The visible invisible hand

The invisible hand of the marketplace is not so invisible if you know how to look. Peak Oil and climate change are converging to drive new directions in the energy market.

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Market moves cause behavior change. Are you ready for this?

There has always been a limit on the amount of petroleum in any given oil reserve and the apparent glut of oil we’ve all lived on since 1859, when we began extracting crude oil in Titusville, PA, exists only because we have continued finding more oil elsewhere. But all of the elsewheres have been drying up for over 150 years.

Is there a supreme irony in the fact that just as carbon dioxide is accumulating in environment-killing proportions in the atmosphere we are running out of the stuff? Or is the universe telling us something profound that we need to pay attention to? Are we running out of oil? The idea of peak oil is not new. It was first brought to our attention in the 1950’s but because there were still many more elsewheres to drill no one thought much of it. But that’s not true anymore.

In 1956, M. King Hubbert, then a geologist and geophysicist working at Shell Oil Company, in Houston, Texas, predicted that the rate of oil production in the US would peak in about 1970 and begin to decline thereafter. Hubbert’s prediction was remarkably precise but should not be a surprise. New inventions like horizontal drilling and fracturing (fracking) have made additional oil from old fields available. But by definition, earth and everything in it is a limited resource — why should petroleum be different?

For the most part, Hubbert’s prediction has been ignored and forgotten, because as long as there was more oil in some other location, it made perfect sense to continue drilling and pumping and not worry about it. That’s how humans deal with big, ugly problems — we kick the can down the road and if we’re lucky, someone else will have to deal with it. We, the people alive today, are those people that our parents’ and grand parents’ generations kicked the can to and while the can reached us, it probably won’t reach our kids.

US crude production

For much of the 20thcentury, the US was a leading producer of crude oil and for many years it was the largest supplier of petroleum products to the world. When, in World War II, the Luftwaffe was running on aviation fuels synthesized from coal (an elaborate and expensive process) and Japanese fighter aircraft were operating on 87 octane fuels, the oil fields of Texas, Oklahoma, California and many other states were pumping enough crude to fuel and win a global war effort (the Soviet Union also pumped significant amounts of oil). American aviation fuel was rated at 100 octane a difference that gave Allied pilots the tactical advantage of flying much higher than their adversaries so as to ambush them from above. American crude was also converted into a jellied form (napalm) that was as effective for destroying cities like Dresden and Tokyo as an atom bomb.

Western civilization owes its existence to American crude oil but today the amount of producible crude oil in the earth’s crust is rapidly diminishing in the same way that American crude diminished several decades ago. Hubbert was only the first messenger.

U.S. oil production peaked at 9.9 million bbls/day in December 1970 much as Hubbert predicted and began a long decline to less than 4 million bbls/day in September 2008. The situation dramatically reversed, rising to more than 9.4 million bbls/day in September 2015 and about 12 million barrels per day today after oil field explorers began using horizontal drilling and hydraulic fracturingto extract more oil. But while this development was welcomed it also highlighted the problem of dwindling oil reserves across the planet. Fracking is a temporary solution for recovering relatively small amounts of oil in known locations; it’s not an exploration tool.

Recovery techniques

When an oil field’s production begins to decline, geologists and oil field specialists begin a series of efforts to extract more oil from the subterranean rocks. Depending on the type of oil, rock features, and other factors, they may pump water or steam into a well or use solvents to loosen oil from the rock formations. Within the past 20 years, they have begun hydraulic fracturing, a process that breaks up underground rock formations and enables whatever petroleum that is present to flow more easily.

Fracking has given new life to the American oil industry, making more crude oil available and along with other secondary recovery methods is responsible for a current glut of crude oil that, in the middle of this decade, has kept prices relatively low on a historical basis at the pump. All this is good news except that while there’s a great deal of oil in the ground, using secondary techniques implies that we’re running out and we’re already working harder than ever to extract this oil.

Think of a wet sponge: when you squeeze it, water comes out. If you’re ambitious once that’s done, you might then wring out the sponge and voila, more water comes out. That’s secondary recovery and as you can see with the sponge, you get less water the second time around than you did initially. The biggest oil fields in the world were found many decades ago and many of them are in secondary recovery right now.

Peaking oil production

A 2013 article in The Guardianstates, “Official data from the International Energy Agency (IEA), US Energy Information Administration (EIA), International Monetary Fund (IMF), among other sources, showed that conventional oil [production] had most likely peaked around 2008.”19 The article quotes Dr. Richard G. Miller, who worked for BP from 1985 until retiring in 2008, saying, “We need new production equal to a new Saudi Arabia every 3 to 4 years to maintain and grow supply. . . .New discoveries have not matched consumption since 1986. We are drawing down on our reserves, even though reserves are apparently climbing every year. Reserves are growing due to better technology in old fields, raising the amount we can recover — but production is still falling at 4.1% p.a. [per annum].”

Miller (and Hubbert earlier) is far from the only person calling attention to the dwindling supply of crude oil and to be clear, the slightly arcane subject of the discussion isn’t overall supply (at least not yet), but a limit to how fast oil can be produced. So this is really a multisided problem: overall supply, ability to produce it or to get it out of the ground, and increasing demand. As new oil is brought to market through secondary recovery others are reaching their production limits and are in decline and the oil industry is playing an elaborate game of whack-a-mole with secondary recovery methods while dealing with increasing demand.

Today, oil production is concentrated in a small number of giant fields (called elephants in the industry) located in a few countries scattered across the world. Most of the easy to find and produce oil was found in the 20thcentury, which is why there’s so much activity exploring for oil under oceans now. While there is, undoubtedly, oil to be found under the seabed, the cost of extracting it is much higher than on land and factoring in offshore exploration and production will continue to add to the cost of fuel in the future.

Paradoxically, high prices will be important to keeping the oil flowing from here on. The price of each barrel has to reflect production costs, such as exploration, extraction, refining, and marketing, and when market prices go below a well’s production break-even point, a producer simply turns off the pumps to avoid losing money. This is already happening for producers pumping from relatively expensive, horizontally drilled and fracked wells today, and it’s why, even if a new giant oil field is discovered under a shallow sea, the oil and the fuels produced from it will be expensive.

But higher prices, while good for producers, are bad for the economy overall and although high oil prices have contributed to recessions in the past, not every recession is caused by high prices. But according to Miller, “…it is highly likely that when the U.S. pays more than 4% of its GDP for oil, or more than 10% of GDP for primary energy, the economy declines as money is sucked into buying fuel instead of other goods and services… A shortage of oil will affect everything in the economy. I expect more famine, more drought, more resource wars and a steady inflation in the energy cost of all commodities.”

Where this is going

So the supreme irony in all this seems to be that as we are reaching a dangerous zone in climate change we’re also running out of the stuff that drives it. While this article doesn’t discuss coal or natural gas each fossil fuel is on some kind of peaking trajectory. So we’re at the point where we have to do something about our energy supply. Even if you dismiss all of the talk about climate change the real information about peaking supply should be enough motivation to look at the problem differently.

The not so invisible hand

If you look at the free market, you can see primary energy consumers like electric power companies and auto manufacturers slowly abandoning the fossil fuel paradigm. They aren’t specific about why but businesses do things for only two reasons: to make money or to save it. In this instance there’s a strong business case for going green. For instance,

· An editorial in the New York Times, on September 18, 2017, quoted Chris Beam, head of Appalachian Power, West Virginia’s largest utility saying, “We’re not going to build any more coal plants; that’s not going to happen.” The same editorial quoted Lynn Good, the head of Duke Energy, America’s largest utility saying, “Our strategy will continue to be to drive carbon out of our business.”

· But there’s also this, in February 2018, the consortium that owns the Navajo Generating Station, in Page, Arizona, billed as the West’s largest coal-fired power plant, with a capacity of 2,250 MW, announced that it would close the plant in 2019 (decades ahead of its end-of-life).

Most automakers have some kind of plan to move aggressively to electric vehicles in the 2020’s. Sample headlines,

· Volvo aims for 50% of sales to be ‘fully electric’ by 2025.

· Ford CEO Hackett reassures investors of EV plans as it pours money into electric F-150, ‘Mustang-inspired’ crossover

· General Motors goes all-in on electric vehicles

· Aston Martin’s first electric car is finally here

It goes on but what’s truly interesting is that Aston Martin, maker of ultra-high-end luxury British sports cars, didn’t have to jump in to the electric vehicle competition so early but it did. The signals are all over and they’re saying that the old fossil fuel paradigm is dying. The primary producers have seen Peak Oil coming and they’re doing some long range planning. And some consumers are already positioning themselves for electric futures by purchasing electric cars and placing solar panels on their roofs.

There’s a lot more work to do to get to an all-electric future but we can all take heart. The free market is moving, even as the politicians and interest groups that deny climate change resist the inevitable. The invisible hand is at least partially visible if you know where to look.

Researcher, author of multiple books including “The Age of Sustainability” about solutions for climate change. Technology, business, economics.

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