Why Oil And Gas Are Different

Peak Oil occurred in the US in 1970, but a new record for natural gas production may be set soon. This divergence explains why oil’s value grows while natural gas’ value declines.

Oil prices have bounced back from lows in the 30’s earlier this year to around $80 per barrel today. Natural gas prices, meanwhile, have recovered less from summertime lows, from below $3 per Million BTU to $4 today. Oil and gas prices are historically correlated, as the two fossil fuels are often produced from the same wells and share overlapping uses in industry, residential heating, and other sectors. Why have prices for these commodities decoupled, and will this continue in the future?

Here are two graphs, depicting long term US production of oil and natural gas:

US Oil Production

Since its peak in 1970, US oil production has declined from 9.6 million bpd (barrels per day) to 4.9 million bpd, a decline of 49%.

US Natural Gas Production

Natural gas production set a record of 22.65 TCF (trillion cubic feet) in 1973, but 2009 is on pace to reach within 3% of the old record, and 2008’s production of 21.26 TCF is only 6% less than record.

The long term histories of the two fossil fuels show a fundamentally divergence in path. Domestic oil production peaked decades ago, while natural gas production is poised to set a new record if  the market demands it. While Peak Oil is now in the rear-view mirror in most countries, and could be quite close worldwide, Peak Natural Gas has yet to even occur domestically. In addition, oil status as the world’s primary transport fuel is proving difficult to change [1], while natural gas competes against coal, nuclear, and renewables in the market for electricity production. This situation explains the breakdown of the historic price relationship between oil and natural gas, which is unlikely to return soon.

[1] The EIA projects that 3% of new car sales in 2030 will be PHEVs, or plugin hybrid electric vehicles. Even if PHEV sales accounted for 100% of all new car sales, it would take twenty years to replace all existing cars on the road (since the US has over 200 million vehicles and annual car sales around 10 million). The EIA’s projection makes it clear the PHEVs won’t have a significant impact absent an oil price shock that forces a change in behavior.

Is Peak Oil Real? A List of Countries Past Peak

Only 14 of the 54 oil producing nations in the world are still increasing their oil production. The era of cheap oil is definitively over, as shown below.

Is peak oil real? The BP Statistical Review of World Energy provides the data needed to answer this question. Using the 2009 edition, I have compiled a list of all oil producing countries and regions in the world, along with the production status of each, ordered by year of peak production. BP groups minor producers into categories like “Other Africa”, and “Other Middle East”, and that notation is used here. All production numbers are quoted in barrels/day.

Country Peak Prod. 2008 Prod. % Off Peak Peak Year
United States 11297 7337 -35% 1970
Venezuela 3754 2566 -32% 1970
Libya 3357 1846 -45% 1970
Other Middle East 79 33 -58% 1970
Kuwait 3339 2784 -17% 1972
Iran 6060 4325 -29% 1974
Indonesia 1685 1004 -41% 1977
Romania 313 99 -68% 1977
Trinidad & Tobago 230 149 -35% 1978
Iraq 3489 2423 -31% 1979
Brunei 261 175 -33% 1979
Tunisia 118 89 -25% 1980
Peru 196 120 -39% 1982
Cameroon 181 84 -54% 1985
Other Europe & Eurasia 762 427 -44% 1986
Russian Federation 11484 9886 -14% 1987*
Egypt 941 722 -23% 1993
Other Asia Pacific 276 237 -14% 1993
India 774 766 -1% 1995*
Syria 596 398 -33% 1995
Gabon 365 235 -36% 1996
Argentina 890 682 -23% 1998
Colombia 838 618 -26% 1999
United Kingdom 2909 1544 -47% 1999
Rep. of Congo (Brazzaville) 266 249 -6% 1999*
Uzbekistan 191 111 -42% 1999
Australia 809 556 -31% 2000
Norway 3418 2455 -28% 2001
Oman 961 728 -24% 2001
Yemen 457 305 -33% 2002
Other S. & Cent. America 153 138 -10% 2003*
Mexico 3824 3157 -17% 2004
Malaysia 793 754 -5% 2004*
Vietnam 427 317 -26% 2004
Denmark 390 287 -26% 2004
Other Africa 75 54 -28% 2004*
Nigeria 2580 2170 -16% 2005*
Chad 173 127 -27% 2005*
Italy 127 108 -15% 2005*
Ecuador 545 514 -6% 2006*
Saudi Arabia 11114 10846 -2% 2005 / Growing
Canada 3320 3238 -2% 2007 / Growing
Algeria 2016 1993 -1% 2007 / Growing
Equatorial Guinea 368 361 -2% 2007 / Growing
China 3795 3795 Growing
United Arab Emirates 2980 2980 Growing
Brazil 1899 1899 Growing
Angola 1875 1875 Growing
Kazakhstan 1554 1554 Growing
Qatar 1378 1378 Growing
Azerbaijan 914 914 Growing
Sudan 480 480 Growing
Thailand 325 325 Growing
Turkmenistan 205 205 Growing
Peaked / Flat Countries Total 49597 60.6% of world oil production
Growing Countries Total 32223 39.4% of world oil production

Only 14 out of 54 oil producing countries and regions in the world continue to increase production, while 30 are definitely past their production peak, and the remaining 10 appear to have flat or declining production [1]. Put another way, peak oil is real in 61% of the oil producing world when weighted by production. Since 2008 capped a record run for oil prices, most countries and oil companies were trying all-out to increase production. While a handful of producers (think Iraq) might be limited by above-ground factors, the majority of producers simply couldn’t do any better in 2008 [2].

The evidence of the demise of the cheap oil era has become insurmountable. In the face of the highest oil prices on record, the great majority of the world’s oil producers were incapable of taking advantage and producing more oil. Many nations including the US saw their oil production peak decades ago – there simply is no turning the clock back. This list shows that we are relying on a small number of countries to keep providing cheap oil. We need to move faster to alternatives and greater energy efficiency, before the last fourteen peak as well.

* More information on these countries:

  • Russian Federation – Russia’s oil production collapsed by the early 90’s as the Soviet Union collapsed, but despite a decade of growth, Russia’s own oil execs don’t think the old peak can be surpassed.
  • India’s production appeared to plateau in 1995, and has stayed within a steady range since. The EIA forecasts Indian oil production to remain flat or decline slightly in the near future.
  • Republic of Congo (Brazzaville) hit a production plateau in 1998, though current production is still very close to 1999 peak levels.
  • Other Central & South America – The remaining countries of the Americas hit a production peak in 2003, though it’s still too soon to know if this will be final peak.
  • Malaysia has been on a production plateau since 1995, and the EIA projects flat or falling production.
  • Other Africa – Oil production in much of Africa is potentially impacted by above-ground constraints, so it’s definitely possible that production will rise here. It will rise from a low base of only 50,000 bpd however, and may not have much impact on total world production.
  • Nigeria is impacted by domestic insurgencies in its oil-producing regions, and may be able to lift production if the political situation improves.
  • Chad’s oil production history is too short to definitively identify a peak in production, but the drop-off since 2005 has been dramatic.
  • Italy has been on a production plateau for over 10 years, and it’s unlikely that a mature economy is significantly under-exploiting its resource potential.
  • Ecuador’s production grew rapidly until 2004, but has leveled off and declined somewhat since then.

[1] To be considered past-peak, a producer’s current (2008) production has to be at least 10% less than its best year, and the best year must have occurred prior to 2005. Some countries’ production has been artificially constrained by political and other non-geological considerations. But in some of these cases, it will be difficult to pass an old peak because decades of depletion have occurred since that peak. Iraq peaked in 1979, making it all the more difficult to pass that now.

[2] While OPEC maintains formal production quotas, it is widely believed that only Saudi Arabia had true spare capacity in 2008, while all other OPEC nations were producing at capacity. The truth is unclear, since OPEC nations do not provide detailed reserve statistics for their oil fields.

Total has created its own short list of oil producers past peak, and Wikipedia has a list here.

Plugin Hybrid List

http://www.pluginamerica.org/plug-in-vehicle-tracker.html
Plugin America, an organization devoted to promoting electric and plugin hybrid vehicles, has put together an excellent list of plugin vehicles (linked above). Most major auto manufacturers now have a plugin model targeted for 2011 or earlier.

Continuing advances in battery technology mean that by 2011 plugin hybrids will be cost effective at today’s gas prices ($2.50 per gallon), and by 2013 hybrids may be cost effective at $2 a gallon.

How much energy do we need?

energyvshumandevelopment

Energy usage vs UN Human Development Index, 1997

How much energy do we need? In traditional economics, this question is meaningless, as humanity simply consumes the amount of energy demanded at the market-clearing price. But in a resource-constrained world, this question becomes pertinent. Can the world’s energy supplies power a future in which all of mankind uses the same amount of energy as the average American? What level of energy usage is possible, and as fossil fuel sources run short, what kind of renewable energy investment will be required? Let’s examine some scenarios:

Scenario 1: The World at American Standards

The United States consumes 100 quadrillion btu of energy annually. If the world’s population stabilizes around 9 billion, bringing the entire world up to US energy consumption would require 6000 quadrillion btu per year. This is more than twelve times current energy production, a figure that even optimistic forecasters doubt possible. If solar panels cost 50 cents per watt installed (90% cheaper than today and cheaper than coal), an investment of $500 Trillion would be required to provide this amount of energy.

Scenario 2: The World at European Standards

The graph above shows that the US could cut per capita energy consumption by 70% without a significant drop in quality of life. Achieving this standard worldwide would require total energy production of 1800 quadrillion btu per year, still more than triple today’s capabilities. An investment of $150 Trillion would provide enough solar energy to power the world at these standards, a number over double current world GDP.

Scenario 3: Current Energy Usage per Capita

The scenarios above assume that the developing world eventually reaches parity with the industrialized world. Assume instead that current energy usage is maintained on a per capita basis, with the world’s population stabilizing at 9 billion. The world would consume 700 quads of energy per year. This level of energy usage would require $60 Trillion in investment, which might be achievable over time.

Conclusion

Unless energy prices drop by 99 percent via nuclear fusion, the world’s economy is likely to be energy-constrained in the future. It’s highly unlikely that the entire world will ever reach an American or even European level of energy consumption, and even current energy consumption levels will require a massive investment to reach sustainability. The calculations above assume that renewable energy will become significantly cheaper than coal, and yet the cost of replacing the world’s energy infrastructure is enormous. But in the long run, it will be necessary!

Calculations

At 50 cents per Watt installed, what’s the price per kilowatt-hour that I’m assuming? Assume that a 1kW solar system produces 1800 kWh per year, as according to SolarBuzz. Over a 30 year lifetime the system would produce 54000 kWh. If this system costs $500 at 50 cents per watt, then $500 / 54000 kWh = 1 cent per kWh. This is much cheaper than retail delivered electricity generated from coal.

Scenario 1:

1800 kWh * 3413 btu / kWh = 6143400 btu per $500 system

6000 quadrillion btu / 6143400 btu/system = 976 billion 1kW systems needed

At $500 each, that’s $490 Trillion.

Scenario 2: 1800 is 30% of 6000, so 1800 quadrillion btu would require $147 Trillion in investment.

Scenario 3: 700 is 11.6% of 6000, so 700 quadrillion btu would require $57 Trillion in investment.

Is Oil and Gasoline Demand Rising Again?

The media is filled with reports that Americans are driving less, and that gasoline demand and oil demand continue to drop. What’s the reality of the situation? Is demand continuing to drop, has it leveled off, or is it rising again? The graphs below tell the story:

Figure 1: US gasoline demand dropped off in 2008. US Gasoline demand is highly cyclical, and figure 2 corrects for this.

2007 vs 2008 Gasoline Consumption

Figure 2: To eliminate seasonality, 2007 demand is subtracted from 2008 demand to measure the difference week by week. This shows that demand crashed in September and October, but has subsequently begun to recover. Low gas prices may be responsible for the demand rebound.

2008 Second Half US Oil Consumption

Figure 3: US oil demand also dropped sharply during September and October, but has since recovered to mid-2008 levels. In addition to rising gasoline consumption, residual fuel oil demand is rising since oil is now price-competitive with natural gas.

Figure 4: The long term EIA graph shows that demand growth has leveled off, and that after a sharp drop in late 2008, demand is recovering.

Gasoline and crude oil demand seem to have recovered from the levels experienced during the heart of the financial market meltdown. Intuitively, gasoline demand should rebound a bit, since gasoline price deflation over the past year makes driving a very inexpensive activity for consumers. With the recession curtailing further oil exploration, we may be in for a price shock when economic growth returns!

Note: All data used in the graphs can be found by clicking on the EIA graphs, which link to the appropriate EIA data pages.

Electric vs Gasoline – Which is more cost effective?

Last summer gas prices spiked and the media was awash in stories about the electric car, whether from major automakers or startups. Just a few months later, gasoline is at $1.50 and SUV sales have begun to rise again. Environmental and foreign policy benefits notwithstanding, electric vehicles are perceived to be more expensive than gasoline vehicles. At what gasoline price are electric vehicles more cost effective?

In Theory, Electric Vehicles are More Efficient

Electric motors are very efficient, converting over 90% of electrical power supplied into motion, while gasoline engines manage only 20% efficiency. On a full life cycle basis including power plants and oil wells, electric vehicles manage about 34% efficiency versus only 14% for gasoline vehicles [1]. In theory electric vehicles are much more efficient.

But how does it work in practice? Let’s take a look at two real-world examples, the Tesla electric sports car, and the Hymotion plugin-hybrid modification for the Toyota Prius.

Hymotion Toyota Prius and Tesla Examples

Hymotion is now selling a plugin hybrid modification for the Toyota Prius which enables it to travel roughly 40 miles with minimal gasoline usage. Hymotion states that independent testers have verified the Hymotion-modified Prius capable of receiving a 150mpg EPA city rating.

The Hymotion modification uses 5 Kwh of electricity, worth about 50 cents, to help power it through a 40 mile trip, while using the gas engine about 20% of the time. At $1.50 a gallon the total fuel cost for a 40 mile trip is about 30 cents, resulting in a total trip cost of 80 cents. The average American vehicle gets 20 mpg, so it would use 2 gallons for the trip, or $3.

Tesla provides a good life cycle energy usage comparison between its electric sports car and other automobiles on its website. The Tesla uses 177 watt-hours of energy per mile traveled, which costs 1.7 cents on average. Based on Tesla’s numbers, a 40 mile trip would cost 68 cents in a Tesla versus $3 for gasoline in a typical vehicle.

Even at $1.50 gas or $1 gas, electric and plugin-hybrid vehicles are significantly cheaper to operate than gasoline vehicles. But electric and hybrid vehicles are significantly more expensive than comparable gasoline vehicles today, which motivates the primary question:

At What Gasoline Price are Hybrid or Electric Vehicles Competitive?

For the Hymotion-modified Toyota Prius, the breakeven price of gas is around $3 a gallon. The Hymotion modification for the Toyota Prius costs $10,000, and the Prius itself costs roughly $5000 more than a similar non-hybrid vehicle. At $3 a gallon, a driver that drives 12,000 miles per year would save about $1500 per year, just recouping his initial investment over a 10 year timeframe.

Batteries represent the primary factor in the additional cost of hybrid vehicles, and battery price-performance is improving at a rate of about 8% per year. At this rate, the breakeven price will probably be $2 a gallon in 2013.

Plugin hybrids and electric vehicles provide one additional savings: time. The average driver fills up almost every week, losing a total of 8 hours a year. For busy professionals, 8 hours of time could be worth $500 to $1000 or more, making plugin-hybrids the cost-effective choice today!

Footnotes:

[1] Electrical energy is created by burning fossil fuels in a power plant at 40% efficiency, followed by transmitting it to your house at 93% efficiency, and using it in an electric vehicle at 92% efficiency, providing a total efficiency of around 34% for an electric vehicle. Crude oil refineries operate at 75% efficiency, and gasoline distribution might cause another 6% energy loss. Since internal combustion engines are only 20% efficient, total efficiency would be around 14%. Assuming that the natural gas and oil to power our vehicles comes from the same well, we can directly compare these efficiencies, and thus conclude that electric vehicles are significantly more efficient.

Stimulus Plan Ideas

I’ve been thinking about President-elect Obama’s proposed stimulus plan lately, as it represents one of the larger policy decisions of the coming year. Most economists agree government stimulus that some form of is necessary to prevent a deflationary economic environment, and to improve economic sentiment. But what criteria should we use to judge fiscal stimulus spending, and are there any good ideas out there that haven’t been considered?

Stimulus Plan Criteria:

1. Speed: Any stimulus spending needs to occur quickly in order to boost the economy. Projects which don’t hit the ground til 2010 don’t meet this criteria.

2. Spent, Not Saved: Ideally, 100% of any stimulus funds should be spent on consumption of goods and services to kick-start the economy. Tax rebate checks, particularly to the wealthy, perform poorly in this regard because a larger percentage of the funds will be saved.

3. Return on Investment: Projects with a measurable return on investment, whether in economic growth or otherwise, are preferable to spending that has no longer term benefit.

With these criteria in mind, here are some fresh ideas that I think deserve consideration:

1. Convert school buses and bus fleets to CNG. This would decrease diesel emissions near children, and also reduce US dependence on foreign oil, while providing an immediate boost to the auto manufacturing sector. Particulate pollution kills tens of thousands of people annually – why not spend to improve public health and reduce oil dependence at the same time? $25 Billion would enable the conversion of half the nation’s school bus fleet.

2. 100% tax credits for energy efficiency in homes and small businesses. Instead of handing out tax rebate checks, which aren’t spent in full, why not pay homeowners and businesses to improve energy efficiency? President-elect Obama has made a similar proposal regarding federal buildings, but tax credits would lead to faster spending since consumer and small businesses can move more quickly. $50 Billion would retrofit 50 million of America’s single family homes with energy saving modifications.

3. Increase funding for basic science research. The great economic booms of the 80’s and 90’s were driven by technological advances like the personal computer, the internet, and pharmaceutical technology, and these technologies had their early beginnings in basic research. Increasing basic research and grant expenditure at the NSF, NIH, DARPA, and other agencies would employ thousands of new college graduates and researchers while accelerating the path to future technological breakthroughs. Doubling the NSF and DARPA budgets would cost $10 Billion, while another $5 Billion would add to NIH’s budget.

Funding these ideas in total would cost $90 Billion. While federal spending at this level would crowd at private investment in normal circumstances, today’s circumstances have drastically reduced private investment across the board. If the Federal government is planning to spend close to a trillion dollars on stimulus, shouldn’t we fund high return projects like these?

Just One More Boom

PLEASE GOD, Just Give Me One More Oil Boom. I Promise Not to Blow It Next Time.

– Bumper sticker seen in Texas oil country after the 80’s oil bust

I wonder if any in the oil patch cashed out in the wake of the recent boom and bust? With the stock market, real estate, and commodities all down in tandem, a great many investors probably feel this way!

Fuel efficient vehicles to the rescue!

The market is responding to energy prices with a raft of new fuel efficient commuter vehicles. I thought I’d mention a few here – many of these vehicles or modifications are competing for the X-Prize, and a few, like Hymotion’s BREM for the Toyota Prius, are available today. The automotive market is changing fast, and 100 mpg looks like it will become a realistic target for drivers in the next few years! Where available, each model’s projected cost, mileage (for commute purposes), and top speed are provided.

Available Today:

Hymotion BREM for 04-08 Toyota Prius – $9995 (plus the price of a Prius), 100mpg, 100+ mph top speed. Hymotion’s battery-range extender module converts a standard 46mpg Prius into a 100mpg plug-in hybrid for under $10,000, and is available today in a handful of major cities.

Tesla Motors – $100,000, 200mpg, 140mph top speed. You can have a high-performance electric car today that costs 2 cents per mile to drive, if you’ve got 100k to burn.

Available by 2010/2011:

Chevy Volt – Exact details unknown (more here), but GM is aiming for a 2010 release of the plug-in hybrid Volt, which will have an all-electric range of 40 miles, and effective mpg of 100+ when used as a commuter vehicle.

Phoenix Motorcars’ Electric Truck – $47,500, 100+ mpg (exact figure unknown), 100mpg top speed.  Phoenix has developed all-electric truck and SUV models that it is currently selling to fleets, and will release to the public in 2010.

Poulsen Hybrid – Poulsen is developing a conversion technology which can be installed on the rear wheels of any vehicle to turn it into a hybrid.

Nissan has announced work on an electric vehicle with a 2010/2011 delivery date, but few details are available.

Toyota is working on a plug-in version of the Prius with a 2010 deliver date as well.

Small Commuter Vehicles: Most available in 2009-2010

GreenVehicles Triac – $20k expected price, 200+ effective mpg, 80mph top speed, and 100 mile range. The Triac is a three-wheeled commuter vehicle designed to help urban commuters park their larger vehicles during the daily grind.

Aptera – $30k, 230mpg, 85mph top speed. Another three-wheeled vehicle, Aptera looks more like a plane than a car, but still has two seats plus space for a child car-seat in rear.

Venture One – $20-25k, 100+ mpg, 100mph top speed. This three-wheeled commuter vehicle looks more like a motorcycle, and incorporates technology that enables it to automatically “lean” as it moves through curves.

Commuter Cars – Tango T600 available today for $108k, T100 target of $20k, 100mpg+, 120mph+ top speed. George Clooney owns a T600, whose tandem seating allows for two passengers or a rear child seat.

Fuel Vapor Ale’ – $75k, 92mpg achieved to date, 100mph+. This is another three-wheeled commuter car, but it’s shaped a bit like a rocket and is designed for high-end performance.

This list is not exhaustive, though I believe I’ve covered most of the credible efforts currently afoot. Feel free to add others in the comments below if you feel they were erroneously omitted.

Obama & McCain: Here’s a real way to reduce gas prices!

Oil prices have continued their steady march, breaking through $135/barrel (which implies gas around 4.25) and climbing. As noted previously, the fundamentals driving oil prices higher are steady growth in global demand for oil combined with flat supply – an Econ 101 recipe for higher prices. What’s a presidential candidate to do about the situation? John McCain and Hillary Clinton both expressed strong support for a repeal in summer gas taxes; Barack Obama chose not to hop on the bandwagon, but offered no immediate alternative. So what can we do in the short term in this regard?

First, eliminate the use of heating oil in American homes. Heating oil and diesel fuel are essentially the same product, so heating oil demand directly impacts the price of diesel and gasoline. Replacing oil heating with gas heating would replace demand for imported oil with demand for natural gas that is produced primarily in the US and Canada.

Eight million homes in the US still use heating oil, and it accounts for roughly 2% of all oil demand in the US. Since oil prices are decided at the margin, a 1% drop in demand could significantly impact price. A $4000 tax credit would convince most heating oil users to switch immediately, and would send a strong signal to gas utilities to expand their service areas. If four million homes switched to gas overnight, this would cost taxpayers $16 Billion in one-time tax credits, about the same as two summers of the McCain/Clinton tax holiday plan. But the additional natural gas demand would be manageable, and the market signal of reduced oil demand would have swift impact.

Second, buy out old gas guzzlers and crush them. Since new vehicles are much more efficient on average, buying old junkers that get less than 20mpg would be an efficient way to reduce oil demand, while potentially helping poorer consumers to find new transportation. For example, offering $2000 per inefficient old car would enable many drivers to retire their old vehicles and move to new, efficient vehicles by using the money as a down payment. 10 million cars could be retired by spending $20 billion, and if each 15mpg vehicle were replaced with a 25mpg vehicle, 210,000 barrels per day of consumption could be eliminated.

Replacing oil heat and getting rid of old gas guzzlers may sound wonkish, but together these ideas could reduce US oil consumption nearly 5%. Unlike many plans under discussions, these steps are feasible and can be implemented today. Of course, these are only steps in a larger energy plan – but it’s better than many of the steps that politicians are currently advocating!

Calculations:

8 million homes * 730 gallons per year / 42 gallons per barrel / 365 days = 381,000 barrels per day

Converting 200,000 bpd of heating to natural gas requires 7 BCF (billion cubic feet) per week of natural gas. Since this consumption is wintertime only, it’s probably closer to 20 bcf per week, which is large, but not unsustainable, given that the US draws roughly 100 BCF per week from storage during the winter.
For cars, if each old 15mpg car is driven 12,000 miles per year, it consumes 800 gallons per year, compared to 480 gallons for the same distance in a 25mpg car. This equates to a savings of 3.2 billion gallons per year, which is equivalent to 210,000 barrels/day.