Oil producers know what they can do, and not do. And while they have assisted drillers in their quest for new oil, they have not served as the panacea for the world's oil crisis that some had originally hoped.
Take the U.S. situation, for example. The U.S. is the most technologically advanced nation on earth. Its major oil companies employ the best and brightest geologists and field technicians in the world. Yet for all our technical sophistication and knowledge, we have not been able to stop our inexorable slide in oil production from 11-plus million barrels a day to seven. Neither has any other peaked nation, including the United Kingdom, Russia, Canada or Iran.
As we said before, oil is being found every month; the problem is that finds in recent years have consistently been in the small-to-medium sized range, when what the world needs (and what major oil companies have been desperately trying to find) are huge fields which can replace the soon-to-peak monster fields of yesteryear. 3-D seismic and horizontal drilling has yet to accomplish this feat, and it may be simple wishful thinking to assume that they will.
Secondly, the idea that all we have to do is go back to abandoned fields and more thoroughly exploit them ignores a fundamental equation in the drilling business, which is known by the acronym EROEI, for Energy Return On Energy Invested.
The central question is this: in any given project, how much energy is going to have to be expended to extract the energy that is there? An even trade is obviously a waste of time; there needs to be a significant surplus of energy available to make any project economically viable, and to add to available oil reserves for world consumption.
If, as we have said, the easy oil—the low-hanging fruit, as it were—has been picked, then the remaining oil will be harder and more costly to extract, which—and this is a key point— will require significantly higher prices over a long period of time to make the hoped-for oil yield profitable . Either way, we're talking about higher prices across the board, which, as investors, is our principal concern.
The only way to circumvent the EROEI cycle is if a breakthrough technology emerged which would allow all or most of the remaining oil from previously-drilled fields to be extracted quickly and with ease; no such technology has yet appeared on the horizon.
#4: Through conservation and ever-more-efficient vehicles and appliances, we can reduce our energy consumption.
It is true that many of our appliances, electronics and heating and air conditioning systems are far more energy-efficient that they used to be. On the other hand, Americans' much-commented-upon love for large vehicles, especially large SUVs and trucks, has blunted much of the efficiency gains we've achieved elsewhere.
But while increased energy efficiency is always a welcome development, for our concern as investors it can mask the real issue—that is, how much total petroleum are we using ? The answer is, more every year. Our total petroleum usage, both nationally and globally, has consistently seen steady increases on a year-over-year basis.
We are not reducing our dependence upon oil; we are increasing it with every passing year. And that increasing usage will further tax world reserves, putting continued upward pressure on prices, regardless of how efficient this or that appliance or vehicle might happen to be.
#5: We can always find substitutes for conventional crude oil. For instance, there are promising possibilities in oil shale and oil sands, which we are just beginning to develop, that could supply the world's oil needs for decades to come.
It is true; there are vast quantities of “oil shale” and oil sands waiting to be exploited. But there are reasons why they have not been greatly developed to this point.
What is called “oil shale” is actually neither oil nor shale. It is marlstone, which contains no oil but an energy-bearing substance known as kerogen. Energy companies have been attempting to harvest oil shale for 90 years now, with no notable success. Recent efforts by Occidental Petroleum, Chevron, Unocal and Exxon have all failed.
The reason is that oil shale is a very difficult substance to convert to usable energy. First, the ore must be mined. Then it must be transported to ovens, which heat it to 900 degrees. Hydrogen must be added, then the waste resulting from the heating process must be disposed of, which is of greater volume than the original ore, and happens to be a significant groundwater pollutant. With current technology, so much energy is expended in this process, the resulting energy yield is negligible, and the environmental issues are significant.
Oil sands, the best-known of which are located in Alberta, Canada, contain an estimated 1 trillion barrels of oil, roughly equivalent to all the crude oil burned since the invention of the internal combustion engine. A very promising source of energy indeed; but unfortunately, it too is extremely difficult to exploit.
A consortium of oil companies known as Syncrude have been mining Alberta's oil sands for several years, and now produce 200,000 barrels a day. However, it is an inherently inefficient process. Two tons of oil sand must be mined and processed to yield one barrel of oil.
In addition, for each barrel of oil produced, two-and-a-half barrels of oily waste water is produced, which is now shunted off into huge pools, which are slowly becoming small lakes. (Continuing to exploit the Alberta oil sands this way will eventually produce an oily waste pool the size of Lake Ontario!)
Thus, the environmental costs of the Syncrude project are skyrocketing, yet the net energy yield is painfully low. Currently, two barrels of oil energy are required to produce three barrels of oil—barely a positive yield. Syncrude hopes to refine and perfect the process to address the environmental and inefficiency issues, but these improvements have yet to be realized.
Summing up, all of these common objections to peak oil have one thing in common: they are based upon faith, not fact. While the grand hopes of the energy optimists may well come true—for the sake of the world's economic health we certainly hope they do—as investors our only course is to accept the facts they present themselves. And those facts suggest a greater likelihood of further oil reserve depletion, with continued upward pressure on oil prices over the long term.
But aren't there energy alternatives like solar, wind and hydrogen just waiting to be exploited? Can they save us from the prospect of worldwide oil scarcity? We'll explore that issue next time. |
