Simple, but discouraging arithmetic

Gnnnnggh! (The sound of a hand jammed into one's mouth) Why, when the News hour debates the Energy bill do they choose an environmentalist to argue against the provisions? Going downhill from saying that American oil production would peak in 2020 or some such he did not display a full understanding of the problems of oil production at all. And then we wonder why the general public has no sense of the coming problem. (End of rant).

So now we come to August. The French are sensible and taking the month off. In the United States traffic on the highways is getting heavier even though our vacations are barely half as long as that of the Europeans. And as the political and governing folk disappear for a while, the consumption of oil does not take a holiday but continues to go up.

As mentioned yesterday US consumption is already up 0.5 mbd over last year, and with the economy building steam, one must assume that if anything this growth will get larger as the year moves on.

The OGJ has been running a series on China over the last month, and it is interesting to catch a couple of points from that study. The first is that the Chinese will start filling the tanks, now completed, that form the start of their Strategic Petroleum Reserve. The second is that they have been rapidly building new refineries to help meet the growing demands that have developed.

Two articles give a broad look at the situation. The first gives a more detailed look at refinery plans and growth.
After 10% growth in 2003, China's petroleum product demand is estimated to have increased by a further 15% in 2004, a growth rate not seen in China for decades. China's 2004 petroleum product consumption is estimated at 6.1 million b/d, up from 2.2 million b/d in 1990, 4.5 million b/d in 2000, and 5.3 million b/d in 2003.

Incremental demand in 2004 therefore approached 800,000 b/d, accounting for nearly one third of global incremental oil demand and more than 70% of incremental demand in the Asia-Pacific region.
The article then goes on to project demand growth for the rest of the year.
Our base-case projections for China's petroleum product demand growth is 8.2% for 2005 and 6.7% for 2006, or incremental demand of more than 500,000 b/d and just under 450,000 b/d, respectively, which are high compared with the rest of the world. On the upper end, it is possible for China's demand to be up by more than 11%, with an incremental volume of 700,000 b/d for 2005.
However the second article summarizes the arrival of new refinery capacity to be some 634,000 bd this year, only 50,000 bd next year, but then rising to 274,000 bd in 2007 and 864,000 bd in 2008.

Given the demands for fuel one must anticipate that these refineries will be run at close to full production. This already will exceed the OGJ base case numbers, and when one adds a little something for the SPR, it seems likely that Chinese demand will grow by at least 700,000 bd on the world market by year end, given that the domestic production is sensibly flat.

Now this is of concern because when we add just the US and Chinese growth together we reach 1.2 mbd. And if total demand growth this year is now projected to be only 1.3 mbd there must be a fair bit of demand destruction out there. Or, more likely, we are again trying to wish the statistics so that we don't have to worry about the problems of trying to meet an ever rising target, when the annual world production increase (again from the OGJ) was the same 1.3 mbd.

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Thanks for two very interesting articles. I need to take a bit of time to digest both. There are a few other points, however, that jump out.

Neither article even hints at peak oil or potential inability to meet what they both expect will be massive Chinese oil product demand growth in the next five to ten years.

The first article that you cite (Fersharaki & Wu) predict a growth in product demand of 1.4 mbd by 2010. The second (Vautrain) appears to be close to double that. F&W expect the trend will continue and seem to point to additions of close to 4 mbd by 2015. They do point out that Chinese domestic production is not growing by much. Volume after refining is a bit higher than crude intake, but only a few percent.

This means that the preeminent oil & gas publication seems to believe that there is oil out there to support this level of demand. I am skeptical about the refinery data, but if it is true China and (it appears) international public companies are spending an awful lot of money on equipment that needs to be refining a lot of oil as far out as 2020 to pay back investment costs.

The Vautrain article even says that over the long-term China wants to meet OECD levels of GDP, and goes on for a few sentences on what it means. Again, no hint that the oil might not be there. Strange.

I can see China investing in refinery capacity; even for modest growth they have not enough now, ignoring for a moment the peak oil scenario. Perhaps they don't read Peak Oil blogs or perhaps they believe the peak is farther out.

Tangental thought: does anyone believe that new refinery capacity in the US has not been actively sought because the oil majors are unwilling to invest due to peak oil on the horizon? I've often wondered but have no idea what the average oil CEO thinks about the subject.

Back to China, even if they are attuned to the PO scenario, perhaps they simply believe they can get a larger and larger slice of the available pie... while there is still a pie big enough to divide?

There's something to that perhaps, although not with China specifcally in mind, we could think about Venezuela, whose president has actively been courting area nations to form a Caribbean cartel of "oil users", offering to them crude at a discount to world prices to boot.

In his own way Chavez is trying to protect his markets by creating a new one, closer to home, and reduce dependency on the US. Venezuela is a key supplier of crude to the US and its not growing its output rapidly.

If Venezuela found significant customers for its crude.... other countries, notably the US, may find a peak in supply occurs long before the actual peak in world capacity...

Venezuela's state oil company Petroleos de Venezuela SA (PDVSA) is looking to upgrade Uruguay's La Teja refinery to process Venezuelan oil in the most recent step to increase oil sales to Latin America, a company official said.


Reuter's had an article out. One of Japans large refinery's reducing its rates due to decreasing demand down 3% I think "its off the top of my head sorry". A problem with demand is that small demand distruction caused by Japan etc is probably being offset by increased demand in oil producing regions as there economies would be getting quite a boost from $60+ oil (sweet light). What price is it going to take to get real distruction of the economy's I thought $50 was going to do it but now I realy have no Idear. China and the US economies are linked if one goes down so too will the other IMO. Mr Simmons says $180 a barrel. I dont think we will see that but we will find out in the next few years.

Because the US economy is so much more energy efficient, meaning we need much less oil to produce each dollar of GDP, even after adjusting for inflation, oil will have to be a lot higher than it is now. (1,000 of BTU/ dropped from 17.99 in 1970 to 9.44 in 2003, according to the DOE.)

Someone (Simmons?) said a while back that we would need a price of around $180/barrel to trigger a serious economic adjustment. This figure is, coincidentally or not, almos exactly double the inflation-adjusted all-time high for oil of around $90/barrel, set in approx. 1981. This sounds like Simmons or whoever thinks we need the same effective oil price as we saw in 1981.

My feeling is that it will happen before $180, likely in the $100 to $120 range. And, of course, oil will go that high and much higher, even if not this year or even next.

But the key point is that we need to do everything we can to educate people about this NOW to avoid a cognitive avalanche, when suddenly "everyone" figures it out and tries to trade in their SUV for a hybrid, demands that politicians "do something" (my greatest fear in the short run, actually), etc. We want to spread out the realization and reaction as much as possible, to minimize the economic dislocations and human impacts of PO.

Washington Post today has an article by the CERA folks in the "what me worry" style.

It's Not the End Of the Oil Age
Technology and Higher Prices Drive a Supply Buildup

We're not running out of oil. Not yet.

Concluding paragraph:

The growing supply of energy should not lead us to underestimate the longer-term challenge of providing energy for a growing world economy. At this point, even with greater efficiency, it looks as though the world could be using 50 percent more oil 25 years from now. That is a very big challenge. But at least for the next several years, the growing production capacity will take the air out of the fear of imminent shortage. And that in turn will provide us the breathing space to address the investment needs and the full panoply of technologies and approaches -- from development to conservation -- that will be required to fuel a growing world economy, ensure energy security and meet the needs of what is becoming the global middle class.

Lou Grinzo:  Does that analysis account for the export of energy-intensive manufacturing, and the inevitable rise of prices of imports which will follow even today's oil prices as night follows day?

The purpose of CERA and the EIA is to get a quasi-official set of counter-balancing arguments out there to prevent panic in the financial markets. They can get away with this because of the lack of transparency primarily in the middle east. So while you have the small peak oil community ringing alarm bells, and the data and even advertising campaigns of the oil majors pretty well spelling it out, there is this official looking line of bullshit put out there to add "strategic ambiguity". What they are doing is trying to head off a meltdown in the financial markets. Because of the herd mentality and the dominance of psychology in the markets, the fear is that if the notion that we are well and truly fucked takes hold, there will be some irrational plays going on and the whole thing could go south in a chaotic manner. Therefore there has to be an official countervailing narrative out there so that when the financial analysts do their projections there is enough uncertainty that they hedge their bets. Speculation about who CERA really works for would find you in the same kind of trouble that Karl Rove is currently in.

SW: Exactly. For more information inquiring minds will want to read Confessions of an Economic Hitman by John Perkins. My concern is that CERA actually believes that "Big Projects" using American contractors in the traditional mode will substantially increase OPEC (or post-OPEC, if you will) production. They appear to have actually bought into the OPEC proven reserve estimates. On a geopolitical realist model you might justify the Iraq war assuming the ME reserve numbers are accurate, but not if the OPEC numbers are pure fabrications. We can't "secure" every exporting nation in the world and if we "take" ME oil then the rest will go everywhere else in an inversion of the 70's oil embargo.

In this way, the Defense establishment will be just as much a victim of Peak Oil as everyone else. We are out there defending an empty well.

Finally, after much searching, I have found a detailed critique of CERA's report. It was just published this last Thursday and the title is Oil Depletion? It's All In The Assumptions. Its by Ronald R. Cooke, the author of "Oil, Jihad & Destiny" (which I haven't read). Here's chapter 1 published over at the Energy Bulletin.

Cooke discusses 18 crucial assumptions made by CERA for their scenarios to pan out. Following this, there is a Reality Check section that reviews some recent statements (Chevron, ExxonMobil, John S. Herald, PFC Energy, etc.).

Check it out.

Great article, Dave.


Are you ready to write to your Congressman, your newspaper and all 5 American auto manufacturers (don't forget Honda and Toyota) telling them that you want to buy a plug-in hybrid for your next vehicle?

Oil depletion only matters if you still need oil.  If your "motor fuel" can come from the sun, the wind, burning the gas from the landfill, your microhydro generator, your cogenerating furnace or water heater, or anything that doesn't involve petroleum, you don't care any more.

Of course you are right, EP. Unfortunately we are still in the "convincing them" stage, not the "doing something about it" stage. Just like climate change, at least in the US. You know what a joke the new energy bill is. It took over 5 years for those stooges in Congress to put that corporate subsidy nonsense together. And now you want me to write letters to those same clowns. Sorry if this too cynical, but writing a letter to my congressman is about the least effective thing I can do IMHO. Buying a hybrid would be more effective but I'm poor and can't afford one.

My point in posting this article was that the Washington Post and Daniel Yergin felt it necessary to regurgitate a summary of his report --- as if we all need a periodic reminder that "Its All Good" with respect to fossil fuels. If someone here reads Cooke's article and tells someone else who tells someone else.... well, that's better than nothing.

i tried writing to california's govenor, telling him that i thought hydrogen was a bad gamble. he wrote back saying that the new hydrogen filling stations, and his hydrogen hummer (no lie!) "demonstrates the viability of the hydrogen fuel technology."

i don't think you can argue with logic like that. you've just to to watch and wait.

... or again, engage in a few "gas price" discussions here and there.

You can write nasty letters to the editor, pointing out that hydrogen stations for the few people able to get one of the million-dollar fuel cell cars are not the solution; if anything, such diversions are part of the problem.

I've read multiple times that there is only enough Platinum for 1 million cars (per year?) powered by fuel cells. So until fuel cells don't need platinum, it's not going to happen.

Not to mention the amount of energy needed to power a fleet of hydrogen cars. Don't forget that a car uses an *ORDER OF MAGNITUDE* more energy compared to a house.