Monday, October 14, 2013

Countering claims that peak oil is a myth

Update Oct 27, 2013: I added a new subsection called "Update:  Author Ignores Fracking's Externalities, Confuses 'Cost' and 'Price'"

A friend sent me an article that attempted to debunk some peak oil myths and expressed lots of optimism about the present and future of the fossil-fuel based energy.

Here's the article ("Sometimes They Ring a Bell").

The site requires a free account to read the article. It's quite short and worth reading.

I disagree with the beliefs the author expresses. My criticisms fall in two categories:
  • Important points the author does not address
  • Falsehoods / Nonsense
Furthermore, I believe the mindset of the author and hedge fund manager he references reflect a core problem that has caused our society to erode over time.

I’ll address all 3 of these.

Important points the author leaves out

Energy Return on Energy Invested
Nobody disputes that there are huge energy sources on earth available for extraction with current technology. The question is “How much energy does it cost to get them out?” The author goes on and on about how much energy there is and how many new finds there have been, but fails to address the EROEI of these.

How many barrels-of-oil-equivalent does it take to get one hundred barrel-of-oil-equivalent out of the ground? Is the ratio 100:1 (extracted:invested) like it was 100 years ago? Is it 30:1? 5:1?

Here are some graphs on EROEI (EROEI is hard to calculate, so numbers can vary but the trends are the same):
Dark green represents energy inputs included in transporting, refining, and other post-extraction actions required for the energy to actually be usable. Light green portions exclude these extra inputs.

and this:

To quote from the article which hosted the above graphs:
Notice that nothing compares with sweet crude – with its magnificant EROEI of 100to 1. In each case much more effort – and also environmental disturbance – has to take place in order to get less energy than we are used to getting. (In some cases, like the US corn-to-ethanol program, the net energy return is actually negative – more energy is used to make the product than is recovered from the process. Turning coal into liquid fuels is much the same.)
In general, an EROEI has to be at least 3 to 1 in order for the process to be economically viable. You will notice that many of our choices sit barely above that threshold. Note also that in order to sustain the sort of society that we have requires an estimated EROEI of energy supply 12 to 1.

This is crucial. The total quantity of energy isn’t important – it’s the gain compared to how much is invested. Furthermore, any one energy source may yield less than 1:1 and so be ‘worth it’ energy-wise, but would still not support our society. Society would utterly fall apart on 2:1 or 3:1 energy because we must also support the huge infrastructure investments, complex and geographically dispersed governments, massively energy-dependent military, etc. Sufficient EROEI is crucial.

Note in the first graph that current energy finds, e.g. in Texas, are not nearly as good as much earlier ones, regardless of total quantity of energy available.

You might argue “but with better technology, it’ll take less energy to extract the oil/gas/etc!” Better technology can indeed mean it takes less energy to extract energy, but this also obviously has its limits: it will ALWAYS takes more energy to “unleash natural gas trapped in methane ice buried deep in the ocean” than to make a short hole in the ground in Oklahoma and have top-quality crude oil gush to the surface.

This part of the letter, among others, makes this glaring omission:
I've noted in previous letters that there may be as many as four distinct oil- and gas-producing zones layered on top of each other in North Dakota. So the Bakken could be four times as big as we think today.

ALL FOUR OF THOSE PARTS AREN’T EQUAL. The lower zone will be much more expensive, environmentally damaging, and energy-intensive to remove than the highest. And if it takes more energy to get it out than we get in return, even with our best technology, it will never be worth it.

For a good video on EROEI: Peak Prosperity Crash Course

Rapid decline rate of fracking wells

Fracking wells have low EROEI, but that isn’t the only problem with Bakken, Eagleford, and others. The other issue is that the output from them declines super fast.

Here’s an image on the yield over 3 decades of the Samotlor field in Russia, 6th largest in the world: (Image source; data source is TNK-BP, a Russian oil company)

You can see how long it took for yield to begin a permanent decline after drilling started in the 1960s: ~12-15 years, and it didn’t deteriorate so fast! (and the USSR collapsed as this and other large fields bottomed out).

Now look at Bakken and other shale wells: (Image source)

To quote from the same article that image came from:
Newly fracked wells deplete far more rapidly than conventional wells, at times losing 70% of initial production in just the first year. That means the new shale oil discoveries trumpeted by those predicting energy independence will struggle just to keep pace with dropping production in current ones.

America burns roughly 19 million barrels of crude per day. Hydraulic fracturing produces roughly 1 million barrels. That means 18 million barrels per day (mbpd) still need to come from somewhere else.

You can see that these shale oil/gas ‘plays’ are not nearly as good resources as the massive oil finds of early/mid 1900s. Each drill starts strong and deteriorates quickly, meaning it doesn’t replace nearly as much oil as a classic, massive oil field from 50 years ago would have.

This is why you hear phrases like ‘working hard to stay in place” or “The Red Queen Syndrome”, a reference to the Alice in Wonderland sequel “Through the Looking Glass”. We’re investing huge amounts of energy and money into these resources (and destroying lots of aquifers, farms, etc) and the yield really ain’t that great.

You can see that clearly here:
(Image source; data source: Bureau of Economic Geology/Univ. of Austin Texas)

With early wells dying out so quickly, you don’t get exponential growth for long – yield from new wells can’t make up for dramatic depletion in old ones.

Article doesn’t address “Demand Destruction”

The article notes that ‘people are driving less’ as if this were a good thing. It means that people are too poor to afford the fuel. If fracking/shale/tar sands can’t lower the price because they’re not economically feasible with prices <$80/barrel or <$100/barrel, our economy won’t recover – it’ll continue to sink into recession. We’ll continue to have more and more fiscal problems (like we’re seeing our gov’t deal with now [Oct 2013]…)

And when fracking/tar sands run out? And we’re stuck with deep ocean only? I mean… when does this stop?

Update:  Author Ignores Fracking's Externalities, Confuses "Cost" and "Price"

" is actually a major societal good. Abundance at cheaper prices? Increased lifespans? What's not to like?"
"Price" is the amount you pay for something. "Cost" is the total expenses incurred in the creation of that thing.

How are these different?

In a market, the producer incurs certain costs for making a product (like a basketball, meal, or gasoline). When selling that product to a consumer, he charges the consumer for all his costs as well as some extra that he keeps as profit.

To make up an example, imagine it costs an oil company $3 / gallon to extract, refine, and transport gasoline to a station where they sell it to a driver for $3.50, making a profit of $0.50. Where's the problem? Well, what if the producer doesn't incur all of the costs of producing that gallon of gas? What if some costs are borne by others? That cost doesn't get included in the cost of the final product, and the total cost of making that gallon of gas is hidden from the driver.

Let's look at some costs of fracking that aren't included in the price (the article referenced more than just fracking, but the same problems apply to other energy sources as well):
  • Destruction of drinking water supplies (aquifers, rivers): Fracking involves injecting lots of obnoxious chemicals into the ground, and since the (Federal) Environmental Protection Agency and most state agencies is not acting effectively to curb this, fracking companies don't pay the cost of cleanup - that's paid by the communities, if anybody (often, the water is never cleaned up, and everyone just suffers illness/death/loss of property value). These chemicals include arsenic, benzene, and other toxins.
  • Dealing with the waste products: In the linked example, frackers just dumped their wastes into a river. This is separate from the first example, because non-waste products also can destroy water supplies.
  • Fracking can cause earthquakes: ... and it's the building owners, bystanders, insurance companies, and other 3rd parties who pay the costs.
  • All this can lead to dramatically reduced property values: including going down to $0 in some cases when absolutely no buyers show interest in your property. Drilling leases can also void title insurance, and damage or lost home value may not be covered by home insurance.
  • Increased demand for public services: Fracking requires public roads, 911 services, access to public lands, and other things paid for by tax money. When frackers pay less in local taxes than the government pays in public services, taxpayers effectively give frackers a free ride.
Anyone interested in more detail can look at these reports here or here.

These are what economists call 'externalities', and they're known problems with a market-type economy like America's. Externalities occur where neither the producer nor the consumer incur all the costs of their activity. However, these costs are real, and really substantial, and they should definitely factor into the costs of fracking for anyone considering whether fracking is cheap. If the original article's author wants to claim these alternative energy sources are cheap, he should address this class of issue.

Falsehoods / Nonsense
Comparing Hubbert’s Peak and Fracking
This is very poorly worded and very misleading:

In the US, oil extraction followed a Hubbert-like curve, with the peak in 1971 – until 2008, that is, when production began to increase sharply again.

Hubbert’s down-curve isn’t necessarily that smooth – it’s quite bumpy. For example (and scale):
(Image source)

You can tell since 1971, there’ve been periods of increasing oil output, even though we’re on the down-side of Hubbert’s slope. There’ve also been flat periods. The last 5 years doesn’t break the trend yet in my book.
Furthermore, Hubbert’s peak doesn’t really apply as well to shale plays as classic oil fields, so comparing them is disingenous. Classic oil fields had the nice inverted-U pattern (inverted parabolic curve) in yield, where they produced an increasing amount over time until their yield began to fall.

You can see above that fracking wells are different – they max out very early and then deplete rapidly. They’re a different beast entirely.

It's not new technology: fracking has actually been around for decades
From the article:

We have known the oil and gas was there for decades; we just couldn't get it up at a reasonable price. Now human ingenuity and new technology have made increased production possible.

Fracking technology has been around since the 1950s! (brief intro to fracking's history)

The 1960s had the first earthquakes attributed to fracking (yes, that’s been known for a long time too).

The author has it backwards: The reason we can get the energy out now is because prices have risen high enough so that we CAN get it out at a ‘reasonable price’ – the goal posts of what price was reasonable changed! If you doubt that, compare oil prices and the ‘fracking revolution’:

(Image source)

And fracking:
(Image source; data source: EIA)

Comparing the two, look at what happens in year-2000 in oil prices: they hit $30+/barrel and after a recession-induced interlude, climb inexorably higher. Fracking is expensive and dirty; it’s possible only because prices are so high.

This also explains why prices increased so fast after the crash in 2008: these ‘plays’ became unprofitable; unprofitable energy sources ceased being drilled, rapidly bringing supply in line with (diminished) demand. As governments re-inflated their economies, output increased again – but at the sustained higher prices they require.

Of course technological advances have occurred – I’m not saying they haven’t. I’m saying the major factor was the price change; increased price of energy drove interest in fracking. This is important: are humans and their technological prowess in control of the situation, or are they just reacting to the outcome of past decisions? What does this imply about our ability to shape the future?

Major problem: if we become hyper-efficient, who will buy our outputs?
Quoting the article:
Further, production of all types will become more efficient, requiring less labor to produce more goods and services. Many things will cost less but do more. To an economist this might look like a drop in the bucket of GDP, when it is actually a major societal good. Abundance at cheaper prices? Increased lifespans? What's not to like?

This has been a common theme throughout history. Increased efficiency->less need for labor -> recession/labor unrest/etc. If jobs aren’t needed because processes are so efficient, then too few people generate income, and too few people are around to buy the outputs of the efficient processes. This has been known for a long time, and it’s not a huge deal if out-of-work people are helped into new jobs, given aid by the gov’t, etc. When they’re left out to dry, or when there are no jobs they can easily jump into, you have major problems.

Interesting (short) readings on this:
  • Bertrand Russell: In Praise of Idleness (good description of how society ought to respond to increased wealth; compare with how it worked out and why hyper-efficiency is a problem)

In short: increases in efficiency have happened a lot, but we haven’t been good at distributing the resulting new wealth fairly. The bottom 99% are forced to keep working hard while the top portion become quite wealthy (especially early America through the 1930s and then 1980s-now).  It’s understandable that the author didn’t consider this: he would benefit mightily I’m sure.

I'm not arguing against efficiency improvements, just that the benefits aren't distributed to all the way the author implies ("major societal good").

Lastly, the attitude problem

In a healthy society, each citizen would care about the long-term well being of the society and government. The government wouldn’t be a parent-like, inscrutable figure that behaved foolishly occasionally, but would surely recover just fine and keep things stable without any work required on the child’s part – rather, citizens would recognize the challenges gov’t faced and work to understand and overcome them.

Compare that attitude with these two quotes from the article:

I was riding around in a golf cart this week at the Barefoot Ranch with a young hedge fund manager. He runs a value fund and could wax enthusiastic about his investment ideas. But then he would ask me about my macroeconomic views, and I could see the frustration cloud his face. "I know this is bad, but I just wish we could get it all over with so I could just do my work without having to worry about what the government is going to do to me." He just wants to find great companies with solid business models that are priced attractively. And not have to worry whether the governments of the world are going to create another big crisis. He was wistful about the "good old days" where we had a normal business cycle with a recession every now and then.

… and this …

Like my young hedge fund manager friend, I would so rather focus on the exciting transformations that are happening in our world, with all their positive implications. It is good to remind ourselves that there is life outside of government-created problems.

You can see what I mean! “Government-created problems” (!). These people don’t want to understand what the government faces – they just want it to ‘do its job’ and get out of the way. They deserve the government and the situation they get. If you want to see the actual problems, watch this video series. It's a good intro.

So that’s my thinking on the article. What do you think about my counter-points?