Economics, Global Warming/Climate Change, peak oil — by Craig Mackintosh PRI Editor November 17, 2008
The IEA World Energy Outlook reports get more accurate every year – by 2030 it’ll be spot on.
Disclaimer: As the title should indicate, don’t read this post if you’re of a delicate disposition.
The International Energy Agency has just released the latest incarnation of its annual ‘World Energy Outlook‘ report – the 2008 edition. Please stand for a moment of mock-reverence.
Thank you. Please be seated.
For those not familiar, the IEA releases an annual report, making reasonably detailed projections of expected energy supplies and demands for the nations of the world. It breaks these total energy forecasts down into its various sources (oil, coal, natural gas, renewables, etc.), and looks at expected economic growth trends for different countries and sectors and their impacts on energy consumption. The last several editions have covered the period from publication to the year 2030, and they have also factored in a few different scenarios to roughly cover policy changes that could occur throughout the period to give policymakers an idea of potential outcomes.
It is certainly a worthwhile endeavour – you could say critical, actually. If only they did it well.
The analysis and advice found in these reports are aimed at industry heads and policymakers, so their determinations can affect us all. In a similar way as your broth can get spoiled, too many authors (and vested interests) can result in the document being a little off-base. They are famously conservative in their estimations on consumption, and famously optimistic about supply forecasts. Last year was the first time they actually began to hint at Peak Oil predictions being a reality. Until very recently, their estimations of supply seemed to be simply based on their estimations of demand. The projections were essentially, "if we need it, it’ll be there". As Swiss MP Rudolf Rechensteiner said about the IEA back in November 2005 in regards to a previous WEO report (speaking at the World Assembly on Renewable Energy at the World Council for Renewable Energy in Bonn):
You find everything and nothing in the foggy IEA report, you might even find renewables. But the report is confusing and contradictory and the main objective seems to [be to] prove that the future will be a repetition of the past.
It is difficult for IEA to accept the obvious, that most of the World’s oil has been found. – Energy Bulletin ("IEA: Stupid, Manipulative or Corrupt?")
Without any help from the IEA, who should be giving sage advice as our energy prophets, the public is slowly becoming more aware that ancient rays of sunlight, in their finite, fossilised form, do not simply stream onto the world in the same way real-time sunlight does. People are also beginning to wise up to the implications of supplies being restricted or withheld from the fossil fuel dependent systems that make up our modern societies. And, finally, the language of the IEA WEO reports themselves are also beginning to inch closer towards something resembling reality – their past rosy impressionist paintings now giving way to more of a stark, draft charcoal outline.
Check out the strong words in the lead paragraph of the WEO 2008 executive summary:
The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable — environmentally, economically, socially. But that can — and must — be altered; there’s still time to change the road we’re on. It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply. What is needed is nothing short of an energy revolution. This World Energy Outlook demonstrates how that might be achieved through decisive policy action and at what cost. It also describes the consequences of failure. – WEO 2008 Executive Summary
Sound bites from the 2008 WEO report:
These are words more often found on grass-roots websites, from people joining up all the dots, with concern. It is refreshing to see such sentiments expressed in documents targeting high-level decision-makers (if they’d keep it up, we could concentrate on the job of transitioning, and not spend half our time trying to wake the world up).
Unfortunately, while the opening paragraphs seem to reflect the sense of urgency that is needed to get us through the years ahead, the details of the document send mixed messages – even dangerous ones.
Firstly, the IEA still seems to cling to a common misconception – they think that ‘Peak Oilers’ are trying to say that the world is running out of oil (What? You thought this too??). But no, what Peak Oilers are actually saying is that the world is running out of cheap oil. Indeed, if we reach a peak in oil production, it means that we’re pretty much at the halfway point – we will have just as much left as we’ve already used! But, it also means that in each successive year thereafter, oil will become increasingly difficult to retrieve, and thus more expensive to mine and refine.
With this in mind ‘listen’ carefully to the sentences below, again from the WEO Executive Summary:
The surge in prices in recent years culminating in the price spike of 2008, coupled with much greater short-term price volatility, have highlighted just how sensitive prices are to short-term market imbalances. They have also alerted people to the ultimately finite nature of oil (and natural gas) resources. In fact, the immediate risk to supply is not one of a lack of global resources, but rather a lack of investment where it is needed. Upstream investment has been rising rapidly in nominal terms, but much of the increase is due to surging costs and the need to combat rising decline rates — especially in higher-cost provinces outside of OPEC. Today, most capital goes to exploring for and developing high-cost reserves, partly because of limitations on international oil company access to the cheapest resources. Expanding production in the lowest-cost countries will be central to meeting the world’s needs at reasonable cost in the face of dwindling resources in most parts of the world and accelerating decline rates everywhere. – WEO 2008 Executive Summary (emphasis added)
The IEA says there is not a lack of global resources – which is correct. There’s still plenty of oil left out there. But, it’s getting increasingly expensive to retrieve. Investment funds that are "rising rapidly", and that a generation ago would have been more than enough, are now being consumed on "surging costs" and are fighting a losing battle with hundreds of oil fields that are suffering "rising decline rates" – since individual fields all have their own peak, after which production steadily declines despite best efforts. (Note also – the IEA would like to see the resources in "the lowest-cost" countries getting more attention. Amongst other things, they’re great places to externalise environmental costs, due to lax or non-existent regulations.)
The problem, you see, is not a shortage of oil – but the cost of getting what remains.
Gentlemen, Get Out Your Wallets
To give you an idea of what we mean, consider that in the 1930s the ERoEI (energy returned on energy invested) was around 50:1 to 100:1. In those days, if I can say tongue in cheek, you could trip over a stone and discover a gusher. Oil rushed out under its own pressure, and for the input of one unit of energy you could get 100 units back – a massive return on investment. Several decades of exponential economic growth ensued.
By the 1970s this ratio had shrunk to a modest level of 30:1, and then on to an uninspiring 13:1 by the year 2000. It is now approximated at around 5:1. This trend makes oil an increasingly unattractive investment and a more expensive commodity. Eventually it will reach the point where as much energy will be required to retrieve the oil as we would get back. At some point before this time we will, however, finally give up trying, and will resign ourselves to inevitability – a life without oil.
And please note, this will happen long before the oil actually ‘runs out’.
The chart below gives you an idea of why oil is getting increasingly expensive to source. The world peaked in oil discoveries back in the 1960s
Every year we’re discovering less oil (at present we’re discovering one barrel for every four or five we’re consuming), despite dramatically improved discovery techniques and technologies. And now, from 2005, world production appears to have plateaued, despite new small fields coming online each year:
The IEA, with their latest report, give evidence of having a rear-view mirror mentality with their ‘predictions’, in that it is only since they’ve seen the world actually plateau in oil production, despite increasing demand, that they’ve started to be a little less optimistic about future supply scenarios. It took the summer of 2008, and its skyrocketing prices to confirm to them that something is amiss. Their science and accounting seems more based on wishful thinking than geology or economic realities. For example, for as long as the IEA have been projecting to the year 2030, they have also been guessing what the price of a barrel of oil would be for that same year. In this 2008 edition, they’re betting on it being US$200 p/barrel. This figure is actually more than all of their previous 2030 price-per-barrel projections combined (1998-$17, 2002-$29, 2004-$29, 2006-$58, 2007-$65).
Considering the IEA expects an increase in total global energy consumption of 45% between now and 2030 (that’s an increase of 1.6% per year), and oil demands specifically are expected to be 106 million barrels per day (up from 84 million today), and with global past-peak oil field decline rates sitting on about 6.7%, how do they see all this coming together so that life can go on with some degree of normality? The IEA chart below gives you an idea:
The dark blue area is what we can all be reasonably sure of. As shown further above, oil has plateaued as of a few years ago, and the decline rate is calculated from observing the historical decline rates of hundreds of oil fields. The rest of the chart is where the greater uncertainty lies. The red section (accurately coloured, at least) is potentially non-existent oil that is hoped will be found with a viable ERoEI. Additional EOR (enhanced oil recovery) techniques, like pumping CO2, or water (another serious ‘peak’ resource), into aging wells to force more oil out, is relied on for another chunk of supply – the dark brown segment. Then we have ‘non-conventional’ oil, notably the Alberta tar sands in Canada, in green (a highly inappropriate colour considering the environmental impacts) – an oil that is so costly to process it is said to be uneconomic while oil prices are below $100 p/barrel. The light blue field (discovered, but yet to be developed fields) – largest after the currently producing fields – like the red section, will require significant and immediate investment, and that will be, even at the IEA’s likely optimistic figures, just to maintain the current production plateau for a few short years.
The IEA report places almost all of its hope for supply increases in non-OECD countries (i.e. OPEC), as the OECD is already past peak. They also recognise that the needed investment may never be secured due to geopolitical obstacles (can you imagine western investment in Iran, for example?). Those obstacles aside, whether OPEC can actually increase output, even if more money was thrown at the problem, is a topic of huge debate amongst oil experts everywhere. The IEA states that "Most of the increase in world oil output is expected to come from OPEC countries…. Saudi Arabia remains the world’s largest producer throughout the projection period, its output climbing from
10.2 mb/d in 2007 to 15.6 mb/d in 2030." – yet the evidence of the last few years, and particularly 2008, where we saw G.W. Bush personally visit King Abdullah of Saudi Arabia, twice, to beg for increased production, has left many believing they are today working at capacity.
Of the largest 21 fields, at least 9 are in decline…. In April, 2006, a Saudi Aramco spokesman admitted that its mature fields are now declining at a rate of 8% per year (with a national composite decline of about 2%)….
This information has been used to argue that Ghawar, which is the largest oil field in the world and responsible for approximately half of Saudi Arabia’s oil production over the last 50 years, has peaked…. The world’s second largest oil field, the Burgan field in Kuwait, entered decline in November, 2005. – Wikipedia
Saudi Arabia has the largest known reserves, and its
exports are declining as its own internal consumption rises.
Most oil experts believe that if Saudi Arabia has peaked,
then the world has peaked.
We have already seen, over the last year, what can happen when demand even appears to outstrip supply by even just a small degree. The laws of supply and demand, aided by willing market speculators, drove prices to wildly unbelievable heights. Although the current financial crisis has given oil prices a breather, this won’t last forever. Sooner or later, even slow growth will see the world’s demand curve increase beyond the current maximum output level.
In fact, the economic slowdown is now taking centre-stage, pulling politician’s minds away from what has just occurred on the oil front. Most economists are expecting continued economic recession throughout 2009 – but (perpetual optimists that they are) not a few are gingerly anticipating a new phase of growth – to hit sometime in 2010. Just today the world’s leaders are trying to forge a new economic model – a ‘Bretton Woods II’ – and the announcement from the G20 financial summit is that they have committed to "restore growth". When (or if) that happens it seems to me that as soon as a measure of optimism lifts the spirits of investors, unfreezing credit and trade, enabling markets to give birth to a new, fledgling economic bubble, they will get up just to hit their heads on the low ceiling that is now our maximum daily oil production limit of around 85 million barrels per day (or less by then). If this happens, prices will skyrocket once more, and the economic mood may never recover again.
Giving Up Battle Against Climate Change
Interestingly for this particular WEO report, the IEA is also giving advice in an area it hasn’t tackled to any great depth before – that being climate change. Even only in the couple of years it has broached the topic, it has already moved the goalposts – as what last year’s report referred to as their "’climate stabilisation target" (levelling at 450ppm of CO2) is this year having to defer to an apparently more palatable target of 550ppm. In the 2008 report, last year’s 450ppm level is included, but is now described as a "still more ambitious level".
Where 450ppm is estimated to have our climate leveling out at 2′C higher than pre-industrial times, 550ppm takes it to 3′C above. Even at 387ppm (today’s level), we’ve managed to send the arctic ice into dramatic decline, are seeing methane-rich permafrost beginning to melt, weather disasters increasing in frequency and we’re already committed to a lot worse. The latest science-based research tells us that anything beyond 350ppm is too far, a point we passed some time ago. The idea of aiming for 450ppm, let alone 550ppm is close to humanicide, but the IEA is clearly giving up the battle against climate change because, in today’s political, economic and consumer climate, it is just too hard. Our modern lifestyles are non-negotiable.
The scale of the challenge in the 450 Policy Scenario is immense: the 2030 emissions level for the world as a whole in this scenario is less than the level of projected emissions for non-OECD countries alone in the Reference Scenario. In other words, the OECD countries alone cannot put the world onto the path to 450-ppm trajectory, even if they were to reduce their emissions to zero. Even leaving aside any debate about the political feasibility of the 450 Policy Scenario, it is uncertain whether the scale of the transformation envisaged is even technically achievable, as the scenario assumes broad deployment of technologies that have not yet been proven. The technology shift, if achievable, would certainly be unprecedented in scale and speed of deployment. Increased public and private spending on research and development in the near term would be essential to develop the advanced technologies needed to make the 450 Policy Scenario a reality. – WEO 2008 Executive Summary
More Money is Solution to Everything
As the last paragraph indicates, the trick to decreasing CO2 emissions, while allowing for economic growth, according to the IEA, is not to relocalise, not to grow your own food and focus on a simpler life, but to spend more money. Despite an apparent concern over climate change, the IEA is calling for more investment to the tune of an eye-watering U$26 trillion over the next 22 years, so we can pay through the nose to convert all the possible oil we can find into CO2.
And, when are they asking for it? Right in the middle of what is fast becoming a global recession, or depression. Remember how we all sat and goggled at the prospect of bailing out the banks to the tune of 700 billion dollars? Well this particular fuel-infrastructure investment, if you consider only the U.S. portion (25% of the total, since the U.S. uses 25% of global production today – er… with only 4% of its population) would be like bailing out the banks every other year between now and 2030.
Keep in mind that almost all the growth over the next 22 years will be in non-OECD countries. Growing populations in OPEC and other developing countries, combined with higher per capita energy demands, will translate to the increasingly import-dependent OECD countries becoming last priority as oil-producing nations supply their own populations first. Ending up in an auction type situation for diminishing supplies of oil will not be a pretty sight. The West has built itself up, first on the back of slavery, then on a rising tide of oil that gave birth to a new generation of economic slavery – but now we will decline as we watch developing countries aspire to the same lifestyle we flaunted, and that has, on its own, brought the world to the brink of environmental and climate catastrophe.
And After Every Dollar is Spent?
Is it just me, or is it becoming clear that an incredibly serious energy issue has been left just a little too late?
I haven’t yet even mentioned that even all these hard to get and likely overly optimistic quantities of yet to be found and/or developed oil would only supply the world for another thirty to forty years, max. It is inconceivable that we can maintain economies in any kind of manageable state with such a bloated proportion of individual expenditures and national GDP going towards this massive energy bill, yet even if we did somehow pull this off, we would have put all our eggs in that finite basket, committing every spare dollar on an outdated technology that won’t last. With that kind of spending, we’ll never see funds for greener alternatives, or for investing in natural capital, or for urgently needed transitioning. In short, there would be no provision for what is to come next – no nest building for future generations.
I suspect we are now staring at the future from the top of a very big slippery slide.
Human history becomes more and more a race between education and catastrophe. – H.G. Wells