Category Archives: Crude oil

When will oil production peak?

When will peak oil happen?

One of the most common questions people ask when first learning about peak oil is when will “it” happen. People want to know “When will we run out of oil?” and later, “What is the date of Peak Oil?”

Unfortunately, these questions probably do not address what people really want to know. One of the most difficult things in educating people about peak oil is that you have to start off by telling them that their questions are incorrect. These questions stem from a lack of understanding about the world’s tiring oil production system and the extremely complex interaction between fossil fuel production and the economy.

Energy that can be summoned up at man’s command is his wealth in the physical world, and fossil fuel currently provides the vast majority of this wealth. At any given time, the net energy available for use by industrial man is given by the formula:

Eg – Ep = En

Where:

Eg is the gross energy extracted.

Ep is the Energy that has been consumed in the production of energy.

En is the net Energy that is available to power the industrial economy.

The net energy that is derived from fossil fuel production sets the possible wealth that our economy can potentially create. How much fossil fuel is produced over a given period of time is determined by a great many factors.

One of the most interesting and poorly studied factors in fossil fuel production is how the economy is affected by the decreasing availability of high quality oil reserves. While the U.S. Department of Energy and IEA show that gross oil production has been approximately flat over the last few years, this data does not take into account the increased amount of energy consumed in the extraction of decreasing quality reserves. Nor does it take into account the large amount of diesel fuel energy that has been converted into less desirable Ethanol or that the increase in the world’s population has decreased the quantity of oil energy available per person.

As the quality of a fossil fuel resource declines, the net energy available from its production decreases and the strain on the economy increases. Eventually, the economy will reach a point that it cannot afford to increase production, and thus will be resized for lower energy consumption. For a time, the price of oil may decline. This decline in price will actually further reduce the supply of oil because the new, more expensive production and recovery projects will be canceled or scaled back. And while the decreased oil prices from the economic downsizing may encourage the economy to grow again, this growth will quickly be stopped by the limited supply of high net energy resources.

Consider how the long-term, global trends of increasing energy consumption in oil extraction have affected the U.S.

In 1965 when the oil industry was just starting to experience declining results from increased efforts in oil production, the U.S. was the world’s largest creditor nation, and the wealth of the U.S was growing each year. In 1970, U.S oil production peaked and began to decline in spite of the greater amounts of energy expended in attempts to increase production.

Move to the fall of 2008, with the U.S as the world’s largest debtor nation and its wealth declining each year. Not even global oil prices in the $100 range and above for several months could raise oil production substantially above the level that it was in 2005 when oil prices were in the $45 range. Now in the winter of 2008, the economy has given in and oil consumption and oil prices have crashed. This cycle can be expected to continue unless proper management is implemented.

Without correct management of the economy, it is possible that the economy can be stimulated enough to get a short economic up cycle with oil prices and production higher than ever before. However, this becomes increasingly unlikely with each cycle.

I am convinced that no one understands all of the things that would be necessary to predict when global oil production will be at the highest level. There are just too many factors, including some that are completely unpredictable like the weather and politics.

I think that the question “When will oil production peak” is more accurately addressed by the following two questions:

1. When will increasing energy intensity of fossil fuel production begin to limit the wealth that can be created with the U.S. economy?

That already occurred in approximately 1965.

2. When will the increasing energy intensity of fossil fuel production really show up as a serious problem to the global economy?

That too has already happened, in the fall of 2008.

As for when the all-time peak of oil production will occur, each month that passes with the economy in decline increases the likelihood that the peak is now past. The reason is that high net energy reserves are being depleted, and low net energy reserves are not being developed. This makes it unlikely that any economic up cycle can last long enough and allow oil prices to be high enough to ever increase production above levels that were seen in the summer of 2005 – fall of 2008. But we will have to wait for the history books to be written for the best answer.

Understanding the Low Prices of Oil and Gasoline

Oil prices have fallen from over $147 per barrel (42 gallons) in July of 2008 to $64 during this Friday’s trading. I was in Houston at the end of the week and drove by some gas stations that were selling unleaded regular for under $2.26 per gallon. This price looked shocking to me as I have become accustomed to the price of motor gasoline costing at least $3.50 per gallon and even $4 plus per gallon like it was this summer. So the question becomes, what is causing these low gasoline prices?

There are dozens of factors that cause the price of motor gasoline to fluctuate, as we are aware. Let’s look at the most important factors in conjunction with the current news to see if we can figure out what is causing the low price of oil.

Long Term Factors:

  • Oil Supply
  • If new reserves of oil are found, and can be brought online at a rate faster than existing oil fields are being depleted, the supply of oil will increase and the price will fall. If new oil supplies are not found or new extraction technologies fail to offset the aging of the fields, oil production will fall and prices will increase.

    There hasn’t been much in the news about oil supplies in the last few years. There have been no new large supplies of oil brought online in recent months. There have been no new discoveries that will substantially increase supply in the next six years. There have been no substantial new innovations in production/extraction technologies. Government reports show oil supplies looking very flat since the summer of 2005.

  • Intensity of Oil Usage and Technology
  • If technology is invented that makes oil less useful or desirable at its current market prices, oil demand will drop as the other inventions take its place. If technology is invented that makes oil more useful to the economy, oil prices will rise.

    There have been no substantial changes to the oil technologies that are powering our economy. No new engine designs or significant agricultural breakthroughs have been reported. Even positive news on oil efficient technologies has been scarce. Boeing has been promising 787s that are supposed to save 20% fuel, but not one has been delivered.

Intermediate Factors:

  • Annual Cycles of Demand
  • Each year, the demand for oil changes as the year progresses. Demand for finished products is highest in the summer during driving season and demand for crude is usually highest while the heating oil inventories are being built up and there is still pre-winter driving demand.

    Currently we are at the low point of demand. Driving season is over and heating season has not really started.

  • Amount of Economic Activity
  • Oil demand is a direct result of economic activity. As long as there is no new technology to supplant oil for many necessary parts of our economy, oil will be required in direct proportion to the economic activity. Think of a small business. If delivering $100 worth of pizza requires $10 of gasoline, delivering $90 of pizza will only require $9 of gasoline. If business picks up to $110 worth of pizza, about $11 of gas will be required to deliver it.

    Consider some recent news:

    “Feds to slash interest rates as recession looms”
    “Chrysler to cut 25% of salaried workers”
    “NorthWest Airlines loses 317 Million dollars, announced schedule cuts”
    “Trading in Austrian Airlines halted”
    “Airlines see load factors drop despite capacity cuts”
    “Southwest loses $120,000,000 first loss in 17 years, will cut unpopular flights”
    “Gainey Trucking can’t pay owner”
    “Canadian truckers face losses from diesel fuel shortage”
    “UPS faces precipitous declines on overnight shipping”

Short Range Factors:

  • Speculation
  • Speculation tends to increase the volatility or the size of the price cycles; it also therefore increases the height of the highs and the depth of the lows. The reason for this is simple. If a speculator sees that each day for a year the price of gasoline is $3.00, there is no way for him or her to make any money from buying or selling it. He would just end up buying it, sitting on it, and selling it again at the same price, making no money and wasting his time. The speculator makes his money when the price deviations increase. If the price is dropping, he sells what he has and increases the market supply, causing the price to go down further. If the price is going up, he buys more to sell at a later time. Deferred selling shrinks the available market supply and raises prices.

    Consider this quote from www.marketwatch.com in an article about how OPEC is on its own as investors flee from oil speculation:

    “This time, however, OPEC is on its own. With speculators fleeing, the cartel is going to have to build a floor under oil prices through disciplined production cuts. This isn’t a group known for discipline, however. And given the wheezing global economy, OPEC has only an outside chance of pushing prices back up to $100 a barrel even if they manage to significantly slash output.”

    From this and similar articles, it is clear that investors are selling oil positions due to both the oversupply and subsequent price drop, as well as the fact that they need money to cover losses in other areas of the falling market. This causes the price of oil to drop even further, but can only continue until investors sell off all of their positions. After this, the price of oil will begin to rise even if speculators do not buy again.

  • Weather
  • The weather can affect both the supply and the demand of oil. Unusual weather events can be things like extreme cold snaps in the Northeast Unites States, resulting in the demand for heating oil to increase substantially. Conversely, very mild winters cause decreased heating oil demand. On the supply side, weather can decrease supply by preventing the transportation of oil from the point of production to the consumer or refiner.

    Searching the news about the weather, it looks as though the weather has been very friendly to the price of oil. There have been no weather-related reasons for declines in supply or evidence that demand has strayed from the seasonal norms in the last few months.

  • Accidents and/or Malicious Destruction
  • Accidents or malicious destruction of petroleum equipment that is necessary for petroleum production can cause oil supplies to drop and prices to increase.

    There has been no substantial accidental or malicious damage to the petroleum infrastructure in the last few months.

Conclusion:
The current low price of oil is caused primarily by what economists call “demand destruction.” That is, as economic activity winds down, the demand for oil drops and the market verges on a glut in supply. The price will stay low and most likely go lower as long as the following continues:

The weather stays good.
There are no accidents or attacks on the petroleum infrastructure.
The speculators continue to sell.
The economy continues to decline.

The last one is the most important because the health of our currently configured industrial economy is directly related to how much oil is being consumed–much like your car requires fuel in proportion to how much work it does. Let’s hope that we can get the economy going well enough again to bring on some unprecedented high prices. If not, we will be dealing with more economic disaster and unemployment.

Daniel J Swanson
dswanson@danswanson.com

Algae Crude

About a week ago a friend of mine pointed me to a company called Sapphire Energy. Sapphire Energy wants to use Algae to make a fuel like many other companies are but the thing that makes Sapphire Energy different is that they are trying to make “algae crude.” What makes this idea so exciting and promising is the fact that they are aiming to create a system that will create a fuel that is chemically identical to crude oil. Yes, crude oil, this would allow for there fuel to be completely compatible with all of the current energy infrastructure like vehicles and the distribution chain. The idea of creating crude from something like algae isn’t entirely new but the concept has not been extensively explored. Hopefully Sapphire Energy can pull this off, feel free to visit their web site and check them out, http://www.sapphireenergy.com/. They go into more detail about the algae-to-gasoline concept on their Green Crude Production site.

Biodiesel as a Biofuel

In my previous posting I talked about ethanol. I know there are other promising ways of producing ethanol but lets be honest, nothing from the ethanol camp, as of yet, has as much promise as some of the biodiesel production methods. Currently the major source used to produce biodiesel is soybeans. Soybeans unfortunately do not have a very good EROI(Energy Return Of Investment), much like corn does not. EROI is the ratio of the amount of usable energy acquired from a particular energy resource to the amount of energy expended to obtain that energy resource (http://en.wikipedia.org/wiki/EROEI). Basically, energy return on investment is the measure of the amount of energy needed to create biofuel (for example) and then the amount of usable energy you have from the biofuel. If the amount of energy needed to create a biofuel is not significantly less than the amount of useful energy contained in the biofuel then the energy source becomes less and less useful, much like soybeans or corn. Soybeans, at this point, are a major biodiesel fuel source used for mass production. Soybeans have worked as a beginning biodiesel producer but the effects on our water table and environment won’t allow them to be a viable mass production source into the future. Rapeseed and canola are better options when comparing them to soybeans but you still have to use farmland to grow a crop, to make a fuel and to power society. This requires the use of farmland, farm equipment, fertilizers and pesticides, and water. Though canola and rapeseed both produce more oil per acre, which requires less farmland, neither of these crops are solutions to the problem. Now I am not against using crops like canola or rapeseed to produce biodiesel in small quantities, but to do so at a scale that would even come close to meeting the diesel demand would be detrimental. We need to stop using food products and valuable farmland to produce fuels, we need to use food products for food and farmland to grow food.
There is one biofuel source that has great promise to alleviate many of the common drawbacks to biofuels, algae. Algae is just now starting to get some of the attention it deserves. Algae can be grown in open ponds and closed systems. Open pond systems have been studied for quite some time but one of the biggest challenges with an open pond system is controlling the type of algae growing in the pond. Naturally open pond systems are susceptible to contamination from outside sources, this is where closed systems excel. An example of a closed system is a bioreactor. A bioreactor is a closed system that pumps water though a network of tubing, the algae is then harvested from the water (http://img.alibaba.com/photo/100453709/Jeruz_Algaelink_Photo_Bio_Reactor.jpg) for biofuel production. Though some closed systems like bioreactors can use more energy than an open pond system and are more complex, the control over the type of algae growing in the system is very beneficial. Companies like GreenFuel Technologies have a bioreactor design that use CO2 from coal power plants to grow the algae within the system, this gives the bioreactor a steady flow of “food” for the algae. Valcent Products has one of the most interesting and promising closed systems that I have seen so far. It uses plastic bags hung vertically, these plastic bags have channels in them to direct the water through a series of paths to maximize the amount of sun the algae is exposed to for photosynthesis. This method is relatively simple in comparison to many other methods used to create biofuels. Valcent thinks their company can create a algae system that can create “…about 100,000 gallons of algae oil a year per acre, compared to about 30 gallons per acre from corn; 50 gallons from soybeans.” (http://www.cnn.com/2008/TECH/science/04/01/algae.oil/index.html). If you research oil production from algae you will find the estimated amount of oil per acre to have varying numbers. I am somewhat skeptical that 100,000 gallons of algae oil a year per acre is possible but even if that number is significantly less, like 15,000 or even more conservatively around 1800 like some estimate, it is still a much more viable option than any other biofuel source at this point.
Each biofuel source can and probably will play a role in replacing crude oil with a renewable energy source; but we need to stop giving the majority of the research and funding to sources that will not benefit society. Algae is by far the most promising of all biofuel sources but ethanol may also play a role in the future. Anytime an energy source is considered we must not forget the law of thermodynamics and energy return on investment, these two things will give you the true benefits and negatives of a biofuel.