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A Failure to Prepare for What Should Have Been Expected

 

I occasionally read the Detroit newspapers and based upon some of their articles and commentaries it appears the present oil crisis came as a surprise to the U.S. auto industry.  My impression is that many U.S. industries that are heavily dependent on cheap oil were taken by surprise, as well as most Americans.

 

In the last few decades, the U.S. auto industry has relied heavily on SUVs and light trucks to make their profits.  They assumed that cheap oil would last forever.  Unfortunately cheap oil is now history and the U.S. auto industry is scrambling to catch up to foreign auto companies, particularly Japanese, in the manufacture of fuel efficient vehicles. 

 

Toyota, a leader in fuel efficient vehicles, has steadily increased its U.S. and global market share in the last decade and in the first 6 months of 2008, it sold more vehicles globally than General Motors.  Making fuel efficient vehicles isn’t the only factor in Toyota’s increased market share but it’s a significant factor. 

 

The U.S. auto industry has a long history of fighting safety, environmental and fuel efficiency measures.  In recent years, they have consistently fought measures to improve vehicle fuel efficiency.  They did not have the foresight to prepare for the time when oil would no longer be cheap.  To their credit, Toyota and Honda came out with hybrids years ago and have worked hard on fuel efficiency technologies beyond conventional hybrids.       

 

An unbiased analysis of oil production data over the years should have made it obvious that there was a coming problem.  Unfortunately most people believe their beliefs rather than believing data.  I’ve been warning about a coming oil crisis for 15 years or longer.  To make people aware of the problem, I wrote a book which was published in 2005.  Below is an excerpt from the final chapter. 

 

There are no dramatic revelations in what I wrote below, but it’s worth pointing out that it should have been clear that an oil crisis was coming that would create major problems for the American and world economy.  If major industries that rely heavily on cheap oil didn’t see a coming problem, it suggests a desire not to see the obvious.

 

As oil resources become tighter, prices will rise.  We are now experiencing early signs of oil resource problems as the average oil price in 2003 was $27.54/barrel and in the first 8 months of 2004 it was $40.56/barrel.  Even with elevated oil prices, supplies are still tight.  As the price of oil increases, it’s reasonable to expect that the impact will be felt most heavily by people in poor and developing countries, people who can’t easily afford paying higher prices.  Gradually people in those countries will be squeezed out of the market, to the detriment of their increasing expectations.

 

In wealthy countries, people can absorb higher prices up to a point.  In the U.S., there have been complaints in the last few years over higher gasoline and heating fuel prices, but most people can handle the increased costs.  In time, price increases will seriously impact the majority of Americans.  During the oil crises of the 1970s, shootings occurred in gas lines as tempers flared.  Any cutoff of oil supplies or dramatic increase in prices could result in a repeat of such behavior.

 

Assuming that the price of oil increases significantly in coming years, there will be a concerted effort to produce the world’s remaining conventional oil as rapidly as possible.  In the early 1980s, the price of oil increased to ~$35/barrel from ~$3/barrel in the early 1970s.  Due to the price increase, the number of drilling rigs in the U.S. increased dramatically, but oil production in the lower 48 states barely increased.  The same situation is likely to occur globally in coming years and the economic impacts could be severe.  Back in the late 1970s and early 1980s, there were undeveloped conventional sources of oil globally that could be brought on-line, ultimately leading to higher production and a decline in the price of oil.  There will be few undeveloped sources of conventional oil globally after ~2010.

 

Economists argue that declining conventional oil production will stimulate the production of unconventional oil resources, and that is true.  There is further latitude to increase oil production from the Orinoco Oil Belt and Athabasca Oil Sands, but production from those sources can only be increased slowly relative to conventional oil.  Most of the world’s oil shale may never prove to be economically or practically viable.  As well as the slow production rate increases from unconventional oil resources, the maximum possible production levels and low energy profit ratios are problems.

 

Alternatives to conventional oil beyond oil sands and oil shale will be tried, but probably with limited success.  The advantages of oil for transportation and heavy equipment use are substantial.  There are no alternatives on the horizon that come close to the advantages of oil.

 

Increasing efforts at conservation and energy efficiency will occur as oil supplies tighten.  In the U.S., urban sprawl has made much of the population dependent on motor vehicles.  Americans will buy more fuel efficient vehicles in the future when oil prices get high enough, but it would not be easy to restructure urban areas so that people wouldn’t need to rely on motor vehicles. U.S. motor vehicle manufacturers are dependent upon large fuel inefficient vehicles such as SUV’s and light trucks to make profits.  Those manufacturers could develop serious financial problems if higher oil prices lead a large part of the population now buying SUV’s and light trucks to buy higher efficiency motor vehicles.  Manufacturer’s problems would be more serious if a significant portion of the population couldn’t afford motor vehicles due to high oil prices. 

 

Although the U.S. population is quite wealthy relative to much of the world, it is ill prepared for large oil price increases.  The U.S. economy is heavily dependent on cheap oil and many industries depend upon it: construction, agriculture, logging, air transportation, trucking, motor vehicle manufacturing, etc.  Those industries could experience serious financial problems if the price of oil rises dramatically.  The home building boom in the U.S. is predicated on the belief that cheap oil will last forever.  Modern industrial agriculture has been termed a process of converting oil into food.  Dramatically higher oil prices would greatly increase food prices over what they are today.   

 

If terrorist attacks target oil pipelines and refineries in the Middle East causing a sudden cut-off of oil supply from that region, it could have a devastating impact upon the world economy.  The impact would be even more serious in the future as the world relies more heavily on the Middle East for its oil supply.

Submitted by Roger Blanchard, 8/11/09

 

The Illusion of Vast Undeveloped U.S. Oil Resources

 

There has been a relentless stream of discussion on talk radio and articles in the mainstream media that claim that if only all of the U.S. were opened for oil development, we would have plenty of U.S. oil.  No amount of evidence would convince those promoting that idea that it is not correct but there is ample evidence that the U.S. is in terminal decline and opening all remaining lands and waters to oil development would at best only slow the inevitable decline.

 

Those promoting the idea that the U.S. has plenty of oil state that the United States Geological Survey (USGS) and Minerals Management Service (MMS) estimate huge amounts of oil in the Arctic National Wildlife Refuge (ANWR), federal offshore waters, National Petroleum Reserve-Alaska (NPR-A) and anywhere else that is not presently open to oil development.

 

The numbers that USGS and MMS provide are indeed quite impressive but those organizations have a history of greatly exaggerated oil reserves estimates.  The USGS’s 1995 oil and gas assessment for the onshore United States is an illustration of their tendency to exaggerate. 

 

Based upon the USGS’s 1995 assessment for the U.S., the onshore US/48 had 82.8 Gb of technically recoverable oil after Jan. 1, 1994.  Cumulative production from the region was 145.4 Gb, as of January 1, 1994.  Production for the onshore US/48 peaked in 1971 at 8.40 mb/d.  By 2001, production had declined to 3.10 mb/d. During the 1992-2001 period, oil production from this region declined at an average rate of 4.46%/year.  Based upon a continuation of that decline rate, the ultimate recovery for the region would be 180.2 Gb and the amount of oil recoverable after January 1, 1994 would be 34.8 Gb.  The USGS assessment concludes that about 2.4 times that amount of oil is technically recoverable after January 1, 1994 from this region.

 

As for the MMS, it estimated that the undiscovered technically recoverable amount of oil in the Gulf of Mexico (GOM) was 37.1 Gb, as of January 1, 1999.  The 37.1 Gb figure is for discoveries in all of the GOM but most of the oil would be “discovered” in the deep-water GOM since the shallow-water GOM in the western and central gulf has been extensively explored and the eastern GOM is not oil prone.

 

Deep-water GOM production increased from 151,000 b/d in 1995 to about 960,000 b/d in 2003.  Since then production has languished due to hurricanes and rapidly declining production from older fields.  Between the middle of 2007 and the end of 2008 four fields: Thurnderhorse, Tahiti, Neptune and Atlantic are expected to come on-line and bring a projected summed peak production of approximately 600,000 b/d, assuming all goes well.  This should cause a relatively minor increase in U.S. production to 2010. 

 

Beyond those 4 developments, only two +50,000 b/d projects are scheduled to come on-line through 2012: Shenzi (2009 at 100,000 b/d peak) and Perdido (Great White, Tabago, Silvertip fields-2010 at 130,000 b/d peak).  In the meantime, the older fields in the deep-water GOM will continue to decline, probably at rates greater than 15%/year.

 

Because of the nature of deep-water oil production, where fields reach maximum production quickly and then go into rapid decline, it’s hard to imagine that deep-water GOM oil production will peak after 2010.  It typically takes 6 years or more for a deep-water field to reach production after the decision to develop and frequently it takes longer due to problems.

 

At this point, it appears realistic to expect an ultimate producible volume of oil from deep-water GOM fields to be on the order of 10 Gb, certainly not >30 Gb.   

 

In their Annual Energy Outlook 2007, the US DOE/EIA projected that deep-water GOM production would increase to 2.0 mb/d in 2015 and then fluctuate between 1.8 and 1.9 mb/d to 2030.  That is totally unrealistic.  The US DOE/EIA bases their production projections on assessments from the MMS and USGS.

 

I frequently hear calls for all federal offshore waters to be opened as if that will be our salvation.  The most geologically favorable areas off the Atlantic coast have been explored in the past with no significant discoveries.  If Atlantic federal waters were opened for development, it’s likely that no oil or next to no oil would ultimately be extracted.  The same would be the case for Pacific waters from north-central California north to the Canadian border as well as around most of Alaska. 

 

Concerning the National Petroleum Reserve-Alaska (NPR-A), the Clinton administration opened ~4.6 million acres to oil exploration and development in the late 1990s.  Lease sales occurred in 1999 and 2002 in the northeast quadrant but only ~330 million barrels of oil have been discovered in that area.  That corresponds to ~15 days of U.S. liquid hydrocarbons consumption.  Production from the ~4.6 million acres started last year but that hasn’t even reversed the production decline in Alaska.  According to a USGS assessment, the area has 3.1 Gb of technically recoverable oil.  

 

Based upon a MMS assessment, the Beaufort and Chuchi Seas off northern Alaska have 24.9 Gb of technically recoverable oil.  Presently the Northstar field, just off the coast, is the only offshore field producing oil.  Since 1970, over 99,000,000 acres of the Beaufort and Chuchi Seas has been offered in oil and gas lease sales and as of 2003, there were active leases on over 140,000 acres. 

 

There may be the belief that the oil industry didn’t have the capabilities to explore for oil in the Arctic Ocean until recently but back in the early 1980s a huge structure about 65 miles northwest of the Prudhoe Bay field, in the Arctic Ocean, was drilled.  In December 1983 the structure was breached only to discover it was filled with salt water, the infamous $2 billion Mukluk well. 

 

The Bush administration has opened large areas of Bristol Bay (Alaska), NPR-A (Alaska), western federal lands and the central and eastern Gulf of Mexico.  In the case of Bristol Bay, oil exploration occurred there some years ago without finding any significant oil.  The administration is also attempting to reopen the Chuchi Sea (Alaska) to oil development.  Contrary to what one hears or reads from the media, a lot of federal lands and water have been opened for oil exploration and development in recent years. 

 

If all federal lands and waters were opened to oil development, the most probable production profile would look something like Figure 1.  Opening the Arctic National Wildlife Refuge (ANWR) and all federal waters would create a minor hump in the decline curve. 

 

Figure 1-Historical [1900-2001] and projected [2002-2100] total U.S. oil production (Click on Figure 1.doc to download a copy of this Figure.)

 

Desperate people do desperate things.  As Americans become more desperate for oil, I expect that ANWR and offshore areas will be opened for oil development.  It will be like burning the furniture to keep the house warm in mid-January.  It will be a desperate move that won’t result for much.

 

Submitted by Roger Blanchard, 8/11/09