Saturday, November 17, 2012

UPDATE-2: Peak Canada? No, it's still peak oil

Just came across this: Peak Oil? More like Peak Canada

Now, my posts over the last few days on Alberta's financial and energy situation have gotten a lot of reads, and since I am one of few Canadians talking about peak oil and how it affects Canada I can't help but think that perhaps this is a response or was at least inspired by my posts. If not, then the timing couldn't be more perfect and as such I am going to respond to it anyway.

What is Peak Oil?

The author of the article linked above has proven that he has no idea what the concept of peak oil is or actually means. People who have not studied peak oil or the anticipated effects for one often confuse it with oil depletion, but the two are not related at all. Peak oil is generally speaking the phenomenon which occurs when you have used up half the resource in a single well, across a country, or across the entire world. There is no law written in stone which says production on the way up will be smooth, and no such law for what production looks like on the decline.

Peak oil also describes the cost. Oil once past the 50% mark is extremely energy intensive to produce. The so-called "energy renaissance" being experienced in the U.S. is being driven by the energy intensive process known as "fracking".
It predicted what we all know now – that the U.S. would become the world’s largest petroleum producer by 2017 and a major world exporter not long afterward, exceeding Saudi Arabia, Libya and Iran and dwarfing Alberta, and that, by 2015, it would overtake Russia as the world’s largest producer of natural gas. “An energy renaissance in the United States is redrawing the global energy map, with implications for energy markets and trade,” the report concluded.
Let's put this energy renaissance into perspective.

 Now, according to various sources U.S. crude production has reattained levels not seen since 1994-1998. As you can see though, that comes nowhere even remotely close to the peak attained in 1970. With the energy intensive shale gas and other extreme energy solutions to get oil, production will not be reaching those levels again. What you're seeing with this so-called energy renaissance might best be described as a "dead-cat-bounce".

Jevon's Paradox

Jevon's paradox provides more evidence that the author has ventured into an area he has not suitably studied. Energy usage is directly tied to GDP, and the nature of our infinite growth economy ensures that any energy efficiency gained will be matched by an equal increase in energy consumption. A lot of people have been pointing to a depressed demand coming from the U.S. since the 2008 collapse and conclude that that must be all of this energy efficiency at work. Rather, it is the natural result of the economic collapse. demand was destroyed, simple as that, and enough economic stability cannot be attained to keep consumption on the upswing. Oil and gas prices ensure that if momentum does take hold the credit limits of the consumers then take effect. Sooner or later driving becomes unaffordable and people cut down on this. remember, just earlier this year gas prices were on every front page.

The understanding of the economic reactions to peak oil is just as essential. Oil production is not some self-contained entity, but rather an integrated economic component, one which responds to economic events. Production as a result goes up and down but on a long term timeline, clearly the trend is downwards and this temporary glut of fracking and extreme energy isn't going to last as long as people think it's going to.


I don't know, I'm going back and reading this post and I think there is still information that can be added to the situation.

Even as new production ramps up, existing production is in decline

Over time we have opened up a large amount of wells and from the moment we start extracting resources from them those wells go into decline. It is often overlooked that to have a stable, sustainable, infinite growth economy supplies and production must continue to climb to offset the declines. This is why those who advocate the concept of "plateau oil" are over-simplifying the situation. What a "plateau" in oil would represent is a perpetual recession (not unlike what we have now) that continues forever. The problem with this theory is that recessions naturally have a direct effect on the economy, and the health and status of the economy and growth forecasts have a direct effect on oil prices and oil production. A perpetual recession (as we're witnessing) severely impacts confidence levels and since our economy is based entirely on confidence and not any sort of actual value-backing this can be quite destructive.

Understanding EROEI

There is only one currency in the world that is universal, and that's energy. Alberta's issue when it comes to oilsands development has been to look at the "price" in dollars instead of looking at the energy returned on energy invested. This is why Alberta's target oil price is always moving and is a function of the peak oil issue. The oilsands have an EROEI ratio of 3:1 which means that for every 3 barrels of oil/bitumen produced it took an equivalent 1 barrel of energy to produce.

To put this all in perspective, traditional domestic oil production had an EROEI ratio of around 200:1. So what does this mean? It means the amount of surplus capital has been significantly reduced and is in decline. Largely the world is still running off the fumes of traditional oil production. Western governments who are racking up debt based on established credit, established this credit during the period of cheap oil.

We're borrowing on the future based on the productivity of the past and with no evidence that the resources to cover our borrowing from the future are actually there or can provide the sort of returns needed to pay off the debt.

Natural gas might be cheap right now, but fracking is expensive

There is plenty of excitement in the U.S. about the new fracking boom, but what seems to be overlooked is the long-term costs in comparison to the cheap price the glut is creating.

Chesapeake loses US$2B on gas field writedowns amid slump

Chesapeake has been the poster child for the negative effects of the gas glut. While the temporary cheap price of gas due to the glut is excellent for consumers, it's not as excellent for the producers. The operational and profit margins are extremely slim and the resources required to do the process are only getting more expensive. The technology itself is an oil derivative, produced in factories, transported around the world and utilizing the supply chain.

Low Mississippi River water levels may halt barges
Despite severe drought, US farm income may hit record high

Half the U.S. is considered to be a disaster zone due to the drought, and now we're told that a water and energy intensive process called fracking is going to deliver an energy renaissance and that it will last for 30 years? Don't count on it.


Alright, I have one final point to make. I'm sorry this post has ended up so disjointed but the cause and effect of peak oil is very complex. All of the different dynamics to the issue provide for lots of places for misunderstandings.

From what I can gather based on the authors conclusions, he is essentially saying Canada banked on peak oil and now that the U.S. is having what is perceived as a long term energy boom Canada's bet was wrong. This is, frankly, absurd.

This conclusion is based on the assumption that had the U.S. not had it's shale gas boom the price of oil would have continued to rise exponentially as had been the pattern prior to 2008 and therefore the oilsands themselves must not be flawed, it is the market situation. What this ignores is that the flaw in the oilsand's financial viability is simply being made visible by the "lower" (remember when $80+ for oil was expensive? Wasn't that long ago) demand for oil attributed to the natural gas boom. The flaw always existed, the Alberta government's moving target for a profitable oil price shows this problem. Focusing on the reason for the price drop ignores the fact that all assumptions of profitability were made on an ever-rising price and that assumption is unto itself erroneous as it's absolutely ridiculous to think that high prices would be sustained and affordable. The basics of demand and supply blow holes in that assumption. The problem isn't centered around competing energy sources, the problem was adopting an unsustainable business model based on unrealistic oil prices which essentially said "what goes up never comes down".

Overall, what we call "cheap" oil today is relatively extremely expensive. The latest production floor on extreme energy ($80) was at one time, a short while ago, considered to be at the height of oil prices. $80 and above is not normal, yet because it's been like that for the last few years and the years leading up to the collapse of 2008 (which coincided with $147 oil) we've come to call it normal or "cheap". It's not cheap, it's just cheaper than recent highs.


The Arctic? Fracking? Oil sands? Offshore? This is all extreme energy, and it's the sort of energy a society might go after once they've reached peak oil.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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