Monthly Archives: August 2014

Where Did Our Cheap Oil Go?

Aerial view of the oil sands operation in the Alberta Province of Canada.
Aerial view of the extraction of the oil sands in the Alberta Province of Canada (Google Earth). The field of view is approximately 25 miles across.

In March 1998, two geoscientists by the names of Colin Campbell and Jean Laherrere wrote an article in Scientific American titled “The End of Cheap Oil” which explained that a peak in conventional (cheap) oil would occur within the next 10 years, leading to higher oil prices.  The general public in the USA pretty much ignored the statements of this article (at their peril, by buying SUV’s and Hummers in the early 2000s), but we can see now, looking back, that Colin and Jean were correct!  In April 2007, some oil company CEO’s even admitted that the age of cheap oil was over.  In this post I will delve into the economic costs of oil exploration and extraction in this new age of the oil industry (this post grows out of Points 1 and 4 of my first post).  I will not go into the social and environmental externalities of oil extraction, as there is enough there for hundreds of posts, and indeed entire books have been written about these externalities (e.g. Crude World by Peter Maas). 

Exploration and extraction of crude oil has come a long way technologically from the days when Edwin Drake drilled the first commercial oil well in 1859.  Today (2014), oil & gas companies use extremely sophisticated methods to explore for and extract crude oil from the Earth’s crust.  These technologies include the use of supercomputers to create 3-D and 4-D (3-D over time) seismic models of oil and gas reservoirs to optimize exploration of new fields and optimize exploration of the peripheries of old fields.  Extraction technologies include horizontal drilling and the notorious hydraulic fracturing method; which was developed in the 1940s (http://fracfocus.org/hydraulic-fracturing-how-it-works/history-hydraulic-fracturing). 

Now, with the incredible rate of technological development over the past 155 years, not to mention increasing economies of scale, one would think that it would be easier and cheaper to extract oil from the crust than it used to be.  However, this is obviously not the case, as the break-even price for developing shale (tight) oil wells ranges from $60 to $80 a barrel, not to mention the high costs facing deep-water oil wells and oil sands development (these are other examples of unconventional oil). 

This is sobering.  All of the incredible technological development in the oil industry has resulted in increasing oil prices over time, not decreasing.  Yes, the USA is definitely extracting a lot more oil than before the boom began in 2009, but this oil is expensive, a lot more expensive than the conventional oil produced at the previous peak of oil extraction in 1970. 

So why is the shale oil boom in the USA even occurring? If it is so expensive to drill for, couldn’t a company make more money by drilling conventional (i.e. cheap) oil? Well, yes, of course! The break-even price for Iraqi oil is only $20, as conventional oil is much more easy to produce than unconventional oil (think of the oil gusher scenes in the movie Their Will Be Blood).  So we have a problem.  The problem is that there aren’t really any large conventional reservoirs left in the USA to develop!  That’s why the shale oil boom is happening now.  Decline of conventional crude oil extraction caused world oil prices to rise making it attractive to drill in shale.  The hydraulic fracturing technology has been around since the 1940s, but back then there were more than enough conventional oil fields to develop so the process was not widely used until around 2003 (when oil prices started rising). 

Why do you think oil companies are trying to drill in the Artic or are drilling even deeper than the Macondo well (2010 BP Blowout) in the Gulf of Mexico?  Why deep-water oil off of Brazil and Africa?  Why oil sands?  It’s because oil prices are high and the discoveries of cheap oil reservoirs have declined.  There could be 5-8 trillion barrels of crude oil in the Earth’s crust, but at what cost and rate can we extract it, and how much of it is actually recoverable? We’ve already extracted around 1.2 trillion barrels of the easy stuff!  If it costs $75-100+/bbl to develop the remaining oil then economies will try to switch to a different energy source for transportation, and the world economy will probably struggle to grow in the process.  Which, interestingly, would be a good thing for controlling CO2 emissions. 

Evidence for High Costs and Difficulties

Here are some articles indicating the difficulties and high costs facing oil companies in their race to extract the remaining crude oil from the crust:

Many oil companies are finding it very difficult to even explore for oil in the basins of the Artic Ocean, let alone extract any of it:

http://oilprice.com/Energy/Energy-General/More-Oil-Companies-Abandoning-Arctic-Plans-Letting-Leases-Expire.html

The Kashagan oil field in the Caspian Sea off of Kazakhstan was the largest conventional oil field discovery in the past few decades (discovered in 2000).  Its development has been extremely problematic over the past 14 years:

http://www.cacianalyst.org/publications/analytical-articles/item/12981-kazakhstans-kashagan-oil-fields-faces-problems-and-soaring-costs.html

Brazil’s pre-salt oil field discoveries were hailed as game changers by the media in 2007/2008 and yet 6 years later it is still hard to get oil out of them, though, very recently (summer 2014) the development of these fields maybe turning a corner; albeit at a very high cost:

http://www.washingtonpost.com/world/brazils-oil-euphoria-hits-reality-hard/2014/01/05/0d213790-4d4b-11e3-bf60-c1ca136ae14a_story.html

Shell pulled out of oil shale (Note: different from shale oil) research and development last year after 31 years trying to figure out how to make the economics work; if they can’t do it at $100/bbl, what price do they need?:

http://fuelfix.com/blog/2013/09/25/shell-pulls-out-of-oil-shale-project-leaving-1-big-operator-behind/

Last but not least, Saudi Arabia, the king of conventional, cheap oil is now looking for oil and gas fields in the Red Sea:

https://www.hgs.org/civicrm/event/info?id=1321&reset=1

Saudi Arabia has (supposedly) 268 billion barrels of reserves (virtually all conventional oil, cheap to produce) but they are now looking into the deep-water regions of the Red Sea for expensive-to-produce oil?  That should be concerning, as maybe their supergiant conventional fields (e.g. Ghawar) are finally starting to show some wear. 

Conclusions

Even the oil majors (IOC’s) admit that the easy oil is gone, yet they deny Peak Oil extraction will occur anytime soon.  As such, they are presumably betting that the world economy is willing to pay $100-$150+ per barrel for the next few decades.  That may not be the case as people are trying as hard as they can to give up fuel-intensive cars and trucks and looking for alternatives (electric cars, hybrids, public transportation, etc).  In addition, global economic growth maybe hindered by triple-digit oil prices for the foreseeable future, thereby impacting demand for oil.

It seems to me (and to a lot of “experts”) that oil companies the world over are stuck between developing increasingly expensive oil and dealing with a world economy that is ready to shift to a different transportation fuel or method as soon as it becomes widely available (maybe cheap, driverless, electric cars?).  All in all, the world oil companies will probably have to at some point give up spending more and more money on extracting expensive, unconventional oil and just become natural gas companies (this may already be happening due to the cuts in capital spending that many IOC’s are currently making).

If we include social and environmental externalities in the costs of extracting oil, then oil is truly becoming very expensive as we try to tap unconventional reserves like shale oil and oil sands.  For unconventional oil there is just more social and environmental impact per barrel produced (e.g. CO2 emissions per barrel produced).  It will be interesting to see how long the world economy is willing to put up with these increasing economic, social, and environmental costs. 

Earth Can’t Become Coruscant

In mid-July, Ram Realty Services acquired over 125 acres of formerly protected endangered forest in Florida after negotiations with the University of Miami. These South Florida pine rocklands are home to some of the rarest plant and butterfly species and represent some of the last patches of Florida’s dying everglades. With only 23 percent of native species declared safe, Florida’s biodiversity crisis serves as a microcosm for the larger biodiversity crisis affecting North America.

Ram plans to use the space to build apartments, restaurants, fitness centers, and a Walmart while promising to set aside 40 acres for a preserve. The company’s CEO cited that demand for “high-quality rental housing, shopping, fitness and dining options,” along with Walmart’s backing, helped decide location. In other words, gentrification.  Such ‘high-quality’ residences , trendy fitness clubs and fine dining options will drive up real estate prices as well as the cost of living. On top of that, Walmart’s presence will force out the last small businesses that remain. This isn’t urban development, its urban sprawl. Not only does urban sprawl inflict violence upon our communities it also inflicts violence on the environment we inhabit.

The Pacific Northwest contains 6% old growth forests, the largest for any region in the United States. In the Northeast, there remains less than 1% old growth. Old-growth refers to the oldest living forest ecosystems usually hundreds, even thousands of years old. Why does this matter? Why am I focused on these forests when the Earth has largely recovered from the ecological devastation wrought by colonial history?

Learn more about Old-growth Forests

Its true that second and third growth forests have replaced the original forests destroyed by colonial settlers. Bill McKibben calls this the “great environmental success story of the United States.” Despite this comeback for mother nature, original forests possess the quality of age and thus represent the most evolved and developed ecosystems on the planet.

The Definition of Symbiosis

Time allows for forests to develop complex systems of mutual aid between organisms. Trees, plants, and animals don’t evolve in a vacuum. These species evolve together. Over time, various species eventually form ways to benefit each other. For example, a species of lichen will grow in 100-year-old forests that provides nitrogen to the trees.

Old growth forests have the most biodiversity since they have been alive the longest. In the Pacific Northwest, many old growth forests contain mycorrhizal fungi which makes connections between soil fungi and plant roots thus assisting in absorbing and distributing nutrients to a larger network of ground plants. The destruction of trees break these connections disrupting an entire system of symbiosis.

Symbiosis is the basis of ecosystems. Ecosystems are what distinguish a tree farm from a forest. The longer a forest survives, the more resilient it becomes. Old growth tend to be significantly more fire resistant than second and third growth. When these original forests were blighted with wild fires, the trees that survived grew stronger bark. The forest grows stronger after each subsequent burning to the point where some trees won’t even scar. Trees are necessarily the keystones of the forest.

A healthy forest produces healthy ecosystem services. These are the natural services and products that the forest creates that benefit local species. For us, ecosystem services come in the form of rivers, fruits from the canopy, and shelter. Humans, as bipedal creatures with opposable thumbs, need to manipulate lumber and rock in order to build the appropriately habitable shelter. This isn’t necessarily bad as humans are by far not the only creatures that manipulate the environment for their own benefit.

However, just as the beaver dam can inadvertently disrupt the flow of a river at the expense of other species, humans can cause irreparable harm to forests. This is why the environmental movement takes such a strong stand against clear-cutting. Most people accept the view that some trees need to be cut down, but they also believe we shouldn’t cut down what we don’t need.

Lumberjacks and tree-sitters generally agree that the majority of forest needs to remain in order to continue the viability of ecosystem services. Problems arise, not from individual workers, but from decision-makers in the Bureau of Land Management.

“Manhattanizing” the World

Urban centers certainly provide a plethora of opportunities and services. Yet, these services don’t necessarily foster healthy communities. In fact, urbanization requires the smelting of ore powered by fossil fuels and destroys the self-correcting symbiosis that maintains the environment. Cities cannot self-correct. There isn’t any symbiotic relationship between skyscrapers and streets. Clean urbanization requires the constant maintenance of the urban landscape through human activity which in turn requires fossil fuels.

Think about it this way: Cities wouldn’t need water treatment plants if urban pollution didn’t destroy the capability of the river ecosystems to provide a constant flow of clean water. Human progress pushes the myth that natural ecosystem services need to be destroyed to make way for the construction of urban human services. This results in policy makers and land grabbers prioritizing urban expansion over ecological protection thus endangering species and accelerating the destruction of human viability. Where do the fruits at the farmer’s market come from? How did that steak get from the farm to your plate? Urbanites take human services for granted without realizing that they essentially rely on external ecosystems. If we cut down all the forests and replace them with shopping centers, then there will be nothing with which to fill these supermarkets. Cities exist within the natural environment. We ultimately need ecosystem services to survive.

This is clearly an existential crisis but its gentrification that remains the gravest evil in this scenario. As younger generations move back into the cities, they bring with them the suburban culture that lies at the root perpetuation of urban expansion. Well-intentioned white people failed to correct the unsustainable and elitist practices of the privileged culture they came from and inevitably drive out poor people of color turning their historical communities into playgrounds for the rich.

Gentrification destroys diversity and turns urban centers into some of the most culturally detestable places to live. Every time a white progressive opens up a vinyl record shop or an expensive Whole Foods store, they drive up the cost of living in the area. Realtors appeal to white people by renovating former public housing projects into apartments ex-suburbanites would feel comfortable inhabiting usually forcing out the poor communities that used to live there. Eventually, loitering and vagrancy laws are passed to keep the former residents from “offending” the new hipster elite. So, congratulations on your choice to live in historic Brooklyn! Your presence and the culture you peddle ended up making a whole generation of black New Yorkers homeless.

Green Urbanism: The Sustainable Way to Move Back to the Cities

We can’t go back to nature. Humans have adapted to live in urban environments and vast swaths of our populations have lost their instinctual survival skills. We rely on the human services of urban centers for food, shelter, and social sustenance.

The question then becomes, how do synthesize human services with natural ecosystems? The answer lies in the ecological faction of the New Urbanism movement. While realtors have used New Urbansim as a way to peddle gentrification, many of the movement’s advocates actually work very hard to come up with ways to “Green the Ghettos” and make city life sustainable.

The success of New Urbanism relies on the creation of functioning urban ecosystems along with social programs that include the historically marginalized. The goal is to encourage people to abandon the suburbs by offering a community that promotes positive opportunities centered around human need and ecological health.

Green roofs, community gardens, and building materials constructed of solar cells are just a few of the ways cities can be transformed to provide all of the necessary services human rely on. Large urban parks should also be constructed and numerous. New York’s Central Park is a prime example of this kind of land use in which traditionally human constructions become integrated within a vast tract of nature. In essence, apartment complexes and even entire neighborhoods could be constructed in such a way that they become synthesized with the very park itself.

There are numerous possibilities of how to engage cities from an environmental perspective. The key is to harness the political and social will to make such a future a reality. So instead of buying land to open up a record shop, next time plant a garden. You might just end up providing food to the hungry communities that remained invisible through your privileged mentality.