IT’S CALLED BAD GOOD NEWS ABOUT OIL

Ferdinand E. Banks (ferdinand.banks<AT>telia.com)

These days I make it my business to take for granted that just about everyone understands the situation with oil. I assume that with the oil price occasionally exceeding seventy dollars a barrel, the more vulgar forms of optimism will be discarded. Amazingly enough however, there are still persons with a passable background in energy matters who are unable to deal with the new oil realities. One of these harbingers of good news made herself known to me recently, and at almost the same time the (official) Swedish Energy Agency released its long awaited report on the world oil situation.

Where this impressively educated young lady is concerned, seismic technology is a “guess and a gamble”. Furthermore, she assured me that even when drilling you can miss a mega-sized oil field by a matter of “feet”. With all due respect, I interpret this kind of information as one of two things: a complete lack of knowledge about the most important commodity in the world, or possibly contempt for mainstream science and technology, as well as the men and women who have devoted their lives to it.

I was informed by the same person that the attempt to assess oil reserves should be characterized as “guesswork” – which to a certain extent it is; and so “the stuff written today about peak oil is a bit like the usual nonsense about climate change. It is written by people who know nothing about it.” I have reason to believe that this is an indirect reference to my forthcoming textbook (2007).

The elite of oil geologists and petroleum engineers now accept the peak oil thesis, while well over 90 percent of acknowledged climatologists have attached a high probability to a large part of present and future changes in climate having their origin in human behaviour. Where the latter is concerned, right or wrong, I prefer the opinions of experts to conjecture by the rank and file of sceptics working the other side of the street, most of whom are non-climatologists trying to make the most of a gut feeling. As for the matter of peak (conventional) oil, I fail to understand how we have peaks in e.g. huge land areas like North America or the former Soviet Union, without recognizing that a global peak is a distinct possibility, and perhaps in the near future.

When I lecture on this topic I say that it’s possible to learn everything that you need to know about what is going to happen with global oil production by spending an hour or two examining what happened in the United States. Modern oil history is generally considered to have had its beginning in the U.S., and as you can find out from the topic heading ‘Oil Fields’ in Google, oil was produced in many states. The really big strike in the lower ’48 was in East Texas, and for many years a large percentage of the population of the U.S. did not believe that production in that rich basin would ever peak.

But it did peak, and so did production in the lower ’48 about the end of 1970. However a huge structure, Prudhoe Bay, had been discovered in Alaska in l968, and when it came on-stream in l977 the total production curve in the U.S. rose for a while. Unfortunately though U.S. output never reached the l970/71 level again, and in 1986 the production curve turned down again. The Prudhoe field peaked in l987/88, and for all practical purposes that was the end of the fantasy that the U.S. could function without large and growing imports of foreign oil. Today imports are much larger than domestic output, and with production falling and demand increasing that situation cannot be reversed. There are persons who claim that exploitation of the North Slope of Alaska will reveal perhaps the largest oil bonanza experienced in North America, but I have decided to believe that if this were likely, there would already be a record amount of drilling taking place there, regardless of the environmental and political costs.

In addition I’ve decided to e.g. reject the hypothesis that the UK North Sea peak is due to excessive taxation, as is occasionally claimed. My argument here would be based on what is happening in the Norwegian North Sea, which I know something about. I was also told by the person mentioned above that 80% (or more) was the correct figure for the recovery factor of oil. Unfortunately, even if this were true, our oil worries might not be over, given that only about 1 barrel of new oil is discovered for almost every 3 produced, although some people say that 1 for every 4 is closer to the truth. I wouldn’t advise anyone to spend valuable time mulling over this alleged recovery statistic though, because when I gave my first lectures on oil in Australia, the actual recovery factor was about 32%, while globally the present average is reckoned to be about 35% by oil business insiders who would like nothing better than to believe something quite different.

Both this young lady and the Swedish Energy Agency have great faith in the tar sand reserves of Alberta. I don’t have any faith in them at all where changing the international oil picture is concerned, at least not for many years. Here the thing to focus on is production rather than ‘reserves’. Tar sands and heavy oil can drastically increase the nominal reserves figure, but this is a distraction that, fortunately, at least some of our political masters have been warned not to accept by important and experienced oil company executives and their geologists.

If ex-post (actual) production and/or discovery ‘rates’ continue to fall, which is likely, while ex-ante (expected) demand continues to rise, which is certain, oil prices could spike to levels that are well above the danger level, which in turn raises not only the prospect of macroeconomic and financial market chaos, but the initiation or extension of small or large scale military action. This is not a new idea, and I suspect that topics of this nature are being treated at great length in the corridors and restaurants of power in at least several of the main oil importing countries by persons who are prepared to back their theories with marines and gunships.

Finally, a few words about the report of the Swedish Energy Agency. As yet it is in Swedish, and as far as I know not generally circulated (or even discussed). However on the basis of a two minute presentation on Swedish television the day it was finished, I know that it asserts that there is no need to be concerned about oil in the foreseeable future. Such being the case, it would hardly make a difference if that crank document were available in every civilized language, and in addition was passed out on every street corner between Lapland and the Capetown naval yard, because there isn’t a serious decision maker in Sweden who finds this kind of news plausible, regardless of what they might say when TV cameras are pointed in their direction.

The simple and inescapable fact of the matter is that the money that the major oil producing countries have been making over the last year or so, and which will continue to roll in during the next few years (because of the actual shortage of oil in the ground in terms of the demand for this commodity), has provided them with some remarkable options when it comes to choosing strategies for the great oil game. I see no reason to speculate on this topic since almost everything we need to know about the trouble that we might be in was presented in unambiguous language by the Petroleum scientist and executive Donald E. Carr (1978): “The clock of stupidity is attached to a bell, and it tolls for your descendants”. It probably tolls for us too, but I prefer waiting until later in the year before thinking about that.

REFERENCES

Banks, Ferdinand E. (2007). The Political Economy of World Energy: an Introductory

textbook. Singapore, London, and New York: World Scientific.

Carr, Donald E. (1978). ‘Energy and Earth Machine’. London: Sphere Books Ltd.