The recent dip in the world oil market has given consumers relief from surging pump prices, and has investors and commentators waxing with hope that the dip will become a trend.
But don’t bet on it, says energy expert Matthew Simmons. Along with the likes of oilman T. Boone Pickens whose celebrated national campaign calls for a radical shift away from oil dependence, Simmons says that all fundamentals remain in place for energy prices to resume their skyward climb to levels quite beyond records of a month ago.
In fact, in 2005 Simmons personally wagered $5,000 that the worldwide price per barrel would top $200 by 2010 (it was at a record $147 on July 11, and closed Friday at $113.77 on the New York Mercantile Exchange).
Simmons fully expects to win the bet.
He has a growing band of believers, including state Rep. Bill Hilty, DFL-Finlayson, who chairs the House Energy Policy and Finance Division and is openly concerned about the future picture of energy and its implications for Minnesota.
“We have a global economy that’s based on cheap oil,” said Hilty, adding that sharply rising energy costs would be economically damaging and could, if not checked, become dangerous.
A key witness at St. Paul hearing
Simmons, of Houston, Texas, was a key witness at a St. Paul hearing last spring chaired by Hilty. Listening intently and nodding agreement in the packed hearing room were Eagan energy investor Jim Johnson and a retired IBM scientist, Norm Erickson of Rochester, Minn.
Simmons explains that the supply-demand fundamentals that drive oil prices “have actually gotten worse”:
• Worldwide oil demand continues to grow rapidly in populated China and India, while economic growth in oil-rich Russia, Mexico and even Iran has those nations keeping more of their production to themselves. Economic growth means more oil-gulping industry and many more cars; later this year Tata Motors’ will bring its low-cost “Nano” to market, and millions who now ride bikes or small scooters will be driving cars that require lots of oil to make and still more oil to move.
• Despite a rash of media reports that Americans are driving less and in smaller cars, oil demand in the world’s highest energy-consuming nation has dipped only slightly. The United States still consumes 21 million barrels of oil daily (with 5 percent of world population the U.S. consumes a quarter of world oil, while China, with 21 percent of the population, consumes just 8 percent).
• Producing oil is increasingly difficult, time-consuming and costly — Canada, for example, has turned to extracting oil from “tar sands” with a complex heat process that burns so much natural gas that exports are curtailed, helping crimp supply that’s driving gas prices in places like Minnesota much higher. World oil production of 85 million barrels a day is seen by some analysts as unsustainable (54 of the 65 major oil fields — including the North Sea and Mexico — already are in decline) economic projections would require daily production to increase to a staggering 130 million barrels by 2030.
Warnings of a ‘tipping point’
It’s the last point that most worries Simmons and Hilty, and a growing band of others. Simmons warns that the world is near a “tipping point” where demand could overwhelm supply, sending energy prices soaring and causing economic disruption if not collapse. In a volatile energy market, massive overnight price spikes could be triggered by threatening speeches by a Middle East leader or a catastrophic shipwreck in places like the narrow Strait of Hormuz at the mouth of the Persian Gulf, through which a third of the world’s oil supply passes on vulnerable vessels longer that three football fields.
Worse, Simmons says, a severe supply and demand imbalance could result in resource wars that a European group has warned may be closer than most would care to believe.
More recently, a diverse group of luminaries — including Colin Powell, Henry Kissinger and James Woolsey — sent an open letter to President Bush and presidential candidates Sen. Barak Obama and Sen. John McCain warning that the United states “is facing a long-term energy crisis that could become one of the most significant economic and national security challenges of the 21st Century.”
Simmons, for 40 years an energy investment banker, is among adherents to the theory of “peak oil” — a point where oil production hits its maximum, after which supply goes into permanent decline.
Little dispute that oil is finite
There is disagreement on how much oil remains, owing to notoriously inaccurate data on reserves. But among energy experts there is little dispute that oil is a finite resource with all signs favoring the “peak oil” view: Oil supply is of lower quality, which requires more refining; there are more and more dry drill holes (Simmons said there have been 220 nonproducing holes in the Arctic, a place that the U.S. Geological Survey says is oil-rich) and oil will be much more costly to extract from things like oil shale or from much deeper wells, some of which are under lots of water.
When Brazil giddily announced it had found an offshore oil field that could make the country the world’s largest producer, analysts noted that the oil is 32,000 feet deep and technology to draw it out hasn’t even been invented.
According to a Bloomberg report, tapping the potential reserve will require equipment that can withstand 18,000 pounds per square inch of pressure (enough to crush a truck), pipes that can carry oil at temperatures above 500 degrees Fahrenheit, and drill bits that can penetrate layers of salt more than a mile thick. Also, the water is so deep that massive drilling platforms cannot be anchored (as in the Gulf of Mexico) but must float on a windy, swelling ocean and rely on complex positioning technology to maintain proximity to the drill hole.
Compare that to the derrick that Edwin Drake erected to tap Pennsylvania crude in 1859 that was a mere 70 feet under solid ground.
‘Easy stuff’ is gone
What it comes down to is that the “easy stuff” has already been pumped out, and much of what’s left will be very expensive to produce. Vast oil shale deposits in Colorado, Utah and Wyoming, for prime example, would require the removal of millions of tons of rock and an energy-intensive extraction process (nearly 1,000 degrees of heat is needed to free the oil) so expensive that no one has yet figured out how to make it work.
Hilty puts it this way: To extract Pennsylvania crude, it took only one unit of energy input for each 100 units of energy extracted, or 100 to 1; most oil fields today have an energy input/output ratio of about 30 to 1, and Canadian tar sands is down around 3 to 1. Once technology is developed to extract oil from the Brazilian reserve or oil shale, the energy ratio would be even less.
By way of comparison, most analysts say the energy ratio of corn ethanol is about 1 to 1 (Simmons says it’s less, so much so that “it simply doesn’t make any sense”).
Along with others, Simmons has been warning about peak oil for two decades, but he’s not the first. M. King Hubbert, a geophysicist with Shell Oil, accurately predicted in 1956 that U.S. oil would peak by 1970. That’s when the United States went from being a producing nation to being one that today imports 70 percent of the oil it consumes.
Unlike climate change theorists, who rely on data and modeling, “peak oil” advocates rely on known production data that in every case shows a bell-curve history of discovery to increasing production to decreasing production to exhaustion. Taken together, the data from all oil production sites, along with such other information as the ratio of dry-hole to successful-hole drilling and economic growth rates, have helped geoscientists develop “peak” scenarios that are broadly accepted.
National campaign to reduce oil dependence
Among them is lifelong oilman T. Boone Pickens, who recently launched a national campaign to reduce America’s dependence on imported oil by radically increasing wind-power production and using natural gas in vehicles.
Another adherent is Jim Johnson of Eagan, who spent over a decade in the oil business and is now an energy investment adviser.
Johnson said that energy-industry insiders quietly acknowledge “peak oil” and the dire economic and social consequences that are implied by doing nothing about it.
“Energy prices will go through the roof,” Johnson said, “and people don’t see it coming. Worst, we deny that the cause is us and our profligate style of consumption.”
When asked about the prospect of resource wars, Johnson says flatly that it already has started. The war in Iraq, he says, is all about oil because of the reserves that lie beneath the entire region. Indeed, some analysts have suggested that the current military conflict between Russia and Georgia has much to do with controlling oil and natural gas supply.
Concern about dwindling natural gas
Norm Erickson, a retired IBM educator from Rochester, Minn., believes that natural gas supply, like oil, is dwindling. As evidence he points to an announcement from Alberta that gas exports (Minnesota gets over half of its gas from Canada) are being cut sharply and then reduced by 8 percent annually.
Erickson believes that oil soon will become in such short supply and so expensive that he has planted hazelnut trees on some property he owns near Lake City, Minn., so that when they’re mature in about six years he can press out the high oil content and burn it in his VW diesel car.
Hilty said the issue of peak oil won’t go away, and he aims to do what he can with his Minnesota House Energy Committee and the newly formed Legislative Energy Commission to develop workable solutions. He said a problem is that the range of solutions to the problem will take two decades to achieve.
Hilty and Sen. Jim Carlson, DFL-Eagan, tried to move the state ahead with solutions by winning bipartisan support for a legislative resolution recognizing the threat of peak oil and calling on Gov. Tim Pawlenty to assemble a study that could lead to development of a comprehensive approach of solutions. Pawlenty said he recognized the problem of peak oil, but he vetoed the resolution. (PDF) However, Sen. Carlson said he was told by Pawlenty’s former energy point person, Edward Garvey, that peak oil “is a door I don’t want to go behind.” Garvey left his job on Aug. 5.
So, what are the solutions?
Short term, it’s a radical rush to conserve energy and to develop alternative sources, an approach that’s supported by a broad spectrum of folks like T. Boone Pickens and fellow conservative Sen. James Inhofe, R-Okla., and the Sierra Club’s Carl Pope.
Longer term, Simmons said, people must learn to “live in villages”: in small, energy-efficient homes near where they work and shop, grow their own food, and bike or walk instead of using the car.
But first, he said, people “must wake up and understand what’s going on here.”