Daniel L. Davis is a field grade officer in the United States Army, having served four combat deployments (Desert Storm, Operation Iraqi Freedom, and Afghanistan twice). He has a master’s degree in International Relations from Troy University. He has been writing on oil and energy issues in major national publications since 2007, but has been writing on foreign, diplomatic, and military affairs for over two decades. His work has been published in the Washington Times, Armed Forces Journal, Dallas Morning News, Defense News, Philadelphia Inquirer, Army Times and other publications. He has appeared on CNN, Fox News, PBS News Hour, NPR, Democracy Now, and other broadcasting organizations on defense-related subjects. Davis is also an advisory board member for the Association for the Study of Peak Oil and Gas, United States (ASPO-USA) and was awarded the Ridenhour Prize for Truth Telling in 2012. [See link at bottom to full report]


Since January 2012, at least three prominent energy authorities have heralded an “oil revolution” and “energy independence” in the United States that a thorough analysis suggests is built on flawed assumptions that renders their conclusions unsupportable. These three separate yet corroborative reports, released by Pulitzer Prize-winner Daniel Yergin, Harvard University’s Belfer Center for Science and International Affairs, and the US Energy Information Administration (EIA), have predicted that North America has the potential to become the “new Middle East” of oil and that the concept of American energy independence is a legitimate possibility. However, a rigorous analysis of these arguments reveals critical, foundational flaws in their conclusions. Moreover, evidence, logic, and observed oil field performance strongly suggest that the world in general may be unable to meet its crude oil needs at some point between now and 2017, though possibly as early as next year.

To many, it is inconceivable that these reports could be wrong – particularly as the list includes the industry’s best-known analyst plus the EIA and Harvard University – and thus are encouraged by the prospect of an energy-secure America. The projections these studies offer fail to properly consider several critical factors and dismiss some of the more significant problems involved in future oil production.
This paper examines the arguments offered by these three sources in detail, including several major articles and Congressional testimony given by the Chairman of Cambridge Energy Research Associates (CERA), Daniel Yergin; a June 2012 report written by former Italian oil executive Leonardo Maugeri through Harvard University; and the June 2012 release of the EIA’s Annual Energy Outlook 2012. The first section deconstructs the arguments presented by each author, analyzing the fundamental underpinnings of each message, and compares them with basic data and alternative analysis. In particular, the piece examines one of the main sources of optimism cited by all three sources: the Bakken “tight oil” play in North Dakota.

The second section explores several fundamentals of oil production that the three sources fail to cover. In order to understand how the legitimate increase in production from the Bakken contributes to the overall energy mix in the United States, it is crucial to concurrently examine several other components of oil production. The paper looks at global production in terms of historical performance as well as estimated future production.

Next, it examines consumption patterns in oil exporting countries and OECD countries, with a focus on expanding patterns in China and India (which directly affects the amount of oil globally available for export). It then considers the economic implications of the findings. Finally, this paper outlines the flawed track record of past projections made by many of the aforementioned organizations.

The bottom line: Those who contend the US is on the cusp of energy independence have relied on incomplete, selective, and in some cases unsubstantiated evidence on which to base their projections. They have failed to account for a measurable and considerable decline in the amount of oil globally available for export; they have significantly understated observable declines in production from mature fields (not even mentioning that since 2005, six former oil exporting nations have gone into net importer status); and have failed to examine political realities in the remaining oil exporting countries which may adversely affect future production levels.

Should the US Administration, Congress, and other leaders base policies on these flawed studies, the economic and national security consequences to the United States could be severe.

Why These Flaws Matter

A common theme among the many optimistic reports and studies is that there are massive amounts of petroleum resources presumed to exist throughout the world. These estimates range from a low in the 2 trillion range to as many as 9 trillion barrels of oil beneath the ground. This paper does not argue for one figure over another, but shares the view there are likely trillions of barrels of oil and its equivalent under the earth. But to what extent does this treasure trove of resource matter in terms of rates of oil production in the near term (which this paper defines as the next five years)?

Long-term projections of oil production capacity and knowing the extent of oil resources and reserves are necessary and useful. However, for this generation and its ability to emerge from the current global economic recession, a more realistic estimate for how much oil may be produced in the next five years is of far greater significance than knowing how much exists in total and may someday be produced. “Possibilities” will not fill American gas tanks. Based on an analysis of the key factors necessary to produce oil to scale, it is likely neither the world nor the United States will be able to produce the amount of crude oil necessary to meet current demand, let alone to enable economic growth, over the next five years.

If the United States bases its future economic and national security decisions on the belief that energy independence by 2020 is possible, we may make decisions in the near future that will greatly complicate what will already be a precarious situation. Taking a rational view of the situation as it genuinely exists, however, may help us more effectively navigate a future of oil shocks and economic turmoil.

You can read the full report at this link.

ASPO Ireland is kicking off its first event for 2012 by inviting back the two leading economists it brought to Ireland last year, Dr. Michael Kumhof from the research team at the IMF and Professor Steve Keen from the University of Western Sydney. Both Kumhof and Keen are participating in the influential INET conference in Berlin next month and we’ve taken advantage of the opportunity to get them both in Dublin together. The IIEA is kindly hosting the event.

Kumhof and Keen’s work is of interest because of their attempts to model how the economy works, and by so doing, attempting to forecast how the economy might unfold in the future under different sets of scenarios. What’s particularly interesting about the models they’ve built is that they’re based on fundamentally different theories of how the economy is believed to work. Kumhof’s model is based on the economic theory thought to everyone today as ‘economics’ based on the assumption of equilibrium between supply and demand, called general equilibrium theory, and also known as neoclassical economics. In stark contrast, Keen’s starting point is that the economy is rarely if ever in equilibrium, a dis-equilibrium theory.

Kumhof was centrally involved in a piece of research published in the IMF’s World Economic Outlook last April on the impact of peak oil on the global economy: Oil Scarcity, Growth, and Global Imbalances. Included below is a graphic showing the oil supply scenarios considered and another showing the model’s forecast global GDP based on the shock associated with each scenario:

Kumhof gave a very compelling presentation in Dublin last October when he came to present on this work.

Eqaully, Keen, when he presented at the IIEA last November, gave a compelling presentation on how the Global Financial Crisis, or GFC as the Australians like to call it, was no black swan event and was forewarned by a small group of economists outside the mainstream (see Bezemer for an overview of who saw it and why). Keen actually built the foundation for his economic modelling approach back in 1995, and forewarned back then that we were on an unsustainable track. Curiously, around the same time ASPO’s founder, Dr Colin Campbell started his work to warn the world of peak oil. He has since coupled his purely monetary model with a physical stocks-and-flows model to look at carbon emissions and energy consumption in the Asia Pacific region as part of a study for UNEP on resource efficiency (REEO). The scenarios considered and the results emerging are fascinating.

The Irish Context

Macroecocomic modelling along similar lines to that above is carried out in Ireland by the ESRI. There, Prof John Fitzgerald heads up the Energy Research Policy Centre (EPRC). The ESRI macroeconomic model was originally developed out of a model called HERMES, a model built immediately after the Seventies oil shocks, curiously enough, to help economists understand their impacts and develop policy.
In 2010 the ESRI published a study entitled ‘Recovery Scenarios for Ireland: An Update‘ which considers two scenarios for Ireland’s economic future, one called the High Growth scenario and the other called the Low Growth scenario. Disturbingly, the  Low Growth scenario assumes an annual average GDP growth rate over the period 2011-2015 of 3.2% (Table 3.2) and the deficit problem arising from this can be seen in Figure 7, included below:
Clearly, based on recent performance, we’re not on a trajectory to get our deficit under control. Not surprising considering the growing chatter about the need for a second bailout, a la Greece.
Unfortunately, what’s not considered by this model is the output of Kumhof’s research, above. Not that we need sophisticated models like those used at the ESRI or the IMF to tell us what the general impact of a continuing hike in the price of oil might be on the economy. But more importantly, and this is Keen’s contribution, these traditional equilibrium models also ignore the role of debt in the economy. It’s interesting to note that these mainstream models ignore two primary sources of power, the rate of energy consumption (the scientific definition of power), and the rate of credit creation. The power to create and allocate credit is arguably the primary source of economic power, a power very capable of corrupting both itself and our political and social systems, as the documentary Inside Job so deftly demonstrated.
Unfortunately, understanding the ‘general impact’ is not enough, and indeed this is probably where much of the ‘peak oil impact’ narrative has stultified by quickly descending into apocalyptic tales of societal collapse. [As always, when the topic of societal collapse comes up, I direct people to a professional on the topic (Vinay Gupta) for a sense of perspective.] When I met Dr Campbell first back in late 2004, he told me the first sign of peak oil will be a banking crisis. It took me until relatively recently to properly understand what he meant. Given our recent experience in Ireland, we have a very vivid image of what a banking crisis looks like and the damage that gets inflicted on the general public when the banking system over-lends and our politicians fail to stop the bankers dumping to cost of cleaning up the mess in the public lap.
As our banks reign in their lending to repair their balance sheets and purge them of their non-performing loans (at our expense) to get back to a state of ‘prudent banking’, deflating the economy in the process, they’re contemplating returning to a world that existed in the Nineties, before Greenspans’ Irrational Exuberance took hold. Problem is, back in the Nineties, oil was less than $20/barrel. Now with oil prices remaining consistently over $100/barrel, an enormous increase, the floor at which our bankers think they need to get to in order to hit ‘prudent banking’ has dropped considerably. We can now start to understand the transmission system for the impact of high and increasing oil prices. Sadly, it will look like more of what we’ve been seeing since the bubble burst in 2008. Peak oil is a systemic risk to our banking system, much like Anglo was, and with similar implications. At a macro level, higher oil prices lower global economic activity, the reduced aggregate demand leading to job losses. At the micro level, as more  disposable income gets diverted towards the increased price of oil, our ability to put petrol in the car to get to work to earn the money to pay the mortgage is reduced, and that’s for those lucky enough not to have been impacted by the reduced aggregate demand and haven’t lost their job. Increased loan impairments start to impact on bank balance sheets, and well, you know the rest.
If the above analysis is correct, then the focus of peak oilers needs to grow beyond collapse rhetoric and talk about specifics: banking policy. Peak oil should be an issue keeping the governor of our central bank awake at night (not that he has a shortage of such issues at the moment). More positively, it points the way to the lever to pull to help turn the heaving behemoth that is a national economy away from the iceberg of energy security: lending policy. To elaborate, you only get a loan if the net impact of the money spent will be to reduce your overall exposure to future energy price rises/availability.

ASPO Ireland has invited Australian economics professor, Dr. Steve Keen, to Dublin to give a series of lectures as part of his global tour to support the recent publication of a revised edition of his book ‘Debunking Economics‘.

His visit is already generating debate over on the IrishEconomy website.

During his trip he will be presenting at several events:

TASC Economists (4:30pm Tuesday 15th)

ASPO Ireland/Feasta (7pm Tuesday 15th)

IIEA Economics group (open event) (11am Wednesday 16th)

Following hard on the heels of our event last Monday, today I read two recently published articles which prompted further thinking on how to/impact of reducing our oil demand:

A brief economic explanation of Peak Oil by Chris Skrebowski

Graph 3 Shows the development of oil prices and illustrates the $10/year trend (red line)

The conclusion appears to be that:

Unless and until adaptive responses are large and fast enough to constrain the upward trend of oil prices, the primary adaptive response will be periodic economic crashes of a magnitude that depresses oil consumption and oil prices. These have the effect of shifting consumption from incumbent consumers—the advanced economies—to the new consumers in the developing economies.

This is exactly what happened in the last recession when between the start of the recession in January 2007 and its effective end in 1Q 2011 demand rose by 4.3 million b/d in the non-OECD area and fell by 4 million b/d in the OECD area.

Weak World GDP Growth & “Peak Oil” by Bob Hirsch

As we previously forecast, the decline in world oil production is likely to occur in the next 1-4 years…

Beginning in 2004, world oil production (total liquids) has been on a fluctuating plateau, as shown below.

Hirsch’s warning that we’ve got at best 4 years before terminal decline is particularly disconcerting. It leaves us with barely time to brace for impact, let alone attempt to get out of the way. The Initial Thoughts article published yesterday took a high level look at Ireland’s oil consumption and looked at an illustrative scenario to halve consumption by 2020, effectively rolling us back to where we were in 1990. It was not possible without a drastic (2/3) reduction in private car use. The chart below extends the data back to 1970.

We can clearly see the impact of the second oil crisis on our consumption, although it doesn’t appear to have had much impact on GDP (worth further investigation to understand why). The steepest future demand scenarios reflect the reverse side of the steep rise in the 90’s. Between 1990 and 2000 we doubled our oil consumption and GDP. The charts below show a strong correlation, the direction of causality being the subject of much debate, with Ayres-Warr arguing that there is a positive feedback between the two, but energy being the critical enabler:

If this relationship holds on the way down, as it did on the way up, we should expect the economy to shrink back according to oil availability. Whether and to what extent this relationship works in reverse should be the focus of much considered attention. One important factor will be the cause of the reduction. If it’s because of high price imposed by market factors, then that could have a very different impact than if we implement policies ourselves to force us down the curve.

SEAI’s 2009 Transport Statistics report is a great resource, some highlights worth mentioning in this context include the chart below showing a strong link between personal consumption and private car travel.

What’s interesting about the average distance data is how it demonstrates that our cars spend most of their time stationary. At an average speed of 30 kmph, it takes just over 500 hours to hit the average distance travelled by an Irish petrol car. Assuming normal driving hours are between 7am and 9pm (14 hours/day x 365 days = ~5,000 hours), the car spends 90% of its time going nowhere.

The vast majority of private cars are less than 10 years old, the average life of a car in Ireland is almost 7 years. Even if we get back to the heady days of 100k new cars each year, and assuming petrol cars were outlawed, forcing everyone to buy electric, it would take 10 years to replace half the nearly 2 million private cars in Ireland (in the scenario being considered here, the remaining half needing oil will be recycled for parts).

The chart below, extracted from a report by the CSO, presents a vivid image of those most vulnerable from a transport perspective to oil price volatility or availability.

Finally, for the jet-set among us, it’s worthwhile to understand where most of our airline travel is destined. The link with the UK and EU clearly evident. I don’t know if the data is available, but it would be useful to see a breakdown of this data into purpose of travel, business versus tourism. The government’s strategy of reinvigorating the economy through tourism may be misplaced.

The recent ASPO/SEAI event, which was headlined by a presentation from the IMF on Chapter 3 of their April 2011 WEO, has prompted some further thinking on the issue of Ireland’s strategy for risk management and resilience building. Probably the most important statement by Dr. Kumhof was

If there is a non-negligible risk of future oil scarcity in the near term, then it would be negligent not to manage the associated risks.

Dr Kumhof presented a wealth of very useful information, and more importantly, an approach to understanding our economy’s dependence on energy and oil in particular, that needs to be repeated for Ireland. Below are some initial thoughts using headline data from the IMF and SEAI.

The chart above shows total oil consumption in Ireland on energy related activities (95% of all oil used) [source]. Clearly, the lions share goes into Transport, although Residential use is also substantial.

A closer look at the Transport sector demonstrates that private cars are the single largest consumers. Consumption by rail and public passenger services is paltry. ‘Unspecified’ and ‘Fuel Tourism’  are remarkably significant and will be looked into further in future research.

Let us next take a look at historic consumption and future projections, which were prepared by SEAI [source]: Continue Reading »

Morning Seminar – Oct 10th – National Gallery, Dublin 10am

Assessing the Risks

Energy Security and the Global Economy


Dr. Roger Bentley [slides]

Prof. Robert Ayres [slides]

Dr. Michael Kumhof [slides]

Following up on our June seminar Energy Security and Competitiveness in a Rapidly Changing World, our next seminar expands on the recent warning from the IMF, published in their April 2011 World Economic Outlook, on the risks of oil scarcity to the global economy.

Access to affordable, reliable, and sustainable energy is a matter of national security, particularly so for a state such as Ireland, heavily dependent on increasingly expensive imported fossil fuels. Since the last seminar we have seen the unprecedented release by the International Energy Agency of their strategic oil reserve in an attempt to ease pressure on rising prices, further oil price volatility, and continuing economic stagnation in Europe and the US.

Dr. Michael Kumhof, a Deputy Chief at the International Monetary Fund will present his latest research on energy augmented macroeconomic models which formed the basis of Chapter 3 of the IMF’s April World Economic Outlook, entitled ‘Oil Scarcity, Growth, and Global Imbalances’. This work is a noteworthy departure from classical economic growth modeling methodologies. He will be joined by Dr. Robert Ayres (INSEAD) and Dr. Roger Bentley (UK ERC), whose respective work on the role of energy in economic growth and oil production forecasts, were referenced in the IMF study.

This seminar will highlight how

  • traditional models of economic growth exclude energy as a factor of production
  • present a new model incorporating energy as a factor of production (Ayres)
  • present an overview of a comprehensive study of future oil production forecasts and their attendant risks (Bentley)
  • an updated IMF model for economic growth incorporating oil and considering different future availability scenarios (Kumhof)
  Dr. Michael Kumhof Deputy Chief, Modeling Unit, Research Department, International Monetary Fund Dr. Kumhof prepared the economic model and ran the oil supply scenarios published in Chapter 3 of the IMF’s April 2011 World Economic Outlook.He will present his latest work on the impact of different future oil availability scenarios on economic growth.
  Dr. Robert U. AyresProfessor Emeritus, INSEAD Prof. Ayres is a co-author of The Economic Growth Engine: How Energy and Work Drive Material Prosperity and Crossing the Energy Divide: Moving from Fossil Fuel Dependence to a Clean-Energy Future. He has published ground-breaking research into the role of energy in determining economic growth, raising fundamental questions about our conventional models for economic prosperity.
  Dr. Roger BentleyUniversity of Reading Dr. Bentley is a leading expert in energy and oil production forecasts. He co-authored Global Oil Depletion (2009), a report commissioned by the UK Energy Research Council. He has studied the often controversial debate on oil production forecasts since the oil crises of the 1970’s and attended the IEA’s meeting in 1997 on oil reserves which formed the warning in their 1998 World Energy Outlook, a warning repeated in their 2008 WEO.

ASPO Ireland has teamed up with SEAI, who will host the event.

RSVP by Wednesday 5th October to Jackie O’Dowd events@seai.ie
Attendance is free and we advise you to book early to avoid disappointment

To see what is in front of one’s nose requires a constant struggle – Orwell

ASPO Ireland was invited to return this year (last year) to Cultivate‘s Rethink Tank at Global Green, a part of the Electric Picnic festival, to participate in a panel discussion on How green is Ireland? The panel was chaired by Davie Philip of Cultivate, and participants, along with yours truly, were Gavin Harte, Taja Naidoo, and Eamon Ryan.

Continue Reading »