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Oil Supplies &

the Coming
Global Energy
Crisis
Seth Cook, PhD
June 13, 2012
Is climate change the only problem with fossil fuels?
Oil spills highlight the downside of the fossil fuel based economy
We’ve forgotten about the biggest problem:
fossil fuels are FINITE
My father rode a camel.
I drive a car.
My son flies a jet plane.
His son will ride a camel.
- Saudi saying
To understand our present predicament, we need to
understand the special qualities of fossil fuels

•  the release of enormous amounts


of cheap energy from fossil fuels
enabled the growth of industry,
population, consumption and
technological innovation

•  Oil, coal and natural gas were


produced by natural processes
over millions of years

•  they are FAR more concentrated


forms of energy than the sources
previously available to humanity
(e.g. food crops, human & animal
muscles, windmills, etc.)
Fossil fuels made modern industrial society possible

•  This abundant energy available to


drive production processes
enabled increased extraction rates
of other natural resources
–  e.g. chainsaws, trawlers, etc.

•  Modern farming machinery


powered by fossil fuels made it
possible for small number of
farmers to feed large populations
–  this in turn enabled massive
urbanization

•  Modern chemistry (largely based


on organic compounds derived
from fossil fuels) gave rise to
modern pharmaceuticals
–  facilitated longer lifespans &
growing populations
Human vs. machine power

150 watts
Human vs. machine power

100 hp engine 2000 people


Imagine pushing your car 20-30 miles (32-48
km)
The energy slaves of modern man

•  if we add up the power of the


machines running on fossil fuels
that we rely on to light and heat our
homes, transport us and keep up
our lifestyles and compare that to
the amount of power generated by
the human body:

•  the average American has the


equivalent of over 150 energy
slaves working for them 24/7

•  a middle class person today has an


unimaginable standard of living
compared to previous periods,
largely due to fossil fuels
Oil – the master resource & most important commodity

•  Oil is the lifeline of the global


economy

•  Our primary transportation fuel


(94% of transport is powered
by oil)
–  gasoline for cars
–  diesel fuel for trucks &
buses
–  jet fuel for airplanes
–  bunker fuel for ships

•  Cheap oil has made


globalization possible

•  Oil is the raw material for a vast


array of industrial products
Oil is everywhere

13
Oil is everywhere
Oil – an ideal fuel & raw material
•  cheap & abundant (at least
until recently)

•  energy dense

•  easily transportable

•  capable of being refined into


different fuels (e.g., gasoline,
kerosene, diesel, bunker
fuel, etc.)

•  suitable for a variety of uses,


including transportation,
heating, production of
agricultural chemicals and
many many other materials
World’s first oil well
Pennsylvania, USA 1859
Global oil consumption

•  since 1859, the world has


consumed about 1 trillion
barrels of oil

•  we consume about 85 million


barrels a day

•  over 30 billion barrels a year

•  at least 1 trillion barrels of


economically recoverable oil
left in the ground, probably
more

•  so what’s the problem???


It’s not about running out
•  the global economy
depends upon cheap and
abundant energy

•  in the 20th century, energy


was cheap and abundant,
but that era has ended

•  we are now in the era of


scarce and expensive
energy which is increasingly
difficult to extract

•  that is going to change


everything
From easy oil to tough oil

© BP 2011
World oil production and prices 2002-2010

Production (million barrels per day)

Price (dollars per barrel)


From Tom Whipple 2010. Sources: Production data from U.S. Energy information Administration, “February
2010 International Petroleum Monthly,” March 10, 2010, http:// www.eia.doe.gov/ipm/supply.html; price data
from U.S. Energy information Administration, “World Crude Oil Prices,” accessed April 7, 2010, http://
tonto.eia.gov/dnav/pet_pri_wco_k_w.htm.
What is peak oil?

"The term Peak Oil refers to the


maximum rate of the production of oil in
any area under consideration,
recognizing that it is a finite natural
resource, subject to depletion."
- Colin Campbell
The US Oil Production Story
M. King Hubbert: Energy Visionary

•  Fields peak when ! the oil


has been extracted

•  There is a time lag of about


25-40 years between an oil
field’s initial development
and that field’s peak
production
Predictions of peak oil

Projected Date Source of Projection Background


2006 - 2007 Bakhitari, A.M.S. Iranian oil executive
2007 - 2009 Simmons, M.R. Investment banker
After 2007 Skrebowski, C. Petroleum journal editor
Before 2009 Deffeyes, K.S. Oil company geologist
Before 2010 Goodstein, D. Vice Provost, Cal Tech
Around 2010 Campbell, C.J. Oil company geologist
After 2010 World Energy Council NGO
2010 - 2020 Laherrere, J. Oil company geologist
2016 EIA DOE
After 2020 CERA Energy consultancy
2025 or later Shell Major oil company
No visible peak Lynch, M.C. Energy economist
Source: Hirsch et al 2005
Why is the timing of peak oil so uncertain?

•  if valid data were available in the public domain, determining


the date of peak oil and the subsequent rate of decline would
be a simple matter
•  however, valid data is not publicly available
–  instead, there is a maze of conflicting information
–  OPEC countries’ reserve data is closely guarded
–  oil companies are afraid of their share prices declining
should their actual reserve data become public
–  so experts are left to piece together the incomplete and
often conflicting data
OPEC’s oil reserves are inflated

•  Kuwait added 50% in 1985 to


increase its OPEC quota, which
was based partly on reserves;
no new discoveries had been
made

•  Venezuela doubled its reserves


in 1987 by the inclusion of large
deposits of heavy oil that had
been known for years

•  Other OPEC countries


responded with huge increases

•  Note how the numbers have Source: Colin Campbell 2000

changed little since despite


production
Oil exporters rising domestic oil consumption

Unit: thousands of barrels per day


Exporting 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Country
Russia 2698 2688 2730 2755 2767 2777 2893 2913 3036 2936 3199

Saudi Arabia 1578 1622 1668 1780 1913 2001 2074 2200 2387 2624 2812

Iran 1304 1322 1423 1509 1578 1641 1728 1718 1822 1787 1799

Kuwait 249 253 273 296 327 359 333 338 359 399 413

Qatar 60 73 84 95 107 122 136 153 174 176 220

UAE 396 400 439 488 515 553 584 617 654 616 682

Algeria 191 198 221 230 239 250 258 286 309 327 327

Venezuela 559 622 660 535 582 628 661 682 712 729 765

Ecuador 128 131 130 136 140 166 179 193 203 216 226

Source: BP Statistical Review of World Energy June 2011


Discoveries of oil

•  In order to produce oil, one first


has to discover it; this is an often
overlooked fact

•  Most of our current oil production


comes from fields discovered in
the 1960s & 1970s

•  Oil discoveries peaked in 1960s

•  We now consume 4 barrels of oil


for every 1 we discover

•  Declines in oil discoveries


eventually must translate into
declines in production
Types of Oil
•  Conventional Oil: petroleum found in liquid form, flowing naturally
or capable of being pumped at reservoir conditions without further
processing or dilution.

•  Unconventional Oil: heavy oil, shale oil, tar sands (bitumen) are
considered to be unconventional oil resources. These compounds
have a high viscosity, flow very slowly (if at all) and require
processing or dilution to be produced through a well bore.

•  Natural Gas Liquids (NGLs) are those portions of the hydrocarbon


resource that exist in gaseous phase when in natural underground
reservoir conditions, but are in a liquid phase at surface conditions.

•  Conventional oil provides most of the oil produced today, and about
95% of all oil that has been produced so far.
–  it is the most important form of oil and will continue to dominate
supplies for some time
Source: Hirsch et al 2010: 53
Unconventional oil: will it solve the supply problem?

•  Canadian tar sands


–  estimated up to 1.7 trillion barrels
–  current production: 1.5 million bpd
–  projected: 3 million bpd by 2020
–  processing requires huge amounts
of water & energy
–  produces giant lakes of oily water
–  CO2 emissions higher than
conventional oil production

•  Venezuelan heavy oil


–  estimated 500 billion barrels of
recoverable reserves
–  perhaps the largest source of
untapped petroleum on the planet
–  converting this heavy oil into useable
petroleum requires vast amounts of
energy and money
© Peter Essick, National Geographic
EROEI – energy return on energy invested (net energy)
EROEI – energy return on energy invested (net energy)

Ein

Energy
source Energy extraction Eout
(profit)

Eout
Energy return on energy invested =
Ein
“Balloon graph” representing quality (y axis) and quantity (x axis)
of various fuels in the US economy at various times

Source: Prof. Charles Hall: http://theoildrum.com/node/3810


Dr. Fatih Birol, Chief Economist, IEA

•  After a detailed survey of over


800 oil fields, the IEA revised its
estimates of oil depletion rates
upwards from 3.7% to 6.8%

•  “When we look at the oil markets,


the news is not very bright. We
think that crude oil production has
already peaked in 2006.”

•  “The existing fields are declining


sharply, in the North Sea, in the
United States, in the Gulf of
Mexico. Just to stay where we
are today, we have to find 4 new
Saudi Arabias. This is a tall
order.”
The Hirsch Report: a seminal study on peak oil

•  conclusions:
–  Waiting until world oil production peaks before taking
action leaves the world with a significant liquid fuel
deficit for more than two decades
–  Initiating a mitigation crash program 10 years before
the peak leaves a liquid fuels shortfall roughly a
decade after the peak
–  Initiating a crash mitigation program 20 years before
peaking appears to offer the possibility of avoiding a
world liquid fuels shortfall
Why will the transition be so time consuming?

•  energy transitions are inherently slow and large scale


•  there are no alternative energy sources that are currently
competitive with oil in the transportation sector
•  any transition to more fuel efficient vehicles will require
decades and trillions of dollars
–  existing capital stock can only be replaced gradually
–  would normally require 25-30 years to replace
–  more energy efficient vehicles equipment can only be
gradually phased in as new capital stock replaces
existing stock
The Hirsch Report: conclusions

•  “Oil peaking will create a severe liquid fuels problem for


the transportation sector”
•  “Peaking will result in dramatically higher oil prices, which
will cause protracted economic hardship in the United
States and the world.”
•  “In the developed nations, the problems will be especially
serious. In the developing nations peaking problems
have the potential to be much worse.”
•  “Intervention by governments will be required, because
the economic and social implications of oil peaking would
otherwise be chaotic.”
Geopolitics: the lessons of previous oil shocks

•  in 1973, Arab members of OPEC imposed an oil embargo on the


U.S. and Western European countries in retaliation for their
support to Israel in the Yom Kippur War
–  quadrupling of world oil prices
–  long lines at the gas pumps
–  U.S. economy was severely affected
–  showed that the economic well being of developed countries
was dependent upon a steady flow of cheap oil

•  in 1979, the Iranian revolution led to a steep decline in Iran’s oil


exports
–  worldwide oil shortages ensued
–  world oil prices spiked
–  signified that internal conflict in an oil exporting country could
significantly affect global oil supplies and prices

•  these crises were caused by political events, not by absolute


declines in oil supplies
Iran: potential trigger to significantly higher oil prices?

• Iran’s oil production & exports


–  produces 4.2 million barrels
a day
–  exported 2.2 million barrels
a day before sanctions

•  17 million barrels of oil a day


pass through the Strait of Hormuz

•  if military conflict were to break


out with Iran, or if Iran were to
somehow block the Strait, would
be catastrophic for oil supplies
Converging trends: why time is not on our side
•  global oil production is flat while demand is rising, especially in the developing world

•  due to steep decline rates in existing oil wells, producers are hard pressed simply to
maintain current production rates

•  oil discoveries peaked in the 1960s and have been declining ever since

•  oil reserves have been inflated for political reasons

•  consumption is rising steadily in key oil producing nations, which will eventually lead to
declines in exports

•  we’ve used up most of the easy oil; what remains is tough oil

•  unconventional sources are unlikely to resolve the supply situation due to their low net
energy and serious environmental problems

•  there are no alternative energy sources that are competitive with oil in the transportation
sector

•  political instability in the Middle East is pushing high oil prices up further

•  prices could skyrocket if hostilities break out with Iran


What are the alternatives?

•  Shale gas / oil


•  Gas to liquids
•  Coal to liquids
•  Biofuels
•  Hydrogen
•  Other renewables
•  Electrified
transport
•  Conservation

No easy answers!
Can the current form of globalization be maintained in an
era of increasingly scarce and expensive oil?
How will the airline industry fare in a tough oil world?
Modern agriculture: using land to turn fossil fuels into food
Each calorie of food requires 7-10 calories of fossil fuels
to get to one’s plate
What is the future of modern agriculture?
•  industrial agriculture as currently
practiced is unlikely to be viable in
a post-peak oil world

•  this implies major changes in the


way we produce, transport and
market food

•  it could very likely mean a larger


proportion of the population will
need to be engaged in farming,
the opposite of current trends

•  agriculture may have to become


much more localized than it is now
Can present / projected population levels be sustained?

Source: Joint Operations Environment Report 2010 (based upon UN Population Reference Bureau)
Will the competition for resources lead to military conflict?
What can you expect?

–  high gasoline prices are here to stay – get used to it!


–  higher food prices
–  rising inflation
–  recession (past oil shocks have caused recessions)
–  sectors which are sensitive to oil prices (e.g. airlines,
trucking, agriculture, etc) will be hit hard
–  air ticket prices are likely to be much higher in the near
future
–  the world economy will be hit hard, and all nations will
be affected
Implications of
the Coming
Energy Crisis
for China
China & Oil
•  China was a net oil exporter
until 1992
•  China became a net oil
importer in 1993
•  China’s oil import rate
surpassed 50% in 2009;
estimated to be 56% today
•  In 2010, China accounted for
10.6% of global oil •  Fuel prices in China are
consumption controlled by NDRC
•  9 million barrels per day or 428 •  NDRC raised fuel prices for
million tons annually the 2nd time this year by
more than 6% to reflect int’l
crude oil price hikes
China’s Energy Consumption

Hydro,
Hy dro, Nuclear, Nuclear, Wind
Natural Gas Wind 8.6%
3.2% 3.4%
Natural Gas
4.4%

Crude Oil
22.7%

Crude Oil
19.0%

Coal
Coal
68.0%
70.7%

1978 2010

Source: China Statistical Yearbook 2011


China’s Oil Consumption by Sector (%)

Sector 1990 2009


Agriculture, Forestry, Fisheries, Animal Husbandry
8.9 3.4
and Water Conservancy
Industry 63.7 40.9
Construction 2.8 5.0
Transport, Storage and Postage 14.7 35.3
Wholesale and Retails Trades, Hotels, Catering
0.7 1.1
Services
Other Sectors 6.6 5.9
Residential 2.5 8.3
Total 99.9 99.9
Source: China Statistical Yearbook 2011
China’s Crude Oil Imports by Source 2010

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Source: http://www.brookings.edu/research/papers/2011/07/china-energy-zhang
Growth of China’s Net Crude Oil Imports

20%

15%

10%

5%

0%
2006 2007 2008 2009 2010 2011 2012
(Expected)
Source: China Daily 3 February 2012
China’s Vehicle Stock (millions)

90

80

70 Others

60 Trucks

Passenger
50 Vehicles

40

30

20

10

0
78

80

85

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10
19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20

20

20

20

20
Source: http://www.stats.gov.cn/tjsj/ndsj/2011/html/P1624e.htm
Conclusions:
•  China’s oil consumption cannot continue to grow at present
rates; there is simply not enough oil out there
•  China is very vulnerable to oil shocks, and increasingly so
as imports rise (esp. in industry & transport sectors)
•  China has no choice but to electrify its transport system as
the country’s vehicle stock expands
•  In the global competition for resources, China is WAY ahead
US Oil Consumption & Production

US Domestic Crude Oil Production by Source, 1990-2035


• the US consumes 19 million (Millions of barrels per day)
barrels of oil per day (2x China),
21% of global consumption

•  US is the world’s #1 oil importer


at about 10 million barrels of oil a
day

•  the transport sector accounts for


71% of US oil consumption

•  Overall, the US is extremely


vulnerable to supply shocks,
Source: EIA Annual Energy Outlook 2011
despite projected increases in
domestic production
US energy mix
The US: a suburban country
"He ought to be taking advantage
"As a country that has 2% of the
of all of our offshore, and [the
world's oil reserves but uses 20% of
Arctic refuge], and North Dakota
the world's oil, we're not going to be
and Oklahoma and Texas gas
able to just drill our way out of the
resources, instead of trying to
problem of high gas prices.”
hold them off.”
World gasoline prices ($US/gallon)

10

0
a t t n a d a l g s y y
u ela abi wai gyp e ria Ira xi co ssia e si US la n hin a a da n di razi ore ral ia stria rea pan any nce UK on de n nd Ita l wa
z r u E g e n i n I p t o a a K e rla r
n e di A K Ni M Ru do Tha C a
C
B ga us Au K J
in A th
m r
er F ng Sw th e No
e
V au In S u G o
S So H Ne

Source: http://www.bloomberg.com/slideshow/2012-05-12/highest-cheapest-gas-prices-by-country.html#slide1
The age of cheap and abundant resources is over

•  Americans – and the world


– haven’t grasped this yet
•  Not just oil:
–  water
–  many metals & minerals
–  uranium
–  grain production (per
capita)
–  wild fisheries
•  We are in a different era
now, which calls for
different approaches
We’re in for a bumpy ride:
The next 20 years will not be anything like the last 20 years
Conclusions

Due to geological and geopolitical reasons, a global


energy crisis centering on liquid fuels is likely in the
near future
• we need to rapidly put in place a sustainable energy
infrastructure to replace the existing oil infrastructure
•  we need to do so NOW, not simply because of climate
change (the usual justification), but also because of the
global energy supply picture
• a smooth and seamless transition to an alternative energy
regime is no longer possible because we have far waited too
long
• we must get actively involved in the conversation about
alternative energy sources, or it will be imposed upon us
Thank you!

contacts: sncook88@gmail.com
The Shale Gas Revolution
•  IEA is now referring to a ‘golden
age of gas’
•  ‘hydraulic fracturing’ or just
‘fracking’
•  Horizontal drilling combined with
fracking has dramatically changed
the natural gas landscape
•  EIA estimates US has 860 tn cubic
feet of ‘technically recoverable’
reserves
•  China: 1,275 tn cubic feet
•  Global shale gas reserves of 6,600
tn cubic feet; roughly equal to
today’s current reserves
Shale Gas: Boon or Bane?
•  Requires vast amounts of water:
2m-4m gallons per well +
15,000-60,000 gallons of
chemicals
•  Not suitable for arid regions
•  Sand mining
•  Risk of groundwater
contamination by toxic chemicals
and methane
•  Risk of earthquakes
•  Generated a popular backlash in
US & Europe
•  France has banned it; NY State
temporarily banned it, now lifted
•  At best, shale gas should be
treated as a bridge fuel
Further reading
Overviews
• The Impending World Energy Mess, by Robert L. Hirsch et al
•  Peak Everything: Waking Up to the Century of Declines, by Richard
Heinberg
•  Crude World: The Violent Twilight of Oil, by Peter Maass
•  The Long Emergency: Surviving the End of Oil, Climate Change and
Other Converging Catastrophes of the 21st Century, by James Howard
Kunstler
•  The Prize: The Epic Quest for Oil, Money & Power, by Daniel Yergin

Peak Oil
•  The Party’s Over: Oil, War & Fate of Industrial Societies, by Richard
Heinberg
• Twilight in the Desert: The Coming Saudi Oil Shock and the World
Economy, by Matthew R. Simmons
• The Coming Oil Crisis, by Colin Campbell

Peak oil and globalization


• Why Your World is About to Get a Whole Lot Smaller, by Jeff Rubin
China’s Share of World Commodity Consumption (2009-10)
Commodity China’s % of World
Cement 53.2%
Iron Ore 47.7%
Coal 46.9%
Pork 46.4%
Steel 45.4%
Lead 44.6%
Zinc 41.3%
Aluminum 40.6%
Copper 38.9%
Eggs 37.2%
Nickel 36.3%
Rice 28.1%
Soybeans 24.6%
Wheat 16.6%
Chickens 15.6%
PPP GDP 13.6%
Oil 10.3%
Cattle 9.5%
GDP 9.4%
German military think tank report on peak oil

•  Conclusions of the report by the Bundeswehr Transformation


Center (leaked to the media in August 2010):
–  In the near term, rising oil prices will lead to lower
consumption and economic output (e.g., recession or
worse)
–  Increasing transportation costs will lead to lower trade
volumes, lower incomes for many and unaffordable food
for some
–  Pressure will increase on gov’t budgets as they struggle
to keep populations fed, deal with mass unemployment
and try to invest in sustainable forms of energy
–  “In the medium term, the global economic system and
every market oriented national economy would collapse.”
Causes & consequences of the oil shock of 2007-08

•  “Whereas historical oil price


shocks were primarily caused
by physical disruptions of
supply, the price run-up of
2007-08 was caused by
strong demand confronting
stagnating world production.”

•  “The experience of 2007-08


should thus be added to the
list of recessions to which oil
prices appear to have made a
material contribution.”

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