Understanding the Current State of Energy Supply and Demand

Scott Lemieux asked a very good question in the comments a couple of posts ago:

"Roughly what percentage of energy consumption is taken up by the internal combustion engine, and what by energy production? The higher the latter, the more difficult the long-term problems (of peak oil) would seem to me, although perhaps it doesn't really matter much."

The first part of my answer comes from an interview with T. Boone Pickens who started Mesa Petroleum Company in 1956 with a $2,500 investment and built it into the largest independent oil and gas company in America and now runs one of the largest energy hedge funds.  T. Boone does a nice job of explaining why he thinks we are at the tipping point.  (In fact, today he had a couple of quotes about oil testing $70/bbl soon and a couple of other related topics.  He's been right so far.)

"Let me tell you some facts the way I see it. Global oil (production) is 84 million barrels (a day). I don't believe you can get it any more than 84 million barrels. I don't care what (Saudi Crown Prince) Abdullah, (Russian Premier Vladimir) Putin or anybody else says about oil reserves or production. I think they are on decline in the biggest oil fields in the world today and I know what's it like once you turn the corner and start declining, it's a tread mill that you just can't keep up with.  So, when you start adding the reserves in these countries, you're not even replacing what you're taking out..."

(Pickens, cont'd) "Let me take you to another situation quickly. 84 million barrels a day times 365 days is 30 billion barrels of oil a year that we're depleting. All of the world's (oil) industry doesn't even come close to replacing 30 billion barrels of oil. We don't spend enough money to even give ourselves a chance to replace 30 billion barrels. It may be because the prospects are not there. I rather imagine that's what the answer is to that.

So, if you accept that 84 million barrels a day is all the world can (produce), and then look at refining capacity, I think it's just a coincidence that refining capacity... world capacity... is 84 million barrels a day. So, we're in balance: 84, 84.  Now you see the projections for the fourth quarter of '05, I mean like tomorrow; it is 86 to 87 million barrels of oil a day required. China (and) India (are) growing fast. Our economy is going down a little bit, but it doesn't seem to be shutting off demand for gasoline, oil, natural gas, whatever. But around the world... just assume that the (U.S.) economy is slowing, but China is still ramped up; it is still 86, 87 million for the fourth quarter.  Now we've got some pretty good inventory, those will be... I think.. they'll be gone in the third quarter. I can't wait to see how this is all going to play out."

You see, the world up until the "peak," which by Pickens' logic is this year, have become accustomed to having slack production that it can call upon to assuage any supply fault.  And, until recently, OPEC and other countries were able to help us with that supply (and still say that they can, which is seeming more and more disingenuous, as it seems their fields are heading toward depletion, and we're not discovering any more large pockets of oil, and therefore can no longer make up for that slack.)

That means if there's some, no any, disruption to the supply lines, prices will spike.  This lack of a supply option also means that those who wish to disrupt the flow of oil to affect geopolitical wranglings (i.e., terrorists) will have more and more pricing power over time as the gap between supply and demand grows, as we discussed in this post over at TOD.

Another thing to remember is that the "easiest"/"cheapest to extract" oil comes out of the ground first, then the expensive "sour" oil comes out.  Much of the "sweet crude" that refineries are set up for is a good bit of that "cheap oil" that is already out of the ground.  Refining the "sour" oil requires investment in refining techniques that take a long time to implement.  Another problem that we face is that we are nowhere close to having those kinds of refineries online and ready to go (of which there are very few) to turn that into gasoline.  In fact, that is what the Saudis have been grousing about lately, "you Americans should change your infrastructure so that you can handle this more expensive and tougher to refine "sour" "heavier" oil. 

The second part of the answer, where that supply goes, goes something like this:

These days, of an average 42 gallon barrel (which after refining yields a little more than 44 gal of fluid) of oil, about 40-45% of it becomes gasoline, and another 20% becomes fuel oil, and the rest becomes jet fuel (9% or so) and other petroleum derivatives such as plastics and agricultural aids (pesticides, etc.).  Ergo, a lot of fuel goes into some kind of an engine.

The final part of the answer to his question is a little simpler, how that supply is consumed.  About 65% of the energy produced by oil turns into transportation, the rest turns into other applications, industrial uses being about 25% of the total.   

One final note about production.  As I said, many in the media, etc., keep looking to the Saudis and OPEC, or for that matter anyone else, to solve the supply problem.   

But as we have been seeing of late, it seems no one can help out, as there are very few net oil exporters left, and they, as evidenced by my last "picture of depletion" post, are getting in worse and worse shape, as my colleague Heading Out demonstrates in posts over at the Oil Drum, here, here, and here.

The only country that may be able to help us out supply-wise in the long run is Canada, because of the amazing amount of tar sand oil (which is very difficult and costly to extract and refine...), and as they are bound under NAFTA to do, they must assist member nations in the treaty before they help other consumers of oil.  Yes, so is Mexico.  Interesting, eh?  (Although, today, T. Boone Pickens was not very positive about the Canadian Tar Sands.)

Finally, if you're looking to check out current events on energy and other related topics, of which there are many, you can always check out peakoil.com, The Energy Bulletin, or Flying Talking Donkey.

--Prof. Goose