Gruppo Consumo Critico – MilanoGruppo Consumo Critico – Milano

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The Coming Oil CrisisThe Coming Oil Crisis

A survey about the present energy supply and demand,A survey about the present energy supply and demand,

and their implications on war, peace and our futureand their implications on war, peace and our future

links and references: www.inventati.org/consumocritico/crisienergetica e-mail: crisienergetica@inventati.org

What are fossil fuels?

Fossil fuels are high-energy content materials, which directly or indirectly originate

from living matter.

For instance, coal originates from dead wood, oil from marine organisms bodies,

natural gas from subsequent changes of other hydrocarbons.

Why do we need fossil fuels?

Fossil fuels are hugely important for industrial societies.

Italy satisfies 90% of its energy demand with fossil fuels. The same do United States for 86% of its one.

Fossil fuels enhanced the working potential of humankind at a level never seen before.

For a human the energy daily demand achieved by eating is 2500 Kcal, but it can be as much as 5-6000 Kcal very hard jobs, e.g. traditional woodcutter or miner.

Thanks to fossil fuels an Italian burns as much as 100000 kcal per day on average(enough for the work of 40 men), and a Northern American as much as 200000 kcalper day (the energy demand of 80 men!)

Renewable and non-renewable resources

An energy source is said renewable, when its exploitation doesn’t affect itsavailability in the future.

For instance, hydropower is a renewable energy, since generating electricitywith a dam doesn’t influence the rain in the future.

In other words, an hydropower plant generating one million Kcal today,will still generate it tomorrow and, with proper management, forever.

On the contrary, when we pump oil from a reservoir there will be less to pump in the future.

Every time we use fossil fuels, there are less remaining on the Earth for our descendants.

Fossil fuels are a non-renewable energy source.

Are the various types of fossil fuels equally important for economics?

No, they are not! Although similar in energetic content, coal, oil and gas are very different on the physical-chemical side, and then have different properties.

Coal is solid. It cannot be transported through pipelines. This makes coal transportationexpensive. Moreover, coal can not fuel car and truck engines.

Gas is transportable in pipelines and can fuel car engines. But it’s difficult to transportit onto ships. This makes difficult to transport gas at very long distances. Moreover, it is more difficult to produce from gas the panoply of plastics that our modern economy needs so much.

Oil is the paramount fossil fuel. Because of its transportability it is the fuel ofglobalisation. Because of its chemical complexity, it is indispensable for hightechnologies.

There is no doubt: oil is the most important fuel for industrial civilisation.

Economic relevance of oil

Italy(energy needs)

Coal 6%

Gas 38%

Oil 46%

USA(energy needs)

Coal 23%

Gas 23%

Oil 40%

Oil is the most required fuel, as this figure shows.

Even USA, that have the largest coal reserves in the world relies mainly on oil for its

energy demand. USA is the largest oil importer in the world.

This is a hint of at what extent oil is irreplaceable with other fuels.

from: Strategic Energy Policy

Challenges for the 21st Century

Economic relevance of oil

Do politicians and economists know at what extent energy is relevant for our economy?

Look at this public document of a Northern American think-tank , written during theClinton administration.

coal

reservesca. one trillion tons

consumptionca. 5 billion tons per year

0,5% per year

Reserves for 200 years

gas

reservesca. 169 trillion cubic meters

consumptionca. 2.5 trillion cubic meters per year

1,5% per year

Reserves for 65 years

oil

reservesca. one trillion barrels

consumptionca. 25 billion barrels per year

2,5% per year

Reserves for 40 years

How much fuel is still in the world, and how fast are we depleting it?

reference: ENI

Further details…

Actually, the estimate of latter slide (40 years) is useless for any practical purpose.

That figure aimed to show a fact that maybe is not clear to everyone: oil is a limited

resource, and at the present consumption rate it is possible to completely deplete it

within a human life time.

If we wish to estimate more accurately in how much time we are going to face serious

supply shortages, we have to account for at least three more factors: the growth of

consumption, the discovery of new reserves, and the ‘peak production’.

The growth of consumption

1925 1950 1975 2000

Bil

lion

bar

rels

per

yea

r

year

25

12.5

Economic boom: + 7% per year

Oil shock:less consumption

Present growth+ 2% per year

Look at the historical figure of oil consumption. Consumption heavily grew during

XX century, and is still growing at a 2% yearly rate.

Discovery of new reservesB

illi

on b

arre

ls d

isco

vere

d pe

r ye

ar

40

20

1975 1985 1995

yearOil discoveries in new reservoirs declines at a 4% yearly rate

Bil

lion

bar

rels

per

yea

r

40

20

1975 1985 1995

year

discoveries

burned

Overlap the curves...

…and notice that since the early eighties, we are depletingmore than we are discovering!

1945 1970 2000

Bil

lion

bar

rels

per

yea

r

2,5

3,5

The oil peak production

Oil production in USA lower 48

Look at oil production time series in USA: it reaches a maximum in 1970, then declines.1970 is the year of oil peak production in USA.Until 1970 production follows the demand, that is, it is pumped out so much oil as it ispossible to sell. Then, it is sold so much oil as it was possible to pump out.

What does peak production mean?

Peak production is achieved when oil demand is over the capacity of the reservoirs

to match it.

Economic consequences of a world oil peak would be devastating.

Before the peak, the price of fuels is determined by the cost of ‘production’

(work, machinery, transportation). After the peak, it will be regulated by the demand

and offer law: in other words, the fuel, more and more rare, will be caught by who

offers more.

The history since second world war (i.e., since when we rely on oil for our energy supply)

showed us that when oil prices rise, western economies recede.

It couldn’t but be so: transportation, dresses, food… there is no industrial process that

doesn’t need the power of the tens of ‘virtual slaves’ that fossil fuels provide us.

Why a peak?

The following question is: ‘if there still is so much oil, why should we slow pumping,instead of having growing consumption until complete depletion?’

The answer is: because a reservoir is not like a tank, from which the content can be drained at every desired rate. A reservoir is rather like a repository, full of both useful and useless stuff.

Imagine you are entering in such a repository, full of little balls and other stuff, andyou need to get the balls. First you can easily manage to collect as many balls as you can carry, because you get the most visible, the most grouped, the most reachable.Then, even if there is still most of the balls into the repository, you must slow collecting,as you start to get them one by one, to shift other objects to get some balls, and so on.Getting oil is like collecting such balls.

Let us get back to the figure of the USA production time series. Note that the curve hasapproximately the same slope, before and after the peak. To get back to our repository,USA slowed their ball collecting, when there was still one half to get.

When will oil production peak?

May we estimate it with data we rely on?

First of all, get back to the consumption time series. The curve signs yearly

consumption, the area below the curve is the cumulative consumption.

The same holds for the discoveries time series. The area below the curve is the

cumulative discovery.

This helps us to estimate the year of peak.

The model

1) starting from today’s figure, consumption will rise with an yearly rate c…2) …and will go on growing until the year of peak pp...3) …then consumption will decline with an yearly rate m…4) …and finally, the area below the curve will be a quantity R, that is the sum

of known and unknown reserves.

2003year

Bil

lion

bar

rels

ext

ract

ed p

er y

ear

25

c

pp

m

R

The model

if we know c, m e R, we can calculate pp.

The formula to calculate pp, given c and m are time invariant, is reported.

So we need to estimate c, m and R

The consumption growth rate, c

c, the growth rate of consumption and economy, was 2% during last years.

So 2% will be our c estimate for following years.

2003c

m1

c125

c25R

ln

pp

An estimate of global reserves, R

R is the amount of known oil reserves plus the still undiscovered ones.Known reserves total one trillion barrel (see page 7). What about undiscovered reserves?

To estimate the amount of such reserves, extrapolate the discovery time series to the right......and the area below the curve (S) is an estimate of the oil still in the ground......R is obviously 1000 billion barrels + S.

2000 2025S

S400 R 1400

The yearly rate of decline, m

The variable m is affected by different factors. m is a measure of the technological

quality of the pumping industry, the amount of capital invested in it, the peace

and the stability of the region around the reservoir.

m is higher (i.e., decline is steeper) if the reservoir was exploited efficiently,

and if the peak was delayed.

Let us try to show with a graph how this can happen.

pp pp’

?

m

m’

Note: these areas must be equal

The yearly rate of decline, m

if I have best technologies, as much money as I need and political stability, I delay

the peak at pp’...

…but I can’t increase the amount of world oil (that is, the area below the curve)...

…and then the declining curve m’ must cross the m curve...

The yearly rate of decline, m

Factors like obsolescent technologies, shortage of money, political instability

are negatively affecting m.

On the ground of theoretical considerations, some scholars of oil hypothesise decline

rates as high as 10%. But in reality, even USA, in the best attainable conditions for

capital availability, technology and stability, didn’t succeed in pushing m above 3%.

The year of oil peak production

now we can estimate the year of peak production.

Fix c at 2% as we told before. Give m all possible values between 2% (easily

attainable even in developing countries) and 3% (see page 21).

Finally, give R all possible values between 1400 (see page 18) and 2000

(theoretical maximum for some scholars).

Look at the results in the next slide.

The year of global oil peak productionR

(bi

llion

bar

rels

)

2% 2,5% 3% m

Few considerations…

By imposing western exploitationrates (privatisation), but without discovering new oilfields, the peakwill be before 2015 (R=1400; m3%)

2% 2,5% 3%

R (

billi

on b

arre

ls)

If we discover huge amounts of new oil,and we respect the sovereignty of oil countries (m2%), the peak will bebefore 2015.

m

The amount of reserves we arediscovering now, and the rate at which world reservoirs can beexploited now, put the peak before 2010!

presentpresentsituationsituation

paxpaximperialisimperialis

luckluck

Finally, the trend of discoveries changes,and oil countries cooperate to satisfy westernneeds. This puts the world peak of oil at... 2025(R=2000, m=3%).

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Intermezzo: are our politicians so crazy?

I think these conclusions are absolutely incredible!

If a new, unprecedented energy crisis is so close, why are the governments of western

countries that will be hardly hit the by such a crisis doing nothing about it?

There are different explanations, on economic, political and geostrategic grounds.

Let’s see them:

Intermezzo: economy

the leaders of the Earth are used to seek advice from economists.

No problem, of course. But economy, like every science, has its dogmas and itsideology.

One such dogma is that a growth in demand generates a rise in offer.Economists think that a rise in the oil price will enhance investment in the oilsector and finally will make the production to rise.The bare fact that world oil is a finite quantity finds no place in their equations.

A clever geologist defined them ‘flat Earth economists’.

Unfortunately, the leaders of the Earth are not used to seek advice from geologistsor physicists.

Another common tale from economists is that the rise in the price of oil willmake other renewable energies profitable.

Right! But if we wait for the rise in oil prices, we will have to build the newinfrastructures in a landscape of crisis, energy shortage, mass unemployment,maybe famine. Should not be better to do it now?

Intermezzo: politics

Few politicians seem to have realized the risks we are facing for our wealth and even

our culture, and are trying to cope with the problem. German and Icelandic governments

are two such examples.

Unfortunately, even clever and long-sighting politicians cannot be completely honest

about energy supply.

Imagine to go to the polls, campaigning upon consume reduction and improvement

of public transport while taxing private mobility, and upon general tax raising to build

the sustainable energy infrastructure. Do you think you could be elected?

So many politicians who recognized the problem but are too fearful to claim it

are waiting that everyone gets convinced.

But, of course, at that time it will be much harder to cope with the crisis.

Intermezzo: geopolitics

Until now we looked at oil scarcity from a global point of view. In other words,

we looked at the supply shortage for all humankind.

But someone as usually could think to gain economic and geostrategic influence

thanks to the crisis.

Because of this, it is much more difficult to find the less harmful solution for everyone.

Let’s try to understand who gains and who loses, in the global energy shortage game.

Oil: Reserves

Oil: Consumption

Areas that are darker in the bottom map than in the top one will face oil shortagessooner than the others

Identify them:

North America

Europe

Eastern Asia

Fossil fuels geopolitics

Therefore, it looks that all the world powers, maybe except Russia,

share the same problems.

They are all going to face an oil shortage soon.

The ‘emerging’ China is not different.

Let’s give a look at natural gas, now.

productionreserves consumption

Natural gas: reserves, production, consumption

Remarks:

1) Look at the two continental blocks (Ancient and New World). Production and consumption are roughly equivalent. This is due to difficulties in sea shipping for natural gas.

2) Notice the huge discrepancy between reserves and production for North-America and, with inverted direction, for Middle East.

0%

50%

100%

Natural gas: reserves/production ratio

Here is a more friendly way to evaluate what is shown in the last slide. The R/P ratiois correlated with the future lasting of production.Look at the average tonality of Eurasia and Americas. It is a hint for who is going to facethe first an energy shortage.

Summarising:

1) our civilisation and our wealth were born on the ground of a dilapidation of

fossil fuels;

2) the coal, once of paramount importance, is now secondary. Oil is now the star

of energy supply, but natural gas is also very important. The location of the

reservoir is much more important for gas than for oil, because oil is easy

and cheap to transport both on the ground and the sea. Natural gas is very

expensive to transport overseas;

3) cheap oil is going to find its place on history books. Maybe natural gas is going

to last a little more, since reserves are still growing and production decline

does not seem imminent;

4) but for gas there is not only a global issue to consider: North America could be very

close to a gas production decline, while for the Ancient World decline is

everyway sure, but farther in time.

Fossil fuels geopolitics (2):

Looking at world politics, with an eye on energy supply, many things turn clear, e.g.

1) USA aggression to Iraq: with no choice to find new energy sources, and more

and more addicted to oil imports, USA stole by force the second world oil

reserves. Its goal is to delay the world peak production, by privatising

Iraqi reserves (raising m) and finding new reservoirs that could be in Iraq

2) European opposition to the war: Europe has no such urgent energy need like

the United States. The huge gas reserves of Russia and Iran, make

Europe less dependent on oil than USA.

Fossil fuel geopolitics (3):

3) International disagreements onto the Kyoto Protocol: Europe signed the protocol

soon, accusing USA of environmental indifference. But Europe will be able

to reduce emission by using natural gas, that is everyway its short term energy

future; while USA in oil shortage will have to rely on coal aggravating

CO2 emissions.

4) The International Penal Court: Europe backed supranational rules aimed at

limiting expansionism and aggressiveness from single countries, because

European wealth do not rely, on the short term, on its imperial capability, the

opposite of USA situation.

5) The US menace of aggression against Iran: fourth oil reserves in the world, next

global star of natural gas, soon a paramount energy supplier for Europe.

Conclusions

The end of cheap fossil fuels, in probably not more than twenty years, is to markthe end of western civilisation, at least the way many think of it.

The future is foggy: a war between powers blinded by the will to get the last oildrops could throw us in something very similar to a new Middle Age.On the opposite, from comprehension of other countries necessities, from responsibilityfor us and our descendants, a new age could be born, an age that will be surelypoorer, but maybe more equitable and liveable, and, I think, even happier.

As individuals, it is to us to look in our daily lives for the path to emancipate fromfossil fuels and their derivatives.

As political subjects, our role is to promote a new common sense, the sense oflimited resources, giving a new point of view to those that want to solveblack-outs by building new plants; or to those that want to stabilize the worldby getting Europe more and more armed. And these are only two of the most foolishideas recently heard.

The crossroad which brings to a new Middle Age or to Peace and Dignity is now infront of us.

sources

slides 2 e 5: Department Of Energy (USA)

slide 6: Strategic Energy Policy Challenges for the 21st Century

slide 7, 30-33: ENI

pagina 13: http://www.oilcrisis.com/

More information and contact uswww.inventati.org/consumocritico/crisienergetica