The transition of oil: from resource  to burden for the Civilization

by Alberto Cavallo

The price of oil keeps rising

The economic analysis

Short-termism

The peak of the oil

The core of the problem

The ghost of the greenhouse effect

Solutions?

Bibliography

Oil lamp - il cannocchiale 

The price of oil keeps rising

A little more than a year ago the price of oil reached the threshold of 45 US $ a barrel and we published an analysis on the wider topic of the real status of production and reserves of the precious black gold (See the article, in Italian language only). This year it reached 67 dollars (48% higher), even though more recently it has dropped back to about 60. These oscillations are due to normal short-term, speculative movements, but the price is still much higher than a year ago. Naturally the recent disaster caused by the hurricane Katrina in the south of the United States won't fail to have, in its turn, a significant impact on the market. In any case, what then seemed an already very high price has been vastly exceeded. Some now foresee prices above 100 dollars a barrel in the near future.

One year ago we said that structural causes existed, so that the long term, permanently rising trend in the price of crude oil would not substantially change. The analysis proved valid, even in its most pessimistic version. We are going to examine it in detail, in order to understand if something has changed and what more we can expect.

Oil contraband in Iraq

The economic analysis

First of all, prices rise because demand continues to exceed supply. For sure, speculative factors exist, but there are good reasons to believe that only the oscillations of the short period can be related to these, while it is not the case of the general tendency. For instance, immediately after the August holidays there was a slight decrease, because of a normal phase of profit taking. The general tendency however shows no signs of change. See for instance “Why are oil prices so high?” on the BBC website ().

Why these price increases in summer? 

It’s clear that the greatest world consumer, USA, has a summer peak of fuel demand for both transport and air conditioning, that exceeds the winter peak for heating. Like the American economy, the thirst for oil products is also growing. There have been other contingent factors, like the hurricanes of the Gulf of Mexico, which interrupted the production of some offshore wells. We are told that the insufficient availability of refineries contributed, but this affirmation must be considered with caution: if the refineries reduce production, in the first place it should increase the price of the refined product, not that of the raw material. It is exactly what recently happened in the United States: the halting of the refineries of Louisiana due to hurricane Katrina, provoked an increase in the price of raw fuel as well as the price of the refined fuels. Equally, the lack of oil-tankers influences price primarily on the consumer, not on the production side. Limitations of transportation and refining capacity have however a secondary effect: they decrease the actual availability of oil on the market. They subsequently fuel a further climb in the price of better quality oil or of that coming from favourable locations.

Saudi Arabia, for instance, has great quantities of crude of the heavy, sulphur rich kind, which nobody wants, because today there is a larger need for light products with a low sulphur content. The techniques of refinement allow, in theory, to draw gasoline and gas-oil of good quality from whatever filth, but the refineries have to be equipped to allow the elimination of the sulphur and the transformation of the heavy component into lighter hydrocarbons (cracking), in measure suitable to the request. The lack of refining facilities affects both the production and the corresponding reserves, and therefore this also influences the price of crude oil.

Political uncertainties contribute, besides the fact that they are inducing purchase in advance of real necessity. The unsolved crisis of Iraq and the "nuclear" Iranian one have a significant weight. The production of these countries is of doubtful availability, and they are two of the greatest world producers.

It’s more and more evident that, from a strictly realistic and strategic point of view, the war in Iraq has been a colossal error for Anglo-Americans. Or perhaps not so? Certainly those who draw profit from the present price of oil are above all the oil companies, that not by chance have strong bonds with USA and UK institutions. If we look at the interest of States, and not at the affairs of private companies in touch with government people, it has been a disaster however:

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the risk of terrorism increased, because Iraq was not among the countries supporting terrorism before the war, and it has now become the crossroads for the whole Islamicist movement;

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the oil resources of Iraq are not under firm Anglo-American control yet, because of the dramatic situation of the country;

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the armed forces of the Anglo-Americans are busy in Iraq in an endless guerrilla warfare, which on one side keeps them engaged preventing their employment elsewhere, on the other it has substantially decreased their prestige because their apparent ineffectiveness in resolving the situation.

It is not by chance that Iran has decided to resume its nuclear program of ambiguous goals (officially civil, but everybody knows that it also has a military side). The ayatollahs of Teheran see with satisfaction the powerful American army being trapped in the Iraqi quagmire, while the Baghdad provisional government leader, the shi'ite Ibrahim Jaafari, on July 16 paid visit to the guide of the Revolution ayatollah Khamenei and to the new Iranian president Ahmadinejad, with great demonstrations of esteem and even the promise of reciprocal help in the struggle against terrorism! The full application of "democracy" in Iraq, understood as government of the majority, would result in a shi'ite-guided Iraq, allied to Iran - wonderful result, Mr. Bush!

Short-termism

The sociologist Luciano Gallino, whom we already quoted last year for his analysis of the Italian industrial crisis, this year published a very important text on the theme of enterprise management: it deals with " The irresponsible enterprise" (“L'impresa irresponsabile”, Einaudi), and is the source of some terms like the one used in the title. For reasons due to the nature of “managerial-financial capitalism”, which looks after the maximization of the market value of shares, nobody is eager to make long-term investments. Therefore, coming back to our argument, new refining facilities are not easily erected, new oil-tankers are not built (this also applies to the shortage of shipyards), and the search for new production fields is not made without very concrete assurances of finding something!

Oil wells in Azerbaijan - (c) Contrasto

The perversity of the mechanism that dominates the present economy is evident if we just think about the case of oil-tankers. In the past years shipyards were closed all over the world, on the basis of the principle that if a plant doesn't make enough profit it is better to close it. The result is that now the facilities are insufficient and concentrated in just a few countries, with a reduction, not an increase in global efficiency. The so-called mechanisms of self-regulation of the market produces enormous waste, because there are factors that are not considered. For instance, the fact that a complex productive plant is easy to close but hard to open again, an asymmetry that completely destroys the presumed utility of closing the scarcely profitable facilities. It absolutely is not true that the market left to itself produces an optimal condition, rather it constantly shows the opposite: the market by itself cannot keep account of all the factors, and it requires corrective interventions to avoid all sorts of perverse effects. There is a tendency towards monopoly, clearly pointed at by Karl Marx and confirmed by evidence, in many sectors of the economy: for example, without the interventions of governments there would be only one producer of large civil airplanes in the world today (actually there are two...).

In recent years the market that dominates is the global market of capital, where the only objective is the maximization of the stock value and not, as it happened in traditional capitalism, the production of dividends. As Gallino explains, the concentration of the management of enterprises on the creation of value has actually caused an enormous destruction of value, because the energy of the irresponsible management is entirely based towards the maximization of the short-term stock value. This concentration on increasing stock value rather than dividends removes the incentive for productive investment and for creating real efficiency in the firms, and is replaced with an emphasis on downsizing, both in financial and human capital terms.

It’s clear that the scarce propensity for long-term investments not only stops the adjustment of the oil industry, but also the search for alternative sources. At the same time, the fact that the price is determined by the market and not by costs causes the profits of the oil companies and states that have control of reserves to grow and grow. It’s typical of the present economic system that these profits are not reinvested in the energy industry but simply transferred to executives, shareholders and governments. Enormous resources, that would allow us to develop solutions we need for the time after this era of oil, are used instead for private interests and for political power. The increase of profits for the giant oil companies, determined by the present price of oil, can be valued in billions of dollars which, if opportunely invested, would allow us to resolve many of the problems of energy, of job availability and of nourishment for the human population and any other purpose we can conceive of at this historical moment - for instance, a noteworthy space program.

The oil industry is draining the financial resources of the world, frustrating the progress of increasing productivity for the world economy and resetting the potentialities of growth for our economy (Italy) in particular, above all that of the European countries.  It seems however that even this does not succeed in slowing down the development of China and secondly of India. China relies mainly on hydroelectric and coal for the production of electric energy, but it also has recently become the second largest, world consumer of oil. For a series of reasons unrelated to energy factors, China is becoming the center of world economic development, and oil price ends up being a limiting factor not just for it, but also for all the other countries that depend on oil. However these other countries suffer the consequences of price increases more seriously due to the feeble growth of their own economies.

The peak of the oil

By now the concept of "peak oil", based on the theory of Hubbert, is well known and diffused (see “ 'Peak oil' enters mainstream debate”,), even if it meets opponents of various backgrounds, from that of oil industry itself even to some environmentalists. The basic concept is that for whatever raw material exists in the world in a finite quantity, being a non-renewable resource, there is a moment when the maximum production is reached, after which the availability of the resource is constantly reduced and the price grows in correspondence. This peak point is reached, according to the formulation of Hubbert, when a half of the total resource has been consumed. It happens then that it is not possible to feed the increase of production with the opening of new extraction fields, to compensate for those that become exhausted: the number of fields closing for exhaustion first counterbalances, and then overcomes that of the new ones. 

Tokyo Night

Only when the peak is reached is there a structural push for a price rise, which up to that moment freely oscillates under the effect of the contingent situations of the market. An example of a price increase unrelated to this Hubbert peak was the one of 1973, when OPEC drastically reduced their production to support the Arab countries in the war against Israel. Today OPEC does not represent the majority of producers, and is not limiting production. There is general agreement that only Saudi Arabia has the capacity to increase production, however their main supply is heavy crude that currently has a lower market demand.

Beyond the details of the theory, it is true however that the oil of the world exists in a finite quantity; based on the information we have, it seems that we are very near to having consumed half of it. Maybe the peak has already been reached this year, or else the increase of price and the decrease of availability that we notice today are ahead of the true peak, because of the contingent factors described above. In any case, the peak is nearby. A precise analysis is not possible because of data unreliability: in practice, many producers lie about the real state of their reserves (see How much oil do we really have?). Just to make a simple example, some countries have been declaring for decades the same reserves even if extraction goes on and no new fields are discovered.

The naysayers like William Bowles, author of several negativist articles like “The truth about ‘Peak Oil’ “(http://www.williambowles.info/ini/ini-0292.html) rely on the idea that enormous undiscovered oil reserves still exist. They sustain that the increase of the price is entirely due to cartel actions, piloted by the big Anglo-American companies. Certainly, we know, inaccurate data are circulating about the reserves, but all the signs indicate an actual status smaller than the declared one, not greater. This for the simple reason that both the producing countries and the trans-national companies have an interest in declaring large reserves, to attract investments (governments) and to raise the value of their own stock (companies). More than that, OPEC bases its system of quotas on the entity of the reserves, a sensible criterion that implicates that every country produces in proportion to how much oil it possesses. However this induces those who want to produce more, in order to increase their profits, to overestimate their own reserves. It’s evident that for decades important oil reserves have not been discovered in new areas, neither have significant new discoveries been made in well known places.

The opponents of Hubbert’s analysis, like Bowles, should give concrete examples of “hidden” reserves or of “unexpected” discoveries, when instead we know that the majority of the producers declare unrealistic numbers about their own reserves. The other side of their reasoning is that the price of the oil is vastly higher than todays' cost of production. It’s absolutely true – but in a free market system, the principle that prices are not determined by the cost is valid for all prices! The prices of the commodities are determined by the market, the cost of production simply acts as a limit: when the offer of a product greatly overcomes demand the price goes down to the point that every producer is forced to propose the lowest price, going down even under the cost for some producers. This is the situation for highly competitive markets of low added value, like for instance that of cheap textile products: the made in China shirt imposes the standard of price to everybody, apart the products of the great marques. For oil it is not the same, here the problem is: excess demand makes the price climb at the same level as cost.

The core of the problem

Oil is an irreplaceable product today. To reduce its consumption means to reduce all economic activity, that is to fall into recession, because the energy derived from oil enters virtually every sector of the economy and is, at this moment, irreplaceable. In the face of increasing demand we now have a production level that has already reached glut for several reasons. If it was only the result of speculation by the producers, we would have the possibility to resolve the crisis in a short time, but it is undoubtedly true that we are dealing with a limited resource and that sooner or later the reduction of the availability of oil will be due only to geology, and not to human will. There are many elements to believe that geology has already entered the game - that most of the world oil reserves have already been found. It can be supposed that dreamers like Bowles are right and that immense undiscovered reserves still wait for us, but we would like to know where they can possibly be. If oil exists in vast quantities because it is not a product of biological but of primordial origin, the theory should be developed and tested against evidence, according to scientific method.

In the meantime, it seems much more reasonable to manage to escape from this situation by planning and realizing a progressive exit of the world energetic system from it’s oil dependency. This would be desirable in any case, because the use of oil has profoundly negative environmental consequences, beginning with the problem of overheating the Earth. By keeping on introducing CO2 in the atmosphere we are changing the thermal budget of the planet and the chemistry of the atmosphere and the hydrosphere itself. If enormous undiscovered oil reserves existed indeed, it would be a true disaster, because it would induce us to continue with the current waste of energy to such a point as to cause our very end. It’s a matter of us, not of the environment: the Earth would rejoice and develop in other ways, as it did many times during the mass extinctions known to the geologists and to the paleontologists. It already happened, in the Permian extinction, 90% of living species disappeared - to be replaced by others. Do we want to disappear as well? The events of these days don't only have an emotional weight: it seems evident that hurricanes and other violent atmospheric phenomena are significantly increasing in frequency, and the whole world experiences alterations of the climate.

We don’t see many positive signals about this issue. The newly developing economise are following the usual patterns. As we have seen, China is by now second only to USA for oil consumption, but it also makes wide use of coal for electric production. Obviously this introduces a further worsening of the environment.

We can see what ideas are circulating in the business world by reading the article of David Tabarelli in Il Sole – 24 ore (newspaper belonging to Confindustria, the association of Italian industrialists) of August 11: he deprecates that we don't succeed in erecting new facilities like the gas terminal in Brindisi because of environmental opposition, he invites those who enjoy great profits to reinvest them instead of transferring them to the shareholders, he invites the increased use of coal, he confirms the necessity to invest more in oil refineries and at last he invites work on saving and on new sources of energy. Nothing new, (the analysis is confirmed), but it is worrisome that we are invited to return to coal which produces a disproportionate greenhouse effect, even if all the other forms of pollution, from sulphur to the dusts, are resolved with complex systems of emission reduction. The appeal to energy saving and to research for other sources seems just lip service. The author misses an important point: the removal of the linkage between the price of gas and that of oil. Why do we have to pay more for gas when the price of oil rises? An independent market should exist for gas.

A strong initiative is needed now in order to make investments for the progressive replacement of oil. In the long term neither coal nor nuclear fission is the solution. Oil is essential today, firstly for transportation. Another field not to be forgotten is the petrochemical industry, where oil is absolutely irreplaceable, so much so that it is not very sensible to burn oil to produce energy, thus destroying an important resource that allows us to produce plastics at low cost and in large quantity, and other by-products that are essential for our daily life.

These days we see how important the petrochemical industry is, because of the consequences of the hurricane Katrina, which harshly struck the American industry situated in Lousiana and Mississippi, due to the proximity to the oil fields. It is not only a matter of energy, but of the ample range of products that derive from oil, beginning from the various types of plastic materials, that have replaced wood and metals as basic or at least accessorial constituents of manufactured goods.

http://www.comciencia.br/reportagens/nuclear/nuclear01.htm

A Twister in the United States

The ghost of the greenhouse effect

As we have seen, the attention of all energy operators is concentrating on the energy source that is still most abundant today: coal. With the current price of oil and gas, coal is strongly competitive – it’s a pity that a 1000 MW coal plant produces 6 million tons of CO2 in a year!

It seems that China, having a large quantity of coal, plans to resort to production of synthetic gasoline with the methods already used on a vast scale by Germany in World War II. These methods are becoming economically competitive, thanks to the high oil price. From the environmental point of view there are only disadvantages: a gasoline car that uses the synthetic product derived from coal causes twice the carbon dioxide emissions of one fed with gasoline obtained from oil.

The climatic transformations are a fact and not a hypothesis today.

Apart from its awful physical and media impact, hurricane Katrina reminds us that the frequency of hurricanes in the world has doubled in the last years. Meteorologists even ran out of names planned this year for hurricanes, and started using Greek letters instead. The greater energetic content of the atmosphere is by now evident and it show through phenomenons of greater intensity than normal, along with unexpected alterations of climate all over the world. Carbon dioxide in the atmosphere has passed from the 280 ppm of the pre-industrial age to 380 ppm today - and it seems that half of the excess that we produce is ending up dissolved in the ocean, otherwise the number would be much higher.

Robert's Socolow article -To bury the hothouse effect-, published on Le Scienze of September 2005 treats the possible solutions to remove carbon dioxide from the exhaust gases of power plants and by the production facilities of derived fuels, from the syngas to the synthetic gasoline, to trap it in underground storage. But the idea of storing the produced CO2 underground runs into evident difficulty: because of the enormous quantity of gas implied, it doesn't seem believable that a feasible and safe solution can be found. The safety issue obviously concerns the risk of leakage of the trapped gas: if it escaped even slowly over years, this would be enough to frustrate entirely the operation of burial. An abundant and sudden escape, as Socolow remarks, could cause serious consequences like death by suffocation of every living being in the stricken area (all of us know the danger of carbon dioxide, every year there are accidents in wells or wine cellars where it accumulates for various motives, among which the alcoholic fermentation). Moreover CO2, unlike nuclear waste, does not decay over time. It’s upsetting that we worry so much of the secular or millennial duration of the nuclear waste, but do not hesitate to propose a perpetual store of enormous quantities of a stable substance! Besides that, carbon dioxide dissolves in water forming carbonic acid - which involves the risk, rather the certainty, of acidifying the underground water in the accumulation zones, producing a sparkling drink! By the way, this is also happening to the ocean itself, which already has an altered composition. Arid and stable zones should be looked for, exactly like those for nuclear waste. I cannot even imagine how the CO2 could be transported from the points of production to those of storage in an economically acceptable way.

Resorting to hydrogen doesn't resolve anything if the energetic source to produce it is coal, let alone oil, because we are looking for alternatives. Supposing that we speak of coal, to produce hydrogen from it involves emission of CO2 even larger than for direct use, because the transformation involves a loss of efficiency and therefore a greater consumption of coal for the same amount of energy supplied to the end user.

Biomass has the advantage of using carbon drawn from the atmosphere, allowing an even balance for CO2. Surely they can have an important role, especially if we speak of fuels for transportation, because they allow us to produce liquid fuels compatible with the current kind of engines with just a few changes. Also the production of electric energy in small plants is an opportunity to consider, while it is not possible to propose the realization of large facilities due to the difficulty of transporting the fuel, that’s a cause of fatal ineffectiveness for this type of energetic source.

However, it would not be advisable to use vast agricultural territories for cultivation specifically destined for energy production: the efficiency of the process is scarce and an unacceptable competition would be created with food production and the preservation of the natural environment. Besides the use of fertilizers, agricultural production involves in turn more energy consumption with the current technology - as the agricultural products have such weight and volume in comparison with the energetic content, to make their transport fairly difficult - which causes further consumptions of fuel. It’s instead very sensible to produce energy from waste or low value materials, but certain this is not the global solution we are looking for.

Nuclear energy remains despite everything a very important option. We have to notice that it doesn't cause any significant emissions to the atmosphere, while it allows the concentrated production of energy that our current economic and social system requires. The campaigns against it conducted for years by the environmental movements have left the public with a deep fear of it, so much so as to make a return to nuclear power in Italy very difficult, in other countries the situation is more open - it seems for instance that the majority of the Swedes have now changed their mind. Once the prejudices are removed, every solution has to be valued for what it is, with advantages and disadvantages. Even the sources preferred by the environmentalists have notable disadvantages from the an environmental point of view. The true disadvantage of nuclear energy is its not being a long-term solution: just with the current consumption, the reserves of U235 are destined to last no more than a few decades. The resort to fast breeding reactors (FBR) would allow the availability of nuclear fuel to be prolonged over one century, through the transformation of U238 into plutonium, but it would require the production and management of great quantities of plutonium, (itself an extremely dangerous substance even in small quantities), in complex and vulnerable facilities. Thus we can only propose to keep in use the existing plants and to continue with limited projects in order to maintain the diversification.

Solutions?

We can go on listing possible partial solutions, but in the first place it is necessary to realize that the fundamental problem is not that of energy, but of a political and economic system that is wasteful and destructive, and is exhausting the resources of the planet. We have seen how financial capitalism structurally prevents the long-term investments and how the current American leadership addresses all the resources entirely towards military power rather than to initiatives for development. Their energy system is a disgrace: 5% of the world population consumes 25% of the worlds’ energy. If every citizen of the world consumed like an American, it would be necessary to quintuple the current production of energy. We cannot expect long-sightedness from people who spend billions of dollars on wars and cut the funds (a few million of dollars) necessary for the reinforcement of the levees in New Orleans, with the results that we have seen. Yes, the funds for the levees and other related works have been cut in the last years, to finance the military enterprises and reduction of taxes, as the press reported: the disaster was absolutely predictable.

This way we run into the global climate disaster unarmed, as the inhabitants of New Orleans were in front of Katrina. The masters of oil are the masters of the world and we see the signs of their dominion. We cannot think, therefore, that the solution can be found without a general transformation in our way of living. 

The system of financial capitalism based on oil is in crisis and we have in front of us only two possibilities: to deliberately change it in progressive way, or to wait as it brings us to a general disaster, from which a new world will spring in a traumatic way.

Chasseur d'Etoiles

Returning to the theme of the oil, its progressive abandonment as a source of energy would also allow us to preserve it for other uses. For this reason it is urgent to return to the development of other sources. Which however? The best answer is that a great diversification is needed, that locally favors the renewable and available resources, without anyway neglecting the opportunity of temporarily increasing the “hard” traditional sources like nuclear fission. This would be done to allow time for the further development of nuclear fusion, (on which research is going too slow), and of solar energy in its various direct and indirect forms (aeolian, biomass and sometime, perhaps directly from space).

The basic remark is, however, that the age of low cost energy has finished and firstly we must reduce waste. We cannot continue with the endless use of one or two tons metal boxes (with wheels) to carry around one or two human beings. We cannot adopt the air conditioning of houses all over the world - it is not even good for health. One can go to the province of Bolzano and see houses that even in the cold climate up there almost don't need heating in winter, thanks to smart construction solutions with cheap and common materials; adequate solutions for cooling can likewise be gotten in summer without consuming kilowatts for air conditioning, the technologies are those known for centuries to all human civilizations except a foolish one like ours. Unfortunately we have millions of cubic meters of energetically inefficient buildings, which we cannot demolish and reconstruct en masse.

The solution to the problem of energy is neither simple nor immediate, but another decisive point would be the clean cut of resources destined for armaments, for which there is no justification, to divert them to more useful purposes like the development of new sources of energy. The war in Iraq till now has cost much more than the whole Apollo program, (brought to the current value of the dollar), and its only purpose is to take control of a part of the oil resources remaining in the world. Devoting analogous figures to research and to investment in the field of energy might give us the opportunity to get out of the oil economy without dramatic implications.

We are not able however to change the world in an instant. We are caught up to our necks in the economy of oil, and to get rid of it will require enormous effort. We hope that the disasters produced by the current American administration, which is jointly the political summit and the symbolic epitome of this oil domination, have at least the positive effect of opening the eyes of those who have not yet understood where we are heading, and starting the expulsion of those characters from their positions of political power.

Alberto Cavallo

Bibliography

I list here the quoted books to facilitate the reader.

GALLINO, LUCIANO, L'impresa irresponsabile, Einaudi, Torino 2005.
A fundamental analysis of the motives behind the poorly functioning economic system of today.

GOODSTEIN, DAVID, Out of gas: The End of the Age of Oil, W.W.Norton & C, 2004, trad. it. Il mondo in riserva, Università Bocconi Editore, Milano 2004.
A good general introduction to the problems of energy politics, directed towards the non-expert.

BARDI, UGO, La fine del petrolio, Editori Riuniti, Roma 2003. The analysis section is very precise and well documented. Personally I don't agree totally with the formulation of the second part, on the possibilities and proposals of an alternative, but it is however a highly interesting and advisable text.

[English editing by Ben Croxford]

 [023.AC.TDF.2005 - 10.11.2005]