Wednesday, March 01, 2006

Peak Oil—Nature’s Own WMD? Part IV

History is often a harsh and unforgiving teacher. It is particularly exasperating when a current generation looks back and ascertains that predecessor generations botched opportunities, and as a consequence (as the saying goes) “snatched defeat from the jaws of victory.” As described by Ronald Bailey, science correspondent for Reason magazine, past presidential initiatives to insure America’s energy independence are classic examples of such failed efforts.

He cites how, “during the 1973 Arab oil embargo—which tripled the price of oil overnight—Richard Nixon launched Project Independence, asserting ‘in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving.’ Like Mr. Bush, Nixon also promised federal dollars to produce ‘an unconventionally powered, virtually pollution-free automobile within five years,’” with a goal date of 1985. We are twenty years beyond that target and realistically, few, if any such vehicle ride today’s roads.

In 1975, President Gerald Ford signed the Energy Policy and Conservation Act, setting federal standards for energy efficiency in new cars for the first time, and moved the date for energy independence to 1985. In 1977, Jimmy Carter stated that achieving energy independence was an issue of such vital national interest that it was the “moral equivalent of war” [a prescient observation], and signed the law creating the Department of Energy. When the Iranian oil crisis occurred in 1979, President Carter pledged, “Beginning this moment, this nation will never use more foreign oil than we did in 1977—never.” [That was somewhat less prophetic.] He then proposed a huge energy plan that would seek a 1990 target date of energy independence. (Note how the dates keep moving later and later.)

It was in 1991, just prior to the first Gulf War, that George H.W. Bush declared a national energy strategy aimed at reducing our dependence on foreign oil, funding a $200 million research project to develop lightweight battery systems for electric vehicles. (Haven’t seen much of those either.) Bill Clinton, in 1992 proposed a tax on crude oil to discourage dependence on foreign oil (the most sensible and realistic suggestion of all, but a political no-no) and in addition, he introduced a program with the (then) Big Three automakers to produce a prototype car three times more fuel efficient than conventional vehicles—this time by 2004. (In this case, while the Big Three frittered, the Japanese did make some progress.)

Obviously, none of these objectives were fully met, so here we are, some 33 years after Richard Nixon first enunciated the desirability of eschewing our dependence on foreign oil, and we must confront the sorry historical record of failed presidential initiatives that have occurred. But there is more.

“America in the year 2001 faces the most serious energy shortage since the oil embargoes of the 1970’s.” That was the conclusion expressed by the energy task force appointed by Dick Cheney in 2001, and emphasized by George W. Bush in his State of the Union message in 2003, wherein he pledged “to promote energy independence for our country.” His solution to the problem: The creation of hydrogen cell fueled vehicles, and an expenditure of some $1.2 billion for that purpose. What is the ultimate objective of that effort? To reduce the amount of oil we use by 11 million barrels a day by the year 2040. Of course we have to survive somehow for the next 34 years to see the results. Admittedly, the concept certainly has enormous environmental advantages since the resulting vehicles would be virtually pollution free. However the technical difficulties and the problems inherent in establishing a totally new delivery infrastructure have raised questions about its practicality.

In his recent State of the Union Address, President George W. Bush correctly defined America’s romance with oil as an “addiction.” His solution (among others related to renewable energy sources) is to reduce oil imports from Arab states by 75 percent by the year 2025. At first glance, that would seem to present a significant challenge. However, since we currently import only some 11 percent (some 2.4 billion barrels a year) from our Gulf State “friends,” he is actually seeking to reduce total oil consumption by a mere 8.25 percent over a 20 year period. That is less than one-half of one percent a year, hardly an inspirational effort.

Here is what the New York Times editorial columnist Tom Friedman says on the subject: “In 1961, when President Kennedy called for putting a man on the moon, he didn’t know how — but his vision was so compelling, his expectations so high, that they drove the moon shot after he died. The Bush-Cheney team should be inspiring our generation’s moon shot’s energy independence. But so far, all they’ve challenged Americans to do is accept a tax cut.”

Therein lays the problem. No effort is being made to convince the American public that unless we are willing to sacrifice now, as George Santayana said, “[We] who cannot remember the past are condemned to repeat it.”

Let’s take a word derided by the Bush administration — “conservation.” Here is what Mr. Cheney has to say about that subject: “Conservation may be a sign of personal virtue, but it is not the basis for a sound, comprehensive energy policy.” Really? Here is what oil giant Chevron (the only major oil company that admits we face a serious future oil shortage) says about alternative energy sources: “The good news is we’ve got a huge source of alternative energy all around us. It’s called conservation, and it’s the lowest cost new source of energy we have at hand.” Chevron then suggests the following: “…if automakers improved fuel economy across the board by just 5 miles per gallon, we’d save 22 billion gallons of gasoline a year.(That’s the equivalent of 1.5 million barrels of oil a day), ironically, the same amount we import daily from Saudi Arabia. Perhaps Mr. Cheney might wish to reappraise his denigrating comments about the potential benefits of conservation.

Speaking of Saudi Arabia, that country is the focus of a recently published book, Twilight In the Desert: The Coming Saudi Oil Shock and the World Economy, authored by Matthew Simmons, a highly respected, veteran oil industry analyst and investment banker. As pointed out in last month’s article, he is a friend of both Mr. Bush and Mr. Cheney, serving as an energy consultant to both. This is a book that has sent seismic scale tremors throughout the oil industry, as well as in governments of oil producing countries. (Perhaps the more important issue is whether it has had any impact upon the outlook and judgment of our own government leaders. Thus far the answer is NO!)

Mr. Simmons’ book describes how, in the last half century (between 1950 and 2005), the world’s use of oil grew more than eight times to 85 million barrels (bbl.) per day. That demand is expected to increase to between 120 million and 130 million bbl. a day by 2025 to 2030, fueled by rapid industrialization in countries like China and India. The only area capable of fulfilling this expansion in demand is the Middle East, and it is here that Saudi Arabia is considered to be, as they say, “the elephant in the room.” Oil optimists are counting on that country alone to increase oil production from around 10 million bbl. a day in 2005 to 25 million or perhaps as much as 30 million bbl. per day by 2030 or sooner.

Mr. Simmons writes, “After spending more than two years researching my book, Twilight in the Desert, I am convinced that it is highly improbable that Middle Eastern oil—and particularly Saudi Arabian oil—can grow to those far higher levels. Instead, there is a risk that Saudi Arabian oil output and the rest of the Middle East’s oil supply may start to decline.” He continues, “The likelihood that Saudi Arabia can increase its output to even 15 million bbl. a day is remote.” He amplifies this by asserting, “Even maintaining its current rate of production for an indefinite period of time is hardly a certainty.”

Why does Mr. Simmons challenge so vociferously Saudi Arabia’s Aramco oil company, Saudi government officials, and the U.S. Department of Energy’s Energy Information Administration (EIA), all claiming that Saudi Arabia has over 260 billion barrels of proven oil reserve, a quarter of the world’s total? Consider that if his forecasts prove to be wrong, this disagreement places Mr. Simmons’ reputation at risk. Yet, Simmons’s strong beliefs as articulated in great detail in his book are indeed, compelling.

A major issue is the fact that the condition of Saudi’s oil fields, as well as those in other OPEC countries is a closely guarded secret. That developed when in 1983, OPEC imposed output quotas, a move that resulted in OPEC members inflating and exaggerating the size of their oil reserves. This enabled them to support claims for the highest possible quotas in order to maximize revenues. Therefore, it is now quite probable that most claims for current (so-called) proven reserves are predicated on two decades of overstated numbers.

After a visit to Saudi Arabia in 2003, his suspicions raised, Simmons decided to investigate by examining the most reliable source possible. This consisted of some 200 technical papers published by the Society of Petroleum Engineers, written since 1981, by Aramco and Saudi Arabian engineers and managers. He concluded that the basic inhibiting factor is not oil, but water. About 90 percent of Saudi Arabia’s 10 million bbl. a day comes from just seven giant oil fields, all discovered between 1940 and 1965. The most significant, named Ghawar, the world’s largest, accounts for 55 to 60 percent of all Saudi oil production. That, plus three other fields comprise 90 percent of total Saudi production.

As oil wells are depleted, internal pressure that forces the oil to the surface diminishes, so water is pumped into the well to maintain pressure. Massive injections of water however, ultimately damage the well and the more water used, the more likely the well is approaching its peak. At Ghawar for example, 7 million barrels of seawater are required daily to extract just five to six million barrels of oil. That’s more water than oil. This is a clear indication that Gahwar is near or past its peak. Simmons proceeds to list his opinion of the status of every major oil field in Saudi Arabia, and the outlook is bleak for all of them. He also destroys the notion that future exploration will uncover any major new oil fields in Saudi Arabia.

In the following statements, Simmons sums up the critical consequences if Saudi Arabia cannot meet the future global demand for oil: “The moment that Saudi production goes into permanent decline, the Petroleum Age as we know it will draw to a close. Oil will still be available on international markets but not in the abundance to which we have become accustomed and not at a price that many of us will be able to afford. Transportation and everything it affects—which is to say, virtually the entire world economy—will be much, much more costly. The cost of food will also rise, as modern agriculture relies to an extraordinary extent on petroleum products for tilling, harvesting, pest protection, processing, and delivery. Many other products made with petroleum—paints, plastics, lubricants, pharmaceuticals, cosmetics, and so forth—will also prove far more costly. Under these circumstances, a global economic contraction—with all the individual pain and hardship that would surely produce—appears nearly inevitable.” This is not a pleasant outlook.

If we believe there is the slightest chance that the assessment of Simmons (as well as a number of other Peak Oil advocates) is correct, shouldn’t we be pursuing extraordinarily vigorous actions to, at the very least, prepare for this potentially destructive catastrophe? Next month, the (final) article on Peak Oil will address possible solutions.


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