Oil and overproduction 3

Mark Jones markjones011 at tiscali.co.uk
Sat Jan 11 15:26:53 MST 2003

David Schanoes:
>  The Caspian may or may not be become a bust.

Is there still a question about it? The Caspian is at best a minor province
beset with geological, social and technical problems and of marginal overall
significance to world oil supply. We know that with some confidence by now.

In fact, we have known it for some years. Here is what I posted to this list
on the subject in September 1999, at a time when oil prices were at
historical lows. It was clear then however that the era of cheap oil,
proclaimed at the time by The Economist in a famous editorial that journal
was later forced to retract, was at an end:

<start quote>
The Industrial Revolution began in England when a set of technologies
fortuitously converged to overcome a shortage of energy and raw materials
(principally iron and steel). The shortage emerged at the end of
an extremely rapid cycle of proto-industrial development during
the 17th and 18th centuries.

The technologies of steam power and of iron-manufacture utilising coal
of wood- charcoal, had interdependent origins. The first railways and steam
engines were developed in coal-mining districts to answer specific problems
of deep shaft working, where coal had to be transported considerable
distances and flooded mines had to be pumped dry. Once the technologies
emerged they swiftly became generalised, first to the iron and steel
industries, then to textiles, machine building, transport, agriculture and
arms manufacture. The era of fossil fuel-based industry was launched and led
to very rapid population increases which consolidated the new system's
dependence on its material and energy basis, which emerged in this
fortuitous way at the beginning of the 19th century. World capitalism has
enjoyed two centuries of sustained development since 1800. However the
gigantic growth in social productivity, resource-use and population, the
creation of a vast new built environment and the subordination of natural
processes and resource-systems, has never enabled capitalism to shake free
of its initial path-dependence. On the contrary, capitalism today is more
critically dependent on fossil fuels and the use of non- renewable resources
than at any time in the past, and the absolute level of resource-extraction
and energy use continues to grow.

Although much capital and inventiveness has gone into searching for
alternative energy bases, and in seeking out more energy-efficient
production technologies, no real progress has been made in finding
substitutes for fossil fuels. For a variety of reasons, none of the
alternatives which have been explored have anything more than marginal
importance: biomass, wind, tidal and solar power, hydrogen fuel-cells,
hydropower and nuclear energy still account for less than fifth of energy
consumption and can never replace fossil fuels, primarily oil and gas which
together account for more than half of energy consumption in the
industrialised world (it should be borne in mind that more than half of
humankind still has almost no access to electricity or fossil fuels and
relies upon wood, dung and other biomass for heating and cooking fuel and
animal or human powered transport). The exhaustion of primary fuels would
under present circumstances lead quickly to a complete collapse of western
industrial civilisation. Despite much talk about dematerialisation,
'virtualisation', energy-conservation, substitutability and 'sustainable'
technologies, it remains more true than ever that there are simply no known
alternatives to fossil fuels; the industrial energy base has not changed
substantially for most of this century, other than for a gradual transfer
from coal to oil and gas.

Throughout its history until the 1960s, capitalism
never experienced energy shortages other than local or transient ones as the
result of war, the effects of economic crisis and so on. The transition from
coal to oil occurred long before there was any pressure on coal supplies,
which remain (theoretically) abundant. It appeared (and is still commonly
argued) that there are no foreseeable shortages of hydrocarbons, and the
picture drawn by official oil reserve estimates suggest a rosy picture of
oil reserves which have continued to increase as a result of new
discoveries, despite the high current world consumption of more than 25 bn

Nevertheless, oil is a distinctly finite resource and recent estimates
by Jean Laherrere, Colin Campbell and others suggest that world
oil production will peak within the next decade and decline thereafter.

These new estimates have been broadly if grudgingly accepted by
such bodies as the US Energy Information
Agency and the International Energy Authority. The significance of the
impending end of the fossil-fuel era has still not been widely discussed
however. Future energy shortages will dramatically impact world capitalism.
Yet their impact has still to be fully recognised or understood and
scenarios for the future of the world economy still do not incorporate the
reality of declining energy production. Forecasts are routinely prepared by
a wide variety of bodies, including the IMF, World Bank, the United Nations
and most major states. Many private forecasting bodies and think tanks also
forecast the future: but with very few exceptions, their forecasts still do
not begin to address the impact of future energy supply deficits. The
reasons are obvious: since world capitalism is so path- dependent, and since
no-one has found any realistic alternatives to fossil fuels, the future of a
world in sharp energy-decline is not just bleak. It is apocalyptic. The
bourgeoisie is neither psychologically nor strategically prepared to engage
with the drastic alternatives which confront capitalism, and the whole of
humankind. In fact, the historical impasse posed by energy-limits is not
recent. It began 25 years ago and has been deepening since.

The disintegration of world socialism and the collapse of the USSR are
directly related to the growing world energy-crisis. The profound crisis in
Asia which began in 1996/97 but had its roots in a prolonged slump
experienced by Japanese capitalism, are part of the same slowly enveloping
tide of global general crisis. Now the emerging crisis in western financial
markets and stock exchanges herald a new stage in the rapid disintegration
of the US- dominated world-system and the deepening spiral of interlocking,
interacting contradictions which are both cause and effect within it.

Oil in the Ground

Oil and other fossil hydrocarbons were formed from
organic material under conditions that rarely occurred in the Earth's
history and only in a few places. Where oil came from algal material, gas
comes from vegetal remains. Organic debris that settled to sea floors was
mostly oxidized by bottom dwelling organisms or currents, but in certain
stagnant environments it was fossilised and buried beneath sediments. Heated
by the Earth's heat flow, anaerobic reactions converted it to petroleum. On
deep burial oil is cracked into gas and lighter fractions, which migrate
upwards through fractures, finally becoming trapped in geological faults.
Perhaps one percent of what was formed is trapped in accumulations large
enough to be commercially exploited.  The world has now been thoroughly
explored and most potential oil provinces have now been found. Oilfields are
rare. They occur in the geologically-unusual discrete trends where the
exceptional conditions needed for generation and entrapment are met. They
are separated by huge tracts that are barren and the geophysics and
geochemistry of why, is now well understood. For obvious reasons, the more
prolific trends were found first, as were the larger fields within them.
Most of what remains to be discovered will come from ever smaller fields in
mature areas.

Finding it...

Much of the world's oil was found long ago using primitive
technology. Current technology deploys an array of methods including
satellite scanning, 3D seismology, the semisubmersible rig which opened the
offshore to exploitation. Modern seismic surveys map oil zones at high
resolution, and geochemistry can explain where and when the oil moved. As
Campbell writes, 'These tools are sufficient to efficiently find and produce
the world's endowment of conventional oil... Further technological advances
can be expected and will be needed to find and develop ever smaller
accumulations that have progressively less impact on world supply [but]...
there is no technological solution to the impending shortfall: it is not a
technological problem.'  In discussing the future availability of oil,
Campbell distinguishes between conventional and non-conventional oil.
Conventional oil is cheap, easily produced and easily processed, but the
original endowment was strictly limited. Estimates of the total have varied
little during the past thirty years: there was around 2 trillion barrels of
conventional oil in the ground when the oil era began a century ago. About
half has now been used.

Getting it out...

Non-conventional oil includes tar sands, shales and heavy
oil such as that from Venezuela. It can also include oil which requires
enhanced recovery techniques such as changing the characteristics of the oil
in the reservoir by steam injection or in other ways. Non-conventional also
includes oil found in hostile environments: polar regions or deep waters
such as the North Atlantic Frontier. It will also include oil got from
infill drilling to reach pockets by-passed in the primary depletion of a
field. What all these forms of oil have in common is that they are expensive
to extract and process. The cost of producing non-conventional oil can be
looked at in money terms, but it can also be analysed in energy terms: each
barrel of oil requires a certain amount of energy to extract. Exactly how
much can be reduced by improved technologies. Tar sands and shales, Orinoco
crude and orimulsion, although copiously available, require large amounts of
energy. The oil era will end when each new barrel of oil requires more
energy than is in a barrel, for its production. For this reason alone, most
of the non-conventional oil which exists will never be exploited. More to
the point, the world energy-system rests on cheap Persian Gulf oil which
costs less than a dollar a barrel to extract. This abundant oil provides an
energy subsidy which reduces the cost of extracting offshore and
non-conventional oil, by reducing the cost of energy inputs into industry as
a whole. This invisible subsidy applies to all 'alternative' energy forms.
Nuclear power plants do not pay back in electricity produced the amount of
energy consumed in building them, operating them and managing their toxic
wastes. Optimistic assessments of the falling costs of 'renewable' energy
(photovoltaics, biomass, wind turbines) similarly do not take into account
the Persian Oil energy subsidy involved in manufacturing them. The
replacement costs of turbines and photovoltaics, household heating
insulation, the costs of petrochemical-based fertilisers used in biomass
production, and so on, will reflect the much higher energy input costs
prevailing as oil declines. Renewables will not support an energy-rich

There are no substitutes for oil.

The Hubbert Model shows how unrestricted production of
conventional oil rises rapidly to a peak and then
declines exponentially; whereas the production of non-conventional oil rises
only slowly to a long low plateau, before in turn declining. As Campbell
puts it: 'Non-conventional production is unlikely to make an impact until
the tail end of conventional depletion and then only in a high or very high
price environment. It is no substitute for conventional oil as has fuelled
the Twentieth Century economy.'  For both technical and cost reasons, no oil
reservoir is ever fully depleted. Production falls when the wells have to
draw on oil farther and farther from the wellbore. A point is reached when
no more can be produced. The percentage recoverable ranges from 20 to 60%
depending on the gravity of the oil and the current price. Improved
technology may improve recovery but it is also true that the apparent
improvements may reflect initial underestimate or understatement of the
amount of oil-in-place. Companies and governments have reasons both the
under- and over-estimate reserves, at different times. The oil industry is
not just secretive; it is chronically dishonest.

How much oil is left?

There is a great deal of data publicly available,
but much of it is disinformation. There is a also a deal of confusion in the
defining of terms, and much of that is deliberate too.  The US Geological
Survey (USGS) is the most important source of information, most of it
published in various reports and surveys of the US Department of Energy's
Energy Information Agency. The International Energy Authority, set up at the
time of the 1970s oilshocks, also publishes data. Industry sources include
_The Oil and Gas Journal_, which is widely quoted even though its data on
reserves and production by country is often misleading, because the numbers
supplied by national governments are reprinted without attempting to
interpret the validity of the data provided. _World Oil_ is a second
authoritative industry source which publishes a survey each August. Oil
companies do their own reporting; BP and Shell are both considered
authoritative. However BP's annual _Statistical Review of World Energy_
merely reproduces reserve data from _The Oil and Gas Journal_ and does not
reflect BP's own assessment. Many brokerages and industry analysts also
publish assessments. OPEC itself publish wide-ranging and detailed
assessments. The standard OPEC view is that oil will remain cheap and
plentiful for a century or more . A firm with a somewhat maverick reputation
is the one Campbell himself is associated with: Petroconsultants. This
Geneva-based company maintains what Campbell calls 'the most authoritative
database on production and reserves as well as important drilling statistics
for the world outside the United States and Canada.' Its report is
available -- for $20,000(?). But Petroconsultants' assessments are more
downbeat than the others. Petroconsultants is well-known for predicting the
imminent decline of world oil. The American Petroleum Institute reports that
reserve-to-production ratios have never been higher and in 1998 stood at 43
years .

Oil-industry maven Morris Adelman claims that oil is so plentiful it
should be thought of as a 'renewable resource' . The US Department of
Energy's 1997 annual report sets the Estimated Ultimate Recoverable (EUR) at
up to 3 trillion barrels ? and gives an upbeat assessment of energy
prospects, claiming prices will not rise for at least a decade .  So is the
Petroconsultant view one that should be excluded? In March 1998, the journal
_Scientific American_ published an article by Colin J.Campbell and his
colleague at Petroconsultants, Jean Laherrère, concluding that oil
production worldwide will start to decline within two to five years and that
all the world's recoverable oil will be gone by 2050. The prognosis was
particularly gloomy. In the weeks which followed, however, the price of oil
continued to fall; by April 1998, US gasoline is cheaper at the petrol-pump
than it is has ever been. And the price was predicted to fall lower.
Nonetheless, Petroconsultants should not be written off. For one thing, the
USGS itself relies on the Petroconsultants' database for its assessment of
reserves outside North America. Thus, although the US government in its
official pronouncements about reserves, production and price forecasts,
simply ignored Petroconsultants in favour of other (more optimistic)
analyses, for the hard number-crunching it is the Geneva-based firm's data,
processed by the USGS into comprehensive province-by-province analyses,
which the DEA relies on. What's more, the USGS figures for reserves and p/r
ratios, do not add up, as we shall see. They do not add up but if they did,
they would tend to support the Petroconsultants' version, that oil is going
to run out sooner than people expect. The USGS explain their assumptions by
pointing to the fact that historically every oil province has yielded more,
often several times more, than anyone at first expected. Bearing in mind
that, as we have seen, only one percent of the oil in the ground is ever
likely to be extracted, it is obvious that an assessment of reserves which
increases that amount by half a percent or a percent (allowing for better
technology or higher prices) immediately increased total reserves by fifty
percent or even double the original estimate.  If 'proven' reserves have a
90% chance of recovery, probable reserves are defined as having only a 5%
chance of recovery. Yet these wildly dissimilar magnitudes are often
routinely lumped together to produce a number for the Ultimate.

In the past few years, great excitement has been generated
about Caspian oil by these methods.

The Wall Street Journal reported that Caspian 'reserves' total 197
bn barrels , making the Caspian similar in importance to North Sea oil. Yet
at the time, proven Caspian reserves totalled just over 20 bn barrels, that
is, around one-tenth as much. The Wall Street Journal had lumped in
'probable' reserves of oil alleged to lie deep under he Caspian seabed in a
region where, as of this writing, not a single exploratory well has been
drilled. Maybe the oil is there, but there is an oil industry saying that
'reserves are what I'll pay my own money to extract, probables are what I'll
ask you for yours to look for.' There is perhaps a 5-10 percent chance that
those probables will ever become actual.  Even if is there, 197 bn barrels
is enough to supply the world with oil for less than 8 years at present
rates of consumption.  The Petroconsultants database is used by oil
companies, but they also contribute to it. There are other reasons for being
sceptical about Petroconsultants. Oil is strategic like no other commodity,
and intelligence agencies of consuming and producing countries alike can
have their own reasons not just for investigating each other's claims but
for suffusing the subject with disinformation. I am not claiming that any
firm of body reporting on oil is consciously fronting for the CIA or anyone
else. I'm not saying they aren't either. I don't know, and no-one does
except those concerned.  And because oil is strategic, and big oil firms are
so deeply connected with national governments, the truth is still harder to
get at. In 1986, most OPEC countries increased their published reserves by
arbitrary, but very large amounts. This revision seemed to be prompted by
quota considerations (how much they are allowed to sell depends on the
overall size of their reserves). But the upward revisions, which totalled
more than anyone is claiming lies under the Caspian, have been widely
accepted, to the extent that these revisions formed the basis of many
euphoric pronouncements by the American Petroleum Institute and the US
government about the long-term viability of oil supplies and the great
additions to world reserves.  It is possible that the EUR for Persian Gulf
oil may turn out to be larger than anyone now supposes, as has been true of
North Sea oil, which has enjoyed a second lease of life in recent years. But
the effect will only be to re-emphasise the importance of OPEC in general
and the Arab states of the Middle East in particular, at a time when
non-OPEC oil production is declining sharply. One of the consequences of the
new enhanced recovery technology is to accelerate the final depletion of the
North Sea and other important provinces. The effect is likely to be still
more destabilising to the US-dominated geostrategic balance, in the future.
No doubt the CIA knows the truth about the claims by individual OPEC
countries. As things stand, official US government statements provide ample
reassurance about the safety of future oil supplies. Yet the statistical
basis for this optimism is often not present, or even contradicted, in the
small print of their own publications.

<end quote>

Mark Jones

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