Monday, August 20, 2012

A second chance wasted? Unconventional hydrocarbons:

            If we were to release a convicted murderer from death row back into society, what are the chances that the person will end up back on death row?  I don’t know the precise answer to that and I will not go into the argument, because the precise answer is not important to the conversation I want to bring up.  What I do care about, and took the time to look into, is humanity’s collective behavior in a similar situation, and that is what I want to share.

            The convicted murderer could take the opportunity to take the second chance, and have a new life.  He/She could start a family, get a job, and even strive to do something that would have a lasting positive impact on others.  Many would not take such an opportunity, and we should really be more understanding of it, because we humans as a collective seem incapable to even identify the second chance, much less take it.

            A few years back, we started to worry that the people which society regarded as nothing more than alarmists might be right about impending disaster as a result of dwindling resources, such as oil.  Petroleum prices shot up from just over a decade ago by about 500% in yearly average terms.  Other commodities also showed signs of a world that is at its limits in terms of what it can offer.  In fact food is still an ongoing problem, which is likely to yield a third global unrest event due to food prices and availability in only half a decade.  In the course of the decade, came also the realization that the market can bring secondary sources to the market, so no reason to worry, or so we are told anyway.

            We currently consume about 85 billion barrels equivalent of oil, in total hydrocarbon based energy every year.  Global demand is growing at a 2% average yearly rate.  Currently, proven reserves of coal, oil and gas are about 5,700 billion barrels of oil equivalent according to the EIA 2009 tally.  It is absurd of course to pretend that since this is our proven reserves base, this is what we have.  Technological advancement, price and other factors can all influence the ultimate recoverability factor of the resources we know to be in place.  Furthermore, we are still finding new resources, although as is the case with petroleum, consumption has been outpacing new discoveries by a wide margin for decades already.  Coal is also a resource that can offer few new surprises, because we know about the presence of most large deposits on the planet.  One thing that we should keep in mind about the forward march of technology and knowledge is that as it progresses, our puzzle of the world’s resources is starting to be more and more complete, thus the chance of positive surprises is dwindling.

            All the positive news that we received last decade, comes mainly from resources we already knew to be there, it is just that technology and price, as well as our desire to exploit these resources only made it viable recently to produce them in substantial quantities.  One possible exception we can point to is the deep water oil and gas discoveries.   Here is where I believe our collective human wisdom is failing us.  As the conventional sources of hydrocarbons are showing increasing stagnation in production, we decided to buy time by drilling in deeper oceans, fracturing underground rocks to squeeze more oil and gas out, and we are washing sand in Canada to get oil out of it. 

By deciding that we will refine Venezuela’s heavy oil, we gained maybe another three years of hydrocarbon supplies, Canada’s oil sands gave us another two years.  Fracking in US provided us with an extra one and a half years, and as the technique will spread to other parts of the world, maybe we will get another ten years worth of consumption.  Underground coal gasification projects may also add many more years to our hydrocarbon supply.  As we allow ourselves to be swept away with excitement at all these new sources of energy, which will keep the good times rolling, and the developers rolling in cash for a while longer, we forgot that we bought time, not a permanent reprieve.

            How much time?  Hard to say!!!  The most important factors are energy flow rates, energy return on energy invested and how easily we can adapt to using the changing hydrocarbon fuel mix.  Petroleum has been our top source of hydrocarbon energy in the modern economy, but it is also now the least abundant, even if we add the unconventional sources to the tally.  So the energy mix will have to change drastically.  Recently, focus has been on gas for political reasons, having to do with the need to reduce emissions.  I’m guessing that in less than two decades however, we will turn our focus on the most abundant hydrocarbon energy source, which is coal, with its very dirty side-effects.

Note:  The data can be found on the EIA official website.  This data is somewhat outdated, but still gives a pretty accurate picture of the energy situation.  Newer estimates by BP put the oil proven reserves at 1.6 trillion barrels.  I have to point out however that we also have to account for OPEC’s political rather than proven reserves that make it in the tally, which amounts to about 300 billion barrels that they cannot account for by pointing to new discoveries.  So, unless unconventional petroleum sources such as Kerogen from the Green River Basin in US will one day make in the proven reserves column, chances are that petroleum is now indeed the least abundant hydrocarbon still available to us, even though it still plays the largest role in the energy mix.

            Flow rates can be misjudged by constructing our tally of resources increasingly from hard to exploit sources.  There is no way Canada’s oil sands will ever produce higher volumes than Saudi Arabia does, despite the resource volume being comparable.

            Energy return on energy invested is especially important, because as we look at our resources left to be exploited, increasingly they are made up of deeper coal mines, oil sand, tight oil and gas, deep ocean oil and gas, and the tired old oilfields that already yielded most of the easy to get oil, so now we have to work much harder to get the rest out.  Energy return on energy invested in the oil industry for instance was about 100/1 globally a century ago.  Now, despite all our high tech gadgets, and all our knowledge, we are getting about 20/1.  That ratio is quickly headed towards 4/1, as that is what we are getting from fracking and mining oil sands, as well as from the older giant fields.

            Political and geostrategic interests may also affect energy flows.  Resource nationalism can develop out of the realization that what is in the ground can only become more valuable if left there longer.  Countries like Saudi Arabia will one day have to come to face the reality that they are a one trick pony, and they need to make it last as long as possible.

            So we may have gained a decade, two, three or four, thanks to the effect of higher prices, and the magic of the market which dictated the advance in technology needed to access marginal resources at a positive rate of energy and financial return.  The price we decided we are willing to pay is a higher level of environmental destruction.  The price is also the foregoing of utilizing certain assets for other purposes, such as is the case when farmland and the water that farmers need is re-allocated to oil and gas exploitation.

            The price humanity pays, by not considering the long term needs is that we will leave our future generations with far fewer resources.  It may sound comforting to some to think of a century worth of hydrocarbon resources at current rates of consumption as some more optimistic estimates seem to suggest.  Rates of consumption will increase, the century will get shorter, and before we know it, the ones most dear to us (our children) will be left with an even bigger mess than that with which we are faced with now.

            The lesson most people chose to take away from the past decade, in regards to the energy constraints scare is that we faced a crisis, and the market together with good old human ingenuity combined to once again save the day.  A closer look tells us another side to the story.  It is the story of the low hanging fruit.  We were no longer able to sustain ourselves on the low hanging branches which offered us nutritious fruit for the taking.  We therefore had to build ladders to move higher up.  To build the ladders we needed prime materials, so we cut down some of the fruit trees, in order to get to the higher branches of the other trees[i].  So, the ladders did not come for free, we had to forego the opportunity to harvest those trees that were cut down.  Eventually, even those higher branches will be harvested.  In fact, we will harvest them at a higher pace, because we needed more energy to do the extra work of building the ladders and climbing up on them to harvest more fruit. 

We always knew approximately how much fruit we had in the orchard, so the ladder innovation did not create more resources, it only made a higher percentage available.  Eventually the good healthy fruit will no longer sustain the population, so they will eat the unconventional, half rotten ones from the ground and the ones infested with worms, even though the net benefit to the body is no longer as much.  At that point, they should realize that it is game over and change is needed.  So why don’t we?



[i] We are assuming here a more simple economy made up of people and fruit trees growing on a finite piece of land that makes up the orchard.  For those not familiar with the practice in basic economics of simplifying a model in order to narrow it down to a few factors in order to better understand their relationship to each other, it is how much economic analysis is done.

1 comment:

  1. eToro is the ultimate forex broker for novice and professional traders.