File under “wishing oil was cheap” will not make it so

The boomers will recognize this as a grown-up version of “I want my Maypo!” 

Opec’s greed will herald the end of the oil age“, Bill Emmott, op-ed in The Guardian, 20 August 2009 — “If producers keep prices high even when demand is slack, the world will be surprisingly quick to wean itself off fossil fuels.”  Excerpt:

Given how bleak the world looked as this year began, it feels remarkable to be seeing growth again so soon. But it is even more remarkable that the world is emerging from such a severe financial shock and slump with its most basic fuel, crude oil, priced at close to $70 a barrel, seven times its price of a little over a decade ago and double the level it was as recently as March.

… The oil producers’ cartel has deliberately cut production by nearly five million barrels a day, which is more than the drop in global demand, to keep prices high. OPEC members account for only about 35% of world supply, but Russia, a non-member, accounts for a further 11.5% and is co-operating with their efforts. Moreover, the Gulf states that dominate OPEC have the largest oil reserves and lowest production costs, so can most easily and painlessly turn their taps on and off.

… Brazil has discovered a huge new offshore oilfield and Angola has shown just how quickly development can occur. In seven years it has trebled its oil output, joined Opec and is now challenging Nigeria for its status as sub-Saharan Africa’s biggest oil producer — and hence as the leading oil-rich basket case.

… Yet by the time non-OPEC oil supply has been boosted, something even more important will have occurred, if OPEC continues to overplay its hand and support painfully high prices. In the 1970s, the rather quotable Saudi Oil Minister, Sheikh Zaki Yamani, had a nice saying: “The Stone Age did not end because the world ran out of stones. Nor will the oil age end because we have run out of oil.”

It will end when oil consumers run out of patience with greedy oil producers, and develop substitutes instead. The Arabs should surely see a warning sign in the fact that the first new product of which Fritz Henderson, boss of the fresh-out-of- bankruptcy (and quasi-nationalised) General Motors, emerged to boast was the Chevrolet Volt, a petrol- electric hybrid, which is claimed to do 230 miles per gallon.

Analysis

 Unfortunately much of  this is probably not accurate.  (update:  my misinterpretation about Brazil deleted}

(a)  OPEC is limiting supply in order to boost prices.

Emmott whines that OPEC keeps oil prices higher than he prefers.  He does not comment on the pricing of pharmaceuticals by the big western drug companies.  Probably many emerging nations consider this greedy; fortunately they can manufacture substitute drugs more easily than we can produce alternative liquid fuels.  Which in its own way also trashes Emmott’s point.

They are limiting production because they are smart.  It’s called political peaking, and is a rational policy for nations having one resource, a finite one.  For more on this see:

  1. The most dangerous form of Peak Oil , 8 April 2008
  2. The three forms of Peak Oil (let’s hope for the benign form) , 23 April 2008
  3. The world changed last week, with no headlines to mark the news, 25 April 2008
  4. When the King of Saudi Arabia talks about oil, we should listen , 2 July 2008
  5. Red Alert: the Saudi Princes have annouced the arrival of Peak Oil , 11 July 2008

(b)  Non-OPEC supply has not “been boosted.”

Excerpt from the Oil Market Report, International Energy Agency, 10 July 2009, page 22:

Non‐OPEC supply in 2010 is forecast to grow by 410 kb/d to 51.2 mb/d, led by increases in the Caspian region, Brazil (both crude and fuel ethanol), the US, China, India and Australia. This magnitude of yearon‐ year growth would bring 2010 approximately in line with 2006 and 2007, the last two relatively hurricane damage‐free years. Total non‐OPEC supply declined in 2008 and growth is assumed to be less pronounced in 2009 (indeed, until recent upward revisions, we had assumed a year‐on‐year decline in 2009).

As is true for the 2009‐2014 period highlighted in the 2009 Edition of the MTOMR, net 2010 growth almost exclusively stems from higher NGL and non‐conventional output (together +260 kb/d) and global biofuels (+190 kb/d).

Notes:

  • NGL:  natural gas liquids
  • Biofuels:  aka burning our food

(c)  “It will end when oil consumers run out of patience with greedy oil producers, and develop substitutes instead.”

Even after substitutes for liquid fuels are developed — we have none today — it will take decades to roll them out.  during that time non-OPEC supply is projected by almost all experts to crash.  This is not something OPEC need worry about.  For more on the myths embedded in Emmott’s forecast, see:

  1. An urban legend to comfort America: our massive reserves of unconventional oil, 29 August 2009
  2. An urban legend to comfort America: crash programs will solve Peak Oil, 5 September 2008
  3. An urban legend to comfort America: demand for oil creates new supply, 8 September 2008
  4. An urban legend to comfort America: oil is oil, even if it is not oil, 10 September 2008
  5. An urban legend to comfort America: alternative energy will save us, 16 September 2008

(d)  The 230 mpg Volt

This is absurd.  The Volt’s battery powers trips for the first 40 miles; after that it burns gas at normal mileage.  Also, widespread adoption of electric-powered cars might require the construction of new power plants (even assuming they were charged only during off-peak hours).

Nor is it a bargain.  From CNN, 11 August 2009:

The Volt will need to be plugged in at night to recharge. The company said it estimates it will need 8 kilowatt hours for the recharge necessary to travel 40 miles (off highways). That should cost a total of about 40 cents at off-peak electricity rates in Detroit, Henderson said. National figures from the Department of Energy suggest most consumers would pay more than that, probably around 88 cents per recharge.

Even at those modest recharging costs, and limited use of gasoline, it will be difficult for the Volt to save money for their owners, according to auto sales service Edmunds.com.

“Even if the Volt’s fuel savings could possibly be as dramatic as today’s numbers suggest, the expected purchase price will be much higher than that of existing hybrids, and it will take years to pay off its price premium,” notes Edmunds.com senior analyst Jessica Caldwell.

(4a)  Afterword

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(4b)  For more information

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp relevance to this topic:

Some posts about the energy transition:

  1. The most dangerous form of Peak Oil , 8 April 2008
  2. Peak Oil Doomsters debunked, end of civilization called off , 8 May 2008
  3. The secret cause of high oil prices , 6 August 2008
  4. Another example showing how energy research is just inspired guessing, since America prefers being blind, 23 September 2008

6 thoughts on “File under “wishing oil was cheap” will not make it so

  1. I think that he was referring to Angola as the basket case, not Brazil.
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    Fabius Maximus replies: My error. Thanks for catching this!

  2. In S Korea they run their transportation economy on LNG. I have marveled in person, watching our driver gas up in a “pit stop” with the same speed, lower cost, and comparable range as we get here with gasoline.
    Meanwhile, beneath Pa. the Marcellus shale contains a hundred year supply of methane. At what price is oil displaced by LNG? The cross over costs can’t be that high. I would support an effort to encourage first steps toward providing distribution infrastructure for LNG as a public good. Even baby steps in this direction would send a powerful message to OPEC, that significant barriers to entry does not mean/ are not the same as insurmountable barriers to entry.
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    Fabius Maximus replies: If people had some confidence in the price of natural gas, then the investments to more widely utilize it would be forthcoming. The massive gyrations during the past decade have to settle down first.

  3. Right now methane is about $0.36 per gallon of gas equivalent. At $2.00 or so per pre tax gallon of gasoline, how can we not be converting to LNG now?
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    Fabius Maximus replies: The relevant question is what will it be in 5 years. During the past 9 years spot natural gas has traded between $2 and $15 mcf (see this chart).

  4. This story:
    http://www.bloomberg.com/apps/news?pid=20601109&sid=a6O1M1NvtQ3U

    With this chart:
    http://www.bloomberg.com/apps/news?pid=20601109&sid=a6O1M1NvtQ3U

    Shows that oil is way out of whack with natural gas right now, but historically has been reasonably stable. The historical mean is no doubt consistent with oil keeping just below the crossover threshold net of hysteresis. Public policy to lower hysteresis, e.g. flex fuel vehicle encouragement by tax policy, would help here. Of course, Saudi campaign contributions for the instigators might dry up.

  5. Re natural gas in cars: The use of alternative energy like photovoltaic and wind leads to high fluctuations of the electricity generation, the only conventional power plants that can compensate for this are narural gas fueled ones. Therefore, the large-scale use of natural gas in cars makes IMHO no sense.

    The use of more electric cars will lead to more power plants, however, the majore advatage of this approach is that the charging of the car batteries would be at nighttime which would lead to a more constant base load and, therefore, a increased efficency of the power plants (potential IIRC 15%). In addition, you have a better efficency when you burn the fuel in modern powerplants, convert the chemical energy into electricity and charge batteries. Here some good US studies exist.

    Another aspect is, that you have in the USA a huge potential for saving a lot of energy in housholds and office buildings by measures that are cost neutral or even require a negative investment. This works well with existing technology. (IIRC the FAS has some studies on their home page).
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    FM note: see the Energy and Environment page of the Federation of American Scientists (FAS).

  6. This sounds like the perfect storm: Financial crash and high oil prices. Back in 2005 an oil price above $70 would have made headlines but at that time the world economy was still booming.

    One thing that worries me is the certain belief among many politicians and experts that there is an easy way out of our dependence on fossile fuel. There isn’t. Europe has struggled for years to reduce its dependency on Middle East oil and instead we have become dependend on Russian oil and gas. Hardly an improvement. In 2007 30 percent of Europe’s oil import and 50 percent of our gas import came from Russia. Since we have already experienced a Peak Oil in the North Sea it is only to be expected that this trend will continue.

    I often hear that we have developed alternative solutions like solar power, but these solutions have been around for decades. There is nothing new about that. While R&D should continue we should be sanguine about the prospect for an easy solution.

    One of the more absurd solutions to the growing oil crisis is the growing belief that the North Pole will soon be free of ice and everybody is preparing a scramble for the pole. Geologists claim that a third or something like that of the worlds oil lies below the ice. Even if that were true it would take years – if not decades – before any drop of oil would arrive from the North Pole. Yet everybody seems to get ready for WW3 (except for some reason the Americans, but there are already present at Thule Air Base on Greenland):

    http://royaldutchshellplc.com/2008/02/28/foreignaffairsorg-arctic-meltdown-the-economic-and-security-implications-of-global-warming/

    http://en.rian.ru/russia/20090330/120816974.html

    http://www.barentsobserver.com/index.php?id=4614115

    http://news.bbc.co.uk/2/hi/americas/8204531.stm

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