Peak Oil 20 Years Later: A Comment by Colin Campbell

Colin Campbell illustrating the concept of oil depletion.

Colin Campbell is the originator of the concept of "peak oil," the founder of the "Association for the study of peak oil and gas" (ASPO) and, together with Jean Laherrere, the author of the 1998 article on "Scientific American" that started a  wave of interest in oil depletion that re-examined the work that Marion King Hubbert performed in the 1950s. 

The cycle of the peak oil meme has something in common with the concept of "Limits to Growth." Both raised great interest, then were rejected, demonized, and criticized. Today, it seems that the general opinion has consigned  both to the realm of "wrong scientific theories," yet they had a deep resonance in our current view of the world -- the very fact that they were both so vehemently rejected tells us something.

The world peak of oil production was expected for around 2010, but shale oil delayed it of a few years, at least in terms of availability of combustible liquids. Now, it seems that we are approaching the real thing. But don't worry, just as the peak in the US production was not recognized, and not even discussed when it came in 1970s, the world peak will probably be unrecognized and not discussed when it arrives. We'll surely remain more interested in our usual pastimes of warring and quarreling. 

Colin is now 87 and he is a little less active than before in the debate, nevertheless he keeps following it and he wrote to me the note below, related to a recent article of mine. I reproduce it here with his permission (Note that I am not sure I can lead the secession of the Florentine Republic from Italy as "General Bardi" as he proposes!!)

Dear Ugo

Thank you for sending me the reference to your article on Peak oil in Energy Research and Social Science, which was excellent.

I came to realise that one of the main reasons for the difficulties in predicting the course of depletion relates to the reporting of so-called Reserves. Explorers and Engineers have somewhat different approaches. I was in the exploration side of the business and our over-riding mission was to learn the geology of the area we were examining, which especially offshore demanded drilling wells to obtain the geological information needed to build the overall picture and identify the more prospective areas. The Russian explorers under the Communist regime were allowed to drill holes to simply gather geological information, but we in the west had to claim that every wildcat well drilled had a good chance of delivering a profit. That involved estimating its potential “reserves” which we often had to exaggerate to get the management to approve the well. 

Once a successful discovery was made, control passed to engineers who had to determine how many wells had to be drilled to develop the field, the size of pipelines and other facilities. It made sense for them to be very conservative in their initial estimates of the “reserves” as they won medals if they improved over time. Their projects were naturally very influenced both by oil price and forecasts thereof. Naturally, more can be extracted if prices are high.

Then we had OPEC which agreed to share its production based on each country’s reported reserves. This in turn led to political pressures. The classic example is how Kuwait increased its reported reserves from 64 Gb in 1984 to 90 Gb in the following year, although nothing particular had changed in its oilfields. Two years later it announced a further increase to 92 Gb, but that proved too much for several of the other OPEC countries. Abu Dhabi matched Kuwait at 92 Gb (up from 31 Gb), Iran went one better at 93 Gb (up from 49 Gb) and Iraq capped both at 100 Gb (up from 47 Gb). Saudi Arabia and Venezuela also made large increases. My guess is that Kuwait changed from reporting Remaining Reserves to reporting Original Reserves (namely not deducting past production). This is in fact normal industry practice in determining the relative ownership of a field that crosses a lease boundary or frontier.

Another great difficulty is the absence of a system of clear definition for the different categories of oil, each of which has its own endowment and depletion profile. I recognise so-called Regular Conventional Oil (with a density lighter than 17.5 Deg API), distinguishing it from various other categories (including that from Fracking). It dominated past production and I think it peaked in 2005.  

I discuss all this in my last book Campbell’s Atlas of Oil and Gas Depletion (ISBN 978-1-4614-3575-4) which was published by Springer in 2013. It assesses the status of depletion by country and region as of 2010.  

There is accordingly much uncertainty about the date of the peak of all categories of oil, which is imminent, but it misses the point when what matters is the vision of the long decline that follows it. 

I recently received a reference to a very interesting book (Khan Mansoor 2018, The Third Curve - The End of Growth as we know it. www.mansoorkhan.net) which stresses that it is energy not money that drives the modern world. He was a professor but took this issue so seriously that he went back to India and bought 20 acres of land from which to build a sustainable future for himself and family. 

I conclude that easy oil-based energy fuelled the economic expansion of the past century, which allowed the population to expand greatly. The bankers lent more than they had on deposit confident that tomorrow’s economic expansion was collateral for today’s debt. But the oil price surge to almost $150 a barrel in 2008 cut demand and caused an financial crisis with the failure of several banks. Prices then collapsed into the $50s but have since edged up to about $80. I think that the world faces an economic recession comparable to that of the 1930s. We already see many political pressures and massive emigration as people find that their homelands can no longer support them. There are many political consequences which I think will include a return to regionalism as people come to realise that they will have to rely on whatever their particular area can support. Britain is already leaving the European Union (which was little more than a trading empire) and there are comparable moves in several other countries. The Catalonians want to leave Spain, and I would not be surprised if the people of Florence might not want to leave Italy. Perhaps they will turn to General Bardi as their leader. 

It is difficult for politicians in democracies to face up to the situation as they only get elected if they tell people what they want to hear, and that is certainly not the implications of Peak Oil.

It is fascinating to observe all this unfold but I am too old to do serious work on it. 

best regards

Colin.     

For Whom is Peak Oil Coming? If you own a Diesel Car, it is Coming for you!

At the beginning, the idea of "peak oil" seemed to be relatively uncomplicated: we would climb from one side and then go down the other side. But no, the story turned out to be devilishly complex. For one thing, there is no such a thing as "oil" intended as a combustible liquid -- there are tens, perhaps hundreds, of varieties of the stuff: light, heavy, sour, sweet, shale, tight, dumbbell, and more. And each variety has its story, its peculiarities, its trajectory over time. Eventually, all the oil curves have to end to zero but, in the meantime, there is a lot of wiggling up and down that continues to take us by surprise. Mostly, we didn't realize how rabidly the system would deny the physical reality of depletion, much preferring to "legislate scarcity" on the basis of pollution.

Here, Antonio Turiel writes a fascinating post telling us how the peak is coming "from below," affecting first the heavy fraction of crude oil: diesel and fuel oil. That's already causing enormous problems for the world's transportation system, as well as for the owners of diesel cars, and the situation will become much more difficult in the near future. The light fraction, the one that produces gasoline, seems to be still immune from peaking, but that will come, too.(U.B.)

The Peak of Diesel Fuel: 2018 edition. 

By Antonio Turiel (translated from "The Oil Crash")

 

Dear Readers,

Six years ago we commented on this same blog that, of all the fuels derived from oil, diesel was the one that would probably see its production decline first. The reason why diesel production was likely to recede before that of, for example, gasoline had to do with the fall in conventional crude oil production since 2005 and the increasing weight of the so-called "unconventional oils," bad substitutes not always suitable to produce diesel. With the data of that 2012, I wrote "The Peak of Diesel". At that time, there was a certain stagnation of diesel production, but it seemed to be too soon to venture if it was final or if it could still be overcome. I reviewed the issue in 2015, in the post "The Peak of Diesel: Edition of 2015." The new data from 2015 showed that in 2012 there had really been no peaking, although diesel production had grown less strongly if we compared it with the previous historical rate, and even the last 18 months of the period studied at that time showed a certain stagnation. Now it has been another three years, and it is a good time to look at the data and see what happened.

Before starting, I would like to thank Rafael Fernández Díez for having the patience to download the JODI data, for having elaborated the graphs I show here, slightly retouched, and for having made me notice the problem that is being raised with the refining of heavy oils (We'll see more below). He hasn't had time to finish this post and that's why I'm the one who wrote it, but what follows is actually his work.

As in the previous two posts, we will use the database of the Joint Oil Data Initiative (JODI). This database provides information about most of the world's oil and refined products, but not all of them. The countries not included are countries with serious internal problems and a great lack of transparency, either because of wars or because they are very tight dictatorships. For this reason, the figures that I will show are around 10% lower than they should be if they were representing the whole world. However, given the characteristics of the excluded countries, it is most likely that their data did not change the observed trends, only the total amounts.

All the graphs that I will show are seasonally adjusted, that is, the points are the average of the previous 12 months. In this way, the effects of the variation due to the season are avoided, the graphic is less noisy and trends are better seen. The graphs will always be expressed in millions of barrels per day (Mb/d). First of all, I show you the graph of the evolution of diesel production over the past years:

 
As seen in the graph, the year 2015 marked the maximum so far. There had not been such a marked drop in production since the crisis of 2008-2009, but in the case of the fall of 2015 we find that 1) there has not been a serious global economic recession; 2) the descent is lasting longer and 3) the levels of diesel production show no sign of recovery. Although it is still a little early to ensure that the peak of diesel has occurred, stagnation - even falling - is starting to drag on for too long to be ignored.

Looking at the data of JODI, two other very interesting things are observed. On the one hand, if one analyzes the production of all the fuel oil that is not diesel (fuel oil) it is found that its production has been in decline for years.

As the graph shows, since 2007 (and therefore before the official start of the economic crisis) the production of fuel oils is in decline and it seems to be a perfectly consolidated trend. The diehard economicist interpretation is to consider that there is simply no demand for these fuels (which, although of the same family, are heavier than diesel). When oil is refined, it is subjected to a process called cracking, in which the long molecular chains present in the oil are broken (by means of heat and other processes) and then the molecules are separated by their different properties of fluidity and density. The fact is that if you have made changes in the refineries to crack more oil molecules and get other lighter products (and that is why less heavy fuel oil is produced), those molecules that used to go to heavy fuel oil now go to other products. By logic, taking into account the added value of fuels with longer molecules, it is normal that these heavy fuel oils are undergoing cracking, especially to generate diesel and possibly more kerosene for airplanes and eventually more gasoline. We must not forget that from 2010 the fracking in the USA began to take off, flooding the market with light oil, which is not easy to refine to make diesel. It is therefore quite likely that the refineries have adapted to convert an increasing amount of heavy fuel oil into light fuel oil (diesel). It reinforces this idea that, if we add the volumes of the two previous graphs we have, there is a certain compensation for the trends of diesel production, increasing until 2015, and the long-term trend of decrease of the rest of the fuel oils.

This figure shows that, after the 2008-2009 slump, it has been very hard to raise the total production of fuel oils, which peaked in 2014 and have remained there for almost a year; and at the moment it is suffering a resounding fall (about 2,5 Mb/d from the levels of 2014).

This last observation is quite relevant because if, as you can guess, the industry is cracking less heavy fuel oil to ensure that the production of diesel does not go down too much, the rapid fall of heavy fuel oil will quickly drag down the diesel production. In fact, the graph shows that, after falling in 2015 and 2016, in 2017, it was possible to stabilize the production of all fuel oils, but it is also seen that in recent months there was a quite rapid fall. Surely, in this shortage, we can start noting the absence of some 2.5 Mb/d of conventional oil (more versatile for refining and therefore more suitable for the production of fuel oil), as we were told by the International Energy Agency in his last annual report. This explains the urgency to get rid of the diesel that has lately shaken the chancelleries of Europe: they hide behind real environmental problems (which have always troubled diesel, but which were always given less than a hoot) to try to make a quick adaptation to a situation of scarcity. A shortage that can be brutal, since no prevention was performed for a situation that has long been seen coming.

The followers of that religion called economic liberalism will insist with all their strength that what is being observed here is a peak of demand, that old argumentative fallacy that does not agree with the data (who can think that people are stopping to consume oil because they want? Maybe because they have better alternatives? Which ones?). They will argue that there is a lower demand for diesel and that this is why production stagnates and that the production of fuel oils drops because, as they are more polluting fuels, the new environmental regulations do not allow their use. It's a bit of the old problem of who came first, the chicken or the egg. With regard to the fact that the demand for diesel does not increase, prices have a considerable influence: this is how shortages are regulated in a market economy. And, as for the environmental reasons, the production of heavy gas oil has been dropping from 2007, when there was not as much regulatory interest as there seems to be now. There is one aspect of the new regulations that I think is interesting to highlight here: from 2020 onwards, all ships will have to use fuel with a lower sulfur content. Since, typically, the large freighters use very heavy fuel oils, that requirement, they say, makes one fear that a shortage of diesel will occur. In fact, from what we have discussed in this post, what seems to be happening is that heavy fuel oils are declining very fast and ships will have no choice but to switch to diesel. That this is going to cause problems of diesel shortage is more than evident. It is an imminent problem, even more than the peaks in oil prices that, according to what the IEA announces, will appear by 2025.

The second of the interesting things that the JODI data shows us is how the volume produced of all petroleum products has evolved.

The volume produced has been able to continue increasing during these years thanks to the energy subsidy that the US is giving to the world by means of fracking. However, fracking oil only serves to make gasoline and that is why the diesel problem remains. But you can also note how the end of the graph above shows the same trend in the production of diesel, with a drop of more than 2 Mb/d. What does that mean? That the contribution of fracking to the whole volume is also hitting the ceiling, it does not get any higher. It is a further indication that we are already reaching the peak oil of all petroleum liquids.

That is why, dear reader, when you are told that the taxes on your diesel car will be raised in a brutal way, now you know why. Because it is preferred to adjust these imbalances with a mechanism that seems to be a market (although this is actually less free and more adjusted) rather than telling the truth. The fact is that, from now on, what can be expected is a real persecution against cars with an internal combustion engine (gasoline will be next, a few years after diesel). Do not say that you were not notified (and I was not even the first to do it in this blog). And if it does not seem right, maybe what you should do is to demand that your representatives explain the truth.


Regards

AMT

Note: this post was translated from Spanish using Google Translate, which did a pretty good job, necessitating only some retouches -- although the result is still somewhat "Spanish-sounding" even in English! One problem is the use of the Spanish terms "gasoil" and "diésel" which may not mean the same thing as they do in English (in Italy, btw, diesel fuel is always termed "gasolio"). But these two terms indicate a very similar entity, even though maybe not identical. So, I reworked Turiel's text a little in order to use only the term "diesel".

Thermodynamic model of oil depletion sparks controversy

This is a post by François-Xavier Chevallerau, a Brussels-based public policy professional who is in the process of setting up a new international think tank to support the emergence and promotion of biophysical economics in the public debate and the policy conversation. Here, he comments on the "Hill's Report" that was also discussed in a previous post on "Cassandra's Legacy." 

Guest post by François-Xavier Chevallerau

A report on the world’s oil depletion problem published several years ago by an obscure association of anonymous consulting engineers and professional project managers is suddenly coming under fierce criticism. 
 
In December 2013, an ‘association of consulting engineers and professional project managers’ calling themselves ‘The Hill’s Group‘ published a report titled ‘Depletion: A determination for the world’s petroleum reserve’. Depletion, as is well known, is the inevitable consequence of non-renewable resource extraction, and determining how this depletion will affect petroleum production has been a key focus of energy analysts and researchers for a long time.

Arriving at an estimate for the remaining extractable petroleum reserve is usually attempted by adding together the quantity of petroleum believed to be present in each field, a method which is error-prone and imprecise. The Hill’s Group’s study proposed an alternative model of oil extraction and depletion, rooted in thermodynamics – i.e. the branch of physical science that deals with the relations between all forms of energy. This model, called ‘ETP’ (Total Production Energy), is allegedly derived from the fundamental physical properties of petroleum, the first and second laws of thermodynamics, and the production history of petroleum.

The methodology used by The Hill’s Group is based on ‘exergy analysis’. Exergy in thermodynamics means ‘the maximum amount of work that can be extracted from a system’. The system being considered, in this case, is a unit of petroleum. The Hill’s Group’s study calculates the maximum amount of work that can be extracted from a unit of petroleum, using the physical properties of the crude oil in question, equations derived from studies of the First and Second Laws of thermodynamics, and the cumulative production history of petroleum. It then uses these these values to construct a mathematical model that it claims can predict the status of the world’s petroleum reserve with a much smaller margin of error than can be provided by the quantity measurement approach.

Optimistic estimates place the world’s total petroleum reserve at 4,300 billion barrels. Of that quantity the model proposed by The Hill’s Group predicts that it will only be possible to extract 1,760.5 billion barrels, or 40.9% of the total reserve. Its model suggests that petroleum’s ability to supply the energy needed to sustain its own production process is declining, that petroleum depletion is further advanced than generally assumed and that oil production will decline or even collapse much faster than commonly anticipated.

From its ETP model the Hill’s Group also derives a petroleum cost curve, which it says maps the price of petroleum since 1960 with a correlation coefficient of 0.965, making it the most accurate oil pricing model ever developed. It also says that the price of oil depends, in addition to production costs, on the amount that the end consumer can afford to pay for it, and derives from its ETP model a Maximum Consumer Price curve, representing the maximum price that the end consumer can pay over time for petroleum. It is based on the observation that the price of a unit of petroleum can not exceed the value of the economic activity that the energy it supplies to the end consumer can generate. According to the Hill’s Group, its model shows that 2012 was the energy half way point for petroleum production, i.e. it was the year when one half of the energy content of the petroleum extracted was required to produce the petroleum and its products. From then on, it says, the price of oil can only be pulled down along the descending Maximum Consumer Price curve, which it says is curtailed at $11.76/ barrel in 2020. At this point petroleum will no longer be acting as a significant energy source for the economy, and its only function will be as an energy carrier for other sources. In other words, the oil industry as we know it will disintegrate, with a myriad of negative consequences for the world economy.



The Hill’s Group’s original report was published over three years ago, and a second version was published in March 2015. It gained significant popularity and was favorably commented on many blogs and websites. All this however seems to have change, and the Hill’s Group’s ETP model is now coming under fierce criticism from various sources:

‘SK’, a professor emeritus in the department of Mechanical and Aeronautical Engineering at a Major U.S. University, delivered a strong critique of the ETP oil extraction model at peakoilbarrel.com. The fact that The Hill’s Group said that a threshold for oil markets was passed in 2012 and that oil prices would tend to go down shortly after seems to give the report a superficial credibility. But according to SK the thermodynamic analysis is incorrect and therefore any calculations and graphs based on this analysis must also be unreliable.

Spanish physicist Antonio Turiel published on his website an analysis of the theoretical basis of the ETP model (in Spanish). Applying the principles of thermodynamics to evaluate the limits of the oil’s capacity to deliver net energy to society makes sense, he says, provided it is done in a proper way. The ETP model, however, is according to him based on an incorrect use of thermodynamic theory, erroneous deductions, definitions that do not make sense from a physics point of view, deficient data processing, and ignorance of the interactions between oil production and the economy as well as other energy sources. Given these important shortcomings, he says, the ETP model cannot be used for a serious discussion of oil depletion, at least not until it is fundamentally revised and rebuilt.

Another Spanish physicist, Carlos de Castro from the University of Valladolid, also published a scathing critique of the Hill’s Group’s report (in Spanish). The physical, technological and economic foundations of the report are erroneous, he says. The Hill’s Group in fact focuses on the loss of thermal energy involved in the oil extraction process (oil moving from a high temperature reservoir to ambient temperature outside), which he says has nothing to do with the energy cost of the oil procurement process for human societies. What matters to society, he says, is not oil’s thermal energy but its chemical energy – even if this chemical energy may then be used to generate heat. The ETP model, he concludes, is not an adequate model to assess the net energy derived form petroleum extraction and its evolution.

Prof. Ugo Bardi from the University of Florence is also taking aim with the Hill’s Group’s work in a recent blog post. The Hill’s Group’s report, he says, is badly flawed. While it is true that the oil industry is in trouble, the calculations by the Hill’s group are, at best, irrelevant and probably simply plain wrong. The problem of diminishing energy returns of oil production is real, Bardi says, but the way to study it is based on the ‘life cycle analysis’ (LCA) of the process. This method takes into account entropy indirectly, in terms of heat losses, without attempting the impossible task of calculating it from textbook thermodynamic principles. By means of this method, we can understand that oil production still provides a reasonable energy return on investment (EROI). It is anyway erroneous, says Bardi, to draw conclusions regarding the economy from net energy analysis. The economy is a complex adaptative system that evolves in ways that cannot be understood in terms of mere energy return considerations.

This controversy surrounding the Hill’s Group’s report reveals some inconvenient truths that the ‘peak oil’ community now has to face. The Group’s work was widely embraced and disseminated in this community, with no or limited critical scrutiny. It indeed has an aura of scientific accuracy that comes from its use of basic thermodynamic principles and of the concept of entropy, correctly understood as the force behind the depletion problem. But behind the thermodynamic terminology, it proposes a series of assumptions, not always explicit, and of complex mathematical calculations that nobody until recently had apparently taken the time to review. As pointed out by Antonio Turiel, the Hill’s Group’s work would probably not have passed a proper peer review process in its current form.

Yet the report was widely accepted and commented in the ‘peak oil’ community. According to Ugo Bardi, this episode shows that “a report that claims to be based on thermodynamics and uses resounding words such as ‘entropy’ plays into the human tendency of believing what one wants to believe“. As many in the ‘peak oil’ community want to believe in imminent collapse and disaster, works like the Hill’s Group’s report that are perceived as providing a serious scientific basis to catastrophism are widely embraced. If the scientific basis is revealed to be not as sound as initially thought, as seems to be the case for the Hill’s Group’s work, then its embrace and dissemination can only be detrimental to the peak oil community and undermine its credibility.

Energy researchers and analysts should probably be particularly cautious and vigilant when using the concept of ‘entropy’. As pointed out by Ugo Bardi, “entropy is an important concept, but it must be correctly understood to be useful. It is no good to use it as an excuse to pander unbridled catastrophism.” The problem being, of course, that entropy cannot be correctly understood so easily. As famous scientist John von Neumann (1903-1957) once advised a colleague: “You should call it entropy (…) nobody knows what entropy really is, so in a debate you will always have the advantage.“

FXC

The Great Oil Game: Resource Crisis in Russia?

Weekly pageviews of "Resource Crisis." My blog seems to be having a remarkable success in Russia, but do the Russians understand the problem of resource depletion?

Complex structures, such as states and empires, are always prone to collapse and they usually give little or no previous warnings. The collapse of the Soviet Union, indeed, had not been predicted by anyone and it came completely unexpected. In the present crisis, instead, Western analysts seem to have fallen in the opposite mistake, predicting the rapid demise of the Russian Federation. But that didn't happen. On the contrary, the Russian economic system showed a remarkable resilience and it strongly rebounded after a bad moment, last year. (image below from Bloomberg).

So, predicting collapses is always very difficult in a world's situation that looks more and more like a Russian Roulette (an appropriate name in this context), but played with nuclear weapons. It might well be that some states which at present look very solid could be the ones to experience a sudden and unexpected Soviet-style implosion (let me not say which ones these states could be).

Let's go more in depth in this matter. The collapse of Russia was expected in the West mainly as the result of the recent crash of the world's oil market. That repeated the situation of the late 1980s, when the old USSR was bankrupted by a similar effect: a rapid fall of oil prices which strongly reduced the revenues from oil exports. However, the present situation is not exactly the same. The main difference is related to the perspectives of the oil market. In the 1980s, low oil prices were generated by new oil fields entering the market after the first oil crisis - for instance the North Sea. The supply increased and prices collapsed around 1985 at levels that today we can't even dream any more - around 20$-30$ in current dollars - and they remained there for nearly two decades.

Today, there is no equivalent of the new resources that had entered in production in the 1980s and the price collapse has been generated mainly by a demand slump. Additionally. what we call today "low prices" are at least twice as high (in current dollars) than they were in the 1980s. And these "low" prices are bankrupting the whole US tight oil industry. That can't be without effect in bringing back oil prices to the levels which were considered "normal" up to last year. Consider also that Russian production costs are not the highest in the world, as shown in this figure

The values shown in the figure are very uncertain but, as long as oil prices do not fall below US 40 $, Russia should be able to survive; and they seem to be doing exactly that. In the short term, at least, the "oil weapon" that some analysts saw as unleashed against Russia, failed to obtain its purpose.

Certainly, however, the question of the long term management of the Russian mineral resources cannot be ignored. There are elements indicating that Russia's oil production is peaking this year and, according to Ron Patterson, USA and Russia may peak together. How would their respective economies react to that? More in general, how will Russia manage the unavoidable long term depletion of the country's resources? What do the Russians want to do with their mineral wealth? Who is going to use it and for what purpose? Planning on the basis of the fundamental elements of the depletion process (*) would be the best for Russia to avoid a future resource crisis.


_________________________________________________

(*) The problem of oil depletion is very poorly understood everywhere in the world, but, according to my personal experience, it may be that it is even less understood in Russia. For instance, over more than a decade of existence of the Association for the Study of Peak Oil (ASPO) there have been many national chapters (including ASPO-Italy). However, there has never been an ASPO-Russia (if you google for "ASPO Russia" you'll find the Astrakhan Shipbuilding Production Association, which is not exactly the same thing!).