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IEA WEO 2008: From the Perspective of Biophysical Economics
Dr. Charles Hall and David Murphy, The Oil Drum

TOD editor writes:
Editor's note: the following post is by Dr. Charles Hall and his Phd student David Murphy (EROI Guy), and is part of our on-going series reviewing the World Energy Outlook 2008, recently published by the IEA.

It is also the first post of a new 'channel' on The Oil Drum: TOD:EROI, where we will be posting essays, papers, and analysis on the biophysical aspects of energy. Our intent is to be a real time central clearinghouse for biophysical/net energy research and ideas. We have debated on calling it EROEI - Energy Return on Energy Invested, but have decided to keep it consistent with the acronym from the energy literature.

The post below critiques the neoclassical economic assumptions underpinning the IEA report and proposes future 'energy watchdog' reports utilize an alternative approach grounded in biophysical concepts.

This week's IEA report, predicting 106 mbpd of oil production in the year 2030, and various price forecasts along the way, gives us more of the same from our international energy institutions whose fundamental assumptions remain broadly unquestioned.

It is an open but critical question why anyone would continue to take conventional (neoclassical) economic theory seriously given the events of the last month, not to mention the repudiation of the “Washington consensus” by just about all Latin American countries and the many articles that have been written recently (and not so recently) that debunk some or all of the basic neoclassical assumptions (e.g. Leontief, 1982; Hall et al., 200l; Gowdy and Erickson, 2005; Bouchard, 2008; Galbraith, 2008; Nadeau, 2008 - - from many others).

Nevertheless in this report we see the IEA, after making a good initial statement about the reality and importance of peak oil, revert back to predicting future oil supplies based on the same unproven neoclassical economic theories, including, most basically, an assumption of intrinsic growth of demand for oil at 1.6 percent per year indefinitely (click here for a review of the modeling in the WEO).

This economic theory has allowed for the continued abuse of the words ‘proven’ and ‘probable’ when predicting reserve quantities, and in this case, has led the IEA to report that ultimate recoverable reserves from conventional sources total 3.5 trillion barrels, and from unconventional sources upwards of 6.5 trillion barrels.

This report, and economics more generally, completely lacks the understanding that those numbers are not only quite unproven but irrelevant and useless by themselves, for the important number is not “how many barrels are in the ground” but “how many of those barrels will be gained at a significant energy profit for society.” In effect, the notional figure of 106 mbpd gives the impression that oils net benefit to society will continue and even grow into the future.
(14 November 2008)
Plea to scientists and engineers from a former technical writer ...

The EROEI is very high! Little extra effort, many more readers. -BA

New German peak oil site comments on IEA report
Dr. Steffen Bukold, EnergyComment
IEA: WEO 2008 - Comments on the Oil Field Decline Analysis
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EnergyComment, the new German expert site for oil markets and oil politics, comments on the oil field analysis, the centerpiece of the oil-related results of the WEO 2008.

1. General Remarks

Its results are crucial for the estimate of investment budgets und the size of the future oil supply. It is a great step forward for the global oil debate that
the IEA report focuses on supply issues and does not derive oil supply from demand needs as in earlier WEOs.

The IEA estimate of a 6.7% annual production decline in post-peak oil fields is considerably higher than older estimates. It represents an enormous challenge for the investment efforts of private and, in particular, national oil companies. Low oil prices and a global credit crunch are not helpful in this respect.

A decline rate appraisal is an ambitious task which encounters a number of difficulties ranging from data availability to critical production profile assumptions. It is clear that any number can only be a rough estimate. In fact, the result of the IEA field sample was 5,1%; 6.7% is a rough projection for all fields. This does not diminish its relevance.

2. Critical Issues
However, there remain a number of critical issues which need to be addressed in future analyses:

... Keep it up!
Despite these methodological challenges the WEO results is of high relevance for oil policy makers. The IEA and its new boss Tobuo Tanaka should be encouraged to address even more 'hot potatoes' of the oil debate and continue to caution the world against a coming oil supply crunch.
(14 November 2008)
Offered as a press release through PR-Inside.

According to the About Us page, the group is independent and unconnected to any special interest. The founder and leader is Dr. Steffen Bukold:
EnergyComment ist unabhängig und an keine Einzelinteressen oder Lobbygruppen gebunden. Wir bemühen uns um eine unvoreingenommene, aber dennoch klare Analyse und Kommentierung der Ereignisse. Gründer und Leiter von EnergyComment ist Dr. Steffen Bukold. Er hatte sich zunächst mit den Themen Verkehr, Infrastruktur und Finanzmärkte beschäftigt. Seit 2004 konzentriert er sich auf das Thema Öl. Als Forscher und Berater war er viele Jahre in den Niederlanden, Belgien und Frankreich tätig und lebt nun in Hamburg.

Peak Oil's Bell Is Ringing
Praveen Jaiswal, Seeking Alpha
... Peak Oil as a theory is difficult to prove, until the peaking occurs. Geologists and economists has described three forms of this:

* The “weak” form. This school believes that global oil production will peak unpredictably at some point in next 10 to 20 years. Until then, oil production will decline in most nations but will be offset by increased production from Middle East and Former Soviet Union (FSU) countries;

* The “moderate” form of peak oil will occur when the Middle East & FSU countries will be unable to significantly increase the production, although they will maintain current levels of output for many decades; and

* The “strong” form, the worst predicted, is when the Middle East will prove unable to increase its production, leaving a catastrophic effect on the global economy.

In addition to the above, another, and the most dangerous form of “peak oil” predicted is “political peaking”. The Middle Eastern nations can produce more oil to meet the world’s growing thirst, but will they? Is it better to pump more and invest the surplus? Or leave it in the ground for future generations?

The arrival of Peak Oil may be slightly delayed if worldwide demand for oil would fall; a global recession can hit demand for oil-based products. This would result in spare capacity building up again. Furthermore, high oil prices themselves can dampen demand. We have actually taken our lifestyles and the cheap and abundant supply of oil all for granted. The main worry is not the present levels of resource use and ecological impact. It is the levels we want to raise. The supreme goal of all countries is to raise incomes, the “living standards” and the GDP as much as possible.

With this energy base dwindling, there is simply not enough time to replace a fluid so cheap, abundant and versatile.

... The main changes we need to effect are a move away from “too much” globalization towards local economies that values and preserves own natural capital such as local food supplies, traditional skills, protecting the flora & fauna, the practices of optimum land use and urban design. Peak Oil will certainly pose enormous challenge for future generations; we need to respond now for a harmonious future, time now to put our “Plan B” in place.

... From Sri Lankan perspective, it is worth quoting Mr. Ashantha de Mel, CMD, Ceylon Petroleum Corporation, who says, “alternative forms of energy is an aspect that we can explore, but it is more important to try and reduce consumption…”

To avoid a crunch, energy policy needs to reduce the demand growth – “fuel switching”, or to increase the supply of unconventional liquids. A major overhaul in the thinking process is desired towards energy policy around the globe. Time is not far when an oil price spike might break down opposition to a much greater interventionist approach by the governments in their energy sectors. Thus it might do for energy policy what 9/11 did for US military and security policy. Greater government intervention might return us to the ‘bad old days’ when much of the intervention was ill informed, unhelpful and positively damaging.

... Hence the buzz phrase of the day as posted on Indian Oil message boards is “Save oil today or walk to your destination tomorrow”.

Praveen Jaiswal, aged 40, currently serves as VP (Operations & HR) with Lanka IOC PLC, Colombo, Sri Lanka. Lanka IOC PLC is a subsidiary of Indian Oil Corporation Limited, India. Praveen is a B.Com, MBA and PG Diploma in Import Export Management. He has more than 15 years experience in the Oil & Gas industry. Prior experience includes a stint as a lecturer with the Faculty of Management Studies, University of Kanpur, UP, India, MRF Limited, India and Trikaya Grey Advertising, India.
(16 November 2008)

Global Energy Transition Plan
Andrew McKillop, Petroleum World
Despite there being no 'supply side solutions' able to replace or substitute current rates of world oil and gas demand, and cover coming physical supply shortages, near-term for oil and probable by 2010-11 for Eurasian pipeline gas, this fact is apparently contradicted by oil market operators. A myriad of players in the ‘paper oil' market, from the now mostly bankrupt or part-nationalized big private banks eg. Lehman Bros, Goldman Sachs, Merrill Lynch, to the smaller players notably including the hedge funds, can each day ‘talk down' and ‘talk up' oil prices.

Apart from providing large trading profits on unstable, volatile prices, and the values of related and derived assets, such as CDOs (commodity linked debt instruments) this market-based control of about 51 mln barrels/day (Mbd) of world traded oil supply is perceived as reassuring by the media and public opinion. The key slogan is :« if its traded it has to exist ». Anchoring this childish belief in the minds of consumers is very important to those who have no plan, model, programme or solution for the coming global reduction in oil and natural gas supplies, after their respective peak supply levels are attained.

Doing nothing serious to reduce oil and gas intensity of the world economy and society, and depending on anarchic and inefficient free markets to create alternate and renewable energy infrastructures worldwide runs the sure risk of catastrophic impacts on the so-called ‘Growth Economy' and consumer society, now a global phenomenon, when physical shortage operates. This menace is however ignored by the apprentice sorcerors who run the Growth Economy. All effort is made to bolster the absurd claim that « the market will provide ».

We can note, however, that increasing numbers of oil industry leaders are now able to mention the words ‘Peak Oil', for example the CEO of Total Oil SA, who believes that about 95 Mbd on an all liquids base will be the ultimate peak, and decline will follow quite shortly after peak output is attained. The question of resource conservation or husbandry of remaining resource is generally excluded from media treatment of the subject.
(16 November 2008)