Archive for the ‘Oil’ Category

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.


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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.

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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]: (more…)

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Unemployment, Commodities, and Capital Flows

The latest International Monetary Fund (IMF) World Economic Outlook (WEO) published last month (April 2011) makes for very interesting reading, Chapter 3 specifically: “Oil Scarcity, Growth, and Global Imbalances”.

Considering the findings of the report, it’s remarkable the relatively little press the report has received, and I can find none in the Irish media. All the more remarkable considering their role in our bail-out.

Chapter 3 considers four future oil production scenarios, one of which being a ‘Peak Oil’ scenario (Scenario 2):

  • Benchmark scenario
  • world oil production increases by only 0.8% versus business as usual (BAU) 1.8%
  • Scenario 1: Greater substitution away from oil
    • assumes a more optimistic long-term elasticity of 0.3, almost five times as high as that used in the benchmark scenario
  • Scenario 2: greater declines in oil production
    • -2% per annum (-3.8% vs. BAU)
    • 4% real increase in extraction costs per year (vs 2% in benchmark scenario)
  • Scenario 3: greater economic role for oil
    • the contribution of oil to output (either directly or as an enabler of technology) amounts to 25 percent in the tradables sector and 20 percent in the nontradables sector (rather than 5 percent and 2 percent).

    Oil production assumptions in the IMF model

    The chart above demonstrates the oil production scenarios used in the model. (more…)

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    BP “did not have the tools” to contain a deep-water oil leak, as they now admit. Their failure with that risk must now raise profound questions about how they handle other risks, in particular the threat that global oil production will fall prematurely, ambushing an oil-addicted world economy. That risk, “peak oil” as it is known, worries growing numbers of people, not least in and around the oil industry. But BP’s approach to it, until now, has been to pour scorn on the worriers. The company is a cheerleader in the global oil industry’s effort to persuade society not to be concerned about peak oil. (more…)

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    Fine Gael’s frontbench spokesperson for energy, Deputy Simon Coveney, had his Private Members motion to improve Ireland’s energy security voted down by government recently [16 April 2010].

    The motion, see below, calls for a sweeping range of measures to improve the islands energy security, including an increase in our strategic reserves on the island and to “devise an emergency strategy for the allocation of energy resources in the event of a serious disruption of oil or gas supplies.”


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