Thursday, May 19, 2011

Oil Depletion Information Resources

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The Report on Oil Depletion, which is posted below, provides an excellent introduction to the use, production, consumption and availability of worldwide oil reserves. In the left hand column, you will also find several related essays on oil and energy. These references have been published as free documents subject only to the Legal Information found in the left hand column. In addition, my current commentary on oil and energy resources can be found on The Cultural Economist.

Comments are always welcome.

TCE

Tuesday, April 20, 2010

The Report On Oil Depletion


What Is This Report About?

If we were to list the most important issues facing humanity, resource depletion has to be in the top three. Among a long list of dwindling resources, however, declining oil production presents us with one of the most significant challenges. Oil depletion is not a future event that we can ignore. It is real. It is upon us. The economic and cultural destiny of mankind is inexorably tied to the availability of oil. It is impossible to feed our growing population without ample supplies of petroleum for agriculture, food processing and distribution. Oil provides the raw material for thousands of products, including cosmetics, medicines, plastics, textiles, propane and heating oil. It is the only practical energy resource for motor vehicles, diesel engines and airplanes. Oil and natural gas have played a pivotal role in human progress and population growth.
But the days of surplus oil are coming to an end.

World oil is transitioning from a market driven by consumer demand to one limited by producer capacity. As a result, oil exporting countries are now able to control the price and the availability of an increasingly scarce commodity.

Corporate behavior, government action, cultural stability, economics, legal agreements, geography, weather, crude oil transportation, military diplomacy and the always potent combination of religion and politics are now more important than geology in developing oil production forecasts.

The approaching oil crisis will have a global reach, impacting the economic and cultural health of every nation. Because they have the most energy intensive economies, however, the industrial nations of North America, Europe and the Pacific Rim will suffer the greatest deterioration. We can either try to manage a "soft landing" or let nature take its course. Doing something means encouraging new attitudes about fuel production and consumption as well as the privilege of parenthood on a worldwide basis. If we do nothing, chronic recession is probable. Economic depression is possible.


Prologue

One may wonder, how the heck did someone from the computer industry wind up doing a monumental report on oil depletion? I have never worked for an oil company. I knew little about oil geology or industry operations when I started this effort.

Well, … you might say I got sucked into it.

I retired in 2002. Forty three years of systems design, sales, marketing, product development, industry analysis, and management consulting. Communications and computers. It was quite a ride. After a brief rest to catch my breath, I decided to embark on a new adventure. A life long ambition. I would write the great American novel! And by golly, after three months of feverish activity, I actually had 12 chapters all neatly laid out on the dining room table. My novel had multiple characters, interesting character development, and a 40 year time line. There were pages and pages of detailed notes. I only needed one more thing.

A plot.

Then on a lazy Sunday afternoon in the fall of 2002, I received a call from my sister. “We”, she asserted, “are going to boycott ExxonMobil because they are charging too much for gasoline.” 

Well, I knew enough about oil and gasoline to know that both were freely interchangeable commodities. A boycott was not likely to have much of an impact on ExxonMobil. So I told my sister I would look into the boycott idea, exchanged a few pleasantries with her, and then said goodbye. In three or four days of diligent research I confirmed my original suspicion. Boycotting ExxonMobil would not have much of an impact on the company because it would simply sell its gasoline to someone else, and besides – most of the company’s profits came from other elements of its business. (Which is still true).

But something was pestering my thought processes. While doing my research, I came across two ominous words – oil depletion.

Wow. What a great plot idea. A depletion crisis. Something overwhelming to challenge my characters. Conflict and greed. Malicious villains. Complex plot twists. Great stuff! I started looking for everything and anything I could find on the oil industry.

Big mistake.

Taking on this task has been like falling into a black hole that has no bottom. After 6 years of gathering and analyzing information, I am now knowledgeable enough to be really dangerous.

Although I am now passionate about the subject of oil depletion, the information and analysis you will find in this text is presented without preconception. I have no ax to grind, no position to protect. My objective is disarmingly simple: to share what I have learned with you. So read on. If in some small way I can help you to understand the cultural and economic impact of oil depletion, then I am a happy man.



Introduction

It’s true. When the last human on earth turns out the lights, there will still be oil in the ground. Furthermore, if we humans work together, we can evade the worst effects of the impending “Peak Oil” crisis. And eventually, the depletion of our oil resources will be good for the environment.

That’s the good news.

Unfortunately, everything else about oil is a bit more complicated. And mostly bad news. This report is about the economic and cultural impact of oil depletion, with particular attention on the United States and – by inference – the first world nations of Western Europe, along with England, Japan, and Australia. The depletion of our oil resources is not a phenomenon that will happen sometime in the distant future. It is happening now. It has already altered the objectives and alliances of international diplomacy, empowered the political aspirations of producer nations, restructured how world oil markets work, and changed the economics of oil exploration, production, transportation and refining.

It has also raised the price of gasoline, diesel, propane, and heating oil fuels.


A Little Oil History

We humans have been experimenting with oil for over 6500 years. Sumerians burned oil in pans for lighting as early as 4500 BC. The use of oil in the Mediterranean area for lighting, heat, water proofing, and binding has been documented prior to 2000 BC. Chinese and Japanese history describes natural flows, hand dug wells, and seeps as far back as 1500 BC. The first oil lamps appeared around 500 BC. The Chinese may have drilled the first oil well in 347 BC. The Romans used oil in censers (fire pans) for lighting, to seal their waterways and boats, as a lubricant, and as a weapon of war. Oil was used in the streetlights of London in 1414, and Paris in 1524. Romania was the site of Europe’s first “commercial” oil reservoir circa 1650. In 1739, V. I. Veitbrecht published an article "About Oil" in the Russian scientific magazine "Primechaniya na Vedomosti" describing oil wells in Baku, Azerbaijan. Oil was mined from oil sands found near Pechelbron France in 1735. Between 1781 and 1820, oil was derived from coal and oil shales in England, France and Germany. Oil seeps were discovered by European explorers in 1626 on lands that became the upper part of New York state in the USA. Peter Pond discovered the Athabasca oil sands in northeast Alberta, Canada in 1778. The first commercial oil wells in North America were dug by hand at Oil Springs, and Petrolia, Ontario circa 1858.

Edwin Drake drilled the first American oil well at Oil Creek Valley, near Titusville, in northwestern Pennsylvania in 1859. For at least 300 years, oil had been scavenged from seeps in the area by the Seneca Indians. They sold it to early settlers as a medicinal for soothing aching joints and itching skin. Settlers also burned the foul smelling oil in lamps and mixed it with flour to use as a lubricant. Although Drake’s well was initially only 69.5 feet deep, and produced less than 10 barrels per day, the discovery – along with Drake’s oil drilling innovations – set off a boom in land speculation and drilling in the area.

Despite its early discovery, oil was not widely used as an energy resource until the 1850s. Over the prior 200 years, whale oil had been used for lighting in street lamps, as well as the lamps of residences and commercial establishments all over the world. By the 1840s, however, we were running out of sperm whales and the cost of whale oil was becoming prohibitive. Innovative entrepreneurs began looking for a new resource for inexpensive fuels and lubricants. A Canadian, Dr. Abraham Gesner, an American, Benjamin Sillian, and a Polish druggist named Ignacy Lukasiewicz all developed methods of deriving kerosene from coal or oil between 1846 and 1855.


The invention of the kerosene lamp in the 1850s
ignited an intense demand for oil.



By 1859, more than fifty companies in the United States were manufacturing kerosene from coal. World oil production reached 500,000 barrels a year by 1860, and by 1880 production topped 20 million barrels.


Then came the internal combustion engine.



In 1876, Nikolaus August Otto invented and later patented a successful four-stroke engine, known as the "Otto cycle". In 1885, Gottlieb Daimler invented what is often recognized as the prototype of the modern gasoline engine, and in 1886, Karl Benz received the first patent for a gas-fueled car.

A new industry. Automobiles, trucks, and industrial engines. By 1920, oil production reached 450 million barrels. There was a general fear that we would run out of oil and prospectors began to search for new supplies all over the globe. Oil was discovered in Mexico, Iran, Venezuela and Iraq.

During the early 1900s, British, Dutch and French interests controlled most of the land area where oil had been discovered in the Middle East and Dutch East Indies. The American Congress retaliated in 1920, passing the Mineral Leasing Act which denied any nation the right to produce oil in the United States if that nation denied American companies the right to explore and produce oil in any of the territories under their control. A settlement was eventually reached, giving American oil companies access to oil all over the world.
The fear that America was running out of oil abruptly ended with the discovery of vast new fields in Texas, California, and Oklahoma. World production exceeded demand by so much that by 1931, oil was selling for as little as 10 cents a barrel. Texas and Oklahoma passed production quota laws in order to raise prices. The federal government imposed stiff tariffs on imported oil.

Then came WW2. The oil surplus quickly disappeared. The United States contributed six billion barrels of oil to the war effort. Again Federal officials again began to worry: will we run out of oil? They turned their attention to the Middle East where explorers hinted at great pools of oil. Britain controlled the Iranian oil fields. Oil companies from the United States had discovered oil in Kuwait and Saudi Arabia. After his war conference with Stalin and Churchill at Yalta in 1945, President Franklin Delano Roosevelt traveled aboard the cruiser USS Quincy to meet with King Abdul-Aziz of Saudi Arabia at the Great Bitter Lake. He made a deal with the king. America would protect the Kingdom and Royal family. In return, the United States would have access to Saudi Arabia’s oil. This historic meeting eventually led to the formation of Aramco (the Arabian American Oil Company).

After WW2, America – which accounted for more than 50 percent of world production - began an orgy of oil consumption. By the end of the 1950s, oil had essentially replaced coal as the energy resource for home heating, electric power companies were switching some of their generation capacity from coal to oil and natural gas, my beloved railroad steam engines had been replaced by diesel electric locomotives, and steam driven industrial engines had given way to diesel and gasoline units. We bought cars and trucks just as fast as we could afford them. I could go out on a hot date with only a dollar for gasoline. We used copious quantities of cheap, readily available, oil. America, like every other industrialized nation, built its cultural infrastructure on the assumption the joyride would last forever.

But trouble was brewing. Middle Eastern oil producers, along with Venezuela, formed an oil cartel in 1960 to control oil prices. By the end of 1970, American oil production had peaked, and it was importing roughly a third of the oil it needed. Islamists forced a curtailment of production in 1973 and 1974 to punish the United States for backing Israel in the Yom Kippur war. The imbalance of supply versus demand caused oil prices to increase by more than 250 percent. High oil prices, along with other factors, then pushed the rate of inflation up by almost 11 percent. In 1975, the average rate of unemployment reached 8.5 percent.

Americans were suddenly very interested in the conservation of energy. Energy efficiency became socially correct. The unfettered joy ride had lasted only 27 years.

Worldwide shortages pushed prices up by another 125 percent when Iran and Iraq went to war in 1979. The price for a barrel of oil then declined from $36.83 per in 1980 to $14.43 in 1986 when consumer demand failed to keep up with world production. The average annual price of crude oil would not get back into the $30 range until 2004 when it averaged $38.27. We were able to enjoy another 18 years of cautiously copious consumption.

At $14 to $28 per barrel, worldwide oil prices were relatively stable from 1986 through 2003. Low prices, along with a fear of possible surplus production, had the effect of discouraging oil exploration investment, led to a reduction of experienced exploration and production personnel, and the deterioration of oil industry plant and equipment.

We would pay the price for this lapse.


About Oil

We need to distinguish between conventional crude oil and non-conventional crude oil. Conventional crude oil, together with Natural Gas Liquids (NGLs) from the same geologic structures, is typically found under land or shallow water, and constitutes over 95% of the oil we have used in the past. Although a liquid, its viscosity can range from a dark thick slow moving syrup (heavy crude) to an almost clear thin fluid (light crude). The pH of oil can vary widely. “Sweet” oil has less sulfur than “Sour” oil. As you may be able to guess, sweet and light crude oils are easier and less costly to refine than sour or heavy crude oils. Some wells produce oil, some produce a mix of oil and natural gas, and some only produce natural gas. Oil and natural gas beneath the surface of the earth is often under a great pressure that forces the oil and gas to the surface. If there isn’t any natural underground pressure (which is typical of older wells), the oil must be pumped to the surface.

Going forward, we will have to place greater reliance on non-conventional oil. Non-conventional oil is defined as the oil we get from tar sands, oil impregnated shales, arctic polar wells, and deep sea resources. Although polar and deep sea oil comes to the surface in liquid form, oil from sands and shales is mostly a thick goo that must be mined and hauled to a retort where it is heated to increase it liquidity.

Oil originates from the decomposition of micro organisms that got buried under geologic formations in the sea millions of years ago. These ancient plant and micro organism deposits are found all over the world. Some of these deposits were later covered by layers of sand, shales and mud deep enough to trap the material in a chamber where heat and pressure converted them into oil and natural gas. Although much of this oil and natural gas seeped into the atmosphere, some deposits were covered by an impervious layer that restricted natural evaporation.

In a limited number of structures, the hollow spaces between the stones or sand have been filled with oil. A pipe is drilled into this mixture and the oil is slowly pumped up.



We must remember pumping oil is not like pumping water. It does not flow out at a constant rate until the well runs dry. The amount of oil we can expect to recover from any given oil field is determined by how easily it can move through the geological strata it happens to be located in, whether or not there is any natural pressure (usually from natural gas or water) to force the oil up to the surface, and the viscosity of the oil which may range from a very light liquid to a substance that resembles tar. Obviously, lighter crude oils migrate more quickly through geologic strata, and these fields also deplete faster than formations containing slower moving heavy crude. In any case, it can take many years to deplete an oil field.

Technology now permits us to seek out the oil through the technique of horizontal drilling through the oil bearing strata. If there is no pressure to force the oil up to the surface, we can pump it out. We can also increase the flow of oil to the foot of the well by injecting water, air, carbon dioxide, natural gas, or some other gas into the oil reservoir to loosen the molecules of oil from the surface of the host material. However, these secondary recovery methods come with some risk. If the field engineers are not careful, injected gas or water may find its own channel to the foot of the well – bypassing the oil we want to extract. 

These characteristics of oil and oil production limit the amount of oil we will actually get out of the ground. On average, only ~ 39% of the world's known deposits of accessible oil will eventually be recovered. The maximum projected recovery rate for a new oil field, under ideal operating conditions, is just over 50%. Given current technology, the remaining oil will stay in the ground – forever. 


Oil As A Raw Material

There are two basic energy applications:
· We need high energy content mobile fuels for our cars, trucks, railroad engines, ships and airplanes. No alternative fuel on the horizon comes close to matching the high energy content per gallon, low cost per unit of energy, ease of storage and handling, or transport mobility characteristics of gasoline and diesel fuels.
· We also need bulk quantities of stationary fuels to power our engines, generate heat and make electricity. Again, no alternative fuel yet proposed has the high energy content per gallon, low cost per unit of energy, ease of storage and handling, or transport mobility characteristics of gasoline, diesel, propane, kerosene, bunker oil, and heating oil fuels.
Oil provides about 40 percent of America’s total energy and 98 percent of its mobile fuels. Coal, natural gas, water power, and nuclear power provide most of the remaining fuel for stationary applications. Although alternative energy resources, such as solar and wind power, are enjoying phenomenal growth, they only give us a small fraction of our energy needs, and are primarily useful only for stationary applications. That means we will continue to rely on oil products to fuel our cars, trucks, planes, trains, and ships.

Oil and natural gas provide the raw material for the fertilizers, insecticides, herbicides, fuels, and lubricants that enabled the “Green Revolution” to feed millions of people all over our planet. Higher oil prices increase the cost of food. And if the availability of oil is jeopardized, we may experience shortages in the food supply chain. Oil is also the basic raw material used in the manufacture of thousands of products – cosmetics, pharmaceuticals, plastics, textiles, asphalt, tires, chemicals, adhesives, paints, roofing, and so on. On average, we humans currently use 272 Billion Cubic feet of natural gas, 3000 million oil equivalent tones of coal, and 84 million barrels of oil every day. And our consumption is growing.


Why Worry About Oil Depletion?

In 1920 the United States Geological Survey (USGS) gravely warned us that we had no more than 60 billion barrels of oil on this planet. In the 1950s, various geologists warned that we probably had 600 billion barrels of oil. By the 1990s, that number had increased to 2 trillion barrels (more or less). In 2000 the USGS told us we had 3 Tbl of oil left. That compares with an ExxonMobil estimate of 3.2 to 3.4 Tbl of recoverable oil. Estimates of recoverable oil keep increasing.

Why?

One of the key reasons is oil exploration and production technology. Oil company engineers use advanced seismic imaging technology and very fast computers to model reservoirs in multiple colors to identify the size and location of a potential reservoir. They have learned how to drill for oil located more than 5 miles below the surface of the earth, drill for oil and natural gas in the continental shelf in water depths of more than 2 miles, bore multiple shafts from one well head, and bore horizontally from a vertical shaft to seek remote deposits of oil. Oil companies have also learned how to increase the amount of recoverable oil within any given oil field by enhancing the flow of oil to the foot of the well. As mentioned above, they currently do this by injecting water or gas into the oil bearing strata.

So. Improvements in exploration technology will increase our projection of proved reserves, and production technology will increase the rate of recovery from existing and future wells. It is also true that as the price of oil increases, formerly marginal deposits of oil become economically attractive to produce using secondary recovery methods and scavenger or “stripper” wells.

But technology will not solve our problem. Thus far, these efforts have only given us a marginal increase in accessible oil reserves. In fact, the challenges that lie ahead have little to do with technology or oil reserves in the ground. They have everything to do with the economics of oil consumption and the cultural impediments to oil production. 

And here is why.

Suppliers have little spare capacity. Most of the world's production is coming from older fields, many of these fields have gone past peak production, and many have a depletion rate of more than 4% per year. Exporting countries are thus in a position to control the price and availability of an increasingly scarce commodity. As a result, corporate behavior, government action, cultural stability, economics, legal agreements, geography, weather, transportation, military diplomacy and the always potent combination of religion and politics are now more important than geology in developing resource production forecasts. Call these the derivative factors of doing business on a global scale. Each one could disrupt the flow of oil and natural gas. As a result, proven or identified reserves are less important than accessible reserves –


"Accessible reserves are those reserves of oil
that can actually be found, produced, transported, refined,
and distributed without disruption
 at a price the consumer can afford to pay."


For the last 30 years, we have been living in a resource supply never-never land. Saudi Arabia has provided the world with a huge buffer of oil reserves. If the demand for oil exceeded the available supply, they opened the spigot. If the world had more oil than it needed, they reduced production. That buffer is almost gone. Even if depletion were not a factor in the oil market equation, the vulnerability and unpredictability of the supply chain will make it impossible to balance supply with demand. Going forward, we can expect price and supply volatility unlike anything we have experienced in the past
.
We are using oil faster than we are finding it. We passed the point of no return in 1986. New discoveries in 2004 and 2005 were the lowest since WW2. Consumption now exceeds new discoveries by  4:1. Exploration and production companies must add at least 400 Bbl of oil to the world's reserves between 2005 and 2024 to sustain world oil production. On average, that's 55 Mbl of accessible oil every day. Thus far, new finds are NOT keeping pace with the increase in demand.


As geologists are fond of pointing out, when half the recoverable oil in any field has been extracted, production must inevitably decline. This fact should be worrisome because at least 53 nations have passed the peak of production and are now in a decline.

Oil in the ground may not be useful oil. Some analysts have estimated that as much as 80 percent of our untapped reserves consist of heavy or sour oil. Heavy (thick) oil is harder to transport and process. Acidic sour oil, and oil laced with metals or chemicals, add costly steps to the refining process. As I write this report, for example, Saudi Arabia is claiming it has 1.5 Mbl per day of unused capacity. What they fail to mention, however, few refineries have the equipment needed to process this stuff. That means we need to expand our refining capacity with additional process steps in order to produce useable oil products.

Since 1999, most of the new oil discoveries (~65%) have been found under the ocean, and many of the big discoveries are in water more than 200 meters deep. Weather, water pressure, muds on the floor of the ocean, and other factors make recovery a technological challenge laced with ecological and economic risk. It will be more costly to bring this oil to the refinery.

Can “Big Oil” save us? Probably not. In the 1960s, American, French, Dutch, and British oil companies had access to 85 percent of the world’s oil reserves. Since then, most of the world’s oil has been nationalized by local governments. By the late 1970s Big Oil’s share of world production had dropped to less than 40 percent. Today, these companies are limited to less than 15 percent of the world’s known reserves. The world’s largest oil companies now have names like Saudi Aramco, the national oil company of Saudi Arabia; the National Iranian Oil Company; Petroleos Mexicanos (PEMEX); INOC (Iraq); KPC (Kuwait); PetrĂ³leos de Venezuela, S.A. (PDVSA); PetroChina; and Lukoil (Russia).

And finally, the really bad news. Make a chart of world population growth. Add the data for wood, coal and oil consumption on an appropriate comparative scale (as I have done later on in this report). Population growth has obviously driven the consumption of energy. The more people on this planet, the more energy we need. But this begs a question. If we no longer have cheap and readily available energy at our disposal, what happens to population growth? Food production? In his book “The End of Fossil Energy” John Howe shows the relationship between food energy and population, and compares human labor (in terms of energy expended) with the energy stored in a gallon of fossil fuel. Allowing for the inefficiency of converting fossil fuel into useful energy, one gallon of gasoline releases enough energy to equal the energy production of a strong health adult working 150 hours. His point, of course, is that the energy available to us in fossil fuels has provided the foundation of almost unlimited population growth, as well as a dramatic shift of the general population from farming to other activities. Does this mean we have to reduce our population in order to match the available energy needed to support our activities? Or face famine?


The Awakening.

Oil depletion is no longer a secret. Although the press typically ignores a problem until it causes a crisis, there has been much commentary in the media about oil and oil depletion. And by golly, some media persons are even willing to admit (understand) that our emerging oil crisis was not caused by some big oil company, but rather by a confluence of world events and cultural change. American politicians, on the other hand, continue to shun the topic of oil depletion because it is political suicide to discuss unpleasant issues. If they acknowledge a pending oil crisis, then we voters will ask embarrassing questions: Why did you let this happen? What do you intend to do about it?

And that will lead to more obfuscation. The press sings the mantra of (frequently impractical) pop culture energy solutions. American politicians hold yet another round of useless hearings. Everybody points the finger of blame. Democrats. Republicans. Liberals. Conservatives. Don't rock the boat. The officious pressure of conformist procedure ensures government bureaucrats will cover for the political establishment. That’s a real shame. To date (November 2007), it has not been politically expedient to develop a strategic plan for energy production and consumption.

But American voters are discovering oil depletion and the whole Middle East mess. They are becoming aware that several other nations have begun to fashion a new energy policy. And we have entered the age of petroleum diplomacy. Russia, for example, has delivered a blunt message to the nations of Europe – Mother Russia has enough natural gas and oil. And you don’t. Does that give Russia political leverage over the European Union?

Yes.

In the age of petroleum diplomacy, oil and natural gas are the weapons of choice. Those that have these resources have leverage over the nations that consume more oil than they produce. Consumer nation security and military power have been jeopardized by a growing lack of oil resources.

Ominous signs are everywhere. Rising gas prices. Talk of shortages. Indefensible terrorist activity. A continuing war in Iraq. A growing suspicion of Saudi Arabia. Energy consumption and production should be a high priority subject on the agenda of every industrialized nation. Politicians who avoid the subject will eventually have to face the economic and cultural consequences: embarrassing questions of failed leadership and the contempt of an unhappy electorate.

The Data Problem

We need a better understanding of the basic problem. Oil depletion. Reserves. How much of that black gold there is left for us humans to consume.

Unfortunately, we don't know. How much oil there is in the ground. Or how much oil we Homo Sapiens can produce. And those who control the information don't want to tell us the truth. Over 80% of the world's oil belongs to a sovereign nation. They protect their oil reserve data from public scrutiny. Many deliberately mislead the public for financial and political reasons. And – all to often – they actually do not know how much oil they have left.

We thus have insufficient hard data about oil reserves. The data we do have lacks credibility. Data definition standards are often ignored or misused. Reserve information does not tell us when oil production will peak. Oil depletion projections are more "art" than "science". We have therefore been forced by these realities to use scenarios or "probability" projections in order to forecast “Peak Oil” and the impact of oil depletion on our economy and culture.

Result: Confusion and Mistrust.

Consumer national governments are loath to even discuss the truth because - anyway you look at it - oil depletion is bad news. And national governments do not like to tell their constituents bad news. That's the way political systems work. Democracy or dictatorship. Bad news must be avoided at all costs. It creates anxiety. Conflict. Questions. Opposition. Bad news always generates a pervasive distrust that somehow the existing national government is doing something wrong. And eventually the offending government officials will be blamed for causing the problem. People, after all, expect their national government to protect them from harm or deprivation.

Even if that is impossible.

Producer nations pretend they can go on producing oil - forever. Oil reserve information is a state secret. National governments fabricate oil reserve numbers for a gullible public. Big reserve numbers allow them to borrow large amounts of money. It gives them prestige and status. They use the numbers to placate their constituents – big reserves mean the welfare gravy chain will never stop.

But for many of us, there is a credibility problem with producer nation claims. For example, the reserve gains of the nations that belong to OPEC (Organization of Petroleum Exporting Countries) claimed in the late 1980s are an obvious fabrication. There has never been an independent verification that the oil they claim to have actually exists. And get this - even though these nations pump millions of barrels per day, their reserve claims never seem to decrease.

What’s going on?

Even Canada has succumbed to the temptress of misrepresentation. Canada now claims to have the second largest oil reserves in the world, all based on the inclusion of its oil sands in its reserve estimates. Oil sands? Doesn't this ignore the incredible problems of producing poor quality oil from sticky rock?

Oil companies do not actually own most of the oil they produce. It is produced under a revenue sharing arrangement with a government agency of the nation under whose land (or water) the oil reservoir is located. The oil company has a license or extraction contract. Revenue is shared in the form of taxes and fees paid to the local national government. So when an oil company tells us it has so many barrels of oil in its reserves, that figure may include assets that are derived from existing contracts. If the contract goes away, so does the oil that can be claimed as an asset. That should alarm you. National governments have shown a proclivity to nationalize their oil industry. From their point of view, existing contracts are not enforceable. In addition, at any given time the oil companies are under contract for only a fraction of the reserves that may be claimed by the nation that actually owns the oil.

Everything about oil is a bit complicated. And mostly bad news. Three weeks into my research in 2003, it became very apparent that the key issue about oil depletion is not how much oil is left in the ground, or even the date when peak oil occur. Although both of these issues must be researched and analyzed in order to understand the nature of oil depletion, they do not tell us how much oil we will have to consume in the foreseeable future. The key issue addressed in this report is therefore: How much oil can actually be found, produced, transported, refined, and distributed without disruption at a price the consumer can afford to pay.

For an interesting read on Drake’s life and efforts, visit www.drakewell.org. For more information on the history of oil, and the oil industry, start with www.wtrg.com
The End of Fossil Energy, The Last Chance for Survival, John G. Howe, McIntire Publishing Services, 3rd edition, 2006, pp. 145.
Kuwait significantly reduced its reserve estimates in 2006.


What is the Truth?

In more than 35 years of doing overly long reports on incredibly complex subjects, I at least had the benefit of working with good data. Much of it was available through secondary research found in books, documents and media. Specific information could be obtained through the interviews and surveys of primary research. It was possible to validate gathered data from alternative resources. Based on collected data and information, one could walk through the process of analysis and derive a set of high probability conclusions.

By contrast, it was very difficult to find trustworthy oil reserve data. Published statistics are unreliable and subject to broad interpretation. They must be carefully examined for error, intentional misstatement and imprudent logic. Doesn’t this seem a little strange? Here we are. Trying to understand an incredibly important subject that will impact our future lifestyle, the wealth of our children, and the health of our grandchildren. But instead of good analysis backed by credible data - we are plagued by deliberate ignorance. Despite the dire need to address the twin issues of oil reserves and depletion, there is almost a criminal lack of reliable information on these subjects.


Oil Depletion Forecasts

As we discovered after two hurricanes in 2005, the United States is vulnerable to any disruption of crude oil production or transportation (upstream operations which bring crude oil to the refinery). This vulnerability is actually becoming more acute because American oil production is declining, and its oil consumption is increasing. As a result, the demand for imported oil is increasing both in absolute terms and as a percentage of annual oil consumption.

This disparity between production versus consumption is dramatically illustrated by the following chart.


America is not alone. There is a growing gap between production and consumption in England, Western Europe, China, India and most of the industrialized nations of the world. These nations are thus becoming increasingly dependent on producer nations for the oil they need to support their economic growth. Any disruption in the supply chain will lead to shortages of gasoline, diesel, heating oil, kerosene and propane fuels, as well as the raw materials we use to manufacture thousands of products. The price we pay for these goods will skyrocket.

That is why the concept of “Peak Oil” is so important. As we near peak oil, world prices will become volatile, and sporadic shortages occur.
 

Arguing about the specific date when we humans will reach the peak of our ability to produce oil is silly. Whether Peak Oil happens this decade, next decade or even later is far less important than understanding the impact it will have on human civilization.


We need to have an intelligent discussion about mitigation. In other words, if we prepare for the inevitable crisis, we can substitute other forms of energy and adopt a less energy intensive lifestyle before depletion causes an economic and cultural crisis.



Calculating Probable Production

The series of estimates and calculations described in the prior chapter only tells us what oil may, or may not, be in the ground. To complete our exercise, we must know how much of this oil can actually be produced. For the purposes of this report, we are going to look at a period of 20 years - 2005 through 2024 so that we can compare the data thus developed with actual production and consumption data from the prior 20 years 1985 - 2004.

We will refer as the future years - 2005 through 2024 - as the Forecast Period. Net oil production must be evaluated on a region by region basis, taking into account the geographic, technical, production, transportation, financial, and cultural factors that will most likely impact production from 2005 through 2024. We need to:
  • know the current rates of oil exploration,
  • make an assessment of probable future discoveries,
  • analyze current data on regional production,
  • read the exploration and production opinions of geologists,
  • ascertain how oil processing and transportation are likely to impact future production,
  • assess the availability of capital,
  • and determine how cultural influences will influence exploration and production contracts, oil field operations, oil processing facilities, and regional transportation.
We actually have two almost identical spread sheets. The first one is used to determine our best estimate of the world’s conventional oil reserves, probable production from undocumented reserve additions and new discoveries, and added production from reserve growth. Then we do the same exercise for unconventional reserves. Added together, we now have an estimate – as discussed in the prior chapter – of accessible oil resources.

Then we build a second spread sheet. Because we do not have a base of trustworthy data, and since there are so many cultural, economic, and other variables that could impact the cost and pace of oil production, we dare not risk making a specific forecast of future oil production. Instead, we will build a series of scenarios. The data and assumptions for each scenario will have a high probability and will be internally consistent. Then, using the second spread sheet for each scenario, we develop an estimate of probable production for each producer region over our 20 year forecast period. We want to estimate how much of the conventional proven oil reserves, undocumented conventional reserves, and conventional reserve growth will actually be produced during this period. We then add a like estimate of unconventional oil production. Taken together, we now have a reasonable estimate of probable oil production that is likely to occur under the assumptions of the scenario we develop.


Mitigation

If we take a competitive approach to oil depletion that is embedded with deceit and contemptuous behavior, then appalling projections of suffering are a given. If we want to avoid competitive oil resource conflicts, we must develop an international oil depletion management plan. We must try to develop a consensus based strategy for sharing our planet's dwindling hydrocarbon resources. Producer nations must be encouraged to cooperate with consumer nations in the creation of agreements for hydrocarbon infrastructure investment, production and consumption. Understandably, this will be difficult because all nations will struggle to protect their selfish best interests. But we have to try. Cooperation is far better than the alternative – resource war.
At the same time, leading industrialized nations must work together to develop, manufacture and deploy an alternative energy system for both mobile and stationary applications. Again. International cooperation is the preferred strategy.

We can not escape the negative impact of oil depletion.
We can, however, mitigate is effects.

Oil, Jihad and Destiny outlines a long list of recommendations. Some are easy. Some are controversial. Many challenge cherished ideology and preconceived conviction. All are worthy of intelligent, thoughtful, discussion.
Remember. The whole point of pursuing these recommendations is to avoid economic and cultural chaos. 


Results

We humans inherited at least 13 Tbl. of oil. Or 7.6 Tbl of oil. Or 3.5 Tbl of accessible oil.
Pick your expert. Everybody has a number. And since we have only used ~1.1 Tbl Bbl, we must have a lot of oil left. Feel better?

We will never be able to find, extract and refine
all of the oil that is left on this planet.
 
In order to use all of our oil resources, we humans would have to find and liberate every drop of oil on this planet, ignore all of the environmental consequences, and be able to pay an unlimited amount of money for the resulting oil based products.
That will not happen.

We also have to make the absurd assumption that the amount of oil energy we get from all of this effort will be greater than the energy it will take to extract and process the oil we find.

That will definitely not happen.

There will be multiple technical challenges. Something like 1.4 Tbl of our legacy is buried in the ground in the form of unconventional heavy oil, oil sands, and shale oil. Getting this sticky stuff out of the ground will take enormous amounts of energy and water resources. As for the 2.1 Tbl of (increasingly sour) conventional crude oil, it will not do us much good unless we find all of it. Then we will have to extract, transport and refine this stuff using enhanced recovery technology and increasingly expensive refinery processes. Human conflict will restrict oil exploration and production activity. Oil projects will collide with cultural antipathy and labor discord. We can not assume that the use of military force will always be a feasible solution, nor can we assume that throwing money at conflict will bring about the desired result.


The cost of finding, producing, refining and distributing oil
will exceed the price that we humans are able to pay
for oil based products
long before we run out of oil.
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Oil production peaks between 2020 and 2040. Maximum annual oil production, including added liquids, peaks between 34 and 38 Bbl per year. That may sound like a lot of oil, but it is not enough.


TCE


Author's Notes

Purpose of this study- The objective of this research effort was to characterize the size and direction of the worldwide market for crude oil, including the depletion of reserves and the impact that alternative depletion scenarios would have on oil production and consumption. These scenarios were then analyzed in order to determine their impact on world and national economies, with a special focus on the United States.

Methodology - Market or industry research is a process that involves a number of interrelated steps. Research reports are based on facts and opinions which have been compiled, organized, analyzed and interpreted by someone who understands the research process. Market and Industry Research is not about absolutes. It’s about people. Events. Products. Issues. Questions. And their interrelationship. It has FOCUS. It will deal with a specific question or issue.

Other authors have dwelled at length on the question: When will oil production peak and then begin to decline? Although this question is very important, it is not the key issue. In this study, it quickly became evident the key issue is: How much oil can we expect to produce, year by year, over the next 20 years? That data can then be compared with projections of consumer demand to produce patterns of potential shortages, price changes, and disruptions. This far more complex question forces us to look at the entire oil product supply chain for possible obstacles – from exploration, production, and transportation (upstream operations) to refining and distribution (downstream operations).

This report is almost entirely based on many months of secondary research. My efforts included selected reading from several books and reports on Arab history and culture, as well as information published by multiple national governments, oil industry participants, trade journals and newspapers, Internet sites, and oil industry consulting firms. My primary research included several person to person interviews and topical discussions with industry participants. In this report we deal with oil in its liquid form (crude oil) and in its highly viscous form (as it is found in tar sands and bitumen). 

Audience- Scholars will shudder at the brevity of my explanations. However, my intent is to reach the lay person - not the academic - so a thousand pardons for my humble erudition. In order to capture the attention of the lay person - the technical stuff has to be interesting. And brief.

Additional Information - The reader is invited to pursue further study by reading my blog "Oil, Jihad and Destiny", which deals with the cultural and economic impact of oil depletion. Also pick up a copy of  Detensive Nation", a book that outlines a positive, productive and proactive government response to the energy challenges that lie ahead.

Copyright
The Report on Oil Depletion
Copyright 2007 and 2010 by The Cultural Economist
All rights reserved.
This report is free. As a courtesy, please include the following attribution if you choose to excerpt or reproduce any material from this report as follows:
Reference:
The Report on Oil Depletion,
by: The Cultural Economist,
April 2010.


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Disclaimer

There are multiple and sometimes conflicting opinions about the governments, religions, cultures, organizations, companies, markets and products discussed in this report. Specific or inferred references to, and all discussion of, persons, groups, organizations, events or circumstances are subject to a variety of interpretations and should therefore be treaded as conjecture. Since there are so many variables that will impact the timing and values shown, all graphs presented in this report should only be interpreted as illustrations of the scenarios discussed in the associated text. Because the underlying data is based on a set of assumptions that may, or may not, occur as characterized, scenarios should never be construed as reliable predictions. The reader should pay careful attention to the definitions described in the Appendix when interpreting the information contained herein. As of this date, April 15, 2010, this report has not been reviewed or endorsed by any oil company or oil industry organization. The information contained in this report represents the author’s interpretation and analysis of information that is available to the public. It is not guaranteed as to accuracy or completeness. Although the statements, comments, conclusions, and forecasts prepared for this report are based on logical research, they are presented without any warranty.

The research found on this site may be withdrawn from publication at any time at the sole discretion of the author.


TCE

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Wednesday, October 20, 2004

Cultural Economics

What is Cultural Economics?

The study of how human culture interacts with economic events and conditions. Culture, in this sense, includes everything we are: our political systems, religious beliefs, ethnic character, mores, traditions, history, customs, arts, sciences, and education. These all play a role in how we chose to organize the production of goods and services, the values we place on labor and opportunity, how we make purchase and investment decisions, and how we utilize the resources of this earth. The term "Economics" refers to the extent and process of how we employ capital, labor and materials. In the aggregate, these drive the data that is used to measure how our economy is behaving - markets, raw materials, production, finished goods, revenues, costs, profits, inventory, employment, housing, income, savings, stocks, bonds - and so on.

Why is Cultural Economics Important?

Cultural Economists must have a strong sense of the cultural matrix within which economic phenomena occur. However irrational they may appear, values and traditions are non-the-less relevant to economic analysis. Political and religious allegiance influence purchase decisions. Fear and greed are economic motivators. Attitudes about education, individual rights, the accumulation of wealth and the importance of private property drive the adoption of economic systems and political institutions. Collectivist, dictatorial and democratic solutions compete for political power that will determine how labor, capital and material resources are allocated and managed. Culture defines the collective manifestations of who and what we are, including our religious beliefs, political systems, customs, values, intellectual acumen and creative endeavors.
It should be obvious. If we want to make long range economic forecasts, we must understand how culture and cultural change will shape future economic choice.

What sets Cultural Economics apart from other methodologies of economic analysis?

Economic research frequently yields inadequate conclusions based on irrelevant or obsolete data that has been interpreted using algorithms of questionable relevance. In other words - we play with the numbers. It's a great academic exercise. Then we project our conclusions into the future on the basic assumption that future reality will be an extension of past reality.
Sometimes it actually works. We can usually make reasonable estimates of near term demand and consumption, Gross Domestic Product (GDP), inflation, employment and so on. We have a reasonable probability of success if we are making a specific forecast for event driven data that will occur within the next three to six months. It helps our accuracy if future events within the forecast period are well understood and relatively static. In other words – our economic environment will not be altered by any surprises such as weather disasters or unanticipated political events.
Unfortunately, the longer the forecast period, the higher the margin of error. Cultural change is a given. Our economic environment is always evolving in reaction to current events. If we only use historical data as the basis of our economic analysis, then forecasts that extend out beyond a year or two will be something of a crap shoot.
Why? Because the future is NEVER an exact duplicate of the past. The technology boom of the 1990s was a one time series of specific events that will never be repeated. It is therefore useless to extrapolate the economic data of that period in making forecasts of future events. When the boom went bust, all of our economic data got reshuffled. Sure. We will have other periods of boom - and bust - but they will be propelled by a different set of circumstances. Data from periods like the Great Depression and the 1990s can be used as a point of comparison, an illustration of what might happen, but not a blueprint of future events.
For example. Various economists have made estimates of how the price of oil impacts GDP, inflation and employment. These forecasts have usually been based on an analysis of historical data and events. They generally conclude that oil consumption only constitutes about four percent of domestic consumption and therefore even radical changes to the price of oil will only have a marginal impact on the economy. The numbers are correct.
But the forecast is not.
Why? Three reasons.
  1. Past oil demand occurred in a world where there was excess capacity. Although temporary supply restrictions drove up the price of oil in the early 1970s and 1980s, the supply of oil eventually recovered to a point where there was more than enough oil to satisfy consumer demand. The price of oil then declined. Our cumulative thirst for oil continued to increase. As we look ahead, however, the combined impact of cultural change and declining oil reserves will bring about a continuing decrease in available supply versus a continuing increase in demand. Islamic Jihad, for example, promises to have a negative impact on oil exploration, production and transportation. On the other hand, China and India are scrambling to secure as much oil as they can to satisfy the needs of their growing economies. Since actual consumption will be restricted by available supply, the economic disruption will far exceed a mere change in price. At first, supply disruptions will cause intense shifts in the world’s economy. Oil shortages will drive recession and inflation. Subsequent reductions in economic activity will reduce the demand for oil. When demand falls below available production, excess capacity becomes available and oil is no longer a barrier to economic growth. As economic activity recovers, the demand for oil will again increase until consumption equals production. The cycle will then be repeated. Good times beget bad times beget a resumption of good times. However, as described in “The Report on Oil Depletion”, the cumulative impact of declining reserves and escalating cultural conflict will push the world’s economy into a long term decline.
  2. Generally speaking, relatively short term oil shortages and price increases do not have much of an impact on long term consumer behavior. Despite what happened in the 1970s and 1980s, we Americans continue to favor energy intensive life styles and emerging industrialized powers such as China need a lot more oil in order to continue their economic growth. These life style and economic choices are structural in nature. That means they are embedded in the economic outlook of our respective cultures. The net result? Even though higher prices and widespread oil shortages will unquestionably force a transformation of national cultures, cultural change usually takes a long time to evolve. During the interim, oil depletion will have a long term inflationary impact on the price of oil and a recessionary impact on the world’s economy.
  3. The third reason has to do with the uneven impact of price on individual consumers. In 2002, the national average price per gallon for refined oil consumed was just over $1.50 per gallon. By 2008, it appears the average price for the refined oil we consume may exceed $3.00 per gallon. Since fuel shortages can be expected to increase the cost of transportation, warehousing and distribution, net discretionary income will decrease from 2002 to 2008. The greater percentage of this decrease will fall upon lower income groups. Given the patterns of oil product consumption by income group, and factoring in a three percent per annum increase in wages, if you made $25,000 in 2002, refined oil products absorbed over 8 percent of your income. By the end of 2008, refined oil products will cost you over 13 percent of your income. For someone making $100,000 a year, however, the direct and indirect cost of oil increases from a more affordable 2.35% of income in 2002 to 3.94% of annual income in 2008. There will be substantial shifts in the economy as consumers, particularly in lower income groups, scramble to reduce the cost of transportation. Consumers will demand vehicles that can deliver greater fuel efficiency, there will be political pressure to improve the public transportation infrastructure, and we will be forced to adopt less energy intensive life styles. Economic stress will drive a cultural transformation which – in turn – will drive additional economic change.
We must conclude that if we hope to forecast future reality with any accuracy, we must find a way to factor cultural change into our economic analysis. To meet the demands of this challenge, we need the disciplines of Cultural Economics.

What are the disciplines of Cultural Economics?

Cultural Economics is not some dreary cross between tedious accounting and data necrophilia. It is a science that quantifies the past, present and future of human behavior. If human existence is dynamic, then economics – as a field of study – must be able to characterize the interaction of culture and economics in contemporaneous terms.
· We start with an understanding of human nature and its expression through the institutions and corporations that characterize our existence on this planet. Every organization has a unique personality. The contemporary economic environment influences organizational behavior. Political and social constraints impact business decisions. And finally, we need to understand research, development, production, marketing, distribution and finance as a series of interrelated business processes.
· To this we add the sociology and psychology of consumer behavior and the projected evolution of established religious and political institutions. Both will respond to economic, demographic and social trends.
· We then add information resources that quantify and describe our economic environment - population, employment, inflation, GDP, production, consumption, finance, commodities, trade, property, geography, and so on.
Research is a process of discovery. Raw information is accumulated and assembled into a series of related data structures that describe economic events, trends and environments. We are not looking for random pieces of information. Every piece of data that we chose to save must relate to the essential issues and questions of our inquiry. Research provides information.
Analysis is a process of creation. Starting with validated data structures, we assemble a hypothesis of future reality. Our hypothesis can then tested for logical consistency and intellectual credibility. Analysis yields understanding.
In order to make sense of our economic environment and to forecast future reality, we need to know how to focus our attention on a specific issue. For example, the key issue in our study of oil production and consumption was not - How much oil is left? Or when will we run out of oil? It soon became apparent that the real issue was - How much oil can we (humans) produce? That shifts the burden of research from geology to questions that describe how we find, produce, transport, refine and distribute the products derived from oil. Along the way we need to consider where the remaining oil is located. That leads to questions like: Who actually owns the oil that is left? Under what conditions will they be willing to let us find, extract and transport the remaining oil? Can we find oil elsewhere? What are the production constraints of alternative energy resources? And so on.
All of our questions should be relevant to the key issues we have identified. In doing the research for “The Report on Oil Depletion”, it was unnecessary (however interesting the topic) to become an expert on Islam. It was enough to establish if Islamic Jihad has the resources, intensity, and endurance to disrupt oil production. The next step was to establish a probable timetable and a realistic disruption scenario.
Our Cultural Economics Forecast starts with an examination of industry trends. We must understand existing and projected oil exploration and production by geographic region; the application of technology to enhance the discovery, extraction, refining and distribution of petroleum resources; competition and accommodation among the national governments that actually own most of the oil on this planet; how standards and bureaucratic duplicity impact the veracity of industry data; the role of cultural conflict as a barrier to exploration and production; and how political agendas, government regulation, and environmental challenges impact world oil supplies.
We then build a profile of current and projected consumer demand by examining petroleum market trends, consumer wants and needs, historical and projected demand data, consumer demographics, and purchase criteria. This profile of consumer demand is matched by a corresponding synopsis of suppliers that includes a chacterization of their exploration and production capability, market presence, financial strength, strategy, use of technology and business practices.
Assuming we have done a good job of identifying the key issues and developing a relevant set of questions, we can now plunge into a period of intensive primary and secondary research. We methodically collect the data and collateral information needed to answer our questions. Along the way, we will undoubtedly develop additional questions that scream for an answer because they are critical to our analysis and forecast.
After we collect, organize, calibrate, qualify, verify and synthesize a mountain of data that will (hopefully) permit us to accurately describe the contemporary economic environment and to lay down a credible forecast of future trends, we can proceed with our analysis and interpretation. Our oil production and consumption forecast, and the data upon which it is based, can then be substantiated by treating it as a hypothesis. In order for the hypothesis to be true, it must have intellectual consistency and the individual data elements should be verifiable through further research. If our hypothesis survives this rigorous examination, we have a credible forecast of future reality.
Our final step is to document our conclusions and forecasts in a comprehensive report that not only profiles the impact of resource depletion on oil production and consumption, it can also be used as a basis for projecting the effect of depletion on our economy.
So there you have it.
The market or industry research used in Cultural Economics is a process that involves a number of interrelated steps. Research reports are based on facts and opinions which have been compiled, organized, analyzed and interpreted by someone who understands the research process. Cultural Economics is not about static absolutes. It’s about people. Events. Products. Issues. Questions. Change. And their interrelationship.

Why is Economics called "The Dismal Science"?

Economics has been called "The Dismal Science". That phrase was coined in 1849 by Thomas Carlyle in an essay "An Occasional discourse on the Negro Question.". The essay attacked John Stuart Mill for supporting the emancipation of slaves. Mill, along with many other Economists of that era, assumed that people were basically all the same, and thus all entitled to liberty. The paragraph reads: " Truly, my philanthropic friends, Exeter Hall Philanthropy is wonderful; and the Social Science—not a "gay science," but a rueful—which finds the secret of this universe in "supply-and-demand," and reduces the duty of human governors to that of letting men alone, is also wonderful. Not a "gay science," I should say, like some we have heard of; no, a dreary, desolate, and indeed quite abject and distressing one; what we might call, by way of eminence, the dismal science." There are those who believe that Carlyle's label was also, in part, motivated by Mill's support of T. R. Malthus's gloomy prediction that population would always grow faster than food, dooming mankind to unending poverty and hardship.
If my work had been confined to the mind numbing analysis of extinct events described by copious quantities of dubious numerical data; if economics were merely an exercise in abstract analysis based entirely on theory; then my interest would have withered long ago. But I quickly learned that neither number crunching nor theory can predict real world events with consistent accuracy. Because it is people – in their infinite diversity - who interact with economic events and conditions. That undeniable truth makes Cultural Economics a challenging, interesting, and provocative field of study.
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