Saturday, June 12, 2004

Oil Watch: New Era Sneaks Up On Public

It is fashionable to say that there will be an oil crisis, but only in the future. This view is comfortably supported by those that like George Will have lived through decades of false alarms or only temporary crisis like the 1970's. As George Will notes, there have been multiple cases where alarmists have jumped the gun (WaPo) calling for the international energy crisis that theoretically should occur sometime.

However, in 1920 the inflation-adjusted price of gasoline was twice today's. To match 1981 prices, a gallon of gasoline today would have to be $3.50. Inexpensive gasoline is one reason why the average gas mileage of U.S. passenger vehicles has declined since 1988 and why in the 2003 model year, for the first time since the mid-1970s, the average weight of a new car or light truck was more than two tons (4,021 pounds).

In 1977 President Carter said we "could use up all the proven reserves of oil in the entire world by the end of the next decade." But today known reserves are larger than ever. Reserves and production outside the Middle East are larger than they were 31 years ago, when a State Department report was titled "The Oil Crisis: This Time the Wolf is Here."

In 1971, a year before Texas output passed its peak, U.S. production met more than two-thirds of the nation's needs. Today the nation imports 54 percent of the oil it uses. M.A. Adelman of Massachusetts Institute of Technology notes that in 1971 non-OPEC countries had about 200 billion barrels of proven reserves. In the next 33 years they produced 460 billion "and now have 209 billion 'remaining.' " Note Adelman's quotation marks. To predict actual reserves would require predicting future exploration and development technologies.

However, the rate of discovery has been declining for several decades. Of course, oil supplies are, as some people say with a sense of profound discovery, "finite." But that distinguishes oil not at all from land, water or pistachio nuts.

Russell Roberts, an economist, says: Imagine that you love pistachio nuts and are given a room filled 5 feet deep with them. But you must eat them in the room and must leave the shells. When will you have eaten them all? Never. Because as it becomes increasingly difficult to find nuts amidst the shells, the cost of the nuts, in time and effort, will become too high. You will seek a substitute -- pistachios from a store, or another snack.

Oil over $40 a barrel accelerates exploration for new fields, and development of known but technologically inaccessible fields, including some fields four miles below the surface of the Gulf of Mexico, where there may be at least 25 billion barrels. High prices may also prompt development of hitherto economically unfeasible sources, such as U.S. oil shale and Canadian tar sands. Tim Appenzeller, writing in National Geographic, says tar-sand deposits in Alberta "hold the equivalent of more than 1.6 trillion barrels of oil -- an amount that may exceed the world's remaining reserves of ordinary crude." Alberta, a future Saudi Arabia? Perhaps. Full-throttle production of oil from tar sand is not economical. So far.

Therefore it comes as no surprise that when the actual crisis begins, when the turning point becomes irevocably reached that it should occasion no alarm whatsover. People have become cynical. They have lived their entire lives with oil only becoming historically speaking cheaper and more available. Not only have they done so, but their grandparents have done so. There is no institutional and cultural memory of any significant scarcity and therefore no political will in order to prepare for scarcity. Indeed all the political will that exists is for attempting to maintain the current situation. No practice in human culture is more than three generations away from extinction. What happened in your great-grandparents' time unless explicitly passed on to newer generations vanishes from the collective memory except for the scribblings of historians.

So it is because of this that when the danger signal well and truly appears (NYT) that it is puzzled at, poked at, and ignored mostly because the culture has lost all capacity to appreciate its alarming significance.

But near the bottom of ChevronTexaco's financial filings is a much less promising statistic. For each of those years, ChevronTexaco's wells have produced less oil and gas than the year before. Even as reserves have risen, the company's annual output has fallen by almost 15 percent, and the declines have continued recently despite a company promise to increase production in 2002.

ChevronTexaco is not the only big oil company whose production is falling despite rising reserves, though it has the largest gap. As consumers, economists and governments around the world wonder if oil supplies can keep pace with rising demand, production trends at the industry's publicly traded companies are not promising.

Collectively, they paint a picture of an industry that has depleted nearly all of the world's easily exploited reserves outside the Middle East and that is now struggling to sustain production, much less increase it. Fears about supply shortfalls and rising demand have already caused prices to climb about 20 percent this year, hovering around $40 a barrel. The four biggest companies own only about 4 percent of the world's reserves, which are mostly government-held, but they offer a unique glimpse of supply trends because they must disclose their reserves and production each year.

Historically, proven reserves and output have moved in tandem. Industry experts disagree why the relationship has broken down. Although the reserves are only estimates, federal rules require companies to calculate them conservatively.

Some analysts and the companies themselves take a relatively benign view of the production declines, promising that output will soon rise again as big new projects come online around the globe.

ChevronTexaco said its production had declined in part because of asset sales and production agreements that allocate it less oil when prices are high, as they are now, than when prices are low, as they were in 1998. The company says it expects production to stay flat through 2005, then begin rising in 2006 as output increases from fields in Chad, Kazakhstan, Venezuela and Angola.

But ChevronTexaco has promised to reverse its production declines before. In 2002 the company said that it expected its output to rise more than 20 percent by 2006, a forecast it has now dropped.

This is the blinking red danger light. Historically reserves have moved in tandem with production. However production has already flattened, while the markets are fed overly optimistic and rosy estimates in order to keep them happy. Is there more oil? Of course. Iraq sits on a giant pool of cheap low sulfur oil for instance. However we are nearing the beginning of the end of oil without conflict.

George Monibot outlines crisply the alternatives to our present situation. Either we reduce energy dependency, shift to alternative energy sources, go to war in order to secure diminishing world supplies, or pay increasingly high costs for using carbon fossil fuels. In all likelyhood a combination of all the alternatives will be pursued.

But the age of cheap oil is over. If you doubt this, take a look at the BBC’s online report yesterday of a conference run by the Association for the Study of Peak Oil.(5) The reporter spoke to the chief economist of the International Energy Agency, Fatih Birol. “In public, Mr Birol denied that supply would not be able to meet rising demand … But after his speech he seemed to change his tune: ‘For the time being there is no spare capacity. But we expect demand to increase by the fourth quarter by three million barrels a day. If Saudi does not increase supply by 3 million barrels a day by the end of the year we will face, how can I say this, it will be very difficult. We will have difficult times.’” The reporter asked him whether such a growth in supply was possible, or simply wishful thinking. “’You are from the press?,’” Birol replied. “’This is not for the press.’” So the BBC asked the other delegates what they thought of the prospects of a 30% increase in Saudi production. “The answers were unambiguous: ‘absolutely out of the question,’ ‘completely impossible,’ and ‘3 million barrels – never, not even 300,000.’ One delegate laughed so hard he had to support himself on a table.”(6) And this was before they heard that two BBC journalists had been gunned down in Riyadh.

The world’s problem is as follows. We now consume six barrels of oil for every new barrel we discover. Major oil finds (of over 500 million barrels) peaked in 1964.(7) In 2000, there were 13 such discoveries, in 2001 six, in 2002 two and in 2003 none.(8) Three major new projects will come onstream in 2007 and three in 2008. For the following years, none have yet been scheduled.(9)

The oil industry tells us not to worry: the market will find a way of sorting this out. If the price of energy rises, new sources will come onstream. But new sources of what? Every other option is much more expensive than the cheap oil which made our economic complexity possible.

The new technology designed to extract the dregs from old fields is expensive and doesn’t seem to work very well, which is why Shell was forced to downgrade its anticipated reserves (other companies, under pressure from the US Securities and Exchange Commission, will surely follow). Extracting oil from tar sands and shales uses almost as much energy as it yields.(10) The same goes for turning crops such as rape into biodiesel. Nuclear power is viable only if you overlook both the massive costs of decommissioning and the fact that no safe means has yet been discovered of disposing of the waste. We could cover the country with windmills and solar panels, but the electricity they produced would still be an expensive means of running our cars.

Just as the oil supply begins to look uncertain, global demand is rising faster than it has done for 16 years. Yesterday morning, General Motors announced that it is spending $3bn on doubling its production of cars for the Chinese market.(11) Seventy-four minutes later, we saw the first signs of entropy: the International Air Travel Association revealed that the airlines are likely to lose $3bn this year because of high oil prices.(12) The cheap carriers complained that they could be forced out of the market.

If the complexity of our economies is impossible to sustain, our best hope is to start to dismantle them before they collapse. This isn’t very likely to happen. Faced with a choice between a bang and a whimper, our governments are likely to choose the bang, waging ever more extravagant wars to keep the show on the road. Terrorists, alert to both the West’s rising need and the vulnerability of the pipeline and tanker networks, will respond with their own oil wars.

5. Adam Porter, 7th June 2004. Is The World’s Oil Running out Fast? http://news.bbc.co.uk/1/hi/business/3777413.stm

6. ibid.

7. Aaron Naparstek, ibid.

8. The Oil Depletion Analysis Centre, 29th January 2004. Oil Supply Shortages Likely After 2007, New Report Shows. News Release. Citing a report by Chris Skrebowski, January 2004, in Petroleum Review.

9. Ibid.

10. For a discussion of energy returned on energy invested, see Richard Heinberg, 2003. The Party’s Over. New Society Publishers, Gabriola Island, Canada.

11. BBC News Online, 05:20 GMT, 7th June, 2004. Carmaker GM Raises China Stakes.
http://news.bbc.co.uk/1/hi/business/3782265.stm

12. BBC News Online, 06:34 GMT, 7th June, 2004. Oil Prices To Hit Airline Profits.
http://news.bbc.co.uk/1/hi/business/3782299.stm

Deliberating reducing the vertical energy consumption infrastructure for a horizontal reduced energy consumption socio-economic structure is possible. There is no reason why we have to use machines to do everything. Overemployment is not a problem and neither is a shortage of unskilled labor. Every machine we use consumes more fossil fuel energy. Using human labor on the other hand would improve employment, lifetime productivity, reduce energy consumption, etc.

One possibility is to encourage the growth and large-scale implementation of organic farming by small land stake-holders. This would not be the agricultural life of our forebearers. Instead relatively well educated families would produce organic food at greater acreage biomass productivity of specialized high-valued added crops and domesticated protein. We're talking about vintage grapes for winery, organic cherries, free range meat, etc. It would massively cut down on the use of insecticides, fertilzer run off, and anti-biotics as well as nasty little surprises like Madcow prion infections.

Similar programs could be put into place for aquaculture and piscean protein production. It would increase the employment of our societies and the increased production would cause greater wealth. Small producers could coordinate through production cooperatives to obtain economies of scale and better bargaining terms with lenders and processing industries.

The truth is that this is not likely to be what happens. What is likely to happen is that we will ignore the problem and throw 'bread and circuses' at it as politicians choose to stay in power by hiding the inevitable failure of the status quo. It is most likely what will happen afterall with the public pension and social security system in this country.

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