Don’t gush over prospect of US as oil king

For one thing, it confirms that conventional oil production is in serious decline. This is the “light sweet” crude that is inexpensive to extract and refine, one of the key building blocks of modern industrial society.

 

Now that we have a pause in the important news, the Petraeus sex scandal, let’s turn to other recent tidings.

Specifically, a forecast that the United States will be the world’s largest oil producer around 2020 and North America will become a net oil exporter a decade later.

These predictions come in the latest World Energy Outlook report from the International Energy Agency (IEA), and the media reported them as a “game changer.” So much for peak oil. Happy motoring days are here again!

Let’s set aside past criticism of this intergovernmental group’s forecasting methods and credibility. Taken on its own, the latest outlook is far more nuanced and cautionary. (Today I’m going to concentrate on oil rather than natural gas or coal.)

For one thing, it confirms that conventional oil production is in serious decline. This is the “light sweet” crude that is inexpensive to extract and refine, one of the key building blocks of modern industrial society.

Production probably peaked around 2005, a time when many producers started holding back their supplies for domestic use.

In addition, much of the forecast is predicated on conservation and technological advances to slow demand.

Electric-car sales are small so far and the battery technology is still fairly primitive. We can’t assume electric cars will displace the internal-combustion engine soon.

Hybrids are more promising, but still not sales leaders. Raising fuel economy helps, too. But these are all baby steps in the large transition needed.

Another wild card is assuming that precarious Iraq will represent 45 percent of the growth in total world oil production by 2035.

“Taking all new developments and policies into account, the world is still failing to put the global energy system onto a more sustainable path,” the agency states.

The United States never stopped being a major oil producer. It did hit peak in the Lower 48 states in the early 1970s, which meant half of the recoverable oil had been pumped and burned away. But the big problem is that we are a huge oil consumer, using 19 million barrels a day, the largest in the world.

The game changer is what I’ve been writing about: higher energy prices. This alone makes it economically viable to go after what the industry calls “tight” oil, which is trapped in shale deposits, as well as tar sands.

For example, the average well in North Dakota’s Bakken formation needs a price of at least $80 to be viable. Higher prices have also restarted the low-producing stripper wells in places such as Texas and Oklahoma.

Bringing this unconventional fuel to market calls for massive capital investment, not easy in the aftermath of the financial crash and one with many risks.

For example, shale plays deplete much faster than conventional fields. Companies must keep drilling just to stay even.

The hydraulic fracturing, or fracking, used to get at shale deposits requires huge amounts of water — an especially precious resource this century — and causes massive pollution. Tar sands carry their own nasty environmental consequences.

In this highly complex issue, nothing is either-or, always-never.

We will discover new sweet crude. It just can’t offset the declines in the huge “elephant” fields that fueled the 20th century. Real net increases will come from shale oil, tar sands and natural-gas liquids. Many of the reserves will be sour: low quality, costing heavily to refine into fuels.

Also, we won’t “run out of oil.” The same price mechanism bringing unconventional sources online would always rise enough to keep plenty of oil around.

Critically, we will continue to see price volatility. The cost of extracting oil will rise until it causes the economy to slow. Then prices will fall, but this won’t feel like a relief to drivers because we’ll be in a recession or slowdown. The cycle will keep repeating itself, especially as demand grows from developing countries. The IEA notes this phenomenon is already holding back the global economy.

Increased American oil production flows into the global market. So barring protectionist legislation, we’ll be bidding against the world for this commodity. And that world will continue to have a ravenous demand with destabilizing risks.

One example is Beijing’s faceoff against other nearby nations over the resource-rich South China Sea.

Something prominently missing from the report is an assessment on the energy return on energy invested for the new sources, including biofuels and even some clean energy technology. In many cases, they may require more hydrocarbon inputs than the hydrocarbon outputs realized.

Unfortunately, happy motoring days are not here again. This last great rush to grab fossil fuels and dump their greenhouse gases into the atmosphere will ensure that the worst scenarios of climate change come true.

And this is no tree-hugger, hippy-dippy stuff: Climate change carries enormous economic costs.

They are greater than we can imagine, although a barrage of recent reports from the World Bank, the humanitarian institution DARA and the United Nations give a sense of the death, disruption and reduction of global GDP we can expect.

As Bob Dole would say, “Where’s the outrage?”