The US once was, but will never again be, the Saudi Arabia of oil

[Update: slight revisions to the “…join us next time” paragraphs at the very end.  :)  ]

The idea that the US might one day produce more oil than Saudi Arabia, popularized by an International Energy Agency (IEA) report, has gone viral in recent weeks.  It’s like the “Call Me Maybe” phenomenon, but for Very Serious People!  :)

Alas, the idea that the US will out-produce Saudi Arabia is a vaporous mirage.  Well, unless Saudi Arabian production falls off a cliff, that is.  The projections are built on the kind of verbal trickery that transformed “47% of Americans don’t actually earn enough money to pay federal income taxes” into the “47% of Americans are lazy takers” meme that sank Mitt Romney’s campaign.  Did those World War II veterans think they could just beat Hitler and rely on handouts in retirement?  ;)

It’s said that where there’s smoke, there’s mirrors, so let’s find that disco ball, shall we?

As noted by the free-market-leaning OilPrice.com, the IEA said that US liquid hydrocarbon production could surpass Saudi Arabia.  And it well could.  US liquid hydrocarbon production is roughly 10 million barrels per day (bpd) with Saudi Arabia at roughly 11 million.  When this filtered to the broader world, however, the word “liquid hydrocarbon” got translated to “oil” — in the sense of “stuff you can drive your car with”.

And that’s just not true.  

US liquid-hydrocarbon production is about 10 million bpd, compared with 11 million for Saudis.

US oil production is roughly 6 million bpd and slowly rising, whereas the Saudis pump about 10 million barrels per day.  (See Figures 4 and 5, here.)

The US produces about 2 million bpd of natural gas liquids — which are great for making plastics (ethane), barbecue fuel (propane) and lighter fluid (butane) but can’t be used to fuel cars.  Well, unless you want to spend billions of dollars on specialized refineries that is.  It also produces about a 1 million bpd of biofuels.  Which are liquid hydrocarbons, and are used for cars.  But are definitely not oil!

All in all, claiming the US will imminently (or ever, for that matter) produce more liquid hydrocarbons than Saudi Arabia would be like me saying that our family owns more cars than noted super-rich auto collector Jay Leno.  This might actually be true — despite our best efforts, Leo’s Hot Wheels collection is pretty extensive — but it would be extraordinarily deceptive.  When people hear “car” they inherently think of vehicles people can travel in, not vehicles kids can push around the house while making “vroom-vroom” noises!

The problems of imprecise language were compounded with arguments that surging US energy production could make the US energy-independent in the next little while.  Which seems to’ve been interpreted to mean, the US wouldn’t need oil imports.  This is a fantasy, given that the US currently consumes about 18 million barrels per day of oil: 3x US oil production, and roughly 2x its “liquid hydrocarbons, even stuff unsuitable for cars” production!

As a side note, a few years ago, back when the US consumed about 21 million bpd of oil, you could make cute allusion to the fact that the US had 5% of the world’s population, but 25% of the world’s oil consumption.  And prison population, too.

It’s technically correct that the US might one day export more hydrocarbon energy than it imports, but that would be a scenario where coal and/or natural gas exports grow bigger than oil imports.  Given that they’d still be importing oil, the Carter Doctrine would still apply.  Named for the only US President in recent memory who never actually declared war on anyone, it asserted that the US would defend its interests in the Persian Gulf (i.e. oil) with force, if necessary.  Contemporary South Americans might well have phoned their Arab OPEC chums and said, “so you got yourselves a Monroe Doctrine too, eh?”.

Future US production

A lot of enthusiasm for future US production derives from the boom in hydrofracked “tight oil” (also called shale oil, it’s very different from oil shale) in recent years.  Alas, this enthusiasm consists of projecting year-by-year production data for regular wells, onto shale oil wells.  And there’s a difference: flow out of your regular oil well might drop 4-8% per year, whereas flow from a tight oil well drops at 40% per year.  Which means you have to keep up a frenetic pace of drilling, just to stay at the same production rate!  This is called the Red Queen effect, after a passage in Alice in Wonderland where the royal matron explained that in her country, you have to run as fast as you can, just to stay in the same place.

This Red Queen effect really applies to natural gas, though I won’t go on too much of a tangent right now.  :)  As noted by Canadian (yay!) geologist Arthur Berman, back in 2001, the US had to replace 23% of its natural gas production per year, due to well depletion.  That number is 32% now.  Historical data from earlier Barnett Shale gas plays suggests that shale gas well production drops 75% in year one, then stays fairly flat.  Which means you need a lot of drilling every year, just to tread water.

IEA Follies

Give that the IEA has consistently and chronically overestimated worldwide oil production over the years, one wonders if they’re factoring in the “Red Queen” effects of depletion.  Downward revisions have been the trend since I hit puberty, and possibly before.  :)  And before you ask, no, I’m not sure which of a zillion definitions of  “oil” is being used here.  :)

Vintage-IEA-oil-demand

 

Some people might wonder whether oil consumption didn’t meet IEA projections because the stuff got so expensive that people shifted to alternatives.  As such, it’s worth considering that the price of oil was reasonably flat (indeed, it was slowly dropping after adjusting for inflation) until about 2004 or so.

It is, however, true that production growth has slowed dramatically in recent years.  A key graph comes from Figure 4 of this article.  World oil production has essentially flatlined since about 2004.

world-crude-oil-prodcution-and-fitted-growth-pct

There’s reason to think that global oil consumption will start declining soon — which will mean production will begin to decline.  This is cause for optimism for everyone outside the Alberta oil sands and its Ottawa outpost.  ;)  Especially those of us who figured oil production was peaking.  (Though like most people, I figured it was supply constraints, not demand constraints, which would be the bottleneck.)  :)

Calgary energy analyst Peter Tertzakian (whose two books we covered in the Ballard book club) noted in the Globe & Mail  that in recent years, declining demand from developed countries has essentially completely offset increased demand from developing countries.   He also made a few comments about technological developments that could invalidate the Red Queen hypothesis I outlined above.  ;)

My own response would be that technological progress isn’t just a feature of the fossil fuel industry; and that renewables are likely to see even more progress thanks to the tailwinds of rising economies of scale.  Experience curve effects have been seen in so many disparate industries, you can more or less bank on them.  And venture capitalists do, when they invest in promising little startups!  Now, let’s move on before anyone asks about the typical venture capitalist’s track record…  ;)

Oil demand going forward

It’s tough to imagine that oil demand will increase much in the next couple years.  If and when the next downturn happens (Europe, Japan, and even China are looking wobbly) one would expect demand to drop.  This would reduce the price of oil, which would make a variety of [mainly, oil sands] projects unviable.

More ominously for our landlocked provincial neighbours, the US is losing its love for cars: despite the economic recovery of recent years, Americans aren’t driving any more than they used to.  (Folks like David Suzuki, who’ve long wished Americans could starting moving past a car-centric culture, have had their wish granted.)

VehicleMilesSept2012

And since gas guzzlers from the cheap-oil era are being replaced by more fuel-efficient cars (a trend which will only continue, what with Obama’s moves on stricter fuel efficiency standards) American oil consumption is likely to fall.  If total vehicle miles travelled stays constant — quite plausible given an aging population and, um, more impoverished youth — US oil demand could drop by 10-20% in the next decade.  (Nerdy economist calculations here.)    That would be a 2-4 million fewer bpd needed from the oil sands.  Well then!  It’s a good thing Alberta used fossil fuel royalties to build up a massive provincial wealth fund to flatten out the boom-bust cycle endemic to all resource sector — oh, wait…

– – – – – – – – –

Next up (probably) is a largely trick-free discussion of how solar power has reached grid parity with coal in un-sunny Germany — meaning it can compete with coal.  And that’s even without considering the health effects of coal, or assigning a carbon price to its emissions.

While there are a few, let’s call them nuances, to the way one can structure these calculations to get the result you want, the fact that solar is marching down a cost curve while coal miners’ costs are going up (due in part to the fact that they’re having to dig lower and lower-grade ores, having already dug up the high-grade ones) kind of tells you that in a few years’ time, no matter how you massage the numbers, renewables will come out ahead.  (Solar is a lot pricier than wind.)

At least, that was the conclusion of the granola-crunching accountants at General Electric.  :)

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