Thursday, March 4, 2010

As demand rises, can oil supply keep up?

Liquid hydrocarbons provide the fuel for the vast majority of the vehicles that carry us to and fro over the course of a day. The latest edition on the TWIP comments, in looking at the future of vehicles through the eyes of the Annual Energy Outlook, released this month, that:
the market share of alternative vehicles will increase to 49 percent of new vehicle sales by 2035 due to the combination of more stringent corporate average fuel economy standards, the renewable fuel standard and higher fuel prices (See Figure 1). However, with continuing improvements in the fuel economy over time, conventional gasoline-powered vehicles are projected to retain the majority of sales.
Figure 1 looks like this:

EIA projects for vehicle fleet changes in future years (EIA)

But the projection carries with it some inherent assumptions about the continued availability of those fuels, both here and in the other countries around the world. And in some of those growth is expected to be such that, by 2035, countries such as China will have more vehicles on the road that the USA. Last year the Chinese car industry overtook that of the United States, and just recently Saudi Arabia began selling more oil to China than it does to the United States. Sales to the US averaged about 2,000 bd below 1 mbd last year, while those to China just crossed that significant marker. Similarly Russia, the country that now leads the world in crude production, increased its sales to China so that it now supplies around 7.8% of total Chinese crude imports. (Through last October this amounted to around 100 million barrels of oil for the year).

There is a new pipeline that is being constructed to help those exports, with the goal of increasing sales from their current 6% of Russian exports to between 20 and 25%.
After many years of discussions, the construction of the pipeline started in April 2006. The ESPO was supposed to connect Tayshet (in the Irkutsk oblast) with the Kozmino port on the Pacific Ocean. The new oil pipeline is intended to stimulate the development of a new oil production centre in Eastern Siberia, which is particularly important in view of the expected decline in production from the Western Siberian fields and in the Urals-Volga region. The ESPO's total length will be 4857 km and it will have an annual capacity of 80 million tons. The first section between Tayshet and Skovorodino (Amur oblast) has a capacity of 30 million tons.

Initially, oil will be transported from Skovorodino to Kozmino by rail. The second phase of the project (to 2014–2015) will see the construction of the pipeline section to the terminal in Kozmino (50 million tons) and the expansion of the first section’s capacity to 80 million tons. Moreover, a branch connecting the ESPO with China's Daqing has been under construction since April 2009; it is expected to start transporting 15 million tons a year in 2011 (with an option of extending the capacity to 30 million tons).
Russia’s Energy Strategy through 2030 does not see a shift from fossil fuels to alternative energy until after 2022.

Now these projections of growth, and the fuel supplies required to meet them are predicated on there being enough, relatively economically viable, supplies of crude to meet that demand. There are the occasional troubling signs that this might not be the case.

JoulesBurn has one of his usual, incisive and informative posts on The Oil Drum today discussing his latest analysis of information from the satellite view of the recent Saudi addition at Haradh. This, the third addition to the program of extraction from the Southern tip of the large Ghawar field, is being produced, and bragged about by the Saudi, at a level of 300,000 bd. But as Joules has spotted, and pointed out, there are a lot more production wells that have been drilled into that field in recent years than Saudi Aramco have been admitting to, and their placement suggests that they are being needed to maintain production from wells that might not have been able to sustain the original targets.

Now that could be a problem, and Ace has commented that this could signify that Aramco might not be able to sustain more than 8.35 mbd this year, and expects a decline next year.

Into this picture now increasingly steps the slowly growing global economy. And as it seasonally happens US demand for gasoline is beginning the steady increase that normally occurs between now and mid-summer, with the concomitant increases in price.

US Demand curve from TWIP (March 3, 2010 )

Turning to the vehicle miles travelled data for last November the numbers were positive across the entire country, with an average increase of 1.4% over the previous November. (This is in contrast with the October figures where the overall had shown a drop of 0.7%, the first drop in 5 months). The rolling 12-month total, because of that, reached a plateau, though I expect that it will return to upward progress next month, perhaps beginning to exceed the driving done in 2004.

Rolling 12-month total of vehicle miles driven in the USA through November 2009. (FHWA )


  1. Please allow a personal opinion from someone who follows the automobile industry pretty closely. It's hard, I'd say impossible, to make accurate projections like Fig. 1 for 25 years out without knowing how the economics of vehicle operation will change over that period.

    Take flex fuel vehicles, for example, said in the graph to have pushed 10% of sales in 2008. If the refining subsidy for ethanol were dropped or if the vehicle purchase rebate were removed, most of those sales today would disappear in a heartbeat. And while it's true that E85-capable vehicles are being sold, most run on regular gasoline most of the time. Less than 1.5% of the retail gasoline outlets in the USA sold E85 in 2008.

    Fig. 1 is US-centric. That's fair enough here, but a poor mirror for the rest of the world where the market for oil is increasingly set. Take France, for example, where diesels make up close to 75% of new car sales. In Canada, I could buy a flex-fuel vehicle and I do see them on the road but, the last time I checked about a year ago, there wasn't a single commercial E85 pump in the whole country.

    There's no category in the graph for the straight electric vehicles which rental companies in Europe have already started to buy. I think the market penetration of series-hybrid EVs has been seriously underestimated. I've had a short drive in the Chevy Volt, and it's a pretty impressive car. Its operating cost on electricity alone, which would comprise most of my driving, would be about one cent per kilometre at my utility's rates. Yes, the battery will be expensive when the car goes on sale later this year but, in 2035, who knows what that initial cost will look like to the more than 50% of owners considering purchase of a new gasoline-powered vehicle?

    Somebody projecting the sales of land lines versus mobile phones on the basis of trends and historical patterns 25 years ago would have got today's numbers quite wrong. Mobile phones then were at an early stage of commercialization, as electric vehicles are today. A 1982 Nokia handset weighed close to 10 kg, a far cry from an iPhone!

    Patterns change. They respond to technology and policy developments in unexpected ways. For me, the EIA's graph hasn't much credibility as an indicator of the future. No references, no links, this is just an opinion.

  2. There are a few stations that offer E85 in Canada, but only a few. However California only has 45 E85 stations, with a comparable population.

    VMT + FMG 12 ma: Link. They've tracked each other nicely since about 1990. This should properly include diesel, of course. Maybe next time.

  3. RR
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