"The era of cheap oil is over. Current trends in energy supply and consumption
are patently unsustainable - environmentally, economically and socially - they
can and must be altered."
- International Energy Association executive director Nobuo Tanaka, November
12, 2008.
The International Energy Association (IEA) was formed in 1974 at the initiation
of then United States secretary of state Henry Kissinger. It was established in
reaction to the 1973 oil embargo. Its initial charge was to establish surplus
oil reserves in the US, Europe and Japan, so these oil-importing nations would
not be vulnerable to embargoes or other sudden changes in global oil supplies.
Over the past 35 years, IEA has evolved into one of the
major sources of information on the global oil industry; that is an extremely
problematic role.
Now, just as the world economy slows and oil drops below US$50 a barrel, the
IEA has released the most important report in its three-decade history, World
Energy Outlook 2008. This report does something both very important and most
amazingly unprecedented. It takes an extensive inventory of global oil
supplies.
It would seem fairly logical that an organization responsible for tracking the
global oil industry would as a matter of course, indeed of its very nature,
take a close look at actual oil supplies every year, but this in fact has not
been the case. For almost its entire existence, the IEA has quite unbelievably
looked at demand and assumed supply would be there to meet it.
So after their first real inventory of global oil supplies, extrapolated from
800 largest oil fields, the IEA's conclusion? Mr Tanaka put it quite
succinctly, "The era of cheap oil is over." And despite some of the report's
optimistically shaded opinions, a closer look at the World Energy Outlook 2008
leaves a rather more ominous conclusion. Not only is the era of cheap oil over,
but the era of oil as a yoke on future economic growth has begun.
The report states that current field production is declining 9% a year. Even
with the most advance technology, this decline will only be stemmed to 6.7% a
year. Mr Tanaka adds, "Even if oil demand was to remain flat to 2030, 45
million barrels per day of gross capacity - roughly four times the current
capacity of Saudi Arabia - would need to be built by 2030 just to offset the
effect of oil-field decline." In 20 years, to just run in place, we have to
replace almost 60% of the oil we're currently producing.
The IEA provides various ways this oil will be replaced; all are, to say the
least, controversial and none is cheap. Here is a chart the IEA provides on how
we will meet future oil demand:
Let's start at the bottom and work up. First, the dark blue, shows that
currently producing fields will decline by at least 6.7% per year. Importantly,
notice these fields started declining in the last couple years, but then
inexplicably and wrongly, this decline levels off by 2025. This is a problem
for IEA's final production figures 20 years out.
Next area, light blue, are fields yet to be developed. Together with currently
producing fields this is called by the oil industry "proven reserves", and
brings current production levels forward to 2015. However, these numbers are
highly contentious. The IEA itself states that these reserve numbers include
"increases in official figures from [members of] OPEC [Organization of
Petroleum Exporting Countries] ... mainly in the Middle East, as a result of
large upward revisions in 1986-1987. They were driven by negotiations at that
time over production quotas and have little to do with the discovery of new
reserves or physical appraisal works on discovered fields.”*
What the IEA is admitting here is in a open secret in the oil industry. In the
mid-80s, many OPEC nations doubled their oil reserve numbers in order to beat
quota limits imposed in reaction to the collapse of oil prices in the last
global recession. Nonetheless, the IEA did not change their figures. It kept
the doubled reserve numbers, and most alarming, further in the report claims,
"The bulk of the increase in world oil output is expected to come from OPEC
countries, their collective share rising from 44% in 2007 to 51% in 2030."
In addition, respected oil industry investment banker Matt Simmons writes,
"Sadad al Husseini, former head of E&P [exploration and production] in
Saudi Aramco, has said the Saudis should not produce more than 12 mbpd (million
barrels per day) if they want to avoid damaging their reservoirs. He has also
said that Middle East OPEC will never produce more than 25 mbpd. Yet IEA
projects that these countries will produce 37.1 mbpd by 2030." So, the two
areas IEA claims will make up over 50% of global oil supply in the next 20
years are at very best problematic, and most realistically fairly useless.
The next area, shaded red, is an estimation of undiscovered oil, which IEA
claims will, "account for about a third of the remaining recoverable oil."
Simmons reveals that IEA's estimate is based in great parts on a United States
Geological Survey from 2000, which has since proven wildly optimistic, or more
accurately, quite wrong. The USGS estimation of new reserves has been off to
date by over two-thirds.
The next area is oil from enhanced recovery (EOR). Once again this is
controversial and problematic. Most data shows enhanced recovery simply keeps
production up for a longer period of time, but then makes the decline more
drastic, while not necessarily providing more oil. For example, over a number
of years Mexico has been injecting nitrogen, an enhanced recovery method into
Cantarell, the planet's second-largest oil field, only to see in the last
couple years a drastic decline in production of 30%.
The top two components of the chart's future oil supplies are natural gas
liquids and unconventional sources, including biofuels, oil sands and shales.
We have seen this year the growth in biofuels is unsustainable, leading to vast
and immoral hikes in food prices. The mass development of sands and shales will
lead to unprecedented environmental destruction. Their production is incredibly
water- and energy-intensive for the return provided. This will be an extremely
limited and immensely expensive source of oil.
I have given a very general overview of the problems of the IEA study. There
are many other aspects of the IEA's conclusions that will not hold up to close
examination, nor unfortunately, help provide our future energy needs. Despite
its importance to modern life, oil across history has been controlled by a
handful of companies and countries. It is an industry that is exceedingly
opaque in its operations and one where information is both limited and
questionable. However, there is no debate over one very important fact, "The
era of cheap oil is over.”
Oil, more accurately cheap oil, is the foundation of 20th century industrial
life. It is the basis for much we deem modern. No more cheap oil, means we are
going to have to drastically change our economy. Over the past five years, the
price of oil unprecedentedly rose 500%. In the early and late 70s, the spikes
were not nearly as sharp, yet both times the economy was sent into recession.
However this time, not only was the spike sharper, there will be no lag between
renewed growth of the economy and growth of the price of oil. In fact, in the
last two months as the price of oil has fallen, billions of dollars of oil
development have been canceled or postponed, insuring a faster rise in oil's
price when the economy picks up.
We have been taught a very important lesson in the last couple years. The
question is whether we want to learn it. Oil has become a yoke on all future
economic activity. The inertia of the oil economy now fundamentally impedes the
future. Each time the economy picks up, the price of oil will climb with it,
impeding all forward motion. Oil will not disappear, but it will be
increasingly more expensive and less available.
We need to develop a triage system to begin repairing our oil economy. As first
priority, we must identify certain activities in which it will be difficult to
find an oil replacement, for example, jet fuels. Secondly, we must look at
processes were oil is integral, but will take time to replace, such as much of
our modern agriculture system or in how we more elegantly design our
communities for energy use. Finally, there are things which can be immediately
remedied.
On the top of that list is the one-passenger American automobile culture, the
single greatest consumer of oil on the planet. The US needs to begin
carpooling, taking public transport, and walking. In as little as five years,
with not great discomfort, America can cut its oil use in half. The necessity
of this is beyond debate. Conservation is the one and only incontestable source
of future oil supplies.
The struggle to control oil, even when it was plentiful, was one of the great
sources of tragedy in the 20th century. It needn't be in the 21st. The world
can rip itself apart fighting for remaining reserves, or we can begin to change
our ways and usher in a new and vibrant era.
Joe Costello is a communication and energy consultant. He served as
communications director for Jerry Brown's 1992 presidential campaign and senior
advisor on Howard Dean's 2004 campaign. joecostello@gmail.com
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