Oil Supplies & the Coming Global Energy CrisisSeth Cook, PhD

June 13, 2012

Is climate change the only problem with fossil fuels?

Oil spills highlight the downside of the fossil fuel based economy

We’ve forgotten about the biggest problem:fossil fuels are FINITE

My father rode a camel.

I drive a car.

My son flies a jet plane.

His son will ride a camel.

- Saudi saying

To understand our present predicament, we need to understand the special qualities of fossil fuels

• the release of enormous amounts of cheap energy from fossil fuels enabled the growth of industry, population, consumption and technological innovation

• Oil, coal and natural gas were produced by natural processes over millions of years

• they are FAR more concentrated forms of energy than the sources previously available to humanity (e.g. food crops, human & animal muscles, windmills, etc.)

Fossil fuels made modern industrial society possible

• This abundant energy available to drive production processes enabled increased extraction rates of other natural resources

– e.g. chainsaws, trawlers, etc. • Modern farming machinery

powered by fossil fuels made it possible for small number of farmers to feed large populations

– this in turn enabled massive urbanization

• Modern chemistry (largely based on organic compounds derived from fossil fuels) gave rise to modern pharmaceuticals

– facilitated longer lifespans & growing populations

Human vs. machine power

150 watts

Human vs. machine power

100 hp engine 2000 people

Imagine pushing your car 20-30 miles (32-48 km)

The energy slaves of modern man

• if we add up the power of the machines running on fossil fuels that we rely on to light and heat our homes, transport us and keep up our lifestyles and compare that to the amount of power generated by the human body:

• the average American has the equivalent of over 150 energy slaves working for them 24/7

• a middle class person today has an unimaginable standard of living compared to previous periods, largely due to fossil fuels

Oil – the master resource & most important commodity

• Oil is the lifeline of the global economy

• Our primary transportation fuel

(94% of transport is powered by oil)

– gasoline for cars– diesel fuel for trucks &

buses– jet fuel for airplanes– bunker fuel for ships

• Cheap oil has made globalization possible

• Oil is the raw material for a vast array of industrial products

13

Oil is everywhere

Oil is everywhere

Oil – an ideal fuel & raw material

• cheap & abundant (at least until recently)

• energy dense

• easily transportable

• capable of being refined into different fuels (e.g., gasoline, kerosene, diesel, bunker fuel, etc.)

• suitable for a variety of uses, including transportation, heating, production of agricultural chemicals and many many other materials

World’s first oil wellPennsylvania, USA 1859

Global oil consumption

• since 1859, the world has consumed about 1 trillion barrels of oil

• we consume about 85 million barrels a day

• over 30 billion barrels a year

• at least 1 trillion barrels of economically recoverable oil left in the ground, probably more

• so what’s the problem???

It’s not about running out

• the global economy depends upon cheap and abundant energy

• in the 20th century, energy was cheap and abundant, but that era has ended

• we are now in the era of scarce and expensive energy which is increasingly difficult to extract

• that is going to change everything

From easy oil to tough oil

© BP 2011

World oil production and prices 2002-2010

From Tom Whipple 2010. Sources: Production data from U.S. Energy information Administration, “February 2010 International Petroleum Monthly,” March 10, 2010, http:// www.eia.doe.gov/ipm/supply.html; price data from U.S. Energy information Administration, “World Crude Oil Prices,” accessed April 7, 2010, http://tonto.eia.gov/dnav/pet_pri_wco_k_w.htm.

Pro

duct

ion

(mill

ion

barr

els

per

day)

Price (dollars per barrel)

What is peak oil?

"The term Peak Oil refers to the maximum rate of the production of oil in

any area under consideration, recognizing that it is a finite natural

resource, subject to depletion."

- Colin Campbell

The US Oil Production Story

M. King Hubbert: Energy Visionary

• Fields peak when ½ the oil has been extracted

• There is a time lag of about 25-40 years between an oil field’s initial development and that field’s peak production

Predictions of peak oil

Projected Date Source of Projection Background

2006 - 2007 Bakhitari, A.M.S. Iranian oil executive

2007 - 2009 Simmons, M.R. Investment banker

After 2007 Skrebowski, C. Petroleum journal editor

Before 2009 Deffeyes, K.S. Oil company geologist

Before 2010 Goodstein, D. Vice Provost, Cal Tech

Around 2010 Campbell, C.J. Oil company geologist

After 2010 World Energy Council NGO

2010 - 2020 Laherrere, J. Oil company geologist

2016 EIA DOE

After 2020 CERA Energy consultancy

2025 or later Shell Major oil company

No visible peak Lynch, M.C. Energy economist

Source: Hirsch et al 2005

Why is the timing of peak oil so uncertain?

• if valid data were available in the public domain, determining the date of peak oil and the subsequent rate of decline would be a simple matter

• however, valid data is not publicly available

– instead, there is a maze of conflicting information

– OPEC countries’ reserve data is closely guarded

– oil companies are afraid of their share prices declining should their actual reserve data become public

– so experts are left to piece together the incomplete and often conflicting data

• Kuwait added 50% in 1985 to increase its OPEC quota, which was based partly on reserves; no new discoveries had been made

• Venezuela doubled its reserves in 1987 by the inclusion of large deposits of heavy oil that had been known for years

• Other OPEC countries responded with huge increases

• Note how the numbers have changed little since despite production

OPEC’s oil reserves are inflated

Source: Colin Campbell 2000

Oil exporters rising domestic oil consumption

Exporting Country

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Russia 2698 2688 2730 2755 2767 2777 2893 2913 3036 2936 3199

Saudi Arabia 1578 1622 1668 1780 1913 2001 2074 2200 2387 2624 2812

Iran 1304 1322 1423 1509 1578 1641 1728 1718 1822 1787 1799

Kuwait 249 253 273 296 327 359 333 338 359 399 413

Qatar 60 73 84 95 107 122 136 153 174 176 220

UAE 396 400 439 488 515 553 584 617 654 616 682

Algeria 191 198 221 230 239 250 258 286 309 327 327

Venezuela 559 622 660 535 582 628 661 682 712 729 765

Ecuador 128 131 130 136 140 166 179 193 203 216 226

Unit: thousands of barrels per day

Source: BP Statistical Review of World Energy June 2011

Discoveries of oil

• In order to produce oil, one first has to discover it; this is an often overlooked fact

• Most of our current oil production comes from fields discovered in the 1960s & 1970s

• Oil discoveries peaked in 1960s

• We now consume 4 barrels of oil for every 1 we discover

• Declines in oil discoveries eventually must translate into declines in production

Types of Oil

• Conventional Oil: petroleum found in liquid form, flowing naturally or capable of being pumped at reservoir conditions without further processing or dilution.

• Unconventional Oil: heavy oil, shale oil, tar sands (bitumen) are considered to be unconventional oil resources. These compounds have a high viscosity, flow very slowly (if at all) and require processing or dilution to be produced through a well bore.

• Natural Gas Liquids (NGLs) are those portions of the hydrocarbon resource that exist in gaseous phase when in natural underground reservoir conditions, but are in a liquid phase at surface conditions.

• Conventional oil provides most of the oil produced today, and about

95% of all oil that has been produced so far.  – it is the most important form of oil and will continue to dominate

supplies for some time

Source: Hirsch et al 2010: 53

Unconventional oil: will it solve the supply problem?

• Canadian tar sands– estimated up to 1.7 trillion barrels– current production: 1.5 million bpd– projected: 3 million bpd by 2020– processing requires huge amounts

of water & energy– produces giant lakes of oily water– CO2 emissions higher than

conventional oil production

• Venezuelan heavy oil– estimated 500 billion barrels of

recoverable reserves– perhaps the largest source of

untapped petroleum on the planet– converting this heavy oil into useable

petroleum requires vast amounts of energy and money

© Peter Essick, National Geographic

EROEI – energy return on energy invested (net energy)

EROEI – energy return on energy invested (net energy)

Energy return on energy invested = Eout

Ein

Energy source Energy extraction Eout

(profit)

Ein

Source: Prof. Charles Hall: http://theoildrum.com/node/3810

“Balloon graph” representing quality (y axis) and quantity (x axis) of various fuels in the US economy at various times

Dr. Fatih Birol, Chief Economist, IEA

• After a detailed survey of over 800 oil fields, the IEA revised its estimates of oil depletion rates upwards from 3.7% to 6.8%

• “When we look at the oil markets, the news is not very bright. We think that crude oil production has already peaked in 2006.”

• “The existing fields are declining sharply, in the North Sea, in the United States, in the Gulf of Mexico. Just to stay where we are today, we have to find 4 new Saudi Arabias. This is a tall order.”

The Hirsch Report: a seminal study on peak oil

• conclusions:

– Waiting until world oil production peaks before taking action leaves the world with a significant liquid fuel deficit for more than two decades

– Initiating a mitigation crash program 10 years before the peak leaves a liquid fuels shortfall roughly a decade after the peak

– Initiating a crash mitigation program 20 years before peaking appears to offer the possibility of avoiding a world liquid fuels shortfall

Why will the transition be so time consuming?

• energy transitions are inherently slow and large scale

• there are no alternative energy sources that are currently competitive with oil in the transportation sector

• any transition to more fuel efficient vehicles will require decades and trillions of dollars

– existing capital stock can only be replaced gradually

– would normally require 25-30 years to replace

– more energy efficient vehicles equipment can only be gradually phased in as new capital stock replaces existing stock

The Hirsch Report: conclusions

• “Oil peaking will create a severe liquid fuels problem for the transportation sector”

• “Peaking will result in dramatically higher oil prices, which will cause protracted economic hardship in the United States and the world.”

• “In the developed nations, the problems will be especially serious. In the developing nations peaking problems have the potential to be much worse.”

• “Intervention by governments will be required, because the economic and social implications of oil peaking would otherwise be chaotic.”

Geopolitics: the lessons of previous oil shocks

• in 1973, Arab members of OPEC imposed an oil embargo on the U.S. and Western European countries in retaliation for their support to Israel in the Yom Kippur War

– quadrupling of world oil prices– long lines at the gas pumps– U.S. economy was severely affected– showed that the economic well being of developed countries

was dependent upon a steady flow of cheap oil

• in 1979, the Iranian revolution led to a steep decline in Iran’s oil exports

– worldwide oil shortages ensued– world oil prices spiked– signified that internal conflict in an oil exporting country could

significantly affect global oil supplies and prices

• these crises were caused by political events, not by absolute declines in oil supplies

• Iran’s oil production & exports – produces 4.2 million barrels

a day– exported 2.2 million barrels

a day before sanctions

• 17 million barrels of oil a day pass through the Strait of Hormuz

• if military conflict were to break out with Iran, or if Iran were to somehow block the Strait, would be catastrophic for oil supplies

Iran: potential trigger to significantly higher oil prices?

Converging trends: why time is not on our side

• global oil production is flat while demand is rising, especially in the developing world

• due to steep decline rates in existing oil wells, producers are hard pressed simply to

maintain current production rates

• oil discoveries peaked in the 1960s and have been declining ever since

• oil reserves have been inflated for political reasons

• consumption is rising steadily in key oil producing nations, which will eventually lead to

declines in exports

• we’ve used up most of the easy oil; what remains is tough oil

• unconventional sources are unlikely to resolve the supply situation due to their low net

energy and serious environmental problems

• there are no alternative energy sources that are competitive with oil in the transportation

sector

• political instability in the Middle East is pushing high oil prices up further

• prices could skyrocket if hostilities break out with Iran

What are the alternatives?

• Shale gas / oil • Gas to liquids• Coal to liquids• Biofuels • Hydrogen • Other renewables• Electrified

transport• Conservation

No easy answers!

Can the current form of globalization be maintained in an era of increasingly scarce and expensive oil?

How will the airline industry fare in a tough oil world?

Modern agriculture: using land to turn fossil fuels into food

Each calorie of food requires 7-10 calories of fossil fuels to get to one’s plate

• industrial agriculture as currently practiced is unlikely to be viable in a post-peak oil world

• this implies major changes in the way we produce, transport and market food

• it could very likely mean a larger proportion of the population will need to be engaged in farming, the opposite of current trends

• agriculture may have to become much more localized than it is now

What is the future of modern agriculture?

Can present / projected population levels be sustained?

Source: Joint Operations Environment Report 2010 (based upon UN Population Reference Bureau)

Will the competition for resources lead to military conflict?

What can you expect?

– high gasoline prices are here to stay – get used to it!

– higher food prices

– rising inflation

– recession (past oil shocks have caused recessions)

– sectors which are sensitive to oil prices (e.g. airlines, trucking, agriculture, etc) will be hit hard

– air ticket prices are likely to be much higher in the near future

– the world economy will be hit hard, and all nations will be affected

Implications of the Coming Energy Crisis for China

China & Oil

• China was a net oil exporter until 1992

• China became a net oil importer in 1993

• China’s oil import rate surpassed 50% in 2009; estimated to be 56% today

• In 2010, China accounted for 10.6% of global oil consumption

• 9 million barrels per day or 428 million tons annually

• Fuel prices in China are controlled by NDRC

• NDRC raised fuel prices for the 2nd time this year by more than 6% to reflect int’l crude oil price hikes

China’s Energy Consumption

Coal68.0%

Natural Gas4.4%

Hydro,Nuclear, Wind

8.6%

Crude Oil19.0%

Coal

70.7%

Crude Oil

22.7%

Natural Gas

3.2%

Hy dro, Nuclear,

Wind

3.4%

1978 2010

Source: China Statistical Yearbook 2011

China’s Oil Consumption by Sector (%)

Source: China Statistical Yearbook 2011

Sector 1990 2009Agriculture, Forestry, Fisheries, Animal Husbandryand Water Conservancy

8.9 3.4

Industry 63.7 40.9

Construction 2.8 5.0

Transport, Storage and Postage 14.7 35.3Wholesale and Retails Trades, Hotels, CateringServices

0.7 1.1

Other Sectors 6.6 5.9

Residential 2.5 8.3Total 99.9 99.9

Others19%

Saudi Arabia19%

Angola16%

Iraq5%

Iran9%

Oman7%

Russia6%

Sudan5%

Kuwait4%

Kazakhstan4% Libya

3%

Brazil3%

Others

Saudi Arabia

Angola

Iraq

Iran

Oman

Russia

Sudan

Kuwait

Kazakhstan

Brazil

Libya

China’s Crude Oil Imports by Source 2010

Source: http://www.brookings.edu/research/papers/2011/07/china-energy-zhang

Growth of China’s Net Crude Oil Imports

0%

5%

10%

15%

20%

2006 2007 2008 2009 2010 2011 2012

Source: China Daily 3 February 2012

(Expected)

China’s Vehicle Stock (millions)

Source: http://www.stats.gov.cn/tjsj/ndsj/2011/html/P1624e.htm

0

10

20

30

40

50

60

70

80

90

1978

1980

1985

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Others

Trucks

PassengerVehicles

Conclusions: • China’s oil consumption cannot continue to grow at present

rates; there is simply not enough oil out there• China is very vulnerable to oil shocks, and increasingly so

as imports rise (esp. in industry & transport sectors)• China has no choice but to electrify its transport system as

the country’s vehicle stock expands• In the global competition for resources, China is WAY ahead

• the US consumes 19 million barrels of oil per day (2x China), 21% of global consumption

• US is the world’s #1 oil importer at about 10 million barrels of oil a day

• the transport sector accounts for 71% of US oil consumption

• Overall, the US is extremely vulnerable to supply shocks, despite projected increases in domestic production

US Oil Consumption & Production

US Domestic Crude Oil Production by Source, 1990-2035 (Millions of barrels per day)

Source: EIA Annual Energy Outlook 2011

US energy mix

The US: a suburban country

"As a country that has 2% of the world's oil reserves but uses 20%

of the world's oil, we're not going to be able to just drill our way out of the problem of high

gas prices.”

"He ought to be taking advantage of all of our

offshore, and [the Arctic refuge], and North Dakota and

Oklahoma and Texas gas resources, instead of trying to

hold them off.”

World gasoline prices ($US/gallon)

0

1

2

3

4

5

6

7

8

9

10

Venez

uela

Saudi

Arabia

Kuwait

Egypt

Nigeria Ira

n

Mex

ico

Russia

Indo

nesia US

Thailand

China

Canada

India

Brazil

Singapor

e

Austra

lia

Austria

South

Korea

Japa

n

Germ

any

Franc

eUK

Hong K

ong

Sweden

Nether

lands

Italy

Norway

Source: http://www.bloomberg.com/slideshow/2012-05-12/highest-cheapest-gas-prices-by-country.html#slide1

The age of cheap and abundant resources is over

• Americans – and the world – haven’t grasped this yet

• Not just oil:– water– many metals & minerals– uranium– grain production (per

capita)– wild fisheries

• We are in a different era now, which calls for different approaches

We’re in for a bumpy ride:The next 20 years will not be anything like the last 20 years

Conclusions

Due to geological and geopolitical reasons, a global energy crisis centering on liquid fuels is likely in the near future

• we need to rapidly put in place a sustainable energy infrastructure to replace the existing oil infrastructure

• we need to do so NOW, not simply because of climate change (the usual justification), but also because of the global energy supply picture

• a smooth and seamless transition to an alternative energy regime is no longer possible because we have far waited too long

• we must get actively involved in the conversation about alternative energy sources, or it will be imposed upon us

Thank you!

contacts: sncook88@gmail.com

The Shale Gas Revolution

• IEA is now referring to a ‘golden age of gas’

• ‘hydraulic fracturing’ or just ‘fracking’

• Horizontal drilling combined with fracking has dramatically changed the natural gas landscape

• EIA estimates US has 860 tn cubic feet of ‘technically recoverable’ reserves

• China: 1,275 tn cubic feet

• Global shale gas reserves of 6,600 tn cubic feet; roughly equal to today’s current reserves

Shale Gas: Boon or Bane?

• Requires vast amounts of water: 2m-4m gallons per well + 15,000-60,000 gallons of chemicals

• Not suitable for arid regions

• Sand mining

• Risk of groundwater contamination by toxic chemicals and methane

• Risk of earthquakes

• Generated a popular backlash in US & Europe

• France has banned it; NY State temporarily banned it, now lifted

• At best, shale gas should be treated as a bridge fuel

Further reading

Overviews• The Impending World Energy Mess, by Robert L. Hirsch et al• Peak Everything: Waking Up to the Century of Declines, by Richard

Heinberg• Crude World: The Violent Twilight of Oil, by Peter Maass• The Long Emergency: Surviving the End of Oil, Climate Change and

Other Converging Catastrophes of the 21st Century, by James Howard Kunstler

• The Prize: The Epic Quest for Oil, Money & Power, by Daniel Yergin

Peak Oil• The Party’s Over: Oil, War & Fate of Industrial Societies, by Richard

Heinberg • Twilight in the Desert: The Coming Saudi Oil Shock and the World

Economy, by Matthew R. Simmons• The Coming Oil Crisis, by Colin Campbell

Peak oil and globalization• Why Your World is About to Get a Whole Lot Smaller, by Jeff Rubin

China’s Share of World Commodity Consumption (2009-10)

Commodity China’s % of World

Cement 53.2%

Iron Ore 47.7%

Coal 46.9%

Pork 46.4%

Steel 45.4%

Lead 44.6%

Zinc 41.3%

Aluminum 40.6%

Copper 38.9%

Eggs 37.2%

Nickel 36.3%

Rice 28.1%

Soybeans 24.6%

Wheat 16.6%

Chickens 15.6%

PPP GDP 13.6%

Oil 10.3%

Cattle 9.5%

GDP 9.4%

German military think tank report on peak oil

• Conclusions of the report by the Bundeswehr Transformation Center (leaked to the media in August 2010):

– In the near term, rising oil prices will lead to lower consumption and economic output (e.g., recession or worse)

– Increasing transportation costs will lead to lower trade volumes, lower incomes for many and unaffordable food for some

– Pressure will increase on gov’t budgets as they struggle to keep populations fed, deal with mass unemployment and try to invest in sustainable forms of energy

– “In the medium term, the global economic system and every market oriented national economy would collapse.”

Causes & consequences of the oil shock of 2007-08

• “Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007-08 was caused by strong demand confronting stagnating world production.”

• “The experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.”