Sunday, December 29, 2013

7 things everyone knows about energy that just ain't so (2013 Edition)

Mark Twain once said, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." And, there are many, many things that the public and policymakers know for sure about energy that just ain't so.

That list is very long indeed and getting longer as the fossil fuel industry (which has little interest in intellectual honesty) continues its skillful manipulation of a gullible and sometimes careless media.

Below I've listed seven whoppers that it would be charitable to call misleading. Longtime readers will recognize that I've addressed them before in various pieces. But I thought that it would be useful to review the worst of the worst of 2013 as the year ends.

Here are seven things everyone knows about energy that just ain't so:

1. Worldwide oil production has been growing by leaps and bounds in the last several years. Oil companies (with governments following suit) have cleverly redefined oil to include something called natural gas plant liquids (NGPLs) that you might surmise actually come from natural gas wells. These include propane, butane, ethane, and pentanes. The new definition also includes biofuels such as ethanol and biodiesel.

This mishmash is sometimes referred to as "total liquids," but more often "total oil supply." This redefinition, however, depends on something that just ain't so, namely, that NGPLs and biofuels are 100 percent interchangeable with oil. There is some interchangeability, but the volume is relatively small. NGPLs make up just 10 percent of total liquids. I've seen investment research that asserts that probably less than one-fifth of that (equivalent to about 2 percent of total liquids) can be directly substituted for oil, primarily in petrochemical refineries. That portion could grow, but only with extensive and costly retooling of the refinery industry, a move that seems risky with U.S. natural gas production stalled (see below).

Now, the central problem with including NGPLs as part of the oil supply remains that they have only a very limited ability to be used as transportation fuel which is the main driver for oil consumption.

Moreover, the energy content of NGPLs is around 65 percent of oil per unit of volume. Ethanol has about 66 percent of oil's energy, and biodiesel has slightly more than crude oil, but somewhat less than the diesel it is meant to replace. We must also consider all the energy including oil that goes into growing, harvesting, transporting and processing the crops that are feedstocks for biofuel refineries. Some studies show that more energy goes into making ethanol than ethanol produces when burned in an engine.

Despite these well-known facts, the industry and government continue to count NGPLs and biofuels in barrels right alongside oil as if they were all equivalent.

Ethanol and biodiesel do directly substitute for some motor fuels. But there are upper limits on what we can produce and use. We are near those limits with ethanol unless engines change to tolerate higher concentrations of ethanol. Moreover, neither ethanol nor biodiesel can be used for the wide variety of purposes that crude oil can.

It turns out that 2005 was an inflection point after which supply growth for both total liquids and oil proper slowed considerably. With all this in mind, let's look at the actual numbers which come from the U.S. Energy Information Administration (EIA).


Total Liquids:
Growth from 1998 to 2005: 11.7 percent
Growth from 2005 to 2012: 5.7 percent

Oil Proper (Crude Oil Plus Lease Condensate):
Growth from 1998 to 2005: 9.9 percent
Growth from 2005 to 2012: 2.7 percent

You can see that the real oil supply (crude oil plus lease condensate) has been growing at just over one-quarter the pace it did in the previous seven years--even with record prices, record investment and the wide deployment of new extraction technologies. Slowing growth coupled with skyrocketing demand in places such as China and India has put a lot of upward pressure on oil prices. It's one reason oil prices remain near record highs based on the average daily price of Brent Crude, the world benchmark.

In 2011 the average daily Brent Crude price was a record $111.26—which was followed by another record in 2012 of $111.63. The price in 2013 through December 26 has averaged $108.52.


2. U.S. natural gas production continues to grow by leaps and bounds. This claim is even more misleading than the first one. It's true that natural gas production has grown in the United States in recent years due to the exploitation of gas trapped in deep shale deposits, deposits that new technology called hydraulic fracturing is now making accessible.

But, it turns out that the rate of production of these wells declines rapidly, and the numbers suggest that raising the overall U.S. rate of production is going to be very difficult and expensive from here on out. In fact, since January 2012, monthly U.S. marketed natural gas volumes have been nearly flat despite a more than doubling of natural gas prices from their April 2012 lows. The average monthly volume in 2012 was 2.11 trillion cubic feet (tcf). For 2013 the data are only available through September, but the average through that month was 2.12 tcf. It's doubtful that the average will change that much when the final three months of the year are included.

The easy shale gas has been extracted. Now comes the hard stuff. We may already be on the shale gas treadmill.


3. There is enough natural gas under the United States to last the country for 100 years. This claim requires that you first do bad math on the numbers even the perpetrators of this falsehood provide. The number turns out to be 90 years using their figures and 2010 U.S. natural gas consumption (while assuming, improbably so, no growth in U.S. natural gas use for the next 90 years).

But even that number vastly overstates what we are likely to get out of the ground for it includes estimates of probable, possible and speculative technically recoverable resources. Now, just because something is judged to be technically recoverable does not mean it will be economically recoverable. And, if it is further labelled possible or speculative, it seems foolish to base our public policy on such resources as if they were proven to exist and were ready to extract.

Shale gas expert Art Berman suggests we focus on the probable resources category and assume generously that 50 percent of those resources will actually get turned into reserves. (Keep in mind that no resource is ever exploited to 100 percent and usually only to a fraction of that. Also, resources are what are thought to be in the ground based on sketchy evidence, while reserves are what the drill bit proves are actually there and, more importantly, amenable to extraction.) Based on these assumptions, the United States has about 550 tcf feet of probable and proven reserves which means that the country has a likely supply of about 23 years (again, assuming, improbably so, no increase in the rate of consumption during the entire period).

Since Berman made those calculations, some of the probable resources have moved into the reserves category. But, the outlook has not really changed because this was expected.


4. The United States is about to become the world's largest oil producer. This claim depends on the same sleight-of-hand being used to inflate worldwide oil production numbers as noted above: the inclusion of NGPLs and biofuels in the production numbers. The United States has been furiously drilling natural gas wells in the last few years and has increased its supply of NGPLs greatly. The production of crude oil proper has also been growing for essentially the same reason natural gas production grew: the deployment of hydraulic fracturing techniques and horizontal drilling to extract previously inaccessible deposits of so-called tight oil.

The results have been impressive, lifting U.S. production of crude oil proper (crude oil plus lease condensate) from 5.2 million barrels per day (mbpd) in 2005 to 6.5 mbpd in 2012. The latest available monthly production results are for September 2013 and put U.S. crude oil production at 7.8 mbpd.

But, it seems unlikely given the very steep production declines that existing tight oil wells experience--about 40 percent per year--that production will be able to scale that of the world's number one and number two oil producers.

Russia currently produces 9.9 mbpd of crude oil proper. Saudi Arabia produces 9.8 mbpd. Both numbers come from the EIA.

Could the United States produce more crude oil proper than these countries in the near future? Since we cannot know the future, anything is possible. But, consider that the United States has gotten most of the easy tight oil. Now, it must begin to rely on extraction of the hard-to-get oil. That oil will come out at a slower rate.

Meanwhile, the tight oil wells already drilled will continue to decline at colossal rates and their output will have to be replaced before any increase in production is possible. Trying to increase oil production under these circumstances can be likened to running up a down escalator since the declining production of existing wells cancels out much of the production from newly drilled wells.

If the United States were to attain the number one spot some day, it would be hard to maintain given the high production decline rates cited above.


5. The United States is on the verge of energy independence. This canard takes advantage of the lack of public awareness about U.S. energy resources. The country has long been self-sufficient in coal. This has never been an issue. It has also been nearly self-sufficient in natural gas, importing a little over 15 percent of its needs (almost all of it from Canada) from 1991 through 2011 according to the EIA. That percentage has trended down recently as U.S. production has increased. But the U.S. supply of imported natural gas was never in danger due to political disruptions or wars in faraway unfriendly countries.

So, it turns out that energy independence really means oil independence. On this count the country is still very far away from independence despite recent gains in domestic oil production. For the week ending December 20, the United States' net crude oil imports were 7.5 mbpd. The country would have to nearly double its rate of domestic crude oil production to meet its current consumption needs. That seems very unlikely given the production dynamics discussed above for tight oil which is where nearly all the growth in production is currently taking place.


6. The United States has 250 years of coal left. This claim keeps getting recycled even though a 2007 National Academy of Sciences study concluded that there was no basis for making such a claim. It suggested that the United States might have 100 years of coal left (assuming, improbably so, there would be absolutely no increase in the rate of consumption over that period). But, the report concluded that no comprehensive study of U.S. coal resources was currently available. The truth is nobody knows how much coal is left in the United States, nor how much of that might actually be accessible.


7. Peak oil is a myth. Peak oil is the idea that oil production inevitably reaches a maximum rate and thereafter begins an irreversible decline. It does NOT mean running out, but rather that production declines over time. It turns out that peak oil is actually an empirically demonstrated reality for every oil well, every mature oil field, and now for the majority of oil producing countries in the world. Those who tell us that peak oil is a myth can only be engaged in propaganda rather than a search for the truth. Ironically, many of them cite the upturn in U.S. production as "proof" that peak oil is a myth, forgetting that U.S. production peaked more than 40 years ago.

Oil is a finite resource and so, the real debate is over the timing of peak oil production for the world as a whole. Some say the peak is nearby. Others say it is two or three decades away. But no credible expert says that there will never be a peak.

The cases for and against a near-term peak would be difficult to relate in detail here. But, it's worth noting that the optimists have been consistently wrong about prices and supplies in the last decade, and those predicting a near-term peak have been much closer to the mark.

That doesn't mean that the peak must be nearby. But it suggests that the models and assumptions of the optimists are badly flawed.


There are so many other misconceptions about energy which remain that it would take a dozen seven-item lists just to begin to address them. But, I offer these seven as a starting point for a clearer and more honest discussion of our energy future in the coming year.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

25 comments:

Crooktooth said...

We don't yet know how fracking will play out. But we do know a couple of things:

1) The largest fracking play in the US, with some 2/3 of the total estimated reserves, is yet untapped. California just passed legislation opening the Monterey Shale. It's twice as big as the Brakken, Marcellus and Eagle Ford - combined!
2) The US is yet the only place where fracking has been tried seriously. But the US makes up only some 5% of the world's land mass. There might be a lot more out there. A lot, lot more.

Charles Hall said...

I suggest that Mr. Crooktooth read David Hughes assessment of Monterrey Shale published by the POst Carbon Institute before he makes his investments in Monterrey Shale.

ChemEng said...

Kurt:
As a year-end comment I would like to express my appreciation for all the information that you have supplied this year. I have started a new blog at The PSM Report (http://psmreport.wordpress.com/). It is addressed to process safety professionals, and I have used and referenced your site a number of times.

One of the most interesting posts was The one chart about oil's future everyone should see (http://resourceinsights.blogspot.com/2012/12/the-one-chart-about-oils-future.html). In your judgment is the EIA chart (dated 2009) still valid?

In addition to discussing energy issues in some of my posts, I am also starting to take a look at the on-going, slow motion crises at Fukushima-Daiichi through a process safety lens. The most recent is The Seven Gods of Fortune at http://psmreport.com/2013/12/24/the-seven-gods-of-fortune/.

Thank you for all your hard work.

Kurt Cobb said...

Thanks for the thoughtful comments. Let me respond.

Crooktooth leads us to believe that the Monterey Shale has never been drilled. In fact, it has been producing oil for decades and many fracked wells have already been drilled in recent years.

The record so far is not very encouraging as Charles Hall suggests. David Hughes has done an exhaustive review of production from the Monterey including fracked wells. It's not that we aren't going to get oil from the Monterey Formation, it's that it's likely to be far less than is currently being touted.

Also, Crooktooth uses the word "reserves" which means drilled fields from which identifiable hydrocarbons can be extracted profitably at today's prices. We have not drilled very many areas of the Monterey and so what Crooktooth is referring to are "technically recoverable resources." Please re-read my piece for what this actually means, and it is a far, far cry from "reserves."

Also, the stratigraphy of Monterey is not identical to Bakken and Eagle Ford. (I'm not sure why Crooktooth includes the Marcellus Shale which is almost all natural gas.) Second, the oil is proving far more difficult to extract as a result.

And, here's the most important point. It's not the size of the resource that is key, but rather the RATE at which oil can be extracted. The best illustration of this issue is the so-called oil shale deposits (really organic marlstone) on the Colorado plateau. (Don't confuse this with the oil in the Monterey Shale which is properly called "tight oil.")

Oil shale in the Green River Formation in Wyoming, Colorado and Utah is thought to have 800 billion barrels of technically recoverable oil. (Actually, kerogen which must be processed into oil.)

After one hundred years of trying we have zero commercial oil production from oil shale and we have zero reserves, since none of the pilot plant production to date can be done profitably, even with near record oil prices.

I'm not saying that the Monterey will yield no oil. But, what will matter is the RATE of production. And, given what we know now, that rate is going to be far less than currently touted by the promoters. And, of course, wells will experience the same sharp declines in rate of production experienced elsewhere.

Crooktooth does not seem to understand that what we are witnessing is a classic gold rush scenario in which production ramps of steeply and then crashes as the wells play out (and they do play out quite quickly).

As for fracking outside the United States, so far it has yielded very little. That doesn't mean it won't yield something. But fracked oil elsewhere will experience the same problems of steep production decline and rapid depletion that we see in North America. And, of course, not all shale deposits are the same. The kaleidoscopic vision of the oil industry and its public relations machine is in contradiction to what we know about the high variability of Earth's geology.

This is all against a backdrop of aging giant oil fields. The world’s 507 giant oil fields comprise a little over one percent of all oil fields, but produce 60 percent of current world supply. The fate of those fields is much more relevant to future supplies than the small marginal supplies we are getting from deep shales.

I've engaged in a very informative correspondence with ChemEng regarding risk management and I can recommend his site for those interested in this topic.

As for the 2009 EIA chart, I think it remains a good illustration of the challenges we face in growing oil production worldwide, especially given the rate of decline of existing wells.

Anonymous said...

Some of the info in your blog is misleading. Yes the USA is currently importing 7.5 mil. barrels a day of crude. But what you fail to mention is that much of that is refined and exported. The actual net import number is 5.5 million barrels a day. What you also fail to mention is that our net oil imports are dropping by about a million a year at the current rate.

Interesting article, but the facts remain the USA is on a tear in developing its energy resources and it will likely continue for quite a while.

Kurt Cobb said...

(My response to Anonymous will be in two parts because of Blogger's comment length limitations.)

Anonymous is correct that the United States does export some refined crude products such as gasoline and diesel. He admits, however, that the net imports of crude number is correct. (And does not dispute any of my other numbers.) So, what we are talking about is net imports of total petroleum products.

The way the EIA reports imports and exports is complex and not at all straightforward. For that reason, I did not try to go into a detailed discussion for this piece. But, I'll say a few words about why Anonymous's claim about net imports is wrong. It's not his fault. The EIA's data is misleading in this category.

While the EIA reports exports of 3.64 million barrels per day of "Crude Oil and Products" this number does not tell us the whole story and is quite misleading if you take it on its face.

(All numbers are for the week ending December 20 and linked to in the piece except crude exports by destination for which the latest data is from October.)

Amazingly, the U.S. does export a small amount of crude oil, all of it to Canada. This has to do with the economics of transporting oil to Canadian refineries rather than southward to U.S. refineries and the favorable price differential between the two destinations. These exports are reflected in the EIA's net crude oil imports data and the 7.5 mbpd number is correct for this category.

Now, the U.S. does export finished petroleum products. But the way EIA defines these is confusing because it includes a category for propane/propylene which can be but are not necessarily the products of crude oil refineries. Those products now come primarily from natural gas processing and refining operations. So, I would subtract these from the EIA export figures.

EIA also lists a vague category called "Other Oils" in its export figures. If you look them up in the EIA's glossary, you find that it includes a mishmash of products, but the main component--and the EPA doesn't tell you this--is natural gas plant liquids, which are, of course, NOT from oil refineries.

Given this, it would be reasonable to subtract these two categories from U.S. exports and that would lower U.S. export of product tied specifically to petroleum by 1.247 mbpd (.370 mbpd propane/propylene and .877 mbpd of "Other Oils.). This isn't perfect. But it's as close as one can get to actual U.S. petroleum liquids exports.

So, the total number for "Crude Oil and Products" export should be 2.394 mbpd.

Now from total imports let's make sure we subtract the propane/propylene and the natural gas plants liquids from total imports just as we did exports since they aren't really oil related. That gives us 8.818 mbpd [9.145-(.117 + .021)].

Now, let's subtract the true export number from the real total imports number. That's 8.818 mbpd - 2.394 mbpd= 6.424 mbpd of net petroleum liquids imports.

Kurt Cobb said...

(Here's part two of my response to Anonymous.)

This net import number is almost 1 million barrels higher than what the EIA reports because the agency includes non-oil related products in our exports. And it is also a little over 1 million barrels less than the net crude oil imports.

It does mean that the U.S. would only have to increase domestic oil production by about 6.4 mbpd to become "energy independent" in oil, but that's still a huge hurdle and unlikely. (Even if we could achieve that level of production, our oil refineries would still import a substantial amount of crude oil to refine for export to other countries.)

But the EIA projects that U.S. oil production will hit a third peak in 2016 of 9.5 mbpd, slightly lower than the original one in 1970, and then start to decline after 2020. That number is only 1.7 mbpd higher than today's output and far below the additional 6.4 mbpd that we would have to produce to become "energy independent" in oil.

So, Anonymous has a point. But it's not as big a point as he would like you to believe. Furthermore, he asserts--using a technical term that I'm not familiar with--that the United States is "on a tear" in developing its energy resources.

That's typical of the kind of hyperbole (without reference to actual numbers in context) that has us making foolish energy policy decisions based on little else than the boosterism of the industry, its public relations machine and its many dupes among the public.

(I told you this was complicated and now you have some idea about why it is so easy for the boosters to fool us!)

Anonymous said...

Let's go to myth #2 and #6.

Natural gas production did not increase from 2012 because there was a glut, driving prices to around $2 mcf (which is $12 a barrel based on 6/1 BTU basis). So natural gas production did not increease because to price was so low companies stopped drilling in "dry" gas areas. Had prices stayed at $13 an mcf, as it was in 2008, production would have ramped up big time.
Peak Oil is total BS, as it is based on Hubart (sp) theory which did not believe price or improved technolgy would increase production. Now, oil production may have peaked, and prices may go up, but that is not the same thing as "peak oil." If you believe in peak oil, what about peak natural gas?

Kurt Cobb said...

Let me respond to Anonymous No. 2 just above.

I think his analysis is correct about U.S. natural gas production. Low prices discouraged drillers and they withdrew rigs and mostly moved them to oil fields.

I'm merely trying to dispel the widely held notion that U.S. natural gas production continues to rise.

Now, Anonymous No. 2 appears to agree with my view that we'll need to see much higher prices for natural gas before drillers once again began to drill vigorously for natural gas.

Just a few years ago the natural gas industry was touting an improbable business model. They said they could produce natural gas that was both cheap and plentiful and make a profit. That simply hasn't proven to be the case. Can we raise natural gas production in the United States? Of course, we can. But not at these low prices. The bonanza of cheap plentiful natural gas was a false promise and a ridiculous one to make.

Saying that peak oil is BS is not really an argument. And, Hubbert did recognize both price and technology as drivers of oil production. These were built right into the left side of the curve. The oil production curve to any date by definition includes all technological and price developments.

We must remember that Hubbert was talking about conventional oil, light sweet crude, the stuff we've been running civilization on. Once that started to decline, he thought we would be in trouble. The International Energy Agency now recognizes that conventional oil peaked in 2006. And, it turns out that we are now experiencing trouble. We are seeing record high daily prices for crude despite record investment and new technology.

Hubbert knew about unconventional sources such as tar sands and heavy oil. But he felt that it would be wise to make an energy transition before we became too dependent on these high-cost and difficult-to-extract resources.

And despite his protestation, Anonymous No. 2 admits that oil may have peaked, but somehow believes that this is something different from what I'm discussing.

(Incidentally, I do not think oil production including unconventional has peaked or will peak soon. But, we are experiencing the very problems that peak oil theorists predicted would occur as we approach the peak. Sluggish economic growth due in part to high energy prices and an inability to grow energy supplies, particularly oil supplies at previous rates.)

As for a peak in worldwide production of natural gas, it's bound to happen. There are many predictions out there. But, I think we are foolish to be spending our time talking about the exact timing of such things. We're already in trouble because of much slower growth in oil supplies. That we need to make a rapid energy transition is apparent right now. Should we wait until the last moment when it will be too late to make a transition that will take a generation?

Prudent risk management suggests that we start now in earnest and leave fossil fuels before they leave us. We should be trying to make society forecast proof, not continue to depend on uncertain and inevitably faulty forecasts that MUST BE RIGHT in order for us to avoid catastrophe.

eurico said...

I would rather not leave a name. We live in Brazil and yet receive some royalties from ancestral mineral rights in the Midwest. Our project has done very well from our association with biodiesel in the western Amazon, where we live with the purpose of helping the common people.

Your article is of interest, it appears to be written with an agenda, which is understandable.

I still entertain the theories of Thomas Gold as possible.

Anonymous said...

Anonymous twq here again.

Let me restate your myth 2.

"Markets work. Who would have thunk it? If prices for natural gas go low enough, $.1 on the dollar verses oil, and we are producing more natural gas than we can use, and there is fear we would run out of storage for natural gas so any additional production would have to be flared off, producers would curtail drilling enough (with some holding back production) so US natural gas production stops increasing."

Isn't that a much fairer statement of what happened?

Yes for production to go up, price must. Natural gas may go from give away prices to super cheap, maybe even very, very cheap, but at any where close to world or oil pricing, we would have a flood of natural gas.

Hubbert's is a specific theory, and the recent increase in US oil production have disproved it for the US oil production, where it had some productive value.

As for prudent risk management, I believe in markets. Your main point is you are smarter than the markets (and the millions of people who are in the market with real money) so you know we need to do something.

Markets told the US we had a glut of natural gas and a shortage of oil, all the producers went to liquids and US oil production increased and US natural gas production stopped increasing.

Kurt Cobb said...

(I'm responding in two parts to the above comment because of Blogger's comment length limits.)

I appreciate Anonymous twq's patience with me and his civil tone. This kind of interchange helps to clarify the issues at hand and allows each party to adjust his or her ideas when presented with new information and errors of logic.

Let's first look at natural gas pricing. Anonymous leaves us with the impression that when natural gas prices dipped briefly below $2 per thousand cubic feet in April 2012 that gas was "super cheap." And, relative to the 2008 peak of around $10.79, the monthly average for July of that year, it certainly appears cheap.

But, we need to keep the historical context in mind. At the lows of 2012, natural gas was only returning to the area of its 10-year average in the 1990s which was $1.92 mcf.

So, today, we are paying more than twice as much for natural gas as we did in 1990s. Yesterday's closing price for Henry Hub natural gas on the GLOBEX as $4.23.

And yet, even this price isn't enough to get drillers to shift their rigs en masse to natural gas drilling targets. We know from industry data that it would take prices higher than $6 to get this kind of movement into the natural gas fields. That's 200 percent higher than the 1990s price.

What we are experiencing is an affordability crisis. Energy is becoming a larger and larger share of consumption and crowding out other expenditures in the economy. The same is true for oil.

I agree that higher prices will bring in more supply. But, Anonymous omits one very important feature of markets. Higher prices tend to depress demand. So, the "flood" of natural he expects at higher prices may never appear simply because people cannot afford to buy as much natural gas at these higher prices. (And, they are significantly higher.)

Once again, as with oil, price signals can incentivize more drilling, but they have not solved the affordability problem as the industry has been promising for more than a decade. It promised CHEAP abundant natural gas and oil. Neither has been cheap judging by historical standards. Abundant is a matter of perspective. If you can afford it, then it's abundant. If you can't, then it's not.

Affordability for the economy is the key. And high energy prices are part of the cause of the sluggish economy. Money spent on energy can't be allocated to other things.

As for Hubbert, Anonymous continues to mischaracterize what Hubbert said. For those who want to understand what he actually said here is a PDF of a typed manuscript of his actual speech in which he predicted U.S. peak oil among other things. And, here is a link to the Hubbert Tribute site which has a discussion of the speech.

Please note that when Hubbert predicts a peak in oil production for the United States, the United States at that time (1956) did not include Alaska and Hawaii. The prediction was only for what we now call the lower 48 states.

Hubbert was aware of possible oil resources in Alaska, but did not speak to those since little data was available. It turns out that his prediction for the lower 48 states for conventional oil continues to hold up. And, it is important to understand that these were the parameters. And, Hubbert didn't expect production to go smoothly down. He knew there would be bumps and blips upward on the way down and that's what's happened with regard to conventional oil.

Kurt Cobb said...

(Comments continued from above.)

The current "tight oil" boom was not part of his calculations. It'll be worth watching the trajectory of tight oil since it looks like it will very much follow the Hubbert curve which is what the EIA expects it to do.

In his speech Hubbert mentions both tar sand and oil shale. He recognizes both as potential sources. But again, these were not part of his calculations.

Anonymous tells us that he "believes" in markets. This is really a statement of faith, not fact then. What he believes markets will do beyond mediate supply and demand is unclear. Certainly, markets have not provided cheap abundant fossil fuels in the last decade as the market fundamentalists such at Daniel Yergin predicted they would.

And markets have done nothing to curb emissions of greenhouse gases. There are places where markets fail. And, we must also acknowledge that oil and natural gas are not really free markets. They exist within a framework of government tax breaks (the depletion allowance, for example), government-funded research, export limits, and indirect subsidies such as highways which encourage the consumption of oil products.

So, a truly free market in fossil fuels doesn't exist.

I hope Anonymous would acknowledge that there are limits to markets. Would he advocate a market in human organs, for example? As a society, we find such a thing repugnant and we've made it illegal. We think that such decisions should be made based on need and likelihood of success, not financial capacity.

If there are some things which are off limits to markets, then Anonymous must acknowledge that it is really just a question of where we draw the line and for what purpose.

This is what politics is all about and it will never be separated from our economic lives no matter now much we wish for it.

So, public policy in energy continues to be an important factor. And, the last decade has shown that markets are not all-knowing. Otherwise, the problem of high energy prices would have been solved.

And, so would the problem of dumping pollutants and greenhouse gases into the atmosphere. The principle here is that no one should have the right to pollute the air I breath for free and without responsibility for the consequences. Certainly, Anonymous doesn't believe that those who are powerful enough and connected enough should be allowed to do whatever they want to the atmosphere just because they are powerful and connected. That issue must be solved by public policy.

Anonymous believes that risk management is unwarranted. And, yet I'll bet that he practices risk management in his own life by taking out insurance on his car and home and possibly his life, and, by taking safety precautions in dangerous situations. Why is risk management good for him, but not for society?

greg85 said...

Natural gas is still a much more viable alternative to cleaner energy than anything else we have. Nuclear power requires mining of uranium ore and a place to dispose of radioactive waste. Harry Reid basically shut down Yucca Mountain, so the challenges of this are infinitely higher. In addition, permitting of a nuclear plant is now impossible for a whole host of reasons. Solar power is not environmetally pure - panel manufacturing needs heavy metals - and life cycle with regard to disposal has yet to be addressed. Plus - night time power production is not possible - obvious but that is when you really need power. Wind power is also VERY inefficient and endangers the avian population. Plus - doing maintenance on a wind turbine is very costly. Furthermore, land use for generating powere with either wind or solar is markedly inefficient - you needs thousands of acres to produce the amount of power you could make with a combined cycle power plant on a few acres. I find it absolutely appaling that almost all of the crying about pollutants focuses on fossil fuel use in the USA, when Chinese soot is blowing down the West Coast, impacting PM pollution far more that any responsible use of methane would.

Nature Creek Farm said...

Great work on the replies to comments, Kurt. I think the bottom line to your discussion with Anonymous comes down to "I believe that markets work."
Here's a definition you won't find in the dictionary that applies:
Evil: an action taken based on an unquestioned belief.
The Invisible Hand is my white whale. Yes, "markets work": until they don't. The market 'thinks' that physics is as fickle as economics: based on the desires and activities of human minds and imagination, not based on actual physical oil and actual physical circumstances (people without jobs because huge amounts of wealth is hoarded and useless). I'm not saying we should eschew the market idea, just that the actual costs of overhead (government, environmental, social stability) should be included at the point of decision in the market: the cash register price. In other words, if the free market people are so determined to "get government out of their lives", then they should put the cost of government where people can choose to avoid it. When the consumer starts seeing that consumption costs them another 50% or more, they might become localized and frugal, and the white whale of the stock market would come thrashing down on their paper houses.

Brad Vietje said...

...and "a lot, lot more" fossil fuel would be what -- GOOD NEWS? Sorry to inform you, but if we woke up to the AM news announcing an amazing discovery of a 500-year supply of oil (or NG or Coal, or any other fossil fuel) that might be the worse possible news of all.

Remember, folks, the more carbon we spew into the atmosphere, the more nails we hammer into our collective coffin as a species. Sure, there would be many short-term economic gains, but more oil will only lead to more population overshoot, and more environmental degradation, and pretty much guarantee near-term human extinction -- as in during THIS century.

I don't call that good news at all.

Anonymous said...

Anonymous Two again.

Kurt, than you for your kind words and rational response.

The 90s in general were an era of low energy prices. Look at the price of oil during that period.

I think $4 natural gas, in a world of $100 oil and a world price of natural gas of $10 to $15, is very cheap natural gas. Are you saying $4 natural gas is not very cheap natural gas? And given $4 gas is a spike because of very cold weather, I don't think you can say it is not enough to cause an increase in supply.

And doesn't shale oil disprove peak oil? It is oil, and causing US oil production to increase when his theory calls for continued decline. The fact his theory did not take into account such a large amount of new supply disproves the theory.

The tax depletion allowance does not distort the US oil and gas market, as only small producers can use it, and most of the revolution was the product of the efforts of large companies (not majors, but big).

I do kinda like markets, though they have limitations (and higher prices causing less use is good). And I don't have any life insurance.

Kurt Cobb said...

Just to be clear about Hubbert. Peak oil theory does NOT say that once a decline has begun that production cannot go back up for a time. What is says is the once a decline begins in earnest, no new peak will be achieved.

Hubbert's prediction for U.S. peak oil production was spot on, 1970. It dealt with conventional oil only. Tight oil is definitely not conventional oil. Conventional oil comes from high-permeability reservoirs in liquid form and suitable for existing refineries.

Tight oil comes from very low permeability reservoirs which is why it requires fracking.

Now, if the EIA is right, even including tight oil in the comparison, a secondary peak just slightly lower than the original one in 1970 is due in 2016. And, this number includes Alaskan production which produced 526,000 barrels per day in 2012. If we subtract this amount and the EIA is right, then the 2016 secondary peak will be well below the original peak in 1970 for the lower 48 states.

In general, oil production peaks. We have extensive empirical evidence of this. There have been instances of returns to and above previous peaks for particular wells or fields and even countries. This just means they haven't reached their ultimate peak. But, the pattern has been that a second higher peak is followed by an irreversible decline that is even steeper since the second higher peak is normally obtained using enhanced recovery methods that tend to pull production forward and set up fields for crashes later on. This is what happened in Mexico's Cantarell field, for example.

The belief that oil will never peak is simply contrary to the evidence, that we live on a finite planet with a finite supply of oil. If you believe that oil supplies are infinite, then they must be coming from outer space or the 5th dimension.

marmico said...

Affordability of gasoline in the U.S. is not an issue.

FRED interactive graph

The average ratio of aggregate gasoline consumption to personal disposable income since 1959 is ~3.4%. 2013 is average.

Kurt Cobb said...

Perhaps affordability of gasoline is not an issue for marmico, but for many people it is. His data set is problematic on many levels.

First, he ignores the rate of change which is much more important than an average stretching over 50 years. The change in percentage of income devoted to "gasoline and other energy goods" more than doubles between about 2002 and 2008, a space of just six years. And, then after falling briefly during the financial crisis, it quickly rebounds. The shock to personal incomes and the economy does not come from some average but from this rate of change.

Second, he takes the average rather than the median. In a room with 10 people, one of whom is Bill Gates, and the others all schoolteachers, the average net worth of each will be $7.2 billion. The median, that is, the person in the absolute middle of the the set might be $40,000 or $50,000. Big difference!

Mamico ignores the distribution of wealth and ignores that it is much, much more skewed today than in the past. Yes, when we include Bill Gates and those in this economy who are getting richer even as the middle class gets poorer, the average appears not to have changed. But again, we do not know what the MEDIAN case, the absolute middle case, is from this data. And, because of the skewed distribution of wealth in the United States that median percentage must logically be quite a bit higher for families than the average he quotes.

Of course, gasoline and other energy prices are not a burden on Bill Gates and others like him and represent only the tiniest fraction of a percent of their incomes, thus pulling down the average significantly since their incomes make make up most of what is earned in the economy. But, this is not really representative of the entire population.

Third, we don't know the composition of those other energy goods so we can't know exactly what the graph for gasoline alone would look like. For example, neither coal nor natural gas appreciated by the same percentage as oil during this period. Also, utility bills rise much more slowly than the underlying fuels because there are other charges such as delivery charges and taxes that did not rise at the rate that oil products rose.

Fourth, the percentage doesn't tell us the total burden on the economy of these unspecified energy costs including the burden on business and government.

As they say, there are lies, damn lies and statistics. We must be very careful not to take such graphs and calculations at face value, but be able to ask probing questions about whether they properly represent the actual situation.

Kurt Cobb said...

I should add that when we look at the trend for real median income for the United States it shows that energy affordability is becoming an even worse problem since the MEDIAN income, that income of the person right in the middle of the income distribution in the United States, has fallen rather sharply since 2008. That means less money to spend on everything including energy.

Doug Short provides this excellent analysis. The median U.S. income is down more than 7.5 percent since the beginning of 2008.

marmico said...

The income gini coefficient has not risen much since 2002, the most recent inflection point for the substantial rise in gasoline prices.

The Sentier Research household income series charted by Doug Short is extrapolated monthly Census "market income". See Census Tables F-4 and F-5. Both the real mean and median household income has declined from 2002 through 2012. Bill Gates doesn't matter. A better tool is post-tax, post-transfer income measurements which reduces the market income skew and which is the BEA mean data in the posted FRED graph.

Total energy goods and services consumption relative to disposable personal income has risen even less in percentage terms since the inflection point.

Another FRED graph

Kurt Cobb said...

Marmico concedes that the average percentage of disposable income spent on energy does not reflect the true state of energy expenditures for most of the population and that the median amount which will be higher is a better measure. And, he concedes the rate of increase is more important than a long-term average.

He also concedes that median income in the United States, at least, has been dropping since 2002. Contrary to what he implies, the census data show median income dropping almost twice as fast (-5.6 percent) as average income (-3.0 percent) from 2002 to 2012, a sign of distress all around, but of particular stress in middle and lower income households which represent the lion's share of households in the United States.

I believe he casts his net too narrowly on energy expenditures because energy is embedded in every good and service we buy for all sectors of the economy. Percent of disposal income spent on an undefined set of "energy goods and services" is a poor measure the effect of energy costs on the economy.

A better measure is the the percent of energy expenditures relative to GDP. Here the EIA offers a helpful data set showing that from 2002 to 2008 that percentage increased by more than 50 percent. It has since declined as some energy inputs declined in price, but it remains 34 percent above 2002 levels even in a sluggish world economy.

Also, not included in Marmico's discussion is the effect that these high and swiftly rising expenditures have on the general economy. Economist James Hamilton showed that 10 out of the last 11 U.S. recession were preceded by oil spikes. In the amorphous world of economics, we cannot prove that oil prices CAUSED the recession, but this is a very strong correlation.

We must therefore consider the damage such recessions do to employment and household income. Clearly, energy prices are taking toll on the financial lives of the population in the aftermath of the so-called Great Recession which began in 2008.

Marmico would like to minimize the effect of high energy prices on the economy and on average people, but the facts simply do not support his view.

marmico said...

I concede that mean family income has risen faster than the median since 1979. There are no other concessions.

Rather than ideological posturing, analyze the data. From 1979 through 2012 the mean Census market income rose 33% and the median 18%, a 15 %point difference. The difference is overstated as it does not consider post-tax, post-transfer dollars; cash in the wallet so to speak. For argument sake call the difference 10%. Adjusting the consumption expenditure data by 10% for the median family doesn't move the affordability needle.

Imbedded energy prices in goods and services sure aren't showing up in the CPI-all items.

Since the '70s oil shocks, the utility of gasoline has risen by 50% (the increase in average new light duty vehicle fuel efficiency), meaning that a gallon of gasoline is even more affordable than the consumption expenditure data shows.

Kurt Cobb said...

Marmico appears to be conceding my point about energy costs as a percentage of GDP rising sharply which I believe is a much better measure of the effect of energy prices on the total U.S. economy.

He again switches away from the rate of change issue, focusing on very long-term effects, the gradually rising fuel efficiency of the American car fleet since 1980.

But if we look at those fuel efficiency numbers, they barely budge in the last 10 years during the rapid ramp up of energy costs.

In my view, he is too focused on gasoline prices as a single proxy for energy costs. We should be looking at the entire cost of primary energy sources as the energy costs to GDP number does.

As for petroleum prices, a better gauge of their impact on the economy than gasoline prices is refiners' acquisition costs which are much more indicative of what petroleum is costing the economy in all sectors, not just transportation and not just gasoline-powered transportation. Refiners' acquisition costs of crude oil have risen from $17.38 in January 2002 to $93.83 as of November 2013.

He tells us that rising energy costs aren't showing up in the CPI. But the CPI has long understated true inflation for households. In the mid-1990s the government changed the way it calculates the CPI for political reasons to reduce the upward adjustments to entitlement programs. It started using what is called "hedonic" pricing. Essentially, if you buy a more powerful computer than the one you bought three years ago, say, twice as fast, then the price you paid is cut in half for purposes of calculating the CPI. Never mind that in order to run the programs that you need to run and in order to access Internet videos you need a higher speed, in other words, the infrastructure REQUIRES the higher speed just for your computer to function. These kinds of adjustments were made in more than one area.

And, the so-called market basket of goods affects what the CPI does.

John Williams at Shadow Stats calculates the CPI that way it used to be calculated before the "political" adjustments of the 1990s. His work confirms that people's perceptions that prices must be rising faster than the government-calculated CPI suggests are closer to what is actually happening.