About that savior technology . . .

It has become one of the mantras that are beginning to appear that "technology" will solve the peak oil issue.  We have had it from even the highest temporal authority that this is so.  So you would think, with all the money they have, and recognizing the problem, that there would be one industry that would be really plowing the money into research.

From "The Color of Oil" by Professors Michael Economides and Ronald Oligney (both Professors who should know).

Many unique features distinguish the technology of the petroleum industry.  First, there is little doubt that technology is crucial, and that deployment and integration of technology is essential to the industry's success.  Yet, this technology is highly diversified and applied to industry segments with different needs.  The scope is wide. Seismic exploration and processing, enhanced oil recovery and the construction of deepwater production facilities have little in common.
Why is it, then that the petroleum industry, so technically dependent, is the industry with the smallest R & D spending? The healthcare sector leads all industries, with 11% of sales going into R&D; the electrical and electronics industry spends 5.5%, and the chemical industry spends 4.1%.  In this light, the petroleum industry's R & D spending of less than 0.5% of sales is striking.
Given the recent public relations campaign by some of these oil companies, it is interesting to note the additional comment:
"Relating with a dean of a prestigious university is mutually beneficial: the dean gets paid very well, albeit for a short time, and the managers get the necessary boost of confidence in their self-worth by the association. "Memoranda of understanding" are produced by the dozens, often not worth more than the paper they  are written on, and having an impact that is even smaller. "
.  In this case they were, I suspect, talking about deans of schools abroad, but one wonders whether this is not also true at home ?

Um! And lest I be accused of partisan rhetoric, it should be noted that there used to be a Government Agency charged with innovation in the mining industry - I do believe it is one of the few Federal Agencies that was deliberately eliminated.   Hmm! Must be that vision thing. Almost on a par with killing the British Coal Industry wouldn't you think. (er! and yes I know, the question is, do you?)

I want to get this thread off to a good start, so here goes.

There are two ways of looking at peak oil, and they are
  1. Economics (markets) and technology will always save us
  2. Geology (recoverable reserves) and EROEI (unconventional sources) work against us
Not to mention "above-ground" political turmoil. Now, "Why is it, then, that the petroleum industry, so technically dependent, is the industry with the smallest R & D spending?"

Because the writing is on the wall and the petroleum industry has read it. It is door #2, not door #1, given the choices above.

Say what you will, but I have read one fantasy article after another about tar sands, CTL, GTL, oil shales, Venezuelan heavy sour crude, God Knows what, that's gonna make all our dreams come true. When it comes right down to it, you know what, it's going to come down to places like the Gulf of Guinea (West Africa) where they are doing deep sea drilling to get as much light sweet crude (~65%) of the 24 billion barrels of oil reserves there. Sakhalin II (was due in 2006, 1 billion barrels reserves) is now delayed. You get the idea. That's it. That's all there is. Look at the figures, year by year as they come out. Look at the market prices. Eventually, these will reflect reality.
"Economics (markets) and technology will always save us"

Huh?  Who believes this?  I'm one of the decoder-ring-wearing members of the Economists Club hereabouts, and *I* sure as hell don't believe it.  You can find people who say that markets will save us this time, but I doubt you can find anyone with more than 3 gray cells to rub together who says literally that markets "will always save us".

But that nit aside, I think the only rational way to look at our situation is to take the biggest view possible.  That means recognizing the absolute limits dictated by geology, plus the contributions of technological advancement, markets (meaning economics and market psychology), and public policy.  Dismissing any one of those four is a recipe for error.

But I think you've got it exactly right about why R&D is so low.  Honestly, does anyone think it's a coincidence that almost all parts of the worldwide infrastructure are stretched tight as a piano wire, all at the same time?  If the oil industry decision makers didn't know what was coming you'd expect to see one major bottleneck, not the series of them we have now.

IMO, this is a good thing, as it causes the onset of higher prices a little earlier, and will actually soften the blow by delaying the peak and accelerating the transition away from oil.  Will it be enough of an effect to make a major difference and save us from some human and economic pain?  Who the heck knows, but I prefer our chances with the early price rise to our chances without it.

Well, Lou, I had in mind "Freakonomics" author Steve Levitt and technology evangelist Michael Lynch and others (Yergin) who I have read...

Not you....
Also, I have both a Greenspan secret decoder ring and also, I believe, a Yergin secret decoder ring at this point ... don't screw with me :)
And specifically, these kind of "disruptions" mean that the peak is smoothed out. The ideal situation is that much mitigation is began so far in advance to render the peak a non-event. Unfortunately that doesn't look like its going to be the case (and frankly it seems like we need the wake up call to deal with some other pressing issues-like how much we're screwing up the ecosystem), but the slower the depletion rate, the better off we'll be as far as societal collapse goes (the poor will suffer more of course...). I must point out I'm taking this excellent analysis from an article posted here titled "4%, 11% who cares" several days ago.

"In reality, Peak oil will be a non-event. As oil becomes more expensive, new technologies will compete with oil and naturally replace it in our economy."

A couple questions/considerations. (1) What is the time period?  (2) If the Saudis had, over that time period, the capacity to flood the market at will, what would have been the good of that R&D? Spend lots of money and have the Saudis push down the price of oil.

Consider this:  Oil & Gas Journal. Mar 8 2004. Maarten Van Mourik and Richard Shepherd. "Investment incentive concerns overlooked in peak-oil debate."   It argues that oil companies had no incentive to invest in R&D until oil prices hit a higher price regime.  That would not happen until the Saudis also had to similarly invest.  Otherwise the Saudis could blow them out of the water at the turn of a spigot.  Once it's clear the new price regime is here, then the higher fruit can be picked, more R&D can be invested with a guaranteed return.

And how has the R&D changed over time?  Say in the 20th century.  And how does that compare with other businesses?
Sorry.  Talking to myself.  Another consideration.  What is the absolute level of R (research) and D (development)?  In other words, what the sales of these different areas?  If I'm not mistaken, oil is one of the biggest businesss in the world.  On the R side, a small percent of sales could still be an enormous amount of money, enough to literally cover just about all necessary bases.  On the D side, I'd expect more (if D includes the building of, for example, offshore rigs, etc).

But in a vacuum, I'm not sure that these numbers can mean much without additional context.

Came across these notes.  Some interesting ideas: The true cost of oil.  A  brief quote:  "But over the past 20 years, oil has been a terrible investment.  A 15% return on investment (ROI) is what one expects to get from a building.  Oil's ROI has largely been less than 15%.  Scotch return 50% ROI, wine returns 15%.   As Simmons quipped, he has spent his career in the wrong kind of barrels."
Good grief - that does seem an extraordinarily low percentage. Has it always been thus, or is it an after-effect of the low prices in the 80s and 90s?
Does your question even matter as we go forward?
Grin - a history lesson (because I was there) - Scene Park City, Utah.  

On the front row representatives of all the big oil companies.  We are meeting to talk about drilling research.  Says the rep of a European oil company - why are the Feds doing research into drilling technology - don't they know that we are working on this?

Says the rep of an oil company located in Houston - what is your drilling R & D budget?

European "$x million."
Houston guy " This new Administration that they are forming has a budget in the billions."
European "Oh, I guess if they are going to fund it there is no reason for us to."
And so they largely stopped, but ERDA went on to fund other things instead of drilling research and, in time, became the Department of Energy.

Sic transit  . . .

Your story is very telling here. I believe the larger social context must be taken into account. What is that context?

This (American) civilization is in decline. Lately, we've had the indignity of Mexican soldiers moving into Texas to help us with our relief efforts vis-a-vis displaced persons from New Orleans and the Gulf coast. All over the world, other countries have been offering up help for our "refugee" problem. This is a turning point for the US. What should have been obvious before (we are becoming, in parts, a third-world country) is now obvious to everyone else all over the world.

Who really thinks that we can solve our Energy Problems given our manifest failures in Iraq, New Orleans and the growing huge income inequality in this country? Even today, the 4th Circuit Federal Court judge ruled that holding Jose Padilla was just fine, no Habeas Corpus, no right to representation, no Bill of Rights. Everyone all over the world sees how things are going in the US, its all pretty obvious to them. This all seems like a no-brainer to me. Since US consumption drives a great deal of the world's economy, it seems obvious to everyone everywhere that we're all (globally) looking at a world of hurt.

Given the "energy bill", the gross stupidity and greed of our rulers and our current supply problems, how exactly is Adam Smith's "invisible hand" going to get us out of this pile of shit?
I definitely concur, Dave.  The key point you made revolves around the "greed of our rulers." Our form of government in practice is actually fascist in practice and is on a quick decent towards a tyrannical dictatorship.  We are just told repeatedly that we have democracy and freedom, but all anyone has to do is open their eyes and test what they hear from our leaders against what is actually taking place.

The sooner we realize that our rulers' "only creed is greed" then we will be much closer to understanding why peak oil is even something to discuss.

As far as technology...conservation technologies that would enable a barrel of oil to go a lot farther has been in existence for many years, but have been suppressed because of greed.  There are many examples of individual inventors who have developed engines that would get close to 100 mpg, but their ideas were suppressed.

Other technologies that would replace some (or all in some cases) oil usage have been around as well, but have also been suppressed.  Several labs worldwide have developed motionless electromagnetic generators (MEGs), based on the research of the late Nikola Tesla.  (see Kawai Motor and http://jnaudin.free.fr/meg/meg.htm).

Interestingly, Chrysler Motors was selling Ethanol powered cars to Australia as early as the 1930s (as reported in American Free Press, August 29, 2005)  Actually the entire issue of AFP was devoted mainly to energy matters; you may be able to find these articles on www.americanfreepress.net).

Sadly, as you mentioned in your post, our society is being deconstructed before our very eyes.  And I believe peak oil may be on the backburner before long.  After the next disaster, martial law will be declared nationwide and our constitution (which means nothing to our current leaders) will be suspended indefinitely...

You started "Sic transit...", For everyone here, since I no longer believe that education is meeting the standards of the past, I am going to do the whole translation:

Sic transit Gloria Mundi -- "Thus passes away the glory of the world", that is to say, "worldly things do not last". Which was the point of my last post.

And as one poster said here once: Jesus wept
Or paraphrasing the Buddha:  "Everything is impermanent.  Accept and move on."
Percent of sales seems like a poor measure. Historically, the company's profit on each dollar of sales is much lower in the petroleum industry than in most other industries, so you'd expect the R&D percentage to be low.

If I have sales of $100 million and costs of $98 million, then I'm certainly not going to spend 5% of sales on R&D.

Maybe comparing industries using R&D spending as a percent of market capitalization would be better?

How's this for saviour technology? Amory Lovins preaches efficiency, CHP and lightweight cars (9 page PDF file):


We have the technology in our grasp to have cars that get 100+ mpg. The basic technology has been around for quite a while now. Honestly I think the big car manufacturers and big oil companies have been milking the current system for all they can. If they make cars that need little crude and the cars have few parts in comparison to traditional car designs, I doubt people will want to continue to pay $54k-$30k for a new car. They might in the short term because of fuel savings, but in the long term I think the price of transportation will go down. China or India might beat us to the punch if we're not more proactive.

Btw, BP has been heavily investing in wind and solar power for years. They know what is coming and they are preparing for it. The oil companies who don't may end up as a footnote in the history books.

I don't want to be rude, but have you looked at the sales numbers for the Honda Insight since it was launched? Compare it to the Ford Explorer. People didn't *want* efficient cars. They wanted big fast powerful cars, and they were willing to pay big $$ for them. So that's what the car companies built. Now that gas is going through the roof, the customer is shifting. But it's useless to blame the car companies for building what people mainly wanted.

Which came first - the chicken or the egg?

The automakers heavily promote powerful cars.  Thus the question is the degree to which people want and would buy a powerful car if there were no adversising, and the degree to which this market was developed by the automakers in order to upsell more expensive cars?

People are often too stupid to know what's good for them. 30% - 40% of people will go along with the status quo no matter what. Another 30% - 40% will go along with the status quo until they are convinced that it's not the right direction. The remainder of people are smart enough to question things and figure out the truth before the masses.

Corporations only care about one thing: profit. They will sell a gas guzzler today because they have so much invested in the technology -- as do their competitors. It's the corporate herd mentality at work. Then when the energy crunch gets bad enough, profits are dwindling, and half their workforce has been laid off, they will turn around and try to sell you some new piece of crap.

As I read these comments (not only about Amory Lovins, but some of the others too), I wonder about how much R&D is really needed?  The basic tehchnology for many of the alternatives (CTL, GTL, or even BTL, etc) has been around for a while.  The basic technology works, it is just the economics that doesn't work.

What is needed is for oil prices to reach the threshold where these other things become economically viable, and the prices need to remain high so that people and more importantly investors become convinced that we will never return to the 'good old days'.

Same goes for Lovins's ideas on how to cut energy usage.  A few people will build houses like his out of altruism, but for the vast majority of people energy needs to become sufficiently expensive that the status quo is no longer viable.

The big unknown question has more to do with the degree to which the threshold of economic viability of these technologies will follow oil prices.  Will they remain just tantalizingly out of reach, or will some of these things become real?

I was talking to my stockbroker the other day, and he was telling me about how he believes that oil will come back to the $30-40/bbl range.  I politely mentioned that I thought that in the long term it was going higher, but I am sure it didn't sink in since I didn't have time to present data to back it up.  Maybe I should give him a copy of Simmon's book.

Stuart: Actually 15% ROI is not bad. Compounding, it means you double your money in less than five years. When you think about it, the economy grows normally at about 3% per year after inflation: increases in population, plus productivity growth. The stock market has "yielded" total returns of capital appreciation plus dividends, in the upper single digits, long term, since the founding of the Republic -- if you measure in terms of stock indexes, which have some statistical problems to them, and most likely bias return estimates upward.

Very few investment managers have had long term 15% records.

One aspect of peak oil and savior technology that is not mentioned very often here is that higher oil prices (and gas and coal prices) feedback on everything that uses oil (and gas and coal). These include oil (and gas and coal) exploration and production (costs for steel, transporation, and so on), but also the manufacture, installation, and servicing of renewable energy devices. As the price of fossil fuels eventually goes up, this is one factor that increases the cost of renewable replacements. One hopes that as the production of renewables is streamlined, and as renewable energy is used to produce renewable energy devices, that this can be overcome.

A positive EROEI is a good sign. But it can be very difficult to accurately calculate the energy investment part of that ratio. I'll be happier when I see some actual price drops. The cost of photoelectric cells actually increased 25% this year, presumably because of increased demand.

Another worry is that proposed saviors such as superconducting magnetic confinement fusion use 'fossil' helium, which comes of out some oil and gas wells, and which has a production curve related to those of oil and gas. Helium is an element that cannot be synthesized (the amount made in a hypothetically working fusion reactor won't help). When it boils off of the dewar, it eventually escapes into space, where it originally came from.

Understanding oil R&D is simple. R is banging on the Earth's crust and listening to the echo. D is poking holes in the Earth's crust.
As for a technological solution there is a safe and reliable zinc air fuel cell.  It's not mentioned in the mainstream media because the zinc lobby can't outspend the fossil fuel lobby. Check electric-fuel.com
There was a very interesting article published in Futures Magazine this past month talking about how funds such as the Goldman Commdities Index has become so popular that it has become a fundamental in itself - meaning that it buys so much of the futures contracts that these funds are likely distorting the market and becoming a force unto itself.  The article also points out that it makes it more difficult for commercial participants in the market. Worth a read although it is not avaiable online.

In terms of the near term view of oil pricing, DeGraaf (over at Lehman) pointed out last week that 96% of participants in the market are positioned bullish, which is the highest it has ever been.  This would point to perhaps a near-term correction.  As he states:

"A few weeks back we discussed the impediment we believed sentiment would have upon the trend in oil, and produced some fairly convincing statistics showing the historical likelihood of limited upside in the commodity and an asymmetrical risk/reward favoring the downside.  The timing of that call was obviously premature given the impact of the hurricane, but we believe it only changed the punctuation of the trend by replacing the period with an exclamation mark!  Last week Consensus bulls in crude reached a historic 96%, a level not seen EVER in the history of our Consensus Inc Data.  There comes a point in every trend where the likelihood for a reversal increases, and perversely, we find that point to consistently be where few expect it."

Just some food for thought as we go forward.

Wouldn't that be truly ironic? What if the price of crude isn't related to shortage  of supply but to peak oil people flooding the market with 'buy' orders?
I think that each and every statement concerning earnings and profits about ANY AND ALL STOCKS should be corrected for inflation, especially anything in the last 5 years. When we are talking about 2 or 3% making a difference, then real, UNadjusted inflation needs to be reconciled against any postulated profit. When you do that, you will quickly see that much "profit" is illusory, when you are speaking of stocks in general.