Wishful thinking or apocalyptic doom forecasting? Fred Curtis, an economist at Drew University, has put together a mashup of peak oil, global warming, and patterns in global trade liberalization and arrived at the principle of "Peak Globalization." (Found via Globalisation and the Environment.) A double whammy of higher energy costs and extreme climate events will disrupt global transportation patterns, reversing the historical trend towards greater and greater levels of global trade and forcing a process of "relocalization" -- "The major implication is that supply chains will become shorter for most products and that production of goods will be relocated closer to where they are consumed, although this will happen neither quickly nor easily."
And there's nothing we can do about it.
Based on melting arctic ice and other evidence, it is clear that global warming has begun and existing concentrations of greenhouse gases in the atmosphere will lead to further temperature increases. The timing of the global peak of oil production is less certain, although there is a growing view that maximum production will occur within the next decade. Global climate change and the global peak of oil production will undermine the economic logic and profitability of long-distance, global supply chains of imports and exports. They will lead to a condition of peak globalization, after which the volume of goods traded internationally (measured by ton-miles of freight) will decline. While policies designed to reduce oil depletion and greenhouse gas emissions may work to delay the onset of peak globalization, it is the conclusion of this paper that they will be unable to prevent it.
Curtis doesn't come out and say so directly, but given the fact that his paper appeared in the journal "Ecological Economics" and ecological economists, as a rule, tend to take a dim view of globalization and its assorted capitalist depredations against the environment, one assumes that he's not all that unhappy about the prospect of relocalization. When Curtis writes that "The economic logic of the comparative advantage of global supply chains will be overcome by both increasing transportation costs and interruptions and delays in the transit of freight," he doesn't sound too broken up about it.
But there are some fairly mighty assumptions in his opening paragraph, not least being the imminence of peak oil, the certainty of catastrophic climate change, and human inability to do anything meaningful about either or both of these threats. Additionally, Curtis sees climate change and peak oil working in concert -- but they could just as easily work at cross-purposes.
For example, we've already seen rising oil prices contribute to a global recession, which, in large parts of the world, has led to drastic reductions in greenhouse gas emissions. The economic impact of peak oil, in that sense, may actually postpone, or delay global warming.
There's also an implied presupposition that technological innovation has, for all intents and purposes, stopped. As energy prices climb, not only won't we find new, renewable cost-effective sources of energy, but we also won't devise more efficient ways to use what we've got -- freighters and airplanes that consume less fuel, for example. Curtis believes that "Offsetting technologies and policies are very unlikely to be implemented in sufficient magnitude or with sufficient promptness to counter peak globalization."
He could be right. The hitherto unstoppable advance of the Industrial Revolution could be reaching its high point right now. Curtis doesn't prove this will happen in his paper so much as he lays out the "pathways" that could lead us there. But whether wrong or right, the fascinating thing is that the answer to the question could well be provided during our lifetimes.
The old joke about cellulosic ethanol -- biofuel made from lignocellulose, the tough, woody, hard-to-break-down structural elements of plants -- is that it is always five years away from commercial deployment, and has been for the last 20 years, at least. The problem is not inherently technological: We know how to do it; the difficulty has always been in making the process cost-competitive with other fuels.
So the news that POET, the largest ethanol producer in the U.S., has managed to cut production costs for cellulosic ethanol from $4.13 a gallon to $2.35 a gallon in the past year at its trial plant in Scotland, South Dakota, is potentially significant. POET is now predicting big things, reports the Argus Leader:
"Two years ago, I would have told you this was a long shot," CEO Jeff Broin said. "Now I'll tell you that we will produce cellulosic ethanol commercially in two years."
Two years instead of five! That's a big improvement! According to Broin, the factors involved include "reducing energy use, enzyme costs, raw material requirements and capital expenses."
POET's preferred feedstock: left over corn cobs and other post-harvest remnants known as "corn stover" that farmers typically leave to rot on their fields. A few weeks ago, POET organized a "Project Liberty Field Day" in Emmetsburg, Ohio in which 16 different agricultural machinery companies demonstrated new equipment specifically designed for the collection of corn cobs.
I asked Robert Rapier, who has established himself as one of the more influential commentators on all-things-biofuels, what he thought of the news. The critical factor, he said, is knowing what the cost of the inputs are. How much will POET be paying for the corncobs?
"The key to this is going to be how much they have to pay for the biomass. The cost that is quoted assumes a certain price for the biomass. I had a farmer tell me recently that he wouldn't bother gathering it for the price POET wants to pay. So I would say that the costs mentioned in the news story are a best case scenario for getting the farmers to sell corn cobs at the right price."
But the question I always have when hearing about biofuels made from farm "waste" is what happens to soil fertility when you keep extracting more and more plant material from the life-cycle of the farm, and turn it into fuel? Not surprisingly, this is a hot topic among agricultural research scientists in Iowa.
From "Studying Stover Harvest Effects on Yield, Soil, Climate:"
Corn stover has been used for many years as bedding and food for livestock, as well as to nourish and protect soils. In recent years, the ubiquitous stalk, leaf and cob residue of corn plants left in fields after harvest has found a new market: as a potential source for cellulosic ethanol production.
But harvesting the stover -- which, when left in place, halts erosion and supplies vital nutrients back to the soil -- could have unintended consequences, from lowering the fertility of fields to affecting productivity, soil and water quality and even climate. A comprehensive new study by Iowa State University agronomy researchers may soon shed light on these questions.
One result of the study, according to the authors, will be better information on "the optimal nitrogen, phosphorus and potassium fertilization rates needed to supplement nutrients lost from residue removal."
That's not such great news. The production of synthetic fertilizer is highly energy-intensive and consumes a lot of fossil fuels. What's the good of replacing gasoline with cellulosic ethanol made from farm waste, if we need to burn more oil to replace the soil nutrients that we are subtracting from the earth?
What if, as a result of efforts to fight climate change and boost energy efficiency, global oil demand peaked in the foreseeable future? You could argue that such an achievement would be one of the most historic accomplishments of human civilization to date, proof, indeed, that we are civilized. It's a task that will require lots of hard work all over the globe, but based just on the actions taken by President Obama in his first year of office, in the United States, we have made real progress toward that goal.
The International Energy Agency, reports Spencer Swartz in the Wall Street Journal, is predicting that even if China and India continue to consume ever more oil, overall, the world's appetite for crude is slowing down.
The IEA, which advises rich nations, such as the U.S., on energy matters, is set to use its closely watched annual World Energy Outlook report to forecast that improved energy-efficiency measures in developed nations, as well as climate-change legislation, will help to slow the rate of global oil consumption.
Swartz reports that Deutsche Bank is bold enough to predict that "global demand will peak by 2016 ... due to efficiency gains and technology improvements in electric vehicles."
This kind of thing doesn't happen by accident. Yesterday Energy Secretary Steven Chu announced $38 million worth of grants to Alaska, Kansas, Utah and West Virginia to "support energy efficiency and conservation activities."
Hardly a week goes by when the DOE isn't making a similar announcement. On Sept. 14, Chu announced $354 million in grants to 22 other states. On Oct 1, $72 million. All the grants are part of the DOE's Energy Efficiency and Conservation Block Grant (EECBG) program, created in 2007 under the auspices of the Energy Independence and Security Act, but funded for the first time, to the tune of $2.7 billion, by the American Recovery and Reinvestment Act of 2009 (aka the stimulus bill). So far, $1.6 billion in grants have been disbursed.
So if you're feeling gloomy at the state of financial regulatory reform, or the compromises being made to get a healthcare bill passed, or the failure of same-sex marriage in Maine, consider this. Every single day, the Obama administration has been making steady progress in addressing two of the greatest challenges the human race faces -- human-caused climate change, and a fossil fuel-constrained future.
I'll let Joe Romm, the indefatigable climate change activist, have the last word. In a post published yesterday, "One year after his election, Obama on verge of audaciously fulfilling his promise as the green FDR," Romm writes:
Future historians will inevitably judge all 21st-century presidents on just two issues: global warming and the clean energy transition. If the world doesn't stop catastrophic climate change ... then all Presidents, indeed, all of us, will be seen as failures and rightfully so.
In that sense, what team Obama has accomplished in the year since he was elected is nothing less than an unprecedented reversal of decades of unsustainable national policy forced down the throat of the American public by conservatives.
Specifically, Romm cites the stimulus funding for "energy efficiency, renewables, transmission and smart grid, and mass transit and train travel," Obama's decision to raise fuel economy standards, Obama's EPA ruling that greenhouse gas emissions are a pollutant covered by the Clean Air Act, and the progress made so far toward a climate bill.
Not bad ... for a start.
Did U.S. gasoline demand really peak in 2007? According to Reuters, that's what Exxon CEO Rex Tillerson said earlier this week at an Economic Club of Washington dinner.
"We think going forward that because of the emphasis on energy efficiency, ongoing improvements in vehicle miles standards and hybrid (cars), that motor vehicle gasoline demand is down, is headed down, and is going to continue to head down," said Tillerson.
The implications of Tillerson's forecast, if it pans out, are extraordinary. A peak in gasoline demand in the U.S. implies that mature developed economies may reach a stage where their hunger for transportation fuels does not continue to expand indefinitely. Gasoline accounts for a whopping 45 percent of all oil consumption in the United States, according to the Energy Information Agency. So if gasoline demand peaks, we're nearly halfway to a peak in overall oil demand. And what that means -- if the principles of conservation and energy efficiency are applied all across the energy-consuming economy on a consistent ongoing basis, is that we might not be as disastrously hobbled by the threat of a supply peak as some of the more downbeat peak oil futurists fear.
Which is not to say that, globally speaking, we are anywhere near close to a global peak in gasoline demand. China and India are a long, long way from reaching that promised land, and it seems reasonable to assume that a massive expansion in car ownership in both countries will push the global oil supply-and-demand equation to the breaking point in the not-too-distant future. But there's also the possibility that China and India might learn from the West's example, and push much more aggressively for higher fuel economy standards, energy efficiency, and the rollout of hybrid and electric cars than the United States did.
But we'll see. The one factor in depressed demand that I did not see Tillerson mention, at least as reported by Reuters, was the down economy. The true test of his thesis will come when real economic growth returns. If the 2007 peak holds even in the face of a healthy economy, then we'll know the Exxon CEO is on to something.
It's not every day that an oil company announces the discovery of a "giant" new field, so energy geeks are paying a lot of attention to the news that BP, after drilling the world's deepest exploratory well in the Gulf of Mexico, has tapped a bonanza. As much as 3 billion barrels of oil may be lurking at the so-called Tiber Prospect.
BusinessWeek is especially effusive, speculating that the discovery might be one of the biggest finds of the decade, and, by the time it is fully deployed the latter half of the next decade, will be "raking in cash" like its BP operated Gulf-neighbor, Thunder Horse.
I am having some trouble reconciling the figures, however. BusinessWeek cites Fadel Gheit, an analyst at Oppenheimer (OPY) in New York, as figuring "that at a price of $60 per barrel, BP will earn pretax profits in the mid-$20s per barrel from Thunder Horse."
That suggests that the cost of finding, developing, and extracting oil from Thunder Horse is about $40 per barrel.
But according to the Energy Information Agency, the cost of finding oil in the Gulf of Mexico, as of 2007, had risen to $50 dollars a barrel. The EIA puts average U.S. "lifting costs" -- actually getting the oil out of the ground -- at about $10 dollars. One would presume that the lifting costs would be even higher in ultra deep wells of the Gulf of Mexico. The Tiber Prospect well goes down 35,000 feet !
Those figures suggest a break-even point of at least $60 dollars a barrel, and possibly more.
A giant find it may be, but cheap oil, it ain't.
Has it all come to this? The wars and invasions, the death and destruction, the exile and torture, the resistance and collapse? In a world of shrinking energy reserves, is Iraq finally fated to become what it was going to be anyway, even before the chaos and catastrophe set in: a giant gas pump for an energy-starved planet? Will it all end not with a bang but with a gusher? The latest oil news out of that country offers at least a hint of Iraq's fate.
For modern Iraq, oil has always been at the heart of everything. Its very existence as a unified state is largely the product of oil.
In 1920, under the aegis of the League of Nations, Britain cobbled together the Kingdom of Iraq from the Ottoman provinces of Basra, Baghdad and Mosul in order to better exploit the holdings of the Turkish Petroleum Company, forerunner of the Iraq Petroleum Company (IPC). Later, Iraqi nationalists and the Baath Party of Saddam Hussein nationalized the IPC, provoking unrelenting British and American hostility. Hussein rewarded his Sunni allies in the Baath Party by giving them lucrative positions in the state company, part of a process that produced a dangerous rift with the country's Shiite majority. And these are but a few of the ways in which modern Iraqi history has been governed by oil.
Iraq is, of course, one of the world's great hydrocarbon preserves. According to oil giant BP, it harbors proven oil reserves of 115 billion barrels -- more than any country except Saudi Arabia (with 264 billion barrels) and Iran (with 138 billion). Many analysts, however, believe that Iraq has been inadequately explored, and that the utilization of modern search technologies will yield additional reserves in the range of 45 to 100 billion barrels. If all its reserves, known and suspected, were developed to their full potential, Iraq could add as much as 6 to 8 million barrels per day to international output, postponing the inevitable arrival of peak oil and a contraction in global energy supplies.
Nailing down the energy heartland of the planet
Iraq's great hydrocarbon promise has been continually thwarted by war, foreign intervention, sanctions, internal disorder, corruption and plain old ineptitude. Saddam Hussein did succeed for a time in elevating oil output, in the process raising national income and creating a well-educated middle class. However, his ill-conceived invasions of Iran in 1980 and Kuwait in 1990 led to devastating attacks on Iraqi oil facilities, as well as trade embargoes and crippling debt, erasing much of his country's previous economic gains. The trade sanctions imposed by Presidents George H.W. Bush and Bill Clinton in the wake of the First Gulf War only further eroded the country's oil-production capacity.
When President George W. Bush launched the invasion of Iraq in March 2003, his overarching goals all revolved around the geopolitics of oil. He and his top officials were intent on replacing Saddam Hussein's regime with one that would prove friendly to American oil interests. They also imagined that, greeted as liberators by a grateful population, they would preside over a radical upgrading of Iraq's petroleum capacity, thereby ensuring adequate supplies for American consumers at an affordable price. Finally, by building and manning a constellation of major military bases in a grateful Iraq, they saw themselves ensuring continued American dominance over the oil-soaked Persian Gulf region, and so the energy heartland of the planet.
All of this, of course, proved to be a mirage. The U.S. invasion and ensuing occupation policies provoked a bitter Sunni insurgency that quickly overshadowed all other American concerns, including oil. As a result, no matter how much money they poured into the task, the Bush administration and its Baghdad agents found themselves incapable of boosting petroleum output even to the levels of the worst days of Saddam Hussein's regime -- and so their plans to use oil revenues to pay for the war, the occupation and the reconstruction of the country all vanished into thin air.
The data provided by BP on yearly production tallies cannot be starker when it comes to the impact on oil output of the insurgency, rampant corruption, the loss of the nation's oil professionals (many of whom fled into exile amid sectarian warfare) and other related factors. Prior to the American invasion, Iraq was pumping 2.6 million barrels of oil per day, already significantly below its pre-invasion peak of 3.5 million barrels per day. In the first year of the ill-starred U.S. occupation, production quickly plunged to a paltry 1.3 million barrels per day. Only in 2007 did it finally top the 2 million mark and, with improved security, 2.4 million in 2008. Assuming conditions continue to improve, Iraqi output could, for the first time, exceed pre-invasion levels, though barely, in 2009 or 2010 -- six years or more after Baghdad fell to American forces.
A sea change in Iraqi oil production?
Until recently, most analysts assumed that Iraq would continue, at best, to make modest progress in its efforts to increase daily output. There were too many obstacles, it was argued, to achieve dramatic breakthroughs. These included continued insurgent attacks on pipelines and production facilities; corruption in the Oil Ministry and major energy production enterprises; the failure of parliament to adopt a national hydrocarbons law; differences between the Kurdish Regional Government (KRG) and the central government over who has the right to award what sort of oil contracts in Kurdish-controlled territories and the reluctance of major foreign oil firms to venture into or invest in a major way in such a dangerous and unstable place.
Recently, however, the Oil Ministry has made noticeable progress in overcoming at least some of these obstacles. Under the leadership of Oil Minister Hussain al-Shahristani, a former nuclear scientist who was jailed and tortured by Saddam Hussein for refusing to assist in the development of nuclear weapons, corruption has been substantially reduced and various production bottlenecks eliminated. Shahristani has also won support from Prime Minister Nuri Kamal al-Maliki for the participation of foreign firms in the development of Iraqi oil fields, even though this has alienated many in Iraq who oppose any such involvement. Once derided for ineptitude, the Oil Ministry is beginning to be viewed as a functioning, professional operation.
As a result, there are clear indications that Iraq's oil industry could be poised for a major turnaround. Among the most significant recent developments:
* Late last year, Iraq's state-owned North Oil Company signed a $3.5 billion, 20-year service contract with the Chinese National Petroleum Corporation (CNPC) to develop the Adhab oil field in Wasit province, southeast of Baghdad. Originally negotiated under the Saddam Hussein regime, the deal was put on hold after the 2003 invasion and only given final approval in November 2008. This is the first major contract the government in Baghdad has signed with a foreign oil firm since the Iraq Petroleum Company was nationalized in the 1970s. It also represents the first significant investment by a company from China in Iraq. Under the agreement, CNPC and its partners will develop the Adhab field and deliver all resulting crude oil to state refineries; as the field's main operator, CNPC will be paid a fee by the Iraqi government for its engineering work and all delivered petroleum.
* In May, the Oil Ministry reached an accord with the Kurdistan Regional Government that, for the first time, will allow the Kurds to export oil from fields under their control. Previously, the Baghdad government had refused to recognize any contracts signed by the KRG with private oil firms to develop fields in their territory and had prevented the Kurds from exporting oil from these fields through pipelines controlled by the central government. Under the accord, the KRG will initially be allowed to export 100,000 barrels per day from the Tawke and Taq Taq fields, with higher rates expected in the future; 73 percent of the resulting revenues will go to the central government, 15 percent to the Kurds, and 12 percent to the foreign oil companies that signed production contracts directly with the KRG, bypassing the central government in Baghdad. This agreement paves the way for a significant increase in output from Kurdish-controlled areas, which are thought to hold substantial reserves of untapped petroleum.
* In June, the Oil Ministry conducted its first auction of rights to operate existing fields in the country's major producing areas. This represented a major -- even staggering -- shift in policy, opening the door for the first time in three decades to the participation of major international oil companies in the operation -- if not the ownership -- of the country's nationalized oil fields. Although opposed by many key groups in Iraq, ranging from the oil workers' union to significant factions in parliament, the move was taken to secure outside expertise in modernizing and upgrading the country's crumbling oil infrastructure, thereby boosting output in a country that still relies on oil for more than 75 percent of its gross domestic product and about 95 percent of its revenues. In fact, many foreign companies chose not to bid in the auction's opening round, finding the returns being offered insufficiently attractive. Nevertheless, one Western firm, BP, won the right (in partnership with CNPC) to operate the giant Rumaila field, Iraq's largest. The Oil Ministry has since indicated that it will conduct additional auctions, including one for the right to explore for oil, on terms as yet unrevealed, in the country's undeveloped south and west -- possibly laying the groundwork for significantly more intrusive participation by foreign firms.
Taken together, these steps -- aimed at securing the necessary external financing and expertise to achieve a significant boost in production -- represent a genuine sea change in the way the Oil Ministry has been overseeing the country's hydrocarbons industry. If all goes as planned, it intends to increase output by 1.5 million barrels per day, and another 4 to 5 million barrels by 2017. These efforts, if successful (and given recent history, that remains a big "if"), would place Iraq among the world's top four or five oil producers, along with Saudi Arabia, Russia and the United States.
A new petro-state servicing the global economy?
No one should underestimate the potential obstacles in the way of this objective. Any number of factors -- a rise in opposition to giving away any part of the national "patrimony" to foreigners, a significant increase in insurgent violence, heightened factional fighting in Baghdad, a sharpening of tension between Baghdad and the Kurds, an increase in corruption -- could prevent the realization of these ambitious goals. Moreover, pending the passage of a national oil and gas law (a goal pursued by U.S. officials for years), the major foreign oil companies will remain reluctant to sink too much money into Iraq, fearful that their assets will not be protected.
Nevertheless, it appears that, for the first time since the outbreak of the Iran-Iraq War in 1980, the stars in the energy firmament are aligning in ways that may favor Iraq's reemergence as a major oil producer. Whereas the major powers once competed among themselves for influence in Iraq or backed one or another of Iraq's local rivals in efforts to weaken or contain that country, all now seem inclined to invest in, and benefit from, the reconstruction of its energy infrastructure. The Bush administration, which looked with alarm at Saddam Hussein's growing ties to Russia and China, invaded the country in part to reassert American dominance in the Persian Gulf region and diminish the role played by Moscow and Beijing. Today, Washington appears to welcome the growing role of Chinese and Russian firms in the rehabilitation of Iraq's dilapidated energy infrastructure.
It's a reasonable assumption that behind this unprecedented shift lies an acknowledgement of the inescapable reality of peak oil. As things stand now, the world will soon reach a maximum level of sustainable daily oil output, followed by an inevitable contraction in available supplies. Many experts believe that the peak in conventional (liquid) oil output is likely to occur in the very near future, perhaps in the 2010-2015 timeframe, with global output topping out about 5 to 10 million barrels per day higher than today's 85 million barrels.
Hitting the peak moment in that timeframe, and at that level, would prove devastating to the world economy, as global energy demand is expected to climb far higher, thanks to rising consumption patterns in China, India and other dynamos of the developing world. It's not hard, then, to do the math. An addition of perhaps 6 million supplemental barrels per day from Iraq would make a striking difference in the energy equation. In fact, it might prove the difference between squeaking by and a catastrophic worldwide shortage. Under such circumstances, it is understandable that -- no matter what their governments felt about the Bush administration's invasion and occupation of Iraq -- the major powers now share a common interest in facilitating that country's recovery as a major oil exporter.
For devastated Iraq, of course, these last years were a disaster and real reconstruction of the country still remains a long way off. For the United States, gone are expectations of converting Iraq into a model Middle Eastern democracy, or of inserting a Western-trained, pro-U.S. regime in Baghdad. Nor is there any expectation that the state-owned Iraq National Oil Company will be completely privatized -- once the dream of Bush-era neocons. Nonetheless, the (re)emergence of a functioning Iraqi petro-state working closely with foreign energy firms to boost global oil supplies (with American troops, whether based in Iraq or neighboring countries, providing ultimate security) would be an outcome that could be sold to Congress and, presumably, a majority of the American public.
Within Iraq itself, conditions may favor such an outcome. Although various Iraqi factions have enormous differences, all recognize that their future prosperity rests on the successful development of the nation's hydrocarbon reserves. While Shiites, Sunnis and Kurds may each hope to benefit disproportionately from this great treasure, they all realize that some degree of cooperation -- for example, in the construction and maintenance of export facilities -- is essential to their ambitions, however disparate. While the bargaining over the terms of cooperation may seem endless, and violence may sometimes accompany these negotiations, it is likely that some sort of collaborative structure will, in the end, emerge. A gradual drawdown, if not total departure, of American forces will, in all likelihood, only accelerate this process.
So it has finally come to this dismal possible end point: After all the blood and tears, all the death and destruction, almost all interested parties seem to be returning to the only vision of the country, however depressing, that has demonstrated any viability. In the future, Iraq is likely to be an oil-fueled petro-state with no function other than to service global markets and enrich local elites as well as the technocrats that assist them. This may be not be an inspiring vision -- especially for Iraqis who have suffered so much -- but it might possibly be the only reality available that will circumvent the horrific bloodletting of the past 30 years.
Oil historian Daniel Yergin wrote a feature story on the future of oil for Foreign Policy in September 2009.
Foreign Policy had a special report on oil in its September-October 2009 issue.
Energy Consultant Michael Lynch argues that most of the claims of peak oil theory are weak and anecdotal.
Matthew R. Simmons rebuts Lynch and others in Foreign Policy.
The World Energy Outlook projects medium to long-term projections for energy markets. Industry analysts closely read its publications.
Why Hopenhagen Turned into Nopenhagen.
Oil Consumption Will Take Five Years to Recover