GAO Peak Oil Study

"The Skeptic" would consider this report generally optimistic. Yet, it still makes for some disturbing reading. Here are some highlights:

Most studies estimate that oil production will peak sometime between now and 2040.

Key alternative technologies currently supply the equivalent of only about 1 percent of U.S. consumption of petroleum products, and the Department of Energy (DOE) projects that even by 2015, they could displace only the equivalent of 4 percent of projected U.S. annual consumption. In such circumstances, an imminent peak and sharp decline in oil production could cause a worldwide recession. If the peak is delayed, however, these technologies have a greater potential to mitigate the consequences. DOE projects that the technologies could displace up to 34 percent of U.S. consumption in the 2025 through 2030 time frame, if the challenges are met.

However, there is no coordinated federal strategy for reducing uncertainty about the peak’s timing or mitigating its consequences.

Historically, U.S. oil production peaked around 1970 at close to 10 million barrels per day and has been generally declining ever since, to about 5 million barrels per day in 2005. While recent discoveries raise the prospect of some increases in U.S. oil production, significant reductions in world oil production could still have important consequences for the nation’s welfare. The United States imported about 66 percent of its oil and petroleum products in 2005, and the U.S. economy—particularly the transportation sector—depends heavily on oil. Overall, transportation accounts for approximately 65 percent of U.S. oil consumption. New technologies have been introduced that displace some oil consumption within the sector, but oil consumption for transportation has continued to increase in recent years.

For example, more than 60 percent of world oil reserves, on the basis of Oil and Gas Journal estimates, are in countries where relatively unstable political conditions could constrain oil exploration and production.

According to IEA, most countries outside the Middle East have reached their peak in conventional oil production, or will do so in the near future. The United States is a case in point. Even though the United States is currently the third-largest, oil-producing nation,6 U.S. oil production peaked around 1970 and has been on a declining trend ever since.

Oil accounts for approximately one-third of all the energy used in the world. Following the record oil prices associated with the Iranian Revolution in 1979-80 and with the start of the Iran-Iraq war in 1980, there was a drop in total world oil consumption, from about 63 million barrels per day in 1980 to 59 million barrels per day in 1983. Since then, however, world consumption of petroleum products has increased, totaling about 84 million barrels per day in 2005. In the United States, consumption of petroleum products increased an average of 1.65 percent annually from 1983 to 2004, and averaged 20.6 million barrels per day in 2005, representing about one-quarter of all world consumption. EIA projects that U.S. consumption will continue to increase and will reach 27.6 million barrels per day in 2030.

Recently, for example, a large discovery of oil in the Gulf of Mexico made headlines; however, this potential wealth of oil is located at a depth of over 5 miles below sea level, a fact that adds significantly to the costs of extracting that oil.

Estimates of how much oil remains in the ground are highly uncertain because much of these data are self-reported and unverified by independent auditors;

For example, IEA believes that oil from nonconventional sources—composed primarily of Canadian oil sands, extra-heavy oil deposits in Venezuela, and oil shale in the United States—could account for as much as 7 trillion barrels of oil, which could greatly delay the onset of a peak in production. However, IEA also points out that the amount of this nonconventional oil that will eventually be produced is highly uncertain, which is a result of the challenges facing this production.

The timing of peak oil is also difficult to estimate because new sources of oil could be increasingly more remote and costly to exploit, including offshore production of oil in deepwater and ultra-deepwater.

Alberta, Canada, contains at least 85 percent of the world’s proven oil sands reserves. In 2005, worldwide production of oil sands, largely from Alberta, contributed approximately 1.6 million barrels of oil per day, and production is projected to grow to as much as 3.5 million barrels per day by 2030. Oil sand deposits are also located domestically in Alabama, Alaska, California, Texas, and Utah. Production from oil sands, however, presents significant environmental challenges. The production process uses large amounts of natural gas, which generates greenhouse gases when burned. In addition, large-scale production of oil sands requires significant quantities of water, typically produce large quantities of contaminated wastewater, and alter the natural landscape.

According to our analysis, 85 percent of the world’s proven oil reserves are in countries with medium-to-high investment risk or where foreign investment is prohibited, on the basis of Oil and Gas Journal estimates of oil reserves. (See fig. 8.) For example, over one-third of the world’s proven oil reserves lie in only five countries—China, Iran, Iraq, Nigeria, and Venezuela—all of which have a high likelihood of seeing a worsening investment climate. Three countries with large oil reserves—Saudi Arabia, Kuwait, and Mexico—prohibit foreign investment in the oil sector, and most major oil-producing countries have some type of restrictions on foreign investment. Furthermore, some countries that previously allowed foreign investment, such as Russia and Venezuela, appear to be reasserting state control over the oil sector, according to DOE.

Factors that create uncertainty about the timing of the peak—in particular, factors that affect oil exploration and production—also create uncertainty about the rate of production decline after the peak. For example, IEA reported that technology played a key role in slowing the decline and extending the life of oil production in the North Sea. Uncertainty about the rate of decline is illustrated in studies that estimate the timing of a peak. IEA, for example, estimates that this decline will range somewhere between 5 percent and 11 percent annually.

In addition, corn and cellulosic ethanol are more corrosive than gasoline, and the widespread commercialization of these fuels would require substantial retrofitting of the refueling infrastructure—pipelines, storage tanks, and filling stations. To store ethanol, gasoline stations may have to retrofit or replace their storage tanks, at an estimated cost of $100,000 per tank. DOE officials also reported that some private firms consider capital investment in ethanol refineries to be risky for significant investment, unless the future of alternative fuels becomes more certain. Finally, widespread use of ethanol would require a turnover in the vehicle fleet because most current vehicle engines cannot effectively burn ethanol in high concentrations.

Federal agency efforts that could contribute to reducing uncertainty about the timing of a peak in oil production or mitigating its consequences are spread across multiple agencies and are generally not focused explicitly on peak oil issues. Federal agency-sponsored studies have expressed a growing concern over the potential for a peak, and officials from key agencies have identified options for reducing the uncertainty about the timing of a peak in oil production and mitigating its consequences. However, there is no strategy for coordinating or prioritizing such efforts.

GAO.pdf

Well Said

Excerpt from John Edwards' speech at the Council on Foreign Relations:

"The president has played political brinksmanship over the war in Iraq time and time again. He refuses to acknowledge the futility of his approach, disregards the clear message sent by the American people last fall, and falsely claims that the only way for Congress to support the troops is to prolong the war. That's just not true. Congress can support the troops and end the war, which is exactly what the bill they sent the president last month would have done. When the president vetoed that bill, it was the president alone who was blocking support for the troops. Nobody else.
Any compromise that funds the war through the end of the fiscal year isn't a compromise at all, it's a capitulation. As I have said repeatedly, Congress should send the president the same bill he vetoed again and again until he realizes he has no choice but to start bringing our troops home. "

Democrats Play It Safe

The democrats caved in. The war spending supplemental will reach Bush's desk with little more than progress reports in the way of added accountability. Democrats, facing a Memorial Day weekend with unfunded troops, made the necessary political calculation.

Apparently we will now be looking forward to September when the good general, Petraeus, reports progress and advises us on the best course going forward. Then we'll go from there. "The Skeptic" has a problem with this. First, generals don't set policy. Civilian officials set policy and generals execute. We should not be waiting around for some general to tell us what to do. Second, what do we think the general is going to say? "We can dig in and prevail victorious." No general is going to say that "we've lost." Generals get paid to fight. War is good for business.

Dubya seems determined to drop this war in the next president's lap. That could be a liability for republican presidential candidates since they are so hawkish. How do you remain a war-mongering hawk while distancing yourself from Iraq? It might be to the advantage of democratic candidates, ex. Hillary who is herself a hawk. The longer the war goes on the bigger an issue it becomes.

Sure, Hillary pays lip service to the anti-war voters but she is a hawk through and through. She only came around to her current position of opposition to the war when it became decidedly fashionable to do so. Furthermore, she wants to sustain military bases in Iraq indefinitely. So if she becomes the nominee anti-war voters could be unrepresented in the upcoming election.

Inflation Obfuscation

Last week our trusty government released it's inflation stats for April. Overall, consumer prices are said to have rose 0.4% from March and 2.6% from a year earlier. The closely watched "core" number, excluding food and energy, came in at 2.3%.

First off, it's amazing that Wall Street, and more specifically our bond markets, fail to question these numbers. Does anyone really think inflation is running below 3%? Guess it's not surprising seeing as Wall Street also buys in to this whole "core" number absurdity.

In reality, inflation is running about 5%. At least. This does not show up in government statistics because the numbers are tortured. The goal posts are being moved. We are engineering new and creative ways to eliminate inflation through statistical wizardry. Our government's numbers, in this case, are so unrealistic as to be deemed useless.

This Week's Stock Pick

Tough decision this week. "The Skeptic" sees many ways to exploit our frothy markets. The original list was 18 stocks. Brought that down to four. After further deliberation...EMC is the pick for this week. Similar to last week's pick EMC is completing a long term consolidation. In this case, very long term. EMC has traded in a range since 2003! Currently trading at 15.82, the very top of it's range, this stock appears poised for higher prices. A decisive move above 16 would likely bring in more buyers.

Disclosure: "The Skeptic" owns this stock and is not a broker. Should you decide to buy this stock you may lose money. It would serve you right.