Lt. Kara ‘Starbuck’ Thrace: [reacts to a joke] That was weak! So very, very weak!

Samuel T. Anders: [playfully] Lighten up a little bit. It’s only the end of the world.
— from Battlestar Galactica

Dr. Steven Chu, our new Secretary of Energy, won the Nobel Prize for physics in 1997 for his research in cooling and trapping atoms with laser light. Not only is Chu a very smart guy, he’s also a considerable improvement over Samuel Bodman and others in the Bush administration who did virtually nothing to address America’s energy future.

Obama’s DOE Secretary Dr. Steven Chu

With the due praise part of this column out of the way, I want to bring up some urgent concerns about the direction the Obama administration is taking regarding America’s oil dependence. We need to ask What’s the plan? Once we understand the strategy, we can then ask Is the plan good, is it realistic? In this column and next week’s, I will answer these questions. Obviously I must start with the first one.

Chu’s Energy Miscalculations

Chu readily concedes he knows nothing about the short-term oil markets. One of my sources is the Wall Street Journal’s As OPEC Prepares to Meet, Chu Focuses On U.S. Energy (February, 20, 2009).

On Wednesday, when approached by reporters after a speech to a group of utility regulators, Mr. Chu declined to offer an opinion on whether OPEC should cut production, saying the issue was “not in my domain.” He later told reporters on a conference call that his response to the question reflected “more of my naiveté than anything else” …

Mr. Chu said Thursday he feels “like I’ve been dumped into the deep end of the pool” in confronting questions about oil policy, such as whether the administration would consider delaying scheduled deliveries of oil this spring to the nation’s strategic petroleum reserves…

An Energy Department spokeswoman said Mr. Chu “will continue to encourage OPEC nations to avoid price spikes” but said Mr. Chu believes that the primary focus for U.S. policy makers “should be making our country energy independent through investments in efficiency and renewable energy.”

[Emphasis added, keep this last paragraph in mind.]

Just for your information, Dr. Chu, OPEC is cutting production to boost oil prices above marginal production costs to safeguard future supply in so far as that is possible and boost revenue streams for the oil exporters. Low oil prices over the next year or two may have profoundly adverse effects on the world’s oil supply before the end of Obama’s first term should the global economy recover by then. Send me an e-mail if you want to know more.

The Secretary of Energy is aware of resource production limits. This is where things start to get interesting. I have combined slides 16 & 17 from a 2004 power-point presentation Chu gave at Berkeley Labs called Sustainable, CO₂-Neutral Source of Energy.

Figure 1 — Slide 16 of Chu’s talk combined with the text of slide 17 (in gray). The graph is an early ASPO-Ireland forecast.

Also consider Chu’s response to Sen. Lisa Murkowski (R-Alaska) during his confirmation hearing about whether he would support lifting bans on offshore drilling. This was reported by Salon’s Andrew Leonard.

Chu acknowledged that the president-elect had said he supports “looking at oil production and gas production both on- and offshore as part of comprehensive energy policy.” But then he immediately pivoted [as quoted directly below]:

“But I should also say, Senator, as you well know, the reserves of the United States are approximately 3 percent of the world’s reserve, and the numbers from 2005 suggest that something like five percent of the world production of oil comes from the the United States. So while it is important to fold into this the continued development of oil and gas resources one should also recognize those numbers. The more efficient use of energy in United States is the one factor that can most decrease our dependence on foreign oil.”

[Emphasis added. The United States produced 9.84% of the world's oil (all liquids) in 2005, not 5%. The proved reserves number is meaningless for various reasons, but the remaining U.S. conventional P50 (proved + probable) reserves are no doubt some small percentage of the world total, which is Chu's point.]

Chu is convinced—and rightly so—that we in the United States can not drill our way out of our dependency on imported oil. His view—again, this is correct—is based on our meager reserves and production rate relative to our consumption, which made up 23% of global demand in Q2, 2008.

In both his 2004 presentation and his recent testimony before Congress, Chu emphasizes efficiency as the main way to reduce our dependence on foreign oil. This is where Dr. Chu and I part ways. He makes two crucial errors in judgment. The second depends on the first.

• Chu conflates oil & natural gas in Figure 1. Since gas production will peak later than oil does, he concludes we have between 10 and 40 years to solve our fossil fuel resource problems. Nobody knows when natural gas will peak, but a commonly held view puts the world’s maximum production in the 2020’s.
• Chu believes that efficient use can delay peak oil and gas production (taken together) by roughly a factor of 2, so he doubles the solution time. As Mark Hertsgaard reported in The Nation on December 16th, 2008, Chu assumes we have 20 to 80 years before oil & natural gas shortfalls cause problems.

As we shall see next week, Chu’s ultimate fix—the Helios Project—for replacing liquid fuels (and natural gas) will require at least a few decades—it will likely be much longer—to get off the ground. Thus Chu has recast the oil depletion problem to give himself the time his favored solution requires.

Lumping oil and natural gas together as Chu does is problematic, as we see in Figure 2.

Figure 2 — The source is the EIA’s WEO 2007. Use by sector for oil (in BTUs) is on the left, natural gas (in trillion cubic feet) is on the right. To do the conversion, a cubic foot of dry gas = 1027 BTUs. Oil is far more energy dense than natural gas. Most oil is used in transportation. Most natural gas is used to generate electricity and in industrial applications. Only in the latter, where oil is also used, is it possible for fuel-switching to occur. Ignore the EIA’s fantasy demand-driven projections for future oil consumption.

Oil’s dominance in transportation will likely continue for some time despite the now moribund Pickens Plan. This will be true even as world oil production falters, so it is inevitable that we will revisit the high prices and economic stress we experienced in 2007 and the first half of 2008.

Fuel switching in industrial applications depends almost entirely on the relative prices of the two fuels. Past prices have been highly correlated but started to diverge in 2006 as the oil price skyrocketed without a concomitant surge in natural gas prices. However, after 2006 no large shift from oil to natural gas in industrial applications took place. Now that prices have crashed, it will likely be several years before fuel switching might again make economic sense, assuming natural gas prices stay low after oil prices shoot up over $100/barrel.

Chu’s optimistic calculations also explain his curious lack of knowledge and concern about the oil (and natural gas) markets. As the nation’s chief energy scientist, he looks only at the very long term. He does not concern himself with what may happen 5, 10 or even 15 years from now. Chu wants to sponsor nifty, cutting-edge science. He does not want to engage in the thankless, difficult work of finding practical ways to reduce America’s oil consumption.

Recently Chu hired Matt Rodgers of McKinsey & Company to expedite distribution of DOE funding of R&D and renewable energy projects (Wall Street Journal, March 9, 2009). McKinsey & Company is perhaps the most important consulting firm you never heard of. Rodgers gave his take on peak oil in Will Oil Demand Peak Before Supply Does? His disjointed analysis contains gems like this one:

… oil will remain the world’s primary transportation fuel for some time. Clearly, we aren’t moving to a hydrogen economy quickly, and renewables are not on a path to replace oil in the next 50 years.

Nonetheless, underlying trends suggest that we could hit peak demand for oil well before we hit peak supply. Going forward, there are significant opportunities to generate positive economic returns from improved energy efficiency—higher fuel economy can have a greater impact on global demand than any other single factor. Oil substitutes are being adopted as blending components much more rapidly than as replacement fuels. The use of e10 (gasoline with 10 percent ethanol) across the system has had far more impact than the limited use of e85 (gasoline with 85 percent ethanol). [emphasis added]

You can see how all this neatly fits together. You can also see—outside the obvious political connections—where Chu might hire Matt Rodgers and not Dave Cohen to advise him on fossil fuel resource issues. This is called groupthink. Here’s how the story goes:

Like CERA, Rodgers embraces the “peak demand” idea. Largely ignoring future oil demand growth in emerging economies like China India and Saudi Arabia, Chu and like-minded colleagues choose to believe that greater efficiency in the developed OECD countries will postpone problems with peak oil production almost indefinitely. Rodger’s assertion that “oil will remain the world’s primary transportation fuel … for the next 50 years” fits nicely with Chu’s calculation that peak oil (together with natural gas) will not cause problems until 2029 at the earliest and perhaps not until 2089.

And now we can finally put the icing on the cake. Because fossil fuel depletion problems can be postponed for decades, anthropogenic climate change should command all of our attention. This is Chu’s view and thus reflects the official policy position of the Obama administration. Don’t hold your breadth waiting for Obama’s energy policies to change anytime soon. So all you peakists should go off and grow your organic gardens, which is what a lot of you want to do anyway.

Weak Measures — Liquid Fuels Efficiency

This is the obligatory part of the column where I muster the facts and their reasonable interpretation to demolish the Chu (and Rodgers/CERA/National Energy Commission¹) position on “peak demand” resulting from energy efficiency.

I wrote at length on these issues during the interminable presidential campaign, so I will summarize my conclusions here with some links to my earlier work and other sources.

• As always, the most important fact is that world crude + condensate production declined in 2006 & 2007 before rising slightly above its 2005 level in 2008 after OPEC put most of its spare capacity on-stream last summer. All liquids tallies show small increases over the last few years due mainly to an influx of 1st generation biofuels, but such fuels (mostly ethanol) are rapidly exhausting their growth potential. Natural gas liquids posted a modest gain of about 4% from 2005 to 2008 (year-end averages). Crude oil declines occurred despite rising oil prices since 2003. World crude oil production was essentially flat—could not grow—during a period of rapidly expanding consumption before the economic downturn. Therefore, prices rose mostly due to market fundamentals regardless of other upward pressures on price (e.g. the value of the dollar, speculation, etc.). July, 2008 was likely the all-time peak of world crude oil production, given the supply-side destruction taking place during the current economic downturn.
• For Chu, efficiency that reduces our liquid fuels consumption means stronger CAFE standards. The Congress passed an energy bill in December, 2007 to raise average fleet fuel efficiency to 35 miles-per-gallon by 2020. Chu hopes his goal of weaning us off foreign oil will be met in part by sales of gas-electric hybrids or plug-in hybrid vehicles. In The Sierra Club solution, I calculated that any savings in oil consumption from efficient vehicles will be completely offset by lower American oil production in 2020. Both numbers are around 1.1 million barrels-per-day range, so it’s a wash. Thus we may or may not be using less oil, but we will almost certainly be importing more. The 1.1 million barrels saved is not much of an efficiency gain (5.56% of the 19.78 million barrels we used daily in the first half of 2008 in 11 years).
• Mexico’s oil production, and thus their exports to the United States, are falling as output from their super-giant Cantarell field continues to decline. See Figure 4 below. Mexico is the 3rd largest exporter to the United States, but will cease exports long before 2020. Their status change from exporter to importer will cause a geopolitical sea change south of the border. No one in the Obama administration seems to have linked the two issues, so they have not anticipated a destabilized Mexican government struggling to function without oil revenues. Mexico may be a failed state in 10 years.
• Market penetration for new products always follows an S-shaped curve as described in Car Crazy (November 21, 2007). Thus we can expect sales for hybrid electric vehicles (like the Prius) and plug-ins, if and when we get to drive them, to follow this pattern even when consumers are offered rebates. Figure 3 shows projected sales for hybrid electric vehicles, which remain mired in the left, lower end of the S-shaped curve many years after they were introduced.
  
  Figure 3 — The source is the Yano Research Institute. HEV sales growth (unit = 10,000, green = Japan domestic, pink = rest of world). The economic downturn is putting a big dent in the Yano forecast.
  

Figure 4 — Production declines at Cantarell. Pemex’s 2009 target is close to the worst case scenario. The source for the original graph is the Wall Street Journal.

I promised you I would answer the question What’s the plan? regarding liquid fuels. The Obama administration’s answer is basically do nothing while we wait for efficiency to take care of the problem. In other words, the check is in the mail.

Let’s break down energy spending in the stimulus package.

• $43 billion will be spent on all energy projects.
• $2 billion will be spent on battery research.
• $400 million will be spent “to encourage electric vehicle technologies”.
• $700 million will be spent on federal & state purchases of fuel efficient vehicles.
• All together, only 7.2% of the energy spending goes toward reducing liquid fuel consumption.

$2.4 billion will be spent on R&D for electric vehicles. Over 90% of the new energy spending goes toward an “efficient and reliable” electricity grid, adding renewable sources to the grid, Energy Star appliances, house weatherization, etc. The chance that a smart grid will significantly reduce our oil consumption in the next 20 years is very close to zero.

DOE’s spending priorities should come as no surprise to you now that you understand where Obama and Dr. Chu stand. They assume we have anywhere from 20 to 80 years to solve the liquid fuels problem as appropriate efficiency measures are put in place over time. So we can add an implicit assumption that explains recent energy spending.

• Pray for rain.

I have not discussed biofuels because these lie at the heart of Chu’s techo-optimism. I will discuss Chu’s Helios Project next week. Until then, you may want to bone up on 4th-Generation biofuels. If you think Chu’s plan is just so much pie in the sky after you’ve studied problem, you are not alone.

Contact the author at dave.aspo@gmail.com

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Notes

1. Jason Grumet, an energy adviser to Obama during and after his campaign, is the executive director of the National Energy Commission. As a Washington insider, he seems much like Aristotle’s political animal, a person who knows a lot about which way the wind is blowing and not much about oil, natural gas and coal. I wrote about him last year in Ignoring the Elephant In the Room (May 7, 2008). He compared oil prices at $160/barrel to a Mad Max/Road Warrior kind of situation. It was pretty funny.

I should also take this opportunity to tell you what Obama’s Energy Czar Carol Browner appears to know about the Earth’s fossil fuel resources over and above dealing with the occasional oil spill—

<This Space Left Intentionally Blank>

I will devote a separate column to Interior Secretary Ken Salazar, who recently decided to delay decisions on offshore drilling in the restricted areas. He also pleased environmentalists by adopting a “go slow” approach to developing Colorado’s oil shale. That’s also pretty funny in so far as it seems to imply that there’s a “go fast” approach. All and all, Obama has a fine energy team.