The American Energy Crisis: February 2007

An Impending Energy Crisis is going to rewrite the U.S. economic map

America has fallen down a very deep well vis a vi its energy supply and consumption, and we are now finding the water to be quite cold. Every facet of the life you thought was “normal”, the American way of life that Vice-President Dick Cheney said was “non-negotiable”, is about to be run over by geology. The lifestyle we have come to see as “normal” is overwhelmingly subsidized by fossil fuels. From the toothpaste, shaving cream, and toilet paper you use every morning, to the light bulb on your nightstand that you turn off before going to bed, nearly every commercial product or service in your life is brought to you courtesy of cheap and abundant energy. From the credit or debit card you swipe at Starbucks each morning to the mortgage check you write each month, our entire financial system is predicated on an economy that uses increasing amounts of fossil fuel each and every year. From Medicare and Social Security to your local law enforcement agencies, local, state, and Federal government services rely on these same energy inputs. The United States’ Foreign Policy, its National Security, perhaps its very existence, is predicated on the adequate supply of oil now and in the future. On a more personal level, the value of your home and your stock and bond investments depends on fossil fuels, as does the U.S. Dollar as the currency instrument and representative of the “full faith and credit of” the United States Government.

For better or worse, the jig is up.

We all know that oil is a finite resource, and as such, at some point will be entirely consumed. Too, we have all heard claims in the past that this precious resource was about to “run out”, and each time those claims were proved wrong. However, in the final analysis of the story “The Boy who cried Wolf”, the wolf in question did actually show up. Just because previous analysis’ have proved to be erroneous does not mean that future calculations will all be incorrect. A pair of dice has no idea what the last number you rolled was. And no, we are not “running out of oil” completely, at least not for a while – but running out of oil is not the issue. There are actually 2 issues: We have run out of cheap oil, and we will have less and less oil each year with which to run the world economy.

This has never happened before. Since the advent of the “Age of Oil”, industrial capitalism as a whole has never been constrained in its ability to expand energy consumption for any significant length of time. Of course, the 2 energy shocks of 1973 and 1979 temporarily constrained the expansion of energy consumption, delivering a painful body blow to the economies of the developed countries, and each case the taps were turned back on and the world continued to experience increasing availability of oil.

The oil shocks of the 1970’s were the ramification of politics, and they were temporary. This is “not your father’s oil crisis”. Geology is the problem, and you can’t negotiate with geology. We either at, or are fast approaching the “Peak” in the amount of oil the world can produce. On the other side of the peak, like the other side of a mountain lies a perpetual decline in volume of oil supplied each and every year.

This book is directed at the effects of Peak Oil on your lifestyle, finances, business, investments and life savings, and the well being of your family. Money is not only time, but security, economics, and politics, and I will discuss these as well. I accept the concept of Peak Oil as a foregone conclusion, and will not spend a great deal of time presenting the arguments that support my conclusion. Nor will I discuss the collective zeitgeist of the past 60 or so years that brought us to this difficult position. There are plenty of excellent books on those subjects, many of which were significant sources in my research, and at this time I have concentrated my efforts on what it means to YOU, and those you care about, going forward. First, a definition:

The following is from the Energy Bulletin website:

“What is Peak Oil?
“Peak Oil” is the simplest label for the problem of energy resource depletion, or more specifically, the peak in global oil production. Oil is a finite, non-renewable resource, one that has powered phenomenal economic and population growth over the last century and a half. The rate of oil 'production,' meaning extraction and refining (currently about 84 million barrels/day), has grown in most years over the last century, but once we go through the halfway point of all reserves, production becomes ever more likely to decline, hence 'peak'. Peak Oil means not 'running out of oil', but 'running out of cheap oil'. For societies leveraged on ever increasing amounts of cheap oil, the consequences may be dire. Without significant successful cultural reform, economic and social decline seems inevitable.
Why does oil peak? Why doesn't it suddenly run out?
Oil companies have, naturally enough, extracted the easier-to-reach, cheap oil first. The oil pumped first was on land, near the surface, under pressure, light and 'sweet' (meaning low sulfur content) and therefore easy to refine into gasoline. The remaining oil, sometimes off shore, far from markets, in smaller fields, or of lesser quality, takes ever more money and energy to extract and refine. Under these conditions, the rate of extraction inevitably drops. Furthermore, all oil fields eventually reach a point where they become economically, and energetically, no longer viable. If it takes the energy of a barrel of oil to extract a barrel of oil, then further extraction is pointless.

“In the 1950s a U.S. geologist working for Shell, M. King Hubbert, noticed that oil discoveries graphed over time, tended to follow a bell shape curve. He posited that the rate of oil production would follow a similar curve, now known as the Hubbert Curve (see figure). In 1956 Hubbert predicted that production from the US lower 48 states would peak between 1965 and 1970. Shell tried to pressure Hubbert into not making his projections public, but the notoriously stubborn Hubbert went ahead and released them. In any case, most people inside and outside the industry quickly dismissed Hubbert's predictions. It turned out that Hubbert was right, US continental oil production did peak
in 1970. However in 1970, by definition, US oil producers had never produced as much oil, and Hubbert's predictions were a fading memory. The peak was only recognized several years later with the benefit of hindsight.

No oil producing region fits the bell shaped curve exactly because production is dependent on various geological, economic and political factors, but the Hubbert Curve remains a powerful predictive tool.
Although it passed by largely unnoticed by many, the U.S. oil peak was arguably the most significant geopolitical event of the mid to late 20th Century, creating the conditions for the energy crises of the 1970s, leading to far greater U.S. strategic emphasis on controlling foreign sources of oil, and spelling the beginning of the end of the status of the U.S as the world's major creditor nation. The U.S. of course was able to import oil from elsewhere, and life continued there with only minimal interruption. When global oil production peaks however, the implications will be far greater.” - Peak Oil Primer, energybulletin.net

Hubbert’s analysis has been fiercely debated over the past decade by academics, and only recently, as the price of energy has moved inexorably higher over the last half dozen years, has the debate seeped out of academia to the energy industry and our political leaders.

I know many of those reading this will dismiss my assertions, reasoning along the lines of: “if this were true, why isn’t this front page news? Why isn’t the government debating our options?” My answer is that it is front-page news (just go to google.com, and search news on “peak oil”, “alternative energy”, “energy crisis” – not websites, although there are literally ten’s of millions of those, we are searching for news articles in this exercise), and it is being debated at the highest levels of government. After all, the President of the United States said in one State of the Union Speech that we are “addicted to oil”, and proposed that the U.S. use 20% less gasoline (and presumably 20% less diesel, jet fuel, kerosene, and heating oil) in 10 years time in another. James Howard Kuntstler, author of “The Long Emergency” describes this lack of recognition of the information that is standing right in front of you regarding our energy circumstances as “Sleepwalking into the Future” and the coming decades as “The Long Emergency”, also the title of his excellent book. For better or worse, reality does not care whether or not you perceive it correctly; reality just keeps on coming, and will dispassionately role over you in the process.

The level of denial at the top, and a people only too willing to believe what they want to hear, has left us in a most unsavory position.

“Denmark had a 50% increase in its economy with a zero percent increase in energy consumption.” Bill Clinton, Newsweek, 11.27.06 

All true – and completely irrelevant.

• Norway has fewer people than South Florida (4,610,820 (July 2006 est. CIA FACT BOOK), and population growth of .38% 
• Norway has more oil per capita, and exports far more oil per capita, than any other nation. Russia and Saudi Arabia, numbers 1 and 2, aren’t even close 
• Norway is the largest welfare nation on earth. Why not? They have the greatest Oil wealth per capita.  

In the speech, the former President insinuated that the Norwegians accomplished this feat by, among other things, replacing incandescent light bulbs with fluorescent bulbs – and the media ate it up. If the world had as much Oil on a per capita basis as Norway this might have some relevance - alas, it does not.

Lest you think I am Clinton bashing, let me work on the current occupant of the White House and his “Hydrogen Economy” and “Ethanol Economy”.

“Tonight I’m proposing $1.2 billion in research funding so that America can lead the world in clean, hydrogen-powered automobiles,” President George W. Bush, 2003 State of the Union address to Congress  

In the 2007 State of the Union speech “hydrogen” was not mentioned once, conversation and bio fuels are the new buzz words.

“It better be” – President George W. Bush when asked if ethanol was the solution to our Oil addiction

Yes, we have cars that run on Hydrogen, and yes, we have cars that run on ethanol – and by the way, we also have cars that run on liquid petroleum products. Designing cars that run on different energy sources is not the problem – THE ENERGY SOURCE IS THE PROBLEM.

Let’s move on to some corporate manipulation of the public through our scientifically and mathematically challenged media.   

We all know that if you pay somebody enough money, they will say anything. Have you ever followed, or worse, been involved in a large civil trial? Each side has their “expert” witness’s. Great system. These guys advertise a particular view point from which they will never waiver, no matter what new data become available, and then claim credibility for their bought and paid for testimony because some formal educational establishment admits that they received a couple of years of part time training there several decades ago. Hell of a thing… Listen to this:

"Although annual global production has exceeded annual discoveries since the early 1980s, annual global reserve additions still exceed annual production because of reserve growth in existing fields.” - Dr Richard Vierbuchen, vice president, Caspian/Middle East region, Exxon Mobil.  

I am embarrassed for Dr. Vierbuchen. Not for maintaining the company line, but for not obfuscating that statement more. The general public might have no idea what he is saying, but there are countless geology geeks buzzing around the web taking silly statements like that one apart. If you are going to speak an absurdity, well, you know the old saying “if you can’t dazzle ‘em with facts, baffle ‘em with Bulls—t.” 

Allow me to explain. It is a simple matter to credit ALL of the reserve growth in a particular field back to the date the first well was drilled (the date of discovery) for a single aggregate number (and by the way, the “reserve growth” that he is speaking of is phenomena of the 50’s, 60’s and early 70’s; technology has improved on the estimation front, too. So much so that there was little if any “reserve growth” in fields discovered and developed after 1975 – If you doubt this, just email me and I will send you the data for Alaska’s North Slope and the U.K.’s North Sea.). When this is done for all fields, and it has been done COUNTLESS times (so there is no shot the good Doctor is unaware of these data points) we see that the peak discovery year was 1964 (ASPO), and that discovery has been trending down EVER SINCE. Also, that since the mid 1980’s or so, we have discovered less oil than we have been using, and our usage grows exponentially.

There are no pipelines coming into planet Earth from an intergalactic oil exporter. The Earth was endowed with a certain amount of oil at the beginning of the Oil Age, and that amount was finite. This is not negotiable. Many renowned scientists believe that mankind has consumed ½ of the original endowment of conventional crude oil held in the earth’s crust. (2) That feat took mankind roughly 146 years, if one uses “Colonel” Drake’s Pennsylvania oil well as the starting point. The consumption of the remaining ½ will not take nearly as long. But its not the very end of oil that is the problem – it is the beginning of the end that is going to be so difficult to adjust to. Because from the time we cross the 50% threshold (more or less), the world will have less and less and less oil to use for any and all purposes from that point forward, until the last barrel is pumped from the ground. The world will have reached the peak in oil production, hence the term “Peak Oil”.

Peak Oil is a mathematical fact and the mathematical necessity of the Peak Oil can be better illuminated if we become familiar with the concept of the “exponential function”. We have all heard the word “exponential”, but I think a definition is in order. The following is from a lecture given by Dr. Bartlett at the University of Colorado to describe the exponential function.

“This is a mathematical function that you'd write down if you're going to describe the size of anything that was growing steadily. If you had something that was growing at 5% per year, you'd write the exponential function to show how large that growing quantity was year after year. And so we are talking about a situation where the requirements required for the growing quantity to increase by a fixed fraction is a constant 5% per year. The 5% is a fixed fraction, the three years a fixed length of time. So that's what we want to talk about. Its just ordinary steady growth.  

Well if it takes a fixed length of time to grow 5%, it follows it takes a longer fixed length of time to grow 100%. That longer time's called the doubling time and we need to know how you calculate that doubling time. It's easy. You just take the number 70, divide it by the percent growth per unit time and that gives you the doubling time. So our example of 5% per year, you divide that into 70, you find that growing quantity will double in size every 14 years. Well, you might ask, where did that seventy come from, well, the answer is that it's approximately one hundred multiplied by the natural logarithm of two. If you wanted the time to triple you would use the natural log of three. So it's all very logical. But you don't have to remember where it came from, just remember 70.” 

(Please don’t let your eyes glaze over, I promise not to mention “logarithm” again; for our purposes here, as Dr. Bartlett says, just remember 70, and doubling time (“T2”).

So what is so important about the rule of 70 and doubling time? Just this, if something is growing at 7% per year, it will double every 10 years (70/7). Something growing at 5% doubles every 14 years (70/5). More importantly, the total amount of the unit measured at the end of the doubling period will be greater than the total of ALL of the preceding doubling periods, and at the end of 10 T2’s is over 1000 times the size of the original amount (1,2,4,8,16,32,64,128,256,512,1024 – “1024” is 10th doubling time; “2” is the first doubling time). For example, total world Oil consumption grew at 7% per year during the 1950’s, 60’s and most of the 70’s. Using the rule of 70 that means that the world consumed more Oil in the 1960’s than it had in all of human history prior to January of 1960 (look at the above numerical progression - 16 is greater than the total of all the numbers before it (1+2+4+8=15, as are each subsequent number). During the decade of the‘70’s the world consumed more oil than it had from 1859 (Colonel Drake drill’s his well) to December 31, 1969. After the Oil shocks of the 70’s, the period 1980 to present saw much lower exponential growth in Oil consumption, 100% by geological necessity. Had the world continued to double its consumption of Oil each decade from 1980 to the present, the world’s entire endowment of oil would have been consumed, and you and I would be cooking over a dung fire tonight.

Still, although we may have extended the length of the doubling time, we have not eliminated it. World oil consumption is currently increasing 1.8% per year (IEA). Dividing 70 by 1.8 (70/1.8) leaves us with a doubling time of 38.9 years. At 31 billion barrels per year currently mankind would, if left without the inconvenience of geological limitations, be consuming nearly 62 billion barrels per year by 2045! I bet that brings great comfort to the members of the scientific community studying climate change.

We have been receiving price signals from the Oil and Natural Gas markets (some would argue those signals have broken down with the recent decline in price, but volatility is one of the signals), political signals from national governments in the form of resource wars (Iraq), political blackmail (Russia turning off Europe’s Natural Gas Pipeline in January 2006), and the 9/11 attacks on the World Trade Center (perhaps Radical Islam is much more aware of this crisis than the average American).

In the year 2000, the United States Department of Energy’s Energy Information Agency (“EIA”) stated the following as the closing paragraph on the future of energy in the U.S.

“What of our long-term energy future? That is even more speculative. Many would argue that the world is destined to move beyond fossil fuels eventually; if the threat of global climate change does not compel it, then exhausted supplies and rising prices might. The far future seems likely to belong to renewable sources of energy. Although the form they take may be radically different than in the past--solar hydrogen and advanced photovoltaics, perhaps, rather than fuel wood and dung--humankind's sources of energy thus will have come full circle.” (1)

“Perhaps” is the key word in the previous quote. Webster’s dictionary defines “Perhaps” as “possibly but not certainly: Maybe” Unfortunately, the mainstream media, corporate America, and the political establishment have led Americans to believe - as fact - a very big “Maybe”. “Maybe” ethanol and bio-diesel will allow us to drive our cars to our heart’s content. “Maybe” PV cells and windmills will generate sufficient electricity to allow us to grow our economies. “Maybe” we will have a “hydrogen economy”. Then again, “maybe” not. Then what? Then what, indeed.

Maybe, we will just have to figure out how to get by with less. And not just less oil – less of everything. How much less? Maybe a great deal less.

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I want to emphasize the point that oil will not suddenly “run out”. Oil reservoirs are not like the fuel tank in your car (Natural Gas reservoirs, however, are), where you can suck the fuel out as quickly as you like until the last drop, and then just like that, it’s empty. As we’ve already seen, that is not how the rate of oil extraction from a given field or reservoir works.

The key point is to know how much recoverable oil the world started out with. The equation for that is rather simple. All oil produced to date “P”, + all proven reserves “R” + all future oil left to be discovered “F” = ultimate recoverable oil “Q”, or P + R + F = Q.

We have an excellent idea of how much oil mankind has consumed since the beginning of the oil age, and a pretty good idea of recoverable reserves (with a little room for debate, but not so much as to move the peak date by very much). As for future discoveries, well we have a pretty good idea how to estimate those as well. Dr. Kenneth Deffeyes, author of “Hubbert’s Peak” and “Beyond Oil” and Professor Emeritus of Geology at Princeton University, calculates the original endowment at just over 2 trillion barrels of oil. If he is correct, then the world is most certainly past peak, which by Deffeyes’ calculation occurred sometime in late 2005. But what if he is wrong? After all, it’s a big world and this is a less than exact science, right? Let’s see what happens to the date of Peak if the original endowment was, let’s say, 2.2 trillion barrels, roughly the equivalent of an extra Saudi Arabia out there somewhere that just happened to get overlooked by the oil industry. Hmmm… the world consumes nearly 31 billion barrels of oil per year, divide 31 billion barrels (current world consumption annually) into the 200 billion Deffeyes overlooked… that extra oil would be consumed in less than 7 years… and peak occurs at 50% consumed… Hmmm, OK, world peak production won’t occur until early 2009. IF we find that extra Saudi Arabia… and what if Dr. Deffeyes’ oil endowment estimate was overstated?

In addition to Dr. Deffeyes, many scientists, geologists, physicists, and mathematicians believe that we are at, or very near, the peak in the world’s production capacity of oil. I attended the Association for the Study of Peak Oil’s energy conference held at Boston University in October of 2006. Presenting and in attendance were some of the world’s best minds on the subject. There was much discussion as to whether Peak production had already happened, or if will it take another 1 to 8 years, though there seemed to be a consensus around 2005 at the earliest to 2012 at the latest. I really did not see much point in splitting hairs over the time frame. Why? When the world’s oil production peaks is not really relevant to Americans and other importing nations. With populations growing and economies industrializing in the exporting nations, by mathematical necessity (Exports = Domestic Production – Domestic Consumption in the Exporting Nations), Peak Oil will arrive in importing countries, like the U.S., Japan, China, India and most of Europe, several years before it arrives in the data for world oil production. Since it is nearly 2007, and the most optimistic pessimists (can I actually say that?) speaking at the conference put the date of peak out in 2012, it seems reasonable to conclude that Peak has already occurred or will occur quite soon in the U.S. The U.S. Department of Energy’s EIA data point to a peak of supply for the U.S. in 2004. Worse, markets discount the future. How will the stock market respond when it becomes common knowledge that the new car or home you just purchased will not survive its fuel supply? What about the U.S. Dollar, reserve currency to the world – but backed only by the full faith and credit of the world’s largest debtor nation – the United States of America?

The financial markets are going to react to this situation, on that you may stake your life. In 1973, at the time of the first oil shock, the stock market declined 45% by year’s end from its high prior to the embargo, and price inflation spiked to 12.8%, while the world entered the deepest recession since the Great Depression of the 1930’s. (JHK, TLE p. 47) So why aren’t the big Wall Street brokerage houses and mutual fund companies all over this? Because their “job” is to make money for the CEO, a few well connected executives, the board members, and if possible for the shareholders, and to maintain their stock price; it is not their job to inform the “man on the street”, or to save the world, or for that matter, to save their own customers. After all, if you were the captain of the Titanic, would you tell all the passengers about the lifeboat situation the moment you saw the iceberg? There is a fundamental difference between the captain of the Titanic and the captain of an individual lifeboat or a rescue ship. The guy running a lifeboat can save everyone on board; that is not the situation on Wall Street, err…, the Titanic. Most of the “Titanic’s” passengers are not going to make it, but the people in the lifeboat at least have a shot.

When I present this concept someone invariably asks me: “If there is an Oil supply problem coming in the near future, why does the price of Oil go up and down?” A fair question, I believe. I casually replied that markets zig & zag (these are technical terms), they don’t zig and zig. Let me translate: markets, such as that for crude oil, move up and down for a variety of reasons: seasonal, political, economic… they do not move up and up or down and down or flat and flat. If they did, why the hell would we need traders, bankers, economists, or analysts?

I have no definitive answer for the price movement of any security, commodity, property, etc… in the short term. If I did, I wouldn’t need to be gainfully employed (nor would any of the professional economists we hear so much from in the media). That disclosure aside, oil, like any commodity, trades at the margins. It’s that last barrel that moves prices up or down, not the million before it. 1% too much oil can move the price of 100% of the oil down 25%, (we just saw that in that in Q3 of 2006 with oil falling from $78 to $58). The mirror image is true, too. 1% too little oil and the price might be $85, $100, $150…   

That, in my humble opinion, is where we are going (and where we have been). We will continue to see substantial volatility in the price of oil in the spot and front month markets as we move back and forth from 1% too much, to 1% too little. It will be interesting to see how the financial markets and the economy react to 5% too little and then 5% too much. The reason their might still be glut periods in times of declining supplies is a rather sobering assessment: those are the periods in which the economic contraction concomitant with “demand destruction” is so bad that we not using all of the declining supply at the time.

China, India, Viet Nam, the Former Soviet Union, and most of Asia will demand more and more oil to power their economies. Although the U.S. consumes 25% of the world’s oil, it’s the MARGINAL consumer that matters. And Asia is the marginal consumer because, to paraphrase Willie Sutton, that’s where the growth is; because that’s where major industrialization is taking place; because that’s where the population is. If China’s population enjoyed our lifestyle, they would be consuming more than the entire world now. Where is that oil going to come from? What country? What field? What province? We have identified the marginal consumer – what nation will be the marginal producer?   

And it is not just Asia. Based on data published by the 2006 British Petroleum Statistical Review, Europe’s Oil imports are expected to grow 29% by 2012. Currently, the European Union’s population of 460 million consumes over 15 million barrel per day (”bpd”). Until the discovery of the North Sea’s prodigious oil fields Europe essentially imported all of its liquid petroleum fuel requirements. Unfortunately, the North Sea’s production has been declining at roughly 8% per year since 2000 (1999 for the UK and 2001 for Norway if you want to be picky), and many knowledgeable people believe that there is a high likelihood that the rate of decline will accelerate.   

“Applying a 0.5% growth in consumption and a 8% production decline rate points to EU oil imports growing from 9.8 million barrels per day (bpd) in 2005 to 12.6 million bpd by 2012 - an increase of 29% over the next 6 years.” Dr. Euan Mearns, PhD  

The UK alone, which was an exporter as of 2005, will need to import over 1 million bpd by 2020 (Euan Mearns). Where is Europe’s new import requirement going to come from? Said another way, which exporter(s) are going to have the capacity to step up their exports (production – domestic consumption) 2.8 million bpd – and that’s just for Europe. Asia’s increase in demand could be 5 million to 10 million bpd, perhaps more, depending on economic growth, the growth in the auto fleet, and degree of industrialization.

Meanwhile, the world has been unable to increase production of all liquid fuels since May of 2005 (each month’s production average has been within 1% of the monthly average during that time frame). So tell me, where is the extra 7.8 million bpd going to come from? And that’s just for Europe and Asia, to say nothing of growth in demand in the rest of the world.   

Indonesia, a member of OPEC, has gone from an exporter to an importer. The UK is making the transition. Mexico might cross over in 2010-12. If the net number of barrels available for export worldwide declines on a continuous basis what is the effect on the price of the marginal barrel of Oil?   Are we ready for a $200 fill up?

But we have got alternatives, right?

Yes and no. Yes we have alternatives and, no, those alternatives do not scale to meet the world energy needs. Yes we will have ethanol, and wind, solar, hydro, bio-diesel, methane from cow flatulence… and if you add them all together they don’t amount to a good fart when compared to the amount of energy extracted from Oil.

Before I address the impacts, I want to disabuse you of the idea that “business as usual” is likely to continue.

What about the Tar Sands in Canada?

Tar Sands are not oil. The material coming up out of the ground under pressure, “light and sweet” (low sulfur and low wax content, also lower in heavy metals) and even heavy and sour, if a far cry from the Tar Sands. You see, unlike men, “all oil is not created equal”.

"Unconventional petroleum resources (Canada's tar sands, Venezuela's bitumen and U.S. oil shales) are very large and very misunderstood. All oil is not created equal. Although they total trillions of barrels in the aggregate, expanding unconventional production is expensive, technically arduous and slow. Because these resources cannot be produced at high rates, they can do little to postpone the peak in global production. For example, at forecast 2015 rates of production, it will take more than a century to produce Canada's 175 billion barrels of tar sand reserves. (A financial analogy: Imagine having $100,000,000 in your IRA, but being forbidden to withdraw more than $100,000 per year. You are rich, sort of.) With tens of billions of investment dollars, Venezuela could expand its bitumen production, but Chavez is in no rush to do so, nor are the importing countries showing any indication of readiness to make the investments in refinery modifications, which would be required to deal with the increased proportion of very heavy oil. As for oil shale, global production has never exceeded 25,000 barrels a day, has fallen by half since 1990, and now provides just 1/10,000th of global energy. Typical oil shales have the energy density of a baked potato. (In Colorado, Shell hopes to pull the sword from the stone using electricity: a dedicated 1,200 MW powerplant will be needed to produce 100,000 b/d, making this project the world's largest electricity consumer.) Other oft-heralded types of unconventional liquids, such as gas-to-liquids and coal-to-liquids, are very capital intensive and offer abysmal energy returns. Biofuels, particularly Brazilian ethanol, will make an important contribution but only regionally. A breakthrough in the production of cellulosic ethanol is unlikely to occur before oil production peaks." - Randy Udall, Energy Analyst, Co-Founder ASPO-USA 
Jeremy Gilbert, Former Chief Petroleum Engineer, BP 
Steve Andrews, Co-Founder ASPO-USA

The Tar Sands will not be coming to the rescue.

The U.S. is the largest consumer of energy in the world. With just over 4.5% (3 globalinfo.org)) of the world’s population the U.S. consumes nearly 25% of the world’s crude oil (4 EIA). Further, the U.S. imports approximately 60% (5 EIA) of the oil it consumes, with no hope of becoming energy independent. While the main stream media and the political establishment promote hope and promise on this front to the American people, a quick analysis of the sheer magnitude of American energy consumption gives up the lie on this point. America consumes, roughly 7.5 billion barrels of oil per year. Worse, America has at best 30 billion barrels of known reserves (and I am crediting several billion barrels to the “Jack” field in the Gulf. Without imports, it would not take more than a handful of years before we were essentially out of oil, if it were possible to extract at the rate of our current consumption.

Unencumbered Hydrogen does not exist any place on earth. Hydrogen is a lonely element and only exists on this planet in the company of another element, such as Oxygen or Carbon (let’s forget Hydrogen and Carbons, the liquid form of which is the stuff we are in need of, and it certainly makes no sense to remove Hydrogen from Natural Gas such as Methane, CH4, when we could just burn the Methane). It follows that we would need to separate the H from the O in water. Problem is, we need an energy source to do this, and the energy we consume is greater than the energy stored in the resultant Hydrogen.

Producing ethanol from corn consumes nearly as much, or more, energy than can be had from the resulting ethanol (Patzuk, Thermodynamics of corn ethanol). It follows that if corn ethanol was advantageously energy positive that ethanol plants would be entirely powered by the excess ethanol they produce.

"The U.S. has only two percent of world oil reserves. We consume 25 percent of world oil production. We contribute eight percent of world oil production. That means we're pumping our reserves four times faster than the rest of the world. U.S. natural gas production has also peaked. The United States is now the world's largest importer of both oil and natural gas. From importing one third of the oil we use before the Arab Oil Embargo, the U.S. now imports about two thirds of the oil we use. Oil and natural gas production in Texas declined five percent in the first nine months of 2005. We're sliding down Hubbert's Peak.” And “We are just on the verge of not being able to feed the world. Tonight about one-fifth of the world will go to bed hungry." - Congressman Roscoe Bartlett on the U.S. House floor.

Thankfully, it is not possible for the U.S. to extract its remaining 30 billion barrels of oil reserves at the same rate as our current usage. Still, at our current extraction rate, the U.S. will be out of oil long before the world runs out of oil.

America cannot drill its way to energy independence. ANWR, the coastal deep water and continental shelf, and the National Park system sites that the energy industry continues to promote as America’s salvation but which cannot be had at the moment because some “tree-hugger” organization wants to keep the American people dependent on Middle East oil is an out right lie. Under no circumstance can the U.S. drill its way out of the deep well it has fallen into. The U.S. consumes 7.5 billion barrels per year. Can we produce 7.5 billion barrels per year if we allowed unrestricted drilling? Could we even produce 5 billion barrels per year? UNDER NO CIRCUMSTANCE. One intelligent and glib scientist said that those who advocated such drilling activities were advocating a “strength by exhaustion” strategy.

From a national security standpoint, “strength by exhaustion” would be a disaster.
The victors of WWII, the allies dominated by the U.S. and U.S.S.R. – these 2 countries were among the largest oil producing countries in the world at the time. The vanquished? Germany and Japan - had no domestic oil supplies with which to prosecute the war. Can the U.S. maintain security while emptying its reserves? While I am not a military man, one thing is certain - countries barren of Oil do not have a great track record as would be superpowers.

Meanwhile, worldwide, the Oil and Natural Gas (“NG”) industry is struggling to maintain production: Monthly total production of “all liquids” (this includes not only crude oil and condensate, but natural gas plant liquids, coal-to-liquids (“CTL”), ethanol, bio-diesel, and refinery gains) has averaged 84,565,000 barrels-per-day (“bpd”) in 2006 (data through October). This is only 1000 bpd more than 2005.

In the 7 years since 1999, 2000-2006, all liquids daily average production has been reported by the U.S. Department of Energy (EIA.org 1.3.07) as follows:

2000 77,793,000 bpd
2001 77,717,000 bpd
2002 76,957,000 bpd
2003 79,565,000 bpd
2004 83,005,000 bpd
2005 84,564,000 bpd
2006 84,565,000 bpd

The world now consumes nearly 31 billion barrels of oil per year, and in order for world’s economy to grow, the oil industry will need to increase the supply of oil every year. The trouble is, oil producers are not finding as much oil as the world uses. This circumstance cannot go on forever.

It is important to note that during this time the price of oil has climbed from just over $10 per barrel in 1999, to as high as $78 in 2006, and is $59 at the time of this writing. Clearly, there is a great deal of financial incentive to explore for new reserves. Yet the industry is not doing so. Maybe, just maybe, the oil isn’t there to find.

“Big Oil” just isn’t finding as much oil as they used to

The sheer scale of the energy industrial complex would be mind boggling to average person – if the average person ever gave it some thought.

Total capital invested and working in the exploration, production, transportation and marketing of Oil and Natural Gas is approximately $1.7 Billion (TD Economics, September 22, 2005), making the energy complex the largest industry, by capital, in the world. In importance, nothing besides food production even comes close. Increasing worldwide oil production from its current rate would require a huge investment in capital, time, and materials – if the oil was there to be found.

John S. Herold, Inc., a Stamford, Ct., based research firm, compiled 2005 data from the 203 largest, publicly traded, energy exploration and production companies. I’ll sum it up quick. The companies raised their 2005 budgets for exploration and production (“E & P”) by a total of $277 BILIION, up 31% from 2004. For their trouble, these companies increased their gross production 1%, and their reserves by 2%. Even more telling, they spent $35 Billion on exploration, the balance of their E & P budget was spent on production, at the same time THEY SPENT $65 BILLION ON DIVIDENDS AND STOCK BUY BACKS. It seems the oil producers thought it made better financial sense to return cash to their shareholders than to explore for oil. That certainly makes a lot of sense if you do not believe that there is oil much to be found.

This should be quite disconcerting for those of you clinging to the (mistaken) economic concept (geology trumps economics when it comes to oil extraction) that the incentive of higher prices will lead to greater production and reserves increases, as it should for our energy policy makers and their data production minions.

The most recent discovery of a super giant oil field was the Cantarell field in the Mexican waters of the Gulf of Mexico in the mid 1970’s. We have not found a field like Cantarell in over 30 years. Either we have grown increasingly incompetent for 3 decades, or there are no more super giants left to discover. Makes sense, considering that we are now drilling down in 7,000 feet of water and 20,000 feet of earth, 170 miles from land, in search of new deposits (the “Jack” field you have heard so much about in the media), and that would certainly not make a lot of sense if there were a super giant just waiting around to be discovered in Central Park.   If the top 203 E & P companies increase E & P spending $277 Billion per year and cannot increase production by more than 1%... well the law of diminishing returns might force them to curtail E & P. I think that that is what we are seeing.

Think about it: the industry invested a TOTAL of nearly $1 Trillion on E & P in order to increase production 1% per year when consumption is growing nearly 2% per year. To paraphrase Mark Twain: Reports of the demise of the energy crisis have been greatly exaggerated.

Please note that I did not say that we are running out of oil. There will always be some amount of oil in the earth’s crust. What I am saying is that we are running out of CHEAP oil, and that at some point in the very near future the supply of oil available will be insufficient to run the world’s economy as presently constituted. The world will adjust; it’s the adjustment period that will be so difficult.

If you are making financial plans for a 30-year retirement starting 10 or 20 years in the future… listen closely, because no establishment financial services firm is going to be willing to discuss this publicly. For them, it is suicide. If you were the CEO of an established Wall Street investment house with a market capitalization of $30 billion, would you step up to the microphone and say? “Ahem, uh, we have a significant energy crisis coming in the near future and it is likely that the event will cause a stock market crash of Titanic proportions. Come “short” America with us.” I don’t think so. NAFC.

Housing, Autos, Agriculture, and the U.S. Dollar

On November 7th, 2006, the International Energy Agency (IEA) released its World Energy Outlook 2006. At a press conference announcing the new report, the agency's Executive Director was quoted as follows:

 "The key word is urgency," IEA director Claude Mandil told a press conference in London following (the) release of the study. "Urgency for immediate policies and measures to promote energy efficiency and facilitate technology development...  "On current trends, we are on course for an expensive and dirty energy system that will go from crisis to crisis. It can mean more supply disruptions, meteorological disasters or both. This energy future is not only unsustainable, but it is doomed to failure. "Governments can either accept such a future, or they can decide to come together to change course." - The Oil Drum, November 24, 2006  

Now read that again. The IEA, a government agency, and by extension, a political organization that normally would temper its commentary resulting in mealy mouthed, useless BS, is resorting to words such as “crisis”, “doomed”, “failure” and “unsustainable” to describe the world’s energy delivery system. The IEA, along with the U.S.’s EIA, are the 2 government-sponsored repositories of reserve, production, and distribution data for world energy supply and demand.   Venezuela and Bolivia are nationalizing their oil fields. Russia is “renegotiating” their oil contracts with the International Oil Companies (“IOC”). Iraq has disintegrated into civil war. Iran continues to jerk the world’s chain, while at same time the country is trending from an exporter of oil to an importer (From whom will Iran import? What other country is going to lose oil imports to satisfy Iran’s needs?). The U.K. has passed from Oil exporter to Oil importer. Mexico’s production is crashing. Nigeria has no ability to nationalize its fields, instead it resorts to kidnapping and blackmail – but isn’t that the same thing, really? The federal government and the financial media would have you believe that this is all a coincidence? Would anyone really care about the above countries if the Canadian Tar Sands and the U.S. Shale deposits really held a “trillion” barrels of Oil readily available for consumption?

Notice how I did not mention Saudi Arabia in my blow-by-blow country description? I am no diplomat; I have never worked in any foreign policy capacity. But, I will make a bet with you: Flip a coin as to what comes first – the peak in world Oil production or the collapse of the House of Saud. These 2 events are inevitable, and each event by itself will have a similar effect. Together, the compounded effect would be… well, disconcerting.

The numbers just don’t add up

It is estimated that over 600 million passenger cars roam the planet in 2006. For the moment let’s forget about the number of trucks and aircraft and work with these numbers: Auto’s consume 60% of liquid fuels, freight consumes 30%, and aviation 10% of fuels used in transportation. (No, these figure are not exact, but close enough for our purposes.)

It is “conservatively” estimated that by 2030 (data from Exxon CEO Lee Raymond, November 4, 2004, American Chamber of Commerce) Asia will have 400 million cars, North America 300 million, Europe 300 million, South America 150 million and Africa 50 million. In other words, we are going to double the world automobile fleet in 23 years. Let’s assume that freight and aviation growth is proportionate.   

Currently, the 2006 world auto, freight, and aviation fleet, consumes about 65% of the world’s daily liquid petroleum production of 84 million+ barrels.  

Please! Don’t bother me with fuel efficiency gains (the product cycle is 5 years minimum in autos). Everything being equal, we would need to maintain production, without any declines (currently between 4% and 6%) in the existing oil fields, and then discover, develop, and produce 10 NEW SAUDI ARABIAS IN THE NEXT 23 YEARS – A NEW SAUDI ARABIA EVERY 2.3 YEARS!!! Considering we have not found an equal to Saudi Arabia since the 1930’s, it would stand to reason that we would instead have to find, develop, and produce a new North Sea oil field every 3 MONTHS! The only other field in the North Sea’s class discovered in the past 35 years was Alaska’s North Slope. Mind you, that is with just 5% per year growth in the Automobile industry. Considering Asia’s economies are “projected’ (by whom?) to grow, on average, over 6% per year until 2030, this is not an outlandish assumption. Except for one small problem. It is simply not possible.

Forget CO2 emissions. Forget inadequate supplies of raw materials such as iron, copper, zink, and rubber. Forget paving over a substantial portion of the world’s remaining arable land for roads, highways, and parking lots. We don’t have to go there. This forecast would have the world consuming over 700 billion barrels of oil during the decade following 2030, 600 or so billion between 2020 and the end of that decade, and 450 billion or so between 2007 and 2019. Well, that ain’t gonna happen, UNDER ANY CIRCUMSTANCE.

Want to see me do the same trick with housing projections? They don’t add up, either. What does it all mean? A great deal, I’m afraid.  

Now, just for ONE moment, let us forget prices. Let’s talk physics, not economics, but only for a second so that I can make my point and get back to economics… 

Let us suppose that total oil availability for the U.S. falls from 20.7 mbpd (million barrels per day) in 2006, to 20.5 mbpd in 2007, 20.3 mbpd in 2008, and 20 mbpd in 2009. Never mind where I came up with these numbers (but I am willing to bet they are close) - we are playing “what if”, remember? Work with me. If the total liquid petroleum supplies available for consumption for the U.S. fall from 20.7 mbpd in 2006 to 20 mbpd in 2009… Who/what benefits? Who/what is harmed? How do you profit? What are the probabilities? Don’t worry about the price, concern yourself only with aggregate supply. Remember, a Joule of energy has no idea how much it cost its consumer.

The insurance industry is built on taking low probability/high consequence events (think plane crashes and hurricanes) and quantifying their impact probability. Unfortunately, I do not believe that the above scenario is low probability. Most non-politically motivated students of this issue believe that the probability of this occurring before 2020 is approaching 90 – 99 % (that is anecdotal by the way, not empirical… but you get my point). So, is the probability distribution linear (you know, 13 years left between here and 2020, so 1/13 for 2007, 1/12 for 2008, 1/11 2009…), Logistic, Gaussian (if you are not familiar with these just go to wikipedia.com and search them)… who knows, and why bother? Getting this exactly right is not necessary. What IS necessary is taking the appropriate actions.

Between a rock and a hard place

The U.S. Financial System is predicated on the continued growth of the economy, expansion of the money supply, as well as a consistent level of continued inflation.   

The currency risk (crisis) facing the United States, did not come about in a vacuum. Nearly half of the U.S. Trade Deficit can be directly attributed to our International purchases of Oil. Further, I sincerely doubt the U.S. would have been running a Budget Deficit if the U.S. was capable of producing (extracting) all of its Oil requirements domestically.   

This problem has its roots in the 1970’s peak of U.S. domestic oil production. Until that time, the U.S. was the world’s largest creditor nation (at one the U.S. was the world’s largest OIL EXPORTER). As such, the U.S. ran a Trade Surplus. But then U.S. Oil production peaked, and the U.S. began its long, inexorable decent into debt by continuing to increase its Oil imports year after year after year, while at the same time, continuing to promise more than it could pay for in the form of entitlements (Social Security, Medicare, Medicaid, the Drug Benefit…). Hence, we now have the “Twin Deficits” of Trade and Budget fame, in spite of the harsh lessons dealt the U.S. during the 1973 and 1979 oil shocks. At the time of the last Oil embargo, the U.S imported less than 25% of the Oil it consumers. Today the U.S. imports roughly 60% of the Oil it needs to run its economy, while going deeper and deeper and deeper into debt. Further, the U.S. is beginning to import Liquid Natural Gas (“LNG”) for the first time, putting the U.S. further and further into debt and into reliance on foreign energy suppliers (If 25% reliance on foreign Oil did such a number on the U.S. in 1979/1980, just imagine what 60% reliance might do in a supply disruption today).

The only way to pay the debt back is to increase net nominal (not necessarily real) tax revenues, actually or de facto. This can be done in a number of ways:

• The U.S. can raise tax rates
• The U.S. can cut services, entitlements, and spending for defense 
• The U.S. can grow the size of its economy, thereby collecting more taxes without
raising tax rates. For this to work, the U.S. must still get a hold of its
deficit spending
• The U.S. can debase (lower the value of) its currency (or its trading partners can do
it for the them)

It is extremely doubtful that the U.S. could raise its tax rates enough to make much of a dent in its budget deficit and entitlement liabilities – to do so, the U.S. would have to tax its citizens into penury. How likely is it that the U.S. Congress would cut services and entitlements in the absence of crisis? Pigs have a better shot at flying. Can we grow our way out of this mess? Sure, if we had an unlimited supply of domestic Oil and Natural Gas (“NG”) and if we were also able to control our spending. In order to grow the economy we must increase our consumption of energy. And “therein lies the rub”: The only energy source that we can readily increase consumption of is Coal, and Coal will not run the U.S. transportation system. Coal will not heat the homes of the approximately 60% of Americans that use NG for home heat. Not to mention the external environmental costs concomitant with the use of Coal.

So we are left with the currency. You see, to pay its IOU’s, a government is very much able to print more money and use it to pay its debts. The problem with that is the contra party, the guys that hold those IOU’s, don’t like that very much. They won’t extend any more credit on such terms. They will want MORE of that less valuable money in the form of interest in the future and for the exchange of goods and services that they sell us. That means higher interest rates and higher inflation. Much higher, and we all know what that means.

Now for the Coup de Grace: In just over 4 years, the Boomers will be turning 65, and will want those Social Security and Medicare benefits they have been paying for all these years. Problem is, the system was “pay as you go”, and the money that the Boomers paid in is long gone, and the younger generation is not going to be able to pay for the Boomers “pay as you go” entitlement demands. So how do we pay the Boomers and our creditors and our Oil suppliers? We don’t. The Oil foot bone is connected to the deficit shin bone is connected to the U.S. Dollar Hip bone is connected to the…   And that’s why the Dollar is going down - like a rock in a pond.

Each week, the investing public is pummeled with data: Housing starts, auto sales, chip sales… a myriad of reports on the numbers of widgets sold, and services rendered, in a given time frame, the aggregate of which is the gross domestic production (“GDP”) of the U.S. economy. Still, to my mind, nothing sums it all up like “housing/autos”. The correlation between the performance of each other and the overall economy is fairly complete.   

Can “housing/autos”, and by extension, the U.S. economy, grow if oil and natural gas production/imports cease growing? Not for long. Are we at that critical juncture at this moment? The data do not look encouraging. So let’s examine the likely consequences resulting should this sad state come to pass circa 2005-08. In no particular order, this would include, but not be limited to:

1. The U.S. budget deficit would explode  
2. At some point after this, foreign investors would cease to fund U.S. debt 
3. The price of imports would soar. Today’s $60 sneakers from China might be $200 
4. Interest rates would have to rise high enough for domestic savers to be encouraged
to save enough to fund our debts.  
5. The purchasing power of the dollar would plummet 
6. Unemployment would rise substantially 
7. Mortgage defaults would rise substantially 
8. The cost of food and energy would rise substantially 
9. The financial markets would get rocked 
10. The housing and auto industries would collapse 
11. Vacancy rates of commercial properties would rise to unprecedented levels 

Our financial system is more leveraged, by far, than it has ever been. In 1970, the share of the Standard & Poors 500 Index total earnings represented by financial institutions was about 5% - today that number is approximately 50% if averaged over the 5-year period 2001-2005. From “Rosey the Riveter” of the 1940’s and 50’s, when roughly half of the manufactured goods sold in the international trade bore a “Made in America” stamp, America has become a nation of money lenders, stockbrokers, insurance, and real estate salesmen – with the token contractor thrown in for good measure. This is not a rant about politics. This rant is about the exposure we have constructed for ourselves in the 21st Century American economy. Any shock to the financial system will devastate our present day economy in ways that would not have been possible 30 years ago. Like it or not, we are conducting an experiment in uncharted territory the many possible outcomes of which leave much to be desired, to say the least. And an “energy tsunami” is headed our way.

Natural Gas: Running on Empty?

“Nationwide, 58 percent of all households depend on natural gas as their primary heating fuel”, and “Thirty percent of all U.S. households rely on electricity as their primary heating fuel.” U.S. Department of Energy's EIA

Remember that 19.5% (EIA data for 2006) of electricity generation comes from Natural Gas (“NG”) therefore 64% of households rely on NG, directly or indirectly, for heat. As recently as 2004, NG accounted for 24% of electricity generation. (In case you were wondering, the remaining electricity generation comes from: 48.6% Coal, 19.5% Nuclear, 7.8 Hydro, 1.6% Petroleum, and 3% Other.)

At this moment, the U.S. has more than sufficient supplies. At today’s rate of consumption, North America has less than 10 years of NG reserves (US Army Corps of Engineers). Yes, we have a plenty today – and a disaster coming in the near future.

Unlike Oil, NG markets are local. Although the U.S. imports 1% to 2% of its NG in the form of Liquid Natural Gas (“LNG”), these imports cannot be easily increased due to infrastructure issues that are at least a decade away from mitigation – if we addressed them tomorrow (the U.S. has only 5 LNG terminals, and one of these is on the island of Puerto Rico. There is no pipeline between Puerto Rico and the Mainland.). The remaining 98 % of NG consumed domestically comes from Canada, Mexico, and the U.S., and is transported to markets via an intricate pipeline system.

The problem is that when NG Wells begins to decline, they do so at a much steeper rate than conventional Oil Wells do. After the initial surge, Oil must be pumped out of the ground, or brought to the surface using water injections to flood the oil to the surface or a gas such as carbon dioxide to “repressurize” the Well and force it to a collection point. This is not true of NG; NG comes out of the ground under pressure – until it doesn’t. Then it simply stops coming out of the ground. You can’t pump it, and you can’t inject water (no, hydro fraction, or “frac job” in industry parlance, does not count) – the well or field is dry, end of story, and the end comes with little or no warning.

Since 2002 drilling for NG in North America has increased 20 % per year, but production has been declining by better than 4%. We are now severely constrained in our equipment infrastructure, and will be unable to maintain that frenzied growth in drilling activity.  (David Hughes)

Between 1995 and 2005, the U.S. added 220,000 Gigawatts of gas powered electrical capacity. It is clear now what a blunder that strategy was, as NG supplies will be insufficient to generate electricity at aggregate plant capacity. Perhaps it was not a blunder, as it is likely that Coal would have been used in its stead, with its attendant environmental impact.

I think it is important to consider that the process of liquefying and gasifying imported LNG is a HUGE environmental liability. A significant amount of Methane (CH4) escapes into the atmosphere during these processes, and Methane is much more powerful greenhouse gas than is carbon dioxide (CO2) (notice the "C" in those gas compounds). This will certainly be a consideration in the future. But that’s an environmental issue - this discussion is about future electricity availability.

You know, the old Energy Returned on Energy Invested (ERoEI) issue.

Could this be softened using Nuclear Energy? Maybe, but certainly not until we produce 100% of the world’s electricity needs with Nuclear and use the excess capacity to produce Hydrogen. Obviously, the use of ANY hydrocarbon to produce electricity so that some Nuclear power generation can be diverted to Hydrogen production is a loser in the ERoEI department. It would only make sense for excess capacity. Now, when do you think we will have that much Nuclear power? Not in my grandchildren’s lifetime, and my oldest is 13.

Ethanol is in the same ERoEI boat. It takes more energy to produce than it provides, more or less.   The President knows all of this. If the U.S. thought this was not the case our interest and commitment in Iraq and the rest of the Middle East would not extend to lives lost and trillions of dollars spent.   And the media ate it up - and spoon fed it to the pubic.

With basics such as these costing less, more of our budgets can go toward other products. In 1901, the average family spent three-quarters of its income on food, shelter and clothing. Almost a century later, it's little more than a third. (The Dallas Fed, http://www.dallasfed.org/fed/annual/1999p/ar97.html)

The American Energy Crisis

Wednesday, February 7, 2007

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