Peak Oil News - Response to ''Paying the Pumper'' by J. Robinson West

I read with interest J. Robinson West’s Op-Ed piece in the Washington Post titled "Paying the Pumper" 07/23/2004, which describes the growing challenges of making the global supply of crude oil meet growing demand.

On the surface, at least, it is comforting to someone in the business of improving energy efficiency that there are members of the oil industry willing to go on record as recognizing the need for greater energy conservation.

However, I was disappointed that Mr. West’s article repeated a number of common oil industry arguments and statements which, if not exactly false, are certainly misleading. He says that the World will not run out of oil soon. This is certainly true. Current estimates for global ultimate recoverable conventional crude oil range between 1750 billion barrels (1 barrel equals 42 gallons) and 2100 billion barrels, with most estimates in the middle of that range. This estimate includes oil yet-to-be discovered and interestingly has not changed substantially in over 20 years. Of the ultimate recoverable crude, about 950 billion barrels, about half, have been extracted.

As the piece correctly notes, the midpoint of extraction tends to coincide with the peak in oil production, the Hubbert Peak, and represents a geological reality that as oil fields are drained it becomes increasingly difficult to extract the oil and production falls. The Hubbert Peak is named for geophysicist Dr. M King Hubbert who, in 1956, correctly predicted that oil extraction in the US lower-48 would peak in 1970. Hubbert’s methodology has been successfully applied to other oil fields as well as other oil extracting nations. More recently, it has been applied to global oil extraction by a number of experts in the field including Dr Colin Campbell, Kenneth S. Deffeyes, and Jean Laherrère, who have concluded that the date peak conventional oil extraction occurs is no more than 15 years away, and possibly imminent.

Mr. West makes the point that many areas of the globe have not been fully explored, and to some extent, this is also true. He fails to mention that the locations where oil can be found, having been formed in the geologic past, are defined by specific geologic features that allow crude oil deposits, once formed, to collect underground in an anaerobic environment which prevents bacteria and other organisms from destroying the oil over time. Petroleum geologists are well aware of these locations of potential oil deposits and it is true that further investment will open up these new fields to development. However, it is also true that, as exploration for oil has proceeded over more than a century, the largest oil fields are also most likely to be found first. The fields that remain are unlikely to increase conventional oil reserves by more than 10%.

That raises the additional question of how much more oil would need to be found to substantially change the forecast of when the Hubbert Peak will occur. The answer is unsettling because even if the estimate for recoverable oil were to double, a highly unlikely circumstance in the best of all worlds, it would only move the Hubbert Peak back by about 20 years.

What is significant about consuming half of the recoverable oil in the ground, in addition to it coinciding with the Hubbert Peak in extraction, relates to the dynamics of exponential growth in the consumption of a finite resource. Exponential growth is the phenomenon that describes how a quantity changes if its rate of growth increases by a fixed percentage over fixed period of time. For example, one dollar in an interest bearing account yielding 4% annually will double to $2 in nineteen years. In thirty-eight years there will be $4 in the account and the amount will keep doubling every nineteen years so that, for example after 361 years, 20 doubling periods, there will be over half a million dollars in the account. Furthermore, the amount of interest earned over the last nineteen years will equal the cumulative interest earned over the preceding 342 years.

This analogy suggests that a key parameter describing exponential growth in the consumption of any finite resource is the length of time it takes to double the rate of consumption of that resource. A corollary to this is that cumulative consumption during the time it takes the rate of consumption to double will be equal to the total consumption of the resource prior to the beginning of the period in which doubling of the consumption rate is observed. This is sort of like compound interest in reverse. An example may help to clarify my point:

Assume that a resource has been consumed for 50 years. The rate of consumption of that resource has grown exponentially at 8% per year resulting in a doubling of the rate every 10 years. Thus, between the 50th and 60th year as much of the resource will be consumed as was used in the first 50 years combined. More importantly, if half the resource is consumed after 50 years, then after 60 years it will ALL be gone assuming that the rate at which the resource can be produced is only constrained by demand. Moreover, the dynamics of exponential growth are such that even if, in the 60th year, new resources were found that equaled the total amount consumed between year 1 and year 60, these resources would themselves be consumed by the end of the 70th year if the growth rate in consumption remained unchecked. Conversely, if consumption is limited to rate experienced in the 60th year then the remaining life of the resource will be extended by about 70%. This is one of the best arguments for conservation.

To apply this example to the real world example of oil extraction, oil consumption is increasing at about 3% per year, which means the rate of consumption will double, if unconstrained, every 24 years. Therefore, if the World has now consumed half the recoverable oil on the planet, 24 years from now it will all be gone. The fact that half of the planet’s recoverable oil has now been consumed should, therefore, be cause for some considerable alarm.

Of course, the rate at which oil can be extracted from the ground is constrained. The limitations on extraction include the geology of the oil fields, the number of wellheads and other equipment needed, and the capacity of the transportation systems that move the oil from the wellhead to the marketplace. Some of these things can be enhanced by investment in new equipment and drilling more holes in the ground, some, like the geology of the oil field cannot. Obviously, as more investment is required to extract the oil a higher per barrel price is needed to recover that investment. The higher the price of oil in the marketplace, the more oil becomes economically recoverable.

However, there is a second limit on recovery that ensures nearly half of all the oil in the world will remain sequestered underground. Just as there is an economic return on investment for oil, there is also an energy return on energy invested. The first and foremost purpose of oil in our modern world is to provide energy to power our transportation systems. The second primary use is as a heating fuel.

It goes without saying therefore that if oil is to continue to supply these needs extraction must take less energy than the energy recovered when the oil is burned in your automobile engine or in your furnace. As oilfields are drained, it takes more and more energy to get the oil out of the ground. Eventually, the energy embedded in the recovered oil is less than the energy it took to get it out of the ground. At that point, no matter how high the price goes, it makes no sense to continue extracting the oil. In actual fact, the cut-off point comes long before energy return on energy invested is equal to unity.

Another statement in Mr. West’s article is curious as well as misleading, “The world economy is confronted with a situation in which there are large reserves -- more than in 1985 -- but in places where it is hard to tap them.” This statement assumes of the reader a certain familiarity with oil industry terminology. On its face, it is an odd statement; the world is extracting oil from the ground and consuming it at an ever-increasing rate. The oil we have used is certainly not being replenished so how is it possible that there are more reserves now than 19 years ago.

The answer lies in the definition of reserves, which is the amount of oil proven to be in the ground and recoverable by standard means. Reserves are different than resources, the quantity of which represents the oil likely to be in the ground regardless of whether or not it is in the ground. Put simply, banks lend money on reserves not resources. Thus, reserves are used to determine a company’s viability as an investment vehicle.

Therein lies the rub because a portfolio of oil reserves looks far better if the amount in reserve increases from year to year rather than decreases. In addition, a company, or country for that matter, need not book all its reserves on discovery and, in fact, it is prudent not to do so especially when a discovery is too large to be exploited all at once. By booking the proven reserve over time, requests for investment capital based on proven reserves can be matched to the development needs of the field.

A more realistic picture of the state of global oil reserves can be determined by backdating all reserve growth to the date of discovery of the field in which it is located. This is a technique, which has been widely used by those studying the phenomenon of peak oil and shows that the peak for oil discovery occurred in the mid-1960’s and has been declining ever since. Furthermore, no supergiant oil field has been located in over 25 years. This is significant because a few supergiant fields such as Ghawar in Saudi Arabia provide a majority of global oil production. All these fields are now aging and subject to increasing effort to maintain production. The Saudis pump about 7 million barrels of seawater from the Persian Gulf into Ghawar every day to maintain reservoir pressure and a production rate of 3 million barrels of oil.

The essential arithmetic of oil discovery is that the world now finds one barrel of oil for every four it consumes. This is simply an unsustainable situation and underscores the basic fact that there is too much demand chasing too little oil. Exploration for new oil fields will help to a degree, but exploration alone is not the answer to the world energy problem.

I haven’t even mentioned the demand side of the equation because it is particularly bleak. Spurred by industrial growth in China, which imported nearly 40% more oil this year than last, and India, annual global oil consumption is increasing by 2-4% every year. Oil is being pumped out of the ground at the rate of over 82 million barrels (1 barrel equals 42 gallons) per day. It is estimated that there is less than 1 million barrels per day of excess capacity, almost all of it in Saudi Arabia. Since global consumption is increasing, new capacity will have to be brought on line to meet it. In addition, capacity must be added to offset declines in production in the US and North Sea and in other areas of the world for which the Hubbert Peak has already passed.

The oil industry itself has implicitly acknowledged the problem as evidenced by an ExxonMobil report “A Report on Energy Trends, Greenhouse Gas Emissions, and Alternative Energy,” February 2004. This report notes a startling disconnect between global supply and demand. In 2004 supply and demand are equal at 120 million barrels per day oil equivalent (includes unconventional oil and natural gas liquids). But, by 2015 production of current oilfields will have declined to 60 million barrels per day oil equivalent while demand, if unchecked, will have reached 160 million barrels per day oil equivalent. Clearly this disconnect represents an untenable situation but ExxonMobil assume that production can be increased to the required level provided that sufficient capital exists for exploration and development of new oil fields to meet the anticipated shortfall in supply. This seems to be a dubious assumption at best as it implies that extraction capacity needs to be added which equals ten times the current extraction rate of Saudi Arabia.

Mr. West, to his credit, recognizes and advocates that the government do much more to reduce demand for oil by encouraging conservation. There is no doubt that this will be an essential step in surviving Peak Oil with a healthy economy. But it is only a first step. The US economy depends on cheap transportation to function, and cheap transportation depends on cheap fuel. There is no viable alternative fuel that can replace petroleum in the near future. There has been a lot of talk about hydrogen fuel cells, but unless the hydrogen or methanol used by these fuel cells is produced by some energy source other than oil they are not contributing to a solution.

The answer to peak and decline of oil, whether it happens next year or in 20 years, is what it has always been, the Sun. Ultimately, oil is just a form of stored solar energy created from the decay of long dead biological matter anyway. Use of the remaining fossil fuel resources of the planet needs to be prioritized to accelerate the development of more efficient solar panels and better wind turbines to exploit the vast amount of energy the sun shines down on the US every day. Already, it is possible to build a home, even in the Northeast that produces more energy than it consumes by intelligent application of solar photovoltaic panels and solar hot water heaters. It goes without saying that building more homes like this and applying this type of technology to commercial buildings, in addition to conserving limited resources, will also reduce the strain on the nations overtaxed power grid.

Finally, the nation needs to make a commitment to develop commercially viable fusion power. The world’s thermonuclear fusion programs have been moving along at a slow but steady pace for many years now. The latest effort is the ITER reactor program, which intends to be the first to demonstrate break-even (i.e. energy return on energy invested equal to one) and then net power generation. However, at the current rate of development, it will be 2050 before the first commercial fusion power plant is operational. The level of effort and investment by the US and other nations needs to be stepped up by an order of magnitude. The assumption is that ITER will be successful, but if it fails we have no more baskets in which to put our eggs.

Finally, and as a shot across the bows to those who would say that this is the reason we should develop oil reserves in the Alaska National Wildlife Refuge, I note that the estimated recoverable reserves there would be enough to provide the Globe with oil for about 7 months. In the end, we will be forced to kick our fossil fuel habit, one way or the other.

Copyright 2004, Russell D Taylor, Ph.D.
Energy Efficiency and Renewable Energy Consultant
New Haven, CT