The End of the Age of Oil Has Arrived

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Sunset or Sunrise?

Perhaps rather than the end of the age of oil, we should say this is the century of reinventing our relationship with energy. How we create it, how we consume it. How we squander it, how we husband it. Whether we have enough or whether we have shortages. And what harm it does (now and in the future) as it is created and consumed. 

For most of the last sixty years, energy was like garbage, something most Americans paid little attention to. For a small monthly sum waste magically disappeared, energy magically appeared, and we didn’t have to worry our heads about either. With a supply of energy seemingly infinite and a price close to free, all but the poorest could use as much as they wanted, entirely unconscious of how it underpinned modern life.

The end of this feast is close upon us. Our relationship with energy is destined to profoundly change, and not in someone else’s lifetime. In ours. Soon.

But this can’t be! Almost every day we hear of new sources of oil and how the US will shortly be the new Saudi Arabia. And if not us, then the Canadians, who are our good buddies, especially when we want something from them. We will have all the energy we could ever want. Forever.

The all-the-energy-we’ll-ever-need version of the future looks something like this, a recent forecast by the International Energy Agency (IEA):

  

Hey, the world supply of oil is ever increasing and by 2035 will reach 100 million barrels a day! No need for concern.

This forecast, however, only faintly resembles the reality actually approaching. To examine unvarnished reality we must untint our rose-colored glasses with the following five steps.

First step. Let’s turn that bar graph into a continuous line graph, courtesy of Antonio Turiel, a scientist at the Institut de Ciencies del Mar del CSIC in Barcelona, who created all the following graphs and published them in a post here, in Spanish. A translation of his excellent original article can be found here. (The blog post you are reading is largely a reinterpretation of his points for those who may not be familiar with the concepts and vocabulary that energy specialists are wont to use.)

So let’s look at what we have. The black wedge at the bottom shows world crude oil currently in production (real data through 2011.) The light blue shows production that will come from crude oil reservoirs known about but not in production. The medium blue is crude oil from reservoirs yet to be discovered. The magenta represents natural gas liquids. The yellow represents all non-conventional oil except shale oil, and the red represents shale oil. The green represents refining processing gains. So there you have it. Up, up and away. We'll all be zipping around in flying cars before you can say, “Frack, baby, frack.”

Step two. Now we must consider that what’s important about an energy source is not how much space it fills (such as a barrel) but how much energy it possesses per volume. And it turns out that not all “oil” is equal in this regard. All non-conventional oils have lower energy per volume than crude oil—roughly 70%. (Corn-based ethanol has only 66% of the energy of oil. This is why your car gets worse gas mileage when you fill the tank with ethanol-blended gasoline.) So a barrel of non-conventional oil should count for 70% of a barrel of crude, not a full barrel as the IEA counts it. Step two takes care of this.

Step three. Refinery gains are not energy gains and should not be double counted as additional energy. It takes as much energy in the refinery process (these days usually provided by natural gas) to create the additional volume of oil you get from these so-called gains. So what the IEA counts as a gain is just translating one form of energy for another (and losing some in the process) rather than creating additional energy.

After adjusting our rosy glasses with steps two and three, our view of oil reality now looks like this:

Taking into account energy content and refinery gains

A little less exuberant, though seemingly no cause for concern. After all, the overall trend is still up. Notice, however, that the IEA claims that in 2011 the world produced 86.2 million barrels of “oil” per day (mb/d). But when we apply steps two and three and translate this production into the energy equivalent of a true barrel of oil, we end up with only 79.5 mb/d. (This is part of the reason why oil prices are still high even though we constantly hear about oil production going up.) In addition, after applying steps two and three, the forecast for 2035 drops from 100 mb/d to 87.5 mb/d. This is starting to look a little tight, but, hey, no worries. Someone will think of something, and nothing much will change. Except we still have steps four and five ahead.

Step four. We have to consider Energy Returned on Energy Invested (EROEI). This isn’t a difficult concept to understand, but it is quite different from how we thought about energy for pretty much the entire twentieth century.

It takes energy to make or capture energy in a form we can use. Back when you could practically stick a straw in the ground in Texas and get oil to spout out, we could produce 100 barrels of oil energy for just one barrel expended. What a deal! Over time, the easy oil was all sucked out. Over time, that left the more difficult oil to extract. Today we get about 20 barrels of oil energy for every barrel expended. But still, that means we only lose 5% of the energy. Not too bad.

But now even that moderately difficult stuff is declining and we’re forced to go after oil that has an EROEI of around 5 or so. So with this oil we lose 20% of the energy in just getting it. This is why this oil didn’t get used up first—it’s not as profitable.

Now let’s consider the petroleum yet to be discovered. Why hasn’t it been discovered? Because this oil is the stuff no one wanted to go after until the price of oil was high enough to make it worth it. These reservoirs (which geologists think are likely there, but again, haven’t been confirmed) are mainly in deep waters, are trickier to find, to drill, to pump out, and have high rates of decline. They also have more problems with maintenance and shutdowns. (Think hurricanes.) The petroleum that might be in the Arctic is fraught with even more difficulties. The result is that the EROEI for this yet-to-be-discovered oil sinks down to 3. We will expend a full third of the energy just getting the oil out. If we’re lucky.

Biofuels (especially corn-based ethanol) have an EROEI of 1 or less. (It takes a heck of a lot of energy to grow corn and then process it into fuel. Worse, with the Midwest drought we are quickly reaching a point where we need our arable land to actually produce food again.) Shale oils have an EROEI of 3 or less. Again, the IEA numbers ignore the energy in part and just count the energy out.

Put all the EROEI considerations together and we get a net oil energy picture that looks like:

Taking into account EROEI

With our glasses de-rosified, we see that as oil becomes more and more energy-intensive (and expensive) to get out of the ground, oil production peaks in 2015 and then sinks to 79.7 Mb/d in 2035. Not so rosy after all.

Now at this point you might be asking why can’t we count oil that was essentially created from natural gas (via refinery gain or ethanol) even if there is no energy gain or a small loss? If we have plenty of natural gas, is it so bad to use it to create the oil we desire? The first problem with this is that there won’t always be as much natural gas available as there is now. In fact, in the US, natural gas comes in boom and bust cycles. During boom years when the price is high, companies start drilling like crazy to get in on the profits. Soon we have so much natural gas, it becomes dirt cheap! But then all the companies that drilled like crazy begin losing money and cut way back on drilling. (This is where we are now.) Since the wells have high decline rates, natural gas production drops dramatically within a few years. Then, as supply falls and the price shoots up, the cost-effectiveness of turning it into “oil” plummets, refineries stop using it as an energy source, ethanol (unless wildly subsidized by the government) disappears altogether, and the cycle starts again. In addition, since natural gas is not infinite, it should be put to the best possible use, arguably electricity generation in place of coal. We also have to consider that the EROEI for natural gas is not great—only about 10 when we include shipment/transportation to the end user—and appears to be falling. Add on to that, there are environmental problems with fracking, and add on to that, even natural gas contributes to climate change, so within the next couple decades we need to wean ourselves from it as an energy source as well. In the end we have to comprehend the energy available to us as an entire whole. By pretending that converting one source of energy into another creates new energy, we double count the energy and distort both our understanding and our decision-making.

We have one more step to truly clear our vision: the fifth step, which has multiple parts.

The IEA projections of oil production include an optimistic 3.3% decline rate per year from current wells. The observed historical decline rate is 5%. Which decline rate should we be counting on? Step five says use historical precedent.

Some of the oil projected to be produced is of a form so costly to refine or in areas so difficult to extract that this oil will ultimately stay in the ground because no one will pay the price it takes to produce and/or refine it. Reserves aren’t reserves if, for example, gasoline needs to be $30 a gallon to make the economics work out. If gasoline did rise to $30 a gallon, very little would be sold because it would leave households with no money for anything else. So the really difficult stuff just isn’t ever going to see the light of day. Step five subtracts them off.

The IEA projections assume a profoundly unrealistic pace of discovery of as-yet-unknown reserves, a rate four times greater than what has actually occurred over the past 20 years. (And this while oil prices quadrupled.) In addition, oil companies have proven to have less appetite for risk and investment during times of economic uncertainty, making them less likely to go after high risk plays that may or may not pay for themselves. Step five fine-tunes the projections in line with historical precedent.

A substantial amount of projected “oil” production is natural gas liquids. But only one third of these “liquids” (they are actually gases) can be refined into gasoline.  (And they can’t be refined at all into diesel.) So they are overstated as “oil” by two thirds. In addition, due to shale oil’s dramatic decline curves, intense water usage, and cost of horizontal drilling, Turiel believes the IEA’s optimistic estimates of how much shale oil will ever be produced are overstated by half. Step five corrects these overstatements.

So here is the final graph of world oil net energy that awaits us looking through our reality-based glasses that are now clear of distortions:

Net Oil Energy Reality

This is possibly the most important graph you will look at this year. What we have is a very serious downward slope that starts very soon. In fact, it’s started all ready. 

Oil provides 36% of the energy that the US consumes. We import 48% of the oil we use. (Energy-wise, not barrel-wise.) Oil currently powers 96% of our transportation. We are less than 5% of the world’s population but use 22% of its oil. At the moment the world produces only about 70 mb/d of real oil energy, and by 2018 this output will likely drop by almost a fourth. Even more ominous, oil-exporting countries such as Saudi Arabia, Mexico, Russia, Iraq, Canada, Algeria, and the UAE are using more and more oil domestically, leaving less for importers (like the US) to buy on the world market. (In 2012 there was 5% less oil available on the world market for importers to buy than in 2006.) And last but not least, there are a number of up and coming countries (like China, India, Vietnam, Brazil, and Turkey) who historically have used very little oil per person, whose use has increased the last five years, and who want to use a whole lot more. If it weren’t for some European countries dropping oil consumption like a rock (UK, Spain, Greece, Italy, Portugal—they’ve all dropped consumption by 6 – 11% in 2012 alone) the US would already be in a world of hurt (even though we’ve also dropped our consumption slightly.) But the time is not far off. 

The good news is that in the US we waste energy like crazy, so we could cut our energy use in half and still have a comparable standard of living. The good news is the EROEI for solar PV has been rising so it’s now close to 7, and the EROEI for wind is over 20. The good news it’s easy to drop energy consumption with house insulation, whole house fans, ceilings fans, heat pumps, bicycles, trains, rail freight, LED lights and living close to shops and jobs. The bad news is we’ve waited to the last minute to do all this, so the change is necessarily going to be dramatic and uncomfortable. The other bad news is that this decline in oil consumption won’t save us from increasingly violent climate change. It’s going to take the world getting off both coal and oil and a worldwide program of massive reforestation to do that.  

Perhaps the most obvious bad news is that cars with internal combustion engines (99% of all vehicles on the road) are going away in the US, likely half of them by 2018. Currently the average household has two cars. By 2018 this will drop to one. Currently the average household travels 19,652 vehicle miles/year. By 2018 this number will be under 10,000. Though this may seem unimaginable, the fact is internal combustion engines are an extraordinary waste of good gasoline. Our cars fritter away a full 3/4ths of the energy in every gallon, largely in the form of heat. Gasoline is amazing stuff. Each gallon is easily equal to three weeks of human labor. If we paid its value in minimum wage, the price at the pump would be $870.00 per gallon. As the amount available decreases, you can bet its dense, portable energy will be applied to far more efficient, productive uses than propelling 5000 lbs of metal to the grocery store in order to transport 8.4 lbs (a gallon) of milk home.

But won’t everyone just drive electric cars, you might ask? Right now in the US 37% of our electricity comes from coal. Not only can we not increase our electricity consumption, we need to decrease it until enough solar PV and wind can be built out to replace the electricity coal produces. (We also need to seriously upgrade our nation’s electrical grid infrastructure.) If we try to power electric cars with coal we will turn this planet into a crispy tostada. Yes, some rich people might have electric cars (along with a very large home solar array) but for the bulk of the population it’ll be at least a 10 – 15 year wait before enough electricity that won’t destroy the planet will be available to power even one electric car per household to go 8000 miles a year. In an energy-limited world you can count on transit and rail (far more energy-efficient than private cars) to predominate for long trips. (We won’t even mention the enormous difference in energy it takes to maintain a vast road network versus rail tracks.) For short trips, since walking and biking win out hands down energy-wise, you can expect Americans to relearn what our legs are for.

If we’d started twenty years ago to prepare for the energy transition ahead of us, we’d be in much better shape. As it is, fasten your seatbelt, or (you bicyclists) hold on tight to your handlebars. The end of the age of oil means we’re in for bumpy ride.