Showing posts with label oil price. Show all posts
Showing posts with label oil price. Show all posts

Thursday, December 10, 2015

Peak Oil: are we seeing the real one?

World Supply-Demand November 2015


Art Berman reports on his blog the latest data from IEA. These data speak volumes about what has been happening in the oil markets during the past two years or so. The whole thing seems to have gone out of control, with everyone pumping as much as possible, worrying only about harming competitors and without too much concern about the overall disaster caused by overproduction. The excess has stimulated demand, but only weakly. The result has been the collapse of the oil price, that we are still seeing today.

It seems, now, that the market is slowly redressing the unbalance. Demand is growing, and supply seems to have peaked in July 2015. In a few months, we may go back to a situation where demand matches supply, at this point we'll see prices rising again. We'll likely see production going down, and the whole system regaining some kind of balance; at least for a while. For sure, the main element in the readjustment is the decline in the production from shales in the US (image from Ron Patterson).





Is the July peak "the" peak for all combustible liquids? We can't say yet, what we can say is that the period of oil glut has done a tremendous damage to the industry. Perhaps, we are starting right now the terminal decline of the world's oil industry; but we still have to wait to be sure. Americans, it seems, love boom and bust cycles and, if prices go up again, they might want to pour again money into the shale industry. The only sure thing is that fossil fuels must go, sooner or later.





Monday, December 15, 2014

Seneca cliffs of the third kind: how technological progress can generate a faster collapse


The image above (from Wikipedia) shows the collapse of the North Atlantic cod stocks. The fishery disaster of the early 1990s was the result of a combination of greed, incompetence, and government support for both. Unfortunately, it is just one of the many examples of how human beings tend to worsen the problems they try to solve. The philosopher Lucius Anneus Seneca had understood this problem already some 2000 years ago, when he said, "It would be some consolation for the feebleness of our selves and our works if all things should perish as slowly as they come into being; but as it is, increases are of sluggish growth, but the way to ruin is rapid."


The collapse of the North Atlantic cod fishery industry gives us a good example of the abrupt collapse in the production of resources - even resources which are theoretically renewable. The shape of the production curve landings shows some similarity with the "Seneca curve", a general term that I proposed to apply to all cases in which we observe a rapid decline of the production of a non renewable, or slowly renewable, resource. Here is the typical shape of the Seneca Curve:


The similarity with the cod landings curve is only approximate, but clearly, in both cases we have a very rapid decline after a slow growth that, for the cod fishery, had lasted for more than a century. What caused this behavior?

The Seneca curve is a special case of the "Hubbert Curve" which describes the exploitation of a non renewable (or slowly renewable) resource in a free market environment. The Hubbert curve is "bell shaped" and symmetric (and it is the origin of the well known concept of "peak oil). The Seneca curve is similar, but it is skewed forward. In general, the forward skewness can be explained in terms of the attempt of producers to keep producing at all costs a disappearing resource.

There are several mechanisms which can affect the curve. In my first note on this subject, I noted how the Seneca behavior could be generated by growing pollution and, later on, how it could be the result of the application of more capital resources to production as a consequence of increasing market prices. However, in the case of the cod fishery, neither factor seems to be fundamental. Pollution in the form of climate change may have played a role, but it doesn't explain the upward spike of the 1960s in fish landings. Also, we have no evidence of cod prices increasing sharply during this phase of the production cycle. Instead, there is clear evidence that the spike and the subsequent collapse was generated by technological improvements.

The effect of new and better fishing technologies is clearly described by Hamilton et al. (2003)

Fishing changed as new technology for catching cod and shrimp developed, and boats became larger. A handful of fishermen shifted to trawling or “dragger” gear. The federal government played a decisive role introducing new technology and providing financial resources to fishermen who were willing to take the risk of investing in new gear and larger boats.
 ...

Fishermen in open boats and some long-liners continued to fish cod, lobster and seal inshore. Meanwhile draggers  and other long-liners moved onto the open ocean, pursuing cod and shrimp nearly year round. At the height of the boom, dragger captains made $350,000–600,000 a year from cod alone. ... The federal government helped finance boat improvements, providing grants covering 30–40% of their cost.
....
By the late 1980s, some fishermen recognized signs of decline. Open boats and long-liners could rarely reach their quotas. To find the remaining cod, fishermen traveled farther north, deployed more gear and intensified their efforts. A few began shifting to alternative species such as crab. Cheating fisheries regulation—by selling unreported catches at night, lining nets with small mesh and dumping bycatch at sea—was said to be commonplace. Large illegal catches on top of too-high legal quotas drew down the resource. Some say they saw trouble coming, but felt powerless to halt it.

So, we don't really need complicated models (but see below) to understand how human greed and incompetence - and help from the government - generated the cod disaster. Cods were killed faster than they could reproduce and the result was their destruction. Note also that in the case of whaling in the 19th century, the collapse of the fishery was not so abrupt as it was for cods, most likely because, in the 19th century, fishing technology could not "progress" could not be so radical as it was in the 20th century.

The Seneca collapse of the Atlantic cod fishery is just one of the many cases in which humans "push the levers in the wrong directions", directly generating the problem they try to avoid. If there is some hope that, someday, the cod fishery may recover, the situation is even clearer with fully non-renewable resources, such as oil and most minerals. Also here, technological progress is touted as the way to solve the depletion problems. Nobody seems to worry about the fact that the faster you extract it, the faster you deplete it: that's the whole concept of the Seneca curve.

So take care: there is a Seneca cliff ahead also for oil!


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A simple dynamic model to describe how technological progress can generate the collapse of the production of a slowly renewable resource; such as in the case of fisheries. 


by Ugo Bardi

Note: this is not a formal academic paper, just a short note to sketch how a dynamic model describing overfishing can be built. See also a similar model describing the effect of prices on the production of a non renewable resource


The basics of a system dynamics model describing the exploitation of a non renewable resource in a free market are described in detail in a 2009 paper by Bardi and Lavacchi. According to the model developed in that paper, it is assumed that the non renewable resource (R) exists in the form of an initial stock of fixed extent. The resource stock is gradually transformed into a stock of capital (C) which in turn gradually declines. The behavior of the two stocks as a function of time is described by two coupled differential equations.
R' = - k1*C*R C' = k2*C*R - k3*C,
where R' and C' indicate the flow of the stocks as a function of time (R' is what we call "production"), while the "ks" are constants. This is a "bare bones" model which nevertheless can reproduce the "bell shaped" Hubbert curve and fit some historical cases. Adding a third stock (pollution) to the system, generates the "Seneca Curve", that is a skewed forward production curve, with decline faster than growth.  

The two stock system (i.e. without taking pollution into account) can also produce a Seneca curve if the equations above are slightly modified. In particular, we can write: 
R' = - k1*k3*C*R C' = ko*k2*C*R - (k3+k4)*C.
Here, "k3" explicitly indicates the fraction of capital reinvested in production, while k4 which is proportional to capital depreciation (or any other non productive use). Then, we assume that production is proportional to the amount of capital invested, that is to k3*C. Note how the ratio of R' to the flow of capital into resource creation describes the net energy production (EROI), which turns out to be equal to k1*R. Note also that "ko" is a factor that defines the efficiency of the transformation of resources into capital; it can be seen as related to technological efficiency.
The model described above is valid for a completely non-renewable resource. Dealing with a fishery, which is theoretically renewable, we should add a growth factor to R', in the form of k5*R. Here is the model as implemented using the Vensim (TM) software for system dynamics. The "ks" have been given explicit names. I am also using the convention of "mind sized models" with higher free energy stocks appearing above lower free energy stocks





If the constants remain constant during the run, the model is the same as the well known "Lotka-Volterra" one. If the reproduction rate is set at zero, the model generates the symmetric Hubbert curve. 

In order to simulate technological progress, the "production efficiency" constant is supposed to double stepwise around mid-cycle. A possible result is the following, which qualitatively reproduces the behavior of the North Atlantic cod fishery.




Among other things, this result confirms the conclusions of an early paper of mine (2003) on this subject, based on a different method of modeling.

Let me stress again that this is not an academic paper. I am just showing the results of tests performed with simple assumptions for the constants. Nevertheless, these calculations show that the Seneca cliff is a general behavior that occurs when producers stretch out their system allocating increasing fractions of capital to production. Should someone volunteer to give me a hand to make better models, I'd be happy to collaborate!















Tuesday, April 1, 2014

Why we will never run out of oil: an interview with professor Ugo Bardi




Today, this blog is proud to present in exclusive worldwide the transcript of an interview that Professor Ugo Bardi, the author of the book "Extracted," granted to the Ronkonkoma (*) Radio Station, Long Island, New York. 


- First of all, professor Bardi, thank you for accepting to speak to Ronkonkoma Radio. 

- It is a pleasure.

- So, before going on with the interview, a brief presentation for our listeners. Professor Ugo Bardi teaches at the university of Florence, in Italy, and he is well known for his studies on mineral resources and in particular on crude oil. About his work, we came to know that he recently obtained a major research grant from a large oil company. Is it true, professor?

- Yes, I can confirm that I received a grant, although I cannot disclose the name of the company.

- So, congratulations, professor. Do I understand correctly that this grant allowed you to make a major discovery in the field of oil production trends?

-  It is correct. It is a new model that I developed on the basis of some highly sophisticated mathematical methods to describe the future production of crude oil.

- And it led to you to the conclusion that we will never run out of oil?

- Basically, yes.

- I understand that the mathematics involved in the model is very complex, but could you describe your results in a simple way to our listeners?

- I think I can. So, think about this: before you run out of all of the oil you have, you have to use half of it, right?

- Yes.

- Now, if you have used half of your oil, it means that you are left with half of it. Is it right?

- Of course.

- Then, before you consume that half which is left, you have to consume half of that half, right?

- I think I can follow your logic, professor......

- And then, there will be another half, and then another, and so on.....

- That means we'll never run of oil, I guess.

- You have it.

- You know, professor, your model reminds me of something I studied in high school, something that involved a turtle and someone running after it; I don't remember his name.

- Oh, well, it is a remote origin of this model. Indeed, sometimes my students call it the "Achilles and the Turtle" model.

- But, professor, there is something that bothers me about all this. I understand your point, but as we divide our oil in half over and over, doesn't that mean we'll have less and less of it?

- No.... not at all.

- But why?

- Well, you should understand the mathematics of the model but, again, I can explain it in a simple way for our listeners. Let me go back to what I was saying. You have this oil, think of dividing it in two equal parts. Then you go on and you use the first half. You follow me?

- Yes. 

- Then you are left with the other half, correct?

- Correct.

- So, it makes no difference: you have the same amount of oil as before. Then, what's the problem?

- You know, professor, your logic is overwhelming, but I must confess that am a little confused.

- Well, I understand that, the mathematics involved is highly complex, indeed. But the end result is simple. You always have oil and you can produce as much of it as you like. There is just a little detail to consider. You have to invest more in extraction as you have less of it.

 - Doesn't that mean we have to pay more for oil?

- Yes, you have this minor inconvenience.

- I see..... Professor, something made me think again of that grant from an oil company. Could you tell us the amount of money your received?

- I am sorry, I cannot disclose that.

- So, thank you very much, professor Bardi, for being with us for this interview with radio Ronkonkoma, New York. Now a little break. 








(*) If you wonder about the name "Ronkonkoma" - it is a place that exists (and it even has a radio station). I used the name in this post because I lived in that area back in the 1970s





Who

Ugo Bardi is a member of the Club of Rome, faculty member of the University of Florence, and the author of "Extracted" (Chelsea Green 2014), "The Seneca Effect" (Springer 2017), and Before the Collapse (Springer 2019)