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Oil Optimists

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Fifty years ago, you could be forgiven for thinking that this generation would be living in outer space, in bubble shaped colonies, transported by hyperdrive-powered futuristic spaceships.

Just because we knew there were moons and planets out there did not make the technological challenges of getting there surmountable. Sure, we have stuck a few guys on the moon, (but not for decades), and we’ve got a few poor souls tinkering with life in orbit on the International Space Station, but for all practical purposes, reality has missed the dreams of previous generations.

I use this as an example, to illustrate the outlandish claims of remaining oil reserves. The world has been aware, at least in a theoretical sense, of the concept of peak oil for about 50 years, but even as we are at or nearing the probable peak production output, there are optimists who are gaining airtime on major media outlets, many of them making claims that fail to acknowledge the limitations of our abilities and likely technological advances.

Like many Malthusian beliefs, peak oil theory has been promoted by a motivated group of scientists and laymen who base their conclusions on poor analyses of data and misinterpretations of technical material. But because the news media and prominent figures like James Schlesinger, a former secretary of energy, and the oilman T. Boone Pickens have taken peak oil seriously, the public is understandably alarmed.

A careful examination of the facts shows that most arguments about peak oil are based on anecdotal information, vague references and ignorance of how the oil industry goes about finding fields and extracting petroleum.

Source: Op-Ed Contributor – ‘Peak Oil’ Is a Waste of Energy – NYTimes.com

Michael Lynch, the author of the above Op-Ed in the NYTimes, ends his article with a claim that the price of oil won’t rise again anytime soon, and in fact, they’ll fall:

Oil remains abundant, and the price will likely come down closer to the historical level of $30 a barrel as new supplies come forward in the deep waters off West Africa and Latin America, in East Africa, and perhaps in the Bakken oil shale fields of Montana and North Dakota.

Interesting that this conflicts with many other respectable views, including this one from Merill Lynch

“Without firm policy action to reduce global oil demand or an unexpected expansion in supplies, a continuation of extremely loose monetary policy in OECD economies next year could ultimately bring about another spike in oil prices well above $100 a barrel as we approach 2011,” the report said.

Then, of course, if we get an oil spike, Merrill warns of risks to the economy and recovery:

“A vicious cycle of rising oil prices, rising capital inflows in emerging markets, continued emerging market currency appreciation and in turn higher emerging market commodity demand could trigger a sharp deterioration of terms of trade in OECD economies, putting the fragile global recovery at risk,” the analysts said in the report.

Source: Merrill: Oil’s Shooting To $100 Next Year

The Wall Street Journal Picked up on the Deutsche Bank’s recent report –

Global oil supplies are indeed set to peak within a few years, and no, that is not bullish for oil. Quite the contrary—it will spell the end of the “oil age.”

That’s the take from Deutsche Bank’s new report, “The Peak Oil Market.” In a nutshell: The oil industry chronically under invests in finding new supplies, exemplified both by Big Oil’s recent love of share buybacks and under-investment by big oil-producing nations. That spells a looming supply crunch.

That will send oil to $175 a barrel by 2016—and will simultaneously put the final nail in oil’s coffin and send prices plummeting back to $70 by 2030. That’s because there’s an even more important “peak” moment on the horizon: A global peak in oil demand. That has already begun in the world’s biggest oil-consuming nation,

Source: Peak Oil: The End Of the Oil Age is Near, Deutsche Bank Says – Environmental Capital – WSJ

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The common but irrational North American response on reading this conflicting information is to stick your head in the sand and pretend that someone else is dealing with it. Especially when we read of $175 a barrel prices for our beloved energy lifeline.

The optimism described in the articles that discount the peak oil theory usually centres around technology. This is in three main areas, discovery, extraction and processing. With current technology, we’re not discovering a significant amount of reserves that can be extracted with existing technology. The more difficult the extraction, the more energy is required, so the return on energy invested shrinks with the increased effort. There is only so much efficiency that can be squeezed out of the possible extraction methods – and some of the methods end up using or polluting other resources such as fresh water. The most contentious source of oil in this part of the world is the Tar Sands. The amount of processing that is required to turn these messy reserves into usable crude oil leads us again to the question of the return on investment or EROEI. At some point the energy balance tips toward requiring more energy to discover, extract, process, refine, transport than can be gained in the final product. The effort require should always yield a net benefit, similar to the gardener who grows food for consumption, some is retained for seeds to plant in the following season. Recently several authors have suggested the the minimum EROEI for a society needs to be above 3:1 for it to function, which puts the concept of running the global fuel demand on current biofuel technologies into question, as well as many other alternative fuel sources, both large and small scale.

I’d like to see an open dialogue around future scenarios with a lower energy input, allowing communities to build policy based on strategic assumptions rather than unknown technologies. Cautiousness is not in the vocabulary of most businesses and governments when it comes to strategic planning – rather it requires a patient consideration of the facts currently available and the risks associated with each fact or assumption being wrong. I believe that assuming the economy to be weaker than predicted, or oil reserves to be more difficult to extract puts communities in a strong position for a resilient future, regardless of the outcome. I’m not an economist, and I’m not giving professional advice, but as far as I can tell, the only way you can lose on this is on the investment side of things. If you go safe, you will not make as much money of the markets – is that a risk you are willing to take in light of all other considerations?

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Mike Thomas

Mike Thomas P.Eng. ENV SP, is the author of UrbanWorkbench.com and Director of Engineering at the City of Revelstoke in the Interior of British Columbia, Canada. If I post something here that you find helpful as you navigate the world of engineering, planning and building communities, that’s wonderful. But when push comes to shove: This is my personal blog. The views expressed on these pages are mine alone and not those of my employer.

3 thoughts on “Oil Optimists

  1. I like your analogy of investing in the stock market Mike. I don’t think it is wrong to be optimistic though. There are constantly new ideas and technologies that are beiing invested into trying to offset the worlds dependency on oil. The reason being is that it will make money for people and companies as the oil starts to be scarce either economically or physically. There still is a lot of oil supply, its just wether or not it can be made profitable. The environmental issues are being addressed and have been increasingly strict over the years. (living in Alberta most of my life and going to school for a Conservation and Reclemation diploma I saw some huge efforts and changes in practices)
    I am optomistic. We might have a bump here and there and it may even smart a little but I think that there are a lot of innovative and resourceful people around. YOU being one of them.
    The sky isn’t falling. (yet)

    There could be a lot of improvements in metro transportation. That would be a big winner! Drove in Vancouver lately? Brutal.

  2. @Tyrone
    Spell Check – I use firefox, which auto-spellchecks everything that you type on the web. There is a way to get a spellcheck on comments in this software, it might take a bit of wrangling though – I’ll see…

    Avatar – two step solution, (I think). If you want you can skip the first step, but it won’t hurt.

    Firstly, sign into the blog at this page, in your case, you might want to select Facebook as the authentication method, follow the steps, and you’re in. go to “Profile” on the left and put your email address in the appropriate spot.

    Step two: Head over to Gravatar.com, set up an account and link your email address to a favourite image.

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