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With the talk in the United States all abuzz about the presidential election this year, President Obama (and advisors) and Mitt Romney (and advisors) have to act as though they know the solution to lowering unemployment and raising economic growth rates. It is hard for anyone running for an election to admit that they might be powerless to affect some energy and economic realities. In this post, I discuss the trend in the figure below: US monthly personal-consumption expenditures (PCE) for food and energy goods and services as a percentage of total household expenditures. I think it is completely possible that the stop in the declining trend of PCE for food and energy that stopped in the early 2000s is indicative of the new reality facing the United States energy and overall economic (and debt) situation.


US PCE Energy and Food.jpg

Figure 1. Personal-consumption expenditures of US households expressed as a percentage of total expenditures. Data are from the US Bureau of Economic Analysis Table 2.8.5.

 

It doesn't take a PhD in statistics (or engineering, or anything else) to notice the major change in the trends of the time series in the figure. In 1999, the 4-decade trend of decreasing PCE for energy stopped declining and started increasing. In 2007, the (at least) 45-year trend of decade trend of decreasing PCE for food stopped decreasing - just before the beginning of the Great Recession that began in late 2007.  Adding the PCE for "food + energy" shows a minimum PCE percentage of 11.7% in the first two months of 2002. It is a good question of whether or not this will be the minimum percentage PCE for "food + energy" for the US ... for all time.

Several analyses have been done investigating a seeming threshold percentage of US PCE that can be spent on energy goods (and services) before it induces or plays a large role in causing a recession (see James Hamilton's blog entries here (July 14, 20102), here (March 6, 2012), here (September 19, 2012), and there's another one or two or more in there somewhere tracking the same things). But there is much value in considering the role of food in PCE along with energy PCE because food is both the original source of pre-industrial power and it holds high priority in a "hierarchy of needs" sense.

The reason to add the PCE for food and energy is because food is technically an energy source. It is too bad that the statistics needed to plot the data of the figure even further back than 1959 are not readily available, but it is practically certain that the percentage of PCE for food continues higher as one moves back further in time. Before fossil fuels and significant industrialization using wind, wood, and water power in the early 1800s, food was the major energy resource for prime movers. These prime movers were the muscles in humans and animals doing the majority of the physical ('useful') work and providing the most aggregate power. Thus, the quantity of food and fodder produced from the land had the major influence on the amount of power for agriculture and a little industry. The book Heat, Power, and Light: Revolutions in Energy Services, by Roger Fouquet, shows a similar historical graph for the United Kingdom in which he estimates the expenditures for domestic power in the 1500s as at or above 100% of GDP. Thus, in preindustrial times, practically all GDP was to produce power, or useful work!

The data plotted in the figure should be shown in the United States presidential election debates. I'd like to know what our leaders think of this graph and why they think their policies can or cannot affect the trend (or rather new trend since the early 2000s). The likely truth is that demographics and resource constraints have caught up with much of the 'advanced' economies (e.g. EU, US, Japan). There are less young people working to pay for older people to retire. There are fewer older workers retiring because their pensions and retirement funds are not sufficient, thus not making room for new and younger workers. The conventional oil alternatives (oil sands, deepwater, oil shale, biofuels) don't have the same level of pure energetic value of those of the past, and this is the reason that oil prices must remain at current levels in order for new oil supplies to remain viable. I wrote in a 2011 article in Sustainability (see here) how energy return on investment (EROI) and oil price are related. Alberta oil sands are practically the marginal oil supply (in North America at least) and because the oil sands have EROI < 4-5 then the oil price must be near or above 90 $2012/BBL. The economy remains sluggish, unemployment is still below 8%, and the jobs that people are getting are lower paying.

I think that both the 'extreme' left and right are wrong in their approaches. The U.S. can't borrow money and go further into debt to give people high paying jobs while lowering employment, and the U.S. can't borrow money to maintain the same defense budgets of either the Cold War or recent post-Cold War eras. Resource constraints are imposing their real nature upon our real economy. No lowering of interest rates can prevent this impact, and this is why the unprecedented length and level of low US and EU interest rates are not having the 'expected' effects. What we see is that demand for fuels and energy services have decreased (particularly less light duty vehicle miles traveled) since 2008 at a peak near 3 trillion miles (for a nice graph of US vehicle miles traveled see above link to Hamilton blog on Sept. 19, 2012 and search Stanford research on 'peak travel').

Peak travel. A 'bottom' percentage PCE on food and energy. A 'bottom' of interest rates. Coincidence? I think not.

Earlier this year I discussed (The EROI of Algae) some research at The University of Texas on an experimental algae to fuels experiment. A couple of new papers have now been published on the energy return on investment (EROI) of algae-based bioenergy when coupled to a wastewater treatment plant (Energy Return on Investment for Algal Biofuel Production Coupled with Wastewater Treatment: http://www.ingentaconnect.com/content/wef/wer/2012/00000084/00000009/art00002). The reason why it is energetically beneficial to couple a wastewater treatment plant to an algal growth facility is because algae, like terrestrial crops such as corn and soybeans, require nutrients as inputs. Wastewater has a high quantity of nutrients that actually must be removed before discharging the water into the environment...in some cases to prevent algae blooms! Oh the irony...


In another recently published work, we established that a best case scenario using known technology (not possible future ideas of new strains of algae), the EROI of algae-based fuels was 0.36 when adjusting the relative energy quality of the energy inputs and outputs (for a free accessible copy of the paper see Comprehensive Evaluation of Algal Biofuel Production: Experimental and Target Results

 http://www.mdpi.com/1996-1073/5/6/1943).  Note that this value of EROI = 0.36 is what we called a 2nd Order EROI that considers only the energy inputs from direct energy consumption (e.g. electricity, fuels) and the energy embodied in materials (mostly nutrients such as nitrogen and phosphorous). If you want to see work that documents the methodology and assumptions of input values, this work is a good place to start to then lead to other literature.



When you add the wastewater to the algae-to-fuels process...

...it could be possible to obtain a 2nd order EROI of 1.4 (as compared to approximately 0.4 without that wastewater). Note that there is energetic value in extracting energy directly from the wastewater, such as via anaerobic digestion, and this can lead to a second-order EROI of 0.4 from a process that otherwise would have EROI = 0 (e.g. generate no useful energy).  This 2nd order EROI = 1.4 sounds promising, indicating that more energy is produced than is needed for production (EROI = energy output / energy input). However, it does not include every investment needed to produce algae and convert it to a fuel. A rough rule of thumb (as if there really is a rule of thumb for producing fuels from algae) is that the capital and labor costs would be near half of the costs of other operating and maintenance costs. By doubling the energy inputs to account for capital and labor, the EROI will be < 1. 

Further, just because a fuel or electricity resource has EROI > 1 even after accounting for all system inputs, that criteria does not relate to societal viability. For example, there is some evidence to support the idea that an EROI > 5 might need to hold for transportation services or liquid fuels (at least in the modern economy). But this is an ongoing area for study.

What does all of this mean? Well, in my opinion, it means we need to treat our liquid fuels (with high-energy density) as very precious resources as we have yet to prove that we can create a renewable liquid fuel even nearly equivalent to gasoline (petrol) or diesel. There is some evidence to show that the United States goes into recession if the EROI of gasoline at the pump drops to near 5 (http://environmentalresearchweb.org/cws/article/news/44403). Let's keep trying for alternative fuels, but also keep perspective to think about alternative modes of organization and transportation in general. The new targets for US mileage standards to increase to 54.5 miles per gallon are a good step toward focusing people on the constraints on the supply of oil and oil/transportation alternatives.

The Global Gas Flaring Reduction Partnership is public-private partnership led by the World Bank to cooperate on...well, what it sounds like...reducing the flaring of natural gas.  The main idea is that releasing natural gas (primarily methane, a potent greenhouse gas) is more problematic from safety and climate standpoints, thus flaring it is a better means of control.  The natural gas is typically flared because there is no infrastructure to transport the natural gas and/or there is not enough demand for the natural gases in the local/regional market. The flared natural gas is typically associated with oil production, and thus, is somewhat of a byproduct in that location. 

The short of the story is that there is often more than one kind of energy and service associated with producing any particular resource. In the case of natural gas flaring, the production of oil is often accompanied by "associated gas", and if there is no infrastructure for the 'secondary' energy resource, and no plan to make use of the 'secondary' resource, then it effectively has no economic existence but can have an environmental existence. I've seen flaring even in South Texas (a place with one of the most dense networks of natural gas pipelines anywhere in the world) the last two years with development of the Eagle Ford shale as the developers produce oil and gas in locations that are new, and thus without pipelines (but in Texas they build them relatively quickly!).


Links of interest below:

Article on latest World Bank findings (pointing out that the North Dakota is now a significant location of natural gas flaring as a result of development of the Bakken Shale for oil):

"Bakken fires made U.S. the biggest source of new flaring in 2011": http://www.eenews.net/energywire/2012/07/10/4


This video made by the World Bank using Google Earth shows the locations of natural gas flaring around the world: http://www.youtube.com/watch?v=miOJ86B4xe8.


Data from the World Bank site on global natural gas flaring (notice that Russia flares 3X the amount of the next country at the same time it attempts to corner natural gas supplies to Europe): Estimated Flared Volumes from Satellite Data, 2007-2011



The Journal of Industrial Ecology has a special issue on Meta-Analysis of Life Cycle Assessments (LCAs) freely available online.

There are several articles discussing what we can and cannot learn from making and comparing as many LCAs as possible.  One of the introductory articles is: What Can Meta-Analyses Tell Us About the Reliability of Life Cycle Assessment for Decision Support? (Miguel Brandão, Garvin Heath and Joyce Cooper).

The authors explain how the amount of literature about life cycle assessment has grown at a "dauntingly rapid rate" over the last decade. Indeed, in some cases LCAs have been published on the same or very similar technologies or products, leading to hundreds of articles.

"One result is the impression among decision makers that LCAs are inconclusive, owing to perceived and real variability in published estimates of life cycle impacts," write Brandão, Heath, and Cooper. They say that despite the policy need for more conclusive assessments, only modest attempts have been made to synthesize previous research. "A significant challenge ... are differences in characteristics of the considered technologies and inconsistencies in methodological choices (e.g. system boundaries, coproduct allocation, and impact assessment methods) among the studies that hamper easy comparisons and related decision support."

There is, however, an emerging trend of meta-analysis of a set of results from LCAs, which "has the potential to clarify the impacts of a particular technology, process, product, or material and produce more robust and policy-relevant results".  Brandão, Heath, and Cooper define meta-analysis in this context as "an analysis of a set of published LCA results to estimate a single or multiple impacts for a single technology or a technology category, either in a statistical sense (e.g. following the practice in the biomedical sciences) or by quantitative adjustment of the underlying studies to make them more methodologically consistent."

Most of the studies focus on greenhouse gas emissions, and this shows the need for more research into other metrics of LCA such as full energy accounting for net energy analysis.  Other metrics such as land and water needs are more difficult to compare across many studies of energy systems in different parts of the world.

Here I simply list links to some of the studies for those who might want to go straight to looking at specific energy technologies (although the special issue also has an article on computers and biobased materials):

Wind energy: There are studies of wind energy here and here with utility scale wind discussed in particular.

Coal power: here.

Nuclear here.

Electric power systems with carbon capture and storage.

Two studies of various photovoltaic systems: thin film technologies and crystalline silicon.

And one study of GHG for concentrating solar power from both trough and power tower designs.

Enjoy!


As a self-proclaimed energy dork, it's somewhat exciting to see so much discussion of oil and gasoline (and petrol!) in the news recently. The discussions range from indicating that The Limits to Growth is still basically correct to how technology is trumping all limits to enable the United States to soon be the world's number one oil producer and start exporting oil within 10 or 20 years. Non-energy adept or interested persons can be confused easily, and unfortunately this is many. Of course, energy 'experts' don't agree.

But the lay or 'expert' person can read recent articles from Time magazine ("The truth about oil," cover article April 9, 2012) and The Economist ("Keeping it to themselves," March 31, 2012) that are good for thinking about the situation relating to higher oil prices: increased demand from developing and exporting nations, and a lack of any practical increase in gross global oil extraction the last 5-7 years. Basically the oil discussion, at least in the United States, seems to be comes down three camps.

(1) Those who think that limits from natural resources and technological progress will bring peak oil production relatively soon (for crude oil we can say global production has been statistically flat from 2005-2011; see the US Department of Energy's Energy Information Administration's International Energy Statistics). Here, 'relatively soon' means within a decade from now, but possibly even 1 year. Unfortunately, we won't officially be able to declare a sustained drop in global crude oil production until a few years of statistically significant lower oil production rates. One year does not make a trend. As a subsidiary but economically important concept to this peak oil camp, is the total exported oil available for purchase around the world. The world's exporting countries and growing economies (mainly China and India) are significantly consuming more oil each year for the past decade - leaving less for the traditional oil consumers of Europe, U.S., Japan, and Australia. This camp is largely composed of system-thinking academically-minded physicist/engineer/ecologist types that might get some money from oil and gas companies or are retired from the oil and gas industry.

(2) Those that think technological progress that is enabling oil production from oil sands (Athabasca, Canada), pre-salt formations and/or deep offshore (Brazil, Gulf of Mexico), oil from shales using horizontal drilling and hydraulic fracturing (North Dakota, Texas), and possibly offshore arctic if sea ice does not actually form for significant time during the northern hemisphere summer. Thus, oil production is up in many places, and higher prices make this production possible - the market system at work. This camp is largely composed of those who make some portion of their living from selling, producing, or researching how to sell or produce oil and oil products.

(3) Those that think market speculation by entities that do not produce oil or sell refined oil products. People bet that the price of oil will go up, and therefore that indeed makes the price go up. This camp is largely composed of a subset of persons thinking about getting elected to public office (or staying elected).

As far as my position, I'm in camp #1 above as far as being the overwhelmingly most important factor - for main reason that I believe the world is spherical. For fun and interesting takes on being in camp #1 and talking to those who are not, see this blog by Tadeusz Patzek and this one by Tom Murphy. The point isn't so much if peak oil production will occur, but whether or not you should take anticipatory action.


From being in discussions with a few persons of camp #1, I can say that the projections for the ramifications for peak oil production are quite varied. All believe, including myself, that some form of easily noticeable lifestyle adjustment will occur for Americans and most citizens of developed countries. Arguably we are seeing this in the form of fiscal and budgetary difficulties in the European countries you've been reading about in the news since 2008 (Greece, Portugal, Ireland, Spain). In the U.S., this budgetary difficulty is being seen at the municipal/city level.


But I might disagree with some of the peak oil (camp #1 above) about what we can know about the severity of lifestyle adjustments over time. As oil production decreases to a point where most recognize it has occurred (say being below 5% of the peak for a few years in a row), I think we'd continue to see similar but slightly expanded trends as we've seen the last 4 years: less travel in developed economies, higher unemployment (but not crippling), and a limited number of governments at various scales defaulting on debt. Good things that will start to occur are more walking, biking, and conceptualizations about less consumption (but that will be hard to act upon for most).

At the next stage 'solutions' will be flowing like Spindletop. We will be told to believe that many elixirs will cure our 'ill', but we will be wise to prioritize our wants to those that are more crucial to social cohesion. There could be increased thinking about making sure all infrastructure (cities, buildings, homes, water infrastructure) is built in a way to maximize access and resiliency instead of sprawl and expansion. The idea of transition engineering (as discussed by Susan Krumdieck) and the Transition Town movements (just search the word) will become more mainstream models for learning to consume less energy in a more core manner. I myself look to learn more from these existing movements and look to apply their principles to understanding energy transitions in a fundamental manner as to how they represent increasing or decreasing complexity (a la Joseph Tainter). Luckily for me that somewhat fits my job description ...

This weekend I joined a town hall forum in Cuero, TX, (DeWitt County, Texas) on the edge of the very hot Eagle Ford formation in South Texas.  The Eagle Ford is currently a hot bed of activity for hydraulic fracturing for both natural gas and liquids production, depending upon where drilling occurs. As with many regions, local people there are concerned that hydraulic fracturing, and the associated activities surrounding that process (e.g. injection of 'produced' water and waste fluids, trucks on the road, extraction of drinking well water), might cause some deleterious impacts such as depleting or contaminating groundwater supplies.  This town hall was one way of getting information out to landowners and the public.

There is much anecdotal 'evidence' and stories of one water well or another getting contaminated soon after hydraulic fracturing commences in area.  Actually, sometimes water quality has gotten better!  A local water well driller and service provider noted some of the things he thought might be going on, and they made a lot of sense.  Before the actual hydraulic fracturing process commences, the oil and gas companies fill up a man-made pond at the drill site that will hold the 4-8 million gallons of water typically needed for the fracturing.  In the case of much of South Texas, and the Eagle Ford formation, the water comes from the local underground sources of drinking water.  As explained at the Cuero town hall, the rate at which groundwater is being pumped into the holding ponds might be causing much or all of the impacts on local water wells.

Under normal conditions, water flows in a preferred direction in an aquifer, and relatively slowly at that.  This slow flow rate and constant preferred direction settles out sediments and orients them against rock pore surfaces accordingly (like getting sediment build-up at a dam). If a water well begins extracting water at a high enough rate, it can cause pressure changes in the aquifer such that reversal of local water flow can occur.  When this reversed flow occurs, it can dislodge sediments and minerals that will then move with the water flowing in a new direction.  With these sediments now mixed with the aquifer water, they can sometimes be seen in individual water wells when before there were no sediments.  Thus, it would be easy to conclude that hydraulic fracturing IS the cause of water well contamination, at least temporarily.

The reality is that the life cycle impacts of hydraulic fracturing can be larger than the specific process of fracturing itself.  In some cases, which seems likely in DeWitt County, Texas (but more study and cataloging of data would be needed to know for sure), obtaining the fracturing water from local groundwater sources could be the major/only impact of any consequence. More than that, the rate of the well water pumping could be a major factor such that slower pump rates could prevent changes in aquifer flow and stirring of sediments.

While the folks at this town hall meeting are now much more informed, the same cannot be said for most local residents.  The next step for the stakeholders could be (provided funding can be obtained) the collection of data on well water quality, timing for any changes in quality and water level, and timing of hydraulic fracturing activities to understand the likely relationships between fracturing, well water withdrawal rates, and local well water quality.
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There is a new special journal issue of the online open-access journal Sustainability on the topic of net energy: New Studies in EROI (Energy Return on Investment). This has been organized over the last year by Charles Hall of the State University of New York. This special journal edition has many papers on new and updated assessments of EROI for oil and gas in the US, Canada and Norway. Additionally there are new papers discussing how to relate EROI to energy prices and costs as well as how different constructs for EROI measures (e.g. for a technology or a business) are useful for different decision making contexts.

I encourage all researchers and interested persons to view the papers in the special issue, as it is certainly a great contribution to the literature at a time when distinguishing among the most viable energy resources has never been more important.


This week at the American Society of Mechanical Engineers 5th Annual Engineering Sustainability conference, as usual, there were many good presentations on various topics from concentrating solar power (CSP) to assessing wind farm design with multiple turbine sizes. One interesting presentation and paper was from Paul Denholm of the National Renewable Energy Laboratory. Paul's paper is entitled "Enabling technologies for high penetration of wind and solar energy." Here, high penetration means (wind and solar photovoltaics (PV) and concentrating solar power with and without thermal storage systems).

As indicated by Paul, the limit of system flexibility in the grid will limit integration of renewable generation before pure capacity constraints will occur. This is because the renewable generation will begin to get curtailed before load mathematically exceeds the capacity on the grid due to the fact that the combination of dispatchable sources (hydropower, nuclear, coal, and the various natural gas prime movers) will run into difficult economic choices regarding staying on at minimum levels. That is to say, thermal generators, primarily nuclear and coal, are not inclined to turn completely off at some point during the day and then come back online during another part of the same day (or 24-hr period). There are physical reasons for this as making mechanical parts get hot and then cold too quickly can cause premature failures. This is not to say that engineers cannot design coal plants to ramp up and down more quickly with less wear and tear, but coal plants on the ground now are stuck with much of their design characteristics. And while coal plant operators indicate in person that those plants can ramp up and down very quickly (10s of MW per minute), the data on how much they can really do this on a continuing day-to-day basis is not available. It is also not clear how much industry even knows the answer to how much cycling a coal plant can handle. Nonetheless, Paul Denholm's calculations from his conference paper being to give us some insight into how existing grid flexibility has an influence on marginal grid prices as more renewables are integrated into the grid. Here he defines "flexibility" as the conventional thermal fleet's ability to ramp and rapidly follow load. For the most part grids with high capacities of hydropower and natural gas are more flexible than those with high capacity percentages of coal and nuclear. Paul discussed results of his running a unit-commitment dispatch model , a model that determines the most economic manner in which to run an electric grid fleet while considering operating costs as well as costs associated with turning on and off the generators. He compared the increased levelized cost of the total mix of renewable generation as a function of both the flexibility of the grid and the level of renewable integration. For example, if 50% of the grid energy is from wind and solar (PV and CSP) and the rest of the grid is "100% flexible", then the effective levelized cost of the renewables is only about 4% higher than if there were not costs of integration. However, at the same 50% integration level with an 80% flexible grid, the effective levlized cost of the renewables was found to be 50% higher. The increased cost comes from curtailment of renewable generation that occurs because thermal generators will choose to stay at a minimum level of operation even when uneconomic for them to do so at that specific time interval. That is to say the costs of turning off and turning back on are higher than the costs of operating below cost for a few hours.

Because much of the electric grid is "inflexible", this is an important area to consider for continued integration of renewables. Thus, this is one of the main reasons for consideration of storage technologies to reduce curtailment of wind and solar generation: renewables will be curtailed even before the total electrical demand becomes less than instantaneous renewable generation due to the inflexibility of the thermal power plants.

In the Electric Reliability Council of Texas, there is a relatively large quantity of natural gas generation with combined cycle systems dominating. Approximately 65% of ERCOT capacity is in natural gas-fired power plants with nearly 8% of total electricity now provided by wind power. While it is foreseeable that ERCOT could have 20% of total annual generation from wind power within 10 years (approximately a doubling of the current 9.5 GW of capacity is needed along with completion of existing plans for transmission lines), 30% total generation from wind and solar technologies seems further off without some new social or political drivers. However, ERCOT has already seen many hours of operation over the last couple of years during which wind generation accounted for over 20% of generation on the grid (mostly during times when low demand in spring and fall coincide with high seasonal winds during early morning hours). This is a time when the grid is technically less flexible (e.g. when the grid is more dominated by coal and nuclear generation than natural gas) but in which the spare natural gas capacity exists to come online if needed. Thus, because ERCOT has the luxury of a large capacity of natural gas combined cycle plants to meet summer peak loads, it is relatively easy to handle large wind penetrations during times of low loads. If there was a large quantity of wind power during times of high demand, then it could present new problems.

Denholm's analysis in his ASME paper was somewhat simplified in its procedure (e.g. neglected transmission constraints) to more readily explore the issues regarding high percentages of wind and solar integration) also indicates that we would likely not see much increase in the effective levelized cost of renewables on the grid at penetrations below 20% total generation. We do not have examples of over 20% wind and solar on a single grid or within a single ISO in North America, and ERCOT has not yet seen significant costs associated with grid inflexibility. However, ERCOT has seen significant increased in effective levelized cost of electricity from wind power due to curtailments from lack of transmission capacity. Given that the Public Utility Commission of Texas has already set in motion the building of new transmission lines to access wind power regions of Texas, it is anticipated that the wind-grid congestion issue will be resolved in a few years.

While Denholm's analysis is quite forward-looking into the future, it is still important to consider what the world of high penetration of renewables will really look like as much as we can understand with use of existing technologies and operational principles. This will help us anticipate concerns from both renewable and thermal (coal, NG, nuclear) power plant operators to properly distribute investment costs to consumers in as equitable and inexpensive manners as possible.

The USA Today is not known to provide the most in-depth analysis of US news, but a recent article I read while traveling caught my attention. The article discussed the 'high' gasoline prices of $4/gallon in the United States and the economic hardship caused by spending more money on energy. I will not discuss the many reasons, some beyond personal choice and some not, that relatively lower gasoline (or petrol) prices in the US cause economic difficulty versus different prices in the EU.

The interesting quote in the article was from a woman living in New Jersey that worked in Washington, DC. She commuted 230 miles (one way) twice a week for work, and now sold her Mercedes-Benz for a Nissan Versa compact car. The higher transportation costs clearly are imposing new priorities for her. This woman's quote was as follows:

"We're the victims of circumstance, but I don't necessarily understand what the circumstance is…"

This was actually quite a refreshing quote to me in that it signals that at least one American recognizes that she does not immediately need to singly blame the oil industry, the government, or even consumers like herself. It also presents some evidence of self-realization lacking in most Americans. The fact that she made a choice to a more fuel-efficient car for her long commute signifies that she realizes via her consumption patterns she is a large part of the solution. Demand for oil increases, largely now from Asian economies, and new oil production locations struggle to replace existing production declines but from lower quality and higher cost (lower net energy) resources. We need our government to level with the public that alternatives to conventional petroleum, including unconventional resources such as oil sands and oil shale (if it can ever produced economically in the US), all cost more.

The only way worldwide production will even struggle to stay level is to keep production costs near current levels. And it is these current levels of oil price near $100/BBL that are forcing the US economy to reconfigure itself. Part of this reconfiguration is for consumers to switch to lower-consuming lifestyles. Part of this reconfiguration is higher efficiency standards from the government. And yes, part of the solution is likely more offshore drilling, but not because it is likely to decrease gasoline prices, but because it will show the inability of US production to significantly impact oil price any longer. Even Energy Information Administration (EIA) projections estimate that significantly expanded US offshore oil production will impact gasoline prices on the order of single cents per gallon. This amount is in the noise of any meaningful impact. Most EIA and International Energy Agency (IEA) projections also are now estimating constant or slightly declining oil consumption in the US. Part of this consumption trend is due to demand destruction via price, and part is due to transitioning to other fuels such as electricity and ethanol. At the moment (and perhaps always), these non-fossil transportation alternatives are also more expensive than gasoline from $100/BBL oil.

Future choices by US consumers and governments from local to federal levels need to consider resilience to energy prices instead of only efficiency such that energy price impacts are mitigated rather than amplified.

Last week the UK Guardian reported on leaked documents from the United States Embassy in Saudi Arabia that indicate a former executive of Saudi Aramco (the national oil company) believes that the publicly stated oil reserves and possible production rates of Saudi Arabia are overly optimistic.

Access the UK Guardian news article here. Access their link to the documents here (bold added by me).

The source for the information sent in the US embassy cable was Dr Sadad al-Husseini who served as Executive Vice President for Exploration and Production from 1992 until his retirement in 2004. I repeat a couple of the important passages from this document here:

"3. (C) According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described and the timeline for their production not as unrestrained as Aramco executives and energy optimists would like to portray. In a December 1 presentation at an Aramco Drilling Symposium, Abdallah al-Saif, current Aramco Senior Vice President for Exploration and Production, reported that Aramco has 716 billion barrels (bbls) of total reserves, of which 51% are recoverable. He then offered the promising forecast – based on historical trends – that in 20 years, Aramco will have over 900 billion barrels of total reserves, and future technology will allow for 70% recovery.

4. (C) Al-Husseini disagrees with this analysis, as he believes that Aramco's reserves are overstated by as much as 300 billion bbls of "speculative resources." He instead focuses on original proven reserves, oil that has already been produced or which is available for exploitation based on current technology. All parties estimate this amount to be approximately 360 billion bbls. In al-Husseini's view, once 50% depletion of original proven reserves has been reached and the 180 billion bbls threshold crossed, a slow but steady output decline will ensue and no amount of effort will be able to stop it. By al-Husseini's calculations, approximately 116 billion barrels of oil have been produced by Saudi Arabia, meaning only 64 billion barrels remain before reaching this crucial point of inflection. At 12 million b/d production, this inflection point will arrive in 14 years. Thus, while Aramco will likely be able to surpass 12 million b/d in the next decade, soon after reaching that threshold the company will have to expend maximum effort to simply fend off impending output declines. Al-Husseini believes that what will result is a plateau in total output that will last approximately 15 years, followed by decreasing output."

This embassy cable concludes with the following paragraph:

"8. (C) COMMENT: While al-Husseini believes that Saudi officials overstate capabilities in the interest of spurring foreign investment, he is also critical of international expectations. He stated that the IEA's expectation that Saudi Arabia and the Middle East will lead the market in reaching global output levels of more than 100 million barrels/day is unrealistic, and it is incumbent upon political leaders to begin understanding and preparing for this "inconvenient truth." Al-Husseini was clear to add that he does not view himself as part of the "peak oil camp," and does not agree with analysts such as Matthew Simmons. He considers himself optimistic about the future of energy, but pragmatic with regards to what resources are available and what level of production is possible. While he fundamentally contradicts the Aramco company line, al-Husseini is no doomsday theorist. His pedigree, experience and outlook demand that his predictions be thoughtfully considered. END COMMENT."

So basically al-Husseini is reported to be saying that Saudi Arabia may be able to produce 12 million barrels per day (MMBBL/d), but that it won't last for very long. Note that world oil production has been approximately 84-86 MMBBL/d for the last five years. Note also that Saudi Arabia produced an average of 9.8 MMBBL/d in 2009 and a peak (to date) of 11.1 MMBBL/D in 2005.

Al-Husseini is suggesting that Saudi Arabia may be able to keep production near the range of 12 MMBBL/d for nearly 15 years (should it reach that level within this decade), but that after that time frame the total oil output will begin to decline never again to reach as high of a level of oil production. And in saying this, al-Husseini (see 8. (C) above) is also suggesting that his is not part of the "peak oil camp" (for finding out what the peak oil camp is about – see http:\\www.theoildrum.com), but it is unclear from the cable what he means other than suggesting not to agree with analyses by the late Matthew Simmons, and probably Mr. Simmons' analysis as portrayed in his book Twilight in the Desert. In his book Simmons describes how the Saudis are fighting the uphill battle of depletion of their oil fields and that they are already using very clever and sophisticated engineering to maintain the current production rates. I don't consider Simmons' analyses a knock on the Saudis capabilities, but rather acknowledgment that they are employing many of the latest techniques and doing a very capable job. In short, Simmons says that the Saudis cannot keep increasing world oil production, and al-Husseini is broadly saying the same thing.

Given the impending reality of peak oil production in both the world overall and Saudi Arabia, the rulers know that the oil wealth is not to be squandered and that leaving some oil in the ground is as good of a strategy as any. This statement is supported by another leaked document here, with the relevant excerpt:

"Quoting King Abdullah's recent comments (ref B) that Saudi Arabia would cap production capacity at 12.5 million bpd and "leave crude in the ground for its children", Bourland remarked, "There are more accidents, there are escalating costs (in the oil sector). I think the King is reaching the conclusion that the money is safer in the ground than in the bank. He doesn't want to see it squandered."

My view of peak oil is not that there will be a particular shape of the oil production curve over time (meaning oil production vs. time), but that it will indeed reach a point where production rates will stop increasing and begin decreasing. That is to say the slope of the curve on the oil production decline may not be an exact mirror image of the production curve of the oil production increase of the last 100 years. This curve is commonly approximated as a bell curve, and there are laws of statistics that say this is a reasonable approximation given the large number of oil fields in the world. However, this curve is best applied to regions with rather open and capitalistic markets. Upon the peak occurring, should oil production become more of a geopolitical tool instead of primarily a market tool, the world oil production decline could be steep (leading to much instability) or perhaps rather gradual as long as possible (trying to maintain maximum stability) if production is held back today and in the near future to keep it relatively high in the longer future.

Peak world crude oil production has already occurred (see US data at the Energy Information Administration), and peak total oil production will follow. This is realized clearly by those how pay attention and study the statistics. Because globalization is literally powered and enabled by oil, and relatively cheap oil (< $100/BBL), the impending decline in oil production signals the impending decline in globalized trade and travel. There will not be an abrupt end to globalized trade any time soon by any means, but upon peak oil production becoming realized in the mainstream of business, there will be a significant reshuffling of priorities in terms of what goods do get shipped around the world. But for more on this topic, you can read Jeff Rubin's book, Why Your World is about to get a Whole Lot Smaller, and one of his last reports while Chief Economist at CIBC, also summarized on The Oildrum.