Week of February 22, 2009

In a few days I'll know if the startup in which I'm involved gets funded. If it does, we may restructure this publication significantly. For now though it's business as usual.

This last week Sheikh Mohamed Al-Najimi, a member of the Islamic Fiqh Academy, a doctrinal body headquartered in Saudi Arabia, suggested that the traditional Muslim proscription against drinking alcohol might also apply to producing it for use in motor vehicles as in E85. Are such musings sincere or should they be regarded as an oblique blow to the alternative fuels industry on the part of the world's leading oil producer? Are Mormons apt to come to same conclusion, one wonders? What was Mitt Romney's position on ethanol subsidies? I can't seem to recall.

Perhaps more significantly, the IEA (International Energy Agency) in Paris issued some new projections on petroleum usage, predicting 95 million barrels per day by the end of the next decade. The highest level it's reached in the past has been 86 million barrels so that's a considerable increment.

In the past various economic bodies were projecting usage levels as high as 130 million barrels per day that might be reached by mid century. Clearly there is a body of opinion out there that has it that the current demand collapse is a transient phenomenon, and that oil will flow prodigiously in the years to come.

In the past I have chosen not to devote overmuch space to discussing peak oil simply because there is such an abundance of literature elsewhere on the Web. And indeed peak oil discussions generally have abated in the face of falling oil prices. It's not something many people want to read about. Still this IEA finding is interesting.

Now I happen to write for a petroleum journal and I talk with oil guys all the time. I don't know anyone in the business who thinks that current low prices are in any way permanent. And most folks I talk to believe that the easy pickings are long gone with respect to oil supplies. The money thrown into ultra-deep oil exploration, which entails $90 per barrel costs, over the course of the last few years certainly suggests that.

But the real question is whether 96 million barrels per day can be produced continuously out of known reserves.

Many authorities don't think so, perhaps most notably Matthew Simmons, a Houston investment banker who has written extensively on the problem. Simmons thinks that Ghawar, the super giant field in Saudi Arabia that accounts for most of that country's huge production and thus provides much of the world's swing capacity, is at the point of diminishing production, and that when that eventuality occurs the global petroleum industry will have lost its ability to increase production on a sustained basis.

Fresh evidence suggests that Simmons may be mistaken, however, at least in the longer term.

Recently—within the last year in fact—extensive exploration of the Arctic seabed has been undertaken by Russian, Canadian, and American surveyors in the employ of their respective governments. Their findings are of course provisional at this point, but the informed opinion among the major players is that in excess of 100 billion barrels may reside in the depths—if not a second Saudi Arabia, then perhaps a second Iraq.

The ownership of this oil is subject to dispute, with Russia and Canada both having recently made sweeping claims to the sea floor under the ice, and production companies are traditionally loath to drill in disputed territory for obvious reasons. So whether this immense amount of oil will come into production any time soon may be doubted.

And there is also the matter of its accessibility.

Oil geologists have long suspected that significant deposits lay under the Arctic sea, but presence of permanent pack ice over them rendered all discussions of oil resources academic. There was simply no cost effective way of extracting oil located under the ice sheet. But now of course that ice sheet is shrinking and may be on the point of complete disappearance. If that were to occur, then Arctic oil exploration becomes merely an extension of existing North Sea operations, albeit in deeper waters than are the norm today. The platforms will simply march north into the expanding area of open waters and the last oil boom will commence.

Can that push production up to 96 million barrels per day? Probably not very soon and probably not for very long. There are just too many fields elsewhere whose production is falling off including the famous Canterell field in the Gulf of Mexico, the second largest in the world.

On a similar note, we would mention a recent U.S. Geological Survey report which downgrades the estimated reserves for the giant Powder River deposits of coal in Wyoming which not account for over 37% of all coal produced in the U.S. This could signify that the U.S. which is currently the largest coal producer in the world may experience the peaking of coal production more quickly than many had anticipated. The Energy Working Group in Germany published a report in 2007 on the subject of coal reserves which predicted that while world coal production might peak soon after 2020, the U.S. would enjoy increased production until well into the second half of the century. Now that projection might have to be revised downward.

In short, we still believe that fossil fuel shortfalls are apt to be a serious problem in the years to come, but a peak in coal production coming hard on the heels of peak oil could be very serious indeed.

Of the two peaks, the peak in coal production might well be the more serious though that particular issue gets relatively little attention. The electrical grid, here and elsewhere, is anchored by coal fired plants, and plants are designed to operate for decades. Substituting renewables for that vast installed base will not be easy. But, if the report is accurate, that will have to be done and quickly.