The whole oil thing

Posted by bert hubert Sun, 26 Aug 2007 16:18:00 GMT

Ok - Steorn is quieting down for now, and it got enough attention anyhow, so it is time to look a bit into the things behind the appeal of alternative energy sources.

Many readers will recall that in the past, there was debate as to when the ‘oil would run out’, and that this date was supposed to be somewhere in 2045 or so, which was more or less far enough away not to worry about it.

At least I remember thinking about it like that back in school. It is amazing how this sentiment fooled us for so long. Modern tubes of toothpaste are easy to empty down to the last bit, but in the past this wasn’t so. This should’ve told us something.

Oil is not like modern toothpaste, it is like ketchup. Far before it has run out, it becomes hard to extract. And oil is remarkably worse than ketchup.

Back in 1956, one of Shell Oil’s scientists noticed that wells started to become less productive once 50% of their contents had been extracted. He then proceeded to predict US oil production based on this assumption, and correctly calculated it would peak somewhere in the late 1960s, and decline from that point onwards. And so it did.

Additionally, he extrapolated this result to the whole world, and determined global oil production would go into decline somewhere after the year 2000.


Nobody much liked this prediction, and it was widely ridiculed. New wells would continue to be found, and importantly, new techniques would enable us to extract more and more oil from existing wells.

As it turned out, especially this last prediction was correct, which is why the world production of oil hasn’t declined already.

However, no major new fields have been found over the past decade.

Many players in the oil industry now believe the predictions, and agree that oil production might decline from 2010 onwards, or perhaps a bit later.

Production is peaking, demand is increasing

Controversy aside, the International Energy Agency has produced graphs of oil production and demand since 1974, and it is clear that production will one day be overtaken by demand.

It is easy to see why - as it comes out of the ground, oil is not immediately suitable for all kinds of use. For many purposes, it first needs to be ‘refined’. Building a refinery is hard work, and typically takes up to a decade. Additionally, environmental rules mean that it is easily possible to spend a similar amount of time just getting permission to build.

No major refineries have been built over the past years, and no major refineries are nearing completion. The existing refineries are running at or near peak production.

On the demand side, the world economy is growing at an unprecedented clip.

Will demand exceed supply?

The few graphs that plot oil production and demand in one plot (readers, if you know of any, please comment!) typically show a ‘and then a miracle occurs’ event when demand is about to overtake supply.

This reflects the usual market behaviour that once oil becomes scarce enough, prices will rise, and oil that was hitherto uneconomical to produce becomes economically viable. In other words, exploding prices make more oil available.

But as remarked previously, refineries are already running flat out. This means that no miracle will occur in the immediate future, and oil might very well run out temporarily.

To reiterate, this does not mean the oil is gone, just that it isn’t available at the rate we need it.

And then what?

This is the scary bit, and the main reason I worry. Already we see posturing by the big oil suppliers and consumers. China is pouring money into Africa, and has even deployed part of its army in certain countries to make oil production possible.

Russia is throwing its weight around in a frightening way as well, and making it clear not all of its customers are equal. It plays geopolitics both with hydrocarbon availability and pricing.

The various armies in the Middle East speak for themselves. A peaceful Middle East produces more oil, and it might very well sell it preferably to its occupiers or sponsors.

Here in Europe, we appear to believe oil might become mighty expensive, but that we’ll weather it.

But if oil becomes truly scarce, will market prices influence who will get access to it? Or will it be supplied to those countries with the ability to project power, and back up their monetary offers with military encouragement?

Or might suppliers become king-makers, with the power to determine which economy lives or dies?

Our European belief that our ability to pay steep prices will allow us to continue as normal might be seen as exceedingly silly by then, possibly comparable to Neville Chamberlain’s appeasement policy in the 1930s.

So when will all this happen?

It is happening already, but crunch time is not yet upon us. Some countries have already had problem getting access to enough energy, mostly those who (like Europe) depend on Russian oil and gas.

The crunch might be postponed if the economy stops growing at this rate, it might be advanced if any of the major refineries is damaged by terrorism, weather or bad luck.

At any rate, the issue should start making more headlines in the near future.

What about coal, nuclear energy, wind and solar energy? Tar sands?

Some countries have already accepted that we should start building more nuclear power plants because the energy is running out. However, building such installations also takes decades, and it has been argued we’d need to open a new power plant each month or so to make up lost ground.

Coal is currently environmentally harmful or expensive, but might save part of the industry for some time.

Wind and solar, although interesting, struggle to generate an appreciable fraction of our world energy need.

Tar sands, sand that contains oil, are interesting but not for the near future. They might make Canada extremely rich though.

Further reading

Google on ‘Hubbert Peak’, and head on from there. ‘Peak oil’ is also a nice phrase to search on. The International Energy Agency has long published honest and truthful graphs that presaged the issue, but up till recently the IEA did not put this into words. Recently they’ve begone to describe the near future oil situation as ‘extremely tight’.

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