The Gathering Storm

It seems relatively quiet on the “Peak Oil” front. So much so that there are blogs, such as Peak Oil Debunked that are, you might say, powering down. To a first overview the new Administration is said to “get” the need for renewable energy, and the Stimulus package has had large sums of money set aside to create paths forward through the “valleys of death” which often greet innovative ideas as they move from lab to full-scale implementation.

One might think, therefore, that we had weathered the storm that disturbed the world as oil prices rose to their peak, just under a year ago, and that energy supplies are now adequate and prices may be stable, while the world moves on to attend to other aspects of its business. With the coming meeting in Copenhagen on Climate Change this December and the moves within Congress to get the Waxman-Markey bill on Energy and Climate acceptable to enough players to get it approved now in full swing, Climate Change seems to have moved back into the driving seat and Energy Independence and concerns over supply are diminished.

Sadly, however, the events that underlay the drive up in oil prices, and the resulting impact on the global economy, did not go away, but were only transiently made ineffectual. The facts that markets are tightening is shown, both by the price increase in crude, now back up to $70, and the increasing sale of oil that has been, until now, stored in tankers. The current rise in prices already has Goldman Sachs predicting oil prices over $85 by the end of the year. They note the IEA conclusion that the drop in oil demand is about over, with an average level of demand for the year expected to be 83.2 mbd. This presages what they are increasingly concerned about, that is an “unrecognized energy crisis.”

It is now recognized by a number of agencies and forecasters that non-OPEC oil production has peaked, and Goldman anticipates the impact that this will have:

The bank says global supply growth over the next five years will dwindle to just 650,000 barrels a day—due to lagging investment and output in non-OPEC countries, especially. Goldman expects non-OPEC supply, about 60% of the world market, to fall by 400,000 barrels a day this year and by 910,000 barrels a day in 2010.

This puts control of oil supply, and therefore price, firmly into the hands of OPEC. Whether the individual members thereof can control themselves sufficiently to maintain the tight demand:supply balance that gives absolute control to price is unlikely. For example, despite the supposed limit, OPEC increased production in May.

Oil output averaged 28.15 million barrels a day last month, up 405,000 from April, according to the survey of oil companies, producers and analysts. The 11 OPEC members with quotas, all except Iraq, pumped 25.76 million barrels a day, 915,000 more than their target.

So production is up, stored oil is being sold, and, while US refinery usage remains down, Chinese refineries are moving into top gear and oil prices continue to rise. And the Tata Nano may come to the US in a couple of years. (My Jevons Paradox comment).

There are two parts to the “hidden” crisis, the first holds while OPEC retains the ability to increase supply to meet demand. Depending on how much oil can be brought into production from existing fields, how much decline in production there is from those existing fields, and how fast new fields can be brought on line, all control how far OPEC can go to meet increasing demand as the world economy and demand starts to inch back. Goldman believes that this will only hold true for another year.

2010H2: A likely return to energy shortages as dwindling OPEC spare capacity is likely unable to meet rising demand as Non-OPEC production growth is restricted by limited investment in oil production infrastructure. We are introducing an end 2010 WTI price forecast of $95/bbl.

In other words about a year from now the world will again see the intersection of available supply and demand – with consequent increase in prices. Goldman think that this will cause an increase in oil price to $95/bbl. I think they’re kidding themselves.

Of course they are likely more realistic that the Department of Energy. The latest TWIP has the following projection for prices over the next 20 years. It is already out of date. (I must get back to that in a future post, since having not looked for a couple of weeks, I see that summer demand is finally beginning to appear.)

But this is not the only energy source over which we should be concerned. While, as I noted the other day, natural gas might be able to meet half the gas demand in a decade from the gas shales, the question in the short term is where are we going to get the fuel this time next year. The continuing decline in drilling rig usage in the US, has the numbers down to about half the number active last year, and the short operational life of the highly-productive gas shale wells means that they must be replaced within two years. At present that is not happening. Thus we will see a coming shortage of natural gas, perhaps also by the second half of next year.

Which leaves me with coal, and I just happened to note that in the latest version of former-Vice President Gore’s slides that he has a couple where he happily notes the large number of coal-fired power stations that have had their plans cancelled.

The coal-fired power plant that was cancelled in Michigan on May 1st is the 97th to be rejected since 2001, and the ninth this year. The number of planned coal plants across America has plummeted from 150 to 60 in the past five years. Last year 5,465 megawatts (MW) of new electricity were announced, but more than twice that capacity—12,572mw, according to Edison Electric Institute, which represents the electricity industry—was subtracted because of cancellations or delays. The nine coal plants cancelled this year alone, Edison notes ruefully, would have provided about 6,650mw of power, or enough to heat almost 5m homes.

Now this may lead to an interesting Conundrum. Those who believe that current global temperatures are driven by greenhouse gases, such as those at Climate Progress, really need it to get hotter to validate their models, and thus have cast their hopes of a change from the current cooling on an upcoming El Nino. However, should this arrive, and give us a scorching summer next year, then we may not have the power available to meet demand, given the unfolding situations defined above. Which would make it difficult for the Administration (and other like-minded governments) that have themselves, or their supporters, go to the polls in the Fall of 2010.

And if that switch from cooling to warming doesn’t happen, then with another year of disparity with the AGW models, it will be more difficult to defend the current position, and lack of investment in short-term supplies rather than the longer-term initiatives that DOE is currently putting into place. So again the poll results may not be gratifying.

The storm is thus gathering, and while it may not hit at full force for a year yet, I am afraid no-one yet knows if there are even lifeboats on board, let alone where they are and how we should use them.