Shortage, Shortage — What Shortage?

One of the themes of this site is that resources are finite in quantity, hence, once they are gone, they are gone. They will not be replaced on a human time scale. The normal laws of supply and demand do not work because there is new supply available. The logic of the economics for a resource such as crude oil goes as follows.

  1. We  extract the easy pickings, the low-hanging fruit first. So the first oil wells were drilled in places such as East Texas. The oil was easy to find and extract, and it could be moved to the refineries quickly and at low cost. (The picture shows one of these wells. The plume of oil is from a blowout — representing a serious loss of control and the potential for a major fire.)

    Early oil well and blowout
    Early oil well
  2. As the first wells are depleted they are replaced with sources that are more difficult and expensive to develop. (In technical terms there is a decline in ERoEI, Energy Returned on Energy Invested. Companies have to spend more and more of  energy simply finding and extracting new sources of energy.) We go from an easily-drilled field in East Texas to the phenomenally expensive offshore platforms that are being built now.

    Offshore Oil and Gas Platform
    Offshore Oil and Gas Platform
  3. Based on the laws of supply and demand, the price of oil should steadily increase — the demand remains the same but the cost of getting the crude oil to the refineries has gone up substantially.
  4. If the price goes high enough, demand will fall, so the price will also fall. But the price trend will always be upward because it is always going to cost more to find and extract the next barrel of oil. There is no new supply of low-cost oil available to us.

But over the course of the last six years or so that’s not how things have actually worked out.

Consider the following article, which is representative of many others like it.

Oil plunges 7% to lowest level in more than a year
Oil prices slumped on Friday to their lowest levels in more than a year, deepening a rapid seven-week sell-off that has plunged crude futures deep into a bear market.

For background, here is a chart showing the price of West Texas Crude over the last ten years.

Oil Price (West Texas Intermediate)
Oil Price (West Texas Intermediate)

The chart shows that,

  • There was a steady and rapid increase in price up to the year 2008 — the year of economic recession.
  • The price fell, but soon recovered.
  • In 2013/14 the price crashed.
  • Since then it has increased, but is still not at as high as it has been.

In other words, there are ups and downs, but there does not appear to be any systemic move upwards. What happened?

The standard response to this question is that the development of tight oil prospects in the United States increased the amount of oil on the market, and so the price went down.

This new supply can be seen in the following chart. The red line is production in the United States of conventional oil. It peaked around the year 1970 and has been falling steadily ever since. The green line shows the amount of tight oil produced. It can be seen that this new supply has been sufficient to return overall U.S. production to 1970 levels.

Hubbert Curve Actual

Actually, it’s more complicated than this.

The following additional factors need to be considered.

  • The Kingdom of Saudi Arabia was very concerned about the potential dominance of the United States in the world’s oil markets, so they intentionally reduced the price of their crude so as to drive the tight oil projects out of business. This was a purely political move.
  • At these prices, tight oil production is not profitable. In fact, it relies on the continued investment of speculative capital — people who wish to get in on the ground floor of this new business area.
  • High oil prices tend to discourage general economic activity. So the prices go down in response.

It’s complicated.

Some analysts predict that by the year 2020 the tight oil business will have to show it can be profitable. Otherwise the investors will move out. But the only way that the industry can be profitable is to have prices that are well north of $100 per barrel.

If this analysis is correct then, looking back on what happened, it may be concluded that the tight oil business was no more than a temporary interruption on the trend toward higher oil prices, or a slower economy at current prices.

Weeping Jeremiah

 

 

Weeping Jeremiah
Weeping Jeremiah

One of the reasons that I started writing this blog, and later the book A New City of God: Theology for an Age of Limits, was that I had been studying the Hebrew Bible as part of the Education for Ministry (EfM) program. (This is a four year program. Students attend a weekly class every week and carry out the necessary background reading.) The first year curriculum covers the Hebrew Bible / Old Testament. My class colleagues had heard me talk about how the Peak Oil / Climate Change situation creates opportunities for fresh Christian leadership, so they suggested that I become a modern-day prophet. Taking on such a role seemed to be rather presumptuous. Nevertheless, for better or for worse, I decided to give it a go.

Use of the word “prophet” prompted me to take a look at these older prophets. I came up with the following thoughts.

  1. They were not fortune tellers — they make specific predictions about the future — they merely observed what was going on around them and drew some obvious conclusions. For example, in their day three superpowers — Egypt, Assyria and Babylon — were fighting, at different times, for regional dominance. Their armies often clashed in and around the lands occupied by the Hebrews. Therefore one thing was certain — Judah and its capital Jerusalem were going to be in harm’s way. Any other reasonably informed person living at the time would have reached the same conclusion. The prophets were not revealing a secret.
  2. From a material point of view, there was little that the Hebrew people could do to resist their larger and more powerful enemies. Solomon did achieve a brief period of independence, but that was unusual. And, as we know, Jesus often made reference to the superpower of his time: Rome.
  3. The prophets did not offer a way out of the predicaments that they faced. They understood that, by and large, physical resistance was not going to work. We hear the same from Jesus, “Give back to Caesar what is Caesar’s and to God what is God’s.” (Mark 12:17).
  4. But they did call upon the Hebrew people to return to their basic religious principles; their response was spiritual, not physical or material. As I will discuss in future posts, and in the book A New City of God, I suggest that our response to the Age of Limits crises that we face will have to be largely spiritual. After Good Friday comes Easter Sunday.
  5. Nevertheless — surprise, surprise — the prophets were ignored.

The analogy with what is taking place in our time is striking. Taking the above points one by one:

  1. Few of those studying the looming energy and environmental crises make specific predictions as to exactly what will happen or what the timing is likely to be. Like Paul, we can only “see through a glass darkly”. But they do “prophesy” that our modern-day predicaments will have catastrophic consequences. Moreover, anyone who spends just a few hours reading sensible research materials will arrive at generally the same conclusions as the modern-day “prophets”. It’s all fairly obvious. It does not require special insights.
  2. Like the peoples of those ancient times, we also face predicaments.
  3. There are no solutions because predicaments don’t have solutions. When faced with a predicament, all that we can do is respond and adapt. We cannot make the predicament go away.
  4. As I will discuss in future posts, and in the book A New City of God, I suggest that our response to the Age of Limits crises that we face will have to be largely spiritual. After Good Friday comes Easter Sunday.
  5. Modern prophets are also ignored and their prophecies are denied. The number of people willing to face up to the nature of our current predicaments is small and the number who are taking action in their personal lives is smaller still.

Of the Hebrew prophets, probably the best known is Jeremiah. He not only authored the book with his name, but may also have written Kings and Lamentations.

He was called to his prophetic ministry in 626 BCE. He prophesied that Jerusalem would be destroyed because the people of Israel had been unfaithful to the laws of the covenant and had forsaken the true God by worshiping Baal. He prophesied that his people would face famine, and then be taken as slaves to a foreign land.

It is interesting to note that Jeremiah did not want to be a prophet, nor did he believe that he had the skills to be one. But we are told that the Lord touched his lips, and told him to go out and prophesy. To do this he had to,

  • Not be afraid,
  • Stand up and speak, and
  • Go where he was sent.

Jeremiah was persecuted for his work and was condemned to death. Nevertheless, he survived, and, somewhat ironically, was well treated by the Babylonians — the people who fulfilled his prophecy as to his people being captured.

Nevertheless, he was persistent; he had to speak.

But if I say, “I will not mention his word or speak anymore in his name,”
his word is in my heart like a fire, a fire shut up in my bones. I am weary of holding it in.

Jeremiah 20:9

Jeremiah compared to modern Age of Limits prophets
Vernet’s Jeremiah

 

Down the Hubbert Curve

M. King Hubbert. Peak Oil.
M. King Hubbert (1903-1989)

Within the Christian community there is considerable concern to do with environmental changes — particularly global warming. This is all to the good. But one of the themes of this site, and of my book A New City of God, is that no single issue such as global warming can be handled by itself. Each is part of a complex system involving many feedback loops — many of which are difficult understand, or even to identify .

The Venn Diagram below provides a very high level view of some of the elements that interact with one another. They are resource availability, the environment and the economics behind all this. Behind these three elements lies the issue of population.

Venn-AOL-2-300

With regard to oil and the crucial role that it plays in our economy let’s take a look at the work of a remarkable man: Dr. M. King Hubbert.

M. King Hubbert

Over the centuries various publications have been seminal, i.e., they planted seeds for a new way of thinking about the world. An example of such a paper is that written by Galileo Galilei in the year 1632 in which he explained the workings of the solar system. Sir Isaac Newton’s Principia of 1687 was equally important. It provided a mathematical framework for the scientific world that was good until the early 20th century until the introduction of the theory of relativity.

Future historians may well look back on Dr. Hubbert’s 1956 paper Nuclear Energy and the Fossil Fuels (Hubbert 1956) as being of equal importance. Hubbert identified many of the issues that oil plays with respect to the Age of Limits.

• He discussed the issue of fossil fuel production in a global context.
• He recognized the finite nature of fossil fuel reserves. His interest was not so much in oil production rates as in the rate at which we are finding new reserves, and whether the discoveries compensate for the oil that is being used (they don’t).
• He developed a generic (Hubbert) curve to show how the production of fossil fuels peaks and then declines.
• He understood the fact that exponential growth in a finite world cannot continue.
• He had a grasp of the social implications of his research.

So, who was this potentially famous author? (A sign of his fame is that in at least one fictional story set in the future, Hubbert’s name is used as a swear word. The people in the story say, “By Hubbert!” in the way that we would say “By God!”)

Hubbert was a senior technical advisor to the Shell Oil Company. Therefore he was part of the oil industry establishment — he was not some critic “crying in the wilderness”. In the year 1956 he presented the paper that we have just discussed to the American Petroleum Institute. In it he projected that the production of oil from conventional wells in the United States would follow the trajectory in the first of the two curves shown below (they are reproduced directly from his paper).

Hubbert-Curve-1
The Hubbert Curve

The first curve shows that, when a new source of oil is found, further exploration in the same area leads to increased production. Eventually, however, production eventually peaks and then declines.

Hubbert predicted that the production of conventional oil in the United States would peak around the year 1970. His prediction was remarkably accurate, in fact he nailed it. (Since his time other sources such as tight oil and deepwater offshore oil have been developed. But his prediction to do with land-based, conventional oil was and remains correct.)

The following are some quotations from his seminal paper.

The evolution of our knowledge of petroleum since Colonel Drake’s discovery of oil . . nearly a century ago, resembles in many striking respects the evolutions of knowledge of world geography . . .

This opening passage is interesting for two reasons. First, it shows that Dr. King was not just a “dry scientist”. His imagery is unusual for a paper of this type. Second, by comparing the petroleum world with geographical charts he is suggesting that there are continents (giant fields), large islands (medium fields) and small islands (small fields). The continents were discovered early on and no more remain to be discovered. All that is left are the small islands/oil fields.

The fossil fuels . . . have all had their origin from plants and animals . . . during the last 500 million years. Therefore, as an essential part of our analysis, we can assume with complete assurance that the industrial exploitation of the fossil fuels will consist in the progressive exhaustion of an initially fixed supply to which there will be no significant additions during the period of our interest.

. . . world production of crude oil increased at a rate of 7 per cent per year, with the output doubling every 10 years . . . How many periods of doubling can be sustained before the production rate would reach astronomical magnitudes? No finite resource can sustain for longer than a brief period such a rate of growth of production; therefore, although production rates tend initially to increase exponentially, physical limits prevent their continuing to do so. This rapid rate of growth for the production curves make them particularly deceptive with regard to the future length of time for which such production may be sustained.

These two passages summarize the concept of Peak Oil in a nutshell.

It was not a big intellectual leap to move from “Peak Oil in the United States” to “Peak Oil Worldwide”. Indeed, we can develop Hubbert curves for other kinds of resources such as rare earths needed to make electronic equipment, or even fish in the sea. (Resources such as fish and forests are renewable, but we are depleting them so quickly they are not actually being renewed quickly enough; hence the Hubbert Curve can be applied to them.)

Happy-Motoring-1

Not only was his technical analysis remarkably insightful, he had the courage of his convictions. These were the days of “Happy Motoring” — his message was incomprehensible to the culture of his time. And he talked about these issues against the will of his employer (Shell Oil). He continued to speak out until the end of his life.

The chart that Hubbert published actually has two curves. The one on the left, the one that we have discussed, is to do with production of oil within a given area. The curve on the right is to do with nuclear power. He was writing in the early 1950s when the nuclear power industry was just getting started; society at the time was full of optimism to do with this new source of energy that would be “too cheap to meter”. Hubbert anticipated a smooth transition from fossil fuel power to nuclear power.

Our Friend the Atom

We now know that this particular prediction was a miss. Nuclear power makes up less than 10% of the world’s electricity production, and it is unlikely to increase much for the following reasons:

  • The problems (actually predicaments) to do with nuclear waste are intractable.
  • The capital costs associated with nuclear power make the business uneconomic and dependent on government subsidies.
  • Energy sources are only fungible to a limited degree. Considering just road transportation, it is impractical to consider that the world’s motor fleet can be converted to electricity in just a few years. (Any attempt to do so would require a huge consumption of fossil fuels.)
  • Supplies of uranium and other nuclear source materials are subject to their own Hubbert Curve.
M. King Hubbert Peak Oil
M. King Hubbert

Peak Oil Update

Hubbert published his ground-breaking work three generations ago. That’s a long time ago. So how has his work held up?

In March 2018 Ugo Bardi published Peak Oil, 20 years later. In the paper he looks as the forecasts of Hubbert and his successors. Of course, those predictions were not completely accurate — no one can predict the future, except in broad outline. We will probably look at this paper in greater detail in future posts. For now, a key statement is,

Overall, we can say that, even though the role of non-conventional oil sources was not correctly evaluated and the date of the peak missed at the global level, the Hubbert theory produced correct predictions and, in general, a valuable warning of difficulties to come. So, there never were compelling reasons based on historical data to dismiss the peak oil idea as wrong or untenable. Nevertheless, this is what happened.