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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]

Introduction

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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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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    Professor John Barry tipped us off to this report published by Australia’s national science agency, CSIRO:

    Our Future World: An analysis of global trends, shocks and scenarios

    The report includes an interesting chart [Figure 2. Risks identified, and rated, by the World Economic Forum (Source: WEF, 2009)] of risks identified by WEF with Likelihood plotted against Severity (in US$)…

    (more…)

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