Peak Watch

A Response to Romm on Peak Oil

Joseph Romm's Peak Oil? Consider It Solved (Salon March 28, 2008) deserves a response. Here's his main theme.

More supply is not the answer to either our oil or our climate problem -- reducing consumption of oil is. And right now we have two feasible solutions: greatly increase our vehicle fuel economy and find alternative fuel sources that are abundant, low-carbon and affordable.

It's hard to argue that reducing our oil consumption is a good thing, bearing in mind that any oil the U.S. does not use will be consumed elsewhere (e.g. China). Perhaps by "we" he means the global community. The reason "we" in the U.S. need to reduce our oil consumption is to mitigate our vulnerability to supply shortfalls that are likely to occur within the next decade. Reducing our oil consumption will have no effect on climate change (CO2 emissions) because someone else will burn it if we don't.

Romm argues that solving the climate change problem is paramount and peak oil doesn't matter—"consider it solved"—because all we have to do is 1) not develop unconventional oil resources and 2) raise CAFE standards, buy plug-in hybrids (PHEVs) and all-electric cars. Thus we will increase efficiency and implement substitutes for fossil fuel liquids. See The Sierra Club Solution for a discussion of #2 (ASPO-USA, January 30, 2008). Here are some of the parts of Romm's article requiring a response.

To preserve the livability of the planet, we must cut liquid fossil fuel use more than 50 percent by 2050. That is a central reason that more supply is not the solution to peak oil. That is why it is crucial we don't adopt the strategy that most in the oil industry prefer for dealing with the peak in conventional oil -- ramping up unconventional oil. Most of the major forms of unconventional oil will make global warming worse -- and some would make a climate catastrophe inevitable...

Clearly we now have only two realistic strategies: increase our vehicle fuel economy and develop affordable alternative fuel sources that are low in carbon. In 2050, the planet may well have 2 billion cars on the road or more, three times the current number. To avoid dramatic climate impacts, we must use at least 60 percent less total liquid fossil fuels -- and that assumes we have essentially eliminated carbon dioxide emissions in the electric sector. The average car on the road will need to put out under one-fifth the emissions of current cars, or the equivalent of five times the "miles per gallon" of today...

And of course we'll need a very aggressive push toward efficiency and zero-carbon electricity... [emphasis added]

Where does Romm go wrong? Let's make a partial list.

1. Romm seems to be unfamiliar with the work of Pushker Kharecha and James Hansen linking the peak oil and climate problems. See Implications of “peak oil” for atmospheric CO2 and climate. Briefly, if we burn all the remaining oil and gas—undoubtedly we will—it will take us a large way toward the 450 ppm CO2 in the atmosphere target, but not all the way. (This CO2 target is usually used to define "dangerous anthropogenic interference" with the climate.) Kharecha and Hansen conclude that if we phase out coal consumption to zero by 2050, we can prevent atmospheric carbon dioxide from reaching the target 450 ppm ceiling.

   Thus, Romm's assertion that "to preserve the livability of the planet, we must cut liquid fossil fuel use more than 50 percent by 2050" is simply misguided. He's off in the weeds. We need to cut our coal consumption 100% by 2050 to prevent dangerous interference with the climate. The reason we need to cut our liquids consumption now is to stave off the worst economic effects of peak oil.
   

2. If Kharecha and Hansen are correct—this is a Big If because they use EIA ultimately recoverable reserves estimates—then we need to ask this: Where is all the electricity going to come from to power Romm's "2 billion cars or more" by 2050? It isn't going to come from natural gas. It sure isn't all going to come from solar, wind, geothermal, biomass or hydroelectric. The only conceivable sources would be nuclear or coal, but the latter is the very carbon source we need to control. (Nuclear is a separate discussion.)

   Romm asserts that "we'll need a very aggressive push toward efficiency and zero-carbon electricity." Does he seriously think there is any such thing as very-large-scale zero-carbon electricity that will support very-large-scale manufacturing processes for complex things like electric cars? And power them? Not anytime soon, most likely never. We would be fortunate indeed if 25% of our current electricity consumption is available from renewables in 2050.

   Theoretically, if renewables generated most of our energy needs, including replacement of 50% or more of all fossil fuel liquids, you could bootstrap the entire renewable energy or electric vehicle supply-chain (for materials transport, manufacture, product distribution, mining and smelting of required metals, rubber production, car seats, batteries, windmills, solar panels, you name it—no plastics from fossil fuels allowed) and thus we would have low-emissions electric cars (< 20% compared to now). Otherwise, no. Don't bet the farm on carbon capture and sequestration of CO2 emissions from coal on large scales either. Nobody's got that worked out, and we're unlikely to do so. 

   We would require lots and lots of nuclear energy, ancient biomass (coal) or current biomass (wood) to generate the electricity to build and power "2 billion or more" electric vehicles in 2050, but Romm is living in Disneyland if he thinks it's going to be possible in any case, with or without theoretical "zero-carbon electricity." Resource depletion, even for coal, will inhibit the required growth. Everything we do requires energy inputs. Everything. Carbon capture and sequestration, for example, or purifying silicon for photovoltaics or in situ bitumen production at the tar sands. Wouldn't it make more sense to plan a future in which we have only 10% (or far fewer) of the envisioned 2 billion vehicles in 2050? Why do we need to denude the planet so people can drive their cars? Easter Island anybody?

3. When Romm says "to preserve the livability of the planet, we must cut liquid fossil fuel use more than 50 percent by 2050," he doesn't understand that geopolitics, economics and geology are going to do that for us—easily. Liquid fuels from unconventional hydrocarbon sources are never going to supply more than a small fraction our needs in the most optimistic i.e. unrealistic case (graph left, from the Task Force on Strategic Unconventional Fuels). While Romm argues effectively against scaling-up unconventional oils, he neglects to mention that unconventional oils don't scale-up and have poor economics. Over time, we will have to devote more and more energy to producing energy!

Romm does not seem to appreciate the damaging effects of peak oil on economies. Hamstrung economies would need to recreate our electricity grid and vehicle fleet just as the available energy/wealth required to do so is declining. The PHEV solution (along with cellulosic ethanol) presumes we have the time to revamp our energy infrastructure. That's like closing the barn door after the horse has already left. Romm doesn't understand the depths of our oil dependency.

Suppose that by 2020, oil blew past $300 a barrel and gasoline rose to $9 dollars a gallon (still not much higher than current gasoline prices in England). You could replace your car with a plug-in hybrid, and trips less than 30 miles, which have made suburbia what it is today, would actually cut your fuel bill by a factor of more than 10, even if all the electricity were from zero-carbon sources like wind and nuclear power. The extra cost of the vehicle would be paid for in fuel savings in under five years.

Dream on, Mr. Romm. Has he looked at the oil price recently? What about the 6-year trend? What will we do if oil is over $200/barrel in 2012? (As I recall, England is a very small country. I wonder how they will fare at $18/gallon for petrol?) The U.S. economy appears to be going down the tubes now, which is partly due to the fact that the oil price has gone up over 300% since 2002. Nobody can buy a plug-in hybrid today, and few will be able to afford one in 2012, assuming Toyota or GM solve the engineering problems and start cranking them out.

Climate change is certainly a huge problem—the summer Arctic sea ice is clearly disappearing—requiring an effective longer term solution. However, the rising oil price is a disconcerting fact of life right now. Shortages are likely less than a decade away. It's high-time for climate activists to wake up and smell the coffee on peak oil. I studied the climate issues for over a decade before turning to the peak oil problems, which struck me as being immediate and inimical to our ability to solve all the other problems we have—including climate.

Many climate activists have tunnel vision that prevents them from appreciating the real oil supply problems we have to solve right now.  Everything is viewed through the lens of climate change. This view is naive—we're about to get plowed under by the oil market fundamentals. Necessity arises from near-term peak oil effects, not climate. The main effect right now is the rising oil price, but the longer term future promises to be much worse. Nobody is going to curtail their driving to curb global warming. If you want to solve the climate problem, mitigate the peak oil problem now and implement strategies for controlling longer term coal consumption.

Contact the author at dave.aspo@gmail.com

A Recipe For Disaster

Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world
      —from The Second Coming by William Butler Yeats

Signs of an economic meltdown are springing up all around us. The U.S. is almost certainly in a recession now, but the worst is yet to come. The full consumer price index has risen at a 6.8% annual rate in the last 3 months just as GDP growth has likely entered negative territory, raising the Specter of Stagflation. Americans have not faced such dire straits in 25 years.

When the New York Times feels compelled to reassure us that the chances of a full-blown 1930's-style depression are low, you know something is up. See Depression You Say? Check Those Safety Nets, March 23, 2008. The Bear Stearns debacle, a classic run on the bank, took most observers by surprise. This point was brought home to me personally when Standard & Poors downgraded National City's outlook from 'stable' to 'negative' last week, "citing risk from the shaky housing and mortgage markets." National City is my bank. Deposits are insured, of course, but that didn't make me feel any better somehow.

Paul Krugman joined the chorus, warning that we're Partying Like It's 1929. Alan "Bubbles" Greenspan, who oversaw an economy that is now unraveling, writes that "the current economic turmoil is likely to become the 'most wrenching' since World War II."  Even as the no-longer-infallible former Fed Chairman tries to squirm out of this one, Ben Bernanke is left to sort out the mess. Helicopter Ben is cutting interest rates and opening credit windows for banks to "replenish [their] depleted capital," a strategy that is further driving down the dollar's value and boosting pre-existing inflationary pressures deriving mainly from high oil prices and biofuels.

Over the next year we're going to learn a lot about global oil demand and prices. We're also going to learn whether American consumption is still the sine qua non of global economic health it once was. Regardless of the outcome, Americans are in for a tough time. Let's go through some recession scenarios.

Oil Demand and Price in a Recession

In Another Wild Ride in 2008, we noted that American oil demand growth has been slow and steady since 1990, despite two mild, short recessions in 1990-1991 and 2001 (ASPO-USA, December 19, 2008). The American economy had its longest expansion in the 1990's and continued to grow after the post-9/11 recession (graph left from the Times, cited above). This recession promises to be different.

According to the EIA's data for oil products supplied, U.S. demand actually peaked in 2005 at 20,802 million barrels per day (b/d). The data set is incomplete, but demand fell 0.6% in 2006 and was flat at the 2006 level during the last 6 months of 2007 (≅ 20,685 million b/d). This is a modest decrease, considering that the oil price has doubled over the last year.

Last week, the EIA reported that demand for petroleum products fell a whopping 3.2% in the 4-week period ending March 14th, coming in at 20,259 million b/d. Much of the decrease was in distillate fuel oils (-5.4%), which is mostly diesel fuel. Diesel prices stood at an all-time record $4.037/gallon on March 22nd according to AAA's Daily Fuel Gauge Report.

Diesel consumption fell in part because of the end of the winter heating season, in part because of the slowing economy—trucks moving fewer goods from place to place—and in part because of the price. By contrast, inelastic gasoline demand showed only an insignificant drop-off of 0.1%. Gasoline prices are also close their recent record-high.

The consumption signals are mixed. No recession U.S. oil demand trend is in place yet as we approach the "summer driving" season, which may be a bust this year as disposable income for travel becomes scarce.

The main effect of the shaky economy so far has been on the oil price, which has fluctuated wildly in the past few weeks. Traders moved their money into commodities—gold topped $1000/ounce—as a safe haven from an unregulated "shadow banking" system populated by a bestiary of exotic financial instruments in which no one knows the true value of the paper they're holding. Oil prices surpassed $111/barrel but then tumbled to values closer to $100. These actions followed another interest rate cut by the Fed.

Paul Horsnell, a commodities analyst at Barclays in London, asked the pertinent rhetorical question about the "dramatic" fall of the oil price.

“We see headlines: ‘Oil collapses to $102.’ Is that really a collapse?”

If the U.S. economy tanks and oil demand does take a swan dive, what will happen to global oil demand and the price? The answer depends on whether the American consumption still drives the global economy and its thirst for oil.

The Dangers of Decoupling

The term "decoupling" refers to the degree of economic independence of the developing economies from the American market. In Prospects For China, it was argued that 1) Chinese GDP growth, and hence their import levels for oil and other commodities, must eventually slow down to prevent overheating and tame inflation; and 2) China must function within the globalized economy, which implies that they can not push commodity prices up to levels that cripple the economies of their export markets (ASPO-USA, January 16, 2008). China has effectively underwritten debt-financed American ventures like the occupation of Iraq with their massive $1 trillion treasury bond holdings. So it would appear that the U.S. and China are locked in a mutual dependency—if the U.S. economy falters, China's will too.

This "coupling" of the two economies is rapidly losing steam. The decoupling debate, an analysis in the March 6th issue of The Economist, contains data to back up that assertion—

Sales to America will obviously weaken. The point is that [emerging economy] GDP-growth rates will slow by much less than in previous American downturns. Most enjoyed strong growth during the fourth quarter of last year, and some speeded up, even as America's economy ground to a virtual halt [0.6% growth] and its non-oil imports fell...

The four biggest emerging economies, which accounted for two-fifths of global GDP growth last year, are the least dependent on the United States: exports to America account for just 8% of China's GDP, 4% of India's, 3% of Brazil's and 1% of Russia's. Over 95% of China's growth of 11.2% in the year to the fourth quarter came from domestic demand. China's growth is widely expected to slow this year—it needs to, since even Wen Jiabao, the prime minister, warned this week of overheating—but to a still boisterous 9-10%.

Two possible outcomes follow from a substantial decoupling of the American and developing economies and neither is good news for American consumers. First, lower U.S. oil demand would have little effect on oil consumption in the emerging economies. China, Russia and others might even absorb the decrease, leaving global demand unchanged. The oil price would thus remain above $90-$100/barrel or continue to rise in a stagnant American economy, giving consumers little reprieve from higher fuel and food costs. See Would a U.S. recession lower oil prices? Not necessarily by the unfailing Jad Mouawad (International Herald Tribune, January 23, 2008).

The second, more speculative, outcome is that the Chinese may lose interest in propping up American spending when they realize that their growth can be sustained without relying heavily on the U.S. export market. Here's a quote from Prospects For China—

As [Atlantic Magazine's] James Fallows points out [in The 1.4 Trillion Dollar Question], whenever a Chinese official raises a trial balloon even hinting at the possibility that the Chinese might start unloading dollars and investing them to subsidize rapid growth in their own economy, "phrases like 'run on the dollar' and 'collapse of confidence' [show] up more and more frequently in financial newsletters." China has deliberately chosen to inhibit their own growth to keep their export customers, especially the United States, happy.

Although the Chinese are heavily invested in the U.S, they may decide to cut their losses, especially if highly leveraged American consumers are no longer buying much of their stuff in a prolonged, deep recession. Imagine the consequences for the shaky American economy should China start unloading dollars. This would give new meaning to the phrase "Cut & Run."

A Meltdown for American Consumers

As if the possibility of China abandoning its investment in the United States weren't bad enough, there is mounting evidence to suggest that American consumers are about to get seriously squeezed. It's not just the investment banks that have a liquidity crisis.

In Not Fixing To Walk, we explored the standard view of economists that rising oil prices have not affected U.S. demand because energy spending is still fairly low as a percentage of all household expenditures, and discovered that this percentage started to rise toward levels last seen in the 1970's and early 80's in 2003 after a brief spike during the post-9/11 recession (ASPO-USA, November 14, 2008). This trend is poised to get worse.

Bear in mind that wages have not nearly kept up with GDP and productivity growth throughout the Bush years, while oil prices have tripled since the beginning of 2002 (graph above left, cited by Jerome á Paris at The Oil Drum:Europe). The media was looking at this topic back in 2006. The Wall Street Journal's Wages Fail to Keep Pace With Productivity Increases, Aggravating Income Inequality was typical (March 27, 2006).

Since the end of 2000, gross domestic product per person in the U.S. has expanded 8.4%, adjusted for inflation, but the average weekly wage has edged down 0.3%...

Some factors aren't in dispute. Since the end of the recession of 2001, a lot of the growth in GDP per person -- that is, productivity -- has gone to profits, not wages...  Since 2000, labor's share of GDP, or the total value of goods and services produced in the nation, has fallen to 57% from 58% while profits' share has risen to almost 9% from 6%. (The remainder goes to interest, rent and other items.)

It's easy to overlook rising household expenditures for food or fuel when easy credit is available in the form of Visa cards or home equity loans. It was also possible to refinance and take money out of equity. Credit is now drying up for indebted consumers as housing prices plunge, which puts the bill paying burden on stagnant household income alone. Nine million households have negative equity, i.e. their mortgages exceed the market value of their homes. Mortgage defaults are up. Here are three among the many recent examples indicating distress—

1. By the end of 2007, 36 percent of consumers' disposable income went to food, energy and medical care, a bigger chunk of income than at any time since records were first kept in 1960, according to Merrill Lynch. (Associated Press)
2. Americans' percentage of equity in their homes fell below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday... That marks the first time homeowners' debt on their houses exceeds their equity since the Fed started tracking the data in 1945... Economists expect this figure to drop even further as declining home prices eat into the value of most Americans' single largest asset. (Yahoo Finance)
3. The Great Unwind has begun, Citigroup warns — Avoid leveraged companies, countries and consumers, bank's strategists say... "Easy money encouraged many to buy a bigger house, a bigger car or a bigger speculative position... But now, any behavior that relied upon continued access to easy money is being dramatically reassessed," [Citigroup] added. "Leveraged banks must lend less, leveraged consumers must consume less, leveraged companies must acquire or invest less, and leveraged speculators must speculate less." (MarketWatch)

There you have it: continuing high energy and food costs, contracting credit, stagnant wages and increasing property debt. Highly leveraged or poor American consumers—this is just about everybody who isn't among the richer rich—are about to get nailed. The day of debt reckoning has arrived as the U.S. receives a long overdue margin call (Wall Street Journal, March 15, 2008).

Consumer spending makes up about 70% of GDP. The money squeeze is a recipe for disaster. Household finance will be getting more unmanageable for Americans, who have been living the high life made possible by easy credit made possible by rising house prices. The only silver linings are that American exports are up and we're getting more foreign tourists because of the shrinking value of the dollar.

On the oil front, it appears that reduced demand in a cash-strapped American economy is unlikely to lower oil prices much as the recession unfolds, but all bets are off—no one knows how much demand will be affected yet. If China and the other emerging economies truly are "decoupled' from American consumption trends, it won't matter much if U.S. demand falls off significantly in any case.

The Chinese will be partying at the Beijing Olympics while Americans be scrambling around trying pay their mortgages and make ends meet at the fuel pump. Kind of symbolic, don't you think? Here's an idea—why don't we build some light rail systems?

Contact the author at dave.aspo@gmail.com

The Saudis Are Blowing Smoke Again

People don't know the trouble we go to, to balance the market. Without us, the oil market would be chaotic
     —Ali Al-Naimi, December 15, 2006

You may fool all the people some of the time, you can even fool some of the people all of the time, but you cannot fool all of the people all the time.
    —Abraham Lincoln

Shortly after the oil price shattered the record inflation-adjusted high set in 1980, OPEC decided to sit on its hands and let events take their course. No doubt some of the recent price rise is due to investors flocking into commodities, which are viewed as a safe haven in the sagging financial markets. Some of the price rise is also due to the rapidly deflating dollar. Despite these financial considerations, most of the oil price results from a fundamental disequilibrium between supply and demand in the oil markets. How did we get into this current mess?

One reason for the current price shock is that Saudi Arabia¹ scaled-back crude production by 1 million barrels per day (b/d) between September, 2005 and February, 2007 to 8.6 million b/d. Only since September, 2007 has the Kingdom started to increase production, which currently sits at 9.2 million b/d in February, 2008 according to Mr. Ali al-Naimi, Saudi Arabia's oil minister. The OPEC basket price was $99.16 on March 7th. The longer-term basket price trend is shown in the graph (left) which shows a rise of about 360% since 2002.

Saudi Arabia is pumping less oil and making more money, despite the falling value of the dollar. If you want to point to a single factor that has contributed the most to oil's steep price rise since the 1st quarter of 2007, you needn't look further than this—the Saudis and the other OPEC countries kept oil off the market that winter to prevent an irrational price slide below $50/barrel just as production in the OECD nations continued its steep decline and other countries, like Russia, struggled to maintain production levels or put small new increments on-stream. Global supply fell further short of demand with each passing month and the volatile oil price has gone up ever since.

Higher prices did not affect inelastic demand, which is subsidized where it is growing fastest, Russia, China and Saudi Arabia itself, which must float all those unemployed young people who might otherwise be turning to Wahhabism and Jihad. For the Saudis, the OPEC basket price exhibits a happy trend. This isn't rocket science.

Blowing Smoke About Prices

De facto OPEC head Ali al-Naimi, along with other officials (or paid flunkies) who take their marching orders from him, is fond of telling us the market is "well supplied" or "in balance," blaming price rises on refinery bottlenecks, speculators, geopolitics, or whatever comes to mind. Statements after last week's meeting were typical—

Saudi Arabia's Oil Minister Ali al-Naimi, who sets policy in the world's largest exporter, said supply and demand are stable...

Maintaining current production is a "goodwill'' gesture to customers made despite a certain drop in demand, said Qatari Energy Minister Abdullah bin Hamad al-Attiyah. "We are confident there is no shortage of supply at all,'' he said.

"It's not reasonable² to expect OPEC to provide more oil in the market than is needed,'' said Johannes Benigni, managing director of Vienna-based JBC Energy. "There's no shortage.''

A goodwill gesture to consumers! Your pocketbook is telling a different story, isn't it? You can ignore all this talk. You can also ignore statements about OPEC's target price as reported in the tireless Jad Mouawad's OPEC Finds Price Range to Live With, New York Times, December 6, 2007.

Since abandoning a target of $25 a barrel long ago, the Organization of the Petroleum Exporting Countries has not said where it would like to see prices go. Analysts say the group’s new target price is $70 to $80 a barrel.

“OPEC’s floor price keeps rising,” said Jan Stuart, an energy economist at UBS in New York. “You have to assume that’s a strategy. Their actions speak louder than their words”...

OPEC said the reason prices rose to nearly $100 a barrel in recent weeks had little to do with supply and demand but was a result of trading by commodity investors and hedge funds, as well as geopolitical instability.

“We have enough stocks in the market,” Abdalla Salem el-Badri, the secretary general, told reporters. “There is no reason for the price of oil to go to $100 a barrel.”

When OPEC refuses to raise production, as they did just last week, they are supporting the current price, which is $108.71 at this moment. OPEC could move to lower oil prices by raising production, but there's not much of that vaunted spare capacity to spare (ASPO-USA, September 19, 2007). There is some, however.

Simple arithmetic can tell us what Saudi Arabia's spare capacity is now. (All references are to crude + condensate only.) Saudi Aramco's production capacity target is 12 million b/d by the end of 2009 and they get another 500,000 barrels from the Neutral Zone they share with Kuwait. Saudi Arabia is putting an additional 2.05 million b/d of productive capacity on-stream by the end of 2009, which makes their production capacity = 10.45 million b/d now. They are producing 9.2 million barrels, so their spare capacity is 1.25 million b/d, give or take a hundred thousand barrels, most of which is very sour (sulphur-laden) crude they can't sell.

About 1 million OPEC barrels are potentially in play altogether, and almost all of it³ comes from the Persian Gulf (the UAE, Qatar, Kuwait and Saudi Arabia).

Hence OPEC, and thus Saudi Arabia, can not exert much control on the oil price while it is rising. The floor (target) price that OPEC defends is the price at which they will cut production to preserve their revenues. If the oil price goes up, the OPEC floor price will go up with it as it has done for years now. It's that simple, and has nothing to do with preposterous claims that the market is "well supplied" or "in balance."  Saudi Arabia's new production capacity could have some impact on the situation in the near future, but that's the big issue being considered here (see below).

Billions and Billions, Trillions and Trillions

Beyond blowing smoke about the chaotic oil markets, a number of highly-placed Saudis, including Mr. al-Naimi, Saudi Aramco President and CEO Abdullah Jum'ah, and Dr. Nansen Saleri, formerly head of reservoir management for Saudi Aramco, delight in trashing the "peak oil" theory. Their statements appear coordinated, which is likely not an accident. Consider these examples—

[Abdullah Jum'ah] said that in a bid to tackle the perception of peak oil, both conventional oil as well non-conventional resources such as tar sands must be considered. He placed the world's in-place endowment of conventional oil and non-conventional fuels at between 13 trillion and 16 trillion barrels [UPI, February 12th, 2008]

[Ali al-Naimi] also said that [Saudi Arabia] ... planned to add another 200 billion barrels of oil to its proven reserves figure. He said this was "to reassure the world that we are not going to run out of oil in the next five to ten years as peak oil theorists say." [AFP, March 1st, 2008]

[Nansen Saleri said] What are the global resources in place? Estimates vary. But approximately six to eight trillion barrels each for conventional and unconventional oil resources (shale oil, tar sands, extra heavy oil) represent probable figures -- inclusive of future discoveries. As a matter of context, the globe has consumed only one out of a grand total of 12 to 16 trillion barrels underground. [WSJ editorial, March 4th, 2008]

Well, is it 12 trillion on the lower end (Jum'ah) or is it 13 trillion (Saleri)? If you're all going to tell the same story, at least get your story straight. But as SNL's Emily Litella used to say, "never mind."

These statements create a smokescreen that has no bearing on peak oil or rising diesel fuel costs that are forcing long-haul truckers off the road. Let's have the knowledgeable and levelheaded Dr. Sadad al-Husseini, who joined Saudi Aramco in 1972 and held various high-level executive positions before retiring, comment on the pertinence of extraordinary claims about trillions of hydrocarbon barrels.

Dr. Saleri's speculation [in the article quoted above]⁴ regarding remaining hydrocarbon resources skirts several hard realities. These include the very slow timing and massive cost for converting unconventional resources into economic reserves, the cost of new production capacity and finally the cost of refinery processing to generate suitable transportation fuels. The question is not what volumes of tar sands or coal are sitting out there but rather how fast can they be converted to relevant fuels and at what cost.

We have seen oil prices quadruple over the past five years and expected an avalanche of new exploration discoveries and production capacity. This did not happen. In fact the outlook for the next decade is even less encouraging.

The reasons are simple - the industry has reached a ceiling in its ability to discover new reserves and to generate timely new oil capacity to offset accelerating production declines.

Enough said. It's often the retired experts who aren't afraid to tell you what's going on.

Whither Saudi Oil Production?

In A Paradigm Shift, the case was made that the Saudis, along with the rest of OPEC, "are determined to never see the low prices of the late 1990's ever again" (ASPO-USA, June 20, 2007). The underlying reason was stated by Dr. al-Husseini.

There has been a paradigm shift in the energy world whereby oil producers are no longer inclined to rapidly exhaust their resource for the sake of accelerating the misuse of a precious and finite commodity. This sentiment prevails inside and outside of OPEC countries but has yet to be appreciated among the major energy consuming countries of the world. 

Saudi Arabia's lack of effective spare capacity now clouds the issue—one could still argue that with new light crude coming on-stream from Khursaniyah (0.5 million b/d), Khurais (1.2 million b/d) and other fields by the end of 2009, the Saudis could "open up the taps" and raise oil production another 1 million b/d or more in the near term to 2010. And it's not just Saudi Arabia that is bringing new capacity on-stream within OPEC (graph left, see footnote 3). Another 0.9 million b/d of heavy sour crude is scheduled to come from Manifa sometime in 2011. Processing this low-quality oil will fall on the Saudis, who will consume or export the refined products.

Sometime in 2009 the world will finally know how much OPEC really cares. We will know just how hard Mr. al-Naimi and friends are working to "balance" the oil markets. We will know whether the "paradigm shift" should be a working assumption of energy analysts in the OECD countries.

OPEC is in the driver's seat. If recent history is a guide, the only thing Saudi Arabia is balancing is oil flows and cash flows.

Khurais and Manifa are very likely the last large (≅ 1 million b/d) increments that Saudi Arabia will be able to put on-stream—ever.  A "paradigm shift" means the Kingdom is not going to knock itself out raising crude oil production to (best case) levels beyond 10.5 million b/d in the medium term out to 2012 or so, and will likely not be able to do so thereafter—Ghawar will not last forever, despite what Mr. al-Naimi or CERA think. Investment in additional capacity available after 2011 would have to be on the drawing board now, and there is no indication that Saudi Arabia has thought that far ahead.

On a related note, does the EIA know something that we don't about future Saudi crude production? That's doubtful on the face of it, but consider the table below that contrasts the reference case total liquids production (in million b/d) expected from Saudi Arabia in the 2006 and 2007 International Energy Outlooks (IEO).

Report	2010	2015	2020	2025	2030
2006 IEO	14.4	14.8	14.5	15.1	17.1
2007 IEO	8.9	9.4	10.4	12.9	16.4

The values out to 2015 in the 2007 report are far too low. All the values in the 2006 report are far too high. But why this huge across-the-board decrease in the 2007 IEO? If Saudi Arabia is producing only 8.9 million barrels per day in 2010, or only 9.4 million in 2015,  it's all over but the crying, as Hank Williams used to say, for the OECD economies. If anybody can shed light on these crazy numbers, please do so.

The Saudis and OPEC as a whole are likely to wait for the peak and decline of non-OPEC oil production, which is close upon us, before making any large production increases. Once the non-OPEC bloc is exhausted, the most likely scenario has OPEC adding enough oil to the world's supply to maintain the current plateau (≅ 74 million b/d) give or take ½-a-million barrels per day for some number of years as crude oil production outside the cartel declines. (Again, we are ignoring natural gas liquids here.) This is essentially the position of Dr. al-Husseini. This view is also known as "peak oil."

OPEC moves or does not move according to it's self-interest. Misguided attempts to bamboozle the public with silly statements about trillions of barrels, or keeping the "well supplied" market "in balance" are ... counterproductive, to say the least. Here's some free advice for Mr. al-Naimi and his like-minded colleagues—actions do speak louder than words, as UBS economist Jan Stuart said. In addition to his wisdom about fooling the people, Abraham Lincoln also had this to say: "The time comes upon every public man when it is best for him to keep his lips closed."

Contact the author at dave.aspo@gmail.com

Notes

1. For the sake of argument, this article assumes that Saudi Arabia can do everything they say they can do. So, Ghawar is still going strong, Khurais will supply a dependable 1.2 million barrels per day, etc.

2. Benigni falls into the flunky consultant category.  Here's a quote from JBC Energy's website—

“We’re recipients of a number of JBC Energy publications and have always found them to offer a concise and timely brief on key developments in both crude and product markets"

— Mohammad Alipour-Jeddi , Head of Petroleum Market Analysis Department, OPEC Secretariat

In other words, Benigni makes his living by telling OPEC what it wants to hear. Returning the favor, OPEC's website presents an obsequious video interview with Benigni before the recent meeting.

3. — and therefore Mr. Jum'ah's and Mr. al-Naimi's speculation as well. Dr. al-Husseini's on-the-record remarks were received via an e-mail to ASPO-USA.

4. The IEA's February, 2007 Oil Market Report assessed "effective" OPEC spare capacity at 2.4 million b/d. It's not clear where all this oil could come from at this time. The breakdown for all spare capacity is shown in the graph left. The IEA adds the caveat that "these occasional updates of capacity are, at best, a highly imperfect snapshot of current physical supply potential, such is the paucity of consistent, field-specific data." Indeed.

Saudi Arabia's sustainable production is listed as 10.90 million b/d, not the 10.45 calculated in the text. It is possible that some of the difference is made up by declines in Saudi production capacity between now and the end of 2009, but that could only amount to a few hundred thousand barrels at most unless one of the Kingdom's mainstay producers falls off a cliff between now and then. I stand by the calculation made in the text.

Force Majeure

Our goal remains the destruction of the Nigerian oil industry and all who stand on the pathway to our objective.
     —MEND spokesman Jomo Gbomo (Henry Okah)

Effective Feb. 7, 2008, we declared force majeure on Bonny Light Offtake programs for the rest of February and March following deferments caused by our inability to progress repair of three leaks on [the] Nembe Creek trunk line.

Royal Dutch Shell said on March 3 it has lifted the force majeure on exports of Nigerian Bonny Light and Forcados crude...  "Pipeline repair has been done. We are able to meet all commercial obligations."
     —Royal Dutch Shell PLC statements

Hardly a day passes without new oil outages in Nigeria. Shell is unable to fix the Nembe Creek pipeline because of "security concerns," which has resulted in a disruption of 130 thousand barrels per day (b/d) of Bonny Light oil production. In today's world of diminished expectations, if a new field the same size as the latest staunched oil flow in the Niger Delta comes on-stream, it's big news. It ought to be equally important when that amount of production suddenly disappears, and it is—Nigeria is always cited as one reason behind today's climbing oil price, which stands at $103.35/barrel at this moment.

A "greater force" clause in a contract protects the parties from extraordinary events beyond their control such as war, crimes, and assorted Acts of God. Taking a look at Nigeria's future production prospects thus requires some humility, for the Movement for the Emancipation of the Niger Delta (MEND) or the Nigerian government itself may strike at any moment, making a mockery of such a forecast. Arriving at no firm conclusions, let's examine oil fields scheduled to come on-stream, the newly elected Nigerian government, and the security situation.

Nigeria's Offshore Prospects

The graph (left) estimates Nigeria's productive capacity out to 2012 (West Africa second only to Russia in non-OPEC supply contribution, Oil & Gas Journal, January 15, 2007). If you look closely, you will see that the figure contains the note "2006 excludes Niger Delta shutdowns" at the bottom right. The graph indicates a capacity of about 3.0 million b/d for 2007, but the IEA's latest Oil Market Report estimates that Nigeria's production was 2.07 million b/d in January, down 90,000 barrels (2.16 million b/d) compared to December.

Productive capacity jumps to about 3.5 million b/d in 2009 due to large new offshore projects coming on-stream this year and next (2nd graph left). The key word is offshore. The O&GJ authors, Mohamed Bardinko and Ivan Sandrea, note that "new production from deep water is also likely to translate into improved supply reliability," as discussed below.

The two largest fields coming on-stream in 2008 are Akpo and Agbami, which are both in the deepwater and together have a peak production of rate of 430 thousand b/d. Chevron recently confirmed that the first oil from Agbami will flow in June, with a fast ramp-up to 230,000 b/d in 2009 and an additional 20,000 b/d by 2010. Total's Akpo will probably start-up in early 2009—the Korean-made FPSO will set sail for Nigeria in May. Total's Ofon Phase 2 is expected to contribute 100,000 b/d by 2010.

Exxon's Bosi, listed at 120,000 b/d, is now being re-evaluated. "The Bosi project should have been on stream in 2007. Asked when it will now go on stream, John Chaplin, [ExxonMobil managing director in Nigeria], said 'soon is the answer'." Uhhh—OK, anything you say, Big Guy.

OPEC member Nigeria is subject to a production quota. Nigeria's allocation was 2.3 million b/d up to October, 2007. After failing to meet that allocation in each month after August, 2006, the quota was lowered to 2.1 million b/d.  Production is now hovering around the new allocation because production has been shifted to the fields deep offshore. If Nigeria's quota is raised and the deepwater share increases, fields like Akpo and Agbami will add to world oil production. Obviously, Chevron and Total can not recoup their investments unless they are actually lifting oil in these fields.

There's No Place Like the Deepwater

The easiest way to understand the security situation in Nigeria is to look at some maps, the first of which has been slightly marked up for your convenience (left). The hostile onshore Niger Delta regions where MEND and other groups operate surround the population centers Warri and Port Hartcourt, far from the new deepwater oil developments, e.g. Agbami is 70 miles offshore.

The red line in the ideal productive capacity outlook above indicates that only about 20% of Nigeria's total production capacity comes from the deepwater. Rigzone's April, 2006 article, Nigerian Militants Move Oil Attacks Offshore, reports Rolake Akinola, an Africa analyst at consultants Control Risks, as saying that "[The deepwater areas] are being pushed. We have already seen some unreported incidents far offshore. We can't guarantee that pirates won't be able to (regularly) go 50-60 kilometers offshore in the future and attack platforms."

Almost two years later, it does not appear that MEND insurgents have been able to extend their reach to production facilities far offshore, so there is little reason to believe that new deepwater developments will be subject to insurgent attacks, especially with the mighty Nigerian Navy standing in the way. Offshore attacks take place in the shallow waters near Port Harcourt.

The Wall Street Journal reports a new danger in Nigeria Rebels Step Up Attacks With Explosion of Oil Tanker (January 11, 2008). An attack on an oil tanker at Port Harcourt was an inside job—

An oil tanker attack represents a dramatic change for the insurgency in Nigeria's oil-rich Niger Delta... if MEND's assertions are true that it worked with insiders, the attack could indicate the Nigerian oil industry is significantly more vulnerable to attack.

In its email¹ MEND said it had been aided by "our friends inside the military and secret services for valuable information and resources."

What a surprise—MEND has infiltrated Nigeria's military and secret services! Nigeria's corrupt government has not moved against MEND and other groups operating in the Niger Delta because the situation is undoubtedly beyond their control. But if you can't beat 'em, join 'em—Nigeria's new president has decided to go after the oil companies instead. From Nigeria Seeks Bigger Slice of Oil Profits in Overhaul, Wall Street Journal, December 13, 2007—

Since coming to power in May, Nigerian President Umaru Yar'Adua has proposed changes such as creating a national oil company that he expects will help the state manage its oil and natural-gas resources better and pare the historical dominance of foreign oil companies in the country.

The planned changes are also about "rebalancing the relationship" between the state and foreign energy companies, according to Nigerian oil minister Odein Ajumogobia. That is code for handing over more oil profits, analysts say.

The government is in the early stages of renegotiating billions of dollars worth of offshore exploration deals signed in the 1990s with companies such as Chevron Corp., Exxon Mobil Corp., Shell and Total SA. The contracts, up for renewal, were signed when oil traded at about $20 a barrel. Crude-oil futures in New York finished yesterday at $94.39 a barrel.

Nigeria's government is flush with cash despite routine production disruptions, but there is still the irresistible temptation to further pad those Swiss bank accounts. Not content to simply re-negotiate their contracts with the oil companies, Yar'Adua, Ajumogobia and the rest of the gang are also skimping on their current financial obligations. These government actions, together with the escalating rebel attacks, have caused The Wall Street Journal to reach the startling conclusion that Nigeria's Oil-Export Reliability [is] at Risk, February 11, 2008.

Nigeria is at risk of losing its credibility as a reliable supplier of crude oil, traders and analysts say, as worsening rebel attacks hold back exports...

And financing issues have been raising tensions inside Royal Dutch Shell PLC's Nigerian joint venture, Shell Petroleum Development Corp. Shell has criticized the government for failing to abide by its funding obligations to the venture, 55% owned by state-run National Nigerian Petroleum Corp. and 30% owned by Shell.

Constraints on Nigerian oil production include their OPEC allocation, new government pressures on foreign operators, corruption, and unceasing insurgent attacks. If there were an entry for "hopeless situation" in the dictionary, Nigeria's oil prospects might serve nicely as a definition. Reviewing the state of affairs in Nigeria should make us downright grateful that the world is still getting 2 million barrels per day of that beautiful Bonny light, sweet crude.

Games Shell Plays

One could view Royal Dutch Shell as a victim in Nigeria, but their past actions in the Niger Delta have shown little regard for the Ijaw people living there. On another front, Shell recently issued their report A National Dialogue on Energy Security, which documents their public relations blitz across America. The word "Nigeria" does not appear in the text. Company president John D. Hofmeister—The Shell Answer Man—traveled the country with his entourage reassuring the public that Shell is not responsible for record-setting oil prices.

The Myth: Oil prices are artificial. We found this idea accepted among both individuals and government officials with whom we met. There is a belief that energy companies such as ours can set or even manipulate the price of oil higher or lower at will. This leads to either expectations that oil companies acting independently can solve the energy problem (one participant suggested we “…raise the price of crude to enable unconventional sources”), or resistance to seeing the oil companies as participants in the solution. This attitude was reflected in one Charlotte resident’s comment that, “The energy mix will not change – oil companies will reduce prices to keep alternatives out.” [emphasis added]

Shell is clearly not responsible for high oil prices. Be that as it may, Shell consistently touts drilling in the unexplored parts of North America's outer continental shelves as a solution to all our problems. Watching and listening to Hofmeister wax eloquent on the subject, one would think there's more than enough oil out there if only those pesky environmentalists would let Shell drill off west Florida or the West Coast, i.e. he creates the impression that oil companies acting independently can solve the energy problem and lower oil prices if only we would let them. If you want to counter the impression that you're fixing prices, that you're all-powerful, don't pretend to be all-powerful if only additional concessions were made.

It's not a crime for Shell to mislead the public, but wouldn't it have been refreshing to hear Hofmeister tell those gatherings something like the truth?

I'm sorry to inform all of you that Americans have already used up most of their oil, and so have the Europeans. Nobody knows how much oil we might find in the unexplored parts of America's continental shelves, but it surely won't be enough to make much difference in the next decade and beyond. Your gasoline will cost more, much more. What this means for Shell is that we are forced to operate in God Forsaken Places like Nigeria at considerable risk to our people to extract their oil you so you can drive your cars like there's no tomorrow. We would rather work offshore in North America, where it's safe, our workers won't be kidnapped, and governments won't extort money from us.

OK, let's see a show of hands: how many people in the room can find Nigeria on a map?

Nigeria is in West Africa, fronting the Gulf of Guinea, a long way from Las Vegas. Force Majeure, all bets are off. Welcome to the world of peak oil and rising prices.

Contact the author at dave.aspo@gmail.com

Notes

1. Henry Okah, aka. Jomo Gbomo, is being held in a Nigerian jail. The continued silence about his fate is a matter of great concern to MEND. Should he wind up dead—assuming he isn't already—look for increased trouble. Below is the full text of the email from Okah accompanying the tanker attack.

January 11, 2008.

The Movement for the Emancipation of the Niger Delta (MEND) confirms that its Freelance Freedom Fighters (FFF) working inside the oil industry detonated a remote explosive device that caused the fire on a tanker in Port Harcourt, Rivers state of Nigeria today, January 11, 2008.

How can the government of Nigeria fight an enemy that is within and can not be seen? MEND salutes the patriotic agents and also use this opportunity to commend our friends inside the military and secret service for valuable information and resources. We call on all oppressed citizens of the Niger Delta to do your own bit in your own way to regain freedom and win the fight against injustice. Even if it means to poison the drinks and food sold to the soldiers that rape our women and brutalize and kill our youths, just do it.

Again, we are appealing to residents inside the Niger Delta to avoid milling close to military vehicles and check points as we want to avoid the loss of civilian lives. The military seems to be deliberately using civilians as human shields.

Long live the Niger Delta!
Jomo Gbomo