Oil Spin

First I want to thank Matt Simmons for his diligence in trying to assess the true state of the world's oil reserves and oil supply capacity.

One thing that Matt did not mention is the recent IEA report, projecting that existing wells are running dry at an average of 6.7%/year over the next 20 years, which means that at least 5.5 million bbls/day of new production would have to be generated every year for the next 20 years in order for the world supply capacity to remain the same.

Since the price of oil crashed during the same time that the credit markets froze, new drilling was not funded, and today less than 1/3 the number of wells are being drilled than there was at the end of 2008. We currently have some excess supply capacity... but as the economy rebounds global demand will rise again, and that supply capacity will be equalled by global demand. Then the world wil have to try to accomodate falling oil supplies - as existing wells go dry - having not made the investments in new drilling to secure more oil supply. It will be bad, and the bidding war for the insufficient oil resources will quickly drive the price towards new records and far beyond.

That said, many people that understand the limitations of the traditional crude oil have great faith in alternatives. But these also are saturated with myth and misinformation:

Tar sands won't scale up very quickly, expanding the operation is extremely capital intensive, and as production increases it becomes less efficient.. but the greater problem is the lack of sufficient natural gas. The current operation uses roughly 1/10th the amount of natural gas consumed in Canada... if tar sands expand too quickly, then they drive the price of natural gas up (supply and demand), and they quickly become non-competitive.

Oil Shale will scale up even more slowly. Using Shell's ICP (The more competitive and less environmentally damaging method for extracting oil from shale) yields between 5-10 thousand barrels/well drilled over the course of ~five years. An average well would produce ten times that volume in a day. Oil shale may be used to get some small trickle of supply, but there's no solution there. (both oil shale and tar sands have enormous environmental consequences which I'm not addressing here)

Biofuels have already scaled up to nearly the level that their penetration is acceptable. Every gallon of biofuels that is consumed represents a large quantity of food that is not eaten. During the hight of the oil price run-up nearly a billion people were driven into hunger or starvation, largely due to biofuels production. Cellulosic ethanol won't be competitive on a large scale.

Algae oil is actually scalable to the level that we need to offset oil depletion, but algae oil costs over $35/gallon (currently theoretical best price), with no proposals that actually have any scientific merit to reduce that theoretical price. It just costs, A LOT. It will be decades before oil becomes that expensive just through production loss.

Electric vehicles are high cost options that have severe range restrictions. No-one will buy these.
Plug-in electric hybrids (PEHV's), currently have a 15,000 price premium and only save the first 40 miles driven in gasoline... so they save a maximum of 1 gallon/day. Once interest and insurance is accounted for, and the price of electricity is taken into account, it would take 20 years to pay back the price premium if gasoline averaged 4.00/gallon. That's simply absurd. Most of the cost of batteries are commodity costs and not subject to economy of scale. It's likely that less than 0.5% of the fleet will be electric or PEHV cars by 2025. This won't save us.

The only alternatives that have a chance are ones that haven't been developed yet. I believe the most promising one is recycling CO2 back into liquid fuels through a modified FTS system. We can reduce the CO2 into CO through a chemical reaction known as reverse water gas shift (RWGS), and we can electrolyze water (using off-peak wind and nuclear energy) into H2. This gives us H2 and CO, which are combined in a very well known chemical reaction to form hydrocarbon chains (such as gasoline, diesel, jet fuel, ethanol, etc...) This system concept is called Renewable FTS (Fischer Tropsh Synthesis), or RFTS. The trademark of this system is called WindFuels. This could scale up to the level required at a competitive cost - since the inputs are cheap off-peak energy and CO2 (which we have plenty of).
www.WindFuels.com
Disclaimer - I work for Doty Energy and am a member of the WindFuels team.

I wholly concur with your essay. Its not about economics, its about the laws of physics. Volatility in price, in particular, will play havoc with our economy long before the supply of oil is depleted.

Indeed, an numeric analysis that I have undertaken indicates that the acidic effects of underlying volatility in the price of oil has been gnawing away at our economy longer than we might imagine.

If anyone is interested in torturing themselves, my data analysis and an accompanying essay can be found at:

http://ideas.wikia.com/wiki/Volatility_in_the_Price_of_Oil_since_Hubbert%27s_Peak_and_Investment_Risk

or

Oil price volatility and investment risk?

To summarize, the data I've generated indicates that a series of spikes in oil price volatility initiated in the early to mid 2000s. The price shock of 2008, when oil peaked at over $140 a barrel, turns not to be an isolated event. Instead, it seems that the oil shock of 2008 is the largest of a series of 7 prominent spikes in oil price instability that initiated some 6 to 7 years ago. The sharp rise in oil price attributed to "Hurricane Katrina" falls neatly on this sequence of volatility spikes for example.

This new, multi-year pattern of spiking volatility in oil price is unprecedented, ongoing and would be consistent with the natural up-tick in variance associated with a "classic" resource depletion curve. This variance pattern is also consistent with the proposal you outline that "Hubbert's Peak" probably occurred in 2005.

The NY Times op-ed you mentioned by Michael Lynch also caught my attention. I curious as to how this Panglossian opinion piece had come to be published and why the Times had allowed the author to play up a past connection to academia (MIT) - when it was clear that the most pertinent aspect of the author's bio is that he is an oil industry insider.

Interesting that the NY Times also published no follow-up op-eds or even letters in response to the Lynch piece... all very suspicious.