This post briefly reviews a new presentation by investment banker Matthew Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (2005). He is one of the best known of the experts warning about peak oil. IMO he is one of the best of them. As this analysis shows, that is not good enough.
This post does not criticise Simmons, who does the best he can — working on his own time, on his own dime — to warn up about the serious threat of peak oil. This analysis shows the gap between what we have and what we need. It illustrates two problems frequently discussed on this site:
- The poor quality of America’s research — the observation and orientation phases of the OODA loop.
- The poor quality of research in the peak oil community.
(1) America’s vision problem
America is great and powerful, but prefers to be blind. On important issues – from energy to geopolitics to climate change – our national machinery to do research and analysis just do not work well. Fixing this systemic problem should be high on our national agenda.
At the end are links to posts giving many examples of the inspired guessing that mostly substitutes for energy research. We have too little data, and too little analysis of what we have. As I have said so many times:
We know astonishingly little about our available energy resources, consumption patterns, and alternatives. Nor has the available information been collected, analyzed, and used for models and simulations — the foundation of good planning. News reports said that the recent satellite interception by the USAF cost $125 million; one-tenth of that could fund a multi-disciplinary project that would help plan a sound future for America’s energy supply. Instead we rely on inspired guessing.
See the links at the end for many examples of this problem.
(2) The poor quality of research in the peak oil community
“Why” is the most difficult of questions, because causes of group behavior are complex and murky. Still, here are two guesses why the usually well-educated and brilliant people writing about peak oil produce so often produce such flawed work.
- The power-point culture
- Advocates do not like to criticize other members of the team
By PowerPoint I mean presentations without a firm written analytical foundation. Slides and brief Internet posts are powerful presentation devices, but shallow and lack of depth. Advocates too-often focus their energy on marketing (broadly defined), since they tend to believe they already understand the threat. For more on this I strongly recommend reading Edward Tufte’s monograph The Cognitive Style of PowerPoint (32 pages, the best $7 you will ever spend).
The other problem is that advocacy communities tend to lack the intense self-criticism that distinguishes the best of the academic sciences. Linked arm-to-arm in a crusade to save the world, advocates seldom ruin the parade — cracking their solidarity — my criticism of their fellows work. The peak oil community shows the unfortunate price paid: loss of credibility, as the movement is discredited by the low average quality of its research. (The Oil Drum is a poster child for this problem, great work indiscriminately mixed with arrant nonsense. For examples see here and here.)
With that background, I suggest reading Simmons presentation full. It is only 48 slides, with Simmons’ typically clear organization and exposition.
About Simmons’ new presentation
- “Has Oil and Gas Collapse Sealed Fate of Peak Oil?“, Matthew Simmons, Presentation to the Society of Petroleum Engineers, 21 April 2009.
Like all of his work, this presentation has much interesting material. Since it is just slides — no links or citations — we don’t know if it is correct.
Simmons has told some whoppers in the past. My favorite is “Well, the fact of the matter is the refineries in the United States it would appear their core units are basically on average are about 85 years old.” (From “All the Canaries Have Stopped Singing“, transcript of an interview posted at Financial Sense, 18 August 2007. Also see slide 39 of this presentation, stating that the average age of US refineries is 70-85 years. The land, perhaps.).
The first two dozen slides provide an excellent review of the case for a early peak oil (as opposed to 10 or 20+ years from now). I recommend close attention to slides 28 – 38, about the world’s unconventional petroleum reserves. These are vintage Simmons at his best: important material, clearly presented.
Some aspects of the rest appear questionable. Since this post is already too long, I will give just 5 examples — illustrations of common problems in the peak oil literature.
Slide 5: “Athabasca Oil Sands expansion cost $20+ billion to add 100,000 B/D.”
Peak oil presentations are littered with things like this, powerful but unsupported factoids. If the gross profit from the well (after operating costs) is $100/b (very high assumption), and the well operates 100% of the time (365 days/year), at a 10 1/8% cost of capital it requires 8 years to break even. Something seems wrong with Simmon’s numbers –or with the managers running the project!. Actual projects show better rates of return. Suncor’s Voyageur project in Ft McMurray will cost $21 B and add 200,000 b/day by 2012; it is now on hold. Shell’s Athabasca expansion will cost $14B and add 100,000 b/d.
Slide 41: “The entire infrastructure to deliver oil and gas from the well bore to the consumer is too old and needs rebuilding.”
Whenever I meet an oil industry executive, I ask about Simmons’ ‘rust” theory. Everyone have meet so far has considered this false with regard to the developed nations and well-managed OPEC nations (e.g., Brazil, Saudi). Some infrastructure is old, much is new. Almost all is maintained adequately. Simmons mentions this often, but has never provided a shred of supporting evidence. His specific assertion (mentioned above) about US refineries is bizarre, unless he defines “core units” in some idiosyncratic way.
Slide 41: “Core of industry’s employee base is ‘just as rusty.’”
This staple of peak oil warnings is probably false. The population of petroleum engineers is just moving East. For more about this see Myths about Peak Oil – part I: There are not enough petro-engineers! , 15 November 2007 .
Slide 42: “Cost to Rebuild Infrastructure Is Huge”
- To replace 6 million miles of oil and gas pipeline and gathering systems would exceed $15 trillion.
- Replacing 20% of world’s refinery capacity would cost $2 trillion.
- And costs would soar as equipment scarcity sets in.
Warnings of aging and rusty infrastructure are one of Simmons’ main themes. What evidence is there that this is a substantial problem? Even more important, what evidence is there that it need be done so quickly that costs would soar? If this things are so, there should be some articles in the industry press about the problem. But I’ve never seen any supporting evidence in the peak oil literature for this oft-repeated claim.
Slide 43: “World Faced Big Supply Problem When Oil Prices Were ‘High’ … It did not induce replacement programs to build new rigs or any other assets.”
Another false factoid, so far as I can determine. As capital expenditure increased, many new rigs and other assets were built. Now that production is slowing, older equipment is being scrapped. That’s how business cycles work. Perhaps Simmons’ has some context in which this is correct, such as what he computes as the needed replacement level. But on its own this looks wrong.
Summary
The above questions are IMO a serious part of the energy problem. Too many of the people warning about Peak Oil not only make consistently incorrect forecasts (e.g., Simmons forecastsof imminent peaking of North American natural gas production), but often get their facts wrong. In fact, Simmons is in this respect one of the best in the Peak Oil community — his reports are both valuable and mostly accurate. Compare his with presentations at the ASPO conferences, many of which are almost science fiction (in terms of unsubstantiated wild speculation).
Robert Hirsch is IMO the only consistently reliable voice I’ve found warning about Peak Oil. To see his work, as well as a wide range of other quality energy research, see the FM reference page about Science & nature – studies & reports.
Other articles warning that low oil prices today mean far higher prices in the future
- “Crude mathematics“, Michael Meacher, op-ed in The Guardian, 28 November 2008 — “A plunging oil price means cheaper petrol now – and no fuel later as industry investment shrivels.”
- “Oil supply crunch in 2010?“, Reuters, 16 February 2009 — “The International Energy Agency says that when the economy regains strength, demand for crude will pick up.” The slides of the IEA’s executive director’s presentation are here.
- “Energy-Investment Cuts Spark Talk Of Next Price Spike“, Wall Street Journal, 9 April 2009
- “Oil Prices: OPEC Secretary Warns of Darkening Crude Supply“, Wall Street Journal, 24 April 2009
Afterword
If you are new to this site, please glance at the archives below. You may find answers to your questions in these.
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp relevance to this topic:
Posts on the FM site about the quality of America’s energy research:
- When will global oil production peak? Here is the answer! , 1 November 2007
- More answers about Peak Oil! (or just better phrased questions) , 5 November 2007
- Links to articles and presentations of some A-team energy experts , 11 November 2007
- The “Oil Shockwave” project: well-funded analysis of the obvious , 10 April 2008
- Euphoria about the Bakken Formation , 10 April 2008
- The Internet makes us dumber: the Bakken euphoria, a case study , 15 April 2008
- Peak Oil Doomsters debunked, end of civilization called off , 8 May 2008
- Spreading the news: the end is nigh! , 8 May 2008
- The secret cause of high oil prices , 6 August 2008
- How does the long-term trend of peak oil affect us, in terms of short-term events?, 30 August 2008
- An urban legend to comfort America: our massive reserves of unconventional oil, 29 August 2008
- An urban legend to comfort America: crash programs will solve Peak Oil, 5 September 2008
- An urban legend to comfort America: oil is oil, even if it is not oil, 10 September 2008
- An urban legend to comfort America: alternative energy will save us, 16 September 2008
- Another example showing how energy research is just inspired guessing, since America prefers being blind, 23 September 2008
You’ve convinced me with this post. Peak oil is a fan phenomenon — like a winning sports team — people just jump on board for the ride.
However, that doesn’t in itself mean that the core, properly verified, facts are wrong, only that much of the secondary writing that swirls around in public may be flimsy, exaggerated, of much less value. Of course, that’s what happens to ideas when they enter into the public arena.
Further, there’s a populist appeal which underlies this issue which is valuable in itslef — an inchoate objection to the consumer society, a kind of luddite-ism.
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Fabius Maximus replies: I must nto have been clear.
(1) Peak oil is a fact. It’s just the date that is uncertain.
(2) Simmons is one of the best. But there is a lack of internal criticism in the peak oil communit. And the wider energy community ignores them. The combination results in poor research. Most notabily this is seen in the absurdly frequent forecasts of peaking, each in turn proven false. This is perhaps the primary contribution of the peak oil community, discrediting the idea of peak oil. The boy who cried wolf…
You mentioned Tufte, I went to one of his seminars a few years ago. Thought provoking, informative, and inspiring. I highly recommend anyone with an interest in science, history, or art to pay and go see Tufte’s lecture.
Here is a report “Giant oil field decline rates and their influence on world“, Hook, Hirsch, Aleklett, Uppsala University, Sweden — (agreeing with your topic for today) From page 19 of this report:
In response to Comment 1 reply #(2)
“Most notably this is seen in the absurdly frequent forecasts of peaking, each in turn proven false.”
Figure 1 of the Uppsala Giant Oil Fields Report shows an IEA graph that production has flattened since mid 2004. So instead of a peak reached in 2005 as Matt Simmons claimed, we have reached a plateau. Figure 13 shows various decline rates, with the IEA WEO 2008 energy forecast showing total crude oil production increasing again in 2010. So in 2011 we check with Matt Simmons again?
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Fabius Maximus replies: I believe Simmons would agree that production has been flat since 2005. But these short-term trends tell us little. The rising prices through mid-2008 indicated great ex ante demand for oil, limited only through demand-destruction by price. These prices sparked massive investment in new production. The global recession starting in late 2007 – early 2008 reduced the demand. Eventurally alling prices forced production cuts, resulting in a crash of capital investment. All this obscures any signs of geological peaking.
A resumption of global growth will push prices up and eventually re-start investment in all forms of energy. Several years afterwards we will see the magnitude of the supply response. Perhaps 5 years or more. Only then can we see how close we are to peak oil.
The quality of research in almost all areas affecting public policy in the United States is dismal, which seems deliberate. Americans simply don’t want to know how many of their behaviors and public policies are completely unsustainable.
Consider: the Pentagon’s quadrennial defense review is based on junk numbers about weapons procurement and garbage intel about alleged “threats.” History shows most of the Pentagon’s “research” about future threats to be low-quality junkthink that systematically contradicts reality. Valid threats routinely get ignored (example: Pakistan is currently on the verge of implosion, and the Pakis have nuclear weapons) while fantasy “threats” get pumped up (WMDs in Iraq), weapons systems routinely get underbudgeted and touted with unrealistically short timelines for project completion. Many of the Pentagon’s weapons systems get scrapped because the procurement process implodes completely, resulting in billions wasted with nothing to show for the expenditure at all.
Financial research is abysmal. If you study the research on companies done by financial analysts and ratings firms during the runup to this current financial meltdown, you’ll read nothing but glowing reports of the purported magnificence of companies which we now know were nothing but Ponzi schemes.
Research on the cost-effectiveness of our medical-industrial complex is appallingly bad, often lacking altogether or banned outright (ratings systems for hospitals and doctors get deep-sixed by lawsuits — do you know where _your_ doctor graduated in his medical school class?), and what little valid independent research there is, gets banned by the doctors. I.e., a study showing that the single most effective surgical procedure involved a simple checklist, which most American hospital continue to ignore.
Research on crime and our criminal justice is either nonexistent or routinely stymied. We don’t know how many innocent people are in prison because prosecutors routinely fight tooth and nail to prevent prisoners from getting DNA tests that would prove their innocence. Meanwhile, garbage “research” that purports to prove that marijuana is a “gateway drug” gets big press, but blue ribbon panels whose research shows that marijuana is not harmful get buried by the press and ignored by policymakers. Research showing that drug treatment programs are more cost-effective than prisons in reducing drug dependency and drug crime likewise get buried or marginalized. Meanwhile, government reports that purport to prove we’re “winning the drug war” get touted every few years, only to explode in bunkum when academic studies dispel the statistical game-playing.
Studies showing that wind power is not useful because of the problem of matching the constantly varying electric demand get buried, while studies showing that hydrogen cars have a plethora of problems, including poor cycle efficiency and fuel-cells not yet technologically ready to power cars, get deep-sixed. Meanwhile, studies proving the safety of modern nuclear reactors are ignored in favor of shrill left-wing hysteria about “The China Syndrome.”
Nobody in America seems to want to know the real facts. They would prove too disturbing, apparently.
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Fabius Maximus replies: This seems grossly overstated. Not every article opposing something means that all the work in favor is wrong. For example, about wind. A few articles noting the high costs (such as those by Hirst appearing on the FM reference page Peak oil and energy – studies and reports) do not mean that all the other studies in favor of wind are wrong. Few things in life are black or white, and most leading edge issues involve reasonable debate.
I’m a big fan of Edward Tufte and have his seminal book, which I refer to often when I present information and knowledge.
FM you know my opinion about political ‘greens’ (not environmental scientists of course) and their objections to nuclear power … shills or fellow travellers of the coal companies.
But, back to the main point, for a lot of short (the majority) travel a mixture of good (ah la European standard) public transport and electric cars will meet the needs of 80-90% of people for the vast majority of their trips (80% to 90% again). Need something else (eg a road trip) then hire a oil based vehicle. There is a minority this does not apply to (eg farmers), but hydrocarbon fuel will be available for them at a reasonable (but not too cheap) cost.
But, this is where the energy nexus hits, we need a lot more electricity and the delivery (ie grid) systems to move it from generation areas (whatever it is: solar, solar thermal, geo-thermal, wind, nuclear, etc .. flexibility is good).
Plus energy must be ‘level playing field costs’. This means externalities must be costed properly. For example: I just listened to a report om mercury poison of US children (apparantly several hundred thousand children suffer from this).. from coal power stations. Once you cost things out correctly then the costs of the various electricy generating systems come much (much) closer. Then it becomes an issue of local resources, got a lot of sun, then solar thermal and PV solar are the best option. Another area then wind is better, or geo thermal. If you live in Finland then nuclear is the best option .. and so on. The grid will deliver, solar for daytime peak power, geo, wind, nuclear, etc, for baseload and night power .. and so on, optimally power gets passed backwards and forwards.
Price it right, factor in all the correct costs and correct market distortions (add in externalities), Govts’ build smart grids then private enterprise will fill in the blanks, classic public/private partnership .. and the Govt’s correct role = create the environment for the ‘wild spirits’ to deliver .. without ponzi schemes or picking winners.
Good to see you posting again, OldSkeptic.
Please be more clear, OldSkpetic — mercury comes from coal burning in Chinese coal plants and goes into Pacific fish, which are eaten by Canadian, American, Mexican etc children. The Chinese are the largest pollutants by far but they appear to have no choice. They have to use what they have.
Tripped over this a few minutes ago: “Peak Oil: Global Oil Production’s Peaked, Analyst Says“, blog of the Wall Street Journal, 4 May 2009.
I have a problem with the approach. seems murky to me. Then again, trying to quantify the total oil on the planet it fraught with “dangerous” guesswork.
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Fabius Maximus replies: I read the actual report discussed in the article, wasting 15 irreplaceable minutes of my lifetime.
You might, also , like to read Wikipedia Peak Uranium .