Thursday, October 16, 2008

Peak oil a myth?

The Recurring Myth of Peak Oil is a longish article by ISMAEL HOSSEIN-ZADEH which goes at length to claim "Peak Oil" is a hoax. He has some interesting arguments, which I don't buy, and want to analyse a bit. He is a Professor of Economics at Drake Univ., has written books, and from a brief yahoogling seems to have written several articles discussing energy shortages and oil wars and other oil issues.

On the face of it Peak Oil does sound very reasonable as he says. Given that there is a fixed amount of fossil oil available, continued usage will result in a time coming when you run out. The observation goes further in that the usage cannot stay constant and then abruptly end, but that as a field gets older it reaches a point where production levels from that field begin to decline. Thus it gets harder and harder to retrieve the remaining oil as the field is more depleted.

Due to the length of the following summary, here are a few salient points

  • Dr. HOSSEIN-ZADEH repeatedly dismisses the peak oil theorists for claiming there is a fixed quantity of oil. Well, to the best of our knowledge, the natural process to create new oil takes zillions of years and that effectively means there is a fixed quantity of oil. What's lacking are accurate estimates of how much is available. But it's clear that the base proposition is true, that continued use of a fixed size resource will eventually bring us to a shortage condition related to that resource.
  • Dr. HOSSEIN-ZADEH several times describes Peak Oil as a well known and influential idea that is causing the mass of people to take actions he describes as strange. If so then why is Peak Oil barely covered by the mass media, why is the phrase Peak Oil almost entirely unknown to people, etc?
  • He also links Peak Oil and Environmental activists as acting together. In truth the two camps don't quite acknowledge each other even though they're both working towards the same goal.
  • He points to technological solutions which themselves have little merit. For example mining tar sands or oil shales have a very poor Energy Return On Investment (EROI) making it near-folly to make use of them, and they also create ecological disasters in the process. Further non-fossil liquid fuels (a.k.a. unconventional liquid fuels) make up a tiny percentage of the market right now meaning that for them to replace conventional liquid fuels (fossil oil) a huge investment is required in infrastructure. He doesn't explain who is going to make that investment.
  • He points to previous market manipulations and says the current price fluctuations are again merely the result of market manipulation. It's true the market has been manipulated in the past the most blatant example was the OPEC driven faux oil crises of the mid 1970's. However that does not undermine the base proposition and simple economics says that the inevitable decline in supply inevitably means a big spike in oil prices due to ever-increasing demand.

Have environmentalists used peak oil as a lever "to promote more vigorous conservation and more energetic pursuit of alternative fuels"? I've seen it said dozens of times that global warming activists and peak oil activists are at odds with each other even though they're talking about two sides of the same coin. A global warming activist can easily look at the peak oil issue and the take-away is the peak oil message damages the global warming message because peak oil says we're going to run out of oil so it doesn't matter what we do to mitigate global warming because having run out of oil will remove the influence causing global warming. Hurm.. to my eye both issues are reasons to decrease fossil oil use and in particular the global warming influences are a slow moving process which will take decades to run out.

He says.. "Because of its simple logic and facile appeal, Peak Oil has also led many ordinary citizens, burdened by high fuel bills during periods of energy crisis, to support unrestrained or expanded drilling." So, has that been Peak Oil or has it been political manipulation by oil companies and the politicians? The Peak Oil issues are barely known to the public, so how can Peak Oil be leading public opinion? What's happened instead is we have politicians chanting Drill baby Drill in their rallies. I suspect the oil companies are behind this as they have an agenda to increase access to oil reserves so that down the road they can perform more business.

Yes high oil prices have caught the attention of the people. I've noted on several prior postings growing adoption of alternate transportation such as scooters. It's leading them to accepting follies like more oil drilling. Folly? Opening a new oil field takes 20 or more years to accomplish, therefore this is not a short term solution to the short term problem with high oil prices, yet the politico's chanting Drill baby Drill are presenting it as a short term solution. Also the fields in question are small and will quickly peter out, making them a small contribution to the cause of oil use. Finally the use of fossil oil itself has been a bit of a folly in that it's lead humanity to huge environmental degradation on a global scale.

He quotes.. "As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds." .. As he noted further on in the article all the prior periods of high oil prices were due to a manipulation of the market. Either the oil companies themselves manipulated the market or famously in the mid-1970's OPEC manipulated the market. Obviously oil producers make more profit if the price for oil is high. Just as obviously it gives them incentive to manipulate the market and not all manipulations will be as blatant as the OPEC oil embargos of the mid-1970's.

The quote comes from here: [3] F. William Engdahl, “Perhaps 60% of Today’s Oil Price Is Pure Speculation,” (2 May 2008), ... appears to be an online news channel about finance and investment.

But saying that short term price fluctuations are the cause of manipulators does nothing to undermine Peak Oil. It instead makes one wonder if the Peak Oil message may be a victim of crying "Wolf!" too many times. If, as he claims, every time oil prices are high there is a concurrent rise in peak oil discussion it would be easy to connect the Peak Oil message to the prior market manipulations.

For example a subtle form of market manipulation is to not invest in building more oil drilling & transportation & refining infrastructure. To increase the production of oil the oil companies obviously must build more equipment to do so. But if an oil company were to build more equipment, increase the supply of oil on the market, it will cause a price decrease. Supply/Demand economics says if supplies increase then prices should drop, so why should the oil companies participate in increasing supply? Well, they do know that if the price goes too high it causes the customers to look for alternatives. The oil companies then have a dance they can play in manipulating the oil price through the supply they provide dancing in an oil price range between "too cheap" (not making enough profit) and "too expensive" (customers turned off and looking for alternatives).

He says.. "Not only millions...have taken the bait and fallen right into this trap by arguing that recent U.S. wars of choice are driven primarily by oil and other “scarce” resources. More broadly, they argue that most wars of the future, like the recent and/or present ones, will be driven by conflicts over natural resources, especially energy and water—hence, for example, the title of Michael T. Klare’s popular book, Resource Wars ..." and he goes on to connect this with Thomas R. Malthus’s theory of “scarcity” and “overpopulation.”

The Peak Oil thesis is not new, and it's not rocket science either. It's pretty obvious, with a fixed source of supply, continual use will result in running out. In the section of his article headed Peak Oil Thesis Is Not New: Geology vs. Geopolitics he again argues that the peak oil theory is false because of the past market manipulations. To paraphrase a phrase investment analysts are required to say, past manipulations are not an indication that future real shortages are a fiction.

He says .. "One of the major defects of Peak Oil is its facile extrapolation or transition from micro to macro level, that is, an unwarranted generalization or extention of what is true in the case of an existing oil well or oil field to the entire world oil production." What he means is the leap of logic conducted by Peak Oil proponents. "It is true that every operating or producing oil well or field increases in production rate until it reaches a maximum or peak flow rate, after which the rate of production enters a terminal decline." The Peak Oil proponents then go on to say if you sum up the production rates of all oil fields everywhere it will form a similar peak oil graph. This leap of logic seems to be a very reasonable step to make, but he is positioning this as a defect in reasoning.

He goes immediately from that point to again discussing Malthus's theories. "The Peak Oil debate boils down, essentially, to natural versus social limits, or naturally-determined versus socially-determined limits." Yes, it does boil down to that. Tellingly one of the major modern proponents of Peak Oil, Richard Heinberg, the author of Peak Everything, makes exactly this argument. That the physical world we live on has a fixed amount of all sorts of resources and the same obvious truth applies to all of them. Given that there's a fixed amount of oil or copper or gallium or iron etc, continued use will one day inevitably lead to reaching a situation of running out.

"Although not identical, the Peak Oil theory is similar to the Malthusian theory in that it too is based on natural, innate, or fixed and immutable limits. There are, of course, limits to everything—energy, food, water, population. But those limits are not absolute or pre-determined, as implied by the Peak Oil thesis. They are perhaps more social than natural limits. " ... hmm...?

"More Oil Found than Used Up...those forecasts turned out wrong because oil reserves, including proven or cost-efficient reserves, have continued to grow, and more oil wells or fields have been brought under utilization than those peaked and declined..." This is where he starts to explain how the proponents of Peak Oil are making a flawed leap of logic. That oil discoveries prove the global scale peak oil model to be wrong.

I was at the recent USA conference for the Association for Study of Peak Oil, and will soon be posting the materials I collected there. Several presenters showed alternate oil availability charts of future production levels based on different assumptions of future oil discoveries. As a group they seemed to believe that no further large oil fields would be found, and that all new discoveries would be minor sized oil fields. Every chart they showed simply gave a different year for the peak of fossil oil production. Assuming no more oil field discoveries, we've already passed the peak of fossil oil production, but give us a few more discoveries and we've still passed the peak of fossil oil production, but there is a secondary peak in 2040.

I suppose one can argue these Peak Oil proponents are making a faith based prediction that no new large discoveries will be made. The people making these statements were generally having decades of experience in the oil industry, well respected Geologists etc, with lots of data behind them, and in particular one chart they showed was that the peak of oil discoveries happened 40 years ago. No large oil field has been found for over 40 years, and this gives a lot of credence to the claim that no more large fossil oil discoveries will be made.

"The United States holds significant oil shale resources underlying a total area of 16,000 square miles. This represents the largest known concentration of oil shale in the world and holds an estimated 1.5 trillion barrels of oil with 800 billion recoverable barrels—enough to meet U.S. demand for oil at current levels for 110 years....In western North Dakota there is a formation known as the Bakken Shale. The formation extends into Montana and Canada. Geologists have estimated the area holds hundreds of billions of barrels of oil...." Sigh... what he doesn't say is the Energy Return on Investment for processing oil shale, tar sands, and other poor quality oil deposits, is very low. If you're spending 1 unit of "energy" to retrieve 1 unit of oil from these oily rocks, then why are you bothering with them? It's a net loss to process oil shales and other deposits to turn them into oil.

Oh, but, wait, "Examining nukes to replace oil" is about a rising call from the Bush Administration to restart the American Nuclear Power industry. Pres. Bush said at the time, three years ago, that we need more nuclear power to balance our energy needs. The flaw in the reasoning is that nuclear reactors make heat and electricity, not oil, but on the other hand processing oil shales or tar sands do require heat (and perhaps electricity) making a nuclear plant a convenient source of the energy to process oil shales. It would change the EROI because of not using fossil fuel to process other fossil fuel into oil, it would be using nuclear power to process fossil fuel into oil. But the flaw in this line of technology development is that Uranium is in a fixed quantity situation, and there is a peak to Uranium production looming in the future.

An interesting point is this quote "in 1944 a special expert mission estimated Persian Gulf reserves at 16 billion proved and 5 billion probable. By 1975, those same fields had produced 42 billion barrels and had 74 billion remaining. In 1984, geologists estimated a five percent probability of another 199 billion barrels remaining to be added in the Gulf region. In five years those reserves had already been added" ([8] M.A. Adelman, The Genie out of the Bottle: World Oil since 1970, (Cambridge: MIT Press, 1995); cited in Bill Kovarik, “The Oil Reserve Fallacy: Proven reserves are not a measure of future supply,” ... In other words, the claim is that the past estimates of reserves have proven to be false, there's little reason to expect current reserves estimates to be any better, and further the Peak Oil theory is based on the estimates of reserves.

That's an interesting point. It still doesn't undermine the base proposition, that given a fixed amount of oil and a continued use of it that we will eventually come to a situation of running out. What it changes is the estimate of how big that fixed amount of oil is. All a discovery of more oil does is to push out into the future the day when the oil peak occurs. That is the estimate of the time when the peak occurs is based on the estimate of oil reserves, and obviously if the known reserves increase then the model will produce a different date for the occurrence of the peak. It does not change the inevitability of the peak occurring, just the date at which it will happen.

The role of technology is positioned as another flaw in Peak Oil... "A major flaw of Peak Oil ... is that it discounts the fact that energy-saving technologies have drastically improved ... not only the efficiency of oil production but also of oil consumption." But to the extent he is claiming Peak Oil advocates ignore technological improvements he is flat wrong. At the ASPO meeting I just attended most of the presenters did discuss technology improvements and the possibilities they present. However what they generally pointed out is that in the long run the technological improvements don't make any difference.

Again, given a fixed amount of oil available, continued use of the oil means we inevitably reach a situation of running out of oil. All technological improvements do, if they themselves actually do anything, is to decrease the rate of growth in oil use, and to push out into the future the day when the oil runs out. Technology doesn't undermine the base proposition of peak oil.

I do find it troublesome that Peak Oil advocates say there is a 1:1 ratio of population to fuel and energy demand. Sure when population increases there will be an increase in economic activity, an increase in buildings and housing, and an increase in total activity by society, so therefore the fuel and energy requirements by society will increase. What matters in this is whether technology improvements can implement enough fuel and energy savings to offset the increased demand coming from an ever-increasing population.

Perhaps oil industry technology improvements can increase the number of oil field discoveries and the rate of recovery of oil from oil fields. This will act to increase the total amount of oil available to humanity. However it still does not undermine the base proposition of Peak Oil. Instead as said so many times before, improved technology only pushes the peak further into the future.

For alternative sources of energy he says "Peak Oil is also subject to criticism because it pays insufficient attention to substitutes or alternative sources of energy, both actual and potential. These include solar, wind, non-food bio-fuel, and nuclear energies. They also include natural gas. " Again he is flatly wrong. At the ASPO conference all the charts of oil use included unconventional liquid fuels of all kinds. "Unconventional" means liquid fuels other than fossil oil including biomass, liquified natural gas, oil shales, etc.

The thing which struck me is the ratio between conventional and unconventional liquid fuels. This ratio is on the order of 98% fossil oil to all other forms. I should point out here that the Peak Oil advocates are focusing on liquid fuels and that liquid fuels have a specific role that's incompatible with electricity. Liquid fuels are overwhelmingly used for transportation and electricity is overwhelmingly used for everything else. Coal is also widely used but is incompatible with use in current transportation technology. 150 years ago coal was used in transportation and thankfully we left those days long behind us.

If the unconventional liquid fuel technology can be developed to provide a decent EROI (Energy Return on Investment) perhaps they could change the peak oil base proposition. As it is use of oil shales and other poor quality oil resources is folly because the EROI is so completely bad. Again most of the unconventional liquid fuels fall into this model of having a fixed amount on the planet, and if we enter into a pattern of continued use of these unconventional liquid fuels we will eventually run out. The base proposition of Peak Oil is by repeated use of a fixed size resource eventually the resource will be exhausted. At best the unconventional liquid fuels simply expand the amount of liquid oil available to humanity and pushes the day of exhausting oil supplies into the future.

Where the base proposition can be changed is if an alternate fuel is developed which does not depend on extracting fuel from a fixed size resource. Over and over in this analysis I've returned to the phrase "fixed size resource". The total quantity is fixed of fossil oil, fossil natural gas, fossil coal, uranium, methane hydrates, etc. To the best of our knowledge the planet does not make more of any of these resources. Of course the estimates of the total quantity are just estimates, as said above, but continued use of any of those resources will eventually exhaust them.

Biomass derived liquid fuels are in a special case. The planet grows new biomass all the time and is constantly renewing itself. It's feasible that biomass derived liquid fuels could be a very game changing solution to the peak oil problem, simply because biomass is not a fixed size resource.

However there is a huge problem here ... it is that ratio of fossil fuels to unconventional liquid fuels. For any of the alternative fuel technologies to replace the use of fossil fuels means for an immensely huge increase in infrastructure and businesses and processing and transporting equipment and infrastructure for the purpose of supplying unconventional liquid fuels to the public.

External Media