Dealing with finite resources (such as oil) has its drawbacks.
We live in a world where demand for oil is forecasted to increase, with India and China among the noteworthy leaders. Also worth noting: As oil-exporting nations (think Middle East) modernize their own economies and cater to the increasing demands of citizens eager to embrace the lifestyle of Americans, their own energy demands increase.
Their oil; their decisions about keeping or selling. There are no guarantees that the pipelines remain plugged in to feed the American lifestyle at the expense of their own nations.
Those finite resources we depend upon refuse to behave as if they are not finite, so their rates of production continue to slow (assuming they can first be technologically—and then profitably—extracted). The conventional crude oil fields which mankind has relied upon to power its modern lifestyles and industries for well over a century continue to deplete—at least 3-4 million barrels per day depending on which source is referenced.
Despite all the hype about increased production from shale formations here in the United States (a fact not in dispute by those of us concerned about peak oil production), the part of that story omitted in all the Happy Talk hype is that a prime characteristic of deep-water fields (with all of their inherent extraction challenges, being in deep water and all) and those tight oil wells is that they have very rapid decline rates. You get a lot at the start, and then … not so much after that.
The solution: drill more wells. The problem: that’s very expensive, for one thing. The other important factor is that the good stuff gets tapped first, so the Plan B drilling efforts are occurring in places where it’s even more expensive to find the stuff that’s harder to find and extract to begin with. Those facts wreak havoc with the Happy Talk of energy abundance and the we’re-this-close-to-energy-independence story the oil industry and its paid cheerleaders continue to pump out.
So while no one argues that we’re running out of oil (other than those cheerleaders who keep raising this phony straw man argument to lend credence to their cheerleading efforts), what we’re confronted with from this point forward is an ever-diminishing supply of the energy supply which has powered and sustained us for more decades. The Plan B options have short-term benefits and enjoy a level of optimistic notoriety now, but what’s available now is not the long-term answer.
Production doesn’t exactly provide supply in a week or two, either. Start to finish time is measured over a period of several years. Stuff happens in between start and end, so it’s not a guaranteed, effort- and challenge-free process. For instance:
Capex compression is a term we use to describe the reduction of upstream spending by the oil companies when their exploration and production costs are rising faster than their oil revenues. That’s what’s happening today. Hess is divesting oil producing properties to increase profits; BP has shelved the deepwater Mad Dog Phase 2 project in the Gulf of Mexico. This is occurring because oil prices haven’t been increasing, and costs have. So oil companies are looking at their portfolio of projects and deciding to postpone or cancel some of them. Were the oil supply rising quickly and oil prices falling, this sort of capital restraint would be normal—the usual boom-bust cycle of the industry. But oil is still in short supply, and very few of the large oil companies have been able to hold oil production over the last few years—even as they were investing massively in oil exploration and production. Now, they are actually reducing investment in upstream projects, even in the face of historically high oil prices and falling production.
If the major oil companies are cutting back on investments for exploration and production, they won’t be doing as much exploring and producing. Such a concept! High prices are needed to explore, extract, and produce the resource now increasingly relied upon to meet our energy needs. That’s great if you’re the oil industry. If you’re a consumer paying those high prices at the expense of other household and family needs, that’s not so good.
When consumers cut back, prices have to drop. That’s basic economics. When decreasing oil industry revenues cannot keep up with the increasing exploration and production costs of unconventional resources such as deep-water and shale fields, investments decline. Lower investments and thus lower supply from resources harder to find, extract, and produce to begin with means that we’re confronted with some legitimate supply and demand issues most fifth-graders would understand: Less supply and higher demand = a problem.
Not exactly rocket science….
So when we have less energy available to us and to the countless other companies and services we rely upon every hour of every day, and they have less of a supply to work with, how difficult is it to figure out which way the dominoes fall? Facts suck, but they will prove to be all the more troublesome if we aren’t taking steps now to deal with them!
Few of us outside the industry will notice the impact of those realities—and our ongoing failure to plan—right now. But in the not-too-distant future, when supply is critical and we’re all waking to the realization that all the companies were required to do in the intervening years to maintain adequate supply, what happens then when critical supply is not there? What rational adult among us thinks that we can just figure something out in a few days and continue merrily along?
Without high prices, oil companies cannot justify the much higher costs needed to sustain this recent oil boom from unconventional plays such as shale and the tar sands. With high prices come decreased demand from consumers unable to justify spending more money for fuel at the expense of food, clothing, shelter….But that’s not the end of it.
What happens to our commercial and cultural lifestyles when the reality portion of the no-energy-supply-worries tale comes into play? Production from conventional supplies has not increased since the middle of the last decade—misleading arguments about higher production totals notwithstanding (the simplest explanation: it’s not the same stuff being produced, and doesn’t have the same usefulness or angry efficiency as good old conventional crude).
No one likes that part of the story, but our children will thank us if we start engaging in more realistic and fact-based discussions about what to do. Starting soon would be an ideal strategy.
Here’s reality, stripped of niceties. Oil is the lifeblood of industrial society, since nearly all transport fuel is oil-based and transport is essential to trade. Industrial nations have no ready and adequate substitute for petroleum. Therefore, unless preparations are made, the inevitable decline in global conventional petroleum production will gradually strangle the world economy, starting with the most oil-dependent nations.
It’s not all that difficult to connect the dots if one is willing to take a moment or two to consider the substance (such as it is) of the story peddled by those few with a vested interest in maintaining cash flow to their companies … the rest of us be damned.
(Adapted from some recent blog posts of mine)
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