1. Oil and the Global Economy
Crude prices changed little last week as the various forces moving the markets seemed to balance each other out. New York oil closed on Friday at $96.65 and London at $111.52. In contrast with the oil markets, gasoline futures and natural gas underwent substantial moves. Gasoline futures in New York closed 15 cents a gallon higher as reports of multiple refinery closures and production problems at others in the US and Europe raised concerns over the availability of gasoline in coming months.

Natural gas futures, which had been trading above $4 per million BTUs in November, fell to below $2.30 per million last Monday as warm weather and over-production in the US continued. After Chesapeake Energy and other producers announced that they were making substantial cuts in their drilling programs in the coming year, futures rebounded sharply, closing out the week at $2.67 per million.

The now familiar crises of the Iranian confrontation, the EU’s sovereign debt, employment, interest rates, economic growth and the Syrian uprising continued to make news, pulling the markets one way and then the other. In addition to the world’s multiple mega-crises, numerous smaller situations that will impact the availability of oil continued to fester. Bombs continued to go off amid increasingly unstable political and social situations in Iraq and Nigeria suggesting to some observers that civil wars in one or both of these countries might not be far away. South Sudan shut-in some 350,000 b/d of oil production claiming that Sudan was stealing its oil as it was being exported to customers. Although Libyan oil is reported to be back to 80 percent of pre-uprising production, the political situation is still highly unstable with clashes between various militia groups starting to occur.

In the US, “Election 2012” moved ahead with President Obama devoting a substantial portion of this year’s State of the Union address to energy policy and his various political opponents denouncing his positions. With higher, and possibly much higher, gasoline prices in store for the next few months, energy policy could easily come to dominate the political discourse this year.

2. The Iranian Confrontation
Developments came rapidly last week with the European Union formally establishing a phased embargo on Iranian oil imports starting on July 1st — new contracts with Tehran are banned already. Various other economic sanctions imposed by the UN, US and EU already are starting to have an effect, with the value of Iran’s currency dropping precipitously. For the first time, senior Iranian officials have moved beyond bravado to admit to their people that the sanctions are hurting the economy.

Tehran’s response to the EU’s announcement has taken two tracks. One was to call for renewed negotiations over its nuclear program and an IAEA team is now in Tehran to explore whether the Iranians are genuinely seeking a solution to the crisis or, as many believe, are simply seeking to buy more time to develop nuclear weapons.

The second and more risky track for Tehran was the announcement that it could halt oil sales to Europe as early as this week, thereby preempting the EU’s embargo and depriving Italy, Greece, and Spain of five months’ time to line up other sources of oil. Over the weekend mixed signals came from senior Iranian officials. While debate on a bill to halt oil sales to the EU was postponed, a senior Iranian official said oil exports to the EU would be “stopped soon.” Another official warned that the IEA inspection team had better act “professionally” or suffer the consequences.

Should the negotiation track fail once again, the situation gets murkier. The Iranians are saying that stopping the 600,000 b/d that it currently sells to Europe will drive world oil prices to $150 a barrel and thereby do more harm to the EU’s economies than to Iran as Tehran will benefit from the price increase. However, Libyan oil production is recovering nicely and Saudi production is at a recent high, so that the loss of Iran’s exports may not hurt the EU as much as Tehran portrays. Whether Tehran would be able sell the 600,000 b/d to Asia, possibly at cut rate prices, or be forced to load them onto floating storage for a while remains open. Should Beijing be tempted to fill its strategic reserve cheaply with Iranian oil while the rest of the world suffers from high oil prices is an open question. It is clear that China does not want to become dependent on Iran as its major source of Middle Eastern oil and has much to lose from this confrontation.

There are numerous sub-plots to the embargo story. Some of the oil Iran ships to Europe is coming in repayment for investments that Italy, which is still owed $1.5 billion, has made in Iran. Tehran is threatening to cancel these contracts. It also seems that 95 percent of the world’s oil shipments are insured by EU companies and insurance pools subject to the sanctions. Without proper insurance many tanker owners and destination ports would be reluctant to accept Iranian oil shipments.

Although a handful of Iranian politicians continue to talk about closing the Straits of Hormuz in retaliation for the EU’s embargo, the realization that Iran would be a clear loser in any military confrontation with the West is reducing such talk. The situation remains volatile but for now the ball is in Tehran’s court. The solution to the problem most frequently mentioned is to allow the Iranians to develop their nuclear technology under strict supervision to the point where they could in theory quickly build and deploy nuclear weapons without actually doing so. Whether this solution would be acceptable to those countries who would feel most threatened by a nuclear armed Iran remains to be seen.

3. The Euro Crisis
The interminable sovereign debt crisis continues to muddle along with endless talks and new “agreements” surfacing almost daily. On Sunday yet another agreement on conditions for the next Greek bailout of $170 billion was said to have been reached. As usual, this agreement forgives a large part of Greece’s current debt, said to be as much as 70 percent, and sets strict standards for how the Greeks are to manage their fiscal affairs in the future. This time, however, there are said to be automatic penalties should Athens fail to meet its obligations. As the Greeks have a rather bad track record in meeting EU fiscal standards, there is talk that an EU commissioner, with veto power over Greek budgetary decisions will be stationed in Athens for as long as needed. On Sunday, Germany’s economics minister openly endorsed the proposal for Athens to surrender control over its national budget. A German official said the statement was aimed at other EU members struggling to gain political control over their budgets as well.

Whether the Greeks are willing to accept such a surrender of their national sovereignty to remain in the EU is an open question, as is whether the rest of the EU is willing to sign off on the new agreement and hand over yet another bailout to the Greeks. Many observers are skeptical that the new proposal will be ratified. They believe that the only solution is for Greece to be cut loose from the Eurozone while efforts are made to protect the remaining members.

4. Refining petroleum
There were a number of developments in the last few weeks that contributed to the 8 cent a gallon jump in gasoline futures on Friday. At one point during the day gasoline was trading at a five-month high of $2.96 a gallon after it was announced that Conoco was having troubles at its 238,000 b/d Bayway refinery in New Jersey. This news came after Hess Energy announced that it was considering shutting down another New Jersey refinery for maintenance. In recent months announcements have been made that five large refineries serving the US East Coast were shutting down this spring unless buyers could be found. This comes on top of the closing of two other East Coast refineries in recent years.

As in the US, European refiners are coping with overcapacity, weak demand, and tight credit. Two weeks ago Petroplus announced that it was going into bankruptcy and would shut its five refineries located in the UK, Belgium, France, Germany, and Switzerland. Three of those have already been shut down and the outlook for another is precarious. The prospects for EU refining in the wake of the Iranian oil embargo is also raising concerns. The fear is that Iran will dump its oil production on Asian refiners at cut-rate prices, where it will be refined and shipped back to Europe in a position to undercut local refiners.

The Eastern US has long benefited from refining overcapacity in Europe as refiners there could profitably ship to the US gasoline that they were unable to dispose of locally. Any reduction in EU refining capacity is likely to be felt in the form of higher prices along the US’s eastern seaboard.

The outlook already is for higher prices along the East Coast. While retail prices have not kept up with the recent gasoline price increases in the futures markets – up by over 40 cents a gallon in the last six weeks as compared to a 15 cent increase at the pump – it is only a matter of time. Gasoline prices in relatively high-tax New York and Connecticut are now only 2 cents a gallon below those in California, the traditional price leader in the lower 48. Gasoline prices in the Washington DC area, where the political impact is likely to be the greatest, are not far behind.

Given that it is only January and that we still have four or five months of traditional spring price increases to go before the 2012 peak is reached, this year is giving every indication of shaping up to be a record breaker for gasoline prices. Given that it is a presidential election year, and considering what we saw in Washington during the 2008 gasoline price spike, we can expect the political theater, histrionics, and finger pointing to begin any day now.

Quote of the week
“The approaches needed for tackling the economic impacts of resource scarcity and climate change are the same: moving away from a dependence on fossil-fuel energy sources. Whereas the implications of climate change have driven only slow policy responses, economic consequences tend to drive shorter-term action.”
– James Murray and David King

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

• The International Monetary Fund sharply cut its forecasts for global economic growth, warning about multiple challenges as financial stability is in danger, growth prospects have dimmed, and downside risks have escalated. (1/25, #4)
• The IMF also said the oil-related sanctions imposed on Iran could add at least 20 percent to market prices for crude oil. (1/27, #5)
• Chesapeake Energy, one of the oil and gas producers at the origin of the U.S. natural-gas supply glut, said it will reduce drilling activity this year amid tumbling prices for natural gas. (1/24, #19)
• U.S. energy officials have cut their natural-gas-resource estimates, saying there is far less gas in a region known as the Marcellus Shale than previously thought. (1/24, #3)
• The EIA expects offshore production in the Gulf of Mexico, not onshore shale plays, to be the main driver of growth in US crude output to 6.7-6.8 million b/d by 2020. (1/28, #22)
• ConocoPhillips and China National Offshore Oil Corp. have agreed to pay 1 billion Chinese yuan, or around $159 million, to settle compensation claims resulting from oil spills in Bohai Bay off northeastern China. (1/25, #17)
• Since the US military withdrew from Iraq in the middle of last month, 434 Iraqis have been killed in attacks across the country, one of the highest tolls for that amount of time in the past few years. (1/28, #10)
• Iraq is facing worsening water shortages caused by the failure of successive postwar governments to ensure supplies and extensive dam-building in neighboring states that could trigger sectarian conflict. (1/28, #11)
• South Sudan will press ahead with its shutdown of oil production after negotiations with Sudan ended without agreement. (1/28, #17)
• South Sudan and Kenya signed a memorandum of understanding to build an oil pipeline to the Kenyan port of Lamu. The need for a new pipeline has taken on added urgency since the South Sudan production shutdown began on Jan. 22. (1/25, #13)
• Enterprise Product Partners said it is “looking at” June 1 as the date to begin pumping crude on the reversed Seaway crude pipeline. The reversed line is to ship 150,000 b/d of crude from Cushing, Oklahoma, to Enterprise’s ECHO terminal in Houston and with modifications the line could ship up to 400,000 b/d in early 2013. (1/28, #23)
• The first of hundreds of employees have been laid off from a Philadelphia-area oil refinery that hasn’t found a buyer after four months on the market. ConocoPhillips laid off two shifts of workers at its Trainer, Delaware County facility on Thursday. The remainder of the 385-employee workforce is expected to be laid off soon. (1/28, #24)
• Environmentalists who scuttled development of a coal-export terminal in Washington state last year are back at it in Oregon, trying to keep two ports from becoming transit points for coal shipped to the Far East. But while many local residents share the activists’ concerns about pollution, the projects’ promise of jobs also resonates widely. (1/28, #26)
• Russia has set a new record on volumes of fuel drawn from underground reservoirs in the face of increasing winter demand by domestic and European customers. Draws on underground natural gas reserves inside Russia totaled 565 billion cubic meters on Wednesday - topping a previous 553 billion cubic meters single day record set in January 2011. (1/28, #31)
• OPEC will increase shipments through the middle of February as winter demand in the northern hemisphere reaches its peak, according to tanker-tracker Oil Movements. OPEC will ship 23.51 million barrels a day in the four weeks to Feb. 11, 1.3% more than the 23.2 million transported in the period to Jan. 14. (1/27, #4)
• Pakistan and India made considerable progress in talks over a multibillion-dollar gas pipeline planned from nearby Turkmenistan. Pakistani and Indian officials met in New Delhi to discuss prospects for the $7.6 billion Turkmenistan-Afghanistan-Pakistan-India natural gas pipeline. (1/25, #11) (1/27, #21)
• Kuwait chose Total as the third partner to build a $9 billion oil refinery in China, as the Gulf state seeks a foothold in Asia’s biggest consumer of refined products. (1/26, #13)
• Two major oil companies in Libya say they expect to restore their pre-war production levels by the end of the month, just in time to help pick up the slack for energy-hungry Europe if Persian Gulf crude supplies are cut off. But the security situation in the North African state five months after the overthrow and death of longtime dictator Moammar Gadhafi remains as precarious as it is in the gulf. That could adversely affect oil production. (1/26, #16)
• n Nigeria, the union of electricity workers have given the government up to February 8 to address their grievances or the sector would be shut down without notice. (1/26, #17)
• Nigeria’s central bank told a parliamentary committee that subsidy payments for imported fuel totaled $11 billion, as gasoline consumption in the OPEC member country had jumped by more than 100 percent over the past five years. (1/25, #15)
• Argentina’s president has condemned the UK prime minister’s claim last week that her government takes a colonialist attitude to the Falklands Islands. (1/26, #18)
• The drought sweeping swathes of South America’s prime farmland is really starting to bite in Argentina now as farmers count the cost of irrevocably lost crops. (1/24, #16)
• China’s apparent oil demand in December rose 0.7 percent year on year to 41.02 million metric tons, or an average 9.69 million b/d, reaching new records despite slowing growth. (1/26, #19)
• China is rapidly becoming a country on wheels and its crowded driving schools are racing to churn out licensed drivers as fast as cars roll off the assembly lines. But judging by the daily smash-ups and blatant disregard for even basic traffic rules on China’s roadways, quantity seems to have trumped quality at many schools. (1/26, #20)
• The Japanese government’s worst-case scenario at the height of the nuclear crisis last year warned that tens of millions of people, including residents of Tokyo, might be forced to leave their homes, according to a report. Fearing widespread panic, officials kept the report secret. (1/26, #21)
• North Dakota’s economy outpaced every other state in 2011, with the fastest growth in personal income, jobs and home prices. Yet the oil boom fueling the nation’s lowest unemployment rate also has a dark side. It’s pushing rural North Dakota’s housing, electric, water, police and emergency services to the breaking point. (1/26, #26)
• Enbridge’s controversial plan to build a pipeline to the Pacific Coast from oil-rich Alberta requires the consent of aboriginal bands, some of whom staunchly oppose the project. (1/26, #30)
• India is producing power from solar cells more cheaply than by burning diesel for the first time, spurring billionaire Sunil Mittal to jettison the fuel in favor of photovoltaic panels. (1/26, #35)
• India is likely to miss its electrical power capacity addition target for the five-year plan that ends this year, a government official said. (1/25, #18)
• Gazprom plans to drill 10 wells in Bangladesh in collaboration with a state-owned company. (1/24, #18)
• An unexpected renaissance in US energy production derailed Cheniere Energy’s debt-fueled ambitions to become a big importer of liquefied natural gas. Now, if it can stay ahead of its creditors, the money-losing company is aiming instead to be the nation’s first large LNG exporter. (1/23, #19)

The director of the U.S. Geological Survey (USGS) will be delivering a lecture titled “U.S. Energy Outlook: Whatever Happened to ‘Peak Oil’” at Indiana University on February 6. The description of the lecture provides some background: “Not long ago, the public heard much concern that the nation and the globe had reached or was about to reach the point of peak oil production and would be on a downward trajectory due to declining resources. Despite growing demand for energy, however, fossil fuel resources have never been higher.”

One would hope that the USGS director will point out that the peak of US oil production occurred in 1970 around 10 million barrels of oil per day, and while US production has increased recently, it currently stands far below the peak at approximately 6 million barrels of oil per day - this in a time when “fossil fuel resources have never been higher.” As those familiar with Peak Oil know, the key issue is not the total size of the resource - but the rate at which the resource can be extracted and utilized.

News of the USGS director’s address prompted thoughts about the nature of the Peak Oil debate and how criticism of Peak Oil typically contains certain predictable characteristics, often fails to emphasize the daily rate of extraction, and dismisses the reasonable view that we should soberly examine both optimistic and pessimistic projections about future oil supplies.

Anatomy of the Peak Oil Critique

Peak Oil thought is on a spectrum, and it is important to remember that there are a wide variety of opinions and positions. But for the purpose of discussion, it’s still possible to examine larger groups, two of which I’ll call: mainstream Peak Oil educators and mainstream Peak Oil critics.

The differences between the two were on display again this past week with the publication of “Oil’s Tipping Point has Passed” in the journal Nature. The essay, by James Murray and David King, argues that the economic pain of our flattening oil supply will trump climate change as the primary reason to transition away from fossil fuels. The essay was featured online in Wired, Scientific American, and the blog of the New York Times (a summary of the essay is presented at the Energy Bulletin).

Within hours, articles critical of the Murray/King essay began to appear. And as I read them, I was reminded that most articles critical of Peak Oil tend to share some of four predictable characteristics that you see again and again:

• The Peak Oil Theory: An unfortunate common practice is attacking the speaker rather than the speaker’s position. It is common to see Peak Oil with the words “so-called” before it and “theory” after it. When Matthew Simmons was alive, he was frequently called a Peak Oil prophet in print, accused of spreading his Peak Oil religion. These are attempts to suggest that the “case is still out” on Peak Oil.  To be clear: the only way to argue against Peak Oil is to advocate that oil is an infinite resource that will never reach a production peak. The true debate is not about Peak Oil itself, but about the characteristics and ramifications of Peak Oil. By attacking the speaker, some critics hope to win the public relations battle in the mind of the audience before they ever have to have the true debate focused on data.
• Running out of Oil: There are two things you usually can say about someone using the phrase “Running out of Oil” in 2012 - first is that the person is probably early in their full understanding of the Peak Oil concept. Second, if the first isn’t true - then it’s usually someone trying to mislead the public about the Peak Oil concept. No one suggests that we’re running out of oil. But Peak Oil critics work tirelessly to attach this particular straw man onto Peak Oil educators - because it’s very easy to argue against. Michael Levi strongly disagreed with the Murray/King essay and wrote about it an article that is worth reading. Unfortunately, he gave the article the title: “How Not to Argue That We’re Running Out of Oil.” Of course, that’s not what Murray/King are suggesting at all. They even go so far as to literally include the line that’s become almost mandatory in any Peak Oil essay: “We are not running out of oil, but we are running out of oil that can be produced easily and cheaply.”

• Arguing Against the Past: Daniel Yergin frequently spends a great deal of time focusing on past dire predictions that didn’t come true - as to somehow suggest that the thoughts of modern-day Peak Oil educators are unfounded. In the Business Week article “Everything You Know About Peak Oil is Wrong“, Charles Kenny spends the bulk of his article attacking the Limits to Growth, a book from the 1970s. When Newt Gingrich, current US Presidential candidate, called Peak Oil “one of the great myths of the past 20 years,” he also argued against the Limits to Growth. And in a recent article, Steve Maley spends the majority of his time discussing M. King Hubbert’s work in the decades 1950-1980. With much respect to the publication of the Limits to Growth and the great work of M. King Hubbert - both took place well before I was born! Peak Oil thought didn’t simply end at 1980. Peak Oil critics need to do a better job of staying in the present, debating the current thoughts and data of the prominent Peak Oil experts of today.

• The Chief Prescription: Faith. The only thing more curious than the amount of times you see phrases like “Oil is created in the minds of men,” is how often these phrases are taken seriously. Of course technology will improve. New oil will be discovered. And new methods of more efficient extraction developed. But should one simply assume that all of this will happen on-time, and in exactly the quantities and quality needed? Many Peak Oil critics would argue “Yes,” that if you simply believe hard enough and trust the power of market forces, all will end well. In the case of the two hungry economists waiting for the demand of their growling stomachs to bring them a sandwich… they’re likely still waiting.

(Some of these characteristics are also covered in Robert Rapier’s excellent article “Five Misconceptions about Peak Oil“)

This chart from the IEA’s 2010 annual report can take on different meanings depending on how you interpret the oil yet to be found/developed.

Australia’s Catalyst program examined this point in their video report from April 2011:

An Argument in Different Languages

A few years ago, someone developed an image of a cubic mile of oil, roughly the amount of oil consumed by the world in a year. Imagine that a large tube extended from the cube, and that this tube was the only way to access the giant amount of oil contained within. In this scenario, the Peak Oil critic would focus on the cube, correctly explaining the massive amounts of total oil available. A mile wide on all sides and up through the sky - it would seem endless. Meanwhile, the Peak Oil educator would discuss the tube, explaining that total size of the cube - while important - isn’t the point, the size of the tube and the amount of oil one is able to extract per day (and its cost) should be the true focus.

In this way critics and educators often spend time speaking correctly about different issues.

In the current US Presidential campaign, the issue of colonies on the moon was actually a point of discussion recently. The moon represents a large source of resources, but most people intuitively understand the tremendous costs of currency and energy required to travel to the moon, and the difficulties of operating in that environment. Unfortunately back on Earth, when a Peak Oil critic speaks breathlessly about large oil supplies trapped in shale, under miles of water in the Gulf of Mexico, or the icy waters of the Artic - the public often does not have the same understanding of the difficulty of extraction and processing. To them, oil is oil. But in reality, the energy-returned-for-energy-invested for oil production has declined steadily over the past 100 years - oil production is simply more difficult and more costly today than it was in the past - a simple sign of that is the price of oil itself.

Large new supplies of oil are wonderful, but if the cost of oil continues down the path of ever increasing price and volatility - the economy as a whole will still suffer.

Prudence is Always a Reasonable Position

Now in 2012, as more and more people begin to understand the true nature of the Peak Oil debate, the arguments of Peak Oil Educators continue to gain traction.

This position - that we should critically examine global oil depletion and develop a plan to mitigate the economic consequences of oil production decline - is not just the position of ASPO-USA, it’s also the position of organizations from Australia, the United Kingdom, and around the globe, financial professionals, public health professionals, growing numbers of economists, and institutions as varied as the US and German militaries, and the U.S. Government Accountability Office.

The notion that planning for our collective energy future should take into account pessimistic projections as well as optimistic projections, and that future planning should not rely solely on oil fields not yet found and extraction technology not yet invented: these are not radical views, for most - they are common sense.

D. Ray Long serves as the Assistant Director for ASPO-USA and resides in Washington D.C. He received his Bachelors of Science from Michigan State University and a Masters in Engineering studying alternative energy at Wayne State University. Previously he served as a consultant focusing on residential appliance energy standards for the U.S. Department of Energy’s Energy Star program.

By Kurt Cobb

Which of the following can we count on to act as a “bridge fuel” to a renewable energy economy?

1. Oil
2. Natural Gas
3. Coal
4. None of the above

The correct answer is: D. None of the above.

Mark Twain is reported to have said: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” What most environmentalists think they know for sure is that oil, coal and natural gas are all abundant-so abundant, in fact, that many environmentalists believe they are forced to make a Hobson’s choice of natural gas as a so-called “bridge fuel” to a renewable energy future.

Though natural gas produces fewer greenhouse gas emissions per unit of energy than coal or oil when it is burned, it still contributes mightily to climate change. In fact, according to research by a Cornell University team, natural gas from shale, which will make up an increasing share of U.S. gas supplies, is worse than conventionally produced gas which is now declining. Because shale gas wells are drilled in a way that releases considerable volumes of unburned methane into the atmosphere, shale gas is probably also worse than coal.

Methane is about 25 times more potent than carbon dioxide as a greenhouse gas, and it leaks into the environment over the lifecycle of natural gas from drilling through delivery. In addition, hydraulic fracturing or fracking in the country’s vast shale formations pollutes the air and surface waters surrounding drill sites and threatens the groundwater because the process uses toxic chemicals.
It turns out, however, that what most environmentalists know about the future supply of natural gas and other fossil fuels is based more on industry hype than on actual data. And, that means that they are missing a key argument in their discussions about renewable energy, one that could be used to persuade those less concerned about pollution and climate change and more concerned about energy security: There is increasing evidence that no fossil fuel will continue to see its rate of production climb significantly in the decades ahead and so none of them is a viable “bridge fuel,” not natural gas, not oil, not coal. This means that global society must leap over fossil fuels and move directly to renewables as quickly as possible. In advanced economies this leap must be combined with a program of radical reductions in energy use, reductions which are achievable using known technologies and practices.

Okay, perhaps you are wondering about the data. Let’s discuss each fossil fuel separately:

Oil

The first thing you should know about oil is that worldwide production has been on a plateau since 2005. This is despite record high prices and furious exploration and drilling efforts. There have been well-publicized finds here and there that may seem large. However, at the current worldwide rate of consumption, one billion barrels of oil lasts only 12 days. Thus, the multi-billion barrel finds announced in the last decade or so will have little impact on the longevity of world supplies.

Another key issue is one that oil companies do not want to emphasize: depletion. The worldwide average for production declines in existing oilfields has been estimated to be about 4 percent per year. That means that each year just to stay even, the industry must develop new oil production capacity equivalent to the current capacity of the North Sea, one of the world’s largest fields. To grow production, it must, of course, exceed this amount, and that hasn’t been happening.

When you mention these hard facts in polite company, you will undoubtedly be met with skepticism. But the data are available to the public from the U.S. Energy Information Administration (EIA) website. The agency is the statistical arm of the U.S. Department of Energy and is widely considered the gold standard of energy information in the world.

Now, don’t be deceived by shifting definitions of oil. When the petroleum glut long predicted by the optimists failed to appear, they started lumping in ethanol, biodiesel and natural gas liquids with petroleum and calling them all “oil.” These other products are useful, but they are not as energy-rich, versatile or easily transported as oil. Our current infrastructure is heavily dependent on oil inputs with no real substitutes available in the quantities required.

You will also likely be met with protestations that we still have lots of oil: tar sands in Canada, heavy oil in Venezuela and even oil shale in the American West, primarily Colorado. Well, this represents the difficult-to-get oil. We extracted the easy stuff in the first 150 years of the oil age. And, while it is true that these resources and others like them represent an immense store of hydrocarbons, what matters is the rate at which we can produce them.

Because of the high-cost, capital-intensive nature of such production, the rate of production will be slow to ramp up and difficult to maintain. The hydrocarbons locked in the tar sands and the Orinoco oil belt in Venezuela aren’t what we call oil and must be heavily processed at high cost using enormous amounts of energy. As for the oil shale in the America West, the amount of commercially produced oil we are currently getting from that oil shale is zero. No one has figured out how to extract it profitably. Partly this is because oil shale contains no oil. Instead, it contains a hydrocarbon-rich waxy substance called kerogen which must be heavily processed to turn it into oil.

An analogy might be useful: If you inherit a million dollars with the stipulation that you can only take out $500 a month, you may be a millionaire, but you will never live like one. Increasingly, this is the situation we will find ourselves in when it comes to oil. The key issue is the rate of production, not the size of the resource. The hard-to-get oil resources are large, but they take a long time to develop and require strenuous, expensive and energy-intensive methods to extract. All this, when combined with the relentless depletion of existing fields, spells little or no growth in the worldwide rate of oil production in the coming years.

Natural Gas

By now you’ve been told so many times in television ads and news articles that we have a 100-year supply of natural gas in the United States that you assume it must be true. While the claim itself is suspect, even if we accept it, there is a very serious omission. The claim in its entirety reads: a 100-year supply of natural gas at current rates of consumption. If natural gas is to be used as a so-called “bridge fuel”-a  fuel that will power society with the least environmental cost while we deploy nonpolluting, renewable energy-then its rate of production will have to grow considerably if we expect it to displace coal and oil.

Simple spreadsheet calculations will tell you what happens to such long-term supply claims under the pressure of a little exponential growth. At just 2 percent per year growth, the 100-year U.S. domestic natural gas supply is exhausted in 56 years. If we assume that production peaks when about 50 percent of the resource is exhausted, this puts the peak within 35 years. Think about it. Even if the optimists are correct, with a production growth rate of just 2 percent per year, the country reaches a peak within 35 years! What will we do after that?

The picture gets acutely worse as the rate of production growth rises. A 3 percent growth rate implies exhaustion in 47 years and peak in 31 years. A 5 percent growth rates means exhaustion in 37 years and a peak in just 26 years.

As it turns out, the EIA projects a growth rate of just 0.4 percent per year in U.S. natural gas supplies through 2035 with production jumping from about 24 trillion cubic feet (tcf) in 2010 to about 26.5 tcf in 2035, hardly a bonanza.

Beyond this consider that the vast resources of natural gas from deep shale layers, commonly called shale gas, may not be so vast. A U.S. Geological Survey assessment pared the EIA’s original estimate of “technically recoverable” natural gas in the largest of the shale deposits, the Marcellus Shale, from 410 tcf to just 84 tcf, an 80 percent reduction. And, this says nothing about whether the gas will be economically recoverable.

The 100-year figure was based on inflated estimates of recoverable natural gas and on ignoring the fact that the rate of natural gas consumption would have to rise exponentially to displace other fossil fuels. These two facts suggest that natural gas will not be the bridge fuel environmentalists are looking for.

Coal

Among the environmental community, the big fear is that coal will displace clean natural gas and even become a source for liquid fuels as oil supplies wane. That fear is founded on industry claims of vast coal supplies in the United States and elsewhere. But four studies suggest that coal may not be nearly as abundant as once believed.

A 2007 National Academy of Sciences report concluded that claims of 250 years of coal reserves in the United States at current rates of consumption could not be supported. The number was more likely to be 100 years. However, it said that a comprehensive survey was necessary to determine a more accurate figure.

But if coal consumption were to grow beyond the current rate, then the 100 years of supply would quickly shrink as in the case of natural gas. And, data from EIA shows that the total heat content of coal mined in the United States has been declining since 1998 despite roughly level production. This means that coal grades are dropping and that the actual energy the United States gets from domestic coal peaked in that year.

A second study by David Rutledge at the California Institute of Technology concluded that worldwide reserves are probably half of those currently stated. Rutledge noted that unlike oil reserves, coal reserve estimates have been steadily dropping over time as unwarranted assumptions were stripped away and the focus was put on what is actually minable.

A third study in 2007 by an independent group of analysts in Germany, the Energy Watch Group, suggests a worldwide peak in the rate of coal production as early as 2025. The authors noted that poor quality data hampered their efforts. One of the troubling gaps was China, a country thought to have some of the largest coal resources in the world. Chinese coal data, however, have not been updated since 1992, and 20 percent of China’s reserves have supposedly been mined since that date.

A fourth study published in the international journal Energy last year came to the shocking conclusion that the rate of worldwide coal production from existing fields would peak in 2011. The authors did acknowledge that vast coal fields in Alaska and Siberia remained to be developed, but doubted that these difficult-to-extract and therefore expensive reserves would be developed in time to forestall a decline. They also wrote that production from existing mines is expected to fall by 50 percent over the next 40 years.

The researchers explained that this has serious policy implications. One such implication was that money currently being spent on carbon capture and sequestration technology-a technology that assumes vast additional supplies of coal-would be better spent on outfitting existing coal-fired power stations with supercritical steam turbines, lifting efficiency from 35 percent to 50 percent. This would reduce the rate of greenhouse gas emissions while stretching out the available coal supplies so as to aid an energy transition.

Conclusions

No one knows the future. But making public policy based on industry hype could turn out to be disastrous. Keep in mind that it is the job of fossil fuel industry executives to make sure they can sell their in-ground inventories. And, of course, it’s not their job to make good public policy. Our current energy policy, which I refer to as the Good-To-The-Last-Drop Policy, has already meant a huge windfall for oil producers and to a certain extent coal producers. And yet, both regale us with tales of plenty even as constrained supplies send prices skyward.

It is certainly possible that yet-to-be-invented technologies will extend the life of fossil fuel supplies. The question is whether such technologies can be deployed before overall rates of production for oil, natural gas and coal begin to decline. Modern industrial society depends for its proper functioning on the continuous input of high-grade energy resources. If those inputs start to decline or even fail to grow, the system will falter. Some believe we are already seeing the effects of constrained oil supplies on the economy as record high prices suppress economic activity and pressure an already fragile financial system.

It seems doubtful at this time that future technologies for exploiting fossil fuels will be able to do much beyond softening the inevitable declines. And, given the known trends and data, it seems foolish to wait for these yet-to-be-invented technologies to appear. That means that leapfrogging now past fossil fuels to renewable energy is not just desirable but probably inescapable. The only question is whether we as a society will do it with a focused plan for a rapid transition or whether the transition will be chaotic and marked by violent swings in the economy as the world lurches from one energy-induced crisis to another.

Kurt Cobb is a columnist for the Paris-based science news site Scitizen and author of the peak-oil-themed thriller Prelude. His work has also been featured on Energy Bulletin, The Oil Drum, 321energy, Common Dreams, Le Monde Diplomatique, EV World, and many other sites. He maintains a blog called Resource Insights.

1. Oil and the Global Economy

Oil prices were relatively steady at around $100 for NY crude and $111 for London’s Brent until several factors came together to push prices down a bit on Friday. News that manufacturing in China continues to contract combined with the possibility that Iran might return to the negotiating table to discuss its nuclear programs and limited progress in the Greek debt negotiations all contributed to the decline. The news on Thursday that gasoline consumption in the US continues to fall and is now down to the lowest levels in more than a decade did not help. The EIA also reported that petroleum consumption in the US over the last four weeks was down 7.2 percent as compared to last year. Optimism for an economic rebound in the US remains difficult to understand given that oil consumption in the US is now some 2 million b/d below that of the mid-90s and continues to fall.

Natural gas prices in the US have fallen 24 percent in the last eight trading days to 10-year lows. NY futures closed on Friday at $2.34 per million BTUs and at one point touched $2.18 on the spot market. Given that warm weather is forecast for next month across much of the northeastern US, some analysts are expecting prices to fall below $2 per million shortly.

Last Monday the Nigerian trade unions called off their nationwide strike after President Jonathan said he would cut gasoline prices by reinstating part of the subsidy. Violence on the part of Islamic separatists in northern Nigeria continued to grow last week. All this suggests the instability in the country will continue.

The IEA’s monthly Oil Market Report reflects the prevailing pessimism over the state of the world economy by forecasting a drop in the increase of global demand for oil next year from 1.3 million b/d to 1.1 million. The Agency also notes that if the economic situation really goes down hill, there might not be any increase in oil consumption at all in 2012. OPEC production has been growing of late with more Libyan production coming back online and the Saudis pumping more oil than usual. December OPEC production increased by 240,000 b/d to 30.89 million — the highest in three years.

2. The Iranian Confrontation
Much of last week’s news was dominated by threats and bluster from an aggrieved Iran as the sanctions imposed by the US and EU, with a little help from their allies, continued to squeeze the Iranian economy. The Saudi’s announcement that they and their Persian Gulf allies could make up for any loss of Iranian oil shipments due to the sanctions was particularly galling for Tehran which responded with yet another round of threats and bluster. Most of the countries that are currently importing significant amounts of Iranian crude are threading a middle course by quietly trying to line up other sources of supply while not provoking Tehran too much.

Moscow, which sees little to lose by continuing the confrontation, continues to support Tehran by announcing its opposition to tougher sanctions. The Iranians are busy moving their nuclear scientists to places where they would be safe from assassination, and continue burying whatever they can of their nuclear program.

The most important development last week may have been the visit of Chinese Premier Wen Jiaboa to Riyadh and other Gulf Capitols. While Beijing is still publically opposing stronger sanctions on Iran, it is clearly worried about what the situation could do it its oil supply as nearly half of China’s oil imports and a quarter of its current consumption is coming through the Straits of Hormuz. While Tehran is saying that Beijing will take any of its crude production that it cannot sell elsewhere due to the sanctions, the Chinese, who got about 550,000 b/d from Iran last year, do not want to be in the situation where they are dependent on Iran for that much of their oil supply. Should hostilities break out, Iranian crude exports would likely disappear entirely leaving Beijing in dire straits. Interestingly, Chinese imports from Tehran this month are due to drop by 220,000 b/d allegedly due to a commercial dispute, but Beijing may have ulterior motives.

During his visit to the Middle East last week, Prime Minister Wen Jiabao warned Iran not to build nuclear weapons and to settle the dispute through negotiations. While unwilling to join in the West’s sanctions, Beijing is clearly sending a message to the Iranians that they are on a course that threatens world peace. While visiting Doha, Wen stated that China “adamantly opposes Iran developing and possessing nuclear weapons” - which is about as clear as Chinese diplomacy can get.

It is not difficult to connect the Premier’s statement with hints on Friday that Tehran might be willing to return to negotiations. The EU’s Foreign Ministers will meet on Monday, January 23rd to ratify the EU’s sanctions program with Paris pushing for the embargo to start in three rather than six months. Another side effect in recent days is that the Iranian military has stopped warning the US Navy to keep its ships out of the Persian Gulf or face the wrath of Iran.

3. The Euro Crisis
Europe continues to muddle along with endless meetings taking place to deal with the many aspects of the crisis. Last week bond auctions in Spain and Italy went well thanks to hundreds of billions of dollars in nearly interest-free loans that the European Central Bank made to European banks. In turn the banks used the money to buy government bonds thus kicking the can of Eurozone collapse further down the road.

Greece, which is facing a messy bankruptcy in March unless it gets a €130 loan from its Eurozone partners, is the current upcoming crisis. Prior to receiving the loan, Athens must get its fiscal house in order and has been meeting with representatives of its bond holders over how much of a loss the bondholders vs. the taxpayers should take when the bonds’ value is written down.

Beyond the possibility of a Greek default, there are numerous mini-crises popping up all over which do not bode well for the continent’s economic stability. France’s president is fighting for his political life in the wake of the S&P downgrade of the country’s debt. The Euro continues to fall keeping downward pressure on oil prices. The key question is whether the EU’s muddling along, by printing money and implementing “reforms” will do much good. The effect of the proposed embargo on Iranian oil on Europe is another unknown, but Tehran is warning of dire consequences. With numerous austerity programs being implemented in response to mounting debts, it seems almost certain that economic activity will slow. The conventional wisdom that a recession or worse is coming this year continues to dominate much of the commentary.

4. China
Despite the gradual slowing of China’s economic growth, oil consumption is still moving upwards at about 400,000 b/d additional barrels each year. Economic growth in the 4th quarter was reported as 8.9 percent, down from 9.7 percent earlier in 2011. For the year, China’s growth was reported to be 9.2 percent as compared to 10.4 percent in 2010. Industrial production, however, was up by 12.8 percent in December as compared with last year.

Even with the slowdown, economic growth at this pace continues to strain China’s energy supply. Electricity consumption for the year was up 11.7 percent, but still resulted in shortages of 25-30,000 MW during the peak power consumption months of January and July. Similar shortages are expected again this year.

In looking at China’s oil consumption for 2012, the IEA expects that total oil consumption will increase by 4.3 percent during the year as economic growth continues around 9 percent. China’s demand for oil is expected to grow by another 400,000 b/d next year which is 40 percent of the projected increase in global demand. The growth in demand, however, could be higher should China decide to make major increases to its strategic petroleum reserves, which they seem to do during periods of weak prices.

Quote of the week
“Oil is expected to be the slowest-growing fuel over the next 20 years.”
– BP Energy Outlook 2030

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

• Western sanctions on Syrian oil exports have cost the country $2 billion since September. (1/21, #12)
• Venezuela’s state-owned oil monopoly Petroleos de Venezuela reported a consolidated financial debt of $34.9 billion at the close of 2011, up nearly 40% from the previous year. (1/21, #18)
• Chevron Corporation has filed an appeal seeking the review of a judgment issued against it early this month in an Ecuadorian court. Chevron is accused of oil contamination in Ecuador’s Amazon region. The company denies the allegations. (1/21, #19)
• China cut gasoline exports to the lowest level in almost three years in December and diesel imports reached their 2011 high as fuel was stockpiled to meet increased demand for transport around the Lunar New Year break. (1/21, #22)
• The US government has published its first draft of a national strategy that provides a road map for authorities responding to climate change. US Interior Department Deputy Secretary David Hayes said rising sea levels, warming temperatures and other climate issues are having an effect on everything from wildlife to natural resources. (1/21, #24)
• Global warming-related sea level rise constitutes a major threat to the US capital, with the potential to inundate national monuments, museums, military bases, and parts of the Metro Rail system during the next several decades and beyond, according to a recent study published in the journal ¡”Risk Analysis.” (1/19, #33)
• Global warming threatens China’s march to prosperity by cutting crops, shrinking rivers and unleashing more droughts and floods, says the government’s latest assessment of climate change, projecting big shifts in how the nation feeds itself. (1/19, #18)
• The US oil and natural gas rig count rose by 21 to 2,008 for the week that ended Friday. (1/21, #30)
• Royal Dutch Shell said it will spend nearly $1 billion on deep-water oil exploration off the coast of Nova Scotia. It is the largest amount ever spent on offshore drilling rights on Canada’s east coast, and represents a gamble for Shell. (1/21, #31)
• Oil and gas companies drilled 34 percent fewer wells on the UK Continental Shelf last year as compared with 2010. Key causes of this decline are economic turbulence and rig shortages. (1/21, #34)
• The gas, diesel and butane crisis in Egypt continued while hundreds of demonstrators blocked a number of roads in protest of the ongoing crisis, which the government announced has been solved. (1/16, #21) (1/20, #11)
• The official overseeing Japan’s energy industry said there may be no nuclear reactors operating when power demand peaks this summer, as the country struggles with how far and fast to reduce its reliance on nuclear energy. (1/20, #17)
• Swiss-based refiner Petroplus has started the process of finding a buyer for its refinery in the northern French town of Petit-Couronne, as its struggles to convince banks to unblock credit lines that would keep it afloat. (1/20, #20)
• BP predicts that world oil demand will rise by 18 percent from 2010 levels to 103 million b/d by 2030, making it the slowest-growing fuel in the next 20 years. (1/19, #4)
• Iraq will be able to raise its oil export capacity from southern terminals by 900,000 b/d when a new single point mooring is tested in few days. (1/18, #16)
• Tankers in Iraq will start loading crude from new export terminals by Jan. 31, marking the completion of the first phase of a southern oil export expansion project. When all of its stages are complete, the multi-billion dollar project will add 5 million b/d of export capacity. (1/19, #13)
• Some of India’s biggest tycoons are set to make their case to Prime Minister Singh on Wednesday on how to resolve the country’s worsening electricity crisis, adding pressure on a government blamed for neglecting major policy initiatives. (1/19, #24)
• The New Year has greeted Americans with the highest January gas prices ever, and some analysts say prices could get close to $5 a gallon in some areas during the warm-weather driving season. (1/19, #25)
• One of the world’s largest oil refineries will close next month, stunning nearly 2,000 workers and threatening to upend the reeling economy of the U.S. Virgin Islands. Industry analysts said the closure is unlikely to have a major effect on the global oil market, but Gov. John de Jongh described the loss of the territory’s largest private employer as “a complete body blow” for the U.S. territory of about 108,000 people. (1/19, #27)
• A pipeline extension of 1,000 kilometers to bring natural gas to European markets from Norway’s Arctic waters could be built in eight years at a cost of more than $4 billion. (1/19, #36)
• The World Bank is urging developing nations to start planning for a major slowdown in global growth this year. (1/18, #8)
• Egyptian gas supplies to Israel resumed on a limited basis after the latest cutoff of nearly two months. (1/18, #18)
• Chilean President Sebastian Pinera says the country’s energy outlook is likely to get worse before it gets better. (1/18, #22)
• Enbridge is considering options to expand its crude pipeline capacity in the US Bakken region in addition to company projects already proposed and under way. (1/18, #25)
• Bowing to public pressure, Bulgaria’s government says Chevron cannot explore for shale gas in the country using the extraction technique known as “fracking.” (1/18, #28)
• Suezmaxes, tankers hauling about 1 million barrels of oil, are poised for their worst year in more than a decade as the biggest contraction in U.S. East Coast refining in at least 20 years means less cargo on their major trade route. (1/17, #23)
• The European car market fell by 1.4% to 13.6 million vehicles in 2011, marking the fourth-consecutive annual decline, The outlook for this year looks bleak as tough austerity measures are expected to eat into demand. (1/17, #27)
• Norway’s oil production will decline despite major discoveries made last year, while gas production will continue to rise. (1/17, #28)
• OPEC says its estimates that world demand for crude will grow next year remain on track, despite the Eurozone crisis and other economic problems. (1/16, #6)
• UK military leaders have raised concerns that more than 80 per cent of the UK’s liquefied natural gas imports would be halted if Iran made good its threat to block the Strait of Hormuz. (1/16, #22)
• Saudi Aramco expects to raise its refining capacity to 8 million b/d as it increases downstream investments. (1/16, #23)
• Saudi Aramco will continue to donate fuel to Yemen in February. (1/16, #24)
• State-run Oil India plans to buy shale gas assets worth up to $200 million and is scouting for potential acquisitions in the U.S. and Australia as it seeks to gain expertise in the field ahead of India’s plans to auction blocks in the country. (1/16, #34)

By Suzanne Sayer, PhD

During the first Arab oil embargo President Nixon put price controls on petroleum. The next administration successfully launched the first round of energy conservation measures and promoted the development of alternative and renewable energy resources. By the early 1980s oil prices had stabilized, and the GOP in the White House had little interest in continuing the policies of the Carter administration. When President Reagan’s “energy” policy was adopted during the 1980s, R&D in renewable energy resources was neglected. The USA abandoned its position as the most advanced country in the development of alternative and renewable resources. Since then, the Pacific Ring of Fire countries surpassed us in the development of geothermal resources, and northern European countries bested us in wind power, while we focused on petroleum that is ever deeper and more difficult to extract.

The Danes and Germans not only developed technologically advanced wind turbines, they also figured out how to integrate wind power into their national electrical grids using High Voltage DC transmission lines. They consume hydropower from Norway when wind was not blowing, and reverse the power flow when the wind blew. They began to model and understand electrical generation, transmission and distribution systems that integrated wind into their nuclear and coal-based load generation system. With the waning of European oil and gas, a whole wind industry developed in northern Europe leaving us a decade or two behind.

Simmons’ Dream:

When Matt Simmons retired he undoubtedly realized that of the fifty states, Maine was the most highly dependent upon petroleum for its energy needs. Over 75% of Maine’s households heat with fuel oil, no doubt he found we were completely dependent on others for our energy needs. Simmons established the Ocean Energy Institute (OEI) and brought his expertise and contacts in the off-shore oil industry to jump start a renewable energy industry in Maine. This state, settled by people who used wind and water for their transportation and trade, has a tremendous wind resource. Looking at wind maps of the continental US, the proximity of abundant offshore wind resources to densely populated areas is clearly evident.

Offshore wind turbines may well attain capacity factors as high as 75% during the winter months when New Englanders need heat (Mays 2012, Personal communication). Investigators at OEI espoused electricity for use in heat pumps or resistance heating saving fuel oil for transportation, the use of electrical vehicles (EV), anhydrous ammonia, and natural gas for transportation and started research on how to store energy and match the resource to the need.

About the same time, the independent system operator of New England (ISO-NE), the independent regional transmission organization (RTO) funded the New England Wind Integration Study (NEWIS). The NEWIS study modeled wind integration in the RTO from 0% wind to 24% wind. The NEWIS study, as well as other studies, laid to rest the myth that wind generation needs to be backed up 100% by spinning reserves. To the extent that some people still believe that 100% backup is required, I refer them to this study.

Here’s how it works. In order to satisfy North American Electrical Reliability Corporation (NERC) regulations for reliability, all RTOs require generation to be backed up by “reserves”. ISO-NE regulations say that the single largest generator in this RTO has to be backed up by at least three different types of reserves in the event it goes off line suddenly.

In addition to generating the needed power and voltage support requirements for the ISO, the largest generator (LG) within the ISO needs to be backed up by: 1) ten-minute spinning reserves for 25% of its generation, 2) 50% of the LG in ten-minute non- spinning reserves, and 3) 100% of second largest generator in 30 Minute operating reserves: the sum of all back up reserves equals the total operating reserve (TOR). That means that of the 21+ GigaWatts (GW) of generation in the ISO-NE region a TOR of 2,250 MegaWatts (MW) (2.25 GW) is needed even without any wind generation at all. If wind generation replaces 2.5% of electrical generation in the ISO the TOR needed would be 2,270 MW or 20 MW more. At 9% wind integration the TOR is 2,600 MW - only 350 MW more than without wind.

In an earlier study (www.uwig.org 2006) the capacity value of wind was found to typically be up to 40%, and the addition of 1500 MW and 3,300 MW of wind increased regulation reserve requirements by 8 MW and 36 MW respectively. These regulations may have changed because of the ERCOT episode described below. It is not credible that all wind turbines in a region will stop instantaneously as would a single large generator.

The UWIG report states: “Because wind and load variability are not statistically correlated, the net increase in variability due to the addition of wind is less than the variability of the wind generation alone, so wind cannot be treated in isolation from the load.” In other words there is little need to back up wind generation facilities with fossil fueled “spinning” reserves. In fact, the best spinning reserve for use with wind generation is hydropower followed closely by gas turbines (think jet engines). Steam turbines fueled by coal and nuclear are poor reserves, even for the 30 minute operating reserve, because they cannot be spun up or down, but work as base generation. Electrical loads do not mimic the base generation but ramp up in the evening and down late at night with all sorts of hourly and minute fluctuations. In New England the peak electrical loads typically occur on hot summer days for air conditioning. Solar panels would shave off that peak, and wind would cover much of the lower but more constant winter heating load.

ASPO-USA members might be familiar with the “wind” event on Feb. 26, 2008 in the Electrical Reliability Council of Texas (ERCOT) region. This event was a superposition of three factors only one of which was the wind. The evening load (42 MW/minute) ramped up faster than predicted by ERCOT, the wind expected to ramp down (1500 MW in 3.5 hours), did it faster (8MW/minute rather than 5MW/minute) than predicted by the ERCOT meteorologists. The tipping point came when the conventional generation unit (150 MW), scheduled to come on with the evening load, tripped off unexpectedly, and caused ERCOT to  call for an Emergency Electrical curtailment that lasted two hours. This event was widely reported in the press, because it involved wind generation. Similar events using conventional generation have been ignored for the most part. (NREL July 2008) Modeling has shown that the larger the electrical transmission system the easier it is to integrate wind. ERCOT is much smaller than other RTOs.  Texas is not connected to the three other electrical interconnected areas in the USA and Canada.

It is obvious that better wind models and predictions are needed to avoid the miscalculations in ramp speed for wind events that added to the ERCOT event. Electricity has to be used at the moment of generation. This presents a unique problem for wind, since it is not dispatchable, meaning that you can’t decide when to use it, you have to use it when the wind is blowing. Modest excess wind electrical wind generation can be stored in electrical flywheels for minutes to hours and in batteries for days or months. Research on variable sized vats of chemicals to store electrical energy is promising. More research into electrical storage is needed before wind can penetrate much more than 20% into the electrical grid for a prolonged period. Dr. O’Malley, an electrical engineer from Ireland, reported that the Emerald Isle has at specific times generated up to 42% of its electrical power from wind and up to 33% for an entire day, and had to spill the wind so as to stay within the operational limits of its grid design.

The US Navy has an aggressive renewable energy goal, because each gallon of petroleum we save will be one less gallon we have to pay for in blood and treasure. They installed three wind turbines at Guantanamo, saving the taxpayer many thousands of gallons of diesel fuel for generators. The Navy’s 2015 goal is to reduce the non-tactical petroleum use by 50%: their 2020 goal is to have 50% of their shore-based energy requirements come from alternative energy resources. It is widely reported that the cost of diesel in combat areas such as Afghanistan is well over $100/gallon, and most of that fuel is used for electrical power generation.

In support of planned off shore wind farms, Dr. Kempton of the University of Delaware has demonstrated in the PJM RTO how to store excess wind power electrical generation on the order of MWhr in specially designed electrical vehicles (EV). The vehicle batteries provide superior voltage regulation smoothing out the millisecond and minute dips in the voltage signal caused by the constantly fluctuating load. Kemp’s work on EV battery energy storage has been replicated by Xcel Corporation in Boulder, which is doing an advanced study of integrating wind into its service area. Beacon Power has paired its high-tech flywheel regulators with wind farms in NY State, and American Superconductor provides voltage support and regulations to industrial wind farms and solar farms. “System stability studies have shown that modern wind plants with power electronic controls and dynamic voltage support can improve system performance by damping power swings and supporting post-fault voltage recovery”. (UWIG)

Before Matt Simmons’ untimely death in August 2010, he had a vision of offshore floating wind turbines that would gather wind energy and use it to heat Maine’s homes and power its cars. He was also considering using far offshore floating wind platforms to generate hydrogen from water that could then be combined with nitrogen from the air and produce anhydrous ammonia. Large marine vessels could pull up to a floating wind turbine farm fill their fuel tanks with anhydrous ammonia and transit the oceans using modified diesel engines. Matt was well aware that anhydrous ammonia fueled diesel vehicles in Norway in the 1920s and in Belgium during WWII, and envisioned land based ammonia fueled vehicles. Anhydrous ammonia has about one third the energy density of gasoline, but in naval applications it might suffice in a carbon-constrained future.

Suzanne Sayer, PhD, affiliated with the Maine Wind Industry Initiative, currently earns a living as a nuclear engineer. In the 1970s she worked on research in geothermal energy at Los Alamos prior to her career as a petrophysicist/geophysicist at Sohio in San Francisco.

Bibliography

http://www.iso-ne.org/pubs/whtpprs/irc_assess_plugin.pdf

http://biodieselinafghanistan.org/uploads/AFGH-PAPR-20100609-EXEC.pdf

http://www.iso-ne.com/committees/comm_wkgrps/prtcpnts_comm/pac/reports/2010/index.html

http://www.uwig.org

http://www.purepowerd.com/emergency.htm

http://www.nrel.gov/wind/systemsintegration/pdfs/2008/ela_ercot_event.pdf

1. Oil and the Global Economy

Oil prices were relatively steady until last Wednesday as concerns about the possibility of strike by Nigerian oil workers and the increasingly shrill rhetoric and exchange of threats between Tehran and its adversaries dominated the market. The assassination of an Iranian nuclear scientist and the revelation that Tehran was moving some of its enrichment operations to underground facilities which, in theory, would be immune from air strikes added to the tensions. On Wednesday Brent crude traded between $110 and $115 a barrel as news roiled the markets.

On Thursday, after it was revealed that the EU was likely to delay a halt to Iranian oil imports for another six months, some of the concern was taken out of the market. On Friday when it was learned that S&P was downgrading the debt of 11 EU members, the euro slipped as low as $1.26 taking oil prices down with it. The week ended with NY crude closing at $98.70 and Brent at $110.92.

NY oil prices also suffered from the weekly stocks report which showed an increase of 9.4 million barrels in US commercial crude inventories and continuing weakness in US oil consumption. The four week moving average has US consumption running 6.5 percent lower than last year. Moreover, US gasoline consumption is now down to 8.2 million b/d, the lowest since 2003. Despite the low gasoline consumption numbers and the large inventories, gasoline futures were only down a couple of cents for the week closing around $2.75 a gallon. The closure of two refineries in southeastern Pennsylvania and the potential closure of a third has raised many concerns about the supply of petroleum products to the northeastern US. With the loss of circa 45 percent of the region’s refining capacity the area would become much more reliant on the import of finished products from the Gulf Coast or Europe. This raises the likelihood of higher petroleum product prices for the region as logistics of supplying these products would become more complicated and there is the possibility of severe shortages in the event of Gulf hurricanes.

Mild weather across much of the US and forecasts of more to come drove natural gas prices to a 28-month low of $2.67 per million BTUs. Natural gas futures have fallen by 13 percent in the past week and are 40 percent lower than last year. Overproduction from the shale gas drilling frenzy is behind the gas glut as drillers are forced to keep drilling new wells under contractual obligations despite massive losses. Many analysts are predicting that natural gas futures prices will fall as low as $2.40 per million in coming weeks.

Bombs continue to go off several times a week in Iraq, mainly aimed at Shiites and police facilities. Last week saw the first attack on foreign oil workers in a long time - possibly a harbinger of things to come. Syria continues to sink into civil war as efforts by the Arab League to negotiate a settlement are making little progress. Syrian President Assad apparently has more support from his tribe than did Gadhafi and coupled with support from Iran could drag this situation out for an extended time.

2. The Iranian Confrontation

Last week started with a hard-line Iranian newspaper announcing that uranium enrichment has begun at a new underground site protected from airstrikes and having the capacity to carry on the nuclear program should things get nasty. IAEA inspectors in Vienna confirmed the Iranian announcement. This news was accompanied by various threats and establishment of “red lines” by both sides. EU negotiators continued to meet on the details of the embargo of Iranian crude that it is planning as diplomats and high officials scurried about in an effort to line up support for an embargo and discuss replacement oil supplies.

US Treasury Secretary Geithner went to Beijing and Tokyo, while China’s Premier Wen visited Saudi Arabia and other Persian Gulf oil-producing states. While the headlines spoke of China snubbing Geithner’s request, the situation is far more complicated. The object of the embargo is to not to cut off all of Iran’s oil sales, but to restrict them just enough to force policy changes. Most Iranian oil is going to China, India, Japan, Korea and southern Europe. None of these countries are enthusiastic at the prospect of giving up Iranian imports and scrambling to do without or establish other sources of oil which are becoming increasingly hard to find.

Should the EU followed by India, Japan and Korea which are more susceptible to Western pressure cut back on purchasing Iranian oil - even at a deep discount - the issue becomes one of whether the Chinese buy up Iran’s lost sales. China now gets about half of its daily oil consumption from the Middle East and clearly does not want to alienate the Saudis and their Gulf friends or Beijing could be left dependent on Tehran for its Middle Eastern crude. Should war break out in the region, China could grind to a halt. Thus it is unlikely that Beijing will embrace either side in the nuclear dispute, but will attempt to thread a course that will keep its oil flowing.

During the week, there were numerous reports that India, Japan and S. Korea were unenthusiastically looking for a way they might cut back on their Iranian oil consumption before they end up being hurt by US and EU sanctions.

On Thursday, it was revealed that the internal EU negotiations on sanctioning Iranian crude were headed towards a six month delay in order to allow time for Greece, Italy and Spain - which are having obviously serious economic problems - to work out alternative sources of supply. In the meantime, purchases of Iranian petrochemicals will be halted and many European economic links with Iran will be severed.

The ability of Saudi Arabia to make up for any lost Iranian production came to the fore last week with the Saudis telling foreign visitors that they could increase production. With Saudi production now around 10 million b/d vs. a theoretical capacity of 12 million, many foreign observers doubt that the Saudis could sustain production much above current levels.

The assassination of an Iranian nuclear scientist on Wednesday further raised tensions with Tehran openly blaming Israel, the UK, and the US and threatening retaliation in kind. Despite a momentary relaxation of market concerns, the situation still remains a dangerous threat to oil exports and the stability of the global economy.

3. The EU Downgrade

Friday was a bad day across Europe as S&P downgraded the credit ratings of nine Eurozone countries and the talks over restructuring Greece’s debts broke down. The political and economic fallout from these developments could be considerable. By removing the AAA rating from France the ratings agency makes it more difficult for the Eurozone’s bailout fund to help the troubled states of Southern Europe. France’s loss of its coveted AAA is a major blow to France’s President Sarkozy just three months before his bid for re-election. In addition to downgrading two of the Eurozone’s six AAA rated countries, seven other countries including Italy and Spain were downgraded. Portugal is now given “junk” status by the three main ratings agencies.  In the near term it may become more difficult to roll over debt in the zone, and in the longer run various bailout plans may become more difficult to implement.

The failure of the Greek debt restructuring talks makes it likely that Athens will become the first developed country to default on its debt since the end of World War II. The problems came when private bondholders balked at taking a 50 percent write down in their holdings, preferring that governments shoulder the loss. This development is just one more step in the contagion which many fear will spread across the world causing a global depression.

In addition to the downgrade and looming default, it was announced last week that the German economy - the powerhouse of Europe - suffered a small but actual drop in GDP during the first quarter. This development makes it likely that the EU will be enmeshed in an official recession by the end of the first quarter.

The bad news sent the euro down last week and took oil prices down with it. In recent weeks the harsh rhetoric coming out of the Middle East has overshadowed the Eurozone crisis and kept oil prices strong. Now many analysts are starting to wonder if the threat of a major global economic setback which would reduce the demand for oil is not more imminent than the possibility of unmanageable supply disruptions for the Middle East.

4. Nigeria

The nationwide strike to reimpose the subsidy, the removal of which increased the cost of gasoline from $1.60 per gallon to $3.70, continued for five days last week, took a break over the weekend, and is due to start up again on Monday. While tens of thousands took to the streets to protest the gasoline price increase, only a few were killed and some 600 injured in clashes with police. Oil workers remained at their posts last week so oil exports were not affected. The 80 percent of its gasoline consumption which is largely imported from Europe came to a halt, shortages developed and black market operators were selling gasoline for nearly $9 a gallon. With most shops closed, Nigeria’s economy largely ground to a halt.

While foreign observers see the gasoline subsidies as corrupt and wasteful with billions of dollars going to cartels that import gasoline, most Nigerians see cheap gasoline as their birthright and the only benefit from the $200 million a day Nigeria makes from exporting its crude. President Jonathan is adamant that the subsidies must be removed so that the billions of dollars can go to other social programs and not to the benefit of those that can afford cars and the gasoline importing cartels.

The key player in all this is PENGASSAN, the oil workers union which has the power to make a big dent in the 80 percent of its revenues the government gets from oil exports. Last week PENGASSAN was threatening to start closing down oil production on Sunday, but relented as long as talks between the government and the union continue.

This, of course, provides an incentive for the government to keep negotiating with the unions who are demanding a return to the full subsidy. PENGASSAN has a long history of threatening to strike, but never really pulling out its workers. The Jonathan government is also facing an increasingly violent Islamist insurrection in the north of the country and there is clearly a limit on how much turmoil the government can handle at the same time. It seems likely that some sort of compromise will be reached before oil exports are affected.

Quote of the week

• “Russia now needs oil at $110 a barrel to manage its finances. For Iraq, the number is $100. Even Saudi Arabia now needs oil to trade around $80 a barrel just to balance its budgets… Only a decade ago Saudi Arabia was able to balance its budget with oil prices averaging around $25 a barrel.”

– Fareed Zakaria

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

• North Dakota oil production surged 42 percent to 510,000 barrels a day in November, exceeding the output of OPEC member Ecuador, as energy explorers accelerated drilling in the Bakken Shale formation. (1/11, #28)
• Pakistan is heading for a major power crisis as there are shortages of natural gas supply at home and friendly countries have refused to extend any more credit for petroleum imports from abroad. (1/10, #15)
• Surging prices for oil and gas shales, in at least one case rising 10-fold in five weeks, are raising concern of a bubble as valuations of drilling acreage approach the peak set before the collapse of Lehman Brothers Holdings Inc. (1/9, #22)
• At least 50 people have been killed in a suicide bomb attack on Shia pilgrims in the southern Iraq city of Basra. The attack was aimed at pilgrims marking the festival of Arbain, one of the main holy days of the Shia calendar. (1/14, #13)
• South Sudan said that a pipeline to north Sudan carrying its crude oil exports may have to shut down within two days because Khartoum was blocking oil shipments. (1/14, #17)
• The Steelworkers are warning that major oil companies’ closure of three big refineries in the Philadelphia area - and a plan to demolish one plant if its owner can’t find a buyer - could lead to oil product shortages in the Northeast. (1/10, #28) (1/14, #21)
• US Chamber of Commerce Pres. Thomas J. Donohue called for quicker approvals of proposed US oil and gas projects, as well as for the Keystone XL oil pipeline, and more access to domestic resources in his 2012 State of American Business address. (1/14, #22)
• The ice-bound town of Nome will likely get its emergency fuel supply this weekend from a Russian tanker that has taken three weeks to get there, as Alaska continues to be battered by one of the state’s harshest winters in decades. (1/14, #24. #25)
• While U.S. action on climate change remains stalled, four south Florida counties have joined forces to plan for how to deal with the impacts - some of which are already being felt - of rising seas, higher temperatures, and more torrential rains. (1/14, #33)
• The threat of food inflation, a serious concern for emerging countries last year, is starting to recede as high prices for grains restrain consumption and better crop yields in Europe and Russia replenish stocks. (1/13, #5)
• Arab League head Nabil Elaraby said he feared a possible civil war in Syria that could have consequences for neighboring countries, as the credibility of the League’s monitoring mission was hit by members starting to walk out. (1/13, #18)
• Israel’s military chief said that the army was preparing for a potential influx of refugees into the Golan Heights from Syria with the demise of the government of President Bashar al-Assad, which he said was inevitable. (1/11, #20)
• Shell is confident it will be able to drill for oil and natural gas in Alaska’s arctic region this summer as it hopes to overcome its remaining legal challenges. (1/13, #28)
• Chinese inflation edged down in December, setting the stage for a continuation of cautious policy loosening to support the slowing economy. (1/12, #22)
• Auto-sales growth in China, including both passenger and commercial vehicles, will rebound this year after a sharp slowdown in 2011. (1/12, #24)
• China’s crude oil imports in December climbed 5.1 percent year on year to 21.92 million mt, or an average of 5.18 million b/d. (1/10, #24)
• China, the world’s top emitter of greenhouse gases, plans a tax on carbon emissions. The tax rate is likely to be $1.59 for each ton of carbon emitted by businesses or other operations, but is expected to increase gradually over time. (1/10, #26)
• Qatar Petroleum could reconfigure its US import terminal to export gas in a bid to cash in on the US supply glut arising from the shale gas revolution. (1/12, #28)
• Only one in three Afghans has access to electricity despite years of spending to improve supply, and the country is still far too dependent on imported power. (1/10, #16)
• Recent events in Kazakhstan seem at first sight reminiscent of last year’s Arab Spring revolutions: an oil-rich state, undergoing rapid economic growth and modernization, is confronted by unrest that takes a long-term autocratic leadership by surprise. (1/10, #17)
• U.S. officials said a rig operated by Spain’s Repsol that is expected to drill off Cuba in  coming months complies with international and U.S. safety standards. (1/10, #22)
• Ecuador exported 7.38 million barrels of crude oil in November 2011, down 5% from 7.80 million barrels a month earlier. (1/10, #23)
• China is considering a proposal to create an energy “super-ministry” as part of a sweeping cabinet reshuffle in 2013. (1/9, #18)
• A fortuitous combination of ravenous bacteria, ocean currents and local topography helped to rapidly purge the Gulf of Mexico of much of the oil and gas released in the Deepwater Horizon disaster of 2010. (1/10, #29)
• The UK government has given the green light to a controversial new £32.7 billion ($50.6 billion) high-speed rail network which will link London and the cities of Birmingham, Leeds and Manchester. (1/10, #30)
• Venezuela won’t accept any verdict from the World Bank’s International Centre for Settlement of Investment Disputes, including Exxon Mobil Corp. (XOM)’s claim for its nationalized Cerro Negro project, President Hugo Chavez said. (1/9, #16, #17)
• In a case watched closely by energy companies and manufacturers, the Supreme Court is set to consider whether to blunt one of the government’s chief tools for enforcing the Clean Water Act. (1/19, #20)
• In a remote Aboriginal recreation center on the shore of the Douglas Channel in British Columbia’s North Coast, Canadian regulators are kicking off historic hearings on the proposed $5.5-billion Northern Gateway oil sands pipeline. (1/9, #24)
• Statoil, Norway’s biggest oil and natural gas company, made a “substantial” oil find in the Barents Sea near its earlier Skrugard discovery, cementing the potential of a crude production hub in the far north. (1/9, #27)

1. Oil and the Global Economy

Oil prices climbed last week on increasing tensions in the Persian Gulf despite pressure from a weaker euro which tends to hold prices down. NY oil futures closed at $101.56 on Friday and London’s Brent at $113.06. The spread between NY and Brent widened slightly as sanctions on Iranian oil are likely to have more impact on the EU and petroleum sales in the US fell to a 14-year low resulting in an unexpected jump in US petroleum inventories.

The news from Europe last week was not good, with the pronouncements coming from the EU’s leaders taking on an increasingly pessimistic tone. Manufacturing in the Eurozone fell for the fifth consecutive month and the euro is now down to $1.27 as compared with $1.35 at the beginning of December and $1.45 last summer. The euro also hit an 11-year low against the yen last week.

Despite moderately satisfactory French and German debt auctions last week, investors continued to dump the euro. Next week will see the first major refinancing of Italian and Spanish bonds which should provide important insights into the course of the debt crisis. The EU, however, is clearly headed into a recession as austerity measures are being implemented everywhere.

Media attention is starting to focus on gasoline prices in the US. NY futures have risen 30 cents a gallon since mid-December and 10 cents a gallon in the last week. Average retail gasoline is now going for $3.37 a gallon which is the highest on record for this time of the year. Leaving aside the danger of supply interruptions which would send prices much higher, experienced observers are saying the US gasoline prices will average between $3.75 and $4.25 a gallon this year with $4 gasoline expected in the spring. As we saw in 2008, prices at this level will clearly cause serious economic damage with or without economic contagion from the EU.

2. The Iranian Confrontation
Tensions increased last week as the EU tentatively decided to slow Iranian oil imports into Europe; the US acquired Congressional authorization to sanction any foreign entity doing business with Iran, particularly its banking system; and Iranian officials unleashed a new round of threats against the US and EU. On Sunday an Iranian newspaper reported that according to a Revolutionary Guard commander, the country’s leaders have decided to order the closure of the Straits of Hormuz if Iran’s oil exports are blocked. Iranian spokesmen have made this threat many times in the past, but this is the first time the threat has been described as official policy. The Iranian press also reported that the country had begun enriching uranium deep underground where it was safe from air attack.

Much of the Iranian bombast is aimed at keeping up domestic morale in the face of worsening economic conditions – Iran’s currency, the rial, has fallen 40 percent against the dollar in the last month making many imports prohibitively expensive. Many observers believe that the increasing flow of rhetoric from Tehran shows that the sanctions are having an effect.

Tehran is scheduled to have parliamentary elections in March, but these are likely to be boycotted by the major opposition movements as many of their leaders are under some form of arrest stemming from the crackdown following the 2009 elections.

The prospects of a EU embargo and the ability of the US to sanction countries doing business with Iran raises some interesting questions for the months ahead. Policymakers in the US and EU will have a delicate task in restricting Iranian oil exports without sending world prices to new highs. Korea, Japan, and India which next to China are major buyers of Iranian oil are already looking for alternative sources of oil. Some analysts are saying that there is sufficient spare capacity in the world with the return of Libyan oil production and stepped up production in the Persian Gulf to offset the loss of Iran’s 2.5 million barrels a day of exports.

Chinese policy towards all this is the great unknown. Tehran maintains that Beijing is such a good friend that it would be willing to buy up all of Iran’s production thereby nullifying the boycott. China of course would extract a toll in the form of below market prices should it decide to help out the Iranians, but it remains to be seen just how far Beijing is willing to stick its neck out to help Iran. This is a complicated situation with many twists and turns in the offing. For now, the general idea is for any embargo on Iran or sanctions on its customers to be imposed gradually so that the effect on Iran and global oil prices can be evaluated each step of the way.

Aside from the impending boycott, there is much danger implicit in this confrontation. As long as Tehran is determined to remain on its current course of refusing international inspection of its nuclear programs, this situation will continue. While the US and EU are attempting to forestall the much more serious problems that would arise from a nuclear armed Iran, the Iranian government is also deeply involved in numerous other confrontations in the region particularly the centuries old disagreements between Sunnis and Shiites. Last week Turkey’s Foreign Minister warned that events in Iraq and Syria could lead to a “Cold War” between Sunnis and Shiites saying that such a development would be “suicide” for the region.

3. Problems for “Big Oil”
Last week several international oil companies ran into problems as they tried to do business around the world. Exxon took a major hit when the Paris-based International Chamber of Commerce’s Arbitration Panel awarded the company $908 million, 11 percent of the $7 billion Exxon had been seeking in compensation for Venezuela’s 2007 nationalization of its assets. The judgment was further reduced to $750 million due to a counterclaim by the Venezuelans. To add to the insult, Venezuela’s oil company, PDVSA, announced that it will only pay Exxon $255 million on the judgment after it deducted debts that it claimed Exxon owed the company.

While the judgment was a major victory for nationalization-minded oil producers, the case which involves the nationalization of the Cerro Negro project in the Orinoco heavy crude belt, is still pending before the World Bank’s arbitration tribunal so it will be some time before any money is paid. The case will likely continue for years.

Chevron suffered a setback in its ongoing dispute with Ecuador over oil pollution caused by Texaco in the rain forest more than 20 years ago. Last week an Ecuadoran appeals court upheld an $18 billion judgment against Chevron for the pollution. Chevron maintains that the case is simply evidence of corruption in Ecuador’s judicial system and will seek to have the claim reversed outside the country. Chevron promptly asked a US federal appeals court to block efforts to seize Chevron’s assets to satisfy the judgment, but on Friday the US appeals court rejected the request. This case too could last for years. Chevron is also facing large claims in a Chinese court for an oil spill off China’s coast last fall and Shell is facing a variety of claims for oil spills in Nigeria.

Should any of these companies ultimately be forced to pay large and possibly dubious compensation for oil spills or forced to accept nationalizations without just recompense, it will likely have a dampening effect on oil production by major oil companies in less-than-stable regions of the world. Last week the heads of three major oil companies were in Alaska, where the prospects of nationalizations are zero, discussing a new natural gas pipeline that would bring north slope natural gas to markets.

4. Nigeria
The situation in Nigeria, a country with a population of 155 million and which produces some 2.5 million barrels of oil per day, is deteriorating on several fronts. Half of Nigeria’s population is Muslim living in northern Nigeria where an insurrection seems to be breaking out as extremists seek to force Christians living in the area to move south so that they can form an independent Islamic state in the region. On Sunday, Nigeria’s President, Goodluck Jonathan, termed the violence the worst since the civil war of 1967-1970 that killed nearly 1 million people.

Jonathan, however, may be faced with a larger problem in the form of a nationwide strike this week to roll back the highly unpopular doubling of gasoline prices to $3.50 a gallon announced last week. As with many other oil exporting states, Nigeria has long subsidized gasoline prices, but in recent years has come under increasing pressure from the IMF to drop the $8 billion subsidy, thus freeing up money for social projects and eliminating the incentive to smuggle gasoline out of the country. Most Nigerian gasoline is imported at world prices as corruption and mismanagement have largely shut down domestic oil refining.

Nigerians however have long felt that cheap gasoline was the only real benefit they got from the nation’s oil patrimony and are bitterly opposed to removal of the subsidies. It is widely feared that doubling gasoline prices will lead to higher prices for many other products. Several previous governments have attempted to remove the subsidy, but have backed down in the face of widespread opposition.

For now industry sources do not believe that the strikes will disrupt much oil production. Last week the offshore Bonga field which had been shut down due to an oil leak came back online producing 250,000 b/d. Immediately following the resumption of production at Bonga, Shell announced a force majeure on export of its Bonny Light crude – likely due to damage to pipelines. The government has long banned oil companies from announcing damage to oil pipes by terrorists or oil-thieves.

The Islamic uprising in the north is hundreds of miles away from the oil producing regions along the Gulf of Guinea and is not likely to be directly affected by fighting should the unrest increase. Over the longer run 75 million Muslims in revolt is likely to be too much for the government to handle and numerous developments are possible that could curtail oil production. The strike this week is likely to be curtailed quickly with either the government or the unions backing down.

Quote of the week
“Gasoline prices are the highest ever for the start of the year, and they’re on the rise, supercharged by expensive oil and changes in refinery operations.”

– Ronald White, Los Angeles Times

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

• The president of what could be the first country in the world lost to rising sea levels has urged Australia to prepare for a wave of climate refugees. Maldivian President Nasheed’s government is considering Australia as a new home if the archipelago disappears into the ocean. ”I think it’s really quite necessary for Australians and for every rich country to understand that this is unlike any other thing that’s happened before,” said Nasheed. (1/7, #4)
• Iranian scientists claim to have produced the nation’s first nuclear fuel rod, a feat of engineering the West has doubted Tehran capable of, the country’s nuclear agency said. (1/2, #3)
• Lebanon has raised the stakes in the high-octane poker game under way in the natural gas-rich eastern Mediterranean by approving a law to administer offshore exploration and drilling, joining Israel, Cyprus and Turkey in a potentially explosive race for energy riches. (1/7, #20)
• China said that it would begin to publish more detailed air quality data on Beijing later this month, following a public outcry over official government readings that critics said underestimated the severity of the air pollution problem in the smog-filled capital. (1/7, #24)
• Indian state-run fuel retailers may suffer revenue losses of $26.5 billion in the current fiscal year from selling diesel and cooking fuel at state-set prices. (1/7, #25)
• Alaska Gov. Sean Parnell met with chief executives from BP, ConocoPhillips, and ExxonMobil to discuss commercializing the Alaska North Slope’s natural gas reserves. Parnell requested the Jan. 5 meeting after calling on the three major ANS gas reserve holders’ to work together on developing an LNG export project aimed at Asia’s growing markets. (1/6, #22) (1/7, #29)
• Five major oil companies have publicly expressed support for Enbridge’s controversial $6.6 billion Northern Gateway pipeline. The 745-mile proposed pipeline would carry up to 525,000 b/d from oil sands projects in Alberta to the British Columbia coast, opening the Alberta oil sands to Asian markets, including China. (1/7, #31)
• OPEC produced just over 31 million b/d in December, implying that the oil market could face a significant production cut if the group swiftly moves in line with the new 30 million barrel a day production ceiling agreed last month. (1/5, #3) (1/6, #5)
• Venezuela’s inability to develop its natural gas industry has forced it to revise and extend a deal with Colombia’s state-controlled Ecopetrol and Chevron involving gas imports from the partners’ Guajira gas field in northeastern Colombia. (1/5, #23)
• Crude oil production in Alaska fell nearly 5 percent, extending a steady production decline that began eight years ago. Oil production in Alaska peaked in 1988 with slightly more than 2 million barrels of oil produced per day. (1/5, #30)
• The deal for buying the balance of the Mackay River project, announced by Calgary’s Athabasca Oil Sands Corp., marks the first oil sands project to be fully owned by a Chinese company. (1/3, #23) (1/4, #20) (1/5, #32)
• Oil major Total signed a $2.3 billion deal with Chesapeake Energy Corp and EnerVest, continuing a trend of European and Asian oil and gas companies buying into US shale plays. (1/3, #19)
• One of the greatest problems of large scale solar power facilities is that they do not produce electricity at night, and production is constantly fluctuating with the sun’s strength. Under development in the deserts of Tonopah, Nevada is a new technology that will effectively store solar energy in the form of molten salt. When the sun goes down, thermal energy from the salt will be able to produce a steady flow of electricity for eight to ten hours. (1/5, #38)
• Iran said that it would launch full-scale unilateral development of the disputed offshore Arash gas field in the Persian Gulf if Kuwait does not respond to its offer of joint development. (1/3, #8)
• Almost a decade ago, India’s government set an ambitious goal: electric power for all by 2012. Instead, as the target date of March nears, the power sector is in shambles, and its dire state threatens India’s economic prospects at a time when a high inflation rate, a burgeoning government budget deficit and ripples from the European financial crisis are already damping growth. (1/3, #17)
• BP seeks to have Halliburton, its cement contractor for the Macondo well project whose blowout set off the 2010 Gulf of Mexico oil spill, pay all of the oil company’s related costs and damages. (1/3, #20)
• An official in Ohio said that the underground disposal of wastewater from natural-gas drilling operations would remain halted in the Youngstown area until scientists could analyze data from the most recent of a string of earthquakes there. (1/3, #21)
• Oil output in Russia, the world’s top crude producer, reached a new post-Soviet high of 10.27 million barrels per day (bpd) last year, up from 10.15 million bpd in 2010. (1/3, #25)

By Robert L. Hirsch, Ph.D

Many people fail to properly differentiate between energy forms and related energy systems. One result is that they can be misled regarding solutions to such concerns as “the energy crisis,” “energy security,” or “dependence on foreign oil.” This not only leads to unrealistic thinking but poor public policy. Consider three major energy forms and their differentiation.

First is oil (petroleum), a liquid hydrocarbon fuel used to power automobiles, trucks, buses, trains, farm equipment, airplanes, ships, etc. Oil is processed in refineries into products that are optimized for use in specific kinds of machinery and equipment (devices). Oil products include gasoline, diesel fuel, jet fuel, bunker fuel for ships, and heating oil. Devices that operate on oil products are engineered and tailored to operate on that particular form of energy. In almost all cases, those devices cannot operate on other energy forms such as electric power or natural gas. When it comes to liquid fuels and devices built to operate on liquid fuels, we must think in terms of related specifics, not “energy.”

Second is electricity, which is used to power various devices including air conditioners, lights, computers, refrigerators, space heating systems, televisions, VCRs, pumps, fans, communication systems, some trains, motors, various appliances, satellites, etc.  Electric powered devices can rarely operate directly on oil products or natural gas.  When it comes to electricity and devices built to operate on electric power, we must think in terms of related specifics, not “energy.”

Third is natural gas. It can be directly combusted to produce heat or processed to create liquid fuels and various chemicals. Devices that operate on natural gas include electric power generators, building heating and cooling systems, water heating, cooking, and industrial processing. When it comes to the direct use of natural gas and devices built to operate on gas, we must think in terms of yet another specific type of system, different from liquid fuel-based systems and electric power-based systems.

On the basis of the foregoing, there are at least three distinct types of energy powered devices that must be separately and specifically considered. This is definitely true in the short term, when it is virtually impossible to power an existing device by an energy form other than what it was designed for. For example, we could not immediately 1) power existing computers with gasoline; 2) power most existing automobiles with electric power; 3) power existing airplanes with natural gas; etc.

In the longer term, some kinds of devices can be retrofitted to operate on a different energy form, e.g., trains can be retrofitted to operate on electricity instead of diesel fuel; automobiles, trucks and buses could be retrofitted to operate on natural gas, etc. Still other devices must be redesigned and manufactured to operate on a different energy form, e.g., automobiles and other ground-based vehicles to operate on electric power or natural gas.

Accordingly, while we can think about various conversions of devices from one energy form to another, it is essential to recognize that such changes take time and money. For instance, transitioning a significant portion of the U.S. automobile fleet to either hybrid or pure electric power would take decades under the best of conditions. This reality has been treated in a number of National Academy studies on light duty vehicle conversions.  For example in “Transitions to Alternate Transportation Technologies - Plug-In Hybrid Electric Vehicles,” NRC. 2010, one conclusion related to the optimistic adoption in the U.S. of plug-in hybrid electric vehicles (PHEVs) is as follows: “For the Maximum Practical Case, the PHEV-40 cuts gasoline use by 55 percent by 2020…” The PHEV-40 is a plug-in hybrid electric vehicle similar to the Chevrolet Volt with a 40 mile electric range.

The foregoing are realities that many people fail to understand, which means that they can be trapped into advocating energy changes that are not practical in the short term.  Examples of some of the current common traps: 1) Assuming that wind and solar systems - electricity producers - can be a near-term solution to high gasoline prices; 2) Assuming that natural gas from shale is a near-term solution to our dependence on foreign oil; 3) Assuming that wind and solar can be a near-term means to lower the emissions from vehicles now powered by oil products; etc.

As the Peak Oil Review audience well knows, energy production and use are complicated. We have a responsibility to help others understand the realities and disabuse people of the notion that there is a simple “silver bullet” or “silver bullets” that can quickly resolve our various energy challenges.

Robert L. Hirsch is a former senior energy program adviser for Science Applications International Corporation and is a Senior Energy Advisor at MISI and a consultant in energy, technology, and management. Hirsch has served on numerous advisory committees related to energy development, and he is the principal author of the report Peaking of World Oil Production: Impacts, Mitigation, and Risk Management, which was written for the United States Department of Energy.