Oil Depletion Primer

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Back in October of this year, a Parliamentary Research Paper entitled “The Next Oil Shock?” was released.  If you are looking for an up-to-date primer on the oil supply situation, look no further.  The PDF version is here.  It’s a great summary that demands a coherent mitigation strategy as oil nudges towards $90 a barrel.  As such this has been ignored completely.  Here’s the summary:

  • Oil is “the lifeblood of modern civilisation”. This paper provides an overview of the global oil market. In particular, it examines the outlook for oil supply and demand over the next five years, and the economic consequences.
  • Low-cost reserves of oil are being rapidly exhausted, forcing oil companies to turn to more expensive sources of oil. This replacement of low-cost sources of oil with higher-costs sources is driving the price of oil higher.
  • While the world will not run out of oil reserves for decades to come, it cannot indefinitely continue to produce oil at an increasing rate from the remaining reserves. Forecasts indicate that world oil production capacity will not grow or fall in the next five years while demand will continue to rise.
  • If oil production capacity does not rise as fast as demand, the buffer of spare production capacity disappears. In such a ‘supply crunch’ the price of oil ‘spikes’ to high levels. High oil prices can induce global recessions.
  • Organisations including the International Energy Agency and the US military have warned that another supply crunch is likely to occur soon after 2012 due to rising demand and insufficient production capacity
  • There is a risk that the world economy may be at the start of a cycle of supply crunches leading to price spikes and recessions, followed by recoveries leading to supply crunches.
  • New Zealand is heavily dependent on oil imports and will remain so for the foreseeable future. While there is potential to substantially increase domestic production, domestic oil production cannot insulate New Zealand from global oil price shocks because New Zealand pays the world price for goods like oil.
  • Key export-generating industries in the New Zealand economy including tourism and timber, dairy, and meat exports are very vulnerable to oil shocks because of their reliance on affordable international transport.

Future Oil Sheikhs of Pacific? Yeah Right!

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Fran O’Sullivan has a wildly optimistic take on New Zealand being a major petroleum exporter in the future.

In 15 years, New Zealanders could be the oil sheikhs of the Pacific if Government projections over the potential of our petroleum sector bear fruit.

Ministry of Economic Development estimates suggest the petroleum sector alone could generate over $30 billion per annum in export revenues by 2025.

Unfortunately I really don’t think the MED have an accurate handle on potential or possible oil reserves, and they are being wildly optimistic. The Taranaki basin has been well explored and even the relatively successful Tui oil field last year yielded just $24m in royalties and $31m in income taxes. Tui is just 12.5% owned by NZOG, so the rest of the profits flow directly overseas, and we continue to import all of our oil.

Horse and cart – and jetpack optional

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An article in the NZ Herald on Wednesday looked at the need for a change in vision regarding New Zealand’s transport planning.

Mr Gunstan, a commercial manager for the Marsden Pt oil refinery before becoming a fulltime “futurist strategist”, advised planners to break free of incremental thinking wedded to the more recent past.

He said much of New Zealand’s roading infrastructure harked back to horse and cart tracks built 100 years ago, and was totally unsuitable for modern society.

Showing a slide of a motorway jammed with 10 lanes of bumper-to-bumper traffic, he said too much planning involved “more of the same with just some slight variation – maybe a few more intelligent traffic signs”.

“It doesn’t actually conceive that life would ever be different. It maybe takes advantage of some new technologies, but when we build it, it’s for incredibly long time periods – it’s still around when we’re six foot under the ground.”

But as a former oil importer, he was acutely aware of depleting fuel supplies, and expected New Zealand would have no more bitumen in 20 years for maintaining roads.

“So what are we going to build our roads out of – what sort of planning are we doing to maintain and build our roading for the future?” he said.

For the full article, click here.

Oil Supplies Are Running Out Fast

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Dr Fatih Birol of the widely respected IEA has never been one to shout that the sky is falling.  This warning should be taken very seriously.  From the Herald:

The world is heading for a catastrophic energy crunch that could cripple a global economic recovery because most of the major oil fields in the world have passed their peak production, a leading energy economist has warned.

Higher oil prices brought on by a rapid increase in demand and a stagnation, or even decline, in supply could blow any recovery off course, said Dr Fatih Birol, the chief economist at the respected International Energy Agency (IEA) in Paris, which is charged with the task of assessing future energy supplies by OECD countries.

In an interview with The Independent, Dr Birol said that the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated.

But the first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago.

Why building motorways sometimes makes no sense

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I’m reading an excellent book at the moment – Resilient Cities by Peter Newman, Timothy Beatley and Heather Boyer. I commented on this book a few posts ago, with particular reference to how pathetic our preparedness for peak oil is and how stupid Treasury’s oil price predictions are. I have just got up to reading the chapter which relates to transportation issues, and there are certainly some interesting points in it.

The basic premise is that for a city’s transportation system to be resilient – that is to be able to adapt to the changing world that we face over the next few decades – it simply can’t be as auto-dependent as many American cities, as well as Auckland, are at the moment. Whilst electric cars may come along and be the answer to our problems at some point in the future, to properly ensure that the effects of peak oil and climate change are not too horrific there is simply no alternative to making cities more public transport oriented.

One point that I found particularly interesting, before I get on to explaining the pointlessness of building more motorways, is the relationship between increased public transport use and decreased car use. Often it is simply thought of as a one-to-one relationship: that each increased ride for public transport is one fewer trip made in the car. However, it appears as though the relationship is actually stronger than that: that “there is an exponential relationship between increased transit use and declining car use.” This is further explained:

This helps explain why use of cars by inner-city residents in Melbourne is ten times lower than that of fringe residents, though transit use by inner-city residents is only three times greater. The reason is that when people commit to transit, they may sell a car and even more closer to the transit, eventually leading to lan use that is considerably less car dependent.

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Why Peak Oil Matters

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Somewhat continuing the theme of Friday’s post, it can feel difficult to be a “peak oil believer” at the moment. The narrow-minded retorts of “oil was $147 a barrel in July 2008, now it’s barely a third of that – pah!” seem to blind the average driver/politician/roading-lobbyist into believing that the $2.20 a litre prices of last year were a blip and that things have somewhat returned to normality – even if normality is now $1.60 a litre and not $1.10 a litre they feel it should be. Petrol probably would be $1.10 a litre if we had the same exchange rate we had when it was $2.20 a litre, but that’s a completely different story. Perhaps some of the smarter folk figure that rising petrol prices are an inevitability in the long-run, but they ignore the potential effects of that by simply pointing to hybrids, bio-fuels, electric cars, hydrogen economies and other technological advances. All, seemingly, to avoid the conclusion that throwing all our eggs in the “build more roads for more cars” might be slightly reckless. Others say “but there’s heaps more oil out there we just haven’t found yet!” Read the rest of this entry »

Time for the Government to Act on Oil Prices

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Cameron Pitches asks what strategy the Government has for rising oil prices.

A little over a year ago, when oil was $US56 a barrel, I wrote an article which concluded that New Zealand needed to diversify away from fossil fuels in order to survive and prosper.

One year on, and with oil now over $US70 per barrel, there has been no policy response at all from central Government. Projects that would reduce our dependency on imported fossil fuels, such as electrification of the rail network, are being passed over in favour of completing “missing” links of the motorway network. With the price of oil forecast to go much higher than the 25% increase we have had in the last year, many fossil fuel dependent projects simply will not be viable.

Fuel prices will continue to rise as they have done for over five years now. This is because demand continues to grow globally, while supply remains flat or even starts to decline. Recent studies show that 9 out of the top 10 international oil companies have flat or declining production rates as a result of their oil fields maturing.

So why do fossil fuel dependent transport projects continue to be funded in New Zealand? Because the benefit cost ratio (BCR) framework used by Government agencies completely ignores the future price of fuel.

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The King of Oil

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Cameron Pitches / NZ Herald

During the debate about the forthcoming 5c per litre increase in petrol excise, a number of politicians and commentators have suggested deferring the increase until oil prices stabilise at lower levels. Yet no one has been able to offer a valid reason why prices should come down.

With global crude oil consumption running at a staggering 84 million barrels a day, the current price of around $US56 per barrel seems entirely reasonable. At an equivalent price in our currency of 50c per litre, even imported bottled water is more expensive.

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