A neglected form of Administrative Insurance for the future

There is an almost rhetorical question that comes up repeatedly when one talks with those demanding strong action to reduce the possible outcomes of the change in climate that are claimed to be due to increases in greenhouse gases. It is that we cannot afford not to take out insurance in case the theoretical prognostications are correct. And the argument is often made that there is little downside to this.

I was at a talk by Paul Lang, who is the Senior Vice –President for Operations of Arch Coal tonight, and he spoke of a definite and clear downside that the general public is certainly not aware of, and very likely fails to even remotely understand the consequences of. It is this.

Some 50% of the electrical energy in this country is produced from coal. In the MidWest this number rises, to 85% in Missouri, as an example. But over 100 coal-fired power stations have been cancelled or postponed because of the general attitude to coal by the current Administration and the political climate engendered by the furor over the possible AGW effects. We, this nation and the world need energy. At the moment, other than ourselves, nations such as Russia, China, India and Africa rely on coal for significant portions of their energy supply. That demand is not going to go away, and in one of the few likely accurate predictions of the Wicks Report they anticipate that coal production will rise from 4 billion tons a year to 7 billion tons a year, in order to meet this demand.

To produce the coal that the world needs, the industry must have engineers. That supply is beginning to vanish. In a typical year at the moment the industry needs about 750 new mining engineers globally. (This is not just for coal, you name the mineral – it came out of the ground and some form of mining was involved in extracting it). But globally there are about 350 students graduating. The work force in the industry is aging (over 60% of those in the industry are getting close to retirement) and then there are those below 35 in age who relatively recently joined the industry. There is a “missing generation” between the two groups, marking the years when there appeared to be no future going to work in the fossil fuel industries.


The public relations exercises that we see today that tout the “Climate Change” message project a strongly negative image of the fossil fuel industries to the general public, discouraging students, both in the United States and abroad, from going after careers in the industries involved. The nation already has had a more general problem in that less than 6.2% of incoming college freshmen in 2007 were anticipating careers in engineering. This has however recently risen with 7.5% of 2008 freshmen expressing an interest in going on to an engineering job, but given the national need, that is still a pathetic percentage.

For the fossil fuel industry the numbers are smaller and with limited demand for places, at a time where other disciplines were flourishing, University Administrations put their resources where the demand was. As a result while there are nominally about 12 accredited schools of mining, there are viably only around 6 that have what might be considered an adequate to good program. Others have below minimal levels of the faculty numbers required to teach an adequate range of courses, let alone also do the research critical to the advancement of the industry.

To maintain an industrial standard of safety that has now been achieved; to keep the production cost levels down and thus meet the prices for the fuel and electricity supplies that society expects, rather than the prices that will stagger and halt future industrial growth, and to keep the nation out of continued recession requires that the industry be staffed by engineers who know what they are talking about.

Projecting an image of a “evil” industry that will be “taxed out of existence” is fine if there is a viable alternative – but what if there isn’t? It would seem that the Administration might want to consider “insurance” in case their ideas don’t turn out to be right. In case the nation really has to fall back on coal for a viable economic future. If all the billions of dollars that are now being spent to study and suggest steps to take to lower global warming have been put in place because of insurance in case the AGW argument is correct (Joe Aldy made that point at the EIA Energy Conference in April.) then it makes sense to take out similar insurance in case the argument is wrong.

Is that likely ? Are we going to see greater investments in technology to produce fossil fuels at a greater rate, so as to meet demand and help sustain the economic recovery? Somehow I suspect that this, more realistic sort of insurance is unlikely to happen. But we shall see.

In the meantime the world still needs more qualified engineers in the fossil fuel extraction industries than those industries can find and hire. Plans will therefore be delayed, needed research will not get done, (the historic record shows that giving money to the National Labs to find answers to fossil energy problems is a highly expensive way of trying to solve the problem.) We are, therefore likely heading into a really serious problem time - isn't that insurance is supposed to help get you through?
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Future Oil Production

I first started writing about the future energy supply about six months or so before we founded The Oil Drum, and in one of my earliest posts and presentations I looked at where the world was getting crude oil. It turned out, back in 2004, that there were only 19 countries in the world that were producing more than a million barrels of oil a day.

Top Countries producing crude oil in 2004 (source EIA )

I added Azerbaijan to the list because if you go to the latest tables then you find that it has crept into the select table of those producing more than 1 mbd, the total list of which is now made up as follows:

May 2009 Top crude oil producing countries (Source EIA )

The ones that have reduced production are in red, and countries that have changed position have the previous rank shown after their name. Overall the production numbers are not that different, globally we’re at some 71.8 mbd as opposed to 72.48 mbd in 2004, and OPEC now produces 30.31 mbd, in contrast with 30.41 mbd back then.

Of course the world is in recession at the moment, and to compensate for the drop in demand, OPEC has cut production. However in the TWIP this week, the EIA has a comment on the strength of that commitment, which is germane to where we are going in terms of oil supply and thereby oil prices.


Bear in mind that the reduction has now been going on since the beginning of the year and that, originally compliance was relatively high. But as the EIA notes, this is transient, and over time production works back up, as indeed it has. (OPEC was reported to produce only 26.23 mbd in January).

OPEC compliance with average production cut requests by month (Source TWIP )

The TWIP suggests that only Saudi Arabia, Kuwait the UAE and QATAR carried the brunt of the production cuts with Saudi Arabia making the deepest sacrifice. But as compliance diminishes it does begin to raise the question as to how much production can be brought back to match increased world demand.

Most of the countries on the list above are producing about as fast as they can, although a quick check on Russian production showed that they produced 9.99 mbd yesterday so perhaps they also have had a little slack that the return to prices above $70 is bringing back to the market (It may also be that the difference comes from NGL ( natural gas liquids from natural gas wells ) which are not counted in the crude numbers in the tables). And yet, to pick two, the UK and Mexico are seeing production steadily decline with little chance of reversal. Looking, for example, at Mexican production, the decline seems to be significant and continuing.

Mexican oil production over the past twelve months (PEMEX )

As a result imports to the United States have fallen to 1.225 mbd in May, and that shortfall from 1.9 mbd as recently as May 2005 gives an indication of how rapidly Mexico is declining. Which raises the question as to where, given further declines, the US and others relying on that oil are going to get the replacement.

The Wicks Report not withstanding, it is unlikely in the short term that this will come from the Canadian oil sands, it takes too long to gear up. Non-OPEC in general is now considered to have peaked in production which brings us back to the few OPEC players that still have some capacity to boost. Of these the one that has made the deepest cut, and thus it the one with potentially the most available is Saudi Arabia.

Bloomberg believes that the current excess production that is being held off the market is around 6.1 mbd. Since this is held by OPEC, then OPEC is going to set the price from now on and

The Saudis are happy with oil in the $70-to-$80 range,” Mueller said. “It’s low enough to stop development of some oil sands and alternative energy sources while not hurting the economy. If prices rose above $75 they would open the spigot.”

Saudi Arabian Oil Minister Ali al-Naimi said on May 23 in Rome that crude oil at $75 a barrel would be healthy for the global economy. The aim will be “keeping it between $70 and $80,” he said. The Kingdom is the world’s biggest oil exporter.

I would be a lot happier with this if I believed that 6 mbd number. I don’t. And we will have to see, as the economy gains in strength, just how much oil will be released to support the growth. It would be nice to believe in Euan Mearn’s optimism but I believe that the estimates are probably at least 2 mbd too high – we’ll just have to wait and see how close we come in the months ahead.