More on "peak oil"

A reader named Dave offered a thoughtful comment to my posting about "peak oil theory" last week. Following is his comment, and then my response:
Rossputin, In the arena of alternative energy, you run up against the constraints of ROI and EROEI. ROI is a accountancy constraint - if your profit falls below a threshold, you curtail or cease the endeavor. Observe the stock by-backs the oil companies have undertaken in the past year alone (Conoco-Philips $15 billion, Exxon $29 billion). Exxon’s exploration budget?: Just 19 billion. The big oil companies see the writing on the wall and are not making sizable investments, regardless of the price of oil. They haven’t built a new refinery in the US for over 20 years. Extraction is getting too expensive and too difficult with the finds too small. EROEI is the amount of energy gained, minus the expenditure of energy to acquire, transport, process, maintain, store, and utilize the energy source. As it gets harder to extract, the EROEI drops. Early oil was 100 to 1; today it’s 8 to 1. The EROEI ratio has been deteriorating at the rate of about 3.5% per year since the 1930's. We are reaching the limits of this constrai The most difficult reality to comprehend and accept is that no combination of alternative energies can come even close to providing the energy density of oil, nor can any of them be used as the feed-stocks for our plastics, medicines, and over 500,000 other products and chemicals. Without oil, we cease to live the lives of comfort and convenience we have become accustomed to. As I began my personal investigation of this issue, the single reality which took me by surprise, and a great deal of time to wrap my head around, is the almost unfathomable density of oil. There is nothing else like it, and no alternative can come remotely close. Review the concept of the Cubic Mile here: http://spectrum.ieee.org/jan07/4820/ncmo01 and here: http://www.theoildrum.com/node/2186 This work was done by the respected IEEE, the world's largest professional technology association. To equal the energy output of one year’s worth of oil, one cubic mile, you would need to construct 52 nuclear power plants ...each year, for 50 years! That’s 2,600 installations total (there are just 429 worldwide presently). The sobering reality is that there is not enough time, uranium, or money to come within a fraction of our energy demands using nuclear, even with other sources in consort. The same applies to any other alternative energy source. Thank you for your time and consideration. Dave
And now my response: Dave, Thanks for the thoughtful comment. Let me respond to a couple of your points. First, it's true there have been large stock buy-backs in the past year or two, but that doesn't signify as much as you imply. The companies have a duty to their shareholders and if they believe stock repurchases are a better idea than dividend increases (a choice frequently made for tax considerations), they should do those buybacks. Some interesting information is in this article: http://www.usnews.com/articles/business/economy/2008/02/01/where-exxon-and-friends-spend-big-profits.html It mentions that in 2007, the five biggest oil companies spend 37% of cash flow on stock repurchases and 20% on dividends. However, their largest use of cash, 54%, was for "property, plant, and equipment" with only 6% between exploration and R&D combined. Again, I don't read this as negatively as you do. The goal of a company is to much as much profit for the long term as possible for its owners. Stock buy-backs are an excellent occasional tool to do that. I would also point out that there is a logistical limit to how much money a company can spend on exploration and R&D in a given year because of the constraints of personnel and management. Just because they don't spend all their money on exploration doesn't mean they're doing anything wrong, nor does it have particularly interesting implications for long-term oil supplies. Let me put it this way: If we knew every project you wanted do get done during the next 25 years and you were suddenly given the money needed to do all of them, would you or could you start them all at the same time and hope to do a decent job with them? You obviously couldn't do them all yourself, so you'd have to hire project managers, but at some point there will be too many project for you to manage those managers. So you spend what you need to in order to do what you can. However, your comments and my response so far have been based on 2007 numbers. And, just like everything else in this world, things change: Just two weeks ago Exxon has announced that their spending on exploration, refineries, and chemical plants will be 20% higher in 2008 than in 2007. According to Bloomberg news, "Exxon Mobil expects to spend $125 billion during the next 5 years on pipes, vessels, exploration leases and other items, a 25 percent increase from Tillerson's March 2007 forecast." And, "Spending this year on exploration, production platforms and other so-called upstream operations will rise by about 21 percent to $19 billion, Tillerson said. The company will start 19 projects by the end of 2010 that will add the equivalent of 725,000 barrels of oil, enough to supply 10 percent of the refineries along the U.S. Gulf Coast." It is certainly true that their costs of extraction increased a lot in percentage terms last year, rising to $7.14/barrel. That hardly seems like an impediment to incentives with oilat these levels. More from Bloomberg: "The return on the company's worldwide oil and natural-gas operations fell to 42 percent in 2007 from 45 percent a year earlier as costs increased faster than energy prices. For the company as a whole, return on capital employed was little changed last year at 32 percent." Again, 42% is not as good as 45%, but it's still a great return. Returns lower than that would still easily justify being in business. The issue of a lack of refineries is also not as simple as you imply. There are two main reasons we haven't built a refinery in a long time. First, refinery technology improved so much over the years that existing refineries were able to constantly increase their refining capacities. Second, there's a huge NIMBY (Not In My Back Yard) problem where citizens oppose the building of a refinery near them. The lack of new refineries has only become a problem recently, and is not an issue of lack of investment capital to build them. You're absolutely right about the density of oil as an energy source. It's one of the great follies of the ethanol hoax that they try to make people think that ethanol could ever be a decent substitute for oil. As far as small finds, there are also big ones like the recent huge find near Brazil. Also, there are existing huge supplies in oil shale and it's simply a matter of developing technology that makes extraction economically feasible, and that's happening. We should certainly be building nuclear power plants. Don't forget that there's absolutely no purpose in aiming to be totally oil-free. The key is to reduce marginal demand somewhat. Even lowering demand by a few percent would have a huge impact on the price of oil, and therefore other energy sources, over time. At the end of the day, Dave, I believe that "peak oil theory" is used by the same people, or the same type of people, who support Al Gore's "global warming" hysterical idiocy. Putting it simply, what do peak oil people say? That since we're running out of oil, we need to use much much less energy. It's not true in any relevant way that we're running out of oil. Here are some relevant articles: http://www.nytimes.com/2007/03/05/business/05oil1.html? http://www.huffingtonpost.com/raymond-j-learsy/peak-oil-rip-official-_b_42936.html http://www.huffingtonpost.com/raymond-j-learsy/oil-is-not-scarce-the-_b_21550.html Therefore, anything that follows from that premise is wrong. You must keep in ind that the key with these people is not that they're concerned about saving energy. It's that they oppose development, globalization, and capitalism, just like the global warming alarmists. And, just as importantly, cries of an impending disaster also sell a lot more books than saying things are OK. (I still recommend the oldie-but-goodie "It's Getting Better All the Time: 100 Greatest Trends of the Last 100 years", by Steve Moore and Julian Simon, even though it's a bit dated, just because it's an example of the kind of research that we never hear about but which we need more of if only to let us know that the world is not in fact ending.) Dave, I wasn't clear whether you were actually supporting Peak Oil Theory in your note. I'm simply suggesting that you go further than that and understand why it's almost certainly wrong. The last point I want to make on the subject is that, just like the global warming alarmists, peak oil theorists assume that human behavior doesn't change. (They're the same liberals who believe that raising tax rates won't change people's economic behavior or entrepreneurial risk-taking.) But if you look at, for example, heat-related deaths in the US over the past few decades when there has been a very slight warming trend, those deaths have decreased every decade (except for in Seattle, the coolest metropolitan area studied.) This is because people learn. We either don't stay outside so much, or we invent better and cheaper air conditioning systems, etc. Humans are very adaptable, which is why we're still here. So, every time you hear someone say that the world will end because something's going to change, you must ask yourself "How stupid do they think we are?"
  • Mike R.
    Comment from: Mike R.
    03/24/08 @ 07:33:44 am

    DON'T PANIC!!! I will go on record right now as predicting that within the next decade the world will be wondering what all the fuss was about and the OPEC nations will be wondering what the hell to do with all the extra black goo they're pumping out of the ground... http://www.azom.com/news.asp?newsID=1895 http://www.ornl.gov/info/ornlreview/v33_2_00/hydrogen.htm http://www.sciencedaily.com/releases/2007/08/070817211908.htm http://www.safehydrogen.com/about.html http://www.fuelcellmarkets.com/boc/news_and_information/3,1,453,1,3062.html http://www.gizmag.com/go/6570/ http://www.sciencedaily.com/releases/2005/09/050907102549.htm Get ready for it boys and girls. "Future shock is the shattering stress and disorientation that we induce in individuals by subjecting them to too much change in too short a time." Alvin Toffler

  • David J. McCartney
    Comment from: David J. McCartney
    03/24/08 @ 07:39:48 am

    Ross, I am a bit pressed for time this morning so I will respond as I can. The stock buy-backs of the major oil companies (and not all of them have chosen to do so) remains an indicator, abet, a small one. I accept that there is more to the issue and take no argument with your added input. I did hear that Exxon just bumped exploration funding up, but I believe it is still less than the buy-back monies (yes - no?). You state, "I would also point out that there is a logistical limit to how much money a company can spend on exploration and R&D in a given year because of the constraints of personnel and management." May I suggest that this analysis is actually somewhat of a validation of my suggestion, that PO is about a whole set of constraints which affect the timely and economic flow of oil to the marketplace. There are serious issues all the oil majors are struggling with, including a decaying infrastructure which is on average over 40 years old and the industry-wide lack of qualified personnel. As regards how Exxon might choose to distribute their funds, there remains one critical constraining fact: Exxon's total share of the oil market is just 3 percent. The total US share is about 5 percent. This is a pittance in the scheme of things. What Exxon can or can not accomplish going forward almost does not factor when considering the exponentially growing demands of the world market. Ultimately, what Exxon does or does not do with their cash has minor effect. To be continued... Thanks - Dave

  • Greg Staff
    Comment from: Greg Staff
    03/24/08 @ 12:06:36 pm

    One point about reserves. There are three different types of reserves: Proven, Probable, and Possible, and they have a 90%, 50% and 10% probability, respectively, of being recoverable under the right economic scenario. Strictly speaking, these are not so much “volumes” as they are economic indicators of the value of oil. If prices double, some “probable” reserves become “proven,” without the first drill bit entering the ground. Oil shale and oil sands go from “possible” in 1980” to “proven” at $100/bbl oil. Also, there are tax implications to having high reserves on the books. Domestic oil companies typically (and legally) have two sets of reserves books – one set for investors, and one set for the tax man – with the tax man’s set showing lower reserves. Since there are “property taxes” (ad valorem) in many jurisdictions on “reserves,” it makes little sense to discover “too much,” and pay that tax years before production can occur. Overseas, the overstatement of state oil reserves is thought to be rife, especially within OPEC. The higher your reserves, the more you can borrow against them. So…. looking at reserves numbers without understanding what the term really means is asking for trouble. And of course, this is exactly what journalists do.

  • David J. McCartney
    Comment from: David J. McCartney
    03/24/08 @ 02:21:10 pm

    Ross, I'm back... Some thoughts on refineries in the USA. Your points are well taken, and I will add that environmental regulations are another constraint. Beyond the drop from 254 in 1985 to 142 today, existing refinery capacity is up against another restriction: the gradual change from available light, sweet crude to heavier, sour grades. It takes more energy and adjusted processes to crack this less desirable grade of oil. That we import 14% of the gasoline we use in this country may be an extension of that limitation. It's always interesting to check the rising asphalt prices, as more and more low grade oil is moved from ancillary applications to fuel refining: http://www.acaf.org/asphalt_price_index.htm Thanks for the forum. Dave