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Global oil depletion is not immune to the Law of Receding Horizons, the Law of Diminishing Marginal Returns, nor it seems to the Law of Unintended Consqequences. The Grangemouth refinery shutdown has apparently caused work on a new wind farm in Scotland to shut down for lack of diesel fuel. This is a real time example of how lack of systems analysis of our energy problem will lead to unanticipated problems.

Tomorrow we will highlight another in a series of analysis on Energy Return on (Energy) Investment. Though measuring an energy projects profit and cost in terms of energy is very important, all energy sources are not the same, and the word ‘alternative’ does not equate to ’substitute’. In effect, quality matters. Despite some attractive substitutes to oil and gas from an energy return perspective, ALL fuel sources are now heavily subsidized by an infrastructure built and maintained by cheap and constantly available liquid fuels.
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In the comment section of theoildrums coverage of the Grangemouth refinery shutdown, we find that a diesel shortage has caused work to stop on a $300 million wind farm.(hat tip to Undertow)

MORE than 100 construction workers could face the dole after the fuel crisis brought their project to a halt.

The drivers for Glasgowbased AB2000 were grounded at the new wind farm at Fenwick Moor, Ayrshire, on Thursday after contractors Morrison Construction were unable to find more diesel.

The job was restarted on Friday but bosses fear the limited fuel supply will soon run out and lead to job cuts.

Ted Reilly, of AB2000, said: “We have 70-odd vehicles stuck there because we are hiring men and vehicles to a contractor which can’t supply diesel. That situation can’t go on any longer.

A wind-farm construction project brought to a standstill because of a lack of fossil fuel.

This highlights an ongoing theme discussed on this website about wide boundaries and energy quality. We need energy to perform work. How we define ‘work’ is dependent upon how our society is structured. A handful of decades ago, crude oil, despite being extremely powerful and right under their feet, would not have meant much to Saud tribespeople in the Arabian desert, who valued fast, healthy horses as the ‘energy quality’ that powered their society. Similarly, today we are utterly dependent on crude oil and its refined end products of gasoline, diesel fuel, jet fuel and heating oil.

Figure 3. The global flux of fossil and renewable fuels. (Source: Smil, V. 2006. “21st century energy: Some sobering thoughts.” OECD Observer 258/59: 22-23.)Click to Enlarge

Water, water everywhere but not a drop to drink

There are large amounts of solar energy hitting the planet. The potential scale of alternative energy is massive (at least when measured in its unharnessed state). It IS possible to replace a fossil fuel infrastructure with nuclear, wind, solar, hydro, etc. but we will need a 20 year headstart and a change in the demand system. Just like most people were unaware of how much systemic risk existed in the financial markets until recently, there is similar unquantified systemic risk in the energy markets. We need diesel fuel, cheaply and consistently avaiable to move parts and components around for wind tubines and solar panel production. We need large amounts of natural gas and electricity to produce crude oil. We need well maintained asphalt roads and clean drinking water and municipal infrastrucuture to keep employees moving to their jobs at alternative energy manufacture. We need hospitals and healthy insurance companies for employees to feel secure and safe in their jobs, etc. There are many many interconnected threads within modern society that all link back to cheap oil and gas.

A great concern of mine is the likelihood of falling into the “Tragedy of the Energy Investing Commons”. As the energy crisis deepens, more money, expertise and resources will be thrown at any energy alternative that produces energy, irrespective of its quality, density or other energy properties. Many of these technologies will be dead ends. Many will produce some energy. Some will be procure new forms of energy valuable to future society, and at a meaningful scale. However, all will drain resources, both liquid fuels and non-energy inputs away from non-energy society. If their energy contributions are marginal, or of differing quality than we depend on, this will accelerate the usage of our remaining high quality fossil stocks. If our energy consumption was well-diversified, and/or redundant, a shortage in diesel would not lead to problems with wind turbine construction.

Until we can make wind turbines from wind, this civilization may be increasingly subject to Murphy’s Law.

(for an excellent primer on the importance of energy quantity and quantity, see Professor Cutler Clevelands Energy Transitions Past and Future)

Where’s the Demand Destruction?

Oil is close to $120/barrel, so where’s the demand destruction? The latest EIA figures actually show a 0.57% increase in US gasoline demand year on year over the last week. The week prior also showed an increase in gasoline demand, but the 4-week average still shows a 0.5% decrease because of lower demand in 2008 for the weeks ending 4/4/08 and 3/21/08. Regardless of which statistic one chooses, this is hardly a convincing case for demand destruction. Admittedly, historical demand growth has been near 1.5%, and the per capita gasoline use is slightly lower since the US grew roughly 0.883% last year. At best, this is not significant “demand destruction.” Take a look for yourselves: here are the EIA’s full historical tables for gasoline demand, both week ending and 4-week average. With statistics available to show both minor increases or decreases, recent reports in the press and blogosphere consistently publish reports of declining demand. Other articles, also consistent in claiming that we’re driving less, rely on entirely different sources: Businessweek recently claimed that “traffic” as measured by the Federal Highway Administration is down 1.4% last year, and MasterCard claims that purchases at the pump are down 6.8% since last year. If EIA statistics are even vaguely accurate, then MasterCard’s figure seems untenable–what is happening to all the additional gasoline being purchased? Gasoline stocks are up from a year ago, but nowhere near enough to make up for these discrepancies. And, of course, it is possible that EIA data is off–there are even internal discrepancies in the EIA’s reporting, with this week’s Weekly Petroleum Status Report highlights (.pdf) claiming that the 4 week average for gasoline demand rose by 0.9% over last year, directly contradicting the EIA’s data tables (referenced above) that show a 0.5% decline in the exact same statistic. Amidst this confusion, the consistency of reporting about a decline in gasoline demand seems like cherrypicking.

With this uncertainty surrounding the concept of “demand destruction,” it’s time to take a deeper look at the mechanics behind how demand destruction occurs. Specifically, this essay will limit its focus on two components of demand destruction in gasoline: the time-lag between high prices and reduced demand, and the need to price alternatives to each gallon of gasoline we consume. Does a lack of demand destruction when oil is well over $110/barrel mean that prices must go even higher to destroy demand? How much higher? Or is it enough that prices hold at this level for long enough to cause people to gradually make long-term purchases with this price in mind, and thereby destroy demand? How long? Finally, how much of current US demand destruction (to whatever degree it exists—even if only as a decrease in growth of demand) is due to current economic conditions, and how much can be attributed directly to the price of oil?

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Time-Lag in Demand Destruction: Major Purchases Drive Energy Consumption

One way that demand destruction occurs is that, when making major energy-consuming purchases such as a car or a house, people choose more energy efficient alternatives when the price of energy is higher. These choices happen over time—everyone won’t (and couldn’t) rush out tomorrow to buy a more fuel efficient car, even if gas suddenly hit $10/gallon. How long is the time lag in these choices? Moody’s says that the average time between car purchases in the US is 4.33 years. Even if we could figure out a magic number at which every consumer will pick a new car based on improved fuel efficiency, it would take at least 4 years to affect this transition. In reality, however, no one knows what percent of people would change to a more efficient car, and how much more efficient that new car would be, based on a given price of gas. The latest data does show that sales of SUVs and pickups were down 27% and 14% respectively, compared with a general automotive sales decline of only 8% for the first quarter of ‘08. This suggests that current oil prices are already significantly impacting consumer car choice when they decide to purchase a new car, but that this transition will take a long time–remember, the 4 year figure to change to a higher fuel-economy automotive fleet is only valid if every new car purchase is more fuel efficient. These numbers suggest that we’re moving toward greater efficiency, but not in a great hurry. The decline in overall sales also suggests that an increasing number of people are financially stuck with their present vehicle, even if it gets poor gas mileage.

What about houses? Americans move houses on average every 5 years. Well, at least they did when they were upwardly mobile in a growing economy and sub-prime credit was easy to come by. It is yet to be seen how the current economic situation will change this figure, but it seems likely that our rate of moving will slow. In theory, when we move homes, we could choose more energy-efficient homes (better insulated, better solar design), or, more germane to a discussion of gasoline demand, we could choose homes that require less driving to commute to work, shopping, etc. However, the massive sunk-cost in suburbia must be taken into account. While these homes may go down in value because of the commuting difference, they will likely remain largely occupied because, while the cost of commuting may skyrocket, the cost of ownership in the suburbs may decline to even this out. If a family currently consumes 50 gallons of gasoline per month in suburbia, and could cut this to 20 gallons per month by moving to a more central location, then at $10/gallon this would save them $300/month. If ownership costs (or rent) in the suburban location declined by more than $300/month, then (ignoring many other factors) it is more financially viable to remain in the suburbs. Additionally, when Americans make the average, once-in-5-year move, they don’t all move to a newly constructed house. The average American home is about 30 years old, and despite the promise of “New Urbanism” or downtown condo living to reduce gas consumption via commuting, the turnover of America’s housing infrastructure will take time.

ROI: Pricing Alternatives to Marginal Gasoline Consumption

Demand destruction happens in other ways than buying a more efficient car or moving to a house closer to work. It is also possible to reduce demand by choosing a less convenient, less pleasurable, or a slower option over another that consumes more gasoline. Take carpooling, for example. The passenger-miles-per-gallon of any car immediately doubles when a single commuter adds another commuter as a passenger. Four adults in a Honda Civic hybrid would average about 200 passenger-miles-per-gallon. Even four adults in a Hummer would get respectable mileage per passenger! If this is so simple, then why don’t we all do this? Because carpooling costs time, both in the time required daily to pick-up and drop off the additional passenger, time required to set-up the carpool system, and time in the form of inconvenience of people unexpectedly needing to work late, not being ready for pick-up on time, etc. How do we value this? There are no statistics that I’m aware of that track % of people who commute with one or more commuting passenger, or that track something similar, nor do I have any statistics for average “inconvenience time” per additional carpool passenger. However, at some gasoline price level, it makes sense for any given person to arrange to carpool instead of commute by themselves. At $4/gallon, however, my impression is that most Americans will still value the time saved more than cutting their gasoline bill in half. The calculations for riding the bus, light rail, walking, riding a bike, etc. are essentially the same—how do you balance the money saved on gas with value of added inconvenience and additional time? For some people the decision clearly makes sense, it may even be more convenient and save time—but those are the people most likely to already carpool, ride the bus, etc. New demand destruction doesn’t occur until the price of gasoline changes the calculus, where it didn’t make sense for a given individual at $3/gallon, but it now does makes sense at $X/gallon. How high would gas prices have to be for it to “make sense” for 50% of suburban commuters to carpool or ride the bus?

Economic Cycles and Demand Destruction

Ultimately, the kind of calculus suggested above is inextricably linked to the health of the broader economy. Rich consumers with large and growing disposable incomes are likely to value their time and potential inconveniences at a much higher rate than those struggling to buy groceries (notably, those with high disposable income are also the most able to pay now to upgrade to more efficient homes or cars, but least incentivised to do so). Another point to consider in evaluating demand destruction is the cause of economic problems. If economic problems are caused by high energy prices, then it seems accurate to consider demand destruction attributable to these economic problems as demand destruction caused by high energy prices. However, to the extent that economic problems are the result of an economic cycle, and not due to high energy prices, then the energy demand destruction that results does not seem accurately attributable to high energy prices. Our current economic troubles seem to be a function of both issues, but in my opinion more a short-term cyclical issue (inaccurate pricing of credit risk and the resultant correction, as I argued a few weeks ago). At least some of the decrease in US oil demand can be attributed to economic cycles, and not to high oil prices, but we probably cannot separate these causes and isolate the portion of demand destruction caused by economic cycles. Can we even say whether or not demand would actually continue increasing at $120/barrel IF there was no “Credit Crunch”? Does a statistic like GDP/barrel of oil consumed allow us to see through this fog? It might if we had a very accurate measure of inflation, but in my opinion the CPI certainly doesn’t qualify. For that reason, comparing the 2006 GDP/barrel consumed vs. the 2007 GDP/barrel consumed is also problematic. Furthermore, it does not necessarily follow that, in a cycle-driven recession, GDP will shift to more energy efficient paths.

Conclusion

With gasoline well over $3/gallon, and oil well over $110/barrel, there does not seem to be any significant demand destruction in the US. Reasonable people can argue that demand is up about 1% or down about 1% since this time last year, but I am defining this entire range as “not significant.” What is the boundary of “significant” demand destruction? By significant, I mean significant impact on the supply-demand equilibrium for oil. Per-capita gasoline consumption, while important from a standard-of-living perspective, at most impacts elasticity of demand, and does not fundamentally change the supply-demand equilibrium (growing populations don’t impact geology), so I am focusing on absolute demand for this analysis. If a low-end estimate of the decline rate for oil production post-peak (or net oil exports at present) is 5% per year, then I think that is the boundary for “significant” demand destruction. Demand destruction of 1% per year on an ongoing basis, compared with oil production decline of 5% per year, won’t have a significant impact on the supply-demand equilibrium. Conversely, a year-on-year demand destruction of 5% compared with an oil production decline of 5% does have a significant impact on the supply-demand equilibrium because it negates the impact of the production decline rate—this is effectively what Richard Heinberg suggests in his Oil Depletion Protocol.

If this analysis tells us anything, it is that there is no easy way to calculate exactly what price point will cause demand destruction of X%. I remember when many proclaimed that $3/gallon gasoline would cause huge demand destruction. Now many of these same people proclaim that demand destruction will explode at $4/gallon or $5/gallon gasoline. Europeans, though admittedly in a very different situation, don’t seem to be driving significantly less at $8/gallon. In the end, we simply cannot know how demand destruction will unfold, and I think that is highly significant for calculating the economic impacts of rising oil prices—we have no empirical basis to either prove or disprove propositions as opposite as 1) present prices, if maintained indefinitely, will cause sufficient demand destruction to keep prices from rising significantly higher, or 2) prices will be able to at least triple before demand destruction begins to keep pace with supply declines. I know that there are nearly endless opinions on this point, but the significance of this analysis is that we cannot prove either point of view to be right or wrong.

It’s also important to highlight that this essay only considers demand destruction within the United States, while the global oil market is inherently global. What will it take (both psychologically and economically) to see 5% demand destruction per year in the US? What are the prospects for global demand destruction of 5% per year? Even if we aren’t currently witnessing a decline in global production of 5%, evidence suggests that net exports are declining at least that fast…

Michael T. Klare: The U.S. and China are over a barrel

Given that the United States and China are the world’s two biggest users of petroleum — a fuel whose worldwide availability is likely to peak at 100 million barrels or so per day in the next five years or so and then commence an irreversible decline — it makes great sense for us to collaborate in the development of oil alternatives and energy-saving technologies.

Such collaboration could take the form of joint ventures to develop advanced biofuels (not derived from food crops) and transportation fuels extracted from coal (without releasing heat-trapping carbon dioxide into the atmosphere). It could also include the development of super-light vehicles, advanced hybrid engines and other energy-saving systems. Such endeavors have been discussed on a preliminary basis by U.S. and Chinese officials, so it is hardly utopian to envision a more elaborate and constructive undertaking of this sort.

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Oil aplenty, but investment needed

THE world is paying dearly for two lost decades in the oil industry - from the mid-1980s until the mid-2000s - when prices hovering around $US20 a barrel discouraged investment.

There is a thick soup of factors contributing to the dizzying rise in oil prices - among them the fall in the US dollar, surging demand from China and the rise of commodities as an asset class - but the most important is the lack of investment.

Crude Oil Hits $119- Ways to Profit From Peak Oil

If oil prices stayed at $180 to $200 per barrel for more than a year or two, huge new oil supplies would come on line, causing crude prices to plummet and tipping the market decisively back towards consumers. The environmental cost of getting really large quantities of oil out of Athabasca and Colorado would be immense, particularly if we attempted to supply the needs of the entire U.S. market from these sources, but at $180 per barrel, I’m confident that the economic necessity would probably trump the environmental problems.

Here’s a bad idea: Gas from trees

Already, Weyerhaeuser and Chevron have joined forces to develop “treecell technology” to manufacture cellulosic ethanol. As you read this, ethanol factories are popping up across the United States like gaping mouths hungry for a constant supply of forest. And, conveniently, just when industry develops the technology to exploit even the smallest tree for profit, the Forest Service announces that “more than half of Oregon’s 29.7 million acres of forest lands” are overgrown and in need of “thinning” to keep down fire risk. What a coincidence!

In Baghdad, power supply may worsen

Last July and August, massive blackouts stretched across parts of Baghdad. This summer could be worse because drought has cut in half power generated by hydroelectric plants. Add war, attacks on transmission lines, antiquated equipment, overdue maintenance and local corruption or bureaucracy and reliable electricity remains out of reach for most Iraqis.

Photos in Oberlin illustrate our consumption numbers

The Allen Memorial Art Museum at Oberlin College is having a Malthusian moment. Thomas Malthus was the early 19th-century English economist who theorized that human populations always outgrow their food supplies, which leads to shortages followed by the four horsemen of war, pestilence, famine and plague.

With oil prices hitting $117 a barrel and riots over high food prices occurring in poor countries around the world, the spirit of Malthus seems to hover over the Allen’s exhibition of photographs by Seattle artist Chris Jordan.

Loss of fuel economy from ethanol-blended gasoline hits motorists in the wallet

Charles Kigar doesn’t think twice when he has a choice of buying a gallon of conventional gasoline or a gallon of gas that contains ethanol at the same price.

He buys the gas without ethanol.

The reason is a simple matter of science. Conventional gas delivers more energy than a gallon that contains ethanol.

…If it’s E-85, a blend containing 85 percent ethanol that can be used in specially equipped vehicles, the energy loss soars and more than offsets its lower cost, even though E-85 is about 60 cents per gallon less at retail than conventional gas.

Oil majors fail to replace reserves

With the exception of BP, IOCs in 2007 failed to replace reserves, according to U.S. Securities and Exchange Commission definitions of proved reserves: ExxonMobil. ExxonMobil ended 2007 with proved reserves totalling 22.7 billion barrels of oil equivalent (boe, a unit of energy companies use to combine oil and natural gas reserves).

Exxon shuts nearly all Nigerian oil output

LONDON (Reuters) - Exxon Mobil has shut nearly all its Nigerian oil production, totalling around 770,000 barrels per day (bpd), due to a workers’ strike, a senior oil official and industry sources said on Monday.

The outage, which represents nearly 40 percent of total Nigerian output, comes after a series of attacks this month by militants in the Niger Delta which has shut-in an additional 169,000 bpd from Royal Dutch Shell.

PetroChina sees steady oil output at Liaohe heavy oil field over the next 10 yrs

BEIJING (XFN-ASIA) - PetroChina, the country’s top oil and gas producer, aims to keep the output of the Liaohe field — China’s largest heavy oil field — steady at 12 mln tons a year for the next 10 years, chairman Jiang Jiemin said.

The company will increase exploration in the field’s western onshore block and a shallow water area, Jiang said in a statement on the website of China National Petroleum Corp, the parent of PetroChina.

Indonesia to miss oil production target this year as subsidy threat looms

Already under threat of a fiscal calamity amid soaring oil prices and unrealistic government fuel subsidy spending, Indonesia is expected to miss this year’s oil production target of 977,000 barrels per day (bpd), the Energy and Mineral Resources Ministry said.

The ministry announced in a media statement over the weekend the country would only produce 965,000 bpd, 12,000 bpd short of its target, as some oil producing companies revised down their output targets.

Russian oil competes despite flat output

LONDON (Reuters) - Russian oil output may stay flat but offers a competitive return as global oil companies face the rising cost of developing tougher, less accessible fields, an owner of Russia’s No. 3 oil company said on Friday.

“It’s true production reached its peak. It’s true we might not see the same rate of growth,” said Viktor Vekselberg, a major shareholder in BP’s Russian oil venture.

“But we will see production on the same level. Maybe it will decline a little, a few percent. But nothing catastrophic.”

Mexico’s Oil Dilemma

As production declines, state-run Pemex struggles to find new reserves under daunting restrictions on foreign involvement.

The need to rethink energy security

Much has been said about Asia’s surging demand for energy, fuelled by its spectacular economic growth and an expanding middle class. Indeed, the total consumption of energy in Asia and the Pacific increased by 70% between 1992 and 2005.

Yet, consumption per person is still relatively low by global standards: 749 kilogrammes of oil equivalent (kgoe) in 2005, compared with the global average of 1071 kgoe.

Japan’s March Russian fuel oil imports almost double

TOKYO/SINGAPORE (Reuters) - Japan’s imports of Russian fuel oil nearly doubled in March versus February to the highest in at least 16 months, as some refiners turn to cheaper alternative feedstocks due to record-high crude oil prices.
The world’s third-largest oil consumer imported a total 275,803 tonnes of the distillate-rich Russian fuel oil (M100) last month, up 135,803 tonnes from February’s imports, data from Japan’s Ministry of Finance showed showed on Monday.

Oil alternatives remain elusive: Could we not just try to use less?

While natural rock oil came along just in time to save the whales and light up Charles Dickens’ writing desk, attempts at its displacement are proving futile.

Recession Diet Just One Way to Tighten Belt

Stung by rising gasoline and food prices, Americans are finding creative ways to cut costs on routine items like groceries and clothing, forcing retailers, restaurants and manufacturers to decode the tastes of a suddenly thrifty public.

Saudi Crown Prince in Geneva for medical tests

RIYADH (Reuters) - Crown Prince Sultan of Saudi Arabia, the world’s largest oil exporter, has arrived in Switzerland for unspecified medical tests, the official Saudi Press Agency (SPA) reported on Monday.

Human warming hobbles ancient climate cycle

WASHINGTON (Reuters) - Before humans began burning fossil fuels, there was an eons-long balance between carbon dioxide emissions and Earth’s ability to absorb them, but now the planet can’t keep up, scientists said on Sunday.

The finding, reported in the journal Nature Geoscience, relies on ancient Antarctic ice bubbles that contain air samples going back 610,000 years.

A contract from Alpex Exports Pvt. Ltd. for a photovoltaic module assembly line for operations in New Delhi, India, has been awarded to Spire Corporation. This will be the company’s first solar energy facility and will support its growth into both the standard module, and Building Integrated Photovoltaic (BIPV) markets, says Alpex.

Orion Energy Group has announced that part of the wind farm that will supply Duke Energy, about 54 wind turbines, is now in commercial operations. An additional 33 turbines, some supplying Duke Energy and some supplying Vectren Energy Delivery, will be in commercial operation soon according to Orion.

BlueFire Ethanol Fuels, Inc. has retained Brinderson as its engineering, procurement and construction contractor for BlueFire’s Lancaster biorefinery in Los Angeles County, California. The 3.1 million gallon per year cellulosic ethanol facility will be built in a joint effort with MECS and Brinderson.