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The fourth key challenge is energy. Total oil production equals conventional oil production plus unconventional oil production from sources like the oil sands, heavy oil, and tight oil. Conventional oil comes from the type of oil wells that people generally think of when they think of an oil well. It’s liquid and, historically, it’s been pretty easy to extract the oil. The trick has been to find it. But it’s becoming more difficult to find new conventional oil fields because the earth’s surface has been pretty well explored. Potential new fields are located in very difficult locations. For example, in deep water, the Arctic, and pre-salt formations. Exploiting these resources push technology and people to their limits and are very expensive to exploit. As a result, current production is concentrated in older, giant fields. Depletion is accelerating while demand continues to grow. And relying on oil exporters for America’s oil is becoming more problematic. They are considering how much access to allow to oil companies and how fast to extract resources. The expertise of some national oil companies is excellent but the expertise of others is not. A bungled extraction can leave a significant amount of oil stranded in the oil field and unrecoverable by conventional means. An oil exporters’ foreign policy could use oil as a weapon. National governments often appropriate money from national oil companies to fund themselves and various social programs. This money is not available for reinvestment in the business. Domestic economic growth in oil exporting nations means higher domestic consumption of oil with less available for export. Finally, the amount of OPEC’s oil reserves may be smaller than publicly stated.
Unconventional oil comes from sources such as the oil sands and tight oil, a major share of which is shale oil. These are potentially large resources but it is difficult to extract oil from them. Engineered solutions like “fracking” must be used. The production rate from these sources will be more modest than from sources of conventional oil.
This brings us to an important distinction between stock and flow. An example of a stock is the barrels of oil in an oil reservoir. Flow is the number of barrels per day which can be extracted from the oil reservoir. These are different; never confuse them. The amount of extractible oil in the Canadian oil sands may approach that of Saudi Arabia, but its production rate never will. It’s simply too difficult. So, even when large new unconventional sources of oil are found, their rate of production is likely to disappoint those who only look at the size of the discoveries.
Petroleum is very difficult to replace. It stores a concentrated source of energy relatively safely and in a liquid form that is easy to transport and store. Electricity and natural gas are imperfect substitutes but will be used more as the relative price of oil rises.
The world reached a plateau in conventional oil production in 2005 that has continued and will probably continue for some time. Since 2005, biofuels, oil sands, and natural gas liquids from shale gas have kept the pool of liquid hydrocarbons growing. Then tight oil, a major share of which is shale oil, burst onto the scene and pushed U.S. production higher again. Tight oil production will continue to grow in the U.S. and the technology will eventually permeate the rest of the world. But, as the diagram shows, new production equivalent to six Saudi Arabia’s needs to be found between 2008 and 2030 in order to replace depleting existing oil production and increase production to meet growing global demand. With the help of tight oil, the world will likely meet that demand. And tight oil is especially helpful to the U.S. But it will still be a struggle to meet that demand. The struggle will not end in 2030 because demand will keep increasing after that year.
Increasing demand will inevitably outstrip a finite supply of crude oil. It’s only a matter of time. Exponential economic growth chews through oil faster and faster until production can’t keep up. Unfortunately, commodity prices don’t give much warning and demand mitigation and substitution of alternative energy supplies can take years and decades to implement. Conventional crude oil supplies the majority of crude oil. The plateauing of its production rate is an early warning that future supplies will likely not expand as easily as they have in the past. The diagram at the bottom shows how a serious, chronic supply shortfall could develop if demand mitigation starts only when the production of crude oil peaks. Shortfalls of this magnitude would greatly damage the American and global economy and reduce Americans’ standard of living as rising crude oil prices did in the 1970s. It would be prudent to mitigate the damage that this future could do to America by reducing America’s demand for crude oil now. This would make the American economy and Americans’ standard of living less sensitive to the supply of crude oil.
It’s not about being right; it’s about mitigating risk. There are multiple environmental and energy issues in play: the challenge of access to energy, particularly crude oil; global warming and its opposite, global cooling; ocean acidification; and the limits to growth, particularly as exhibited through natural resource depletion. And these issues must be addressed while being mindful of national security and two economic factors: the impact on the trade deficit and cost-effectiveness. The proposed remediation strategies are: energy efficiency; energy conservation; increase sustainable energy supplies; access domestic fossil fuel supplies; carbon sequestration using CCS, forests, etc.; non-CO2 greenhouse gas emission controls; and adaptation. Of all of these strategies, only energy efficiency and conservation are good strategies for all public policy issues. Also, they improve the trade deficit and are cost-effective. Therefore, America should pursue all profitable opportunities to increase energy efficiency and conservation.
For all of the reasons given previously, America needs to cross the energy chasm. Fossil fuels will not last forever. The production rate of crude oil from conventional oil fields has apparently hit a plateau. Production from unconventional crude oil sources is meeting the demand for now. Limits on the rate of production for coal and natural gas will follow in time. Exponential economic growth ensures that those limits will be reached sooner rather than later and will surprise the conventional experts. America needs to move from the “now” energy of crude oil, natural gas, coal, nuclear and hydroelectric power to the “new” energy of energy efficiency and conservation; reliable energy that is available 24/7/365 like nuclear, geothermal, hydroelectric and non-food biomass; and variable energy sources like solar, wind, waves and tides. It must find ways to store energy to make variable, unreliable energy sources reliable. During the transition which may take half a century, America must continue to develop domestic fossil fuels. If it does not, it will fall into the chasm of huge trade deficits; dependence on unfriendly governments; and brownouts and blackouts.
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