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Peak Oil: Objects in Mirror May Be Closer Than They Appear

by Richard T. Stuebi

One of my favorite PowerPoint slides about the peak oil phenomenon comes from the dearly-departed Matt Simmons.  The slide depicted a mountain peak in an automobile rearview mirror, the implication being that we would only know for sure when peak oil production has been achieved after it has been achieved and followed by the inevitable decline.

Over the past decade, there has been a lot of debate as to when the date of peak oil would occur.  (It is worth noting that most of the argument has been about when, not whether, peak oil would occur.  Some of the more optimistic forecasters, such as Cambridge Energy Research Associates, have consistently projected peak oil a few decades out.  Some of the more pessimistic observers, such as long-time oilman Simmons himself, worried that peak oil would come much sooner, perhaps within a few years.

Now, according to a new parsing of the data in the World Energy Outlook 2010 by the International Energy Agency (IEA), it might be that peak oil production actually occurred in 2006 at about 70 million barrels per day.  This is a big shift from the IEA’s prior analysis in 2008, in which it projected that conventional oil production would slowly climb for decades to come.

To be clear, there is a bit of semantics at work here.  “Conventional” oil production represents black crude coming out of the ground in liquid form via wells, and that type of oil production may have peaked.  For sure, it’s getting harder to get:  big finds of conventional oil these days are the exclusive domain of multi-billion dollar big oil companies, working in the deepest places in the remotest places on the globe.

But, as you might have guessed by now, demand for transportation fuels (which historically are derived almost solely from oil) hasn’t peaked.  So, what’s backfilling the decline in conventional oil production?  Unconventional oil production – primarily tar sands from places like Alberta, and to a lesser extent natural gas liquids and (maybe more in the future?) coal-to-liquids – and biofuels are making up the difference.

What can declining conventional oil production mean?  For sure, it can only mean upward pressure on crude oil prices.  It also means that alternatives for crude oil in transportation markets become more economically appealing and more widely utilized.

However, the economics and availability of substitutes for conventional oil remains a great concern.  According to a recent study published in Environmental Science and Technology by researchers at the University of California, Davis, the stock market is projecting that the substitutes will not be economically-viable in large quantities at anywhere near the pace that they may be demanded.

Of course, the stock market is not a perfect predictor of anything.  However, if one accepts that the stock market reflects an incredible quantity of information processed by many very sophisticated market participants and further that on average stock prices are properly valued, the findings suggest that the market in aggregate isn’t seeing any huge near-term opportunities to replace oil in a major way.

If peak oil has indeed already occurred and if alternatives aren’t at the ready at competitive price points in meaningful volumes, then it is almost a virtual certainty that we will see some combination of significantly higher oil prices and/or oil demand destruction through reduced economic activity. 

It’s not a pretty picture staring back at us in the mirror.

Drill, Baby, D’Oh!

by Richard T. Stuebi

Unlike many in the cleantech community, I’m not averse to increased drilling for oil in the U.S. 

I recognize that we’re not going to be able to leapfrog out of the corner into which we’ve painted ourselves over the past few decades, and that we’re going to need oil, gas and coal – and probably as much of it as we can prudently get, especially from domestic sources – for a long time to come as a consequence of the accumulation of our past decisions and investments regarding energy. 

As the most thoughtful segment of energy sector observers frequently notes, our energy challenges in the coming decades are so significant that we’re going to need just about everything we have at our disposal to meet the challenges.

But, as Einstein said, “insanity is doing the same thing over and over and expecting a different result”, and betting our entire national energy strategy solely or at least mainly on increasing production from our fossil fuel resources is a losing proposition that will only further exacerbate the challenges we now face. 

Furthermore, the opportunity may very well not be all it’s cracked up to be.  For instance, last month the U.S. Geological Survey released a revised assessment of the remaining resources in the National Petroleum Reserve of Alaska – which you’ll no doubt remember has long been viewed by many to be the savior of all our energy travails.

Oops!  Instead of a mean estimate of 10.6 billion barrels, it now looks like there’s really only about 900 million barrels up there to be recovered – less than 10% of what was formerly thought.

Now, that resource may still be well worth recovering; it’s certainly worth a lot of money.  The environmental community is largely opposed to going for it, and maybe that position is too hard-line.  Yet, it should also be recognized that there’s no panacea for American energy policy up there on the North Slope.  After all, even if fully captured (which is implausible), 900 million barrels is only equivalent to less than fifty days of U.S. oil consumption – not exactly a history-altering development.

And, logic alone shows that there’s no panacea if all of the reasonable conventional oil/gas exploration possibilities are pursued.  The planet is a finite sphere, and organic matter is not being transformed by geologic forces into fossil fuels as quickly as they are being depleted by manmade extraction and consumption. 

Furthermore, as we all know, fossil fuel resources are not evenly distributed across the planet.  While the U.S. is responsible for about 20% of global demand for oil, our national endowment of petroleum reserves only represents about 2% of total supply on Earth.  Perhaps if we’re lucky, we might find an unexpected field somewhere on our property, possibly deep off our coasts (presuming we can avoid Deepwater Horizon Part II), but we can’t expect surprises to change our fortunes by an order of magnitude.

True, there are wild cards.  We can supply the needs we currently meet with petroleum by utilizing other minerals.  For instance, the U.S. clearly has immense coal reserves.  To date, they have been used solely for power generation and industrial production (e.g., coking for steel).  However, it’s been known for decades that coal can be converted into transportation fuels through the Fischer-Tropsch process.  Coal could thus be a transitional source for moving the U.S. off reliance on foreign oil.

In addition, the U.S. has an immense quantity of so-called “unconventional” oil resources:  stuff that doesn’t come out of the ground as crude, but which can be processed into fuels.  The largest of these is the shale resources of the Piceance Creek basin in Colorado, Wyoming and Utah, which are estimated to contain over 1 trillion barrels of oil equivalent.  (In case you accidentally missed that number, it’s over 1000 times bigger than the revised estimate of the resources in Alaska.)

There are other technological approaches:  second-generation biofuels, electrification of vehicles and shifting electricity generation from fossil fuels, and so on.  

Alas, the problem with alternative sources of transportation fuel is that they are both very capital intensive and have higher variable costs than conventional oil/gas production.  Consequently, neither coal-to-liquids nor shale (nor other alternatives) will be pursued with vigor by the private sector unless there is greater certainty that oil prices will remain high enough for long enough to merit the enormous investments required.  Given the oligopolistic oil marketplace, controlled by the OPEC cartel which can depress prices at any time (for at least awhile) by temporarily flooding the markets with the inexpensive-to-produce oil they now are fortunate to have (for at least awhile), no such certainty exists.

As a result, until then, under a status quo energy policy based primarily upon an overly simplistic “drill, baby, drill” mentality, these types of energy sources will not come to market.

Frankly, even then, these unconventional supplies of fuels are just delaying tactics.  Whether one decade or five or ten, it’s only a matter of time before we are compelled to move to an energy system that is truly renewable and sustainable, as opposed to a system based on a “use it and lose it” premise.  

Until we have the foresight and will to do something different, we’ll simply be stuck “over a barrel”.

California’s Low Carbon Diet

By John Addison (12/5/07). When Coke and Pepsi were in the middle of their diet wars, California was an early battle ground. It is a state which tends to do much in excess, including drinking colas. In fact, only a handful of countries spend more money on beverages. Parties of happy and surprisingly fit youth were shown on TV commercials drinking their beverage of choice.

Now millions of Californians are being targeted as early adopters for a low carbon fuel diet. More miles, less carbon emission. It is the law. Executive Order S-1-07, the Low Carbon Fuel Standard (LCFS), calls for a reduction of at least 10 percent in the carbon intensity (measured in gCO2e/MJ) of California’s transportation fuels by 2020. Low Carbon Fuel Standard Program

Successful implementation of the LCFS will be critical to California’s even more ambitious law, the California Global Warming Solutions Act (AB-32), which requires California’s 2020 greenhouse gas emissions to not exceed 1990 emissions. The challenge is that in 2020, California’s population will be double 1990.

Because transportation is the main source of greenhouse gases in California, it is urgent that Californians use vehicles with better miles per gallon and that less greenhouse gases be emitted from the use of each gallon of fuel.

The world will learn from the successful implementation of LCFS because gasoline and diesel are currently becoming more carbon intense. There has been a shift from oil that is easy to get, to extraction and refining that increases greenhouse gases, as we make gasoline from tar sands, coal-to-liquids, and a future nightmare of shale oil. For example, monster earth movers strip-mine northern Alberta, extracting tar sands. Elizabeth Kolbert reported in the New Yorker that 4,500 pounds of tar sand must probably be mined to produce each barrel of oil. The converting of tar sands to petroleum will require an estimated two billion cubic feet of natural gas a day by 2012. Carbon intensity includes all the emissions from the earth movers and all the natural gas emissions from refining.

“All unconventional forms of oil are worse for greenhouse-gas emissions than petroleum,” said Alex Farrell, of the University of California at Berkeley. Farrell and Adam Brandt found that the shift to unconventional oil could add between fifty and four hundred gigatons of carbon to the atmosphere by 2100. Article

So, how can California reduce the carbon emission from fuel use? As a major agricultural state, E10 ethanol will be part of the solution. E10 can be used in all gasoline vehicles including 40 mile per gallon hybrids and in the new 100 mile per gallon plug-in hybrids being driven by early adaptors. Higher percentage blends of next generation ethanol are even more promising. Biodiesel is better at reducing carbon intensity than corn ethanol. Most heavy vehicles have diesel engines, not gasoline. Exciting new European diesel cars are also starting to arrive.

There are over 25,000 electric vehicles in use in California. Heavy use of electricity for fuel would take California far beyond the minimal target of a ten percent reduction in carbon intensity. This is especially true in California where coal power is being phased-out in favor of a broad mix of renewable energy from wind, geothermal, solar PV, large-scale concentrated solar, ocean, bioenergy and more.

California Low Carbon Fuel Standard Technical Analysis documents that there is a rich diversity of sources for biofuels within the state and in the USA including the following in million gallons of gasoline equivalent per year:

In-state feedstocks for biofuel production Potential volume
California starch and sugar crops = 360 to 1,250
California cellulosic agricultural residues = 188
California forest thinnings = 660
California waste otherwise sent to landfills = 355 to 366
Cellulosic energy crops on 1.5 million acres in California = 400 to 900
California corn imports =130 to 300

Forecasted 2012 production capacity nationwide Potential volume
Nationwide low-GHG ethanol = 288
Nationwide mid-GHG ethanol = 776 to 969
Nationwide biodiesel = 1,400
Nationwide renewable diesel = 175

A variety of scenarios have been examined with detailed analysis by U.C. Berkeley, U.C. Davis, and stakeholder workgroups that include technical experts from the California Energy Commission and the California Air Resources Board. Several scenarios are promising including one that would achieve a 15% reduction in carbon intensity with the following percentage mix alternate fuels and vehicles of some 33 million light duty vehicles by 2020:

Fuels:
Low-GHG Biofuel 3.1%
CNG 1.7%
Electricity 0.6%
Hydrogen 0.4%
Low-GHG FT Diesel .9%
Sub-zero GHG Biofuel 3.9%

Vehicles:
CNG vehicles 4.6%
Plug-in hybrid vehicles 7.4%
Flex-fuel vehicles 34.7%
Diesel vehicles 25.5%
Battery electric vehicles 0.5%
Fuel cell vehicles 1.9%

The ultimate mix will be determined by everyday drivers in their choice of vehicles and fuels. Low emission choices are becoming more cost-effective with the growth of electric vehicles, waste and renewable hydrogen, fuel from biowaste and crops grown on marginal land, and even fast growing poplar trees that absorb more CO2 than is emitted from resulting biofuels. The alternatives make fascinating reading for those interested in future scenarios for fuels and vehicles:

California Low Carbon Fuel Standard Technical Analysis and Scenario Details
California Low Carbon Fuel Standard Policy Analysis

California’s ambitious goals to reduce greenhouse gas emissions will benefit by the increased motive energy per CO2e that is described in these scenarios. California will also benefit from vehicles that will go more miles with the same energy input. Vehicles are getting lighter and safer as high-strength carbon fibers and plastics replace heavy metal. The shift to hybrids and full electric-drive systems allow replacement of heavy mechanical accessories with light electric-powered components. Hybrids allow big engines to be replaced with smaller, lighter engines. Pure electric vehicles can eliminate the weight of engines and transmissions. Less fuel weight is needed. Aerodynamic vehicles are becoming more popular.

Employer programs are leading to more flexible work, less travel, and increased use of public transit. Demographics may also cause a shift to more urban car sharing, use of public transit, bicycling, walking, and less solo driving. It can all add-up to a celebration of low-carbon living.

John Addison publishes the Clean Fleet Report which includes over 50 articles about clean transportation.

Triple-Digit Oil Prices Ahead?

by Richard T. Stuebi

Last week, as reported on Yahoo!, the chief economist of the investment bank CIBC went on record that “We’re in a world of triple digit oil prices for the foreseeable future,” beginning by the end of 2008.

Increasingly, I’ve been hearing through the grapevine prognostications of $100/barrel oil. I put a lot more weight on CIBC’s view than on Hugo Chavez’s. Why? Based in Canada, CIBC prides itself on being a banker of note to the huge Canadian oil and natural resources industry. Besides, Canadians in general seem less prone to hyperbole than we Americans (or Venezuelans). As a result, I expect that a firm such as CIBC doesn’t put out such statements very lightly.

What does $100 oil mean? By my calculations, each additional $10/barrel increase in oil prices, translates to about $0.40/gallon in gasoline prices — assuming no changes in oil transportation costs, oil refinery economics and oil taxation. So, if we’re seeing gasoline close to $3.00/gallon today with oil at $80/barrel, I would expect almost $4.00/gallon at $100 oil.

Higher prices for motor fuels should provide further support for the emergence of biofuels markets (both ethanol and biodiesel). Although biofuels continues to receive lots of public sector push and mass-market discussion, the economics of biofuels have suffered recently, as feedstock prices (for corn and soybeans, respectively) have been bid up by surging demand for biofuel production. The price spreads between feedstock and fuel have become so narrow that biofuels producers now have little opportunity for profit. With higher prices in motor fuels markets, there is more prospect for investments in new biofuel production to be profitable, and for existing biofuel producers to return to reasonable profitability.

Perhaps more interestingly, higher oil prices will provide greater impetus — both from the government and from private sector investments — for the development of next-generation biofuel technologies (e.g., cellulosic ethanol, algae-based diesel), coal-to-liquids and gas-to-liquids projects, oil shale retorting approaches, and the hydrogen infrastructure. These are very capital-intensive and long-term opportunities that many parties are leery of pursuing, in the fear that oil prices will fall back to lower levels and render the efforts uncompetitive and therefore wasted.

If we are truly going to wean ourselves off of oil, we really need high oil prices for a long duration, in order to provide ongoing economic sustenance and continuing urgency for the development of these new energy technologies. The forecast of triple-digit oil prices should therefore not be something to dread, but rather something for economic opportunists to seize.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.