Oil: Beyond the Barrel - And Over the Cliff

Includes: GAZ, OIL, UNG, USO
by: Bruce Pile

As the price of oil climbs through $85 a barrel, it reminds me of the explanations flying around a little over two years ago as oil went to this level for the first time. "It's all the funds chasing the hot commodity - the only game in town" was the refrain. It's all a bubble and we will have stable oil at $35 soon - that's what Steve Forbes and many others said. But now, as oil goes through $85, it's not the only game in town. In fact, it's been the dog underperforming just about everything. No desperate performance chasing mania is driving the price of oil today as we threaten $100 again. Could those peak oil nuts be right? Could the Great Recession be camouflaging a real supply peaking process?

There is an interesting article out just yesterday over at The Post Carbon Institute by Tom Whipple. He states:

For two weeks now the peak oil portion of cyberspace has been abuzz with commentary on the International Energy Agency’s (IEA) newly released World Energy Outlook 2010. Without missing a beat and without much explanation, the world’s leading compiler of everything about energy has gone from denying that conventional oil production will peak in our lifetime to saying it happened four years ago.

What? A conventional oil peak happening in late 2005? That's what nuts like Ken Deffeyes and me were saying back then. Overall barrels of what is classified as "oil" isn't peaking. But conventional oil was peaking then, and that's where all the net energy is. As Tom Whipple's article points out, it's net energy that is missing from the equation of energy planners. And, as I wrote in an article about back in April, this miscalculation is a potential nightmare waiting to engulf us. CNBC had just started showing their "Beyond The Barrel" story, and this prompted me to post "Beyond The Barrel - And Over The Cliff" on my blog where I look at this whole conventional vs nonconventional, net energy peak thing. This is the post:

CNBC premiered "Beyond the Barrel - the Race to Fuel the Future". This is a look at the alternatives to the crude oil bursting forth from the ground that has spoiled us for decades with cheap, abundant energy. One thing that will probably be missing in the discussion is the major issue EROEI. What is EROEI? How do you pronounce it? Well, I don't concern myself with pronouncing it, but I do get vexed by how much attention is being paid to it.

EROEI is simply Energy Returned On Energy Invested. It was not even a word back when Jed Clampett could start a bubblin' crude when he was out shootin' for some food. But as we started drilling deeper to recover oil, people like Cleveland and Hall began tabulating estimates on how much of our energy supply was being used to find, drill, and use our new energy finds. They come up with about a 100 figure for oil of the 1930s (1 barrel of oil burned to get 100 new barrels online). This had dropped to around 30 by the 1970s as so much of the easy to find oil in the world's elephant fields in naturally pressurized reservoirs has already been exploited. EROEI for oil and natural gas now is running around 8 - 11 depending on locale.

That is a huge drop from the 100 EROEI of the 1930s, but as it turns out in the math of net energy, it's not that big a deal. What is a big deal is what happens as this EROEI number goes from around 8 to below 4. (click on chart to enlarge)

This chart, constructed by Dr. Euan Mearns, an editor at theoildrum.com, plots net energy as a percent from 100 down to zero over EROEI's range from very high down to one, where it is taking a barrel of recovered energy to obtain a barrel of new energy. As you can see, we're in fine shape as long as EROEI keeps north of 8, but we fall and we can't get up as we go over the cliff as EROEI goes to 4 and below. This is an exponentially increasing problem as we try to replace peaking crude production with things like corn ethanol, which is a worthless solution.

As this oil replacement scale shows, corn ethanol, at an estimated EROEI of 1.3, must be produced at a rate of over 20 barrels for each barrel of oil it replaces energy-wise. Many biodiesel, solar, and electric EROEI estimates aren't much better.

You see a lot of barrel count estimates of future oil production as we deal with peak oil, but as we go over the top of the conventional oil production peak (the evidence suggests we already have) the flood of "alternative" liquids such as tar sand oil, deepwater, etc. are severely challenged to come close to matching crude's EROEI. This makes a big difference in how much net energy is actually being delivered to society despite the raw barrel count. This makes a good EROEI estimate of any new alternative fuel critically important - its most important feature. But nobody is paying any attention as we approach the net energy cliff.

If you were to do an adjusted production curve to get an estimate of a "net energy curve" based on best current estimates on EROEI of the various nonconventional oil liquids going into the barrel count of official oil supply, you get a much different curve than the official projections (which all our energy planning is based on).

The two curves are for the more traditional base production decline rate estimate of 4.5% annually and for the newer estimates suggesting this to be around 7% - so a kind of best and worst case range is shown. The EROEI issue becomes acute as we go past about 2011 unless something radical is done about the low EROEI oil replacement theme that is now so entrenched in Congress, which seems dedicated to any alternative energy in direct inverse relation to its usefulness in actually replacing oil. They dote on corn ethanol because of a powerful corn lobby. They slight lightly lobbied natural gas in favor of the black lung clean coal coalition. They reward anything that will take decades to scale up as an oil replacement and ignore the one viable thing that's already at the scale and the EROEI needed - natural gas.

Obviously, replacing oil is going to have to be a team effort from many things - renewable ethanols, solar, wind, and the best currently available bridge to all these future fuels - natural gas. But we're going to have to pay a lot more attention to the EROEI science of all these team members, or we're not even going to make the playoffs.

Disclosure: Long OIL

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