Showing posts with label ELP. Show all posts
Showing posts with label ELP. Show all posts

Tuesday, July 10, 2007

Net Oil Exports and the "Iron Triangle"

By: Jeffrey J. Brown

As Matt Simmons pointed out several years ago, the critical problem with post-peak exporting regions is that we would have two exponential functions (declining production and generally increasing consumption) working against net exports. From the point of view of importers, it is quite likely that we are facing a crash in oil supplies. In my opinion, what I have described as the “Iron Triangle” is doing everything possible to keep this message from reaching consumers.

In an essay posted on The Oil Drum blog in January 2006, I warned of an impending net oil export crisis, and I used what I called the Export Land Model (ELM) to illustrate the detrimental effect on net oil exports of declining production and increasing consumption. Figure One is a simple graph that illustrates the ELM.

Figure One

Until recently, I had never quantified what percentage of remaining Ultimate Recoverable Reserves (URR) on the ELM would be exported. Note that the ELM is a simple mathematical model for a hypothetical exporting country, but the model is based on actual producing regions.

Also note that the percentage of production that goes to consumption at the start of a production decline has a significant effect on when a net exporter becomes a net importer.

For example, the top five net exporters, in 2006 (Saudi Arabia, Russia, Norway, Iran and the UAE), consumed about 25% of their total liquids production. Offsetting this, many of the top exporters, based on our mathematical models, are at fairly advanced stages of depletion, especially the top three (Saudi Arabia, Russia and Norway), which showed a combined 3.8% decline in net oil exports from 2005 to 2006 (EIA, Total Liquids).

In any case, the answer to the question of how much oil would be exported from the ELM follows (I based URR on Texas URR versus peak production):


  1. URR 38 billion barrels (Gb), peaking at 55% of URR (approximately same range as Texas and Saudi Arabia, based on the premise that Saudi Arabia has peaked);
  2. Post-peak production decline rate of 5% per year (approximately the same range as Texas, historically, and Saudi Arabia, currently);
  3. Post-peak rate of consumption increase of 2.5% per year (less than half the current rate of increase in consumption for top exporters).


  1. Net exports go to zero in nine years (note that the UK went from peak exports to zero exports in about six years).
  2. From Year Zero and Peak Exports on the ELM, only about 10% of remaining recoverable reserves would be exported.

Given the accumulating evidence for declining net oil exports worldwide, it’s useful to remember what the conventional wisdom is regarding world net export capacity, i.e., basically an infinite rate of increase in the consumption of a finite energy resource base. While many economists don’t have a problem with this, back in the real world an infinite rate of increase tends to be hard to sustain.

Figure Two

Figure Two shows Total US Crude Oil and Petroleum Product Imports, which have increased at about 5% per year since 1990.

In my opinion, we will see an epic collision between the conventional wisdom expectations of a continued exponential rate of increase in net oil exports, versus the rapidly developing new reality of an exponential decline in net oil exports.

My frequent coauthor, “Khebab,” is presently working on some mathematical models for production, consumption and net exports by the top net oil exporters. Based on the data that I have seen so far, it will not be a pretty picture. I suspect that the models may show that not much more than 25% of the remaining URR in the top net exporting countries will be exported.

In regard to discussions of Peak Oil and Peak Exports, I have described what I call the “Iron Triangle,” which consists of: (1) Some major oil companies, some major oil exporters and some energy analysts; (2) The auto, housing and finance group and (3) The media group.

If one resides in the oil industry leg of the Iron Triangle, and if one has concluded that Peak Oil is upon us, or extremely close, does one say, "We cannot increase our production," and thereby encourage massive conservation and alternative energy efforts, or does one say "We choose not to increase production and/or we are temporarily unable to increase production for the following reasons (fill in the blank)?"

The latter course of action would tend to discourage emergency conservation efforts and alternative energy efforts, and it would encourage energy consumers to maintain their current lifestyles, perhaps by going further into debt to pay their energy bills, and it would in general have the net effect of maximizing the value of remaining reserves.

I always find it interesting that people like Matt Simmons (who are encouraging energy conservation) are widely blamed by some critics for high oil prices, while some major oil companies, some major oil exporters and some energy analysts are--in effect--encouraging increased energy consumption.

The prevailing message from some major oil companies, some major oil exporters and some energy analysts can be roughly summarized as follows “Party On Dude!”

Meanwhile, over on the other two legs of the Iron Triangle, the auto, housing and finance group is focused on selling and financing the next auto and house, and the media group just wants to sell advertising to the auto, housing and finance group. The media group is only too happy to pass on the “Party On Dude” message to consumers.

To some extent, what we are seeing across the board, from large sectors of the energy industry to the auto/housing/finance industry, media and beyond, is the "Enron Effect," i.e., many people know that we have huge problems ahead, but their paychecks are dependent on the status quo.

The suburbanites are caught in the middle of this, although they have a strong inclination to believe the prevailing message from the "Iron Triangle." As in the movie "The Sixth Sense," for most of us the automobile based suburban lifestyle is dead, but we just don't know it yet, and we see only what we want to see.

However, it is increasingly difficult for many suburbanites to ignore reality as it slowly dawns on them that Jim Kunstler was right when he said, “Suburbs represent the biggest misallocation of resources in the history of the world.” We shall probably soon see that hell hath no fury like a Formerly Well Off suburbanite who just had his SUV repossessed and his McMansion foreclosed.

At least those of us trying to warn of what is coming can try to be ready with a credible plan to try to make things "Not as bad as they would otherwise be,” when it becomes apparent to a majority of Americans that we cannot have an infinite rate of increase in the consumption of a finite energy resource base. How's that for a campaign slogan?

I recommend FEOT--Farming + Electrification Of Transportation (EOT), combined with a crash wind + nuclear power program.

Alan Drake has written extensively on EOT issues, for example in Electrification of transportation as a response to peaking of world oil production.”

In simplest terms, we are soon going to need jobs for hordes of angry unemployed males, and in my opinion “FEOT” is a way to put them into productive jobs.

On an individual basis, I would also recommend “ELP,” which is summarized in the following article: “The ELP Plan: Economize; Localize and Produce.

Good luck to all of us. We are going to need it.

Jeffrey J. Brown is an independent petroleum geologist in the Dallas, Texas area. His e-mail is

Monday, April 02, 2007

The ELP Plan: Economize; Localize & Produce

By: Jeffrey J. Brown

In this article I will further expound on my reasoning behind the ELP plan, otherwise known as “Cut thy spending and get thee to the non-discretionary side of the economy.”

I have been advising for anyone who would listen to voluntarily cut back on their consumption, based on the premise that we were probably headed, in a post-Peak Oil environment, for a prolonged period of deflation in the auto/housing/finance sectors and inflation in food and energy prices.

To put our current rate of worldwide crude oil consumption in perspective, during George W. Bush’s first term, the world used about 10% of all crude oil that has been consumed to date, and based on our mathematical models, the world will use about 10% of our remaining conventional crude oil reserves during George W. Bush’s second term.

First, a discussion of our current economy.

The Current Economy, “The Iron Triangle” & The Mortgage Meltdown

Author Thom Hartmann, in his book, “The Last Hours of Ancient Sunlight,” described a high tech company that he consulted for that went through several rounds of start up financing, and then collapsed, without ever delivering a real product. At the peak of their activity, that had several employees and lavish office space--until they ran out of capital. His point was that this company was analogous to a large portion of the US economy, which has the appearance of considerable activity and uses vast amounts of energy, but how much of this economic activity delivers essential goods and services?

I have read, and it seems reasonable, that the majority of Americans live off the discretionary income of other Americans. We are therefore facing a wrenching transformation of the US economy--from an economy focused on meeting “wants” to an economy focused on meeting needs--and the jobs of a vast number of Americans are thereby directly threatened in a post-Peak Oil environment.

I have described three segments of what I call the Iron Triangle: (1) The auto/housing/finance group (the “Debt” group); (2) The mainstream media group (the “MSM” group) and (3) Some major oil companies, some major oil exporters and some energy analysts (the “Energy” Group).

The Debt Group wants Americans to keep buying and financing large SUV’s and houses. The MSM Group wants to keep selling advertising to the Debt Group. The Energy Group provides the intellectual ammunition for the Debt Group and the MSM Group, i.e., we have trillions and trillions of barrels of remaining oil reserves, and Peak Oil is something that we don’t have to worry about for decades.

Unfortunately, the net effect of the efforts of the Iron Triangle is to encourage Americans to continue buying and financing large SUV’s and houses at great distances from their jobs, because higher oil production, and thus lower fuel prices, are right around the corner.

The US Mortgage Meltdown was inevitable, but in my opinion, the trigger for the meltdown was the increase in oil prices in the second quarter of 2005. The US Personal Saving Rate metric is not perfect, but it is a consistent measurement, and in recent years it was positive--until the second quarter of 2005. It has been negative ever since the second quarter (April, May, June) of 2005 .

The average monthly Brent spot crude oil price, in the 20 months prior to May, 2005 (the middle of the second quarter) was $38 per barrel. The average price after May, 2005 has been about $62, within a range of $54 to $74. I believe that this increase in energy prices was the final straw that pushed many US households into a negative saving rate, triggering the current wave upon wave of foreclosures.

Daniel Yergin, chairman of Cambridge Energy Research Associates (CERA), in 2004 predicted that the long term oil price would be $38 per barrel, because rising crude oil production would force oil prices down in order to equalize supply and demand. In reality, flat to declining crude oil production since May, 2005 has forced prices up in order to equalize supply and demand.

Those who listened to the false promises of energy abundance made by CERA, et al, have had considerable reason to regret it.

What have I and others been advocating? Let’s start with Economize.

ELP: Economize

For some time, I have suggested a thought experiment. Assume that your income dropped by 50%. How would you change your lifestyle?

Many employees of Circuit City don’t have to imagine such a scenario. Many higher paid employees at Circuit City have been fired and then been told that they are welcome to apply for their old jobs, subject to about a 50% pay cut.

In my opinion, the unfortunate new reality is that we are going to see a growing labor surplus--against the backdrop of deflation in the auto/housing/finance sectors and inflation in food and energy prices. By reducing your expenses now, while you can do it voluntarily, you will at least be better prepared for whatever the future may bring.

A key way to Economize is to Localize.

ELP: Localize

I recommend that you try to reduce the distance between work and home to as close to zero as possible, and furthermore, that you live in smaller, much more energy efficient housing, preferably close to mass transit lines.

If you can walk or take mass transit to work, in many cases you can get by without a car, or least fewer cars--and save considerable amounts of money. Currently, it costs about $7,500 per year to drive the average late model US car about 15,000 miles per year. As gasoline prices increase, and as depreciation rates probably also increase, the cost per mile of driving cars will continue to increase.

I would further recommend that you integrate yourself into your local community. Get to know your neighbors. Become involved in local government, etc.

I would especially recommend support of local food producers, perhaps via Community Supported Agriculture, and support of local manufacturing and local businesses.

Finally, the Produce recommendation.

ELP: Produce

Jim Kunstler has suggested that we should not celebrate being largely a nation of consumers. I agree with Jim. We need to once again become a nation of producers. I recommend that you try to become, or work for, a provider of essential goods and services.

Key recommended sectors are obviously energy--conventional, non conventional and alternative energy production and energy conservation--as well as food production, especially local organic farming close to towns and cities.

Other sectors to consider are repair and maintenance, low cost energy efficient housing, low cost transportation, basic health care, etc.

The biggest risk to family finances is trying to maintain the SUV, suburban mortgage way of life in a period of contracting energy supplies. Beyond that, one of the next biggest risks in my opinion, is excessive and unwise spending--especially debt financed spending--on college education costs.

While we will desperately need engineers and many other technically qualified graduates, we are seeing wave upon wave of college graduates entering the work force with degrees that very poorly prepare them for work in a post-Peak Oil environment. We may ultimately see college graduates competing with illegal immigrants for agricultural jobs.

Perhaps the best education investment that many young people could make is a two year associate degree in some kind of repair/maintenance area, perhaps with summer jobs in the agricultural sector.

I would especially recommend that you consider buying, perhaps with a joint venture group, a small farm, either currently organic, or that can be converted to an organic farm. In the short term, if nothing else you could lease it out to an organic farmer. Longer term, you might consider building or moving a prefab, small energy efficient house to the farm. If nothing else, this plan may provide a place of work for your unemployed college graduate.

I think that “Tiny Houses” will become more popular, as larger homes are no longer viable. Where there are jobs nearby, many McMansions could be subdivided, but absent local job centers, I expect large swaths of American suburbia to be essentially abandoned. As Jim Kunstler warned, American suburbs represent the “Worst misallocation of capital in the history of the world.”

Very small (250 square feet or so), highly energy efficient, perhaps prefabricated housing makes a lot of sense, and this may become a growth sector.

I should confess that I in no way have a green thumb, but others certainly do, and there are some very encouraging case histories of Americans doing quite well with their own “Victory Gardens” so to speak, such as this case history: “Berkeley: Urban farmers produce nearly all their food with a sustainable garden in their backyard.”

How have people responded to these recommendations?

The Responses Thus Far

Two responses, from recent years, are illustrative.

First, the West Texan. After outlining my plan, a friend of mine from West Texas thought about it for a moment and then said, “But if we stop borrowing and spending, what will happen to the economy?”

Second, the Dallas socialite. Again after outlining my plan, this lady said, “You’re not from Dallas, are you?” I replied that I was not. To which she said, “No one raised in Dallas would ever talk about living below their means.”

So, living below one’s means, at least in years past, was somehow considered vaguely un-American and socially unacceptable.

However, recently people who have followed some version of the ELP plan, either because of my recommendations, or based on their own evaluation of the present environment, have had considerable reasons to be glad that they voluntarily downsized. So far, I have not heard any regrets from anyone who downsized.

Or, turn it around. Does anyone now wish that they had bought a large SUV and large suburban McMansion--all with 100% financing--on January 1, 2006?

Finally, if we are wrong about Peak Oil, and if you followed the ELP plan, you will have less--or no--debt, more money in the bank, and a lower stress way of life.

Please note that the next essay in this series probably won’t be posted until the week of April 16th. I will be doing ELP research, checking out post-Peak Oil locales.

Jeffrey J. Brown is an independent petroleum geologist in the Dallas, Texas area. His e-mail address is

Monday, March 26, 2007

George W. Bush, Meet M. King Hubbert

By: Jeffrey J. Brown

George W. Bush needs no introduction. Increasingly, neither does M. King Hubbert, a renowned geoscientist who used some mathematical modeling techniques to predict, in 1956, that US Lower 48 crude oil production would peak between 1966 and 1971. In 1956, he estimated that world crude oil production would peak no later than 2006.

In this article, I will attempt to put some of the crude oil production and consumption numbers during the first term of the Bush administration in the context of the Peak Oil debate.

I will make three key points: (1) During George Bush’s first term, the world used about 10% of all crude oil that has ever been consumed; (2) Based on our mathematical modeling, at our current rate of consumption, during the second Bush term the world will use about 10% of all remaining conventional crude oil reserves and (3) Net oil exports are falling much faster than overall world crude oil production is declining.

I also have some recommendations for actions on an individual basis.

First, a quick review of mathematical modeling techniques.

The “Hubbert” Methods

Dr. Hubbert used some mathematical modeling to predict that if Lower 48 Ultimate Recoverable Reserves (URR) were 150 billion barrels (150 Gb), the Lower 48 would peak in 1966. If the Lower 48 URR were 200 Gb, the Lower 48 would peak in 1971. Of course, the Lower 48 peaked in 1970. Dr. Hubbert’s (accurate) premise was that Lower 48 crude oil production would show a parabolic (bell shaped) curve. The area under a production rate versus time curve is the URR for a region.

Recently, Kenneth Deffeyes outlined a simplified way to estimate the URR for a region. Note that this applies to conventional crude oil reservoirs. One simply plots the ratio of annual production (P) to cumulative production to date (Q), or P/Q, versus Q. While I think that the method can be applied to get useful estimates in regions with constrained production, such as Texas and Saudi Arabia, it certainly does work better on regions with simpler aggregate producing histories, such as the Lower 48. This method is now commonly referred to as Hubbert Linearization (HL).

When a HL plot starts showing a strong linear pattern, generally with a P/Q intercept between 5% and 10%, one can extrapolate the line down to where it hits the horizontal axis, where annual production is effectively zero. This is Qt, a mathematical estimate of the URR for a region. The assumption is that regions tend to peak or plateau, and then start declining, in the vicinity of 50% of Qt. The following regions have all shown peaks or plateaus in close proximity to their respective 50% of Qt marks: Lower 48; Russia; North Sea and Mexico (for more information, see this article).

Kenneth Deffeyes, using the HL method, predicted that the world would cross the 50% of Qt mark in 2005. He predicted that world crude oil production would start declining between 2005 and 2009, most likely in 2006. The following graph was constructed based on the assumption that the world (in blue), in 2005, was at the same stage of depletion that the Lower 48 (in black) was at in 1970. (Note that the world data are for crude + condensate + natural gas liquids).

World and Lower 48

I would particularly like to draw your attention to four years, January, 2001 to January, 2005, the first term of George Bush’s presidency.

George Bush’s First Term: January, 2001 to January, 2005

In January, 2001, the US produced 5.9 million barrels per day (mbpd) of crude oil, and we imported 9.1 mbpd of crude oil.

Four years later, in January, 2005, the US produced 5.4 mbpd, an annual decline rate of 2.2% per year, and the US imported 10 mbpd of crude oil, an annual increase of 2.4% per year. (EIA data)

With flat to increasing product consumption, and with declining domestic production, our total crude oil plus product imports have been steadily increasing. The conventional wisdom is that this trend can continue indefinitely.

In this four year period, the world consumed about 100 billion barrels (100 Gb) of crude oil (crude oil = crude + condensate). So, during the first term of George Bush’s presidency, the world consumed about 10% of all crude oil that has been consumed to date.

Based on the Hubbert methods, this rate of consumption is unsustainable, since Deffeyes puts remaining conventional crude oil reserves at about 1,000 Gb as of January, 2006. So, based on this estimate we would consume about 10% of all remaining world conventional crude oil reserves in the second term of the Bush presidency, at this rate of consumption.

In fact, as Deffeyes predicted, world crude oil production has been trending downward since May, 2005, while average Brent monthly crude oil prices (at $62 per barrel) have been about two-thirds higher after May, 2005, than in the 20 months preceding May, 2005 ($38 per barrel).

However, the critical problem for importing countries is that world oil exports appear, as widely expected (because of generally declining production and rapidly increasing consumption in exporting countries), to be declining much faster than overall world crude oil production is declining.

So, where are we now?

The First Quarter of 2007

US product inventories are the lowest they have been since May, 2004, down 116 million barrels since October, 2006, while US product consumption is up about 3.3% year over year.

In my opinion, a Brent price of $62 was sufficient to cause forced conservation in many poorer regions, such as Africa.

However, in my opinion the upcoming bidding for declining world oil exports will be much tougher, against regions like the EU and China, instead of regions like Africa.

What should we do?

Recommended Actions

While hope springs eternal, I have doubts about any policy changes, at least in the short term, especially with groups like Cambridge Energy Research Associates (CERA) and ExxonMobil telling Americans that we don’t have to worry about Peak Oil for decades to come. By the way, note that oil companies working the Lower 48 and the North Sea have so far been unable to reverse the Lower 48 and North Sea declines, no matter how much technology has been applied. Oil fields are still being found—we just can’t offset the declines from older, larger fields.

George Bush has talked about the US “oil addiction,” and he has talked about curtailing US gasoline consumption and encouraging biofuels production, but the underlying assumption is that we can continue our current lifestyle, perhaps with just more efficient SUV’s. If he were still with us, I suspect that M. King Hubbert would disagree.

I recommend “ELP” on an individual basis.

Economize--Try to live on half or less of your current income.

Localize--Try to reduce the distance between work and home to as close to zero as possible, in much smaller more energy efficient housing, and integrate yourself into the community.

Produce--Try to become, or work for, a provider of essential goods and services.

When policy changes become possible, I would strongly recommend an Energy Consumption Tax, to be primarily used to fund Social Security and Medicare, offset by cutting or eliminating the highly regressive Payroll Tax.

Good luck to us all. We are going to need it.

Jeffrey J. Brown is an independent petroleum geologist in the Dallas, Texas area. His e-mail address is