies related to the oil industry” other reports suggest this is based on outdated information, that he no longer owns the stock in question – nevertheless, his decision would have been reached on a legal principle that, essentially, the individual oil companies in that area are innocent until proven guilty.)

Meanwhile, the June 23 edition of the Washington Post is reporting, under the headline Each day, another way to define worst-case for oil spill, how the oil disaster keeps unfolding at a sickening rate as more information becomes available. Or, as writer Joel Achenbach puts it, “even when you think you've heard the worst-case scenario, there's always another that's even more dire.” While distancing himself from the more alarming case, put by Matt Simmons in various television interviews, they are still given space. Specifically:

The base-line measures of the crisis have steadily worsened. The estimated flow
rate keeps rising. The well is like something deranged, stronger than anyone
anticipated. BP executives last month said they had a 60 to 70 percent chance of
killing it with mud, but the well spit the mud out and kept blowing.

The net effect is that nothing about this well seems crazy anymore. Week by week,
the truth of this disaster has drifted toward the stamping ground of the
alarmists.

The most disturbing of the worst-case scenarios, one that is
unsubstantiated but is driving much of the blog discussion, is that the
Deepwater Horizon well has been so badly damaged that it has spawned multiple
leaks from the seafloor, making containment impossible and a long-term solution
much more complicated.

Simmons, referred to here as “the unflagging source of end-of-the-world predictions,” gave a public speech outlining his views at the 7th Annual Energy Ocean International Conference, in Ft. Lauderdale, FL, earlier this month. According to a June 8 report on the Maritime Executive:

As a well-known and respected oil industry executive and author of the book Twilight in the Desert: the Coming Saudi Oil Shock and the World Economy, Mr. Simmons drew quite a crowd this afternoon. He spoke about the
oil spill in the gulf saying, “It is the greatest human tragedy we’ve ever had.
It is our Energy Pearl Harbor.” The oil spill must be attended to with the same
“intensity” as was used by the U.S. in WWII after the attack on Pearl Harbor. He
says that BP has given us nothing but bad information about this disaster from
the very conservative BP report of 1,000 barrels leaking a day to the release of
the video that they say is the leaking oil. Simmons claims there is a different
source of the leak and the video being released to the media is just a 4-foot
oil plume, which is much too small to cause such a massive oil slick.

NOAA ship the “Thomas Jefferson,” a technologically advanced ship used
for mapping the ocean floor, has found a 400 foot lake of heavy oil sitting at
the ocean floor. Mr. Simmons warned, with so much oil in the gulf (what he
believes has been 120,000 barrels a day) a hurricane will spread oil over the
entire gulf coast. Matt Simmons doesn’t hide his dislike for BP, calling them
one of the worst run companies, who he believes will likely have to file Chapter
11 in the next few weeks. A company so horribly run, it thought they could be
“self-insured,” which is a relief to the insurance industry.

Simmons’ earlier comments about the gushing well reaching such a perilous state that it might have to be sealed with a nuclear device was thoroughly dismissed in the item Nukes and Expensive Oil on the Whiskey and Gunpowder site.

Former navy pilot, and peak oil proponent, Byron King, writes that the US government lacks nuclear devices that can operate as such depth. Even if it were otherwise, it would be wrong to assume such a blast would fuse the ocean floor into an area of glass. He continues:

And what of the shock wave? Do we want to rip the seafloor to shreds? Do we want
a nuclear-level shock wave traveling through the seafloor in the vicinity of the
BP oil well? What will that do? Will it break other oil pipelines installed on
the bottom?

Not to mention the contamination,which would travel through the food chain. King concludes the item by bringing the debate back round to peak oil:

I’ll start by making a statement I’ve made before and I’ll make again: the cheap
and easy oil is GONE. Finding new energy to fuel our nation is going to be
harder, more regulated and more expensive.

Is a U.S. moratorium the right choice? I’ll let you decide that.

But there’s one matter that you won’t have a choice on: the higher price you pay for oil.

With oil sitting north of $70 a barrel I can’t imagine it getting any cheaper.

Indeed, a few years from now we may look back and deem this period the
point where the U.S. lost its edge in energy.

(As an aside, bloggers have alleged that Simmons should have declared his interest in BP shares, having supposedly had “a 4,000-share short sale on BP that he picked up when the stock hit $37. That’s in addition to a prior 4,000-share short sale he made at $48 a couple weeks prior.”)

Ultimately, we are left wondering who we can trust. Everyone has an interest, alleged or otherwise. BP has not been honest about the rate of flow from this well, which it initially stated as being 1,000 barrels a day. The US government has not come out and told us about the scope of the disaster. We are left with speculation. And, speculating, it seems fair to say that the failure of BP’s "top kill" operation is consistent with the well casing leaking and oil seeping out from the well, through fissures in the rock, and out to other points along the seabed. Or at least that BP felt that increasing the pressure in the well, to force down oil so it could be sealed, would cause such damage.

According to a June 18 report in the Times-Picayune, headlined BP Cites Broken Disk in 'Top Kill' Failure:

In a well of questionable design with a questionable cement job that's gone
through a major explosion, too much pressure on the well, could trigger a
rupture, sending oil pushing through fissures in the rock of the ocean floor and
bubbling up through the seabed, where it can't be contained.

That's why BP abruptly stopped the "top kill" efforts to seal the well May 28 after the company previously had said the procedure would continue for a few more days.
It's also why the company is continuing with efforts to contain the oil flowing
out of the well rather than seal the well outright by adding another blowout
preventer on top of the malfunctioning one. It's also one reason why the
containment cap that's currently capturing oil has vents in the side that allow
pressure to escape.

U.S. Coast Guard Admiral Thad Allen acknowledged as much at a briefing Thursday.

Either way, we appear to have one hope - that the relief well operation would allow the well to be filled from the bottom up.

But it’s the lack of information coming from BP and the US government that is causing speculation that the oil reservoir is leaking from various points around the area, and that it will continue for billions of barrels of oil to come. There is speculation that the actual reservoir of oil behind the leak is anything between 2.5 and 500 billion barrels.

Business leaders predict 'global oil supply crunch and price spike'

2010-06-14T07:27:00.000-07:00

The Chief Executive Officer of insurance giants Lloyds is warning that the world is facing a “period of deep uncertainty” over the decline of fossil fuels – and may soon be coping with $200-a-barrel oil.

It may be hard to believe now, writes Dr Richard Ward in his introduction to a “stark” report just published by Lloyds and an influential UK think tank, but that’s because “the bad times have not yet hit.” He warns business managers to be ready for “dramatic changes” as oil, gas and coal supplies will soon be “less reliable and more expensive.” The world “has entered a period of deep uncertainty in how we will source energy for power, heat and mobility, and how much we will pay for it,” he states.

And that’s just CEO Ward’s introduction. The rest of the report does not disappoint.

Titled Sustainable Energy Security: Strategic Risks and Opportunities for Business, it urges business leaders to adopt a “transition to a low carbon economy.” Those that do will thrive; the report talks of opportunities for forward-thinking managers that “prepare for and take advantage of the new energy reality.” However, “failure to do so could be catastrophic.”

Lloyds, which provides business services in more than 200 countries and territories (reporting profits of 3.9 billion UK pounds in 2009) produced this report with Chatham House, a London, England “world-leading source of independent analysis, informed debate and influential ideas.” Formerly know as the Royal Institute of International Affairs, Chatham House is independent, but works closely with the British Parliament. For instance, the organization facilitated the March 2010 meeting between British energy ministers and peak oil proponents.

It’s a report for business leaders, so emotive writing is perhaps not to be expected; instead, we get the occasional “new energy paradigm”. The term peak oil is largely avoided in favour of global oil supply crunch – which is emerging as a kind of Brit euphemism of choice for those wanting to attract the business community.

Sustainable Energy Security does not get hung up on predicting a date for this decline in oil production, but states that it is an urgent issue. It quotes from a 2009 study from the UK Energy Research Centre suggesting “that a peak in conventional oil production before 2030 appears likely, and there is a significant risk of a peak before 2020,” and also that “some suggest that this ‘peak’ has already occurred, while others maintain it is either impossible to predict or shows no sign of appearing.”

Having said that, it doesn’t pull any punches. For instance:

MARKET DYNAMICS AND ENVIRONMENTAL FACTORS MEAN BUSINESS CAN NO LONGER RELY ON LOW COST TRADITIONAL ENERGY SOURCES
Modern society has been built on the back of access to relatively cheap, combustible, carbon-based energy sources. Three factors render that model outdated: surging energy consumption in emerging economies, multiple constraints on conventional fuel production and international recognition that continuing to release carbon dioxide into the atmosphere will cause climate chaos.

WE ARE HEADING TOWARDS A GLOBAL OIL SUPPLY CRUNCH AND PRICE SPIKE
Energy markets will continue to be volatile as traditional mechanisms for balancing supply and price lose their power. International oil prices are likely to rise in the short to mid-term due to the costs of producing additional barrels from difficult environments, such as deep offshore fields and tar sands. An oil supply crunch in the medium term is likely to be due to a combination of insufficient investment in upstream oil and efficiency over the last two decades and rebounding demand following the global recession. This would create a price spike prompting drastic national measures to cut oil dependency.

The report looks at declining “extractive energy sources” – hydrocarbons and nuclear – along with climate change, and the likelihood of government carbon regulation. It repeats that fossil fuel energy is going to get more expensive, due to both diminishing supply and carbon taxation, so that “the most cost-effective mitigation strategy is to reduce fossil fuel energy consumption.” It argues for efficiency and for renewable energy, and against just-in-time manufacturing models.

While written in a positive, pro-business frame of mind, Sustainable Energy Security makes it clear that we are fast approaching a transition away from “extractive” energy sources that currently make up “90 per cent of the world’s traded energy” and into uncharged territory:

These changes will naturally impact jobs, profits, national economies and the
environment, just as the dramatic increase in coal use during the industrial
revolution and the onset of the ‘oil age’ did in the first part of the 20th
century. This means that there will be push and pull factors from stakeholders.
This will form the political context for many business transactions and
operations over the next 30 years.

This is a well-researched document. It’s all here: the growing demand for energy within the Middle East, China and India; the scramble for oil in Africa and Central Asia; the growing importance of Russia as a source of oil and natural gas (“EU depends on Russia for 33% of its imported oil and 42% of its gas”); the rise of coal and natural gas as transition fuels, and question over their longterm availability; the Deepwater Horizon explosion and subsequent oil slick, and the inherent risks of deepwater operations; the lack of investment in the oil industry; and the latest on unconventional sources of hydrocarbon. As it states on shale gas:

But the full impact is highly uncertain. Production from shale gas wells seems
to peak much faster than conventional gas, and data is limited. Assessments
of the Barnett wells in the US using horizontal drilling showed that most of
the recoverable gas is extracted in the first few years.

Is the US experience set to become a global phenomenon? Some suggest that resources in OECD Europe are large enough to displace 40 years of imports of gas at the current level, assuming recovery rates in line with those in North America. Exploration is already under way in Europe (including in France, Germany, Poland
and the UK) to assess this potential.

The document even enters into some speculation over oil prices, quoting a range of views (see chart, above). The highest, and most immediate, oil price is suggested by Chatham House’s own professor Paul Stevens: “A supply crunch appears likely around 2013…given recent price experience, a spike in excess of $200 per barrel is not infeasible”

This is highlighted in the document and referred to in Dr Richard Ward’s introduction. It subsequently states that while there is a “huge variety of opinion on how high the oil price will rise, and when it will reach these figures, most commentators agree that the trajectory is upwards.”

An interesting aside on the importance of fuel to the modern economy comes from a brief flashback to a September 2000 fuel tax protest in Britain, during which an informal coalition of truckers and farmers blockaded oil depots around the country, stopping deliveries to gas stations. Sustainable Energy Security states:

As supermarkets tend to keep only two–three days worth of perishables on their
shelves, a transportation fuel disruption lasting just a few days would affect
availability. This happened during September 2000 when protests over fuel price
rises prevented the distribution of fuel from depots to the rest of the country.
Supermarkets were obliged to put the government’s priority user scheme in place
at its petrol stations. They also faced ‘panic-buying’ which in some cases ran
down stocks before replacements arrived. Several stores decided to implement
rationing of basic goods like bread and milk. Companies that prepare and deliver
fresh goods to retailers daily were particularly vulnerable. UK food group Geest
announced that its deliveries would be unlikely to reach the supermarkets if
fuel supplies were not restored in a matter of days.48 The chief executive of
Sainsbury’s wrote to the Prime Minister to warn that the petrol crisis was
threatening Britain’s food stocks and that stores were likely to be out of food
in “days rather than weeks”. Fuel disruptions in other parts of the world also
affects transportation of goods to markets, and higher energy prices could push
up the price of basic food commodities, such as rice, soya and wheat - as they
did in 2008.

(I’ll declare an interest: working as a journalist in Derby, England, at the time, I was given a pass to enable me to buy fuel – most cars were off the road after only a couple of days. I guess the government wanted to keep the presses running; if we’d stopped printing, people would have thought civilisation was ending. . . And yes, there was panic buying; I seem to remember bread ran out first, then milk.)

Time and space considerations prevent me from looking at the climate change sections in Sustainable Energy Security, but needless to say, they are equally well put together.

I cannot recommend this report highly enough. It’s a complete introduction to the whole peak debate. Sustainable Energy Security is an essential, must-read document. In the words of Rob Hopkins of Transition Culture it’s “the Hirsch Report for British business… and provides the perfect case for the work that Transition Training and Consulting are now doing with businesses.” (Now that’s damning it with faint praise, considering the Hirsch report is one of the most neglected government documents about a contemporary issue of all time.)

I’ll leave you with just two of the document's conclusions:

Traditional fossil fuel resources face serious supply constraints and an oil
supply crunch is likely in the short-to-medium term with profound consequences
for the way in which business functions today. Businesses would benefit from
taking note of the impacts of the oil price spikes and shocks in 2008 and
implementing the appropriate mitigation actions. A scenario planning approach
may also help assess potential future outcomes and help inform strategic
business decisions.

Energy infrastructure will be increasingly vulnerable to unanticipated severe weather events caused by changing climate patterns leading to a greater frequency of brownouts and supply disruptions for business. This throws out a critical challenge to energy providers, investors and planners in terms of choosing the location of new infrastructure and fortifying existing plants and networks. Those businesses for which uninterrupted access to energy is of fundamental importance should actively consider investing in alternative energy supply systems.

BP's review: 45 years' of hard-to-access deepwater oil

2010-06-11T08:31:00.000-07:00

Embattled oil giant BP has released an annual review of global energy demand claiming we have 45 year’s worth of oil – but at the same time stressing the importance of deepwater operations such as the Gulf of Mexico.

BP, which seems to have problems with risk assessments, is apparently attempting to downplay the notion of peak oil while at the same time admitting to the realities of declining resources by reiterating the need for deepwater production - even as oil continues to wash up on the beaches of Florida. The great unanswered question of course being: Why would they be attempting to extract oil at the depth the Titanic sank if it was easily available elsewhere?

The report, Statistical Review of World Energy 2010 (highlights here, and the company’s press release here ) begins by making a large play about the 2009 downturn in global demand for energy – down 1.1 per cent – and that the subsequent “tentative recovery,” is uncertain enough that “the data shows changes in the pattern of global energy consumption that are likely to indicate long-term change.”

A casual reader may be expecting an oil producer to be triumphing the more recent increase in demand for its product, rather than the earlier slump – but it would seem that doing things this way allows BP to project reserves lasting further into the future, which is the kind of thing shareholders like to see.

And, according to the press release – which many online sources have quoted verbatim without stating that it’s BP’s release – we do have oil reserves stretching off into the future:

The Review reports proved oil reserves of 1,333.1 billion barrels at the end of
2009, including Canadian oil sands under active development and an upward
revision in official Venezuelan reserves. Global reserves are sufficient to meet
2009 production for 45.7 years. On the same basis, reserves of gas are
sufficient for 62.8 years and coal for 119 years.

This figure – 45.7 years – is even rosier than Opec’s peak oil speculation . Here we have BP suggesting oil will peak sometime around 2055, whereas Opec in 2030 – according to information presented at the March 2010 International Energy Forum, a global gathering of energy ministers. This meeting also received a report by independent experts PFC Energy, published online ahead of the event, of oil "peaking between 2020-2025 around 95.0 mmb/d," although with demand - if it continues at 1.5 per cent – outstripping supply slightly ahead of this date.

While BP's statistics are quite predictable, I’m interested in the following graphic of Oil production by region:
Does it, for example, look just a little bit like a Hubbert bell curve, or is it just me? (This probably explains the need for the report's writers to focus on the economic downturn.)

Media response to BP’s report has been somewhat predictable, variously using it as a platform for: considering the financial state of BP and its ongoing US legal woes, a consideration of the importance of the Gulf of Mexico as an oil producing region, a reprise of the peak demand theory (which seems to have been the intention of whoever wrote the BP report), and also for calls for less regulation of the oil industry.

An interesting item in the UK Independent newspaper, Transatlantic spat sees BP shares plunge 7%, reports on wrangling between the British and US governments over BP’s payment of shareholder dividends – which are due in July – ahead of compensation to those hit hardest by its Gulf of Mexico spill. This states:

In recent weeks, Mr Obama and other US politicians have repeatedly criticised
the response of the firm and its under-fire chief executive Tony Hayward.

Members of the US administration have also insisted on referring to BP
by its former name, "British Petroleum".

Earlier this week, the president suggested that Mr Hayward should be sacked and slammed BP for spending money on advertising and shareholders while "nickel-and-diming fishermen or small businesses here in the Gulf".

This continues that BP’s shares have been plummeting of late – not so much over the spill, but following media reports that the US government is taking legal action to ensure the company pays to make good all the damage. On Wednesday, BP shares took another tumble, at one point being down 12 per cent “as US officials threatened to seek a ban on dividend payouts” but rallying later in the day, to finish “down 6.6%, wiping another £5bn off the value of the group.”

This is a government-level issue as the “BP dividend, which has not been cut since 1992. . . provides around £1 in every £7 of share payouts from UK blue-chip firms.”

Meanwhile, the Financial Post – a supplement of Canada’s National Post newspaper – took the opportunity of BP’s Statistical Review to rail at Obama for actually wanting to legislate the oil industry. An item, Comment: The new oil risk: Peak regulation, talks about Obama “gearing up thousand-page rule books and new bureaucracies to oversee the global oil industry” It goes on to make the following interesting claim:

The latest BP statistical review, released Wednesday, put world oil reserves at
1.3 trillion barrels, with consumption currently equal to about 45% of reserves.
New reserves must constantly be found to maintain consumption. Peak oil
theorists believe the world is approaching a point where consumption is
exceeding the world supply of oil, a theory that has many holes, but which could
become a reality if governments begin to impose regimes that prevent the finding
of new reserves. As Christophe de Margerie, CEO of the French energy giant Total
SA, told the Financial Post’s Paul Vieira: “We are not going offshore for
pleasure. That’s where the oil is.”

It’s interesting for a couple of reasons. It doesn’t actually deny peak oil, so much as blame government legislation for it! Actually, reading it closely, other than the line about peak oil theories having “many holes” and the attempt to blame “regimes that prevent the finding of new reserves” it supports the overall peak oil argument. In fairness, the writers had an impossible brief – to deny peak oil while promoting the need for offshore exploration, because that’s the only place oil is these days.

Meanwhile, Jeremy Leggett – executive chairman of renewable power company
Solar Century and a leading figure in the UK Industry Taskforce on Peak Oil and
Energy Security – looked at the fine print of BP’s report. Writing in the UK Guardian newspaper, The oil spill and credit crunch were bad. An oil crunch would be worse, he described what he observed when BP launched the report:

After BP's chief economist, Christoph Buhl, finished his presentation launching
the annual BP Statistical Review of World Energy this afternoon, I reminded him
that last year he had played a question on peak oil for laughs, pouring scorn on
the issue. In the interim, I pointed out, more and more people had become
worried about the prospect for a premature peak in global oil production, not
least the companies in the UK Industry Taskforce on Peak Oil and Energy Security
(ITPOES). Given the heightened stakes with risk assessment in BP's world of
late, how safe did he feel he that BP is serving its shareholders well by
insisting, as he had, that "reserves remain sufficient to meet demand growth"
and that "the supply will never peak". As he well knew, growing numbers of
people – not least in his own industry – consider this assessment to be
dangerously complacent.

"Very safe," he said. The invitation-only audience duly laughed.

Then he looked at the the Statistical Review handed out at the launch. The inside cover announced the documentation was “one of the most widely respected and authoritative publications in the field of energy economics, used for reference by the media, academia, world governments and energy companies," but when he read on he observed:

And in small print at the bottom of the same page I read: "The data series for
proved oil and gas reserves … does not necessarily meet the definitions,
guidelines and practices used for determining proved reserves at company level,
for instance, …. as published by the US Securities and Exchange Commission
(SEC), nor does it necessarily represent BP's view of proved reserves by
country. Rather, the data series has been compiled using a combination of
primary official sources and third-party data."

Let me reword that. "We wouldn't necessarily get the SEC to sign off on this stuff, and to be honest, we don't even necessarily believe it ourselves. But go ahead, use it as a bible if you like. We don't want you to be worried about peak oil. The small print gets us off the hook."

Putting it all together, I would suggest that BP has produced the kind of overly optimistic report that its shareholders like to see – which it arguably has to do, considering that an announcement along the lines of the recent US military report that suggested severe oil shortages by 2015 would cause its stock to plummet. This is not just a matter of corporate profits, as many UK pensions rely on BP stock. Although in writing the report they may have, shall we say, been liberal with its interpretation of reserves data, the fact remains that the only large scale oil reserves for Western countries is deepwater. No-one can deny that the easy-to-obtain oil has gone, and we are now on the downslope of the Hubbert chart.

As the ongoing Gulf of Mexico disaster shows, one mistake can cost an oil producer billions, causing speculation about legal action against directors, shareholder revolts and even, at the extreme end, of a giant like BP having to sell off parts of itself to stave off bankruptcy. And that’s looking at things from a business perspective, overlooking the environmental costs.

Media flirting with peak oil following Gulf spill

2010-06-07T08:24:00.000-07:00

The ongoing Gulf of Mexico oil disaster is bringing the mainstream media a little closer to the peak oil debate.

It’s been out there on the business pages for a while, but it is beginning to make its way into news pages – via comment columns, and in a roundabout way, of course. It’s still at the flirtatious stage, but its beginning.

It’s a hot topic, and few mainstream writers are actually throwing their weight behind the concept of Hubbert’s peak (M King Hubbert, left). Right now, they are mentioning peak oil to deny it, but doing so with words that clearly agree with the concepts behind the issue. Perhaps it’s a coded way of informing people in the know that the writer is in on the bigger picture, but can’t actually come out and say it. Or at least not right away.

Whatever happens, as a journalist, I have observed this process of challenging new issues being brought into the newsroom. (It’s been going on most recently with climate change.) In order to get the newsdesk to allow your copy on an issue to go into print, it has to be something that the bulk of the readers agree with. (How many times in my career have I been told “People don’t want to read that”? Unfortunately, these days, if you have to explain it, it doesn't belong on a news page.)

I think we are a number of months away from peak oil hitting the headlines; when it does, I’d suggest it will happen in Europe first, and gradually make its way over to the US. I’d put my money on the English media – being so much more cut-throat and generally much less pompous about itself and less scared of offending big business – making the first move.

I’d also suggest that the sooner industry leaders and politicians take up the peak oil cause, the quicker this will come about. It’s already happening to some degree in England, with the UK Industry Task Force on Peak Oil and Energy Security’s February 2010 report and subsequent government think tank meeting on the issue. (It needs more leaders, and without ties to the energy industry or with a public perception of being publicity seekers.)

Anyway, that’s pure speculation. Right now, the issue behind the whole BP Gulf of Mexico disaster is why we are having to explore for oil at such depth?
A column in the June 7 Daily Mail newspaper – itself a very conservative, pro-establishment UK newspaper – headlined A slippery business: It's the end of easy oil - and maybe BP too, asks just this. Writer William Rees-Mogg, a Peer and former editor of the Times, considers “the growth in demand for oil, and the shortage of supply.”

From the outset I have to observe that he’s clearly using the theme of “the limits of Man's power over Nature” as a hook to hang the whole thing on. This, it seems to me, is the excuse to write about the decline of oil. Early on it states:

Nobody would be looking for oil at 5,000 ft if there were new supplies in
shallower waters.

The oil market registers the scarcity of oil. Last week oil was $74 a barrel for Brent Crude.

The progressive rise in the price over the past 30 years has been a measure of the growth in demand and the failure of supply to meet that demand.

If the oil companies are to satisfy their markets, they have no choice but to develop high-cost sources which in earlier decades would have been regarded as hopelessly uneconomic.

This leads Rees-Mogg to a consideration’s of President Barack Obama's decision “to make the United States nearer self-sufficient in oil” by promoting offshore drilling, and the damage to this policy caused by the BP Gulf of Mexico spill.

This is when we get to the flirting-with-peak-oil section. It’s very well crafted, considering that Rees-Mogg just can’t – yet – come out and say it:

There are three facts which have to be recognised. The first - and most
important – is that the age of readily available petroleum is over.

For some time there has been a theory that the world had already reached 'peak oil':
the point at which the growth of demand for oil exceeds the growth in supply.

The BP disaster goes beyond the doctrine of peak oil. We are now at the
point of 'peak technology', where the risks of drilling technology have become
greater than society is willing to support.

In the United States, the oil risk has become a political risk.

It may seem like a strange comparison to make, but I’d suggest this is the way that a writer in an establishment newspaper would approach a controversial issue like the assassination of president Kennedy. He would, for instance, write about the US government’s strange behavior before and after the event, especially the apparent stonewalling through the various investigations, before denying the assassination buff theories. (It’s called having your cake and eating it.)

On the subject of the Gulf oil disaster, it looks as if the US government is renewing its commitment to a freeze on shallow water drilling also.

A June 2 Associated Press report that “the first new Gulf of Mexico oil well since President Barack Obama lifted a brief ban on drilling in shallow water” has been given the go ahead has been followed by one stating: “The Obama administration is blocking all new offshore drilling in the Gulf of Mexico, a day after regulators approved a new permit for drilling in shallow water.”

This, APNewsBreak: Feds halt new drilling in Gulf, continues:

An e-mail Thursday from the Gulf Coast office of the Minerals Management Service
says that "until further notice" no new drilling is being allowed in the Gulf,
no matter the water depth. A copy of the e-mail was obtained by The Associated
Press.

The announcement comes a day after the minerals agency, which
oversees offshore drilling, granted a new drilling permit for a site about 50
miles off the Louisiana coast, 115 feet below the ocean surface. Environmental
groups accused the administration of misleading the public by allowing work to
resume in waters up to 500 feet deep while maintaining a moratorium on deepwater
drilling.

I’ve previously written about the sheer amount of oil production in just the US portion of the Gulf –3,858 oil and gas platforms in 2006, and, by 2008, 141 producing deepwater projects and 7,310 active leases on oilfields in the area – so don’t go expecting much of a sea change in the oil industry.

Obama’s response looks like politics: to show leadership, but just for long enough for the public to forget about the issues – say, like six months – before quietly handing things back over to the oil industry. If Obama wanted to control the offshore oil industry, his first step would be to increase, or preferably completely remove, the liability cap for oil spills. It currently stands at $75 million – speculation has suggested that is should rise to $10 billion. (Aside from the PR value of showing it’s a good corporate citizen, BP has probably spent more than $1 billion on the Gulf spill, and could in theory walk away from the whole disaster – which is probably why the US government is putting together evidence suggesting negligence, leading to a possible court action.) If he wanted to promote futhur oil exploration in the region, at least until the media interest in the BP spill has died down, he would have to do some peak oil talking of his own.

Peak oil means deepwater drilling is business as usual

2010-06-04T07:33:00.000-07:00

With Federal regulators approving a new Gulf of Mexico oil well and the Canadian government continuing to support deepwater drilling off its own coasts, it looks like business as usual for the oil industry despite media coverage of BP’s ongoing ecological disaster.

Even if the media debate switches to the realities of peak oil and the need for renewable alternatives to declining fossil fuels – or indeed the lack of regulation of the oil industry in the US, which has been compared to the financial sector before the 2008 credit meltdown – it seems a fair bet that it won’t dull our appetite for oil.

An Associated Press report Wednesday (June 2) reported that “the first new Gulf of Mexico oil well since President Barack Obama lifted a brief ban on drilling in shallow water” has been given the go ahead. It’s only deepwater projects that remain temporarily frozen. The item, APNewsBreak: Feds approve new Gulf oil well off La, states:

The Minerals Management Service granted a new drilling permit sought by Bandon
Oil and Gas for a site about 50 miles off the coast of Louisiana and 115 feet
below the ocean's surface. It's south of Rockefeller State Wildlife Refuge and
Game Preserve, far to the west of the Deepwater Horizon oil rig that triggered
the BP spill.

Obama last week extended a moratorium on wells in deep
water like the BP one that blew out a mile below the surface in April and is
gushing millions of gallons of oil. But at the same time, the president quietly
allowed a three-week-old ban on drilling in shallow water to expire.

Putting this into perspective, a map (left), courtesy of the National Oceanic and Atmospheric Administration (NOAA), showing the “3,858 oil and gas platforms extant in the Gulf of Mexico in 2006” is appearing on a number of websites. Not all of these platforms are deepwater, of course.

Anyone wanting to understand the issue should turn to an 87-page Minerals Management Service document, Deepwater Gulf of Mexico 2009: Interim Report of 2008 Highlights. Essentially, the US Department of the Interior’s Minerals Management Service controls leasing of offshore oil and gas rights in the nation’s waters – these are sold to the highest bidder. This, which defines deepwater as anything in a depth greater than 1,000 feet, states:

In February 1997, there were 17 producing deepwater projects, up from only 6 at
the end of 1992. Since then, industry has been rapidly advancing into deep
water, and many of the anticipated fields have begun production. At the end
of 2008, there were 141 producing projects in the deepwater Gulf of Mexico.

If 141 producing deepwater projects in that area seems larger than expected, note that there are many more leases on oilfields in the area – 7,310 active leases in 2008 - and that the trend is towards ever deeper water. The document continues:

Over the last 15 or so years, leasing, drilling, and production moved steadily
into deeper waters. There are approximately 7,310 active leases in the U.S.
GOM, 58 percent of which are in deep water. (Note that lease statuses may
change daily, so the current number of active leases is an approximation.)
Contrast this to approximately 5,600 active GOM leases in 1992, only 27
percent of which were in deep water. There was a maximum of 31 rigs drilling
in deep water in 2008, compared with only 3 rigs in 1992. Likewise, deepwater
oil production rose about 786 percent and deepwater gas production increased
about 1,067 percent from 1992 to 2007. Production from seven deepwater
fields began in 2008, including Thunder Horse, the largest daily producer in
the GOM.

Much of the future development is likely to be at depths much greater than BP’s well in the Mississippi Canyon – which is in 5,000 feet (1,500 m) of water. As the Deepwater Gulf of Mexico document states: “Shell Oil Company set a world water depth record in drilling and completing a subsea well 9,356 ft (2,852 m) below the water surface in the Silvertip project at the Perdido Regional Host facility in Alaminos Canyon.”

It contains the following chart, updating the 2006 map by including depth:

On the subject of pdf documents, another interesting one is BP's Initial Exploration Plan for its operation in Mississippi Canyon 252 – the blowout well that’s currently spewing anywhere between 12,000 and 25,000 barrels of oil into the Gulf each day. This, which can be seen on the Mineral Management Service website, is dated Februrary 2009. The constant theme of this is that, while BP recognized the potential for a blowout, it was not required to come up with a plan to deal with one:

2.7 Blowout ScenarioA scenario for a potential blowout of the well from which BP would expect to have the highest volume of liquid hydrocarbons is not required for the operations proposed in this EP.
7.1.5 Oil spill responsediscussion – a discussion of response to an oil spill resulting from the
activities proposed in this plan is not required for this Exploration Plan.
7.2 Modeling report
A model of a potential oil or hazardous substance
spill is not required for the activities proposed in this plan.

This document also includes a rather interesting table:

Putting the two together, then, BP did not see the need to prepare for a blowout with the potential to spew up to 162,000 barrels a day of oil. BP’s chief executive Tony Haywood subsequently told The Financial Times that it was "an entirely fair criticism" to say the company had not been fully prepared for a deepwater oil leak.

The spill is now being recognized as America’s worst environmental disaster. The Gulf of Mexico has been described as "a damaged sea for a generation."

Already, an estimated 20 million to 40 million gallons of oil has spewed, eclipsing the 11 million that leaked from the Exxon Valdez disaster.

BP is estimated to have already spent a billion dollars on the oil leak, and estimates suggest it will cost a further two billion or so. Adding to the company’s woes is US Attorney-General Eric Holder’s announcement of civil and criminal investigations. If negligence can be proved, corporate legislation that would cap the company’s liability at $75 million no longer applies. According to press reports, “the US government could seek to fine BP up to $4,300 for every barrel leaked.”

BP’s stock price is tumbling as a result – dropping 15 per cent Tuesday and wiping $17 billion off the company’s value. According to a report in the Canadian Globe and Mail newspaper, U.S. probe, surging costs threaten to sink BP, the oil giant now “ finds itself in an epic battle for its future.” It continues:

BP's market value has shrivelled under the constant onslaught of negative
headlines and growing concerns that the company will have to finance a massive
clean-up and compensation effort, plus face billions of dollars in fines.

Already down 30 per cent from its pre-spill level of $60 (U.S.), BP
shares plunged in trading in London and New York on Tuesday, losing $6.43 to
close at $36.52 (U.S.) on the New York Stock Exchange . Since the blowout on
April 20, BP's market value declined by $63-billion (U.S.), raising takeover
speculation.

Takeover is unlikely, according to market experts, with regulators supposedly not keen on bigger oil companies – and anyway, any purchaser would have to write off the rapidly growing debts from the Gulf disaster. What’s more likely is that BP, which operates in 30 countries with 80,000 employees, would have to sell off elements of the company to survive. There has even been speculation that the US government could nationalize BP.

An item in investors website Daily Profit Blog draws an intriguing parallel between BP’s alleged practices before the Gulf blowout and those of US financial companies before the 2008 “credit crisis.” This states:

BP itself is under siege, too. The stock is in a virtual freefall as repeated
efforts to cap the leak have failed. It could be months before the leak is
stopped. Costs to the company could hit $22 billion. And that’s if BP didn’t do
anything wrong.

It’s inevitable that BP will be found in violation of Clean Water and Refuse Act laws. But there could be criminal charges coming, too. The New York Times has recovered internal documents that suggest there were “serious problems and safety concerns” with the Deepwater rig. BP is also being investigated for lying about its ability to deal with oil spills. And not only that, BP may have been misleading regulators and taking shortcuts to get the rig working.

It seems clear that, at best, BP acted recklessly. And if you’re starting to see parallels with the way financial companies ignored risk and deceived regulators before the financial crisis of 2008, you’re not alone.

The industry as a whole is already suffering as a result of the Gulf disaster. (Not as much as the ecologically fragile wetlands, used by three quarters of US waterfowl and ninety per cent of the Gulf's marine species.) Insurance premiums for deepwater drilling “already jumped 40% and may rise further if U.S. lawmakers raise the liability cap for oil spills.”

But this does not mean the end of deepwater drilling - much of the web speculation in this area fails to consider the extent of Gulf of Mexico operations. And neither is it likely too, in all reality, mean the end of BP - a shareholder revolt, on the other hand, is quite likely once the spill is cleared up.

BP’s Tony Haywood faced City of London investors yesterday, by webcast. According to the UK Daily Telegraph newspaper, BP oil spill: Tony Hayward faces the City, he faced a noted lack of tough questions about the company’s future.

At one point, Hayward admitted the financial ramifications would be
“severe”. But at the same time, he implied there would be no cut backs in
spending – suggesting that BP’s strong cash flow would make whatever has to be
paid out this year seem like pure pocket money.

As one of my colleagues remarked: “His company’s just scattered oil
over the most litigious country on earth, the world’s most powerful man is
breathing down his neck, and that call sounded all business as usual”.

It’s interesting to note that “Hayward says he “doesn’t think” the extra costs of safety improvements will make offshore deepwater drilling prohibitive.”

Meanwhile, the deepwater oil is going on as usual in Canada, according to the Globe and Mail newspaper.

Newfoundland and Labrador is proceeding with the high-risk game of oil
exploration in ultra-deep water, as regulators in the province express
confidence in industry’s safety practices despite the ecological catastrophe of
BP PLC’s Gulf of Mexico blowout.

Canada’s East Coast is now the only region in North America where oil
companies can continue to drill deep-water exploration wells after President
Barack Obama last week ordered the industry to suspend such operations in the
Gulf of Mexico, pending a review of the BP disaster.

Simply put, if one of the largest publicly controlled oil companies (BP revenues are behind only to RoyalDutch Shell PLC and Exxon Mobil Corp.) finds itself in such an expensive mess over a single deepwater oil accident, then the industry will find itself in a terrible, dammned-if-you-do, dammed-if-you-don’t position. They have to go where the oil is, but their only options are either the under-performing oil sands or else technically challenging deepwater, where any error could see the company literally fighting for its survival.

In March, Jim Mulva, CEO of ConocoPhillips admitted that seeking new oil reserves was not a money making venture. We might well see a future of a handful of super-sized oil companies, or else nationalized oil producers serving government’s requirements of keeping industry running and the military mobile rather than seeking to make a profit on the open market.

Government investigates resource shortages

2010-06-01T07:26:00.000-07:00

The British government is making a review of current, ongoing global shortages of vital raw materials.

This will go beyond the notion of peak oil to look at the supply of a series of key natural resources, following rises in commodity prices, food riots and accusations that various countries - particularly China and Japan – are beginning to stockpile important minerals in an attempt to protect their businesses from global competition.

A report in the UK Guardian newspaper, Government review to examine threat of world resources shortage, states that the country’s Department for Food, Environment and Rural Affairs is leading the initiative. The ministry believes that, “every sector of the British economy was directly or indirectly vulnerable to future shortages.”

The government is taking the initiative following widespread reporting on the pending collapse of various natural resources, including a December report by the World Business Council for Sustainable Development that 49 strategically important resources may become harder to obtain. This, EU starts screening raw materials ‘critical list,’ states:

An expert group set up by the European Commission has begun screening a list of
forty-nine "potentially critical" raw materials whose availability to industry
could come under threat as global competition for natural resources intensifies,
EurActiv has learned.

A preliminary list of twenty raw materials considered to be potentially critical for the EU economy, published by the Commission a year ago, has been expanded to include nineteen new substances.

A first batch of raw materials – cobalt, lithium and rare earths – was
examined by the expert group during its first meeting in November, with the
objective of testing the Commission's proposed methodology on the raw materials'
"criticality", EurActiv has learned.

According to this report, the EU is particularly concerned about “rare earths, collections of metals and elements found in a wide range of gadgets and consumer goods, including batteries used in electric cars.” The problem here is that 95 per cent of rare earths come from China, which is currently putting export quotas in place.

Rare earths include neodymium, used to make lightweight and powerful magnets used in hybrid cars and wind turbine generators, touted as ways to mitigate peak oil. The item continues:

Chinese media reported in September that Beijing would start applying quotas on
exports of rare earths and other exotic metals of which it is the only major
supplier, citing environmental reasons.

The United States and European Union filed a complaint with the World Trade Organisation on 23 June, accusing Beijing of unfairly favouring its steel, chemicals and other industries by restricting access to nine types of key raw materials.

Clearly, the Western nations are attempting to force China into providing raw materials – rather than finished goods. According to the Guardian:

Elsewhere, the US, the EU and Mexico have announced that they want to bring a
World Trade Organisation case against Chinese restrictions on exports of nine
key raw materials, including coke, bauxite, magnesium and fluorspar, all
important for producing steel, aluminium and other chemicals.

China has been a member of the World Trade Organization since December 2001, and has been the subject of previous complaints from the West.

In the hands of the World Trade Organization, the matter will be presented as being of free trade rather than resource collapse. Anti-globalization protesters may well say that it’s about the perceived right of Western nations to continue to burn through finite resources at an unsustainable levels, no matter where in the world they may be located and who owns them. Although correct up to a point, this arguably to confuses China’s protectionism with conservation; the Chinese government clearly intends to utilize these resources itself. It wants the manufacturing jobs to be within its own borders.

Underneath all this is geopolitical positioning over declining resources – hydrocarbons are front and centre, but the issue is far wider. As the Guardian reports:

The international affairs thinktank Chatham House, which is carrying out its own
review into the resource crunch, has also compiled a list of deals signed by
Chinese state-owned companies for special access to oil and gas reserves and the
purchase of stakes in oil and coal producers covering South America, Australia,
Russia and the Middle East.

Peak oil writers have long written about the prospect of resource wars, from the US involvement in Iraq and Afghanistan to less obvious suspects such as water wars. (Although water is renewable, drinkable water in underground aquifers can be depleted in the same fashion as oil.)

According to a March report in the UK’s Independent newspaper, tensions are rising between India and Pakistan over water. The item, India is stealing water of life, says Pakistan, suggests farmers on the Indian side of the Chenab are “reducing one of the subcontinent's most important rivers to little more than a trickle” before it reaches Pakistan. It continues:

A group of more than 20 different UN bodies warned earlier this month that the
world may be perilously close to its first water war. "Water is linked to the
crises of climate change, energy and food supplies and prices, and troubled
financial markets," said the report. "Unless their links with water are
addressed and water crises around the world are resolved, these other crises may
intensify and local water crises may worsen, converging into a global water
crisis and leading to political insecurity and conflict at various levels."

At first sight, this may seem like just another in a series of cross border issues between these two nations, dating back to the very formation of Pakistan (and, in fairness, India’s last minute reneging on a deal to cede Kashmir – which was to have been the ‘k’ in Pakistan). But disputes like this are likely to escalate when oil becomes depleted. It states that farmers in the area must pump water from wells:

When Mohammed Babar and other villagers close to the town of Wazirabad sunk a
well several years ago, they discovered water just 50ft beneath the surface; now
the water table lies at around 100ft down. "To irrigate our crops it used to
cost about 200 rupees (£2.71) worth of diesel," said Mr Babar, standing amid
fields lush with rice and winter wheat. "Now it costs 250 or 300."

(The Baglihar hydroelectric dam on the river Chenab, which flows from Indian-controlled Kashmir into Pakistan, is pictured above. Clearly, this is more than a dispute between farmers either side of the border.)

When the price of oil rises, as demand outsrips supply, agriculture will likewise become more expensive. This will make staple foods cost more throughout the world, possibly sparking food riots, and increasing the level of tension over resources such as water.

It’s wrong to look at depletion of any one resource in the absence of others, because they all play together – at the most basic, a rise in the price of oil will push demand for natural gas, for instance. In addition, many writers are independently plotting declines of resources that fit a similar timeline, coming together over the coming decade or so. For instance, an April 2010 Foreign Policy article, Peak phosphorus, stated that demand for this mineral – which is subject to the Hubbert bell curve model of decline – is already outstripping production enough to raise prices. Phosphate fertilizer prices rose 350 per cent between 2003 and 2008, they claim. If this is not addressed we could face “a Malthusian trap of widespread famine on a scale that we have not yet experienced.”

This British review of global resource shortages could be presented as an economic, free-trade issue, but, on closer examination, it becomes difficult to avoid the prospect of people going hungry, and possibly also facing aggressive military intervention. It is a humanitarian crisis.

Deepwater drilling going ahead despite eco disaster

2010-05-29T11:33:00.000-07:00

The desperate ongoing operation to contain the Gulf of Mexico oil disaster is not deterring the Canadian government from “soliciting bids” for offshore drilling, according to press reports.

The BP Deepwater Horizon spill is becoming a milestone ecological disaster: the US’s largest ever oil spill, now estimated to have been gushing between 12,000 and 25,000 barrels of oil into the Gulf each day since April 20. It has already polluted more than 99 miles (160 km) of Louisiana’s coastline (see pic, left, of a pelican attempting to clean oil from itself) and – according to latest estimates – there is a high chance that the chemicals used to disperse the spill will find their way into the food chain.

These dispersants, “a cocktail of organic solvents and detergents” that have never previously been used at the depth of BP's well, are linked to a six-mile (10-km) wide “oil cloud” reaching two miles (3 km) below the surface, that stretches 22 miles (35 kilometers) northeast of the well disaster.

BP’s CEO Tony Hayward has reportedly said the topkill procedure has so far been “partially successful,” apparently temporarily halting the oil leak – but the next challenge will be putting a cement plug in the well. According to a report, All-out effort to tame Gulf blowout ‘partly successful,’ says BP boss, in the May 29 Vancouver Sun newspaper:

BP’s Hayward said he continued to put the chances of success at 60 to 70 per
cent and said it would be Sunday before officials could determine whether to
inject concrete into the pipes, the last step in the process of killing the
well.

Yet despite US president Obama’s six-month freeze on offshore drilling, the Canadian government is “moving ahead with plans to grant new offshore oil-exploration licences in Canada's Arctic,” according to a separate Vancouver Sun report, Canada still inviting offshore drilling bids. It states:

Moreover, any company granted an exploration licence in Canada's portion of the
Beaufort Sea will be subjected to less environmental scrutiny than companies
wishing to explore on the U.S. side, critics say.

U.S. President Barack Obama announced this week that his administration has extended its moratorium on new offshore drilling. Canada is still soliciting bids for exploration licences in the Beaufort Sea and the Mackenzie River delta in the Northwest Territories. The locations up for grabs include a parcel of land roughly 200 kilometres offshore, to the west of existing leases owned by BP and Imperial Oil.

BP has begun seismic testing of the sea floor in the Canadian Beaufort, the article continues. Meanwhile, according to the Calgary Herald, Imperial Oil Ltd. (and its majority stakeholder, ExxonMobil Corp.) “were awarded exploration rights for a parcel in the Arctic region in 2007. The two paid $585 million for the Beaufort Sea acreage, and have yet to drill a well there.” Imperial CEO Bruce March said the company was “at least four or five years out from ever drilling a well” in the Beaufort Sea.

So why would the Canadian government be continuing to grant offshore oil-exploration licences in a pristine and fragile wilderness even as an environmental and ecological disaster unfolds in the Gulf of Mexico?

The short answer: peak oil. The easy-to-extract oil has been used, and we are at the end of the cheap oil. Industry needs oil, and governments need thriving economies and the revenue that extraction can bring.

In addition, there’s a geopolitical game going on in the Arctic sea area.

As Canadian Business reports, the government of Greenland is allowing a major push in its territory here, right alongside the Canadian border. The item, Greenland to Canada: don't worry, our offshore drilling rules best in world, states:

A Scottish oil company plans to drill four wells west of Greenland's Disko
Island and right next to Canadian waters and those are only the beginning.
Greenland has sold exploration leases down almost the entire maritime border.

The item goes on to state that that the “exploration wells the territory plans for this summer in the Davis Strait” will be drilled under far more stringent safety regulations than Canada’s. (They'd have to be, considering Canadian rules are even more lax than those in the US, where oil giants have been lobbying government hard for decades.)

According to the business pages, the next major push for oil is going to be in the Arctic sea. Deepwater exploration is not going to end, despite Obama’s much heralded moratorium and other statements from politicians. Put bluntly, the oil companies need to go where the oil is. And with the underperforming and expensive oil sands, the only place is offshore.

Surely, peak oil is just around the corner.

Gulf oil slick 'worst in US history'

2010-05-27T14:00:00.001-07:00

Early reports are indicating that BP's risky bid to plug it’s Gulf of Mexico well appear to be working – but the subsequent oil slick may be far greater than anyone dared fear.

US officials have reportedly confirmed that the well appears to be no longer leaking – but at the same time it’s being reported that the oil slick is now the worst in the nation’s history (see satelite photo, left), and that BP appears to have attempted to downplay the scale of the disaster.

President Barack Obama, at a press conferrence this morning (Thursday, May 27) said his government will hold BP fully accountable for the massive oil leak in the Gulf of Mexico, and barred any new deepwater oil exploration for six months.

A report in today’s Vancouver Sun newspaper, BP stops oil flow; slick worst in U.S. history, states the US government now believes oil may have been gushing into the Gulf at a much greater rate than BP had stated:

New data released by government scientists said the oil may have been flowing at
a rate up to four times higher than previously estimated by BP.

The new estimates suggested the oil was gushing out at a rate of between 12,000 to
19,000 barrels a day — much higher than the previous estimate of 5,000 barrels a
day.

Under such a scenario, that would mean between 18.6 million gallons
and 29.5 million gallons of oil have seeped into the Gulf — way higher than the
11 million gallons of crude spilled in the 1989 Exxon Valdez disaster off
Alaska.

With 100 miles (160 kilometers) of Louisiana coastline already
contaminated, there are fears U.S. officials may order the burning of the
state's unique marshlands, home to a variety of endangered birds and mammals.

Based on the 5,000-barrels-a-day figure, the clean-up cost was estimated at $23 billion – although subsequent press speculation is that “the company could now face effectively unlimited fines” under the US Clean Water Act. According to the UK Daily Telegraph “ the US government could seek to fine BP up to $4,300 for every barrel leaked.”

And it’s hard to imagine the government cutting BP much slack, considering reports emerging that the oil giant had been allegedly cutting corners immediately before the April 20 explosion and sinking of the Deep Horizon rig and resulting spillage from the Macondo well.

According to a report in yesterday’s New York Times, documents supplied by a congressional investigator suggest BP had been using the riskier – and cheaper – of two methods to seal the well shortly before the blast:

The approach taken by the company was described as the “best economic case” in
the BP document. However, it also carried risks beyond the potential gas leaks,
including the possibility that more work would be needed or that there would be
delays, the document said.

The industry has been speculating on how this will play out across the board. While no-one expects a permanent ban on deepwater drilling off the US coast, an item on Wall Street Journal blog The Source, headlined Oil Industry Suffers First Blowback From BP Spill, suggests Royal Dutch Shell has suddenly found itself unable to go ahead with plans to immediately drill an offshore Alaskan well, and that the industry as a whole will face rising costs:

“A clear outcome of the Macondo well blow out will be higher offshore drilling
costs in the future,” said Evolution Securities in a research note. “Changes are
likely to include tougher permitting systems; tougher inspection regimes for
safety equipment; higher specification for key safety components and more
redundancy features; more extensive clean up plans.”

Insurance premiums for deepwater drilling have already jumped 40% and may rise further if U.S. lawmakers raise the liability cap for oil spills from $75 million to $10
billion, Evolution said.

Rising costs for the industry, at a time of oil price volatility – oil dropped to $70-per-barel due to the European debt crisis, and currently stands at $73 – spell trouble. All it would take is a pronounced market downturn to make deepwater ventures untenable, and the world’s markets are in deep trouble. Europe is awash in debt, China’s economic miracle, based on a housing bubble, is beginning to look shaky, and the US is printing money to bail its own economy out.

Things may be coming into place for a more upfront discussion about the reality of peak oil. The oil industry has nothing to lose by talking about just why it is forced to look to extract oil from mile deep seabed. It's probably time for oil companies, and governments, to admit that this is where the last oil reserves, outside of Opec, are to be found. And at the same time, for those of us that object to deepwater drilling and oil sands extraction to face up to the fact that - like it or not - our modern world runs of such environmentally destructive energy. That's not to let BP off the hook for apparently cutting corners, but to admit the realities of peak oil.

As the Whiskey and Gunpowder site provocatively puts it:

I guess my concern is all those who will come out of the woodwork and decry
what’s happened here…and then drive twenty miles to a supermarket and shop for
goods brought in from across the country by a fleet of trucks. They just don’t
appreciate how necessary offshore drilling is for their way of life to continue.
It’s one thing to say BP or Transocean fouled things up royally, but it’s
another to say that they shouldn’t be drilling in deep water at all.

Gulf disaster illustrates we're now drilling deeper than the Titanic

2010-05-27T07:26:00.000-07:00

BP is today (Thursday, May 27) attempting to seal its deepwater Gulf of Mexico well with a complex “top kill” operation, to end the catastrophic five-week-old 5,000-barrel-a-day leak.

Early reports are speculating that the process has been a success - to which BP has replied that the task is ongoing ("The top kill operation continues," according to their spokesman). But plugging the gushing oil leak won’t be an instant solution for BP. It will just mean the massive oil spill will stop growing; a vast clean-up lies ahead.

And a very expensive one, too. A report in yesterday’s Daily Telegraph newspaper furthered the common view that BP “management had authorized "short cuts" on the sunken Deepwater Horizon rig” that may have contributed to the disaster, and that “legal experts are speculating the company could now face effectively unlimited fines.” Specifically:

A clause in the US Clean Water Act is reported to expose BP to civil fines
unlimited to any finite cap, unlike the $75m limit on compensation for economic
damages. As a result, the US government could seek to fine BP up to $4,300 for
every barrel leaked.

Without wishing to downplay the economic and ecological catastrophe faced by the region – the clean-up alone has been estimated at $23 billion, and long term damage to fishing and tourism will add to this – it has brought about a realization of the reality of our unreliable oil supply and the need to look for alternatives. (Note: realization rather than reorganization.)

US president Obama might be making a “pitch for alternative energy,” and talking about extending a moratorium on new deepwater oil drilling, but many business writers aren’t buying it (and these are the only journalists currently looking at peak oil). They are of the opinion that we need oil too badly right now.

It all comes back to peak oil. Even if there is little agreement on whether we are currently at peak oil – which, in fairness, is something that will only be obvious in retrospect – it’s fair to say that we are at peak cheap oil. What remains out there, outside of Opec, is going to be difficult to extract.

Two very informative items on investors website Whiskey and Gunpowder bring home the peak oil reality behind the need to drill in the Gulf of Mexico.

Written as a transcribed conversation between “polymath oil man Byron King” and managing editor Gary Gibson, the first, Deepwater Disaster Doesn’t Change Need for Deepwater Drilling, begins with the rhetorical question: “I mean, we know about peak oil already. But… is it really THAT bad that we’re having to search for oil buried beneath 12,000 feet of water? And after the water, another 10,000 feet of dense rock?” The answer is a clear yes, of course.

It continues with the sobering reflection that “12,000 feet of water is where the Titanic sits.” Until recently, it was easier to reach the moon. And the level of technology required to extract oil at this depth is at a similar astonishing level:

In the same sense you have a much, much better computer today than you did in
1990, you have much better offshore drilling equipment today than you did in
1990. You have bigger, better rigs. You have more powerful rigs. You have far
better positioning, far better station keeping. You got much stronger steel.
You’ve got better pipe. The way they do these risers is just astonishing. Risers
are not just pieces of steel pipe. These risers are an entire, complex
mechanical and hydraulic system that connects the drill ship on the surface with
the workings on the sea floor 2 miles down. These things are incredible
specimens of engineering.
Keeping with the risers, they’re wrapped in this stuff called syntactic foam. This foam is super high-tech stuff. It keeps the risers buoyant. So you have riser sections that, in the air, weigh many, many tons. But in the water, it’s essentially buoyant. You can push the risers around with a little remote operating vehicle with a couple of little propellers on the back of it. So this stuff is really astonishing.

The item continues with speculation that BP, falling behind schedule, was “trying to make up for lost time.” In addition to human error, the blowout preventer had been adapted from onshore technology, and – the item continues – modified to the point that “the drawings that they had for how the blowout preventer works weren’t the same as the real blowout preventer down on the seafloor.” It states:

Again, though, it’s because offshore development is the future of oil. The oil
industry wouldn’t be taking these risks if cheap oil was still with us. We’re
just starting to scratch the surface of this deep-sea stuff. The cheap stuff’s
gone. Gotta go offshore…

The follow-up column – which is actually a continuation of the first – is titled Deep Water Drilling and Expensive Oil, and goes further into the Western oil industry's desperate need to find new reserves. They have to go where the oil is, and that’s offshore:

On shore and in many parts of the world — Russia as well as all through the
Middle East — the big private oil companies are just publicly owned and other
oil companies are just not able to get their foot in the door. Or if they do,
it’s under very, very, very limited, very circumscribed procedures.

While being critical of the oil companies for overlooking research and development in deepwater control over the last 20 years – to which you could add the allegation of reaching deals with politicians to obtain lax operating standards – it also criticizes the public that also don’t want to see onshore drilling in places like the Arctic National Wildlife Refuge “and then drive twenty miles to a supermarket and shop for goods brought in from across the country by a fleet of trucks. They just don’t appreciate how necessary offshore drilling is for their way of life to continue.”

So, it concludes, for all the political talk, deepwater drilling is here to stay:

But right now and for quite awhile, the money is going to continue to be in deep
water exploration. These oil companies have to get it right so disasters like
the Gulf of Mexico don’t happen, but they also absolutely have to be out there
in the deep water.

According to an item published today (May 27) by Reuters, BP deepwater spill to have permanent impact, the oil industry is expected to carry on with deepwater exploration – albeit with increased regulation and costs. It states:

Oil executives were equally sure that whatever the difficulties, deepwater
exploration would continue because of the need for oil and the limited
opportunities for conventional exploration.

"I am sure that there is going to be continued investment in deep
offshore," Ayman Asfari, the chief executive of UK services company Petrofac,
said.

"The world can't afford not to do that, but I think it may slow down
until there are new regulations."

Any slow-down leads oil executives to the possibility of future supply
crunches and rising prices once energy demand recovers from economic crisis.

(Additional costs include increasing safety features and insurance premium, reportedly up 40 per cent for deepwater operations as a result of the Gulf disaster.)

An April report on BNET Energy immediately after the Deepwater Horizon explosion, headlined Peak Oil Era: Why the Cost and Risk of Oil Exploration Will Keep Rising, suggested:

Rigs like Deepwater Horizon will continue to push drilling depths merely because
the company has to. The days of easy-to-access oil are gone. Now, companies like
BP are faced with oil and gas exploration projects that require operating in
politically unstable regions or working in technologically complex areas like
the deep waters of the Gulf or offshore Brazil.

The price of oil is fluctuating – recently dipping below $70-per-barel largely due to the European debt crisis, and currently at $73 – but no-one has been talking about cheap oil. The market volatility is due to global economic issues, not a sudden glut of oil. The days of cheap oil are over. The days of deepwater are here.

Back to reality

2010-05-23T11:13:00.000-07:00

Just back from my vacation on Salt Spring Island, BC – back to reality.

A couple of days ago I was on Baker Beach, watching the interaction between four eagles and some gulls and crows. At one point, one of the eagles snatched a fish out of the sea, and was flying back when one of the crows suddenly darted upwards to knock the fish out of its talons. That was one brave crow – there were a similar number of crows to eagles, so there was no mobbing involved. (I’m one of those backyard birders that loves crows – pure heavy metal. Yes, I know they are filthy scavengers that eat songbird nestlings, but they are every bit as smart as ravens.)

For a long time I wanted to move to Salt Spring, but now I’m not so sure. I wonder how dependent these places are on cheap oil – what happens when recession hits and ferries stop running? Take away the tourists, and the millionaires – who are much like tourists in that they come and go – and I wonder what will happen to the local economy. There’s still a lot of agricultural land, but not much arable land growing staples like corn and veggies.

All the same, there’s something about islands that speak to me. I’ve spent a lot of time on the Scottish islands, particularly the Western Isles – I’ve flown into Barra airport on the only scheduled passenger service to land on a beach. I can cope with rural, with isolation and quiet. Just not with subsistence farming, which I think a lot of out-of-the way places will return to, in the not-too-distant future. Perhaps I should explain that my view of the world, post peak hydrocarbons, revolves around small towns surrounded by commercial farms, as opposed to everyone becoming self-sufficient. I see the Victorian age coming back - with all its urban squalor and dark, satanic mills.

Funnily enough, every time I mentioned peak oil during the vacation, the current Mrs. Wild called me a communist. Perhaps it’s a similar vocation - being a ranting, lone dissenter and all that. You start to see everything differently once you drink the peak oil Cool Aid. There’s nothing more tedious than being buttonholed by a commie ranting about class struggle, so maybe she meant it in that sense.

But I think of that crow, hammering an eagle three times its size.