[Pops]

SciAm 1998: The End of Cheap Oil
Reproduced at DieOff.org by Jay Hansen - Thanks! PDF version here


It's been almost 15 years since Colin J. Campbell and Jean H. Laherrère published this article in Scientific American. It was the first time I heard the phrase "peak oil" and the first I'd ever heard of M. K. Hubbert.

I'm not sure exactly the context of my reading the article. I did subscribe to SciAm at one point but I feel like I must have picked it up from a stand somewhere. '98 was prosperous for me personally and I wasn't in a particularly pessimistic frame of mind I don't think. I've always been what people today call a Prepper. Back in my folks's day having a garden and pantry wasn't anything unusual, I was a Mother Earth News, Whole Earth, Tree Hugging Guy.

I'm going to pull out some quotes from the article and try to see where they were correct and where they were of the mark.

Right off the bat on the first page they come to the point:

Our analysis of the discovery and
production of oil fields around the world
suggests that within the next decade, the
supply of conventional oil will be unable
to keep up with demand. This conclusion
contradicts the picture one gets from oil
industry reports, which boasted of 1,020
billion barrels of oil (Gbo) in “Proved”
reserves at the start of 1998. Dividing that
figure by the current production rate of
about 23.6 Gbo a year might suggest that
crude oil could remain plentiful and cheap
for 43 more years

This is exactly correct. This chart of EIA data (h/t WaPost) shows that output and capacity were on a collision course from all the way back in the eighties. From 2002 onward the squeeze increased pretty dramatically due to Chinese growth but regardless of the China boom the trend is clear.



Note: the forecast is for conventional "cheap" oil and this chart is for "all liquids".

--

Reserves/demand growth

Unfortunately, this appraisal [43 years of supply] makes
three critical errors. First, it relies on dis-
torted estimates of reserves. A second
mistake is to pretend that production will
remain constant.

Reserve estimates are obviously central to the peak oil debate and most of the article discusses reserves. However, 80 percent of oil reserves are still under the control of national oil companies and as such are in no way audited by outside agencies – of course the 80% number itself is reliant on those same self-reported numbers.

At any rate, we are 15 years farther from the days when outside oil companies did have access to actual field data as opposed to PR pieces (before the nationalization wave of the 1970s) and there has been no increase in transparency.

--

Blood From a Turnip or It's The Flow, Stupid

Third and most impor-
tant, conventional wisdom erroneously
assumes that the last bucket of oil can be
pumped from the ground just as quickly
as the barrels of oil gushing from wells
today.

Point number 3 is especially relevant to where the MSM and Chamber of Commerce booster punditry finds itself today, which is in a word, gushing.

The current revelry around the miracle of hydraulic fracturing oil bearing shale was definitely not predicted in the article although the basins themselves had been mapped and the technique experimented with as far back as the late 70's.

But fracked wells are the perfect example of the "last barrel" in that quote. According to the The State of N Dakota Dept. Mineral Resources, there were 4791 producing wells in the Bakken region of N. Dakota in October 2012 with a daily production of 142 bbls/day average.

In this region of the Bakken,1810 wells – 37% – are less than a year old and 84% are less than 4 years old, yet the average production is only 142 bbls/day.

To give a comparison between the well flows of a pressurized reservoir (the old, cheap kind in a porous rock formation) and the flow from the tight oil wells of the Bakken where oil is trapped inside shale rock, you could take the Macondo well in the GOM that blew out a couple of years ago as an example. Although it was definitely not a cheap conventional oil well, it was estimated to have spewed 53,000 barrels per day.

142 barrels per day verses 53,000 barrels per day.

Or even more damning, as of 1995 the Saudi Arabia average oil well produced 6,000B/d.

As for the rest of the US, there are 500,000+ oil wells! Most of these wells have been producing for decades and are the declining dinosaurs of our heyday as the world's producer. The vast majority are "stripper wells" that are gradually dying and being put out of service as their output declines past profitability.

The average US oil well produces less than 10B/d.

So isn't 142 better than 10? Well, yeah but remember, those Bakken wells are brand new! They have such a steep decline curve they will join the rest of the US well at stripper status in a few short years.

---

Getting back to the article...
As I mentioned, the main body of the article talks about reserves and forecasting using Hubbert's bell curve method. Estimating oil originally in place is the basis for creating that forecast. Much discussion of reporting is made (and has been since) but I won't go into that since nothing has really changed in that area that I know of except for wider accessibility through [urlhttp://www.jodidata.org/]JODI[/url].

--

Backdating.

To judge accurately how much oil explorers
will uncover in the future, one has
to backdate every revision to the year in
which the field was first discovered

I think this is misunderstood and not fully appreciated since oil companies seem to release a PR statement with every successful new well (which subsequently gets posted to PO.com)

Lets say you are wandering around in the woods and find a little "troop" of mushrooms. Not wanting to be overly optimist you say to your fellow wander, "there is probably a pound of mushrooms here!" But as you start collecting the 'shrooms, it turns out there are more than you thought; some under this little bush, behind that log, hidden in the grass. In the end you have 2 pounds of mushrooms all from the same little area. The question is, did you find a patch with 2 pounds of mushrooms or did you make 2 different discoveries, or 3 or 17?

Backdating production numbers to the year the discovery was originally made instead of declaring a "new" find with every successful expansion well or workover in a particular region gives a clearer picture of the size of the original find instead of the illusion of eternal growth...

Such growth is an illusion. About 80
percent of the oil produced today flows
from fields that were found before 1973,
and the great majority of them are declining.

Again this is important today because most "new" discoveries and technologies aren't new, only newly profitable.

I'll say that again, tight, deep, x-heavy, tar sands, etc are all in fields discovered in the past but that were not profitable while we had plenty of cheap oil to satisfy demand.

--
So now the money line…

once approximately 900
Gbo have been consumed, production
must soon begin to fall. Barring a global
recession, it seems most likely that world
production of conventional oil will peak
during the first decade of the 21st century.

Personally I'm not really so sure that it's that accurate to estimate even the amount used to this point but I'll go along, 1056 of regular/conventional oil consumed by '08 (from Campbell's newsletter #100) plus 27Gb/y for the last 4 is 1,164Gb total consumed. So they are off by about a third if the peak were today.

Perhaps surprisingly, that prediction
does not shift much even if our estimates
are a few hundred billion barrels high or
low. Craig Bond Hatfield of the University
of Toledo, for example, has conducted
his own analysis based on a 1991 estimate
by the U.S. Geological Survey of 1,550
Gbo remaining—55 percent higher than
our figure. Yet he similarly concludes that
the world will hit maximum oil production
within the next 15 years. John D.
Edwards of the University of Colorado
published last August one of the most
optimistic recent estimates of oil remaining:
2,036 Gbo. (Edwards concedes that
the industry has only a 5 percent chance
of attaining that very high goal.) Even so,
his calculations suggest that conventional
oil will top out in 2020.

It is clear that we haven't reached the decline phase of petroleum using the revised definition per the "oil" industry. Even using the old definition of crude oil plus well head condensate that the authors were using there is a definite uptick over the last year.

The last quote though I think is sobering. Even if they were off by 55% in their forecast the range of the peak only moves a few years (to about now) and if they were off by 100% the peak only moves down the road 5 more years.

But in 1998 the price of oil in 2011 dollars was $16.80 bbl. Last year the average price paid by US refiners was over $100bbl - a 600% increase in 15 years.

Using the title of the article as the gauge, I think it is pretty clear we have reached the end of "cheap oil", at least if the past 2 years of record high average prices is an indication.

--

There is a lot more to discuss about this little article; the effect of biofuels and even unconventional petroleum on accelerating the use of "cheap oil", drawing future production forward and causing a steeper decline later, the effect of the recession on the peak date, etc. Read again if you have already or read it for the first time and comment.

SciAm 1998: The End of Cheap Oil

http://www.texascenter.org/almanac/Ener ... CH7P2.HTML
http://www.theoildrum.com/node/2372
http://www.oilcrash.com/articles/how_much.htm
http://en.wikipedia.org/wiki/Deepwater_ ... _oil_spill
http://phys.org/news160906147.html
http://en.wikipedia.org/wiki/Saudi_Aramco
https://docs.google.com/viewer?url=http ... 200904.pdf
http://inflationdata.com/Inflation/Infl ... _Table.asp

[SamInNebraska]

Last, economists like to point out that the world contains enormous caches of unconventional oil that can substitute for crude oil as soon as the price rises high enough to make them profitable. There is no question that the resources are ample: the Orinoco oil belt in Venezuela has been assessed to contain a staggering 1.2 trillion barrels of the sludge known as heavy oil. Tar sands and shale deposits in Canada and the former Soviet Union may contain the equivalent of more than 300 billion barrels of oil [see "Mining for Oil," by Richard L. George, on page 84]. Theoretically, these unconventional oil reserves could quench the world’s thirst for liquid fuels as conventional oil passes its prime. But the industry will be hard-pressed for the time and money needed to ramp up production of unconventional oil quickly enough

It would seem that this is happening either faster, or at a lower price, than Colin Campbell imagined, and causing some problems related to the definition of oil, what to count, how much more can come from such sources, and the construction of that damnable pipeline in Nebraska, etc etc.

[Keith_McClary]

The last quote though I think is sobering. Even if they were off by 55% in their forecast the range of the peak only moves a few years (to about now) and if they were off by 100% the peak only moves down the road 5 more years.

That should be in the 10 Basic Facts of Peak Oil .

[Pops]

related to the definition of oil???

The composite average cost to US refiners to obtain oil is just about 1000% higher nominally and maybe 600% higher in real terms than it was in 1998.

refiner cost chart monthly.png

Not sure what definitions, sources, blather, blather you're attempting to obfuscate with now. That is simply the average price of oil paid by refiners in the US - 1000% higher now than then.


http://www.eia.gov/dnav/pet/pet_pri_rac2_dcu_nus_m.htm

[Econ101]

In this region of the Bakken,1810 wells – 37% – are less than a year old and 84% are less than 4 years old, yet the average production is only 142 bbls/day.

Average daily production is not related to recoverable reserves.

Wells have been producing in North Dakota since the 1940s. The first Bakken well was just plugged. It produced about 1 million barrels and lots of gas and water. This is an old well.

Think of the wealth that oil produced through its use. Its market value was probably in excess of 50 million. Multiply that times 50,000. That’s the number of new wells they are busy drilling right now. Production has become more orderly and controlled. It is slowing down by design not need. The estimated recoverable resources are growing every day just like the production. In fact, last month North Dakota production was down 2% but that is unrelated to available reserves.

Production in North Dakota is controlled at the well head. Because of political forces opposed to the development of these resources huge bottlenecks have been created because needed infrastructure is politicized and even under the best conditions take time to develop. So when a well fills its on site storge tanks it stops pumping. Or, if a well has not negotiated favorable sales and shipping terms production might be temporarily cutback or curbed or held at artificially low levels. Its average production has nothing to do with available reserves.

You may not be aware of this but there have been at least 3 major blowouts in the Bakken these past couple months. They are encountering pressures that are blowing out all the blowback equipment.

SciAm is not a scientific journal, it is a newstand propaganda device similar to newsweek.

[Econ101]

Note that major supply disruptions, oil crisis and high prices are all political in nature. Actual physical shortages are not a fundamental driver of high prices or supply problems, the fundamental driver is politics and the profit motive. In the past the business model was to produce as much as you could to produce the greatest amount of revenue. The secret was market share. The 1970s saw the worlds major suppliers take control of their inventory and use it to prop up prices as high as the market could bear by limiting supply. Its been that way ever since and the authors of this chart dont think it will change. I think it will as new reserves, like North Dakota, begin to come on line bringing to the market huge supplies once again trying to compete for market share putting donward pressure on prices.

PRICE TRENDS

1859 - 1860 - First oil drilling and production in Pennsylvania

1863 -1864 - Civil War begins

1879 - 1973 - The average per barrel price follows the Consumer Price Index almost exactly. The CPI adjusted value of a $0.86 barrel of oil in 1879 to 1973 would be $3.95. Note that the price in 1973 was $3.89.

1973 - 1974 - The OPEC Cartel shocks prices by cutting production. First oil crisis; economies reel.

1980 - 1985 - Second oil crisis; US domestic drill rig count tops 5,000.

2000 - 2009 - Middle East instability, oil wars, peak oil begins to kick in, large scale industrial and economic growth of countries like China and India.

2012 and beyond: In the longer view, it appears that Peak Oil and politics will be the dominant controls over oil prices.

http://www.evsroll.com/History_of_crude_oil_prices.html

First purchaser is now paying around $70. That price is driven up in part by burdensome taxes and over regulation as the EPA wages war on the industry. Their major tactic is economic warfare. They try and drive up prices to make the oil less competivite and less profitable, the attack the supply chain trying to break it down or make it less efficient and more expensive, the attack the end user, they tax gasoline beyond the point of reason and need to maintain roads.

[Keith_McClary]

That price is driven up in part by burdensome taxes and over regulation as the EPA wages war on the industry.

Can you point to recent changes in taxes and regulation sufficient to account for the price increases?

Bearing in mind, it's a world market.

[autonomous]

Although this study was done a few years ago it points to the fact that the true cost of oil dependence is much higher than the market price:

All Economic Costs: $480 a Barrel
When Milton Copulus speaks in Washington, D.C.'s corridors of power, people listen, the most recent example being his appearance before the influential Senate Foreign Relations Committee.

In his March 30, 2006 testimony, he presented an updated report of the National Defense Council Foundation's original 2003, in-depth analysis on total economic cost of the nation's growing dependence on imported oil. That original report involved the evaluation of "hundreds of thousands of documents" over more than an 18-month period, the findings of which were "rigorously peer reviewed" he told EV World in an exclusive interview.

"At that time, we determined that the total of these hidden costs, which include things like the cost of defending the flow of oil in the Persian Gulf, the loss of domestic jobs and investment, the uncertainties that enter the economy and the costs related with oil supply disruptions… We came to $304.9 billion annually, which equates at that time to adding $3.60 to the pump price of a gallon of gasoline.

"But in that year we were only spending about $99 billion on imported oil. Since that time, a lot's changed."

According to Copulos, after giving his testimony, both Senators Lugar and Biden were, in his words, "stunned" by how much the United States was spending to defend the oil of the Persian Gulf.

The work of the NDCF is considered authoritative and is based on rigorously researched data from government and other highly respected research organizations including the Rand Corporation and Stanford Research Institute or SRI.

"We've never had anyone dispute our figures," he stated.

When I asked him what are the consequences economically on the nation of this $825 billion oil debt, he replied that it immediately means the elimination of 2.25 million jobs in America.

"It means jobs, it means investments, it means there are two and quarter million people who would otherwise be comfortably able to send their kids to college, own a home, feed their families, take a vacation once and a while, and they're not able to do so because of this enormous burden. The jobs that would be there for them are not there. It means that state and local governments lose tax revenue . It means that all up and down the line at every level of society there is an impact.

"And there is even a more serious impact, I think if we look at the long-term implications of this and why our foundation has been so adamant in promoting the development of alternatives. The simple fact is if you look at global demand and what's going to be required by 2025, there's not sufficient oil that could be discovered to take care of that. We simply can't meet demand from conventional sources. It's not possible.

We wrapped up the interview by my asking his forecast on oil and gasoline prices. He sees it's possible, though not probable that oil will go to $100 a barrel in two years. Depending on this year's hurricane season, the price at the pump on a national average could be $3.50 by mid-summer.

Add in the hidden costs and that $75 a barrel of oil today really cost all of us $480, he concluded."

http://www.evworld.com/syndicated/evworld_article_1018.cfm

[SamInNebraska]

Not sure what definitions, sources, blather, blather you're attempting to obfuscate with now. That is simply the average price of oil paid by refiners in the US - 1000% higher now than then.

I was referring to this:

http://resourceinsights.blogspot.com/20 ... l-has.html

Kurt says that the ones doing the obfuscating are industry and the like, because of changing definitions and whatnot. Kurt is like a massive expert, he is on the board of ASPO, and writes a blog.

[Econ101]

Peak oil politics and vastly over-reaching of environmental policies is at the heart of the misery, suffering and the modern history of the American Military in the Middle East and our confrontation with islmaic faiths.

When policies about exploration and development of Americas resources changed in the 1970s we saw production fall. It fell for the next 30 yrs or so. These policies were implemented in response to two enabler issues: climate change/environment and peak oil. These are still the issues used by the left to control their constituencies in the battle for resource wealth and political power.

Nobody saw the negatives of importing oil. There was a lot of it in the Middle East and elsewhere and for the most part American oil companies were the operators and even held ownership positions in the mineral rights. Well, all of that changed. Ultimately, because the USA was forced to import oil instead of developing its own mind boggling resources we have the situation we see now in the Middle East. All the suffering, all the waste of lives, all the hate is an outgrowth of peak oil politics and the environuts blind ambitions.

[Econ101]

That price is driven up in part by burdensome taxes and over regulation as the EPA wages war on the industry.

Can you point to recent changes in taxes and regulation sufficient to account for the price increases?

Bearing in mind, it's a world market.

North Dakota has 7 lawsuits against the EPA for violations of states rights. This is an ongoing effort by the industry and the state to reign in the EPA which is the policy enforcer of this administration. The EPA is openly hostile and will do other things like limit access to areas forcing haul trucks to take huge, inefficient circuitous routes. It goes on and on from the drill platform to the pipeline.

Stopping the Keystone pipeline was a major policy issue that is driving up prices.

Huge taxes on gasoline not related to road maintenance are good examples of tax policy driving up price.

Restricting access to regions of known reserves on federal lands sufficient to supply our needs for generations, ie Alaska, the Gulf of Mexico and California come to mind but there are other examples in every state that has federal lands inside its borders.

It goes on and on and is costing you everytime you use energy. Why is this happening? Just think if you were a powerful politican like Al Gore and you could sell "alternative" energy to the American people for much more than they pay now with some happy to pay it and willing to turn on those that aren't. Energy that you control through the production, installation and regulation of wind generators and solar platforms you produce or import using governement handouts and companies owned by your friends. Heck, you could even organize and sell carbon credits magically created by the government for free and then sold to every organization in the country. If you could do all that maybe you too could be richer than Mitt Romney and all your friends could be rich and powerful too?

[evilgenius]

I had already realized something was afoot in 1998 concerning peak oil when I came across the Scientific American article. What the article did was give me a framework within which to think about the numbers involved. Since then I've read many people's opinions, many of whom agree with Econ 101. There was a time when I thought the consequences of PO were truly going to be dire. I still think so, but now only if man's ability to adapt and innovate is stifled enough to cause us to fall behind the curve. I have to say that Econ 101's optimism is energetic, but in the end it contributes to that stifling because it causes us to believe we don't have a crisis to counter. More of the same is not the answer. It will only leave you too far down the wrong way with too little left to get back to the point where you left the path. Of course develop the shale wells, but always keep in mind they are only forestalling a crisis that ought to compel you to think about how to manage it, not encourage you to confuse the interim with the long term. Your words are not far from, 'Let's build bigger, heavier sport utility vehicles and convince everybody to drive them because the Saudis have managed to overproduce in compliance with Western desires to defeat the Soviets and now oil is only $10 a barrel.' Things like that may last long enough to make you think you have entered a new paradigm, but they tend to leave you wondering how you could have really believed in them when they turn out not to last.