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Why oil costs over $140 per barrel: the failure of leadership
Posted by Euan Mearns on July 7, 2008 - 12:37pm in The Oil Drum: Europe
Topic: Policy/Politics
Tags: $140 oil, fukada, g7, george w. bush, gordon brown, harper, merkel, original, sarkozy, silvio berlusconi [list all tags]
| Bush, Harper, Fukada, Brown, Merkel, Sarkozy and Berlusconi. The leaders of the G7 (+Russia) will meet this week in Japan. Their collective failure to reduce demand for oil, natural gas and coal within their respective economies is one of the main reasons energy prices are spiraling upwards out of control. |
High oil prices
The leaders of the G7 have been howling about high oil prices. They have been to Jeddah to beg OPEC to produce more oil. They have tried to blame speculators for bidding the price up. They do seem to understand that prices are high owing to a growing imbalance between supply and demand at the price they would like to pay. But they have done nothing to try and solve this unfolding crisis apart from fiddle while Rome burns.
The only part of this equation they can control is demand. It is therefore imperative that action is taken to curb demand for oil within the G7 - now!
But no. Rather than show any form of leadership the favored course of action by all is to allow the market, via price, to ration oil supplies between countries and within countries - and then quite amazingly to complain about the high price their common policy has produced.
The G7 policy of allowing the market and high oil prices to ration supplies is working. G7 oil consumption appears to have peaked at 1681 million tonnes in 2005. It is unlikely this figure will ever be surpassed (though it was exceeded in the 1970s and 1980s).
It is therefore the conscious decision of the G7 leaders to progressively deny poor people access to oil and to energy in general. The creation of a new impoverished underclass within and without the G7 / OECD will have dire consequences for our society. This is the outcome of G7 policy and the leaders must bear responsibility for these consequences as they unfold.
More equitable means of rationing oil supplies are available, but these options have thus far been spurned by the leaders of the G7.
Energy poverty
Many who have followed this debate for a number of years have wondered how the peak oil story may unfold. The early chapters are now written as electricity bills, natural gas bills, heating oil bills, gasoline bills and food bills all rise, the disposable income of lower income groups is being squeezed. For many I imagine this may already mean selling that car, turning down the heating, eating less meat. All this of course is sensible and good conservation.
But we are likely already in sight of many going cold and hungry in winter time. And we are already witnessing rioting by groups who's livelihood is threatened by rising fuel prices. I fully expect to see widespread strike action within the public service workers in Europe this year or next, where strong and reasoned Trade's Unions still exist. With the squeeze on discretionary spending comes pain for a number of business sectors - leisure, airlines, airports, pubs, restaurants and retail to name but a few. Unemployment will inevitably start to rise - and how will the newly unemployed cope with those rising energy bills?
This is just the beginning of a Long Emergency that the G7 leaders meeting this week in Hokkaido fail to understand and are doing absolutely nothing to prevent.
Starving millions
There are a number of different reasons for food prices escalating around the world. But two of the most important ones are converting food to liquid fuel and high energy input prices to farming. The G7 leaders, the OECD and their affiliates are to blame for this. They alone have the power to change the policies that have led to this point.
The G7 (8) summit
The summit has three main themes:
The World economy
Environment and Climate Change
Development and Africa
Reading the Japanese guidance on how to solve these issues leaves me with a sense of despair.
Discussion will include the sustainable growth of world economy, trade and investment, protection of intellectual property rights and energy and natural resources. Japan aims to bring a specific outcome including the measures regarding rising oil prices and toward further liberalization of trade and investment.
It seems thinking is still very much focussed on growth and liberal markets. These objectives may well help Japan continue to secure their share of global resources but they certainly will not reduce energy prices and work towards a more equitable distribution of resources.
Solutions
There are no simple and painless solutions to the greatest crisis ever faced by industrial civilisation. The road to sustainability must start somewhere but I very much doubt that the path will start in Hokkaido. Here are a few pointers as to what I see as the urgent actions required to address the early years of this crisis:
- Recognise and publish the enormous problems associated with the future decline of fossil fuel production so that the population understands the reasons behind actions being taken (immediate)
- Introduce and enforce lower speed limits, uniform throughout the OECD (immediate)
- Introduce regulations on vehicle engine size and efficiency, uniform throughout the OECD (phased introduction from 2009)
- Ban the inefficient production of liquid fuel from food throughout the temperate latitudes of the OECD (effective 2009)
- Introduce regulations on the efficiency of electrical power generating plant (phased introduction from 2009)
- Abandon plans for carbon capture and storage unless this is in context of miscible gas flooding of old oil fields leading to enhanced oil recovery (EOR)
- Abandon all plans for expansion of fossil fuel based transportation and power generation.
This is a list of emergency actions required to reduce demand for oil and energy immediately. The voluntary reduction in demand should lower prices, reduce inflationary pressures and provide a few years breathing space. This must then give way to a structured long term plan for reconstruction of power generation systems and transportation networks built upon sustainable electricity.
In the series
Why oil costs over $120 per barrel
Why oil costs over $130 per barrel: the decline of North Sea Oil
And by Jerome a Paris:
Countdown to $200 oil meets Anglo Disease
Countdown to $200 oil: $140 oil and speculation
Countdown to $200 oil: International Energy Agency says current prices justified...
And a few more charts
G7 natural gas consumption ticked up in 2007, perhaps reflecting a relatively cold N hemisphere winter. It also indicates greater elasticity of supply for gas than oil. Gas production has not yet peaked and expansion of LNG provides that elasticity. This will not last much longer.
G7 coal consumption continues to rise demonstrating the political imperative of providing heat and power above concerns for CO2 emissions.
The US consumes more fossil fuel than the combined remainder of G7. There are definite signs that fossil fuel consumption in the G7 is flattening out, the decline in oil consumption being compensated by rising gas and coal. I think it is fair to say that all of this flattening is caused by high price leading to conservation and demand destruction. The total failure of climate orientated energy policy is amply demonstrated by these data.
Oil makes up almost half of G7 fossil fuel consumption. As global oil exports continue to fall so it is highly likely that G7 oil imports and consumption will fall. The question is for how long can rising coal and gas compensate for declining oil?
On the subject of natural gas, when are we likely to experience winter shortages? This year? Next?
That will likely be weather dependent. First hard winter we get in W Europe and Russia I'd guess we are in deep trouble. Failing that, we will likely continue to scrape through winter with Norwegian gas and LNG until about 2015 - if we can afford some how to pay for it.
Euan,
I am not convinced that we will get the Norwegian gas supplies we need. About 3-4 months ago someone either from the Norwegian govt, or one of the oil/gas companies, announced that they could no longer guarantee gas exports to the UK since continental Europe was their top priority. A source told me that what it boils down to is the Norwegians have contracted all their available gas to continental Europe, and if the Europeans take all the gas available under contract there will be little or none left for the UK. Unfortunately I cannot find the original article in the media, I think it must have been from one of the several newsletters I get. And nothing comes up on Google now. But you have to wonder why this was not on the front page of every British newspaper?
On the other hand, ExxonMobil/Qatar have said that they are ready to send 15 million tonnes per annum of LNG to the UK, starting I believe some time this year. This is just over 20 bcm/year natural gas, so could make up for any Norwegian shortfall. I don't know of anyone who has actually seen or is aware of the contractual details, but my guess is that the UK will be offered delivery first, as long as they are willing to pay more than anyone else. Given that Japan in particular has been paying over $20 per million btu for LNG over the last winter, it means that UK gas prices will have to rise quite a bit more than 40% to guarantee delivery. Doubling would be more like it, especially if the USA gets desperate for supplies this autumn/winter, which is looking increasingly likely. My best guess is that we will get some of the 15 M tonnes, but not all of it.
Our new (rented) flat incidentally has a useable fire place in the lounge, a feature I think is about to become very important in the UK. We will be well stocked up with smokeless coal this winter, and candles. I think the gas central heating system will not work when there is no electricity.
Hello Doug
below is a link to an article in the Guardian form 20. April 2008 about said subject;
http://www.guardian.co.uk/business/2008/apr/20/oil.householdbills
The company Gassco does not sell gas, but operates all Norwegian transport systems and receiving facilities.
Our middle case has net oil exports from Norway and Russia approaching zero in the 2025 time frame.
Hmm, well far be it from me to point up, but the pipelines exporting gas towards europe could easily suffer 'an accident' if the gas going towards the UK weren't maintained.
Thus Gassco might find their priorities rearranged, like it or not, that is a possibility.
Normally the operator of a LNG plant will try to run it at a year around optimum, which could be 90 % of nameplate capacity. This would for 20 Bcm/a turn into 1,5 - 1,8 Bcm/month or 50 - 60 Mcm/d as a continuos flow.
This is the difficult part with LNG, it is hard to adjust the process to the seasonal swings in demand.
Another way to do this is to let LNG constitute part of the base load and then let the domestic gas fields handle the huge swings in seasonal and daily demands. I don’t know if this is happening?
In a world of logic, the LNG in-port would be owned by UK gov plc and would be the supplier of last resort for domestic/essential methane only. Presumably the liquified product can be stored, at high energy density, 'indefinitely' as required, with evaporation pressure vented into the gas grid. Makes a lot more sense than pressurising room temp gas elsewhere.
[OK, on second thoughts, I have lost confidence in any gov management ability..]
They can't get more storage facilities for Natural gas through the planning system - so are totally exposed to a cold snap in the winter.
We now have a yahoo group for UK TOD'ers - 10 members at the moment- if anyone else wants to be on the list to check out comments please e-mail me from my profile - unless you choose it no mail will be delivered to your personal e-mail box, but it should be handy for specific discussion of UK issues where there is not an appropriate thread on TOD, and any suggested measures.
Cheers.
Dave
Any update on following from Guardian June 11 ...?
best, PhilH
That's interesting, but they still need to source gas in summer for storage for use in winter.
I don't know how that application is progressing, but here is an overview of the lack of storage in the UK:
http://www.forbes.com/afxnewslimited/feeds/afx/2008/06/11/afx5104269.htm...
If nat gas was to be sold on parity with oil (using an oil price of US$144/bbl) based on energy content it would cost US$24 MMBtu or approximately 120 p/therm at the trading point or the beach.
Nat gas contracts (futures) for December 2008 in UK recently obtained 108,96 p/therm.
OPTIMIST!!
In addition to Peak Oil, the world is also faced with changes in climate due to the increase in CO2 and other GHG which result. Last summer's exceptional melt of sea-ice over the Arctic Ocean also resulted in an outpouring of sea-ice and fresher waters from the Arctic into the Greenland Sea and this flow continued into the Labrador Sea. One result of this process might be a reduction in the Thermohaline Circulation (aka: THC), which could bring colder weather to Europe in winter.
As I have watched the sea-ice cycle in satellite data over the years, I noticed that this year, the Odden Ice Tongue did not form in the stream of sea-ice to the east of Greenland. This feature has been associated with THC sinking in the Greenland Sea, thus it's reasonable to conclude that the THC may not have happened in that location this year. The impact of this flow on the Labrador Sea could also be significant. Recall the European experience after "the Great Salinity Anomaly" of the 1970's. One can't be sure without making proper measurements of conditions in the ocean, but I wouldn't be surprised if Europe experiences colder weather next few winters...
E. Swanson
Euan I don't know how much of the refining capacity of England is complex with its higher NG usage or much about it at all. But even within normal limits if England suffers a shortage of NG I'm pretty sure it will be crippling for its refineries. Probably forcing them to shut down. This would be for both direct use of NG and for indirect uses such as electricity. Refineries are pretty sensitive to problems in the network if you will.
Not only would this cause problems with petrol delievers in the UK but worse since I'm and American shortage of gasoline exports to the US in fact the UK would become a net importer until it solved its NG problem.
Given this would be happening at the same time US NG demand is high and US refineries would be having there own problems getting NG and probably likely to try and get unseasonaly high imports would face a bit of a double whammy.
Yet again it seems the secondary effects of peak oil will means we probably won't make it far down these nice pretty post peak curves.
To answer my own question, this is from Reuters today:
"Europe faces fresh New Year Russian gas crisis"
http://uk.reuters.com/article/oilRpt/idUKHKG1655620080708?pageNumber=3&v...
UK gas bills are already projected to rise by 40% later this year; electricity by 30%. Such rises, affecting every household, will in turn lead to further reductions in discretionary spending.
Unemployment, already rising, will see a sharper uptrend as businesses who hoped (believed the MSM?) that energy price hikes will be temporary have been reportedly holding off workforce reduction programs. The worsening credit and household spending situations will shortly force their hand. Already this past week housebuilders have been shedding labour in a big way; Barratt for example is laying off 1000 after their share price fell 96% in just 12 months. Taylor Wimpey is also laying off after failing to secure £500bn of 'emergency funding'.
GB doubtless already regrets not calling the 'snap election' a few months ago - he's going to regret it more this next winter.
Consider UK oil situation against the latest official Norwegian Petroleum production estimate:
That is the most optimistic scenario :)
As for natural gas from Norway, the only thing I can find that is current and official is the Wood Mackenzie assessment from July 2008 for Norway's Ministry of Petroleum.
However, I have hard time deciphering this graph. The accompanying text reads:
I know Euan, Campbell and others have already assessed the more realistic scenarios, but it would be interesting to find what the official Norwegian models predict.
Even against these types of optimistic data sets, the leadership is indeed lacking.
Is it just the classic case of Cassandra not being a good role model for a politician?
Hello,
The charts (charts 9 and 10) you refer to was developed by Wood Mackenzie.
There is something that does not add up with regard to the scaling, the shape of the production profiles looks to be in line with other forecasts though there may be some deviations on actual numbers.
The best thing would to have available resourcedriven forecasts based upon latest available NPD data.
Thanks, I had an uneasy feeling about the levels as well, which is why I asked. I can't find more recent NPD data on natgas forecasts.
HELLO,
The diagrams below is lifted out of the Norwegian Ministry of Oil and Energy (MOE)Factsheets for 2008.
The diagram below shows total petroleum production from NCS
The other shows historical and forecast nat gas production from NCS.
Now compare the shapes of WOODMAC and MOE forecasts.
Thanks!
So the greeny blue colour is discovered developed declining at what is likely a too optimistic rate that already has enhanced oil recovery (EOR) embedded in it. But then the orange is more oil to be produced via EOR reducing the already too low decline rate even more. The green is discovered undeveloped - maybe possible maybe not, I thought virtually all the big oil and gas fields were now "on". And the red is yet to find.
So in summary this is fantasy land. Norway needs to understand the harm that may be done to W European clients for nat gas by promising more than may be delivered.
Time you did a hatchet job Rune on your fellow countrymen.
€
€;
Sorry I should have translated the legend and the diagram you refer to is total Norwegian petroleum production as forecast by NPD;
The greeney blue color; fields in production or sanctioned for production (proven)
Orange color; possible increases from EOR (Possible)
Light green; Discoveries considered for development (Possible), some of this will become economical when oil prices hit US$1 000/bbl
Red color; Yet to find
The attached figure (at the bottom) shows actual NCS production against a prediction with Hubbert's based upon actual NPS production data as of 1999. THIS IS FOR CRUDE OIL (C only).
Then is the annual 5 year production forecasts as of 2006 - 2008 from NPD shown and lastly yours truly forecast based upon a field by field forecast (as of 2007).
Note that NPD revised down their forecast with 20 % (or 0,5 Mb/d) from 2006 to 2008.
My forecast LIKVERN 1 towards 2012 is still below Hubbert's and I have been 2-3 % within actual figures in my forecasts through the recent years. Note the difference between LIKVERN 1 and the most recent from NPD, it is close to 0,8 Mb/d by 2012, and it is not my field by field resource driven forecast that EIA or IEA use in their models.
I may come back later with my resource driven forecast for nat gas from NCS,.... but don't expect any good news.
I may (as part of writing a post about future Norwegian petroelum production with the preliminary working title "Lies, damned lies and governmental forecasts" the Norwegian story.
€, are you still optimistic? You want me to tell you more or.......do you prefer water boarding? ;-)
Nice chart Rune - I think we need to have a campaign on NPD forecasts.
We can maybe use the discussion session at Sparks and Flames to flesh out the vital realities of the future of Norwegian oil and Gas production - these parallel shifting forecasts look like sh*t to me.
I presume official representatives from Norway will be present and will want to ask questions.
Should be blame the government or blame ourselves? No one held a gun to our heads to buy that SUV, use plastic water bottles, buy products from overseas, etc.
The government has more immediate priorities viz;
Sex education for 4 year olds
Equal rights and oportunities for all people who are not and never will be equal.
Infinite health care for which there is no prospect of the country affording it, sorry we have PFI to save us.
We now have the private equity bubble comming home to roost. I wonder how loud a pop that will make when the debts are called in with no prospect of them being able to to be paid off. The list of large (ex) uk firms with private equity debt around the neck cannot be ignored. Wimpey, Boots, BAA, INEOS etc etc. I don't know who said it but "We are Living in Interesting Times"!
Common sense initiatives such as reducing speed limit from 70mph to sy 55mph, that would cost nothing except lost revenue to the government, sorry, we were not long back talking about lifting it to 80mph.
and lost votes
"and lost votes"
Well pointed out! All parties would have to agree, oh dear.
There are two costs to lower driving speeds.
1. Whilst driving one is not being productively employed (unless you are a bus driver). More time spent on the road is a waste of time.
2. Slower speeds mean a greater number of vehicles on the road at any one time, causing congestion. This feeds positively back to #1.
Nevertheless, the party that introduced lower speed limits would gain my vote.
I saw an equation once for maximum road utilisation. Since total braking distance is a function of a term proportional to speed (thinking distance) and a term proportional to the square of the speed (braking distance), as you increase speed you need a disproportionate distance between vehicles, so the road density has to be reduced. There is an optimum speed at which the road can carry maximum vehicles per unit of time and it was quite low, something like 30 mph. Unfortunately I cannot locate the equation, but it was derived from an argument that took plce in the letters section of the IMechE journal, Professional Engineer. Nothing in life is as simple as it first appears!
As your point #1 there is no argument with that one. We will just have to change our mindset and realise energy conservation is more important than human life. I get paid per mile and don't get overtime so I have to judge myself which is most important, my time or a reduced fuel bill. Since my decision varies with my mood on the day (had a bad day want to get home or take a nice drive through the country) its not a very reliable measure
You're correct. As I recall from my traffic engineering courses... the most effecient speed for processind vehicles past a point is around 43-45 mph.
This is why part time speed limits work on congested motorways like the M25. They smooth out the bottlenecks and increase overall speed through the congested sections. Regular drivers recognise the advantage and don't exceed speed through the limits.
Let's not forget a likely premium from fewer and less serious road accidents. Reduction of G7 / OECD energy trade deficit that will strengthen our currencies and reduce inflationary pressures. Improved air quality. And for those who care, reduced CO2 emissions.
Lost tax revenue from lower gasoline prices could be recouped by slapping 10% tax on jet fuel and increasing that at 10% per annum. That should sort out the men from the boys in the airlines and the transport sector in general.
As for lost votes. Labour are struggling to find a candidate to stand in the upcoming Glasgow East bye election - a rock solid safe Labour seat. It is not possible for things to get substantially worse for Gordon Brown. So he could make his name by introducing a raft of the most unpopular measures imaginable, safe in the knowledge that these will unlikely have a negative impact upon his or his party's future.
Unfortunately Gordon Brown and his bunch of sycophants have no leadership skills whatsoever.
Couple that with their inability to see what's right in front of their eyes, and there's little hope for any sane action from them.
But, the UK isn't the only G8 nation, and we can naively hope that another nation takes the lead.
The treasury minister (Angela Eagle I think) was being interviewed the other day on the "Today Programme" about the economy and she stated nobody could have predicted the current oil price. I have been following the energy debate for several years now and a number of people have been suggesting oil prices would rise significantly in the near future. That near future that they were referring to happens to be now. The most prominent is obviously Matthew Simmons, but there are others for example the late Ali Samsam Bakhtiari . 2007/2008/2009 have been predicted as the crunch time from at least 2004, its worrying that is so close to being true.
If you consider the growth in China has averaged about 10% over the last 25 years, thats a doubling every 7 years. Assuming their energy consumption tracks gdp, they will require more energy in the next 7 years than the total sum of what they have consumed in all the time before. This is why Hubbert and co are fairly close to the mark in time, even if not the ultimate volume. In China's case 7 years of wrong prediction could be a 100% error in volume consumed. I would imagine Hubbert knew this fact when he gave a range of a few years. He would have been aware that he could be way out on volumetric predictions and still close to the mark timewise. Sooner or later the effect of that simple function e^x will need to be grasped otherwise its curtains.
See Albert Barlett!