Author: Chris Nelder

(This post appeared on Energy & Capital)

When oil crossed $120 a barrel for the first time in May 2008, oil cornucopians knew they were in trouble. Prices had quadrupled in just five years, yet had failed to bring new production online. Regular crude had flatlined around 74 million barrels per day (mbpd). The case for peak oil was looking stronger with every new uptick in crude futures.

The following month, prominent peak oil critic and cornucopian Daniel Yergin of IHS-CERA changed his stance: The peak oil threat would be neutralized by peak demand. Gasoline consumption had peaked in the U.S. and Europe, he argued, due to the combined effects of increasing efficiency, biofuels, and the recession.

In 2009 the peak demand story seemed confirmed, as prices stabilized around $70 in June, and U.S. consumption remained well off its previous high. Most people thought the nearly 2 mbpd decline in U.S. petroleum demand from 2007 through 2009 owed to efficiency and people driving less.

In reality, only about 15% owed to reduced gasoline demand. The other 85% was lost in the commercial and industrial sector: jet fuel, distillates (including diesel), kerosene, petrochemical feedstocks, lubricants, waxes, petroleum coke, asphalt and road oil, and other miscellaneous products.

Very simply, when oil got to $120 a barrel it cut into real productivity, and forced the world’s most developed economies to shrink. At $147, it wreaked serious damage.

As I explained in “Investment Themes for the Next Decade,” the new normal will be  cycles of bumping our heads against the supply ceiling, falling dazed to the floor, rising back to our knees, then finally standing, only to bump our heads against the ceiling once more.

Scooters Will Kill SUVs

Two interesting news stories crossed the wire this week, which portend badly for the world’s #1 net importer, the U.S.

The first was a Reuters report that the last quarter of 2009 had “wiped out” the equity of Mexican state oil monopoly Pemex, leaving it $1.4 billion in the negative. Falling crude output, falling refining margins and a burgeoning dependency of the state on its revenues had squeezed it to death.

Not only did the report offer further confirmation that the oil export crisis has arrived, but it also confirmed my growing suspicion that the oil production everyone has assumed will come online in five to ten years might, in fact, fail to materialize. Negative equity companies have a hard time raising capital for new exploration.

The second was a Bloomberg report that Saudi Arabia had agreed to double its oil exports to India, to some 866,000 barrels per day. India indicated separately that its onshore production of oil may peak this year.

This adds to the pressure on Saudi Arabia’s exports, whose oil shipments to China have been growing at a rate of 11-12% per year and now stand at roughly 1 million barrels per day (mbpd). China has eclipsed the U.S. as the primary bidder for Saudi oil, while U.S. imports from the Persian nation have fallen to a 22-year low.

The last two years have seen the marginal buyers of oil shift decisively to the non-OECD countries. A gallon of fuel delivers so much value in China and India–think peasants on scooters–that even at $120 a barrel, remarkable economic growth rates are possible. In major oil exporting countries like Saudi Arabia and Venezuela, where subsidized gasoline still sells for under 25 cents a gallon, the appetite for fuel grows steadily every year with little thought given to efficiency.

It’s a different story in the U.S. For debt-laden consumers, an extra $50 or $75 to fill up the tank on an SUV every month sharply reduced discretionary income and starved the economy of its most fundamental driver, consumer demand.

The Real Meaning of Peak Demand

The most promising effort I’ve seen to quantify the role of efficiency in peak demand was a report in October of last year by Paul Sankey of Deutsche Bank entitled, “The Peak Oil Market.” My initial excitement quickly gave way to disappointment as dug into it, however, as I realized that its confident assertions were unsupported by the data. I applauded the effort enthusiastically–and I hope to see more serious work along the same lines–but it fell far short of proving that energy transition can be accomplished under the status quo of economic growth, let alone its optimistic twist on “The end is nigh for the age of oil.”

The fact is that peak demand in the OECD is not merely a function of efficiency gains and biofuels substitution, aided by a temporary recession.

Instead, peak demand will be the result of a permanent state of increasing depression in which non-OECD countries not only more than make up for the loss of OECD demand, but outbid them for the marginal barrel.

As we enter the post-peak phase of global oil supply sometime around 2012-2014, the price that heavily import-dependent countries like the U.S. would have to pay for that marginal barrel will become increasingly intolerable. In a weakened economy, $100 a barrel (or less) could be the new $120.

The true import of peak oil, therefore, may not be sustained high prices, but economic shrinkage. Demand will be destroyed long before oil gets to $200 a barrel, but it will not be destroyed by improved efficiency.

From where we stand today, it’s hard to make an argument for economic recovery. Persistently high unemployment rates, broken state and federal balance sheets, and an inflationary depression will continue to cut into petroleum demand. We spent the last several decades offshoring the fundamental value-adding sectors like energy production and manufacturing, and now our FIRE economy (finance, insurance, and real estate) rests entirely on real value created elsewhere.

The reason is simple: Energy is the only real currency. Every dollar of fiat currency or GDP was ultimately derived from cheap energy. Trying to print your way out of energy decline is like prescribing ever-higher doses of aspirin for a headache caused by a brain tumor. Yet those at the levers of monetary policy are, by all appearances, completely ignorant (or in willful denial) of this fundamental fact.

The vogue prescription for the sovereign debtors at greatest risk of default (see a Top 10 list here) is “austerity measures.” The theory is that a period of belt-tightening will stanch the fiscal bleeding until economic recovery puts everyone into the black again.

Yet, if primary energy supply is declining, and the rising star of developing economies is inexorably cutting into the supply available to developed and indebted economies, then there can be no recovery.

I have joked on Twitter that I’m expecting an “M-shaped recovery,” where we’re now on the second hump. A more accurate image is slow strangulation.

Two Questions for Recoveryistas

Those who would argue for economic recovery must answer two intractable questions.

The first is: Where will the energy come from, as more of the world’s net exporters become net importers?

Britain, Argentina, Indonesia, and others have become net importers in recent years. Mexico and Columbia are expected to follow suit within a decade. Clearly, we can’t all be net energy importers.

There is also the obstinate fact that aggregate net energy–the energy you get in return for investing energy in its production–has been dropping steadily. Oil net energy dropped from 100 in the early 1930s to 11 or less today. Net energy for natural gas is now in decline. We don’t have adequate data to know yet, but coal’s net energy is probably in decline too. Meanwhile, the net energy of all substitutes is low: wind, 18; solar, 6.8; nuclear, 5-15; all biofuels, under 2.

It is not surprising that a study of the Herold database (Gagnon, Hall, and Brinker, 2009) showed the amount of oil and gas produced per dollar spent declined between 1999 and 2006.

The second question is: If the creeping infection of sovereign default continues to spread to more countries, where will the money come from to bail them out? The answer has been, and continues to be, more aspirin. Without more cheap energy, monetary tactics to play the game into overtime will not only be futile, they will only draw us closer to the edge of the net energy cliff.

All of which begs a final question: If the answers are transition to renewables, and rebuilding our infrastructure for high efficiency, then where will the money and energy to do it all come from? And how long will it hold out?

Without cheap energy to fuel the growth that is hoped to pay off the accumulated debt, austerity will become an everyday reality, not a short-term fix. A reality that slowly sinks in for the rest of our lives, as net importers become progressively poorer.

The peak demand argument is a good one–but not for the nice reasons.

Get more energy market analyst at Energy & Capital >

Join the conversation about this story »

See Also:

• What Is Peak Oil?
• A Close Look At OPEC Strategy Reveals That They’re 100% Short-Term Focused, And Sure Of Peak Oil
• Why Peak Oil Is The Only Thing That Can Stop The Chinese Export Deluge

(This post was published on GetREALlist.)

When I was a child, I spake as a child, I understood as a child, I thought as a child: but when I became a man, I put away childish things.

(1 Corinthians 13:11)

Judging by the excitement around the unveiling of the Bloom Box, you’d think it was the Second Coming.

The green blogs fell all over themselves repeating the breathless “Holy Grail” speculations in Lesley Stahl’s 60 Minutes report, which was indistinguishable from an in-house marketing puff piece.

Bloom Energy’s media blitz ended eight years in stealth mode, and the star-studded coming-out ceremony on Wednesday featured notables such as board member Gen. Colin Powell, California governor Arnold Schwarzenegger, legendary VC John Doerr of Kleiner, Perkins, Caulfield & Byers, Google co-founder Larry Page, eBay CEO John Donahoe and Wal-Mart COO Bill Simon.

The market could dwarf the Internet, they said. It’s like another Google. It’s a “disruptive technology” akin to cell phones replacing land lines. It will slash CO2 emissions and replace the grid. It’s twice as efficient as grid power generation. Its technology is based on common beach sand, not expensive and corrosive materials. It will “change the world.” (Cue Tom Waits’ “Step Right Up.”)

They congratulated themselves with bear hugs and “I love you, man”s.

Bloom Energy CEO KR Sridhar laid out his bold vision: Bloom Boxes would provide affordable, abundant, reliable, clean electricity to every home and business and light up the dark areas of the world–in a decade. It’s “a market size that starts with a ‘T’,” not a ‘B’, he said at the company’s 2002 launch.

After a decade of studying energy, such claims instantly arouse my skepticism. I had to take a closer look.

What It Is

The Bloom Box is a mini power plant based on fuel cell technology. Fuel cells use an electrochemical (not thermal) process to separate the protons and electrons of the fuel, then pass the electrons through a circuit to generate electricity. At the end of the process, the protons and electrons recombine along with oxygen. If the fuel is pure hydrogen, the emissions will be pure water, but if the fuel is a hydrocarbon, emissions will also contain carbon dioxide.

Fuel cells aren’t new. The first was invented by a Swiss-German chemist named Christian Friedrich Schönbein in 1838, and at least 20 different designs now exist. A long history of companies have attempted to bring a cost-effective and practical device to market, and in the last decade hundreds of millions of dollars have been poured into their research and development.

None have achieved real commercial viability yet. According to data assembled by Fuel Cells 2000, fewer than 1,000 units are in operation or planned worldwide.  One of the top public U.S. fuel cell manufacturers, Fuel Cell Energy, Inc. (NASDAQ: FCEL) has a mere 90 installations worldwide, and its stock has been moribund since 2002.

What’s new about the Bloom Box is that it claims to be high efficiency (producing more power with less waste heat than other fuel cells), small, relatively cheap, and able to run on a variety of fuels including natural gas, landfill gas, and biogas. Its solid oxide design reportedly uses zirconium oxide for the proton-exchange membrane.

Let’s have a look at the numbers, assembled from Bloom’s statements and various blogs.

One cell produces 25 watts. A “residential sized” stack of cells produces 1 kilowatt (kW), which Sridhar claims could be on the market at a price point of $3000 in five years.

A 100 kW system (before incentives) costs $700,000 to $800,000. For my purposes I’ll take the high estimate and call it $8,000/kW.

Most units will run on natural gas. Assuming the gas costs $7 per million BTU, the cost of generation is in the $0.13 to $0.14 per kilowatt-hour (kWh) range, before subsidies.

After factoring in the federal 30% investment tax credit, the $2,500/kW California rebate, and the claimed 10-year lifespan, the unit should produce power for roughly $0.08 to $0.10/kWh. The average retail grid power price in the U.S. is about $0.11/kWh.

Under those metrics, the company claims it will take three to five years to pay itself off, including the cost of swapping out the used-up fuel cell stack twice during the 10-year warranty period. This strikes me as a highly dubious claim.

The CO2 emissions when running on natural gas are reportedly 0.8 pounds/kWh, as compared with 2 pounds/kWh for coal-fired plants and 1.3 pounds/kWh for natural gas-fired plants. Hence the squishy claim that the unit produces power with “half the emissions” of grid power from natural gas.

What It Isn’t

First, a 1 kW unit isn’t enough to power a house in the U.S. I know from my experience in the solar business that 2.5 kW on an averaged demand basis is more like it. Peak demand loads can be much higher. For example, a hair dryer, a microwave, and a toaster together could draw more than 5 kW. Large houses can need 10 kW or more on average. So even at Sridhar’s $3000 price point for a 1 kW unit, a residential application would cost more like $7500.

But long experience in watching “breakthrough” devices like this come to market tells me that one has to discount the initial claims by at least a factor of two. So the real price point will probably be closer to $6000/kW in five years, or $3000 in ten, in which case the unit might never pay itself off in a residential application over the 10-year warranty period.

A quick calculation by editor Rembrandt Koppelaar at The Oil Drum also questions the payback period. Assuming $0.10/kWh for grid power and an $800,000 cost for a 100 kW unit, he calculates it would pay itself off in 15 years–five years longer than its expected lifespan.

The eBay installation featured in the rollout offers a final example. The scant available information about this installation suggests that it consists of five 100 kW units, at a cost of $800,000 each, which have saved the company $100,000 in grid power costs over nine months. If that surmise is correct, then the $4 million installation will pay for itself in 30 years.

Second, since nearly all customers will run the unit on natural gas, it doesn’t fulfill the claims of clean, abundant, or cheap power.

If my expectation of a global natural gas peak in the 2020-2025 range is correct, it could in reality make the situation worse, by moving significant loads to natural gas just as supply starts to flatten out. In effect, it would allow us to crawl farther out on the fossil-fuel limb just before it cracks.

It definitely won’t make sense to use solar power to crack water into hydrogen and oxygen in order to use the hydrogen in a fuel cell. It would be far more efficient, and cheaper, to simply use the solar power.

Third, the suggestion that it will “replace the grid” is simply nonsense. Few of the customers in the commercial market will generate all of their power with Bloom Boxes (the high-profile campuses currently testing the units get 15% of their power or less from them), and most buildings already have grid connections. The units might eventually replace some of the load carried by utility power plants, but that’s about it.

Even a residential application would not eliminate the need for grid power unless it was sized to meet peak loads, which would not make economic sense.

Finally, and most importantly, there is the scale problem. I don’t know what universe you’d have to live in to think that a company currently producing one unit a day is going to put several billion of them into operation in one decade, or even five. Particularly if your outlook on capital markets for the next five decades is informed by an education in peak fossil fuels.

The Verdict

The Bloom Box doesn’t belong in any discussion about renewable, clean power or changing the world.

The main effect of the device would be to transfer some of the power generation load off centralized coal plants and onto distributed natural gas plants. Few customers (and probably only commercial and industrial ones, at that) will have the option of running it on biogas or landfill gas.

For the slightly more than half of the homes in the U.S. that even have a natural gas line, it won’t make economic sense.

Therefore I do not expect it to become a viable residential application. Nor do I expect it to light up the Third World without installing a network of natural gas lines–in itself, an unlikely proposition.

A fair comparison would be to a standard natural gas-fired backup generator. A quick Google search finds an 18 kW Briggs & Stratton natural gas backup generator for $4,200. If $3,000 will get me a 1 kW Bloom Box, then an 18 kW device would be $54,000. Is that a price premium any homeowner would pay for slightly reduced emissions?

For another cost comparison, at $8000/kW, rooftop solar (after incentives) is cheaper today. As long as you have a functioning grid, the 24×7 benefit of a fuel cell (assuming uninterrupted natural gas supply) wouldn’t be worth the cost premium over solar. And once it’s installed, a solar PV system consumes no fuel, and produces no emissions.

By time a Bloom Box goes for $3,000/kW, my bet is that solar will still be cheaper. Should natural gas prices go to $15 or $20 in the next decade (a not unreasonable proposition) then solar will be half the price, or less, and the payback period for the fuel cell would lengthen considerably.

What it can do is allow commercial customers to claim some green cred for reduced emissions while paying close to the going market rate for power.

However, I expect a solid handful of more mature companies (like FuelCell Energy, Kyocera, UTC, and Ballard Technologies) to give them a run for their money.

If the Bloom Box does, in fact, sport a 50% efficiency gain over utility plants–which I think still needs to be proved–then that should confer an advantage on it in the form of carbon reduction incentives. That may be the best advantage the Bloom Box has.

There are certainly important intangible benefits in distributed generation and baseload (24×7) capacity, as my readers well know. However, the Bloom Box’s reliance on natural gas cannot be overlooked, and it appears that nearly everyone has overlooked it here.

The short lifespan of the device and the need to swap out the cell stack every five years must be factored in as well. The cost of maintenance and the availability of service technicians are important questions that still loom over the Bloom. By comparison, a rooftop solar installation is low tech, low maintenance, and far more durable.

In short, I view the Bloom Box as a modest gain over the status quo in natural gas fired power supply. A world-changer it is not.

Too Big To Grail

The most interesting part of the Bloom Box story is the social aspect.

Lesley Stahl’s gushing 60 Minutes take on the Bloom Box was, in so many ways, a paragon of everything that’s wrong with energy coverage in the media.

She was in hot pursuit of “the next big thing,” and found the unit to be “awfully dazzling” in a market “worth bazillions.” “I’m installing a power plant!” she exclaimed with childlike glee, as she peeled the shipping packaging off a new unit.

She was obviously very impressed that the technology was an inversion of an invention that could produce oxygen so people could live on Mars.

Her opening statement, “In the world of energy, the Holy Grail is a power source that’s inexpensive and clean, with no emissions,” is either a complete non-sequitur, or a concise demonstration of her energy illiteracy. One leans toward the latter explanation after watching her ask if the box could use solar as a power source, and Sridhar’s humoring affirmation.

The pressure is clearly on the MSM to make some noise for Holy Grails.

There is also something telling about the appetite for hope in the way the blogosphere lapped up the excitement around the unveiling. The appeal to authority of the brass on stage clearly worked, producing uncritical comments like “Gee whiz, $400 million in capital, it clearly works, it’s cheap, and fits in my backyard? I’m in!”

The fact is that the energy problem is too big to grail. Or, as the peakists say, “There are no silver bullets, only silver BBs.”

BBs as in Bloom Box.

I want to be clear. I spent nearly two decades in the computer industry before I got seriously into energy. I used my first computer (a very early, educational prototype) at the age of five, in 1969. I saw the computer revolution firsthand, and I know the power of technological development.

But I also know that the ingrained optimism of Silicon Valley entrepreneurs, as much as I love them, simply does not translate to the challenge of generating or saving hard BTUs. No single technology will save us. Moore’s Law does not apply here. The history of energy is littered with the bodies of enterprising souls just like them.

One thing I will say: Only a venture capital firm with the power of Kleiner, Perkins could coordinate such a media blitz and star-studded unveiling, and wow the socks off the media. My hat is off; they scored a major coup with this one.

I remain staunchly rooted in numbers, and of the mind that it’s better to have no hope than false hope, because it pushes us toward real solutions.

The Doomsday clock is ticking. It’s time to put aside childish things, retire the phrase “Holy Grail” permanently, and get real about energy.

Until next time,

Join the conversation about this story »

See Also:

• The 10 Biggest Gas Guzzlers Of 2009
• Check Out BMW’s Hot New Electric Car
• The Truth About Cap And Trade: It’s Horrible For The Planet

(This post originally appeared at the GetRealList)

Last March, my study of the effect of peak oil on U.S. imports had brought Mexico to the fore (“The Impending Oil Export Crisis”). As our #3 source of imports, the crashing of its supergiant Cantarell field had put the future of our oil supply into serious jeopardy.

The possibility that Mexico’s oil and gas exports to the U.S. could go to zero within seven years looked very real.

As I explained in that piece, rising domestic consumption coupled with declining supply puts an ever-tightening squeeze on imports. I have found no evidence that policymakers are paying any attention to this critically important dynamic, but it is the very point of the peak oil spear.

Were it not for the market meltdown and recession, it would have pierced our vital organs. Instead we felt a pinprick. Hardly anybody realized what it really was, and most ran off on a wild goose chase for evil oil speculators.

Now Venezuela has appeared on my radar for similar reasons…only this time we’re really going to feel it.

Let’s begin with a review of Mexico’s exports.

Mexico

Shortly after publishing that article, I casually remarked to my friend and fellow energy analyst Gregor Macdonald that Cantarell’s production could fall to under 0.5 million barrels per day (mbpd) by the end of the year.

I arrived at this somewhat startling conclusion by calculating the effect of its decline rate–at the time, 38% and accelerating–on production of 0.77 mbpd in January, down precipitously from its 2.1 mbpd peak in 2003.

Gregor’s recent data sleuthing on Cantarell found its production in December 2009 was 0.527688 mbpd, just a hair above my estimate.

To update the data on Mexico, it’s now our #2 source of imported petroleum because Saudi Arabia has fallen from #2 to #4. As of November 2009 (the latest data available) the U.S. imported 1.08 mbpd of crude and finished petroleum products from Mexico. Its exports to the U.S. peaked at 1.46 mbpd in 2004, the same year as its production peaked. Net exports (production minus consumption) fell to 1.06 mbpd in 2008.

For the years 2005 to 2008, Mexico’s exports to the U.S. declined by 0.51 mbpd. In 2010, supply is expected to fall to 2.5 mbpd–nearly half a million barrels per day less than 2009.

Mexico nationalized its petroleum operations in 1938 in a constitutional amendment and handed over total control to the state oil company Petróleos Mexicanos (PEMEX), with predictable results.

Oil now provides more than 40% of the country’s revenues, which have been used to pay for a vast array of public services and line the pockets of the oligarchy while starving investment in both upstream activities (new oil supply) and downstream (finished products).

Consequently, Mexico’s oil reserves have decreased by more than 75% in two decades (owing partly to the correction of a previous, ridiculously inflated figure), production has begun to decline, and exports are falling fast. It now imports $4.5 billion a year worth of gasoline, $10 billion a year in petrochemicals, and 25% of its natural gas, mostly from the U.S.

This despite having nearly 13 billion barrels of proven oil reserves and more than 50 billion barrels of (unproven) reserve potential. Mexico would be in a far better position, were it not for its hostile stance on foreign participation. PEMEX simply lacks the technical ability to develop its more difficult, remaining resources–particularly deepwater.

Venezuela

As of November, the U.S. was importing 0.9 mbpd from Venezuela, making it our #3 source. Its exports to the U.S. peaked at 1.8 mbpd in 1997, the same year as its production peaked. Net exports (production minus consumption) have fallen 38% from the 1997 peak of 3.1 mbpd to 1.9 mbpd in 2008.

Venezuela’s oil exports to the U.S. have been declining markedly since 2004, after a long period of relative stability. From 2004 through 2009, Venezuelan petroleum exports fell 0.7 mbpd.

Like Mexico, Venezuela is endowed with enormous energy resources, and could be producing at a far higher level. Estimates of its oil reserves range from 153 billion barrels of certified proven, to 513 billion barrels technically recoverable in the USGS’ January estimate, to 1.5 trillion barrels in offshore potential if you believe the effervescent Dr. Marcio Mello of Brazil. Most of it is heavy oil, a low grade which must be upgraded to synthetic crude.

And like Mexico, President Hugo Chavez has exiled the Western oil companies who might have made the investment to bring those resources to market.

A Nation in Free Fall

The good times rolled for Chavez in the first years after his election in 1998. His socialist programs to rebuild the country and raise its the standard of living were popular, but expensive, and soon began to fail under the crush of declining energy supply.

Oil revenues make up 90% of Venezuela’s foreign earnings, so its dependence on oil exports is extreme.

Billions of dollars in profits from the national oil company, Petroleos de Venezuela SA (PDVSA) were diverted to welfare programs and into the pockets of oligarchs, while investment in future petroleum and power supply languished.

The precipitous drop in oil prices since mid-2008 only compounded the revenue shortfall.

Oil production has fallen 25% since Chavez was elected, and a long, devastating drought has cut into its hydropower supply, of which 73% comes from the massive Guri Dam.

Chavez responded by nationalizing most of its petroleum operations and its grid in 2007.

In 2009 another 76 oil services companies on the Maracaibo Lake were taken over. The projects now sit abandoned, waiting for PDVSA to compensate the displaced operators and put them back into operation.

Almost half a million hectares of land were seized in 2009, with the rationalization that it was underused.

Measures to counter the declining hydro supply have been implemented in a haphazard fashion, resulting in frequent, unscheduled blackouts, including seven national blackouts since 2007. Malls and government offices have had their hours of operation cut, and water rationing has been imposed.

“Some people sing in the bath for half an hour,” Chávez cried at a cabinet session in October. “What kind of communism is that? Three minutes is more than enough!”

In January, a wave of public protest erupted, prompting Chavez to implement a rapid series of desperate measures.

• Rolling blackouts were imposed in the capital city of Caracas. After a few days of protests, Chavez lifted the blackouts and fired the electricity minister. Blackouts are expected to be reinstated in an effort to keep hydro reservoir levels from falling to the point of collapse.
• A recent report gave the power shortage a paradoxical twist, indicating that power from one of the state refineries may have to be diverted to the grid, cutting distillate output by 200,000 barrels per day or more. This will result in less heating oil for China, who will make up the loss by burning more coal.
• Chavez devalued Venezuela’s bolivar currency by half, and nationalized a chain of French-owned supermarkets over alleged price gouging.
• He ordered cutbacks in the operation of state-run steel and aluminum manufacturing operations, which account for up to 20% of the country’s power demand.
• This week he turned to Cuba for help on how to cope with the power shortage, since it has been through similar problems. The island nation is providing tens of thousands of energy-efficient lightbulbs and cloud-seeding technology to Venezuela.
• Last weekend, he forced six television channels off the air for failing to broadcast one of his speeches (up to six hours in length) in a continuation of his campaign for “communicational hegemony.” Since December, all radio and television networks are required by law to broadcast his speeches live, whenever he chooses to make one.
• Nationwide student marches have been met by troops armed with rubber bullets, and at least two deaths have been recorded.

Chavez has said he’s prepared to take “radical measures” should the situation worsen, begging the unsettling question of what could be more radical than what he has already done.

Looking East, Not North

Now Chavez is turning east for help in developing his nation’s oil and gas resources. Recent agreements include a $20 billion joint venture with Russia to develop the Junin 6 field in the Orinoco oil belt, with a potential top production rate of 450,000 barrels per day.

China has agreed to build a refinery and develop the Orinoco heavy oil fields, and Venezuela has guaranteed 560,000 barrels per day to China this year.

Venezuela has launched its first major auction for drilling rights in more than a decade, for access to areas east of the existing operations in the Orinoco. Developing the leases will be expensive because of their distance from the existing infrastructure, and winning bidders are expected to make offers in the $10 billion-plus range including early payments of at least $1 billion, financing plans, and commitments to build the necessary roads, pipelines, ports and upgraders. Potential bidders include Spain’s Repsol, Japan’s Mitsubishi, the U.K.’s BP, and Chevron.

Given the sheer size of its resources, it’s too soon to declare the end of Venezuela’s glory days in the oil patch. However it does seem likely that the new barrels it brings to market will be headed east, not north, and Western producers will have very little stake in the projects.

Chavez will put exports to the U.S. on a short path to zero the first chance he gets.

Oh Imports, Where Art Thou?

The combined decline in imports from Mexico and Venezuela for 2005 through 2008 is 0.89 mbpd. If the trend continues in 2009, then over 1 mbpd will have disappeared from the U.S. import stream in the last five years–an 8% decline from 2004 levels.

Since 2007, the loss of production from Cantarell alone was 0.7 mbpd, but the recession cut U.S. demand by 2 mbpd, effectively masking the decline. Which raises the question: If U.S. demand rises from here, where will those barrels come from…and how much will they cost?

The U.S. is not only first in the world in its demand for oil, but in paying the market rate for it. Nobody else buys 8.5 mbpd of crude at retail.

Drivers in Venezuela are still filling up for 25 cents a gallon even as their exports decline.

Mexico’s gasoline prices are more on par with the U.S., but its consumption has been rising steadily since 1997 and continues to cut into exports.

Saudi Arabia’s domestic consumption is currently growing at the rate of 7% per year, following a trend of more than three decades. It uses a whopping 1.5 mbpd–1.8% of total world oil supply!–to desalinate water, at the equivalent of 7 cents a gallon. Before the OPEC cuts of 2009, its exports to the U.S. had essentially flatlined at 1.5 mbpd since 2004.

Exports from our #5 source, Nigeria, have also declined, from 1.17 mbpd in 2005 to 0.98 mbpd in 2008.

In fact, of the top five oil exporting countries to the U.S., representing 63% of our crude imports, only Canada posted an increase, of 0.2 mbpd.

The combined annual net oil exports from our top three exporting countries–Canada, Mexico and Venezuela–illustrate our situation:

Given the very modest increases from unconventional domestic production and Canada, the decline of imports from Mexico and Venezuela means the U.S. will be increasingly forced to depend on suppliers farther afield–the very same suppliers that China has been buying into in size. The “collision course with China” that I wrote about in July 2005 has nearly reached the point of impact.

It also means that when oil prices rise again, the pain will be far greater for the U.S. than it is for our top suppliers. Next time, the spear of declining oil exports will puncture a lung.

The oil export crisis has arrived. We just haven’t felt it yet.

Don’t Miss: How To Deal With Peak Oil >

Join the conversation about this story »

See Also:

• Obama Wants To Eliminate Subsidies For Fossil Fuels
• Goldman: The US Recovery Will Send Oil To $95
• Saudi Oil CEO Comes Out Swinging In Davos: ‘We Don’t Believe In Peak Oil’

(This guest post originally appeared at the author’s blog GetRealList)

Suppose you worked at the Energy Information Administration (EIA), the agency within the U.S. Department of Energy charged with keeping data and making projections on energy, and you had to produce an annual report with a scenario for the next 25 years.

Being an intelligent and informed investor, you might grapple with the $147 to $33 range in oil prices over the last year and try to imagine how such volatility might happen in the future.

You might be tempted to model a few economic factors such as GDP growth rates and credit availability, and how they affect investment in energy supply.

You might consider the price at which producing a barrel of oil or a thousand cubic feet of natural gas becomes profitable, and the price at which it becomes too expensive and destroys demand.

You might take peak oil, peak gas, and peak coal into account, since the best available models on those subjects all suggest peaks within the time frame of your scenario.

You might extend the line tracing the 40-year trend of declining U.S. oil production.

You might look at the steadily falling prices of power generated from wind and solar and the steadily increasing prices from fossil fuels, and include those in your model.

You might take a cautiously optimistic view of the future of unconventional fuels like shale gas and biofuels, since their commercial history is short and good data is hard to come by…plus there are all those niggling questions about things like long-term production rates, net energy return and fuel-vs.-food tradeoffs.

You might include a tip of the hat, at least, to some sort of future pricing for carbon emissions, since it’s all the rage right now and it seems likely that something will happen along those lines before 2035, even if this year’s Copenhagen summit is a failure.

You’d wind up with thousands of linked, detailed spreadsheets, employing all sorts of advanced mathematical functions to tease coherence out of chaos.

And you’d most definitely ring the alarm bell that we’ve got a serious energy supply problem on our hands and we’d better do something about it, fast.

You’d probably point out that moving aggressively to renewables could solve the climate change problem, and do it without a global agreement on emissions.

But then, you’re not working for the EIA.

Anatomy of an Illusion

If you were, you’d do something like this…

You’d get out your crayons and your graph paper, and starting with your most recent data, you’d plot a nice, steady 1.5% global growth rate for energy demand over the next 25 years.

You’d do something similar for supply so that it matches demand at prices that also climb at a nice steady rate. For oil prices, call it, oh, how about 0.4% per year? That sounds pretty good.

You’d draw basically flat lines into the future for all the fuels dominant today, since you know they have serious challenges ahead, and then draw sharply rising lines for the latest and greatest technology, projecting enormous growth rates for things like shale gas and enhanced oil recovery.

You’d be sure to count all possible supply from new sources — like a new gas pipeline from Alaska — even if those projects don’t yet exist. Hey, it could happen!

You would not, however, factor in any CO2 reduction, because policies to control it don’t exist.

Naturally, you’d assume that the next 25 years would show gradual economic growth, so there wouldn’t be any troublesome issues like credit availability or depressed consumer demand to worry about.

You’d wind up with a chart like this:

AEO 2010, Figure 1: U.S. Primary Energy Consumption. Source

In sum, you’d present a picture of the future that looks like a continuation of the best parts of the past, with none of the bad parts.

You’d assert that the declining trend of U.S. oil production would be reversed by the miracle of technology, and grow from 5 million barrels per day (mbpd) in 2008 to over 6 mbpd in 2027, then flatten out for decades to come. You certainly wouldn’t try to explain how that would happen while mature fields continue to decline — in fact, you wouldn’t mention decline rates at all.

You’d explain that, even though domestic biofuels will fail to meet their 2022 renewable fuels target, they’ll exceed it by 2035 as new sources that don’t exist commercially today, like biomass-to-liquids and cellulosic ethanol, suddenly bloom.

To that you’d add some major gains from efficiency and “structural changes” like switching to hybrid cars — hey, what if the fleet of alternative vehicles tripled in the next five years? — eliminating about 90% of the new energy demand that would otherwise result from a constantly growing economy.

You’d do away with the problem that much of the U.S. nuclear fleet has to be rebuilt in the next 25 years because the reactors are past their expiration dates and living on extended operating licenses already, by assuming that they’ll get another extension to operate beyond 60 years. So you won’t have to worry about any loss in nuclear capacity.

Finally, you’d toss in a scenario for electricity production where renewables grow modestly then flatten out, while the use of cheap biomass suddenly explodes for unknown reasons.

You won’t explain where that biomass comes from, or the net energy of using it, or any difficult details like that.

You’d continue the recent sharp growth curve for wind for a few years then flatten it out, perhaps because you don’t think a storage solution will be found to address the intermittency issue. After all, it’s not your job to know about emerging technologies like flywheel storage systems or V2G — it’s your job to make the future look kinda like the past, only better.

That would give you a chart like this:

AEO 2010, Figure 5: Projection of U.S. non-hydropower electricity sources. Source

And voilá! You’d be able to claim that U.S. oil demand peaked in 2005, and would remain flat around 19 mbpd for the next 25 years — even while the economy continued to grow. It’s like magic!

Just Doing Your Job

It wouldn’t bother you in the least that none of your projections use the best available information on these complex matters.

You’d be completely untroubled by the fact that oil prices averaged $74 in 2007, $100 in 2008, and $59 in 2009, but you drew straight lines into the future. Presumably, all that volatility owed to noise outside your sphere of consideration, and won’t happen again.

You’d sleep just fine at night despite the obvious vapidity, in retrospect, of the oil price predictions in your 2004 annual outlook… nor would you be perturbed if I overlaid your 2010 prediction on it in chart form:

Three AEO 2004 oil price projections, plus AEO 2010 Reference Case. Chart by Chris Nelder.

You’d be careful to follow the lead the IEA set in its recent annual report and arrive at basically the same prediction they did for future oil supply, while trying not to piss off your bosses.

You’d be sustaining the illusions that everybody around you believes in and supporting their religious beliefs about endless growth rates, American ingenuity, and so on. Nobody would fault you for that!

You could do all this secure in the knowledge that, apart from a few snarky financial bloggers out there who nobody reads anyway, you’ll never be challenged on any of it. The press will dutifully report your projections verbatim, and won’t ask you any difficult questions.

And when the business and policy leaders of America drive the whole enterprise off the net energy cliff because they relied on your expert opinion and neglected to invest in the renewable energy solutions of the future in time, you wouldn’t worry your pretty little head about it.

After all, that’s not your job.

[Author’s note: This is based on the “early release” of the EIA’s 2010 Annual Energy Outlook, which offered only a summary press release, a slide deck of charts and some data, without the main text. Perhaps when the final report is released in March 2010 they will explain themselves better, but I doubt it. The EIA does an excellent job of collating and reporting historical energy data, but they should be statutorily barred from making projections.]

Read more analysis from Chris Nedler at his blog — >

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