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Chapter 11:

Energy

                       

 

MAIN ISSUE:

When reading about this subject, the reader should understand the terms "reserve" and "resource". The resource is "all that there is". The reserves are a subset of this, namley those quantities that are economically recoverable with current technology. A good survey of how to classify reserves and resources is given by the Society of Petroleum Engineers, here.

An important issue in the energy chapter is to get a more refined understanding of the "reserve" concept . Imagine investigations of a potential offshore oil field. A number of appraisal wells are set up, and on the basis of what they yield, a decision is taken on whether it will pay off economically to develop an offshore platform here. This decision is not made only on the basis of the proved reserves - because by definition the proved reserves means that oil which has already been found. Rather, the decision is made on the basis of what is called the proved plus probable reserves - the latter being the oil that will most probably be found when additional wells are made next to the existing ones. As an illustration, the situation for the British offshore fields in the North Sea in 1999 (when 17.5 bn barrels had been produced already) was that the remaining proved reserves were 6.2 bn barrels. But the remaining probable reserves were an additional 3.4 bn barrels, and what is called the possible reserves were estimated at an additional 4.2 bn barrels. However, the practice in USA is to report only the proved reserves, omitting the probable and possible reserves. The amount of proved reserves depends heavily on the demand, because you do not make the necessary investment in wells etc. until about 10 years before the anticipated need. That is why the R/P ratio (reserves divided by yearly production) has remained at about 10 years in the USA for half a century, irrespectively of oil crises and changes in production. This practice in USA also means that American experts are used to the situation where total reserves are much larger than the "known" reserves. Thus, when experience from the USA is used to estimate what remains in British offshore fields, the geologists of the US Geological Survey estimating the amount of oil available for the future arrive at estimates 50 % larger than the British figure for remaining plus probable plus possible. Thus, US geologists have estimated the amount of North Sea oil still in place as 50 % larger than what British experts consider "possible". In this way, the recent USGS report from 2000 on the world´s remaining oil reserves (which is cited by Lomborg) has become overly optimistic.

Next, one must understand that all implied parties have interests in boosting the estimates of proven reserves. National authorities and private oil companies have an interest in telling that the future is secured and the economic prospects are good, in order to keep the optimism of investors. The OPEC countries have had an incentive since 1983, because from then on, the market share of each OPEC nation is decided according to its share of the total known reserves. So, the greater the reserves on paper, the more oil are they allowed to sell. That reserves have been exaggerated, became especially evident in the spring of 2004 when Royal Dutch/Shell had to downgrade its proven oil reserves by 20 percent, or nearly 4 bn barrels. Thus, any report on oil production or oil reserves is a political instrument, meant to affect investors etc.

Lomborg refers to the existence of two groups, the optimists and the pessimists, but fails to mention who they are. The optimists are mainly economists and governmental instutions, whose claims are based more on economical considerations than on geological insight. The pessimists are not mainly worried green enthusiasts, as Lomborg indicates, but retired geologists that, after retirement, have become free to state their opinion. Thus, the pessimism is based mainly on insight into the geological realities.

Recommended reference:

I recommend a paper by a retired geologist, in which many complicated issues are explained very well. This is Jean Laherrere: "Estimates of oil reserves", a paper presented at the EMF/IEA/IEW meeting in Laxenburg, Austria in June 2001. It may be downloaded here.

 

P. 120 top left: FLAW

"But societies do not demand oil as such, only the energy this oil can supply." Flaw: This is not correct. Oil is a very valuable raw material for the production of many chemicals, e.g. plastics. Some people imagine that some time in the future our descendants will criticize us for having burned off all the valuable oil, which they would now need for producing chemicals.

P. 121 left: FLAW

"Limits to Growth showed us that we would have to run out of oil before 1992." Flaw: It is not true that Limits to Growth said this. What Lomborg refers to, is the result of a calculation using very simplistic and deliberately unrealistic assumptions, not a prediction of the end of oil supplies in a distinct year. See the comments to Chapter 1, page 29.

P. 121 bottom left: MISUNDERSTANDING

"Here, once again, we were told that our resources would soon run out". Flaw: It is embarassing for Lomborg that here, and elsewhere in chapter 11, he shows that he does not understaind the meaning of the word resources. Resources are all that there is, both what can be utilized (reserves), and what cannot be utilized, at least not with the technology known at present. So, although reserves may in theory "soon run out", this can impossibly happen to the resources.

P. 121 bottom left: FLAW

"Beyond the Limits predicts once again that we will run out of oil . . ". Flaw: Lomborg´s review of the contents of Beyond the Limits is very misleading. For instance, concerning natural gas, the book does not predict that the reserves will have been exhausted by a certain year, but rather it describes what will happen under a number of different conditions. Beyond the Limits is not a doomsday prophecy, as Lomborg makes his readers believe. On the contrary, it claims that it is possible that the total world population at the end of the 21st century may stabilize at a level of 7.7 billion people in such a way that these people may have a standard of living somewhat better than the one we have today. However - and that is the point made in the book - this lucky state may only be reached if already now we take the environmental problems seriously and act as early as possible. Time is crucial. If we hesitate too long, the results will be very drastic drops in the quality of life by the end of the 21st century. Among other issues, the book deals with the price mechanism. It tries to demonstrate the fallacy of the postulate that because of the price mechanism, it is not possible to run out of raw materials. It could have been interesting to everybody if Lomborg had taken up this challenge and discussed the price mechanism. His misrepresentation of Beyond the Limits dates back to January 1998. It was pointed out to him in 1999 (chapter 11 in "Fremtidens Pris"), but he has kept his wording unchanged. So it seems that he deliberately misuses Beyond the Limits to paint a picture of all opponents as starry-eyed doomsday prophets.

P. 121 bottom right - 122 left: FLAW

"In 1914 the US Bureau of Mines estimated that there would be oil left over for only ten years´consumption. . " Flaw: As explained in the paragraph "Main issues" at the start of the chapter, these claims are due to a misrepresentation of the reserves that are left, because traditon in the USA has been to count only the proven reserves, not the probable reserves, and the existence of reserves will only be proven about 10 years ahead of when they are needed.

P. 122 bottom left: FLAW

"How should scarcity be measured ? . . If we want to examine whether oil is getting more and more scarce we have to look at whether oil is getting more and more expensive." Flaw: This statement about "how scarcity should be measured", which is uncritically adopted from Julian Simon, is simplified to an unacceptable degree. To quote D. A. Kysar (Ecology law quarterly vol. 30, 2003): "In order for such a methodology to produce reliable results, however, Lomborg first would need to remake the world in the image of a perfectly informed, perfectly competitive market, including the seemingly Herculean task of eliminating governmental subsidization of energy production. Even then, one still would be left with the question of why the market´s interpretation of U.S.Geological Survey data is preferable to the interpretation of the Energy Information Administration. Lomborg does not answer that question . . ". Others have tried to define a useful index that indicates the scarcity, viz. the socalled scarcity rent, defined as price minus marginal extraction cos. It seems that Lomborg is not aware of that.

P. 122 right and Figure 65: (COMMENT)

"Thus, it is also expected that the oil price will once again decline from $27 . . ". Comment: The sources are correctly reported. However, those who make price predictions, are not objective, because the predictions may serve political purposes or be meant to affect the market. They are no more reliable than predictions of bond prices or valuta exchange rates. And indeed, the predictions referred to by Lomborg have already turned false. In october 2004, the oil price passed above 50 US$ per barrel. By now, few expect the price to drop very much again, and so it seems that the general increase in price is here.

P. 122 bottom right: (COMMENT)

"The reason why it is unlikely that the long term trend will deviate much from this price . . ". Comment: But now, the price has actually deviated much from the 17 - 30 $ level, and will probably remain high, contrary to Lomborg´s assumptions. This suggests that the rise is not just a phenomenon in the economical system - because this system would not allow such rises, as Lomborg states. So the rise may actually reflect that demands exceed supplies.

P. 123 and Figure 66: FLAW

"At the same time Figure 66 demonstrates that we have more reserves than ever before." Flaw: Lomborg states that the figures up to 1944 are only American, and, as explained under the heading "Main issues", tradition in USA has been to report only reserves for about 10 years ahead. So the low figures up to 1944 are an artifact, due to an American conception of the word "reserves" which differs from that in the rest of the world. Concerning the years from 1944 onwards, the figure is also very misleading, because even here, it uses the concept "reserve" in a restrictive way (note that all data are of American origin, e.g. from USGS). The figure only shows proven and, to some extent, probable reserves. Lomborg tells us in the legends that he is talking about "total reserves", falsely suggesting to this reader that "reserve" includes all that we expect to find in the future. If we used the word "reserve" in this broader sense - and most readers would probably assume that this was the meaning of "reserve" - then the curve changes completely and assumes approximately the expected form. Such a curve is given by Laherrere in the reference given under "Main issues" (His figure 83 on page 74). His curve starts at 1975 with 59 years of consumption, and declines rather gradually to 38 years of consumption in 2000.

P. 123: FLAW

"Common sense would tell us that if we have 35 years´consumption left in 1955, then we should have 34 years´ supply left the year after." Flaw: The flaw here is in the meaning of the phrase "years´consumption left". The reader would expect that we are talking about the total amount of oil existing in oil fields that can be exploited, and that this total amount should be fixed. But Lomborg goes against this by referring to how many years of reserves are depicted in figure 66, without explaining that the word reserves, as used there, does not agree with the common understanding of what is available in total. Lomborg deceives his reader when he writes, at the bottom of the page, that oil does not seem to be getting scarcer, because this can only be assessed on the basis of total reserves, not on the basis on the proven reserves that he is referring to.

P. 124, Figure 67: FLAW

Figure 67 shows that the known oil reserves have increased more than tenfold from 1950 to 2000. Flaw: The figure is misleading because the word "reserve" is used in a more restricted way than the reader would expect. If by "reserve" we mean all that may ultimately be recovered from the oil fields, then the figure is wrong. Laherrere (the reference is at the top of this web page) has in his Fig. 85 gathered a lot of published estimates of "World oil ultimate recovery" which is what most readers would intuitively feel is the meaning of the word "reserves". The first three estimates, from around 1950, are relatively low, at about 1,000 billion barrels. But the 18 next estimates, from the years 1959 to 1995, all center around an estimate of 1,800 billion barrels, without any time trend. After that, USGS published higher estimates in 2000, but these seem to be overly optimistic partly for reasons explained above under the heading "Main issues". So, there is no increase in the estimated total reserves over the period 1959 to 1995. As to the remaining oil reserves, Laherrere shows in his fig. 2 that estimates from political/commercial sources have been steadily increasing, whereas estimates based on technical/geological sources indicate a decline after 1980. What figure 67 shows, as also stated by Lomborg, are the "known" reserves, i.e. the proven reserves. So the figure tells about the production process - for how many years ahead of the need do engineers start to make the next wells - and not about how much oil is left for the future. When Lomborg fails to state this explicitly, his figure and text is misleading.

P. 124 bottom right: FLAW

"Consequently, the price increase actually increases our total reserves . . " Flaw: This is partially a misunderstanding. Oil, being a liquid, is subject to other conditions than solid minerals. How much is mined of a mineral, depends on the price - the higher the price, the less concentrated ores can be utilized. But once the pumping from an oil field has been set going, the end of utilization is determined by what is technically feasible. Oil is already concentrated when it comes up, so there is no interplay between price and concentration. High prices may increase the rate at which new drills are made to search for additional oil, i.e. speed up the finding of the last reserves which would be found sooner or later. High prices might also increase the political pressure for access to oil in protected areas (Northeast Greenland). But high prices will not automatically lead to more efficient exhaustion of known oil fields, because this may require the use of more energy for the extraction process than the enrgy contained in the oil obtained.

P. 125 top left: WRONG STATEMENT

"Looking at Figure 66, it is clear that we have more and more oil left, not less and less." Error: This statement is wrong, because what figure 66 shows, is not the total reserves, but only the proven reserves. In the opinion of Laherrere (reference on top of this web page), the remaining reserves are actually declining.

P. 125 left: FLAW

"1. "Known resources " is not a finite entity" . . . "Actually, it is rather odd that anyone could have thought that known resources pretty much represent what is left." Flaw: By definition, the resources are all that is there, both what may ultimately be utilized, and what will probably never be utilized. So, the resources are per definition all what is left. Whereas in figure 67 Lomborg uses the term "known reserves" - which is sensible in some respects - he here uses the term "known resources", which is not sensible. "Known resources" should literally mean "the known part of all that is left", and so he says that the known part is not the whole. Of course not. But we know some resources which can never be utilized, so the term does not make sense in this context.

P. 125 bottom left and top right: (COMMENT)

"We become better at exploiting resources". Comment: This is only partially right. We have started to utilize e.g. offshore oil fields, which were not available some decades ago, and we may/may not become able to utilize other oil fields that are not avialable by now, e.g. fields under deep water in the South Atlantic, and possibly fields in Antarctica. But technological advances have mainly increased the rate at which existing oil fields are utilized, rather than they have expanded the range of oil fields that can be utilized. There may be some "unconventional" types of oil fields that may become utilizable by new technology, but up to now, this has been of little importance.

P. 128 left: (COMMENT)

"Should the oil price increase to 40$ per barrel we will probably be able to exploit about five times the present reserves." Comment: Today, the oil price has passed 40$ per barrel. The higher prices have led to increased exploitation of tar sands in Canada, but this is far from having opened up the exploitation of five times the former reserves.

P. 128 bottom left and top right: FLAW

"The total size of shale oil resources is quite numbing . . " Flaw: The impression of vast amounts of potentially exploitable fossil fuels in shale oil is misleading. Although the figures cited by Lomborg are correct, his implications as to what these figures mean are false. The oil shale resources referred to include three parts: 1) identified resources, of which some, but not all, may become exploitable in the foreseeable future; this part makes out 0.8 % of the figure; 2) "hypothetical resources", i.e. resources that have not actually been identified (2.7 %); and 3) "speculative resources", i.e. those quantities that might be present in anticipated resources, regardless of technical or economic constraints. These latter make out 96.5 % of the total. This means that the figure cited by Lomborg is an amount about a hundred times larger than the quantities that will certainly be exploitable in the foreseeable future. So, "the equivalent of our present total energy consumption for more than 5,000 years" is mostly just speculation. The figures cited by Lomborg are seen on p. 159 in the book by Craig et al.; the information that these figures are mostly speculative resources are seen on p. 156 in the same book. Lomborg may, admittedly, have overlooked this just accidentally. On the other hand, his citations from the book include p. 150, p. 159 and p. 164; so it seems likely that he has seen the whole chapter. In any case, to be so careless about a postulate that the amount of fossil fuel available to us is a hundred times larger than generally said, is indeed a flaw.

P. 128 right: (COMMENT)

"Today the global price for energy constitutes less than 2 percent of the global GDP . . " Comment: Lomborg forgets to mention that the price of many foodstuffs, raw materials etc. is very much dependent on the price of energy. If energy prices were to rise markedly, there would be marked rises also in many other products, and thus the total GDP would be affected much more than implicated by the modest figure of 2 percent.