DK GreenRoots

Introduction
There is another eye-opening article on The Oil Drum called "Chinese Transportation Growth" that bears careful scrutiny. Especially in light of the recent (well, last 28 years) oil production trends. It turns out that the world oil production rate appears to be "flat-lining". Then consider the recent price trends over the last 22 years. It turns out that raising the price significantly does not do wonders to increase production rates for oil, despite what classical economics teaches. Whatever response time for production rate increases to price increases exists is glacial in comparison to how fast prices move. And the recent price spikes tend to have a boomerang effect; when prices drop suddenly - the price ricochet - drilling activity drops - see here.

The bottom line: in recent times, the production of liquid fuels appears to have peaked. And if the potential supply rate excess relative to the demand rate goes towards zero, prices will skyrocket. Thus, if the demand increases in any one country and prices are to remain fairly constant, then the demand in some other part of the world must decline. It's just simple math.

Adding to this predicament is depletion - about 5%/yr, or about 4 million barrels/day (mbd) on a worldwide scale. It turns out that the new oil coming on stream for 2010 is...estimated to be 4 mbd. Here is the list for those interested. While this is a steady state of sorts, the discovery rate for new finds of oil has to total the yearly consumption (about 30 billion bbls/yr (bby)) for this to be truly steady state. That has not happened for decades; finds have been much less than production for some time. On a worldwide average, there is a 36 year lag between the discovery of a major oil field and the onset of a decline in production from that oil field (peak rate). For those who are math enabled, a great discussion of that is provided by a person who goes by the handle of "WebHubbleTelescope" titled "Finding Needles in a Haystack" - this article also has some nifty graphs of oil discoveries, and you can see that the 30 billion bbls/yr rate has not occurred for a long time. Most of the oil produced in the world comes from major fields (megaprojects) with production rates of more than 50,000 bbls/day - for example, the largest field (Ghawar) in the world (Saudi Arabia) produces about 5 mbd and has done so for decades (7% of world crude oil production).

Discussion
To get an idea of how far and to what extent the US will go for oil (isn't the IraqNam war enough evidence?), consider the Thunder Horse project (located about 150 miles south of New Orleans in the Gulf of Mexico), which just started pumping in the summer of 2008. It produces now more than 250,000 bbls/day or crude oil and 200 million standard cubic feet per day of (mostly) methane. This oil field is located in over a mile of water and more than 4 miles below the ocean floor, with the hydrocarbons at 135 C and under tremendous pressure. The project was years behind schedule, more than 3 times over budget (about $5 billion cost) for a field with a mere 1 billion bbl estimated ultimate recoverable reserve (URR). The oil platform almost got sunk by Hurricane Dennis (100 foot waves), and the many problems with this "bleeding edge" project have been EPIC. Of course, at a paltry $80/bbl, just the oil alone will be worth $80 billion, and during the lifetime that this operates, prices are apt to exceed that level. The Ngas by-product will also fetch at least another $0.5 to 1 billion/yr, while average oil sales at $80/bbl will be about$7.3 billion/yr. This field would supply the US consumption of 18.5 mbd for about 55 days... At the stated production rate, the decline of the production rate will likely happen in 5.5 years (or less if production rate is increased) when about 500 million bbls have been produced (the Hubbert curve Logistic Equation phenomena).

And so, to keep the oil coming, more oil must be found. Since the "easy pickings" in the USA have already been picked rather clean, smaller and smaller patches of oil in more and more extreme conditions must be tapped. Since the oil fields are smaller, more of them must be found to keep production at a steady state, let alone increase. This oil will be much more costly to develop, and much higher priced. In fact, it tends to set the marginal price for oil, and oil will be sold at this price even though the cost of production from older, established fields (such as from Ghawar) is much lower ($5 to$10/bbl). For most of the oil produced these days, the cost of production has very little to do with the price at which it is sold. It's all about the price that can be obtained for it.

And when push comes to shove, people will pay a lot for oil. Try going without it in just a rudimentary form - avoid the use of a car in the winter for a week or so. Oil has become indispensable to the modern sub-urban way of life, to the way in which goods are transported from one place to another, from how we grow most of our food (and life without food just is not life...) to how we project military force... needed to protect oil fields, of course. And much of the world also wants to imitate America in its oil based lifestyle. But there is a problem or two with
that idea.... too many people chasing too little oil. And the CO2 pollution problem (CO2 is the unwanted by product of petroleum and methane combustion) has also become a worldwide problem due to the shear volume of it. There is about 0.45 tons of CO2 made per bbl of oil that is burned for energy. The roughly 30 bilion bbls/yr used works out to 13.6 gigatons (trillions of tons) of Greenhouse Warming Gas dumped into the air annually. No wonder the oceans (the major planetary sink for excess CO2) can't keep up with absorbing all that CO2.... But, although the Greenhouse Warming effect is a long term, serious problem, odds are, it is of secondary importance for the next couple of decades to the U.S. The devastating effects of Peak Oil on oil-dependent societies could very well bring those nations unable to provide their own petroleum to their knees, economically speaking. In the US, 45% of our CO2 pollution comes from burning oil (coal is 35% natural gas (Ngas) is about the remaining 20%. But, without affordably priced oil (which means oil provided in the right quantities to keep the price from going ballistic), we won't have a functioning economy.

So, to be able to deal with the Global Warming problem, we have to first deal with Peak Oil. If we don't deal with Peak Oil in a satisfactory manner, we will not be able to afford the investments needed to deal with global warming (such as making electricity without burning coal and natural gas). Peak Oil (as in peaking production rates unable to equal the demand for oil) will result in significantly higher oil prices over time, getting increasingly expensive, as people outbid each other for the right to use oil (a process called demand destruction). Very subtle changes in the supply and/or demand can have drastic effects on price. In 2007-2008 period, oil went from $55/bbl to over $147/bbl when demand almost reached the supply capacity of the world. This helped set off a severe recession, since more money had to be spent on fossil fuel energy and that meant less was available for everything else. The recession lowered demand by about 4 mbd worldwide, and the result collapsed oil prices, which rapidly fell to $35/bbl. At this low price (and with related collapses in natural gas prices), drilling dropped by 50% in the US. The "supply destruction" and some "Saudi discipline" (restraining of production) has brought up the price to the present neighborhood of $80/bbl, and it now appears that supply is once again not going to be able to keep up with demand. Part of this is due to the plateauing of the US economy ("bottoming out"), but another factor is the surging demand in both India and most especially China.

Which gets back to that exponential increase in automobiles in China. A 30%/yr increase in car sales (last year was 13.5 million cars sold in China) means a doubling of the car sales rate every 3 years. A similar expansion of road construction is occurring - road building and autos are a way to employ lots of people (China has 1.3 billion of them) as well as stimulate an economy, and in particular, a manufacturing based economy (the US did that earlier - much of the economic growth in the WW2 to 1970's was based on such a model). After all, cars with no roads means an inability to drive much. So, those car sales and roads built almost guarantee a future demand for gasoline - at 40 mpg, and 4000 miles/yr (pretty modest), that is 100 gallons per car per year, or about 2.5 bbls gasoline per car per year. At best, 2 bbls of crude can yield 1 bbl of gasoline, so these new cars put onto Chinese roads are in effect a demand for about 5 bbl crude oil per car per year. Thus, in 2009, a new demand for about 67.5 million bbls/yr ("only" about 0.18 mbd) was created by sales of 13.5 million cars. But next year, that would be another 18 million cars, and a new 0.24 mbd (total increase in 2 years of 0.42 mbd) of oil demand. In year 3, another ~ 25 million new cars would be added and another 0.34 mbd of new oil demand added (= 0.76 mbd new oil demand). By year 4 (45 million new cars, 0.6 mbd demand just from them, total new demand = 1.36 mbd new oil.....), well, you can see the picture. Add that to declining discoveries, declining new production coming online and the price of $80/bbl will not be able to hold. India (only 1.1 billion people) also has similar dreams.

In fact, much of the breakdown at the Copenhagen Climate talks (COP-15) were centered on China and India wanting to develop economically via automobiles. That means almost guaranteed increases in oil demands from countries which have meager and depleting oil reserves, which means they need to buy it from Russia (in oil production rate decline), Africa (for China, Sudan, thus funding genocide in Darfur) and of course, the Middle East. So far, Iraq is the only country with significant reserves that are not being tapped significantly; even Saudi Arabia will be hard-pressed to increase capacity above decline rates. Furthermore both China and India have pursued mercantilistic economies, driving established manufacturing out of business in the U.S. (among other places) via cheap labor and government funding even in money losing operations, just for the foreign currency. So they have huge currency reserves, while in the U.S., we have DEBT (domestic and balance of trade). Much of that U.S. trade imbalance is crude oil related (10 mbd at $80/bbl is about $300 BILLION per year. While we no longer have real money to import oil, China and India do have money (our money via Walmarts). Oh well, it's not as if we were not warned by union leaders in the U.S. such as Leo Girard (Steelworkers).

Here is the basic proposition: we are close to (may have passed it, are at it, or will soon be at it) the point where oil production cannot be maintained at current rates. With the exception of Iraq, almost all major oil production fields are either past peak production (for example, Burgan in Kuwait and Cantarell in Mexico) or nearing it. Any increase in consumption rate will not likely be matched by an increase in production rate. Adding to this problem is the "Export Land Model" scenario. This states that for exporting countries that subsidize domestic production (for example, Mexico, Venezuela and Iran), oil exports tend to decline at a much faster rate than does the drop in overall production rates. This has tremendous importance for oil importing countries such as the U.S., because the decline in oil available for purchase on the world market will start dropping fast once production no longer increases at a rate to match the increases in domestic consumption of oil producing nations. The decline rate in the amount of oil available for export (= for import) can be dramatic - much faster than the decline in overall oil production. And the world oil price tends to be set by the oil available for export, not the total volume of oil that is produced worldwide.

At present, any country that does not produce enough domestic oil but which seeks to increase consumption of oil results in either of two things. As long as those increases are matched by decreases in consumption somewhere else (thus keeping a slight excess supply of oil available for export), oil prices will not increase much. However, if other countries do not reduce their consumption, then there will be a supply crunch when there is insufficient oil available for export, leading to staggering price rises as the process of demand destruction takes place. And keep in mind that like the game of musical chairs, even with a constant world production rate, the oil available for export is ALREADY DECLINING. See here and http://www.energybulletin.net/node/38948. Among the top 5 exporters (SA, Russia, Iran, UAE, Norway), exports are expected to decline about 6.2%/year (in 2006, their 24 mbd accounted for about half of all exports). Thus, there seems to be no likelihood of increase world net exports, and the likelihood is for continuing decline - for 2009, net exports of ~ 43.5 mbd are down 2% from the 2005 all time record of 44.1 mbd. In other words, 0.6 mbd less oil was available for export in 2009. If this total is added to China's increase in automobile related consumption, 0.8 mbd was available for the rest of the world versus 2008.

Since the USA is way less than broke both domestically and especially with regards to a balance of payments basis, we cannot outbid China for oil. They have the money and we don't, and both they and India can outbid the U.S. for oil, and apparently are doing so. Our only choice is to import less, and that means consume less. We cannot produce our way out of this mess, oil wise. In theory, we could use more and more Ngas for transportation either directly or by converting this to gasoline (several established processes for doing this), but this will only staunch the bleeding a bit, so to speak. It will also cause significant spiking in the price of Ngas due to the increase in the demand for Ngas (to convert it into gasoline and diesel), and this would bring on price equivalency between Ngas and oil (e.g. the thermal price ($/MBtu) for oil and Ngas would be similar; right now Ngas retails in bulk for ~ $5.70/MBtu, while fuel oil in bulk is near $2/gallon ($13.50/MBtu). We have to consume less oil, and in a rapid manner. We can't rearrange Ngas to serve as a petroleum substitute, as we presently import 15% of our Ngas supply, too. We will be lucky to remain self-sufficient in Ngas, and we also have to wean ourselves off of the use of Ngas as a source for electricity, and then as a source for residential and commercial heat. Installing infrastructure/investment that uses more Ngas to make more of our electricity just guarantees a future increased demand for Ngas - not good (unless you are in the Ngas sale business), seeing as that supply will be increasingly expensive, and depleting. Installing infrastructure/investments to convert Ngas into petroleum also perpetuates this system, also guaranteeing future Ngas demand/higher prices/faster depletion.

But how do we cut out oil and Ngas use in the U.S.A., now that we have based our society on these wonderfully useful (but without an infinite supply of them) fuels?

Turbine Power, that's one way to do it. The US and Canada have wind resources in vast excess of current electricity supply. We also have significant tidal resources (Oregon/Washington/Alaska, NE USA, Bay of Fundy, British Columbia, the Maritimes (of Canada), etc). And then there is run-of-river hydroelectricity (alternative to dams, and without the negative ecological impact of dams). Tidal turbines have varying but highly predictable outputs, whereas wind is unpredictable on a short term basis at any given site/quite predictable on an annual basis. Stringing together large numbers of wind turbine arrays that are dispersed over 160,000 square mile (400 miles x 400 miles) areas produces a very stable hourly/daily/weekly output, but this does not deal with peak electrical usage in a satisfactory manner. Run-of-river (ROR) systems have seasonal and sometimes significant annual variability. However, all of these problems can be dealt with using existing technologies, though improvements such as "smart grids" also would be helpful.

Above all, an increase in the one proven and extremely low cost/dependable method of storing electrical energy is required for this renewable energy (Green Jobs/Green Energy) approach - pumped hydroelectric (PH). Currently the US only has ~ 18 GW of PH capacity, though we have tremendous potential for it. PH can even be used with seawater - obviously a tailor made solution for California. We will begin to need at least 10 times our current PH capacity when we start to exceed 20% of our electricity from wind turbines and go towards 100% renewables.

Two other approaches could be used to store electrical and/or heat energy. One is via biomass - fast growing cellulose, in effect. This can be either burned as is or converted to syngas (a mix of H2, CO, CO2 and water), processed and then stored as either methane (Ngas) or as liquid fuels. In addition, electricity can be used to convert water to H2 and O2; the O2 can be used to convert cellulose to syn-gas, while the H2 can be used to reduce either N2 to ammonia (both a fertilizer or a fuel, analogous to LPG) or CO2 to a variety of fuels - methanol, ethanol, methane, gasoline, diesel, acetic acid (makes esters with glycerol) and other materials. H2 can also be used to convert syngas mixes into materials such as alcohols and hydrocarbons. These all work as stored energy sources, or else replace materials presently made with petroleum or Ngas. When liquid or gas fuels are burned, both heat and electricity, or just heat can be obtained. But in any case, the result is renewable electricity converted into stored fuels.

Obviously, replacing existing fossil and nuclear (i.s polluting electricity) with renewable electricity is fairly straightforward (see U.S. Energy Flow Diagram). In the US, replacing the Ngas used to make electricity would avoid the use of about 15 bcfd, or about 25% of the Ngas consumed in the U.S. Since imports are currently about 15% of the supply (~ 9 bcfd of the total of ~ 63 bcfd used), this would free up the US from LNG imports and also Canadian imports (about $20 billion per year is presently spent of methane imports). This would also keep Ngas prices from rising, and slow down the depletion of US Ngas reserves. Ngas supplies about 90 GW of US electricity; replacing it with wind would entail installing about 270 GW (about 9 times our current installed wind capacity). Replacing the coal and nuke derived electricity (~ 340 GW) would require installation of about 1000 GW of wind capacity.

Another rarely thought of use for renewable electricity is in residential and commercial heating. Much of this is currently done with Ngas (about 28 bcfd on average). In terms of electricity, about 300 GW of newly installed delivered electricity (current national usage averages about 420 GW) would be needed to provid the heat using only resistive heating. If all of this could be done using groundwater based or air based heat pumps (unlikely), the electrical usage would drop to around 60 GW (a good argument for heat pumps where possible).

Replacing the Ngas used for electricity and heat could probably be done with an additional 200 GW of delivered electricity. This would need about 500 GW of offshore based wind turbines, or 600 GW of land nbased wind turbines. This would have an impressive effect on Ngas consumption and supply requirements - down to about 20 bcfd from 63 bcfd.

Probably that hardest energy sector to replace is oil used for transportation - 8.8 mbd of gasoline, about 4 mbd of diesel, and about 1.2 mbd of aviation (mostly jet) fuel. Probably the best way to lower the current consumption rates is with increases in fuel efficiency, less mileage traveled, substitution of SOME petroleum with renewable fuels (ethanol, biodiesel, other fuels) and lastly some use of electricity for transportation energy.

At present, US car gasoline mileage is about 22 mpg - while Europe's is near 42 mpg. Achieving the European standard (and they now have a higher standard of living than we do) would cut gasoline usage by about 4.4 mbd. Next, some combination of driving fewer miles (somewhere near 50% less miles driven), using mass transportation more (especially electric mass transit), moving closer to work, using motorcycles instead of cars, biking, walking, and using partly electrified (Plug-In Hybrid Vehicles - PEHV) or just all electric cars should then be able to lower gasoline (or EtOH/gasoline) usage another 50%, to near 2.2 mbd. After all, ethanol is now made at rates of about 0.65 mbd (equal to about 0.45 mbd of gasoline) in the US. At the rate of 1.8 mbd of gasoline, about 3.6 mbd of crude oil is needed - and presently, US crude oil production is about 5.5 mbd. There is also significant amounts of "lease condensates/natural gas liquids" - about 0.8 mbd co-produced from natural gas wells, and which contain a lot of gasoline components. Thus, US usable crude oil production averages around 6 mbd for liquid fuels.

Another way to reduce petroleum usage is to shift long haul trucking over to trains (see Alan Drake's excellent electric freight plan for how this could work). In general, trains are 9 times as efficient at hauling freight as are trucks, and freight rail can be easily electrified, in a way that would further strength the grid and renewable energy. Electrification of 36,000 miles of main railroad lines (they haul about 80% of rail freight traffic) could avoid using most of the 260,000 bbls/day of diesel now used by trains, and also replace up to 1 mbd of the 2.5 mbd used in trucks. And if less and less coal is mined/burned for electricity, more of the freight lines could be opened by to haul truck trailers via rail "piggy-back" (coal is one of the major items hauled by rail).

Finally, the passenger rail system (city-to-city, or mass transit in metro areas) needs a drastic upgrade. This could significantly lower both gasoline usage by cars, but also jet fuel usage, especially for "short haul" trios of ~ 500 miles or less. Trains are a 21st century mode of transit, whereas cars and jets are, in general, a 20th century approach. Trains are amazingly frugal energy users (especially electrified passenger rail) compared to airplanes and individual cars.

Conclusion
Of course, a massive Keynesian stimulus (not the wimpy stuff tried to date (as of January, 2010) by the Obama Administration) could do wonders for passenger rail construction/light rail in metro areas. So would supplying the renewable energy systems to replace polluting electrical generation, polluting heat production (especially residential and commercial) and some of our transportation needs. However, most of the oil usage minimization would come by just being more efficient - or to put it another way, less wasteful - (less driving, higher gasoline mileage, less long haul trucking, less airplane usage when trains could do as well) and... smarter. At minimum, eliminating oil imports would save about $300 billion/yr or more in money exports - and by doing that, the US balance of payments might actually go positive, but there would be significant economic benefits because that money would remain circulating within the country; exporting it is like imposing a $300 billion/yr tax on the people. Furthermore, that $300 billion/yr is likely to grow to more than $1 trillion/yr when Ngas is also included once oil and Ngas prices spike again, and again in the near future.

By eliminating most petroleum usage, the investments needed for rail and renewable energy investments can be obtained. After all, $300 billion to $1 trillion/yr is a bit more than chump change. And this plan proposed in this article would also eliminate well over 50% of the US CO2 pollution (most oil and Ngas, which constitute 65% of US Co2 pollution) without significantly impacting electricity costs to consumers (they probably will rise IN EITHER CASE), as long as Feed-In Law arrangements are employed. As renewable electricity is made available, it could also replace the dirt cheap coal burning units, further eliminating CO2 significant single point pollution sources. Once the pricey fossil fuel usages that can be replaced by renewable electricity are taken care of, the replacement of coal can begin in a serious manner, once oil and Ngas prices are no longer bleeding the country to death, economically speaking. Yes, looks like oil and natural gas have now become lampreys on our society. That puts a different spin on those Exxon-Mobil and "Clean Natural Gas" advertisements, right?

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Also cross-posted on http://wagengineering.blogspot.com/2010/01/peak-oil-and-wind.html