Every time I read about what Big Fossil Fuel is doing, I am reminded of the scene in the movie "The Hunt for the Red October", when the executive officer of the Konovalov (an Alpha class attack submarine of the old Soviet Union) screamed at his Captain "You arrogant ass, you have killed us!". This occurred as one of several torpedoes fired by the captain at the Red October acquired the Konovalov as its target. I am paraphrasing the fictional executive officer because the situation between Big Fossil Fuel and the human race is similar to what happened in the movie. The fictional submarine captain was so focused on the killing of the Red October, he developed a very severe case of tunnel vision. While he fired off torpedo after torpedo, he forgot to keep track of his torpedoes. He made one mistake after another resulting in the destruction of his own submarine by his own torpedo. Big Fossil Fuel has been so focused on profits and big bonuses for its Executive Suite officers, it developed its own severe case of tunnel vision; it forgot it was part of the human race. It is constantly firing off one attack after another at its perceived enemies/critics. While Big Fossil Fuel has been attacking environmentalists, regulators, competitors, and renewable energy suppliers, it has ignored the torpedo with the name EROEI Ratio. And that torpedo has acquired Big Fossil Fuel and the human race as its targets.
Before reading the rest of this paper, please read this article The inevitable demise of the fossil fuel empire in the Guardian by Nafeez Ahmed. It will provide you with a very good preface to this paper.
Since the best data available concerns Big Oil, the focus of this paper will narrow itself to Big Oil. The EROEI Ratio will put Big Oil out of the business of energy supplier for the human race. It will also then take out Big NatGas, Big Coal, and Big Nuke, but later. So, what is EROEI Ratio? The acronym stands for Energy Returned On Energy Invested. This ratio is one of the primary components of the concept called Peak Oil. The full title of Peak Oil is Maximum Rate of Production of a Non-Renewable Commodity which is usually depicted as a bell shaped curve. The EROEI Ratio graph looks like this:
How and why would EROEI torpedo Big Oil? Simple, when the ratio hits 1:1, you stop drilling for oil to burn or you go out of business very fast. How does an oil company know when it is approaching 1:1? While the exact time is difficult to predict because of corporate secrecy, a good estimate can be made from comparing the capital expenditures (CapEx) against production revenue (ProdRev) from their quarterly reports. When the CapEx budget is increasing while ProdRev is decreasing over a considerable amount of time, this is an indicator of decreasing EROEI Ratio. Then use Linear Algebra (straight from high school math) to determine when these two lines cross each other and that is when the ratio is 1:1. I will leave it to those who have access to the hard numbers of these oil companies to calculate the current estimate of when these companies stop being oil companies. According to recent Bloomberg reports, some shareholders are already doing the math. And, so are the banks who were loaning these companies billions of dollars to continue drilling for oil.
There is an interesting side note that needs to be mentioned here. Production revenue should also be climbing even if the production of oil is declining because the price of oil should also be climbing as it becomes scarcer. But the price has stayed fairly stable in the range between $90 pb and $112 pb for West Texas Intermediate (WTI) and $105 pb and $124 pb for Brent ICE. Why? It appears that when the price of oil breaks out of the top of those ranges, the US and the world's economy suddenly slows down. This has occurred three times in the last 3 years for WTI and twice for Brent.
Now, you would think the oil companies have already done the math to determine whether they are getting close to 1:1. According to one Bloomberg market analyst, they have, because they are conducting what appears to be a "Going Out of Business" fire sale of assets. The purchase of XTO by Exxon Mobil has not changed the downward trend of oil production. The number of asset sales are too numerous to list here, but you can find one in the newspaper every two weeks or so. Shareholders are also figuring this out. They have begun to demand that oil companies stop spending on CapEx on extremely high risk projects such as tar sands and extreme deepwater drilling projects. Besides being a high risk for climate change/global warming threats, these projects also are at very high risk of not returning on investments of CapEx.
Who is saying there is extreme risk on not making a positive return on investments? Just about everybody, but let us start with the US Dept of Energy's Energy Information Administration (EIA). It has been putting out the Annual Energy Outlook (AEO) report that has some very revealing charts in it relating to the domestic production of crude oil. The AEO 2013 Early Release has the following chart which was removed from the Final Release report (supposedly because the oil companies objected that banks and other investors might see it and refuse to loan anymore money for future projects).
For example, the Alaskan Pipeline is threatened with shutdown because the flow of oil is so low the pipeline cannot operate at all. The reality will soon be no oil flowing from Alaska except in the summer by tanker.
The second anomaly is the "Other lower 48 onshore". You will notice the steady decline in oil production (47% over 22 years or 2.1% per year) until it hits 2011. Then, miraculously, the decline becomes an increase until 2019 before it makes it final dive of 24% to 2040. There is no valid economic reason for the temporary increase of future production numbers except to help the oil industry to get more money from banks and investors in order to keep drilling.
For the "Lower 48 offshore", production will decline, not increase, because EROEI Ratio will continue to impede further drilling. It gets very expensive in energy to punch holes in the ocean bottom and only get small quantities of very heavy and very sour crude oil mixed with very high pressure natural gas, like BP found at Macondo #1.
Lastly, EROEI Ratio has already caught up with "Tight oil" (actually, this refers to both "tight" and "shale"). Reports from Bloomberg TV are questioning the ability of shale and tight oil to achieve the fading goal of "energy independence". As the sweet spots are drilled out and depleted, the drillers have to move to less sweet spots (lower production rates) which are harder to drill (increased CapEx). So, the drillers have to replace the depleting former high production wells with less productive wells. And they have to drill more of the less productive wells to keep increasing total production. This leads to independent drillers spending $1.50 for every $1 they get from production. That is a fast way to go out of business. This applies for both wet and dry fracking operations.
What is keeping this merry-go-round going is the game the drillers are playing with investment bankers and commodity investors. As long as the drillers are able to fool investors into the false promise of future increases in production, the investors keep giving the drillers money to keep drilling even as the losses continue to pile up. There is an article, The Shale Game, in the Fort Worth Weekly that describes this "game" very clearly. This looks like a bad case of boom and bust. It is worse because as the last financial disaster affected everyone on the planet, this will affect the food on everyone's table instead of their check book.
This article, "Petroleum project costs worldwide benefit Texas prospects", gives perspective on the mindset of Big Oil. Instead of looking at solar at the best alternative, their mindset requires them to go back to past glories and re-drill them.
Before we can conclude, two other pieces of information are required. In the same AEO 2013 report, there is a graph of where the US consumes energy by source and how much. The graph (units are quadrillion BTU) below shows the US needing about 17.3 million barrels (converted from quadrillion BTU) of oil per day until 2040. If we need 17.3 million and will only be pumping about 3.5 million and if we can't take the difference from the rest of the world, we have a very big problem.
Back to the original question: Has Big Oil Already Killed Us All? The answer is; Not all of us, just yet. A very large number of us are at great risk and the longer we wait, the larger the number at risk will get.
The other part of the answer depends on how fast can we replace oil before the economy collapses from a lack of sufficient oil supply. If we are looking at 2019/2020 as the tipping point, it gives us 5 to 6 years to build enough solar power to replace the decline in oil supply. Why solar? Because it is the only energy source that can be built in quantity in 5 years. My numbers says we have to get to the build rate of 1 GWh per week. The US built ~2.5 GWh in all of 2013.
This also requires that our transportation system be converted to electricity as fast as possible. President Obama has been working on both solutions since getting into office in 2009. The other action is to use the remaining oil as efficiently as humanly possible.
A final note about the very severe case of tunnel vision suffered by Big Oil and Big Fossil Fuel: Tunnel vision can be fatal. In aerial warfare, pilots would get so locked in on destroying a target, they would forget the danger they are flying into. For example, dive bomber pilots would get so locked on to the target ship they were dive bombing; they would forget they have to release the bomb before they went past the point of no return. The point of no return is where physics says the plane does not have enough room to pull out of the dive before hitting the target or the ocean.
As for Big Oil and Big Fossil Fuel, they too are so locked into drilling and mining fossil fuels, they can't see anything else. We, as a society, must either force Big Fossil Fuel to break out of their tunnel vision or break free of Big Fossil Fuel. President Obama took a step in breaking free this past week with the Carbon Reduction Rule for the EPA. More on the next steps in my next article.
If this article made you think of the future of the human race and what it will take to ensure its survival, please consider contributing to my campaign on my web site. My campaign is to get the word out on the nature of the crisis and what can be done. As the article indicates, I have the vision to see a little into our future. And I also have the knowledge, training, and experience to create workable and effective solutions to the problems we will face in that future. When I assume office, I shall implement what I described in this article and in future articles.
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