Peak Oil News: Expert dispels myths surrounding world oil woes

Sunday, June 29, 2008

Expert dispels myths surrounding world oil woes

The Herald Standard


By James Pletcher Jr.


America and the world will face dire consequences in the next several decades if they do not prepare for a predicted peak in global oil production.

"We really have to start thinking about what the alternatives are, what we are going to do and start acting on it. Our future isn't written. It's all about anticipating the change and doing something about it,'' Dr. Robert Kaufmann, Ph.D. of Boston University and an expert on gasoline prices and world oil supply, said.

Oil, he added, is the ideal fuel for transportation. "But, say right now, you have an alternative to motor gasoline. That means you will have to replace every car, gas station, retrain mechanics, all over the world. These are things that do not occur overnight.''

Kaufmann was the main speaker during a Foundation for American Communications (FACS) tele-seminar, "Pain at the Pump: What Comes Next in the Gas Price Crisis.''

Basing his observations on data available from the U.S. government, Kaufmann said oil is a finite resource laboring under increasing demand.

"This is why foresight is really important. We have to get technologies in place,'' he said.

Kaufmann explained there is a net energy supply, which is the difference between supply and demand. "If you plan early, the net reduction of energy supplies in the economy will be manageable. If you wait until production turns down, then the net energy is really squeezed and that will have incredibly disruptive affects.

"We have to plan for what is coming next and start to invest well before the peak in global oil production occurs or we are really going to be in a tough transition period,'' he said.

Kaufmann also said predictions are that new oil fields in the U.S. won't offer enough supply to cut a growing demand for imported oil.

Among the issues Kaufmann discussed were:

- What's really driving the current spikes and what's next?

- Is the world running out of oil? Can the United States insulate itself from world oil shocks?

- Is there a reasonable policy response to oil prices?

- What are the economic consequences of high gas prices?

- Are environmental regulations responsible for refinery shortages? Would a change in environmental policy help solve the problem?

Prices

"Where are oil prices now? Crude oil is traded in New York Mercantile Exchange daily. There has been this very rapid increase in oil prices. Since about 2003, oil prices have run up fairly rapidly. There was a brief lull, but now they are back up again. Why are oil prices so high? Demand has gone up,'' Kaufmann said.

This situation, he said, has occurred in the 30 developed countries belonging to the Organization for Economic Cooperation and Development (OECD). However, demand has also risen in non-OECD countries, including Mexico, China and Brazil.

"We would be hard pressed to say there has been a sudden, rapid acceleration in oil demand in OECD or non-OECD countries. We are not looking at some kind of demand shock. It is a supply-side issue. Non-OPEC production has gone down in recent years, causing OPEC production to drop, so that even now, OPEC is barely back in terms of production as it was in early 1970s. As long as non-OPEC countries were able to push into the market, they were able to weaken OPEC's influence. Now OPEC is back in the driver's seat and it is responsible for the rise in prices since 2004,'' he said.

"The only time in history when there was a competitive market in the U.S. for oil was during the early part of the last century. There was a tremendous boom and bust cycle. Neither producers nor consumers were really happy with that cycle, so they petitioned Congress to get rid of it. In 1936, Congress passed an act that allowed states to set up commissions and allow them to decide what fraction of operative capacity they were allowed to produce each month. The Texas Railroad Commission figured how much oil was needed from Texas to balance supply and demand. So the fluctuation disappeared from 1940s through early 1970s. That was created by a benevolent monopoly. But, after 1970, boom and bust returns and this is the period when OPEC takes control of the market.

"The bottom line is there really never was a competitive market for oil because most is found in really large fields, making it easier for producers to conspire and set prices.

"OPEC controlled oil at the margin and that is what gives them control or ability to influence oil prices. OPEC controls a large amount of the world's oil reserves today.''

"Why does it matter that oil prices are high? In the early 1960s, 6 to 7 percent of our income was spent on energy. That went up to almost 10 percent during the oil crisis. Then, we spent about 4 percent and now as we approach the end of the first decade of the 21st century, it's back up to 6 to 7 percent.

"Consumers are getting squeezed on all sides. Food prices are going up, energy prices are going up. What happens when consumers have less money to spend on everything else? They spend lots at gasoline stations, for food and health care, which means that all the other things - furniture, clothing, cars and personal items - they don't spend as much. What happens then is we get a recession,'' Kaufmann explained.

Another consequence of higher oil prices also is a weaker dollar, he added. But there is no evidence that as the dollar gets weaker, the price of oil goes up. "The causation goes from oil prices to the strength of the dollar, but not the other way around. So, there is no reason to believe if the U.S. did something to strengthen the dollar, oil prices would come down,'' he said.

Where will prices go? "In the short term, I think there is some room for oil prices to come back down. The belief is there is a significant speculative factor in oil prices. We would like to think that speculative bubble over time will burst and oil prices will come back down. But don't look for even $60 barrel oil anytime soon unless there is a real collapse in economic activity.

Oil supply

"Is the world running out of oil? You hear a lot about world oil production, that we are running out or it's about to peak. Today, we have produced about 1 trillion barrels of oil. If we predict the world has about another 1.5 trillion barrels, then we will never run out of oil.

"But, what if there are less than 1 trillion barrels left?'' he said. Kaufmann believes a peak in oil production will come in 2014 if there are less than a trillion barrels remaining to be pumped and the peak will come in 2035 if, as "optimists believe, there might be 3 trillion barrels left.

"If we believe these curves and follow the decline after the peak, and how quickly we need alternative supplies for oil, then we will need the equivalent of a new Saudi Arabia every decade,'' he said.

Kaufmann explained that from 1900 to 1970 the real price of oil was relatively flat, although production rose during those years. "You can raise oil prices like crazy, you can drill for oil but the production level continues to go down. There is nothing you can do that will reverse that peak in production so you will need those alternatives in a timely fashion.

"The bottom line is that people have to appreciate that oil is a wonderful fuel. It's liquid, easy to get at in the ground, and the last 150 years will be known in history as the petroleum age as much as history notes the bronze age or industrial age,'' he said.

However, Kaufmann added that there is no alternative at present that is as good as oil for fuel. "For the first time in history, we will be going from a good fuel to one that is not as good.''

Oil prices, Kaufmann added, are not going to collapse. "There are real supply-and-demand fundamentals that will keep oil prices high. One of the reasons oil prices collapsed in the mid-1980s is there was a huge drop in demand. The world reduced its oil consumption by 2.5 million gallons a day by generating electricity with coal and shutting down refineries.

"But, it's very hard to replace oil that we use for transportation. Then there are the non-energy uses to make plastics, fertilizer and other feed stocks and these uses are very difficult to substitute. Reducing oil demand now as we did in 1980s will be a much more drawn-out process.

"Demand is forecast to rise. In many regions outside OPEC, we have pretty much depleted the easily obtained oil. In the lower 48 states, oil production has been declining for about 35 years. In the North Sea, production has been declining, even though prices are skyrocketing. Production is going down, although prices are going up.''

U.S. oil independence

Kaufmann said data show world oil demand is 85.6 million barrels per day. "That means every day, the world burns this much. One barrel contains 42 gallons,'' he said.

OPEC produces 43 percent of the oil on the world market. Meanwhile, the U.S. consumes 20.6 millions barrels per day, or about one-quarter of the world production. Kaufmann said this figure isn't "really out of step since the U.S. produces about one-quarter of the world's economic activity.''

The U.S. imports 60 percent of its oil consumption. "How do we get rid of this and replace it with domestic sources of oil? You would have to come up with 12-13 million barrels per day (or an equivalent energy source) to make the U.S. independent of foreign oil sources,'' he said.

"Let's suppose the U.S. produces all of its oil domestically. Let's say there is a big shock in the markets and the price goes up to $146 a barrel? Would oil companies sell oil to U.S. consumers for one penny less than they could get for it on the world market? The answer is no. Consumers in the U.S. would have to pay the same world price as everyone else.'' Another issue, he said, is should the U.S. seek to reduce its reliance on unreliable suppliers?

"That's really a giant myth because there is nothing the U.S. can do to insulate itself. The world has one big pool of oil so whatever happens on one side of the market ripples clear to the other side.

"What if the U.S. gets all its oil from Iran and they decide they are not going to sell it to the U.S. anymore? The U.S. would have to find other sources of oil to buy. But Iran would also have to find other customers to buy its oil. On the net, nothing would really happen in the world oil market, other than the price of oil might go up a little bit because by rearranging the lines of supply, the cost to transport oil around the world would increase. The downside to reducing the U.S. reliance on imported oil is that, ultimately, it is more expensive to produce oil here than to import it,'' Kaufmann said.

"If you try to produce it here you will be devoting more effort to producing a good or service that you could get someplace else more efficiently.''

Kaufmann said that happened in the 1970s and 1980s oil crises. "It was the express U.S. policy at that time to reduce dependence on imported oil and the government offered all kinds of incentives for domestic drilling. But we see that the U.S. in doing that squandered a huge chunk of capital by drilling a lot of dry holes that never produced,'' he said.

"What about opening the Arctic National Wildlife Refuge for exploration? Even if you found the stuff it wouldn't come on line for five to 10 years. If we started producing now, the best-case scenario is that in about a decade we would produce about 1 million barrels of oil a day. But now we are using more than 20 million barrels a day. Would such production make any difference to the world supply-and-demand balance? The answer is no. It would not really lower U.S. imports or the world price significantly.

"If we can't get oil from the U.S., where will it come from? The big supplies are in OPEC countries. Over the next 10-20 years, the U.S. and world in general will become increasing reliant on OPEC for oil and, geologically, there really is nothing that will change that.

"That's important, because in order to balance supply and demand, OPEC will have to embark on an incredibly ambitious plan to expand its capacity from a low of million barrels it is now producing per day to 50 million per day, according to the U.S. government.''

"So, one of the issues is can OPEC really influence prices when it is responsible for producing less than half the world's supply of oil? And, should OPEC increase its capacity? Is it in OPEC's best interest to expand its ability to produce oil? As OPEC increases capacity, it will put downward pressure on prices, and as prices drop the demand goes up and non-OPEC countries will reduce their production because prices are down.

"If you do the math, it is not really in OPEC's interest to expand production significantly because oil prices drop faster than OPEC production increases. We are basically saying that OPEC it needs to expand its capacity and let its revenues decline so the U.S. and the rest of the world can have less expensive oil.''

Gasoline prices

"What about the idea that motor fuel prices rise very quickly when oil prices rise and yet fall very slowly when oil prices come down, thus allowing the oil companies to make huge profits?

Oil and gasoline prices, he said, "are rising together at a fairly rapid rate. And, consumers are pretty smart. Myself and others have done some pretty sophisticated analyses of the data and it's true that in some states gasoline prices to not fall as rapidly when oil prices come down,'' he said.

Those studies show one of the states is Pennsylvania. The others are Texas, Michigan, Florida, Illinois, Minnesota, Ohio, Louisiana and Idaho.

"We can explain that behavior is based on stocks and the way refineries speed up and slow down production of gasoline. What happens is that when crude oil prices rise, the only way to cut demand is to have gas prices rise with it. However, when crude prices fall, refiners slow down the rate at which they refine motor gasoline and sell what they have from their inventories,'' which slows down the drop in gasoline prices. Then, as demand rises, refinery capacity limits supplies.

Regulations

There is a myth that environmental and government regulations have hurt refinery development, Kaufmann said.

"Oil refineries are very capital intensive and the only way to make money is to run them 24 hours a day, 365 days a year. When demand dropped off in 1970s, a lot of companies closed refineries. They are reluctant to expand refinery capacity until they are sure that demand would be there. There really is little evidence that I can find that environmental regulations are responsible for a drop in refining capacity.''

James Pletcher Jr. is Herald-Standard business editor. He can be reached at 724-439-7571 or by e-mail at jpletcher@heraldstandard.com.


2 Comments:

At 12:17 PM, June 30, 2008, Blogger bavarian said...

Planning ahead is a great way for America's to recover from the falling dollar but also get a good idea of where energy is going to come from in the future. peak oil is changing in today's markets once people realize that its going to happen anyone can make a profit. Companies that are at the top of oil will most likely not be there when oil is no longer a main source of energy. Something new is going to come in and take its place...its just a question of what.

 
At 4:00 PM, June 30, 2008, Anonymous Anonymous said...

The energy we consume cannot be stored and we guzzlers refuse to obviate our doomed. Nevertheless, there is no infinite supply of energy- least of all being fossil fuel. Even suns burn out, explode and are recycled to form more suns, more planets. Do humans really have preeminence over nature? Well, let us see.

If we totally convert to nuclear power, there is only so much uranium in the ground. Sun power will only work during daylight. Other methods being explored are contingent upon a limited amount of materials being produced from the soil. The very best we can do is conserve and hope like hell perpetual, alternate energy sources will be invented or found or brought down to us from the Gods. There is no mandate coming out of Washington, no high court decision, no Manhattan-style Project to solve this one.

President Jimmy Carter, in his infinite wisdom, warned us about our lavish, wasteful way with fuel and it cost him his day job. Well, conservation will only prolong the inevitable. We will run out! We are drinking all the wine (on a global level) and there is no way to grow more grapes. I personally believe no one wants to look realistically (some may say fatalistically) at our consumption habits and our inability to find perpetual energy sources. Here is a realistic thought. There may be none available! In our present cognitive and technological state we may lack the ability to develop a source for sustainable energy.

Who among us have the foresight to determine what to do before the last drop of oil drips? Yet, we grandstand and create pages of statistical nonsense as to which methods are best (solar, nuclear, bio…). All seem doomed to failure. Perhaps our total dependence on fossil fuel was a mistake. An economy dependent upon one product to sustain a way of life is subject to collapse. Without a doubt our dependence on the combustion engine (in the form of a car) as our primary method to transport one human was a mistake. Additionally, the type of vehicle one drives in America has always been directly related to a person social standing. For those who don't choose to drive a car but take the subway, ride a bike, the bus, in order to accommodate a life-style beyond the car, their names are carved lowest on the social totem poll. On the other hand, fuel conservation, alternative methods such as building up the infrastructural for public transportation has never been seriously contemplated.

As long as we continue to feed the automobile and waste precious resources, we expedite our own demise. Did we expect to enjoy cheap gas forever and not understand how oil is priced on the world market? Here is how the price of all commodities is driven upward. Most Americans are functionally illiterate as to how the process works although our hunger for oil persists. (close to 20 millions barrels a day- 25% of the world's total) and the supply is low. Before we actually run out of oil, the price will levitate and balance with the demand. Consider China and India for a moment. They are comparable to growing industrial babies and their desire for sweet crude (low sulphur) will become ferocious. But the world output for these little toddlers will not be able to satisfy their appetite. The cost of future crude is going to be enormous. (China, India, Russia and the Middle East for the first time will consume more crude oil than the U.S., burning 20.67 million barrels a day this year- April 21, 2008 Bloomberg)

As for an appetizer- prices for corn, chicken, pork and soybeans are predicted to double within a year. This will happen because we choose to feed grain to our insatiable hunger for the combustion engine- that stupid, so-called sexy, automobile- another mistake in progress. We can refer to this as the Dinosaur AFF-ect whereby they could not foresee their approaching doom.

Remember the good old days before 1973 when gasoline was cheap? We could drive around town in our air polluting V8, run low on fuel, simple drive up to the pump and yell, "filler up". Then alone came Yom Kippur. You remember them- Sadat, Meir, The Sinai, The Golan and the OPEC oil embargo against the US and other western nations. We thought the shortage of oil was them-dammed Arabs holding out on us. Well, the oil embargo is 30 years behind us. Why has oil gone form a simple shortage in 1973 at $12.00 a barrel to $25.00 a barrel in 2003 trading at over $140.00 a barrel in 2008 and headed toward $200.00 a barrel in just 5 years? The answer is we have nearly exhausted the only developed energy resource.

Now there are some questions we might want to ponder. Can oil producing countries become self sufficient and never purchase oil form the world market? Would that not disrupt the market itself? Are we isolated from the ebb and flow of an ocean we are deeply entrenched? (Answers) Any statement from Washington declaring our desire to be free from OPEC is nothing but political grandstanding. As long as oil is traded America will purchase it.

Enter our existing president. In his finite wisdom (Mr. Bush) wants to ripe out the wilderness of Alaska and drill beneath the tundra in order to exploit more of that Texas tea. Bush urged congress to allow the pristine remoteness of the Alaskan wilderness to be exploited for the benefit of the American people. What benefit? So Americans can become free from Middle Eastern oil and return to the days of cheap gasoline? Those days are gone! Even if all world governments subsidized their oil it puts nothings back into the ground and does nothing to locate alternative sources. It would be a foolish and futile attempt to satisfy and addiction that borderlines suicide. This ancient tradition of wastefulness confirms our lack of dominion over the natural world. Because nature is not wasteful, it is circular. It comes back to the starting point renewed, fresh, and invigorated. Even a ragging forest fire only destroy trees, the forest is then transformed. Yet Bush is willing to exploit the last great American wilderness because the single developed energy resource is being depleted. He and his oil-invested cronies, unlike the dinosaurs, know the end is near. Its profit now or never.

So if present trends continue- and they most likely will- the last few billion barrels of oil will not be traded on the open market. They will become the property of a military victor. Under the pretext of national security we will fight throughout the Middle East, drill beneath the tundra- off the coast of California and the Gulf of Mexico or anywhere to secure that last barrel of Oil. Within the lair of oil Gods they will plan for war under the pretext of anything imaginable to position themselves for that last taste of crude. The die is already being caste- invading Iraq when it was not a threat and al Qaeda was never there before the war- forming a pretext to invade Iran to stop it from developing nuclear weapons- wanting to place military bases throughout the Middle East…

When the human species are gone it will be to a large degree our own arrogant, ignorant, self-centered doing- the complete mismanagement of our meager resources. And the combustion engine and our love affair with the horseless carriage will go down as human's biggest blunder. Good luck to you all and you have my deepest sympathy.

 

Post a Comment

<< Home