7/17/2008
Preparing Virginia for Liquid Fuel Shortages
Background, Timing & Ramifications
Robert L. Hirsch, Ph.D. Senior Energy Advisor, MISI Briefing for Virginia Legislators July 17, 2008
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Overview
• World oil production is either at or near maximum.
• Declining oil production will mean liquid fuel shortages that increase year-after year.
• Oil prices will escalate & economic damage will increase each year until effective mitigation takes hold, which will take much more than a decade.
• It’s too late to avoid this world problem, but it’s not too late to begin Virginia planning.
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The Situation
• WHY THE PROBLEM? – World conventional oil resources are finite. – Oil resources are being rapidly depleted.
• WHEN WILL PEAKING OCCUR? – Many think now or very soon. – The exact date is dwarfed by the need for urgent action.
• WHY CAN’T THE PROBLEM BE FIXED QUICKLY? – The scale of consumption worldwide is enormous. – Mitigation will involve many actions & take time.
Peaking = The world’s first forced energy transition
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How We Use Oil
Gasoline for our automobiles, SUVs & light trucks
Diesel fuel for heavy trucks, trains, airplanes, ships, etc.
Heating oil
Lubrication
Plastics
Pharmaceuticals
Building just about everything
Etc.
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This Presentation
• Background
• Some important basics
• Timing
• Mitigation
• Ramifications
• Final Remarks
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Oil is essential…..
• World economic growth has been fueled proportionally by growing world oil production for decades.
• When world oil production declines, the resulting oil shortages & super high prices will lead to economic contraction, which will catapult oil decline mitigation to public priority #1.
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World oil production peaking & Oil fields decline are unavoidable. peak & decline
Production So do regions Time - Decades (Many oil fields)
U.S Lower 48 States Production
1945 Year 2000 So will the world (All regions)
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World oil production could sharply peak.
E in R nd TU a U m rld F De o il w O hy y ld lt m or ea no h o W a ec T S il • SHORTAGE A O P d & rl on d o an • ESCALATING W ucti od Dem PRICES Pr d orl W Production reaches a maximum & declines (PEAKS) Time 8
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Examples of Sharp Oil Peaking
Texas North America 3.5 100% 15.6 3.4 100% 15.4 3.3 95% 15.2 98% 3.2 15.0 3.1 90% 96% 14.8 3.0
Daily Production -Daily MM b/d 14.6 85% 94% 2.9 Production -Daily MM b/d 1967 1969 1971 1973 1975 1977 14.4 1980 1982 1984 1986 1988 1990
United Kingdom 3.0 3.5 Norway
2.9 100% 100% 3.4
2.8 95% 3.3 95% 2.7 3.2 2.6 90% 3.1 90% 2.5 85% 3.0 Daily Production -Daily MM b/d
2.4 Production -Daily MM b/d 85% 1994 1996 1998 2000 2002 2004 2.9 1994 1996 1998 2000 2002 2004 9
A production plateau is also possible.
E in R d U an T m ld FU e or l D w i y O th y rld al om o he on W a ec • SHORTAGE T S il A O • ESCALATING P d & rl on d o an PRICES W ucti od Dem Pr d orl W Production reaches a plateau, then declines
Time 10
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European Oil Production Plateaued, Then Declined
~ 5% / year decline 8
7 ~3% variation 6
5 ~ 6 years Production 4 (MM bpd) 3
2
1
0
1988 1992 1996 2000 2004 11
If world production were to plateau, oil prices would rapidly increase.
Oil Production
Oil Price
Time 12
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In fact, that’s what’s been happening.
92 130 120 88 110 100 84 90
MM bpd 80 80 70
60 Barrel 76 Oil 50 40 World Liquid Fuel Fuel World Liquid price Production Production
72 30 Oil Price - per Dollars 20 68 10 0 2002 2003 2004 2005 2006 2007 2008 Year
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This Presentation
• Background
• Some important basics
• Timing
• Mitigation
• Ramifications
• Final Remarks
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In Oil, Small is Huge
1% of world oil consumption > 800,000 barrels/day
4 - 6% U.S. oil shortages Recessions (1973 & 1979)
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Note the Obvious: In order to produce oil, it must first be discovered.
Example: U.S. Lower 48 States
Discovery Production Discovery & Production / year & Production Discovery Time
~ 30 years 16
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Giant Oil Field Reserve Additions Have Dropped Every Decade Since the 1960s
250
200
150 1970s
100
BillionsBarrels of 50 - Total Discoveries 0 1900s 1950s 2000s
• Oil prices jumped in the 1970s. • Q: Why did discoveries drop? • A: There was less to find.
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The Royal Swedish Academy of Sciences 14 October 2005
54 of the 65
most important oil-producing countries have declining production (past peak)…
(The) rate of discoveries of new reserves is less than a third of the present rate of consumption (in the world).
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Technology & price will NOT reverse decline.
U.S. Lower 48 States
Dramatic Improvements in Oil Field Technology 3.5 Production
3.0
2.5 80 PRODUCTION 2.0 (Billions of Barrels per Year) 1.5 PRICE Price (2003 $ per 1.0 barrels)
0.5
0 0 1950 1970 2000
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The Problem
It’s Liquids Supply, not “energy.”
Peaking is maximum production. It’s not running out soon.
Peak Production
Time - Decades 20
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This Presentation
• Background
• Some important basics
• Timing
• One forecasting approach
• Mitigation
• Ramifications
• Final Remarks
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Where People & Organizations Stand
Sounding the warning / alarm:
IEA, Chevron, Shell, Jim Schlesinger, Boone Pickens, Matt Simmons, The Corps of Engineers, Total Oil, Volvo Trucks, the Chinese, Statoil, Hess Oil, and a number of retired oil company geologists.
Denying an imminent problem:
OPEC, EIA, CERA, ExxonMobil, fewer & fewer others.
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World Maximum Oil Production Forecasts
•Pickens, T. Boone (Oil & gas investor)……………………….. 2005 •Deffeyes, K. (Retired professor & retired Shell)………………….….. 2005 •Westervelt, E.T. et al. (US Army Corps of Engrs)………….……...At hand ~ Now •Bakhtiari, S. (Iranian National Oil Co. planner)……………….... 2005 •Simmons, M. (Oil expert & businessman)………………………..Very soon
•Bentley, R. (University energy analyst)……….………..……..Around 2010 •Campbell, C. (Retired oil company geologist).………….. 2010-2011 •Skrebowski, C. (Editor of Petroleum Review)……………….…. .2010-2011 5 years •Pang, X (China Petroleum Univ.)…………………..…... Around 2012 •Meling, L.M. (Statoil oil company geologist)…..A challenge around 2011 – •Volvo Trucks……………………………………………… .. Within a decade •de Margerie, C. (Oil company executive) ………………...Within a decade •Husseini, S. (Retired Saudi Aramco)………………..………..… 2015 •Merrill Lynch (Brokerage / Financial).…….………..………. Around 2015 •West, J.R., PFC Energy (Consultants)..……………….…….... 2015-2020 8-13 years •Maxwell, C.T., Weeden & Co. (Brokerage)..Around 2020 or earlier •Wood Mackenzie (Energy consulting)……………..Tight balance by 2020
•Shell (Oil company)…….………………………………………..…….2025 •ExxonMobil (Oil company)…….…………………No sign of peaking •CERA (Energy consulting)……………………………………... After 2030 20+ years • EIA……………………………………………………………….... After 2030 • International Energy Agency…………….………... After 2030 23
Forecasting Oil & Gas Supply Is Difficult.
DOE EIA Natural Gas Forecasts With “Good” Data
2002 34.0 Forecast Looks good 33.0 2003 32.0 31.0 30.0 29.0 4 years 28.0
-Year Tcf / later 27.0 2004 26.0 25.0 the U.S. 24.0 2005 23. 0 22.0 2006 Trouble!
North NaturalAmerican Gas Supply to Forecast 21.0 20.0 2002 2010 2020 2030
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This Presentation
• Background
• Some important basics
• Timing
• Mitigation
• Ramifications
• Final Remarks
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Mitigation Is An Essential Bridge to Sustainability
• We must mitigate because it will require decades to massively modify or replace large fractions of the world’s liquid fuel consuming end-use equipment.……We can’t just shut down.
• Climate clash: Climate change is the priority, but peaking is expected to be harsh and to overshadow. Big readjustment!
• Reality: Mitigation & progress on climate change & sustainable energy will coexist for decades.
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It Takes a Long Time to Replace Massively Deployed End-Use Equipment
New Vehicles Added per Year Existing Light Duty Vehicle Fleet
Annual Retirements
• Now ~ 900 million vehicles worldwide. • Adding ~ 50 million vehicles per year.
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Besides Taking Time, It’s Expensive
Median Cost to Replace U.S. Fleets Size Lifetime Half the Fleet (Years) (2006 $)
Automobiles 140 million 17 $1.6 trillion
Light Trucks, 90 million 16 $1.3 trillion SUVs,etc.
Heavy Trucks, 7.5 million 28 $1.7 trillion Buses, etc.
Aircraft 8,500 22 $0.3 trillion
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Mitigation Study A 2005 analysis for the U.S. DOE
ASSUMED CRASH PROGRAM IMPLEMENTATION: THE MOST OPTIMISTIC CASE
Scenario I - No action until peaking occurs
Scenario II - Mitigation starts 10 years before peaking
Scenario III - Mitigation starts 20 years before peaking
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Options
High near term value: • Conservation • Energy efficiency (LDVs) • Drilling offshore & ANWR • Enhanced oil recovery • Heavy oil / oil sands • Gas-To-Liquids • Coal-To-Liquids
Not of near term value - Electricity cannot substitute in existing liquid fuel machinery • Nuclear • Wind ………... Electric / Not Liquid Fuels • Solar
Not yet commercial • Cellulosic biomass, shale oil, or hydrogen 30
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Mitigation Options Considered
- Vehicle Fuel Efficiency
- Heavy oil / oil sands
- Coal Liquefaction
- Gas-To-Liquids (GTL)
- Enhanced Oil Recovery (EOR)
Why these? There’re liquid fuels & ready for Deployment
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Worldwide Crash Program Mitigation of Conventional Oil Production Peaking
35 EOR
25 Coal Liquids Impact (MM bpd) 15 Heavy Oil
5 GTL Efficient 0 Vehicles 0 5 10 15 20 Years After Crash Program Initiation
Delay, then rapid growth 32
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A Model for World Oil Supply / Demand Center on the unknown date for peaking & Assume 100 MM bpd at peak.
Extrapolated Oil Demand - Growing World Economy
120 About 2% 100 growth Shortage 80 (60 MM bpd @ year 20) PRODUCTION 60 (MM bpd) About 2% Lower 48 production decline 40 pattern 20
0 -20 -10 0 +10 +20 YEARS BEFORE / AFTER OIL PEAK
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Scenario I: Mitigation at Peaking
120 Mitigation
100 Shortage 80
PRODUCTION 60 (MM bpd) 40
20
0 -20 -10 0+10+20 YEARS BEFORE / AFTER OIL PEAK
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Scenario Results For A Worldwide Mitigation Crash Program
The Most Optimistic Case
I. Wait for peaking Very Bad
II. Start 10 years early SERIOUS TROUBLE
III. Start 20 years early NO PROBLEM?
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The Shift In World Oil Market Control
Notional picture
100% National Oil Companies (NOCs)
International Oil Companies (IOCs) 0% 1950 Now
MAJOR PLAYERS NOW: Saudi Aramco, NIOC, Pemex, Petrobras, Lukoil, PDVSA, PetroChina, etc.
DIMINISHED PLAYERS: ExxonMobil, Chevron, Shell, BP, ConocoPhillips, etc. 36
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Peak Oil & Exporter Behaviors
• When peak oil is broadly understood, panic could lead to rapid oil shortages & prices rises. It happened in 1973 & 1979.
• For oil exporters: Another large windfall
• Some exporters will likely reduce exports. - New windfall = Less need for income - Realization that national oil resources are finite - Conserving for the future makes good sense
Expect Oil Exporter Withholding
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This Presentation
• Background
• Some important basics
• Timing
• Mitigation
• Ramifications
• Final Remarks
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How Did Oil Shortages Impact?
• The 1973 & 1979 BRIEF oil interruptions caused….
+ Recession + Inflation + Unemployment + High interest rates
World oil peaking won’t be BRIEF.
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A Possible Relationship Between World Oil Shortage & World GDP
• Only experience: 1973 & 1979.
• Since then, many differences, complications, and unknowns, precision is impossible.
• Rough estimate using multiple sources:
% Decline in GDP ~ 1 % Decline in Oil Supply
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When it is no longer possible to add increasing amounts of world oil production, plateau production will end, and production will decline.
Price rising to many $ 100s per barrel
World oil production ?
World oil production Oil Price Now dropping at 3-5% or more Time per year
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Potential Impact On World GDP of a 5% World Oil Production Decline
100
80 GDP?
60 Mitigation 40 5% per year 20 decline rate
Production - MM bpd 0
01020
Time - Years
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This Presentation
• Background
• Some important basics
• Timing
• Mitigation
• Ramifications
• Final Remarks
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The Approaching Shock
• Peak oil is percolating up in awareness + Growing numbers of items in the media + Recognized in the Administration + Growing interest on Wall Street + Google Peak Oil -- 4 million items
It could break into active public consciousness at any time.
• When peak oil hits, aspects of the 1973 & 1979 oil shocks are likely: + Public panic + Hoarding & instant shortages + Major negative reactions on Wall Street + Recession, unemployment, inflation, etc.
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Government Intervention Will Be Required
• Economic & social implications of oil peaking would otherwise be much more chaotic.
• The 1970s and 1980s experience offer important guides on what’s desirable & undesirable.
• Government will have to provide support, incentives, facilitation, & protection.
Presidential leadership will be critical. States will face daunting problems. Industry must implement.
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What Can Virginia Do?
• Educate yourselves - Difficult & painful!
• Develop short and long-range plans + Plan to work together & to compromise. + Permitting in 3 weeks versus 3 years + Etc.
• Plan for deepening recessions / decreased revenues.
• Educate the public.
• Remember ying & yang - There will be opportunities.
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In Conclusion
• Oil peaking / maximum will happen; timing is uncertain.
• Based on likely rates of change, it’s too late to avoid serious economic damage.
Facing the problem squarely is the first step.
Rapid, decisive actions will be required.
Difficult compromises will be needed.
Deployment of technologies will be essential.
We’ll manage but it will be a huge challenge!
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