Bill Totten's Weblog

Sunday, December 05, 2010

When Oil Peaked

by Kenneth S Deffeyes (November 17 2010)

Crude oil output reaches an undulating plateau of around 68 to 69 millio barrels per day by 2020, but never regains its all-time peak of seventy million barrels per day reached in 2006.

-- International Energy Agency

Make that 2005; then we're talking about the same planet. The implied IEA message is that the peak happened several years ago and the world didn't come to an end. Wayminnit [Wait a minute]. We are in the biggest economic downturn since the Great Depression and we don't know whether we can ever restore our earlier prosperity. My interpretation is that the 2008 crude oil price, $147 per barrel, shattered the global economy. The "invisible hand" of economics became the invisible fist, pounding down the world economic growth to match the limitations of crude oil production.

The New York Times this morning (November 17 2010) had a special Energy section. The first headline read, "There Will Be Fuel" and praised Canadian oil sands, offshore Brazil and West Africa, the deep water US Gulf Coast, and even supercomputers as saviors for the oil crisis. (I would have added super-mathematicians.) The Times even said that "the United States has increased domestic oil production for the first time in a generation". Right, but that increase amounts to three percent of our oil imports.

After the 2008 crash, crude oil prices went down to $35 per barrel, but have now crawled back up above $80 per barrel. Some analysts expect oil prices above $100 per barrel during 2011. Are we back in toxic territory?

The Times enthusiasm for increased US natural gas production, at bargain prices, is not misplaced. Although the new gas production is usually referred to as "shale gas", the production comes from a very special subset of shales. The targets are mature oil source rocks; organic-rich shales that have already delivered oil into conventional oil fields. Left behind in the source rock are modest amounts of natural gas. Horizontal drill holes and massive hydrofracture treatments open up economically rewarding amounts of natural gas.

The "natural" price for natural gas is based on the energy equivalence to oil. Burning 6000 cubic feet of natural gas generates heat equivalent to a barrel of oil. Since oil is now around $80 per barrel, divide by six and natural gas ought to sell for $13 per thousand cubic feet on an equal-energy basis. However, natural gas in the USA is now selling for $4 per thousand cubic feet. Natural gas is currently a huge bargain. How huge is it? Installation of new solar and wind energy facilities is now being held back because it is much cheaper to generate electricity from natural gas. Some day, some day, natural gas will run out, but it may be 100 years from now.

I have been following the BP blowout in the Gulf of Mexico. I keep thinking back to a horrendous article that I read roughly thirty years ago, about the collapse of a parking garage under construction. The columns were built first. Each of the floors was poured as a reinforced concrete slab at ground level and then hoisted up the columns to its intended location. Partway through the process, the floors collapsed. There were several fatalities and a large property loss. The article that I read was written by an engineer who had participated in designing the structure. Because of a slightly earlier tragedy in his family, the engineer lost all of his savings to medical costs. There was nothing to be gained by suing him; he was free to write about the legal proceedings.

The judge in the case assigned a percentage of the loss to each of the contractors and subcontractors. Even the owner of the lunch wagon that stopped by each day was assigned a percentage. Any entity that did not agree to the settlement was threatened with continuing legal costs stretching off into the indefinite future. What really grabbed me was the inclusion of the painting company that was scheduled to arrive weeks after the collapse. That wasn't my idea of how the legal system was supposed to work. It seemed to me that the judge was extorting payments from innocent parties.

The same scenario seems to be unfolding in the BP case. Although BP is the lead dog, it would not surprise me that Schlumberger, Halliburton, Transocean, Cameron, Weatherford, Anadarko, and Mitsui are being frisked for deep pockets. In my naive image, BP should be free to sue any of its subcontractors if BP has evidence that the subcontractor failed to do the specified work. But nooooo ... the whole list will likely be assigned a percentage of the damages.

Because of all the energy problems, new ideas continue to emerge. Recently, the suggestion has been made that we all give up taking daily showers and settle for one shower every few days. As people were asked their reaction to the idea, the most common reaction was, "It stinks!"

(c) 2001 - 2010 - K Deffeyes. All Rights Reserved.


Comment by Jay Hanson (November 22 2010)

peak oil = peak "net energy" = peak global economic growth.

It is now physically impossible for global, non-energy-productive, economic growth (in the physical sense) to exceed previous levels.

That is, last year we had net energy to build ten cars, this year we can only build five, next year we can only build three.

Our country can only exceed previous-non-energy-productive-economic-activity by taking energy from another country.

This is a global, political dynamic like the "gold standard", where gold was both needed to increase one's "status" and "limited".

When one was on the gold standard, one could only increase one's status by taking it from another. That historical, gold standard status struggle led to World War One.

Our contemporary, "energy standard" status struggle will lead to World War Three.

Bill Totten


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