Archives for September 2009

BP's "giant" and Peak Oil

By chutay | 09/16/2009 | 11:40 AM

Last blog, the focus was the New York Times Op-Ed by MIT Economist Michael Lynch, "Peak Oil is a Waste of Energy". On September 2, the day this blog appeared, British Petroleum (BP) announced a “giant” oil discovery in the Gulf of Mexico. The discovery inspired several articles like this one in the Guardian, “Giant oil find by BP reopens debate about oil supplies.”

Now my intention is not to take on the press every week, but when surrounded by a target rich environment one must shoot. My experience is that for the most part the conventional media sticks with the conventional views and avoids the serious, rigorous, non-agenda based analysis found primarily on the internet e.g. The Oil Drum.

Lynch’s article confidently predicts “…the price will likely come down closer to the historical level of $30 a barrel…”  He sounds the all clear on Peak Oil and BP’s find, “…reopens debate about oil supplies”.

Just as the press missed the “it's-all-contained” financial meltdown, they are missing the story on oil depletion. Otherwise you would have heard about the ignored 2005 Department of Energy Report "Peaking of World Oil Production: Impacts, Mitigation and Risk Management," by Robert L. Hirsch known as the Hirsch Report. You should read it.

I am not of the end-of–civilization or die-off ilk. But we are on the clock. When oil production goes into permanent decline, it will be a defining issue for humanity.

My intention for this blog is to present the data, attempt to clarify confusion and offer constructive strategies and tactics in the hope more decision-makers recognize the problem and elevate it to the highest levels of their organizations so serious actions can begin.

Oil by its nature is an unusual resource. It is non-renewable, produced in only two geological periods in a few unique places – most long since explored- where seven very specific geological conditions must be present. It must be found, brought to the surface, refined and moved before used.

It has the highest energy density of any portable energy storage medium making it the perfect fuel for 95% of the world’s transportation and especially important for supply chains now mostly dependant on cheap and abundant oil.

Transitioning from conventional oil sources to unconventional sources — heavy oil, oil sands, oil shale, coal to liquids, biofuels, natural gas etc., takes time, money, work and wisdom. There are no quick fix alternatives to replace oil for transportation.

There are alternative sources of energy, but they will not magically appear. Peak Oil is a liquid fuels problem — not energy in general e.g. electricity does not help without massive, slow and expensive replacement of transportation fleets with battery-operated vehicles.

My hypothesis has been, and remains, that Peak Oil is coming and presents great danger to the United States and the global economy. Forecasts range from 2005 to 2050 — clustering near 2012. The Hirsch Report posits that to avoid severe worldwide pain rapid large-scale mitigation efforts must begin 20 years before peaking.

So what does BP’s giant oil find in the Gulf of Mexico tell us about “the debate on oil supplies” and the peaking of world oil?

The BP Tiber discovery is good news for BP and is tangible evidence that technology for extracting oil is improving, but it does little to “reopen the debate about oil supplies.” If anything, it is a canary in the coal mind. 

The oil will be pulled from deeper in the earth than Mount Everest is tall – six miles. It is 250 miles offshore, 100 miles from the nearest pipeline and in the world’s most active hurricane zone. There is nothing routine about this discovery.

These are unchartered waters and considering the cost of development and production - $3 to $4 billion, oil prices need to be in the $70-100 range (adjusted for inflation when the oil actually starts flowing) for Tiber to be profitable.

 BP doesn’t know how much oil is down there nor how long it will take to see it flow. They are speculating that the total find is about 3 billion barrels with an eventual peak flow rate of around 200,000 barrels per day. That's about one day's supply for the world in a year and 1% of our daily requirement. If history is a guide, no major oil will flow from Tiber for at least a decade.

There are many good things about Tiber- proof of exploration technology, additional reserves for the United States,  potential big benefits for our trade imbalance as we import less and huge taxes and royalty income for our citizens plus sustained employment for many people; but it doesn't change the clock on Peak Oil by any meaningful degree.

If anything, Tiber is proof of how hard it is to find oil, even with the amazing 3-D seismic and drilling technology now available. In order to reach the discovery, it took the deepest well ever drilled in the oil and gas industry.

The need to go this deep is a function of Peak Oil. It signals that the low hanging fruit, like setting up a land rig and poking a hole in the ground in Texas or Saudi Arabia, was picked long ago. Oil patch technology has become very good at revealing how little easy oil is left.

Along with all good things it brings, the Tiber discovery is a sign that we are near the Peak and time is short.

Defending Fatih

By chutay | 09/01/2009 | 4:58 PM

On August 24, 2009, the New York Times ran an Op-Ed by MIT economist Michael Lynch, "Peak Oil is a Waste of Energy".

For the last five years, I have tried to educate the supply chain profession about implications of Peak Oil and this week marks my first blog on energy for DC Velocity Magazine. So in view of Lynch’s Op-Ed have I wasted the last five years and should I just forget about the blog? I don't think so.

 As introduction, I am a lifelong supply chain practitioner who started railroading at age 16. I am also a native Texan. Transportation and energy have always been important parts of my life.  In 1973, when the Arab oil embargo hit, I was working for a tank truck carrier in Houston. I saw what happens to supply chains  when oil gets expensive and in short supply - plants closing, gasoline shortages, reduced speed limits, rationing of equipment, serious inflation, unemployment and recession.

In 2004, oil prices moved from $20 to $40 a barrel and I noticed. I also noticed the supply chain world was mostly silent on energy and energy prices. Had everyone forgotten?  The more I studied the geological, geopolitical, oil industry infrastructure and political situation the more concerned I became. 

 My goal became to educate the supply chain world about what was coming. Subsequently, I have presented to over 3000 supply chain people, consulted with companies and written several articles including, "The End of Cheap Oil: are you ready?"The subtitle of the article is, “Supply chain managers must take action today to prepare for the end of the Oil Age tomorrow. “

I stand by everything in the article. There are no readily available substitutes for oil for transportation in the foreseeable future and world oil production is close to or past peak. Mr. Lynch would certainly disagree. He sees oil prices returning to $30 a barrel in the future with a virtually unlimited supply. I not only disagree, but I believe Lynch's article is misleading and dangerous. Some may not be familiar with the concept of Peak Oil, so let’s start with a real world example.

Texas has been the most prolific oil producing area in the world.  Texas annual oil production peaked in 1972 at 1.26 billion barrels. In 2008, annual production was down to 351 million barrels. In 1972, there were 167,000 wells each producing 20.6 barrels per day. In 2008, there were 154,000 wells producing 6 barrels per day. 

So  in spite of huge price increases ($3 per barrel in 1972 vs. $147 per barrel in 2008), vastly improved technology, extensive exploration, sustained drilling, massive investments and some of  the best people in the world at finding oil, production declined by almost 75% between the peak in 1972 and now.

This is how all oil fields work. Production increases until a maximum rate of extraction is reached then flow rates start down the slope. When approximately half the oil has been pumped, the field enters a terminal decline rate, exactly what has happened in Texas. This is the definition of Peak Oil.

Many respected geologists, oil industry executives and economists believe that global oil production has already or soon will replicate the Texas model and begin an inexorable decline. One of those is Fatih Birol, the top economist at the International Energy Agency (IEA). Birol recently said that IEA’s analysis shows the world will reach peak production in 10 years.

Lynch attacks Birol  in his article., “Well, just when we thought that the collapse in oil prices since last summer had put an end to such talk, along comes Fatih Birol, the top economist at the International Energy Agency, to insist that we’ll reach the peak moment in 10 years, a decade sooner than most previous predictions (although a few ardent pessimists believe the moment of no return has already come and gone).”

The International Energy Agency is not some radical group. According to their website, “The International Energy Agency (IEA) is an intergovernmental organization which acts as energy policy advisor to 28 member countries in their effort to ensure reliable, affordable and clean energy for their citizens.”  Founded during the 1973-74 oil crisis and long known as the world's energy “watchdog”, the IEA had long been a conservative proponent of a view that world oil supplies would continue to expand.

This changed significantly with their annual 2008 World Energy Outlook Report published last November which stated unequivocally that, “The Era of Cheap Oil Is Over.”  

Here is the lead paragraph from the Executive Summary:

“The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable — environmentally, economically, socially. But that can — and must — be altered; there’s still time to change the road we’re on. It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply. What is needed is nothing short of an energy revolution.”

Second paragraph:

“Oil is the world’s vital source of energy and will remain so for many years to come, even under the most optimistic of assumptions about the pace of development and deployment of alternative technology. But the sources of oil to meet rising demand, the cost of producing it and the prices that consumers will need to pay for it are extremely uncertain, perhaps more than ever.”

Fatih Birol, far from being someone to be criticized and ridiculed, should be commended for stepping forward and conveying the rapidly deteriorating energy situation to world policymakers. The IEA acceptance that a peak in world oil production is imminent joins  long ignored U.S. Government Reports  and many others to shatter the illusion that oil resources magically turn into cheap oil to keep everything moving as before.


The opinions expressed herein are those solely of the participants, and do not necessarily represent the views of Agile Business Media, LLC., its properties or its employees.

About Chuck Taylor

Chuck Taylor

Chuck Taylor has held senior management positions with Nabisco Brands, Ryder System Inc., Burlington Northern/Santa Fe Railroad, Mercer Management Consultants, Tri Valley Growers, American National Can, ServiceCraft Logistics, and Norbridge Inc. and recently founded an organization called Awake! He founded Awake! out of concern the supply chain profession is not informed about the critical changes facing it with the end of cheap oil. One goal is to raise awareness so supply chain professionals will understand the stakes and take an active role in shaping energy policy.

Video: Chuck Taylor talks about the impact of oil prices on the supply chain.


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