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Oil In Fact and Fantasy -- Or, Fools Without Borders
Posted on May 29, 2012
Posted By: Ferdinand E. Banks
Topic: Fossil & Biomass
Not long ago an article was published on the site Master Resource which featured an outlandish denial of verified (and hypothetical) oil resources in the United States (U.S.). Specifically, with oil imports costing the U.S. almost a billion dollars a day, readers were told that a huge amount of oil reserves were actually available, and President Obama lied when he said that there was a drastic shortage of oil in the crust of the earth. Instead, within the onshore and offshore boundaries of the U.S., there was abundance.
That misconception of reality was also published on a site where I have been graciously allowed to demonstrate my competence in oil and nuclear matters, which occasionally included insisting that I am the leading academic energy economist in the world, which in turn usually meant expressing myself in a manner that ostensibly offended a number of readers. To be explicit, I never miss an opportunity to claim that lies and misunderstandings are a clear and present danger confronting all students of energy topics, although I suspect that the present price of motor fuel is revealing to observers in many countries the shortage of the oil from which that fuel is produced.
As is now painfully obvious to many of us, what is happening on the oil front is that supply is flattening, while consumption continues to increase. Some relief is obtained however because a small fraction of what we call oil is actually a collection of items similar to but not the same as conventional oil. These 'oils' are conveniently referred to as liquids, and examples are natural gas liquids (or condensates), bio-fuels, and perhaps a few others. In any event, we are moving toward some kind of output peak whose geometry displays a certain ambiguity, but even so there is nothing ambiguous about the concomitant fiscal burden that will be experienced in most (or even all) countries consuming oil and oil products. That burden is inescapable, regardless of how lifestyles are organized or reorganized, because it has a macroeconomic component.
In my course on oil and gas economics at the Asian Institute of Technology, I identified the International Energy Agency (IEA) and the (U.S.) Energy Information Agency as purveyors of an absurd scenario of future oil demand and supply (although a director of the IEA informed me that his organization did not deal in supply). These organizations have apparently come to their senses, and today the great wholesaler of pseudo-scientific oil inquiries is the Cambridge Energy Research Association (CERA), which is located in Massachusetts, although it very likely has an international clientele. A very short and non-technical article in 'Science' (2012) identified Daniel Yergin as their chief ideologue, and that gentleman has assured his firm's clients that oil production is a high-technology industry where "innovation will not come to an end".
The less said about Mr Yergin and his recent book 'The Quest' the better, but I would like to say hallelujah to that contention. Innovation will not come to an end, nor will the production of oil (and other liquids), but ceteris paribus they will not suffice to keep the average standard of living increasing in a world where aggregate population is growing at almost a billion persons per decade. I hope that I don't have to describe what a failure of this nature is eventually going to mean both socially and politically.
Someone in Mr Yergin's firm used the picturesque word "garbage" to describe the work of peak-oil believers, adding that instead of a peak there will be a long series of "undulations" where the global oil supply is concerned. My comment here is 'right on', because harmful large and small undulations in the macro-economy as a result of spikes in the oil market are exactly what we have seen since the first oil price shock in 1973. An econometric or even a Fournier Analysis will immediately show the relevant causality, although no statistical or mathematical approach can properly deal with the events of 2008, when the oil price almost moved off the Richter scale. In July of that year the concept peak oil and its associated terminology became completely irrelevant, as the global macro-economy moved into a partial meltdown. Please let me assure you and yours that neither high nor low technology will save us if we encounter the oil price catastrophe that will emerge if the aggregate (WTI and Brent) oil price continues to rise.
The last paragraph in the Science article deserves special notice, because the author mentions a contention formulated by economists of the oil major British Petroleum (BP) that OPEC will raise its production by 8 million barrels of oil a day (= 8 mb/d) in the near or distant future, with 6 million of that "split" between Iraq and Saudi Arabia. I neither know nor am interested in the output plans of Iraq, but Saudi Arabia is not going to increase its sustainable output above the present 10 mb/d, and more important present exports are liable to decline as domestic oil consumption increases.
The senior economist of BP, Mark Finley, says that the oil challenges the world faces are much more above than below ground. If by that he means lies and misunderstandings he is correct, however I can accept an equality for these 'face-offs'. I am willing to claim that OPEC controls the marginal barrel, and Mr Economist should jump for joy, because their agenda is identical to the one BP would contrive if given the opportunity. As for below ground, take a look at the production curves for the largest 100 oil fields in the world, and see for yourself how things are going to turn out.
References
Banks, Ferdinand E. (2012). Energy and Economic Theory. London, Singapore and New York: World Scientific Publishing Company. (Forthcoming).
Kerr, Richard A. (2012). 'Technology is turning U.S. oil around, but not the world's. Science. (3 February).
Authored By:
1960-61: Assistant lecturer, Institute of Economics, University of Stockholm (Sweden).
1961-64: Lecturer in economics, the International Graduate School, University of Stockholm; Lecturer, Institute of Economics, University of Stockholm, Sweden Consultant, United Nations Development Program (Egypt, Ethiopia, Senegal).
1964-66: Senior lecturer in mathematics, statistics, and economics – The United Nations Institute for Economic and Development Planning (IDEP), Dakar, Senegal.
1966-68: Senior Lecturer (economics), Stockholm University, Sweden; Consultant, United
1961-64: Lecturer in economics, the International Graduate School, University of Stockholm; Lecturer, Institute of Economics, University of Stockholm, Sweden Consultant, United Nations Development Program (Egypt, Ethiopia, Senegal).
1964-66: Senior lecturer in mathematics, statistics, and economics – The United Nations Institute for Economic and Development Planning (IDEP), Dakar, Senegal.
1966-68: Senior Lecturer (economics), Stockholm University, Sweden; Consultant, United
Other Posts by: Ferdinand E. Banks
Some Aspects of Japan and Nuclear Energy - May 06, 2013
Not Business But Personal: Nuclear Energy - January 29, 2013
The Beginning of the Nuclear Renaissance Has Not Been Televised - December 13, 2012
Logic and Swedish Nuclear Energy: An Update - November 21, 2012
Oil, OPEC and the Best Brain in the World Again - October 18, 2012
Related Posts
Beware of Energy Complacency: Sic Transit Gloria By Christopher Russell
Natural Gas on Track to Become Next Energy Giant By Sarah Battaglia
Shale Gas - A Potential Game Changer By Kirk Edelman
Oil, OPEC and the Best Brain in the World Again By Ferdinand E. Banks
Economics of Shale Gas By Karol Mazur
Comments
May, 29 2012
Len Gould says
Agreed Fred. Such as EIA (until very recently), CERA etc. SHOULD have a lot of answering to do. Of course, the funny bit is that CERA answers to noone, and noone will ask those responsible at EIA.
May, 30 2012
Jim Beyer says
Since Yergin (and others) aren't stupid, I sometimes wonder if the reason no authority will speak the "P" word is the fear of invoking panic and hoarding. Or to be more general, some kind of change in behavior by both the consumers and producers of oil.
May, 30 2012
Ferdinand E. Banks says
The issue with CERA is money. The people who pay for their services want to be told certain things, and most important want those things disseminated as widely as possible. I have no plans to curse the US oil industry, because I think that they have done a good job over the years for the people of the US, but in point of fact many of the directors and economists associated with BIG OIL have said things about peak oil that are definitely not true - as many persons who contribute to this forum know as well or better than I do..
June, 01 2012
Harry Valentine says
The Sasolburg Group of South Africa is able to develop oil from coal at about US$30 per barrel. They have also developed a method of producing sulphur-free diesel fuel from natural gas. Sasolburg has plants in China and more recently in Alberta, Western Canada.
There is a profit motive to restrict the supply of oil as demand for oil surges across Asia. Expect oil prices to remain high until a low-cost, long-life, automotive capable, quick recharge battery appears on the market.
June, 03 2012
Jim Beyer says
Harry,
But I bet they don't SELL it for $30 per barrel. Like the tar sands, the conversion technologies won't ever have the volume to make a difference. (The fact they are dirty as heck is not so great either.)
This is one of those areas which I get the most extreme cognitive dissonance, especially from my more conservative friends.
The argument is usually on the lines of: "There's plenty of oil out there. Especially with the new technologies available. But the gov't just won't let companies to drill and get it. Like offshore and in Alaska."
I point out that the U.S. has had peak oil since 1970. And plenty of conservative Presidents (Nixon, Reagan, Bush, Bush) have been around since then to allow for more drilling, yet we've never returned to the production of the 70's.
I then point out if oil can peak in the U.S., then over time, it will peak in the rest of the parts of the world as well, and eventually the world.
Also, someone should point out the Yergin that an "undulating plateau" IS a peak. It's just a peak that is real enough to be interacting with the economy in terms of demand.
June, 04 2012
Ferdinand E. Banks says
Great comment, Jim. The thing with CERA (and Yergin) is that the people who pay them and pay them well for their opinions, want an "undulating plateau", and so Yergin and friends give them one. It's called business.
June, 05 2012
bill payne says
Hello Prof Banks,
That misconception of reality was also published on a site where I have been graciously allowed to demonstrate my competence in oil and nuclear matters.
As to your competence in nuclear matters, are King or Katusa right or not?
The US produces only 7% of the uranium it consumes, Byron King reported.
Five new generators are on track for completion this decade, including two reactors approved just a few weeks ago (the first new reactor approvals in the US in over 30 years). Those will add to the 104 reactors that are already in operation around the country and already produce 20% of the nation’s power. Those reactors will eat up 19,724 tonnes of U3O8 this year, which represents 29% of global uranium demand. If that seems like a large amount, it is! The US produces more nuclear power than any other country on earth, which means it consumes more uranium that any other nation. However, decades of declining domestic production have left the US producing only 4% of the world’s uranium.
With so little homegrown uranium, the United States has to import more than 80% of the uranium it needs to fuel its reactors. Thankfully, for 18 years a deal with Russia has filled that gap. The “Megatons to Megawatts” agreement, whereby Russia downblends highly enriched uranium from nuclear warheads to create reactor fuel, has provided the US with a steady, inexpensive source of uranium since 1993. The problem is that the program is coming to an end next year.
The Upside to a Natural Gas Downturn Marin Katusa, for The Daily Reckoning Monday April 2, 2012
June, 05 2012
Malcolm Rawlingson says
I completely agree with you Bill. The US public is blissfully unaware that a large portion of their electricity has in fact been produced by burning the Uranium from Russian warheads that were previously aimed at them. The US does indeed consume much more Uranium than it produces but that is true for many minerals. Fortunately the friendly neighbour to the north has lots and lots of Uranium to sell. Cameco is about to open the Cigar Lake mine and plans to douible its Uranium production by 2020. However as the warheads destruction program winds up next year there will be a temporary shortfall since mines currently produce only about 80-85% of Uranium consumed and there will not be enough production to meet existing reactors plus the 62 currently being built. In fact the Uranium and oil markets bear some limited similarities. As prices decline exploration declines and there is a lag between discovery and production. Down the road a few years that leads to shortages and the price goes up exploration goes up more uranium is discovered and new mines come on line which lowers the cost and so the cycle continues. The fact is that Uranium is not particularly scarce in the earths crust. There is lots of it. It is even found in seawater. The issue is the cost of mining it. The great news is that the price of Uranium only marginally affects the cost of nuclear generated electricity so it could double or even triple without affecting the cost of nuclear generated electricity very much. So low cost producers like Cameco who own deposits in the 22-25% concentration (as opposed to the average 4-5%) are sitting in the catbird seat once U3O8 prices increase.
It is just a matter of time. The problem is that nuclear generated electricity is not in the same market place as oil - unless electric cars suddenly come onto the market in their millions.
The replacement for oil is natural gas of which there is a major glut right now. Most engines can readily be converted to burn natural gas with little modification which is why the Saudis are careful not to increase the price of oil too much so as to kill off the market and cause a wholesale switch to other fuels. I see the LNG business as the major competition for oil and as oil becomes more scarce and therefore more expensive it will be substituted by other fuels.
About a hundred years ago the world was going to be plunged into darkness due to the shortage of whale oil to light the way - then some upstart called Edison invented the electric light and all of a sudden the availability of whale oil became a side show. The same will happen with oil.
Malcolm
June, 05 2012
Malcolm Rawlingson says
Jim, The only way anyone can be sure about how long oil supplies will last is if one knows how much there is in the earth's crust. That is the same for any material and it is of course the very fact that we do not know. In the 1970's the Club of Rome predicted that we would be out of copper by now. We are not. it is harder to get at for sure but we are not running out of it. For oil the situation is complex but it is not crude oil that we burn in cars and aeroplanes it is gasoline and that can be made from a number of different feedstocks which is mostly crude oil at the moment. As noted it can also be made from coal (more expensive but the technology is already there) and it can also be made from natural gas. So my take on all this is that oil production may or may not have peaked and the price may be going higher but that is what will cause the shift to other feedstocks as those technologies become less expensive relative to the present feedstock of crude oil.
If you look back throughout history that has always been the case. Human ingenuity always comes up with a technology that solves the issue. Necessity as they say is the mother of invention. That is why peak oil really does not concern me at all.
If oil prices cause gasoline costs to double then it becomes economic to use something else like natural gas. It's always the way it goes.
Malcolm
June, 06 2012
Ferdinand E. Banks says
Let me tell you something that is unthinkable. To understand the theory of the breeder reactor perfectly, but yet not be able to construct a commercial version. A very smart particle physicist that I write to now and then once challenged me to an on-line debate on nuclear - which is an energy source that he doesn't like - and later informed me that the breeder would never be constructed.
To me that means that a miracle will happen, and miracles are all over the place. The US Navy and US Air Force in WW2 are two miracles, and if I were interested I could find a dozen more. Anyway, I suppose that in ten years or so every new reactor in China will be a breeder, and that will be the end of their concern about nuclear fuel. As for the rest of the world who knows.
As I like to make clear, I do NOT look forward to the breeder and a more plutonium intensive community, not with people like George W Bush and Barack Obama in the White House, but there it is. And there are plenty of politicians in office who are much worse than those two incompetents. As for oil, I'm so glad that the aggregate price has fallen below $100/b that I cant think about the future.
June, 06 2012
Jim Beyer says
Fred,
Communism works in theory as well. Best bet would be to resurrect the IFR (Integral Fast Reactor). Has basically all the benefits of a breeder (efficiency, etc.) without producing Plutonium and the added plus of burning up lots of nasty waste products which then don't have to be stored. If Obama killed Yucca Mtn., he can make up for that by restarting IFR.
June, 06 2012
bill payne says
Hello Dr Banks,
Please answer questions iin minimum uumber of words required to express respnse.
Regards, Google 'embedded controller forth for the 8051 family' or 'ryan crocker j orlin grabbe'
June, 06 2012
Ferdinand E. Banks says
Thanks Bill. Thanks for telling me to answer questions that haven't been asked.
About the IFR. I talked about that for years, but for some reason eventually forgot all about it. The reason of course is that it is too logical. About Yucca: Bush and Obama send soldiers and marines half way across the world to fight in stupid wars, but cant shove some nuclear waste down a few holes and put a few hundred soldiers and marines around them to keep the curious away.
June, 07 2012
Malcolm Rawlingson says
The theory of fast breeder reactors has been practically demonstrated in reality by the British who built a fast breeder reactor at Dounreay in Scotland. It worked just fine and Plutonium made in the reactor breeding blanket (Uranium 238) was extracted refined and placed back into the reactor as fuel thus completing the cycle and proving the theory. That reactor I believe was around 200MW so no small beast at all. George Bush and Obumma have all the plutonium they need without a fast breeder program Fred so fast breeders have nothing to do with military uses of the stuff. They have got lots I am sure. The demise of the fast breeder concept was economics. Uranium is cheap enough that the expense of moving to the technology does not make any sense for most countries. Also bear in mind that fuel costs are a tiny part of the cost of running a nuclear reactor and it is almost inconsequential. There is zero economic incentive to go to this technology. Perhaps it makes sense for energy independence reasons to use them in countries with no Uranium but Uranium is so readily available from stable nations like Canada and Australia that there really isn't any practical reason for doing it.
The French and British attempted a scaled up version of Dounreay called Super Pheonix but messed it up and it never worked properly. It was supposed to be a 1300MW reactor. No idea why they wanted to build a unit 6 times bigger than the one that actually worked but only the French and British know why that was.
Nuclear fuel doesn't need to be stored in a hole in the ground. It is quite safe where it is and is steadily getting less and less of a problem with each passing day.
Not sure why anyone would want to steal a radioactive fuel bundle anyway. Every surveillance satellite looking at the earth would know exactly where you were. A monumentally dumb idea if you ask me. Once you were captured they would just bury you and the fuel bundle in 10 feet of concrete for you trouble.
Going back to breeders, the Chinese are building one as they see it as a means of reducing dependency on western supplied yellowcake (U3O8) and that makes sense to them but the economics are still not worth the effort. Of course you also need to incur the expense of building yourself a separation plant at a cost of a few billion. Like I said U3O8 is cheap so no economic reason for them.
The other slight problem with them is they are cooled on the primary side by a 50-50 mix of sodium metal and potassium metal (NaK) which has the really annoying property of catching fire in air and reacting explosively with water. The secondary side is water so boiler tube leaks are quite a big deal.
The nuclear physics is quite wonderful but the practical implementation is somewhat constrained by materials science.
Malcolm
June, 07 2012
Malcolm Rawlingson says
Bill, To amplify your concerns about US dependency on foreign supplied U3O8 I do expect the price of Uranium to rise dramatically when the warheads program comes to an end next year because mines produce only about 80% of current consumption. The shortfall - about the amount the US consumes - is coming from the warheads program mostly. But Cameco is ramping up production to meet the increased demand from new reactors and to try and fill the gap left by the warheads program. I doubt they can do it fast enough to avert a massive U3O8 price escalation next year. That is why I have been buying Cameco and other Uranium stocks like crazy - especially at these dirt cheap prices.
Like I said above nuclear reactor operation is price insensitive to Uranium costs. The big hitters are labour and capital costs the Uranium is a side show. Therefore it will not change Uranium consumption if the price of it doubles or quadruples because the current fleet of nuclear plants cannot run on anything else. It is a captive market and those that understand what is going on stand to make a great deal of money.
Every single commercial nuclear reactor in the world requires yellowcake. They cannot operate with anything else. Do you think anyone is going to shutdown a reactor because Uranium is 10 times higher...of course not. It is the same as buying a Ferrari and worrying about the price of gas.
And there I go again talking about beautiful Italian engineering.
Malcolm
June, 08 2012
Ferdinand E. Banks says
Malcolm, I believe that the Russians also had a breeder 30 or 40 years ago. In any event, it doesn't make any difference because the Chinese will have a commercial breeder in ten or so years, and that is that.
But sadly some of our friends and neighbors may not understand enough nuclear economics to get an insight into what is going on, however the breeder is a done deal. As a matter of fact, the whole nuclear scene plays to our strong side. What cant be done in many so called advanced countries is to do the things that would improve the quality of the countries.
June, 13 2012
Peter Olorenshaw says
Malcolm the crucial thing you miss about Peak Oil is that it is all about the price. The fact is the era of cheap oil is over: that this is so can be seen in the current price of oil: The global economy is on its knees and the price is still around US$100/barrel. If there was plenty around or alternatives around it should be US$20bbl, but its not. I find it difficult to believe that alternatives to this "good" cheap oil when we actually have to make the stuff will actually cost what oil used to cost us.
June, 14 2012
Ferdinand E. Banks says
Peter. regardless of the price, the output of conventional crude oil is 'flattening'. Of course, if it should go from $100/b to $1000, then plenty of synthetic oil might become available.
If we can assume - and I am ready to do so - that OPEC is as intelligent as people in this forum. then they have no reason to let the oil price escalate and destroy the macroeconomies of their customers. I read in a paper a few days ago that the OPEC countries had to have 100 dollar oil to make ends meet, but of course the guy who wrote that is an ignoramus, and so I didn't write him and his editor a letter demanding an apology.
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