Thursday, June 12, 2008

Peak oil vs cornucopians again...

I get tired of all the Peak Oil conspiracists I run into in my line of work. But I also get exhausted by all the industry cornucopians who keep telling us that there's no problem with oil supplies, or the problems we meet are purely political.

Of course there's a problem in the oil market. If there wasn't, prices wouldn't be so high. And of course oil is a finite resource. You do know the definition of the term finite, right? And, somewhere in all that great MBA training, someone did explain the first and second laws of thermodynamics and some geology, before they put you in charge of an oil company? That molecules of extremely useful hydrocarbons don't just appear in large quantities from nowhere, annually replenished, manna from corporate heaven?

As to the Peak Oil conspiracists, it's easy enough for me to imagine that oil execs are stupid. Lord knows I run into enough stupidity in my line of work. But do you really imagine that they are in charge of the planet? And that all the geologists and other petroleum scientists report directly to corporate mind control once a day, for the order of the day?

Even the Nazis, who probably had one of the tightest mind control ships in the ocean, were not that good. They leaked like a sieve, witness Rudolf Hess, Canaris, and the Wehrmacht assassination plot. Human organization is inherently messy and stochastic.

But what really gets me is not just the social theory that is implied in these silly and mutually antagonistic points of view, nor the way they vie for our attention when I can so easily see that both are mistaken. No, what gets me is the root world view itself that is revealed by their advocacy. The corporate types reveal their uber-capitalistic, super-arrogant notions of world hegemony, such that they actually seem to fancy themselves in charge of geology. The Peak Oil conspiracists, on the other hand, are so helpless in their self-affirming notions of resistance and defiance as to negate both the fact of democracy itself, and their own responsibility to participate in that democracy, in one breath. Plus, they seem to like to go around scaring people into listening to them.

But what appalls me the most is the maths. Neither side gets better than a D-minus for word problems, and I think if we were being honest, and not socially promoting the poor kids so as not to hurt their sad little feelings, we'd flunk them both.

The word problem goes like this:

Little Johnny has a big bucket of oil he can produce each year, called the oil supply capacity. This capacity can be increased, but right now little Johnny can physically only produce about 35 giga-barrels a year. If little Johnny wants to make more oil, he has to build more oil plants and terminals.

It doesn't matter how many plants and terminals he makes, though, because he only has a certain amount of oil in the ground to begin. This is a big problem for little Johnny. We call this problem geology. We're going to talk about giga-barrels of oil. Just remember, children, a giga-barrel is a billion barrels.

Geology means that little Johnny estimates on the one hand he has between 700 giga barrels of oil in the ground (Peak Oil theorists), and on the other hand he thinks he may have as much as 2500 giga-barrels of oil in the ground (the US Geological Survey). This may seem confusing to little Johnny, but geology is not an exact science when you can't actually see the oil to count the number of giga-barrels, and it wouldn't be so confusing if Johnny understood the maths and the geology.

It might seem important that there are two extreme estimates, but it isn't really, children. We'll explain later. We call this part, the "punchline."

(The BP executive in the article used the number of 1.24 trillion barrels, or 1,240 giga-barrels for his estimate. But remember, it doesn't matter, and I'm going to tell you why.)

Little Johnny has a smaller bucket of oil he finds in the ground, at a certain rate per year. The rate goes up if he spends more money to find the oil in the ground, but it has has never exceeded 10 giga-barrels a year in the last twenty years. We don't know why, but some of us suspect it's that bad old geology again. Bad geology just didn't make enough oil to begin. Oh well.

But when little Johnny gets his oil out of the ground, he refines it and sells it. Right now this is very controversial. Lots of big rich people have invested in little Johnny's oil companies, and are making beaucoup of money. But so have all kinds of other people, including lots of littler, poorer people with pension funds and the like, and the pension funds are in fact using the oil investment profits to make up for the losses in real estate and other areas so they can keep paying the little pensions to all the little people. I think we may want them to keep doing this. This is something we call "macroeconomics." But all kinds of people are still upset that this is happening. They don't call it macroeconomics. They call it "gouging." Oh well.

Children, when you grow up, I want you to be nicer than that.

Let's get back to little Johnny's oil that he's selling. This is the punchline. You see, the planet has a thing called the economy, which grows every year. The economy grows about three to six hundreths of it's original size a year. We call this three to six per cent growth. To grow this three to six per cent, the economy seems to use between two to four per cent more oil per year.

Two to four per cent more oil per year is what Johnny is asked to sell, extra, each year. But he has to build new plants and terminals, and he only has between 700 and 2500 giga barrels to begin

So now we have everything we need to do the math, children. Except the proper word problem question.

The question of course is, "how long will little Johnny's oil last?"

If Johnny starts by selling 35 giga-barrels, and he has 3 per cent growth, the next year he's supposed to sell 36.05 giga-barrels. The year after that, he starts expecting to sell 36.05, but he's asked for 37.13. If after 10 years, oil demand increases at 3 per cent per year, he is going to be asked for 45.6 giga-barrels, then at twenty years, he'll be asked for 61.3, then at thirty years it will be 82.4 giga-barrels that little Johnny will be asked for. We call this phenomenon, children, exponential growth.

So you see, children, with exponential growth, it will only take little Johnny twenty or so years longer to finish up his oil if he has 2500 giga-barrels, than if he has 700. That's why it doesn't matter how much he has, really. It matters most what the number is that the global economy grows by each year, and whether that number also makes the oil demand number grow or whether we uncouple our economy from its dependence on oil. That would make a big difference.

Of course, there's a silver lining in this cloud. The inexorable exponential math of oil depletion is just one side of the coin, one part of the model. There's also the math of arithmetic decay that results from supply and demand. Because if oil price keeps rising, oil demand will not in fact grow by as much as two to four percent a year, because people will be busily uncoupling their economies from oil, so as to save money. Demand may even drop below 35 giga-barrels, and that will help little Johnny sell oil a little longer.

I could crunch those numbers for you too, and give you a complete model that accounted for both depletion due to rising demand, but predicted demand as a function of price. But you, like little Johnny and the conspiracy theorists and the oil executives in the article are probably tired of trying to do math in your head. You just want me to tell you what will happen to oil supply.

What will happen to oil supply is, it will run out. Not as slowly as the oil executives think, because demand is rising faster, and new discovery is negligible. But it won't run out as quickly as the Peak Oil conspiracists believe, because, well, there is no conspiracy, and because high price means people look for other ways to run their businesses and homes than oil, and demand actually drops. What will happen is that the price will continue to increase steadily, but this price will be matched in stages by the prices of various other energy sources, such as wind or solar or biomass power, and we will learn to use those now-cheaper sources of power to do the things we do with oil, such as run cars and trucks, or heat our homes.

This will be a confusing time for some of us, especially if we can't do word problems or understand math.

Here's the article that got me going on this. Enjoy.


Production decline does not mean oil is running out, says BP


Chief executive calls for Arctic and other areas to be opened up for exploration

* Terry Macalister
* The Guardian,
* Thursday June 12 2008

1 comment:

LouGrinzo said...

While I generally agree with this, let me add a couple of details.

Peak oilers, including those, like me, who think we're headed for a near-term peak in world oil production, do not think we're "running out of oil". One of the first things the non-doomer crowd tells people is that economics dictates that we'll never run out of oil--it will become too expensive to use long before we use it all.

Also, there's the non-linearity of the cost/barrel of extraction. We're using up the cheap, high quality stuff first, of course--that's econ 101. But a lot of the less desirable oil, like tar sands and ultra deep water fields, are going to be very expensive to turn into the products we want.

The phenomenon you mentioned about higher prices spurring the transition is the issue many doomers don't understand, and also the one that makes a lot of non-doomers nervous. It's all in the timing; if we stick to a "undulating plateau" of oil production for a while longer, which is basically where we've been for a few years already, the transition will be quite expensive and painful, but not too terrible. If there's a big drop in oil production soon, we could face some extremely tough times as we make a forced march through the transition.

If I may, I'd like to invite you and your readers to stop by The Cost of Energy (http://www.grinzo.com/energy/), where I write about energy and environmental issues.