Thursday, July 07, 2005

Will Unconventional Oil Make Up The Shortage?

Such sources [from unconventional fields] will account for 30% of all supplies in 2010, up from just 10% in 1990, according to CERA. ExxonMobil figures the world contains some 7 trillion bbl. of heavy oil, oil sands, and shale-oil reserves alone, an amount roughly equal to those of all conventional reserves. If just 20% of those were recovered, ExxonMobil figures that would top the 1 trillion bbl. of conventional oil produced on the planet to date. If numbers like that prove to be accurate, today's worries over oil supplies could seem like a distant memory in just a few short years.
Original here at Businessweek

The above optimistic picture is painted by Daniel Yergin's Cambridge Energy Research Associates. I am very skeptical. Heavy oil, it is true, has a future, but we'll have to invest billions in a whole new refinery infrastructure. Ditto for the new Liquid Natural Gas freighter terminals I keep hearing about. Even if we could build all this stuff, our economy as we know it won't run on unconventional oil, it requires cheap, abundant oil.

As for oil (tar) sands, yes the fuel is there, but it is vastly more expensive to extract than oil conveniently gushing out of the earth. Shale oil is even harder to extract than tar sand. There will be energy available, but only at prices that we have not yet begun to see. This is because much of the cost of producing these fuels (sand and shale) goes to energy. for example, to liquify the tar in Canadian tar sands, they need to heat the sand with steam. The steam is made by boiling water with natural gas. If the cost of gas goes up faster than the price they get for the synthetic oil, then the tar sands will simply be unprofitable, and production will shut down. Roberts, in the End Of Oil, and Heinberg in The Party's Over, make this point repeatedly: a nation's energy infrastructure must be profitable for it to work. Only Nazi Germany has been able to make much synthetic oil in the past, and it was made possible by using slave labor. Note that this oil did not really drive Germany's economy; only its military got the fuel.

But we won't be able to build all that infrastructure stuff anyway. The amounts of capital needed will not be so easy to get when the supply of dollars finally starts to dry up. If we do get some of it built it will be very hard to pay off.

Parallel to oil, dollars will "peak" very soon, sending this country, and much of the globe with it, into inflationary depression. (Or deflationary depression, depending on the reaction of nations' central banks.) A tsunami of bankruptcies and defaults will sweep the globe. The world's economy is dependent on a supply of cheap abundant dollars just as much as cheap abundant oil. Note that the S&P 500 has negative equity: long term corporate debt is 110% of the value all outstanding shares. Personal debt, government, municipal debt, real estate values, these are pretty much the same story; an unsustainable house of cards that keeps growing taller. The Fed will not be able to flood the world with credit forever. When the money runs out and debts have to be paid, not just re-financed, we will not be able to raise the vast amounts of capital necessary to build the new LNG freighter temminals, heavy oil refineries, nukes, methane hydrate rigs, etc. The idea that we can, at this last minute, re-build our energy infrastructure from scratch is a fantasy. It is too late!

That’s why I think we'll have mules and oxen, and wood-burning tractors, powering our farms in 20 or even 10 years: they don't require a centralized infrastructure.

As for transportaion, the best we'll be able to afford, and run, will be a railroad system. For overseas travel, we'll be going by ship. Freighters will improve their finances by carrying passengers as well as cargo, and some cruise ships may be able to convert to ocean liners.

By the way, you really can run your car, or tractor, on wood chips! And reasonably cleanly, too. During WWII, in Scandinavia and Australia, and other places that had no fuel at all, that’s how vehicles ran. Look up producer gas on google.

In the future, because fuel will be so much more expensive and capital hard to come by, our economy will contract. This is the hardest thing, as Americans, that we need to face. Growth is over.

1 comment:

Thaxter said...

I suppose you're right. This today from Financial Times:

"But private warnings also point to a worsening long-term outllook, with Saudi officials saying that the Organisation of the Petroleum Exporting Countries will be unable to meet projected western demand in 10 to 15 years.

"At today's prices, the world will need the cartel to boost its production from 30m to 50m barrels a day to 50m by 2020 to meet rapidly rising demand, according to the International Energy Agency, the energy watchdog for consuming countries.

"But senior Saudi energy officials have privately warned US and European counterparts that Opec would have an “extremely difficult time” meeting that demand. Saudi Arabia calculates there is a 4.5m b/d gap between what the world needs and what the kingdom can provide."

Yes, the source of oil here is entirely different from Saudi fields (which is the point!), but I think that CERA's estimates do not take into account Saudi Arabia's now public admission of its inability to meet (and even surpass) the shortfall between demand and supply.

After all that boasting and bragging recently from Saudi ministers, this is a bit of a shock.

This news was swallowed up today upon the events in London.