Oil Trends Blog

Although we continue to maintain that the world is in no immediate danger of suffering oil shortages, it is clear that world wide oil production will eventually peak.

The following bell shaped graph based on the technical analysis by the association for the Study of Peak Oil and Gas (ASPO) shows we are reaching a production maximum:

As you can see, discoveries have been dropping off since the 1960s and projected production is expected to peak around 2010. One of the problems with projecting a peak oil date is the ambiguous definition of oil reserves and the politically motivated reporting of oil reserve data. As mentioned in William Clark’s book, “Petrodollar Warfare” and citing Jean Laherrere of APSO, “the pessimists use technical data, whereas, the optimists use political data.” He goes on to say “oil is so important the publishing of reserve data (even production) data has become a political act.”

According to Clark, from 1985 to 1990 the aggregate proven oil reserve data for six OPEC members went from 379 billion barrels of proven reserves to 693 billion barrels. However, the actual discoveries during this time period were around 10 billion barrels. Despite these reported reserves appearing to be blatant political figures, the US government and the media continued to report these fantastic numbers as if they were factual.

In this regard there is considerable evidence to suggest that Saudi’s oil reserves have been exaggerated for several years, perhaps by as much as 40 percent. As pointed out by Matthew Simmons, a key advisor to the Bush Administration, Saudi Arabia’s ability in oil production provides evidence that casts doubt on their ability to effectively serve as a swing producer in the global market.

The above graph showing where we are with oil production makes it clear why Bush and Cheney was secretively willing to risk so much in terms of America’s standing in the world, both geopolitically and economically, and move to invade Iraq under the guise of war on terrorism. The peaking of domestic oil production in the UK may have provided one of the reasons PM Blair endorsed the Iraq war.

In light of the real concern of limited oil output, the US desperately needs a viable national energy policy that involves peaceful negotiations with other user/producer nations. There is time to correct the misguided direction of Bush and Cheney. Our failure to do so earlier was perhaps the greatest mistake since the end of the Cold War. The time is long overdue to address the upcoming peak oil issue with the people of the United States and frame the issues realistically and peacefully in terms other than the “war on terrorism.”

We will have more to say regarding the impact of world oil supply and demand on the US government’s political policies in the upcoming blogs.

Much political discussion has addressed the fact that oil companies have not been drilling for oil on leases they presently have available. Despite the efforts of many politicians, such as, Sarah Palin who consistently urge companies to “drill baby drill” there has not been a significant move to drill on these leases.

As we have noted in earlier blogs the difficulty lies in the fact that the easily produced, high quality crudes have already been produced. Remaining oil reserves require much more effort and expense and will only result in the production of undesirable heavy-high sulfur crude oil. Additionally, decline curves of newly produced discoveries are quite step and production lasts for only a short time. As a result, without unrealistic price increases for crude oil the historical Return on Investments (ROI) do not warrant developing many of these leases.

More importantly, what is happening in many cases is the energy spent to extract a barrel of oil exceeds the energy provided by that barrel. This concept, as discussed by William R. Clark in his book “Petrodollar Warfare” is called Energy Return on Energy Invested (EROEI). As he points out, years ago super-giant oil fields were still being discovered and could produce EROEIs of 200, or energy returns 200 times greater than the energy actual expended to extract the oil. Comparatively, oil wells in deep water, such as, the Gulf of Mexico, currently incur EROEIs of less than 5. The Canadian tar sands, while having vast reserves, have an EROEI of 1.5. If these numbers are accurate, we will eventually reach a point when all remaining oil reserves will require more energy to produce than the energy returned. In other words it will no longer be logical to expend the energy to extract this oil. In such a scenario, the EROEI for those oil fields becomes an energy sink and the oil will simply remain in the ground. Unlike the traditional Return on Investment (ROI) calculations, the amount of money invested in a mature oil field is completely irrelevant if the energy required to extract the oil is greater than the return. In these cases increasing oil prices to improve ROI is just a short term fix.

Despite the social, economic, and geopolitical implications of global Peak Oil many governments, including the Cheney consortium, are reluctant to address or publish information regarding EROEI and continue in the unfounded belief that more drilling will result in satisfying increased demand to further economic growth.

Our newly elected officials need to aware of the fallacy inherent in the “drill baby drill” philosophy and begin to develop an oil policy which makes more long range sense.

Contrary to the conventional wisdom espoused by the Cheney oil group, there is new evidence that the U.S. is not in as dire straights as they would have you believe.

New information from the Energy Information Administration is now supporting views expressed by Oil Trends Blog in earlier publications. EIA is predicting U.S. crude oil production will increase 8 percent from 2008 to 2009. The following graph illustrates this fact:

Two thirds of the overall U.S. increase in production in 2009 will come from the Gulf of Mexico. Some of this increase reflects recovery from this year’s hurricanes, but over half arises from new production. Overall, crude oil production from the Gulf of Mexico is projected to be 11 percent higher than in 2007. See the graph below:

Additionally, U.S. crude oil stocks continue to track well within the historic average range indicating an adequate supply to meet current needs. See below:

As we have stated before, we are not suggesting that one day the world will not reach a point where crude oil demand exceeds supply. However, projections of when that will occur are highly speculative. In the near term it will behoove the incoming presidential administration to not be stampeded by special interest groups concerning oil shortages. Developing an open and qualified staff of oil experts will go a long way to overcoming the misinformation spewed out by the likes of Cheney or Palin. A planned and well thought out energy policy is what is needed and there is plenty of time to cautiously address the issues.

U.S. natural gas production grew by 9% between the first 7 months of 2007 and the first 7 months in 2008. To put this growth in perspective, U.S. natural gas production was essentially flat for 9 years from 1998 through 2006, before rising by 4% in 2007. Thus, the growth in 2008 so far appears to mark an historic shift in U.S. natural gas production. See the graph below.

Data from Energy Information Administration 10/29/08

The increased production in the U.S. meant that the country has needed to import less natural gas in 2008 than in 2007, especially in the form of LNG (Liquid Natural Gas). For the first 7 months of 2008, LNG imports fell by 64% compared with the same period in 2007, continuing a trend of reduced imports that started in the second half of 2007. Additionally, the U.S. added more than twice as much in proved reserves as it produced in 2007 and ended the year with the highest total proved reserves since at least 1977, when EIA first estimated proved reserves. The record additions mostly reflect the rapid development of unconventional natural gas recourses made up of coal bed methane and resources like shale and tight, low permeability, formations that use advanced technologies.

This information does not bode well for Governor Palin’s proposed natural gas pipeline, which would deliver natural gas from Prudhoe Bay to markets in Canada and the U.S. by way of some of the earth’s most hostile and remote terrain. As she stated, “We’re building a nearly $40 billion natural gas pipeline, which is North America’s largest and most expensive infrastructure project ever, to flow those sources of energy into hungry markets.” Not only is this project very expensive, it seems that it was crafted by Palin’s team to favor only a few independent pipeline companies and ultimately benefited only one winner, TransCanada Corp., with which she had close ties. Possibly, with new production and proven reserve numbers there will be a better way to spend the $40 billion.

There has been much discussion lately regarding the need to increase off-shore drilling. In an earlier blog, The Great Oil Shortage Myth, we discussed the fact that there is no short term oil shortage that allegedly accounted for the rapid price increases this year. However, there will come a time when we will see a decline in total world production of crude oil and there is on going debate as to when this time will be reached.

The debate over “peak oil” has become a political football argued by members of congress who know very little about the complications of oil production. This has been most recently demonstrated by our newest “oil expert” Governor Sarah Palin of Alaska promoting the slogan “drill baby drill”. The fact of the matter is that there exists a “fog of transparency” regarding the information concerning world oil production rates and reserves. Many countries, including the OPEC countries and Russia, keep reserve and production data as state or corporate secrets revising them when it is politically expedient. Additionally, remaining proven reserves are essentially non-scientific guesses based on reservoir simulation models developed without sufficient information and thus are simply educated guesses.

Adding to the confusion is the stark difference between high quality light crudes and heavier oils, such as, tar sands. Light, low sulfur oils yield high levels of gasoline and diesel fuels, while heavier crudes yield more heavy fuel oils and tar. The lighter crudes are environmentally less offensive than the heavier oils and have higher production flow rates; however, they represent a significantly lower percentage of the crude oil being discovered recently. The heavier crudes, such as the Athabasca tar sands in Canada, result in a three fold increase in green house gases when produced and run through refineries.

Finally, there is the problem of production decline and the cost of off-shore drilling. As pointed out by Simmons & Company International in the following graphs, off-shore drilling produces wells with rapid declines in out put. Many of these wells produce at efficient rates lasting only 8-10 years and take nearly 10 years to become productive. The operating costs of these wells alone are staggering. For example, the average operating cost of a 100 ft-water depth well in the Gulf of Mexico increased 100% between 2002 and 2006 from $5,093,200/yr to $10, 258,200/yr. A similar comparison for a 600 ft-water depth well show an increase of 101% during the same time frame from $6, 237,600 to $12,148,800.

So, it is not completely clear that just “drilling” can solve the long term oil supply issue. We are not clear as to when we will start feeling the effects of production decline or what the costs to oil companies and individuals will be. It behooves our elected officials to proceed cautiously in this area and remove oil production from the political arena.