Viewpoint: The perplexing problems of peak oil and gas

The temporary drop in gasoline prices is leading a number of people astray. A writer for has declared “The oil crisis is over.” That may be very comforting, but the assertion also is very wrong.

Gasoline prices are not down to stay. The Bloomberg scribe did not take into account several things before he declared peak oil was all through.

Byron King, writing in the Daily Reckoning, noted: “Over the next 20 years, the absolute quantity of petroleum available to the world on any given day will decline. We should only hope, and perhaps be so lucky in a Star Trek future, that fuel efficiency on a global scale will be able to make up for the decline in availability of liquid fuel. But that idea is fanciful if you understand the depletion curves that are out there.

What we consider today as the “normal” state of the world transportation system will be a distant memory by 2025, possibly a hated past as people look back and come to realize how their forbears squandered an irreplaceable Earthly inheritance. The idea is ludicrous, if not dangerous, that we will simply create an alternative future of never-ending, carefree driving based on soybean ethanol or some other such byproduct of composted dead plants. Those who think that way are fooling themselves and others.

“But what about the Tar Sands?” goes the cry. Are we not going to fuel the transport needs of the planet from the “Canadian equivalent of Saudi Arabia”?

King then lays out some hard and disquieting facts. The Canadians’ most optimistic forecast estimates a mere 3 million barrels per day of oil from Alberta’s tar sands by 2025. That is a small drop in a very large bucket.

If we adopt a depletion rate of 4 percent per year (the North Sea fields are depleting at 8-10 percent per year), the 84 million barrels a day we now consume will shrink to 37 million barrels after 20 years. To obtain the same production level as we have today and to stay even with current production, we will need to find and produce the equivalent of more than half of all the world’s present oil reserves.

Put that in a different and more sobering way. In the next 20 years, we will need to find the energy equivalent of Saudi Arabia plus Kuwait, plus Iran, plus Russia. That is just to stay even with present demand to run the global economy at today’s prices. That doesn’t even begin to deal with the rapidly rising demand for natural gas, whose numbers are worse than those for the oil supply.

King says: “Don’t sell your tickets to the apocalypse on eBay just yet. I think we are all going to have a ringside seat for the main event, and as they say, ‘Gentlemen, start your engines.’”

Speaking of natural gas, there’s also the matter of a proposed $20 billion natural gas pipeline from Alaska. The New York Times, in a report last month, noted the oil royalty system that furnishes most of Alaska’s state budget revenue is being changed to a system based on net profit instead of production volume.

What does that mean? Mike Ruppert, publisher of From the Wilderness publications, explained: “If the gas runs out or depletes seriously, then Alaska will make more money as prices rise. In other words, Alaska has just admitted that its gas reserves are running low and that shortages are imminent. There would be no reason to change the revenue system otherwise.”

So that puts the state of Alaska in the position of having a direct financial interest in seeing gas prices rise. Every single state official will be under great pressure to promote an increase in natural gas prices and to advocate more consumption.

As rising energy prices bankrupt its population, unemployment or the general crash looming for the U.S. and global economies, Alaska will have more money to prop up those citizens who will need it. Since the Alaska pipeline was built in the 1970s, Alaska has been known for its annual payments to its citizens from oil and gas income.

How long can this windfall continue? Julian Darley of the Post Carbon Institute said: “The U.S. is consuming 22 trillion cubic feet of natural gas per year. The 35 trillion cubic feet Alaska claims to have is probably there. On its own, however, it would not supply the U.S. for even two years. If they just started pumping like crazy to drive natural gas prices down in order to keep the global markets going a while, it would just continue our addiction to hydrocarbons.”

Natural gas, unlike oil, does not gradually deplete to near zero. The very likely future scenario could be much like the Ladyfern natural gas field in British Columbia in 2001. It was drilled, pumped and exhausted to feed the United States’ gluttonous appetite for gas. Because the extraction was so rapid, the field collapsed.

Another unsettling aspect of all this was a comment by Proffessor Arlon Tussing of the University of Alaska, reported by The Times. The professor estimated that gas reserves in North America are about 9.5 times annual production. Put another way: there’s only enough gas to last for 9.5 years.

But how much gas is there, really? We don’t know. Why? Because the oil companies are not drilling appraisal wells anymore, and they have cut their budgets for exploration way down because they know there’s little gas and oil left to find. What’s an appraisal well? It’s one that is drilled to determine the boundaries of a natural gas field. The wells are sunk near where the drillers think the edge of the field may be. They keep on until they start hitting dry holes. But all of that is very expensive, and nobody wants to spend the money.

Construction of this new pipeline is anything but certain because of multiple environmental and political problems. Nonetheless, a conditional agreement has been reached with British Petroleum (BP), ConocoPhillips and ExxonMobil.

As now contemplated, the $20 billion pipeline would carry gas from the North Slope to the lower 48 states via Canada. The pipeline would move 4.5 billion to 6 billion cubic feet of gas every day, and would start operations between 2012 and 2014.

Alaska Gov. Frank H. Murkowski, speaking of the royalty changes and the pipeline tentative agreement, said: “These are two historic events, ones that will define the state’s economy for decades to come.”

Tussing, said: “This agreement is only one step on the part of one potential applicant to build a project. The final decision about this is going to be made by the respective regulatory authorities in the United States and Canada, as well as their governments. And there’s going to be tremendous opposition.”

If Alaska’s future oil and gas revenues rise sharply, they will affect many things, such as pension funds, medical plans, state bonds and several other items. Fund managers will want to keep the prices going up to protect liquidity.

Boosting the net profits from gas sales will reverberate through the profit/earnings ratio in amounts nearly equal to the P/E for each security involved.

According to Ruppert, that will motivate some in Alaska to become extremely wealthy as they “commit both suicide and murder. It is exactly the scenario facing the planet that I described in one of my own favorite essays of the last three years, ‘GlobalCorp’.”

He went on to say: “Until you change the way money works, you change nothing.”

The one thing no one is asking about all this is—what is the best possible use of the little natural gas we have left?

from the March 8-14, 2006, issue

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