Running on Empty
15 March 2005, Robert Bryce, Salon.com
excerpt:
... turning tar sands and shale into motor fuel is a very expensive proposition. And those new, unconventional oil sources may be insufficient to replace the decline in production from existing fields, which deplete by about 6 percent per year. Further, they may be too small to quench the demand from the developing world-- China in particular. Last month, at a conference in Houston, Zhu Yu, the president of China's Sinopec Economics and Development Research Institute, said that between January and September of 2004, motor fuel use in his country soared by 20 percent. Yu also predicted that China's oil consumption will double over the next 15 years to more than 10 million barrels of oil per day. Meanwhile, the Energy Information Administration expects India's oil consumption to increase by nearly 30 percent over the next five years.
The oil industry has plenty of other reasons to be nervous. The royal rulers of Saudi Arabia, the world's biggest producer, appear vulnerable to terrorist attacks and civil unrest. The Saudi government's biggest enemy, Osama bin Laden, has focused his ire on both the Saudi royals and the oil infrastructure in the Persian Gulf. And his loyalists are eager to attack both of those targets.
In Iraq, insurgents are continually attacking that country's oil infrastructure-- thereby crippling the war-torn nation's economy and its future prospects. In Venezuela, which has the biggest oil deposits in the Western hemisphere, president Hugo Chavez has threatened to cut off the flow of oil to the United States if the Bush administration continues its efforts to undermine his government. In Russia, president Vladimir Putin's brazen, state-sponsored theft of Yukos, one of that country's biggest oil companies-- and his jailing of the company's CEO, Mikhail Khordokovsky-- is likely to slow investment in Russian oil fields for years.
Furthermore, spare oil-production capacity has largely disappeared. Oil producers are running their wells at maximum capacity. Indonesia, a member of OPEC, cannot meet its OPEC quota of 1.4 million barrels per day. In February, Indonesia was able to produce only 942,000 barrels per day, its lowest level of production in 34 years. And last week, Algeria's energy minister, Chakib Khelil, said that OPEC "does not have the production capacity to increase its quotas."
All of these factors are sending oil prices to record highs. Monday's NYMEX closing price for light sweet crude was $54.95 per barrel. Last week, the Department of Energy issued a report saying that it expects prices to stay near or above $50 per barrel for the rest of this year. That's a big change for an agency that has always been conservative in its price projects. At about this same time last year, the agency was predicting that oil would cost about $29 per barrel throughout 2005.
Whatever price projections are used, it's increasingly clear that the era of cheap oil is over and that oil companies are having a harder time finding new oil to replace the oil they're pumping. In short, it appears that the late M. King Hubbert, a geophysicist who worked for Shell in Houston, is being proved right. In the 1950s, Hubbert used mathematical models to predict that American oil production would peak in the early 1970s. That's exactly what happened. Now, Hubbert's theories are being tested on a global scale.
Herold's owner and CEO, Art Smith, is a believer in Hubbert's work. Smith and his fellow analysts at Herold have been building their peak production databases since 1996. About 10 months ago, Herold began publishing what it calls "strategic evaluations" of specific companies, which include graphics showing when that company will reach its peak production. Herold does not do geologic analysis. Instead, its analysts mine the company's filings with the Securities and Exchange Commission. It also looks at the oil properties that the company has acquired or sold, along with new projects being drilled, and older oil fields in the company's portfolio. "We look at this data, put it into a financial model, and start asking questions," says Herold analyst Gordon.
Herold isn't the only Wall Street firm considering the issue of peak oil. In early December, Deutsche Bank issued a report that predicted global oil production will peak in 2014. The Deutsche Bank report also stresses political instability and China's surging demand. Those factors, Deutsche Bank believes, "could trigger a shortage shock leading to a price crisis."
And while many analysts in Houston are convinced a peak in global production is in the offing, there are others who believe that today's high prices will trigger a surge in new oil production. David Pursell, a partner at Pickering Energy Partners, a Houston brokerage, says with oil at $50 per barrel, "a whole lot of oil fields that used to be woefully uneconomic suddenly become profitable and that means that any peak projections get delayed." Although Pursell is not ready to agree with Herold's projections about individual energy companies, he-- along with virtually everyone else in the oil industry-- agrees that the era of cheap energy is over and that America must begin adapting to the new geopolitical realities that come with that fact. Alas, it appears the Bush administration hasn't made that same transition.
Last week, President Bush gave a speech on energy policy in Columbus, Ohio, in which he encouraged Congress to pass an energy bill. Once again, he touted his plan to drill for oil in the Arctic National Wildlife Refuge, a move he said would "eventually reduce our dependence on foreign oil by up to a million barrels of oil a day." The key word here is "eventually." Even if approvals for drilling ANWR were granted immediately, the first oil from the refuge would not reach the continental United States for years. Furthermore, as the New York Times reported last month, it appears that the major oil companies may have cooled in their desire to drill in the refuge. During his speech, Bush also talked about efficiency measures that could save homeowners electricity. But during his 4,600-word, 35-minute-long speech, Bush uttered the words "hybrid vehicle" exactly one time.
It's astonishing that Bush, the former Texas oil man, still doesn't understand the fundamental problem of America's imported oil addiction. Nor does he appear to grasp the threat that is posed by the possibility of peak oil.
The majority of the oil that the United States imports from places like Saudi Arabia and Venezuela is used as motor fuel in automobiles. Yet the president conflated the idea that burning more coal and building more nuclear power plants will somehow allow America to reduce its oil imports. In his speech, Bush refused to discuss the obvious: We cannot cut our oil imports (read: gasoline addiction) without dramatic changes to our auto fleet. At some point, the United States will have to force the automakers to build more efficient automobiles. And a key part of that efficiency changeover will mean replacing increasing numbers of America's 200 million cars and trucks with hybrid vehicles.
complete article: Running on Empty
Auto Asphyxiation
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