Adam Ash

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Saturday, September 30, 2006

Deep Thoughts: what comes after the oil runs out?

The End of the Oil Era Looms
Oil, uranium, gold and platinum are more sought after than ever today. The search for natural resources is becoming increasingly difficult and prices are soaring. But future growth of the world economy depends on these natural resources -- and some will soon disappear forever.
By Alexander Jung (from Der Spiegel)

Five minutes before he was scheduled to speak, leading geologist Marion King Hubbert was summoned to the phone. His employer was speaking, someone from the headquarters of the Shell corporation.

He was urged not to present his forecast, Hubbert later revealed. But the scientist with his little Clark-Gable-style beard stuck to his guns, as he has often been known to do. When he appeared at the spring 1956 meeting of the American Petroleum Institute in San Antonio, he presented exactly what he had prepared -- a theory as simple as its implications are dramatic.

Hubbert claimed that the exploitation of oil resources always follows the pattern of a bell curve: first it rises, then it flattens out, and finally it declines -- irreversibly. According to his calculations, the United States would soon reach the peak of the curve -- around about 1970, according to his estimate.

His prediction could hardly have been more accurate: In fact, it was in 1971 that the US's oil extraction reached its maximum level. Ever since then, oil production in the US has declined.

Hubbert's curve was discovered exactly 50 years ago and is still considered part of the basic knowledge of every geologist. The rise and fall of the curve presents a scientifically precise description of something everyone knows, just as everyone wants to deny it. Petroleum is a finite resource. The supply shrinks every day, every hour, every minute. Once the supply is used up, it's gone for good.

Other important energy sources -- natural gas, coal and uranium -- are subject to the same relentless process. They are constantly consumed, but never replaced.

The supply of metals and minerals isn't unlimited either, just as it isn't replaceable. Iron ore doesn't reproduce itself, and neither does gold -- none of these resources replace themselves. But how many people really think about how unique these resources are?

Enormous quantities are consumed, processed or often simply burned up by citizens and by industry. Every second, an average of about a thousand barrels of oil turns into smoke across the world. The average German consumes about 225 tons of coal in his life, along with 116 tons of petroleum, 40 tons of steel, 1.1 tons of copper and 200 kilograms (440 pounds) of sulphur. It's clear this can't go on forever -- even though it has already been going on for what seems like an eternity.

Human beings have made use of natural resources since prehistoric times. They produce tools from iron and copper, heat their living quarters with coal and natural waste, build houses from sand, plaster and stone. But it was only industrialization that caused demand to increase dramatically -- trade in metals, minerals and fuels became a global business phenomenon. Humanity has consumed more resources since the end of the Second World War than during its entire previous history.

Now China has entered the international market -- a country with an unusually rich supply of natural resources. But it consumes even more than it has, as the price changes of recent years reveal: gold now costs almost twice as much as it did four years ago, and platinum is more expensive than it has ever been. Even junk metal has now become a good source of revenue.

Resources, of all things -- commodities that investors paid little attention to not so long ago. The word "resources" evoked images of mine workers, dust and sweat. It sounded like the 19th century -- economically irrelevant and anything but glamorous. Bits and bytes were considered the modern resource -- immaterial and in abundant supply.

It's only since the "classic" resources have become so expensive that people are becoming aware of their importance again. No computer chip can be produced without silicon, no plastic product without petroleum, no catalytic converter without platinum or palladium. Digital technology and the information economy are both well and good -- but the economy still fundamentally depends on steel and cement, and it's driven by oil, gas and coal. But for how much longer?

The future of many industries depends on the answer to this question, as does the development of the world economy itself. Rising prices are usually an indicator that a commodity is growing scarce and that demand for it is rising. So does the rise of resource prices mean that supplies are running out? And if the answer is yes, then how much time remains before the supply will run out?

If the predictions made by Dennis Meadows in his 1972 report for the Club of Rome think tank had been correct, then humanity ought to have reached the limits of growth by now. Meadows was a young scientist at the time, not yet 30. He and his colleagues at the Massachusetts Institute of Technology fed a supercomputer with vast amounts of data. The results shocked the world.

The resources contained in the earth's crust would soon be used up and the scarcity of resources and foodstuffs would paralyze global economic growth -- that was the conclusion the scientists arrived at, and it was a bitter pill to swallow. An economy constantly oriented towards growth was bound to collapse as a result of natural resource supplies being exhausted, the scientists argued. Their report, published in book-form, sold more than 10 million copies and was translated into 29 languages -- but the economic collapse they predicted never happened. Nonetheless, there is an audience for apocalyptic predictions again. According to American journalist James Howard Kunstler, a fierce struggle over resources and foodstuffs will break out and the leading industrial nations will whither away. Kunstler paints a panorama of horrors whose dimension are almost Malthusian, predicting that the entire world faces a historical era of negative growth, unrest and conflict.

Then there are the notorious optimists. They claim that the world's resources are still far from exhausted and that enormous reserves still exist -- around the North Pole, for example. What's more, they argue, industry has always succeeded in extracting more than expected thanks to innovative methods.

The calculation presented by these optimists is simple. They divide the quantity of known resources by the annual consumption of resources. According to this calculation, conventional petroleum will last another 40 years. Natural gas will last for more than 60 years, and coal will last for a full two centuries.

The figures sound reassuring. The only thing strange about them is that they've hardly changed during the past 50 years.

The reason is that the calculation has more to do with economic logic than with geology. When the price of gold rises, the extraction of smaller or less easily accessed deposits becomes profitable. Resource deposits that were previously ignored suddenly enter into the calculation and the quantity of resources automatically rises.

There is another variable in the calculation: New technologies such as those of multidimensional seismology, which allow for locating even small pockets of petroleum or minor ore deposits, and changes in consumer habits. For example, the demand for copper has declined substantially in the field of transmission technology, since copper has largely been replaced by fiber glass. Now the demand for quartz is declining, because fiber glass technology is being displaced by satellite technology. Such unpredictable influences strongly qualify the validity of the consumption-supply relation; the formula is inadequate as an instrument for predicting future developments.

And yet there are serious answers to the central question: "How much longer?" They aren't easy or simple answers - they vary from one resource to another -- and they are far from conclusive. How long a resource will last isn't decided by fate. It depends on human action.

The most reliable predictions are those about petroleum supplies -- thanks to the discoveries of geologist Hubbert. The picture that is emerging is worrying even to the sober-minded observers at Germany's Federal Institute for Geosciences and Natural Resources (BGR), which is based in Hanover. "We're closer to the peak of resource extraction than we would like," warns geologists Peter Gerling, an expert on fossil fuels.

The so-called "depletion mid-point" will be reached within the next 10 to 20 years, according to Gerling's most recent study. The depletion mid-point is the point at which half of the total quantity of petroleum has been used up.

Gerling is confident the results of his research are accurate. "The Earth has been explored in detail," he says, adding that the layer of the planet's crust that contains its roughly 600 petroleum sediments is known in some detail: "There won't be any major surprises." Gerling's matter-of-fact statement has dramatic implications. Once the depletion mid-point has been reached, the end of the petroleum age will begin.

From that point on, when global resource extraction reaches its maximum, a physical supply gap opens up for the first time in history. From then on, petroleum production declines, whereas demand is likely to continue to rise. There's no return to yesterday's heights, and what's worse: The peak is reached without warning.

A FULL 33 of the 48 largest petroleum-extracting nations have already reached or passed the peak. They include Great Britain and Norway, since the North Sea has seen its best days. During the past five years, petroleum extraction has declined there by some 20 percent. Indonesia, a member of OPEC, and Oman have fallen behind the production rates of previous years as well.

There first signs have emerged of a decline in production even in Kuwait. The state-run company Kuwait Oil is no longer able to deliver the usual 2 million barrels a day in the Burgan oil field, the head of the company recently announced. Burgan is the second-largest petroleum deposit in the world; it contains more than half of all known petroleum reserves in Kuwait. Petroleum extraction has gone on in Burgan for more than 50 years. And it used to be known as a place where oil simply flowed from the ground. Those days are over.

The world's largest petroleum deposit, the Ghawar oil field in Saudi Arabia, has been in use for almost as long, since 1951; its daily production rate is 5 million barrels. All giant oil fields (the so-called "super giants") have been in use for between 40 and 60 years; they are the source of about half of the world's oil production. They're all approaching the point at which production declines, according Matthew Simmons, the head of Texas-based bank that specializes on energy projects.

Simmons has grave doubts about whether the Gulf states really dispose of as many resources as they claim. But he hasn't been able to produce conclusive evidence for his hypothesis. If many in the oil business share his skepticism, that's because Saudi Arabia promotes speculation about the extent of its reserves: Ever since the oil industry was nationalized 25 years ago, the government has denied foreign inspectors access to the oil fields.

The only thing that is certain is that Saudi Arabian production -- some 10 million barrels a day -- is currently close to capacity; there is little or no room for expansion. This means that the kingdom is no longer capable of regulating prices. It can stop supplying oil, but it can't supply more -- at least not in the short term.

Saudi Arabia would have to double its production by 2025 in order to satisfy expected demand. Even the former production chief of the state-owned oil company Saudi Aramco, Sadad al-Husseini, recently declared this goal to be unrealistic. "The expectations are beyond what is achievable," he told the New York Times in 2005.

Regardless of whether he's right or not, what is certain is that it is becoming more and more difficult, on a global level, to discover new sources of oil. For years now, oil consumption has exceeded the discovery of new oil sources. The last major oil field was discovered in 2000, in the Caspian Sea. Most new discoveries are minor, and the search for them now takes place in increasingly out-of-the-way regions such as the Arctic and the deep sea.

"Exploration isn't just becoming more expensive," says Andrew Latham of the Edinburgh oil consulting firm Wood MacKenzie. "It's also become more difficult to achieve success, since the easily accessed oil fields have already been discovered."

Latham points out that oil extraction is becoming more difficult even in the Arab region. Sometimes oil companies have to resort to tricks. They inject water or steam into the ground so that pressure levels don't decline. Without such measures, many an oil source in the Middle East would already have been used up.

Dramatic changes are no doubt ahead for consumers and for the oil industry; corporations are already openly admitting as much. For years now, "BP" has officially been short for "Beyond Petroleum." Chevron's new advertizing slogan announces that "the era of easy oil is over." And even Exxon's oil barons, normally known for their brash attitude, now reply that there are "no simple answers" when they are asked about future energy supplies.

Natural gas is sure to be one of the answers. The volatile substance is becoming increasingly important in the mix of energy sources. Exxon's new chief executive, Rex Tillerson, describes natural gas as "economically and ecologically attractive." Only 18 percent of the suspected overall supply has been tapped. As with oil, the largest reserves lie in areas with a varying degrees of political instability: in Russia, Iran and Qatar. The three states dispose of 56 percent of the world's supply -- probably enough to last for several decades.

Though physical scarcity is not to be expected, political factors could certainly lead to a bottleneck. Russia recently demonstrated how acute that problem could become when it used natural gas as a weapon in its dispute over gas prices with Ukraine.

Such actions are all the more disconcerting to states that import natural gas, such as Germany, to the extent that their own natural gas reserves are dwindling. Roughly a fifth of the methanol consumed in Germany still comes from within the national territory, but as consumption rises, these supplies will be used up. And while the extraction curve for oil is a bell curve, that for natural gas ends much more abruptly.

There is more leeway with coal, the most abundant fossil fuel. Coal supplies are more dispersed than oil or natural gas reserves. Large supplies can be found in the US, Russia, China and Australia. Scientists are certain that the supplies of black coal and brown coal (which provides less energy) could last for at least 100 years.

On the other hand, the consumption rate of uranium, the fourth of the great energy resources, has been almost twice as high as the extraction rate for several years. Electricity suppliers can still make use of back supplies in order to close the gap; in some cases, they also resort to uranium that has been reprocessed or taken from warheads left from the Cold War. But these reserves are dwindling faster than expected as a result of nuclear energy's return to popularity. China alone wants to build 25 to 30 new nuclear energy plants by 2020.

That's why firms that specialize in searching for energy resources are focusing on finding new reserves of "yellow cake," as uranium (which has a golden color) is also called. Years can go by before a new uranium mine goes into operation. The extraction costs will probably be much higher in the future; until now, production was limited to a few sites in Australia, Kazakhstan and Canada.

So it's relatively half-way clear how long supplies of oil, gas, coal and uranium -- the four raw materials of the energy industry -- will last. Metals and minerals are another story. They seem to be available in virtually endless supply.

NO ONE who has looked inside the crater that machines have cut inside the earth's crust on the elevated plateau of northern Chile's Atacama Desert will be concerned about the supply of metals and minerals running out. The crater is three kilometers (1.86 miles) wide and almost 500 meters (1,640 feet) deep. It gets larger every day -- just as the company at work there, BHP Billiton, gets richer.

The copper mine at the edge of the Andes, where rain never falls, is called Escondida, the "Hidden One." The reason for the name is that geologists only discovered the reserves buried there by accident in 1979.

Today, Escondida is the world's largest copper mine -- it supplies 8 percent of global copper demand. The bucket excavators work their way through solid rock with buckets as large as bungalows, loading raw ore onto giant trucks (each of them can carry more than 200 tons).

The corporation extracted some 1.2 million tons of copper here last year, and this year's extraction rate is likely to be similar. In order to achieve such output, BHP has invested more than $400 million in Escondida Norte, a new giant excavation area five kilometers (3 miles) further north that should ensure a plentiful supply for decades to come.

"There's no scarcity when it comes to metals," says Markus Wagner, BGR's expert on metallic raw materials. "We're still a long way from discovering all the reserves in the world."

Vast regions haven't been explored yet, including the entire continent of Antarctica. And unlike oil, with its Hubbert curve, the reserves of iron, nickel, silver and copper are so large that the overall quantity cannot be estimated even approximately.

And yet there is a bottleneck even here. It only came about during the past few years, and it has serious consequences for consumers. A handful of mining corporations now dominates the entire world market. They are dividing up the Earth between themselves and fixing the conditions of trade.

The mightiest iron producers -- Brazil's Companhia Vale do Rio Doce and the Anglo-Australian corporations BHP Billiton and Rio Tinto -- raised the price of copper by between 70 and 90 percent this past spring. They are only able to do this because these three corporations control about three-fourths of the world's supply of iron ore. This oligopoly makes even steel giants like Mittal Steel and Acelor look like dwarves. The market power of the ore suppliers is "virtually crushing," analysts from Dresdner Bank have noted.

In the gold business, things have changed especially radically and in a short time. Canadian businessman Peter Munk, who was born in Hungary and is now 78, first founded the mining company Barrick in 1983. He reports with some amusement that the company's management consisted of a "handful of hicks" back then.

Since then, Munk has been following quite an ambitious strategy; he's been buying up one company after the other across the globe. Recently he even bought up his old rival Placer Dome for more than $10 billion. In this way, Munk has catapulted himself to the top of the gold trade in little more than two decades.

The mining corporations are becoming more and more powerful, and they're organizing their business with increasing efficiency. A mine now works like a giant logistics company. Giant trucks are directed to the bucket excavators by computer. If a bucket gets stuck, the next trucks are immediately directed to the next excavation site. The trucks, which can cost up to $2 million, mustn't ever stand around idly. Even when the trucks are refueled, their engines keep running. One truck consumes about 10,000 liters (2,642 gallons) of fuel a day.

For such an operation to be profitable, mining companies need to invest almost exclusively in large sites. The resources have to be easily accessible and the ground has to contain significantly above-average quantities of ore. In the case of copper, for example, daily extraction only makes sense when a ton of ore contains more than five kilograms (11 lbs.) of copper. And a ton of ore needs to contain at least two grams (0.07 ounces) of gold.

Such abundant supplies can only be found in a few regions of the world, and excavation is focused on the so-called "three A's": Australia, Africa and, more recently, the Andes. For example, some 30 percent of the world's known copper reserves are in Chile, and about half of all iron ore comes from Brazil. Developed industrial nations are hardly extracting anything at this point: The last iron ore site in Germany was shut down in 1995.

The market for precious metals is even more narrow. Niobium is an especially heat-resistant metal -- its melting point is 2,468 degrees Celsius (4,474 degrees Fahrenheit). It's an alloy used in pipelines and turbines; about 75 percent of the niobium supply comes from a single Brazilian mine called Araxá. Platinum is another example: 98 percent of global production takes place at four sites; the South African Bushveld complex alone supplies 66 percent of global demand.

The entire world is dependent on a handful of mining corporations. In the past, when the prices of raw materials were low, these corporations made little effort to expand their capacity. They didn't invest in new extraction technologies, refineries or pipelines. Now they can hardly keep up with demand.

In the meantime, reserve supplies in the storage facilities of the London Metal Exchange have shrunk considerably. The prices for ships that can transport ore have risen drastically, and even the special trucks used are in short supply. David Hottman, the CEO of the small mining company Nevada Pacific Gold, paid about $110,000 for one of the trucks in early 2005. "Today I could sell it for $200,000," he says.

How much effort mining corporations put into the search for new reserves is ultimately a question of prices. The South African mines are only profitable when the price of gold is as high as it is now (about $600 per ounce): Some of the mining shafts are a full 4,000 meters (2.5 miles) deep. At the bottom of the shafts, ore is extracted in temperatures as high as 40 degrees centigrade (104 degrees Fahrenheit). The average extraction cost is $350 per ounce of gold.

That's why large mines are not immediately abandoned even when they don't make their owners a profit. Instead, production is reduced until prices rise and extraction becomes profitable again.

Such mechanisms are characteristic of how things work in the world of raw materials. When copper, coal or crude oil become cheaper, the producers curb production until the quantities available on the market are so low that prices begin to rise again. The producers wait and then raise their capacity again. The supply expands, until it exceeds demand again -- and the cycle begins over again. It's a cycle that can last years, sometimes even decades.

When the raw material becomes scarce and too expensive, consumers and corporations know how to help themselves. Home-owners acquire wood stoves in order to be a little less dependent on oil and natural gas. Industrialists begin using palladium instead of platinum when producing catalytic converters or fuel cells.

At the same time, new materials are put to use -- materials which displace traditional raw materials. The fuselage of the new Boeing 787 airplane is no longer produced from aluminum, but from carbon fiber composite and fiber glass.

Most importantly, the recycling of precious metals becomes more important when prices rise. In the cases of iron, steel, copper, aluminum and zinc, a regular recycling economy has developed. In Germany, almost half the steel is already produced from secondary raw materials and junk. Some 240 of the average 535 kilograms (529 of 1,179 pounds) of steel that go into a car are already obtained through recycling.

That's good for the environment and saves energy. It saves money too: The production costs are lower than when steel is produced directly from ore. Eighty percent of the copper that has been extracted until today is still in use.

Fossil fuels, unfortunately, will never benefit from recycling. And they are being burned up as quickly as ever. However, following the oil shocks of the 1970s, oil corporations and countries that import oil have made great efforts to at least slow the depletion of oil reserves. Influential US oil expert Daniel Yergin believes that vast amounts can still be extracted from the ground. His strategy: "Technology is the key."

To see those technologies in action one need only visit Shell's research center in Rijswijk, The Netherlands. There, engineers and geophysicists gather in a darkened room in order to watch how the exploration of the deep sea is proceeding 10,000 kilometers (6,214 miles) away, in the Gulf of Mexico. Seismographic and electromagnetic data about the ocean floor is converted to three-dimensional images on a screen in front of the scientists. In this way, they're able to direct ocean drills through salt domes and layers of granite with precision.

The simulation of extraction work on "digital oil fields" is only one example of the remarkable progress that oil and gas corporations have made. Remote-controlled drills equipped with sensors are driven through kilometers of sand and rock; during the drilling itself, the porosity, temperature and solidity of the rock is analyzed. Corporations pump water, steam, chemicals and even microbes into oil fields -- using techniques that enable them to extract even the last liters of oil from sites that would previously have been considered used up. Or they use high-pressure technology to force liquids into the depths, creating cracks (so-called "fracs") in the rock. In this way, natural gas contained in closed pockets can escape and stream towards the drill hole.

Such sophisticated techniques dramatically raise the costs of resource exploration. Billions are invested when consortiums build platforms 2,000 meters (1.2 miles) above the ocean floor. From these platforms, engineers direct countless little satellite pumps below; the curved drills of these pumps snake through the earth's crust like spaghetti. Thanks to such technology, it's now possible to extract not just 20 percent of the oil in an oil field, but between 35 and 40 percent, in some cases more.

BP CEO Lord Browne recounts that when he was still responsible for the North Sea oil field "Forties" 25 years ago, the exptectation was that no more oil would be available there by the mid-1990s, when 45 percent of the oil would have been extracted. Now more than 60 percent has been extracted, and the oil field is still in use. According to Browne, "the history of the North Sea reflects the overall development of the oil industry."

Nevertheless, the end is in sight. After oil extraction in the region peaked in 2000, exploration costs in the North Sea rose by almost half. The drilling sites will never extract the quantities they used to.

The Canadian province of Alberta, on the other hand, still has its best years ahead of it. Enormous amounts of oil have been found there, mixed with sand, clay and bitumen. The discovery of oil sands could prolong the pre-peak era for years, some believe. All major oil corporations have a presence in Alberta; even the Chinese are there.

The dramatic rise in oil prices has finally made extraction of oil from the sticky mixture economically viable. First the bitumen has to be separated out; then it is liquified with condensate so that it can be transported through the pipelines; and finally it is converted to light oil -- a complicated process that requires enormous quantities of water and energy. In the end, two tons of sand yield a barrel of oil.

Now doubts are being raised as to whether the potential of Canada's oil sands is really as great as many think. And given that no other industry emits as much carbon dioxide as extracting oil from oil sands, popular resistance is growing.

That's why the world's hopes are ultimately pinned to renewable energy sources -- biomass (organic materials from gall to hay that can be converted into synthetic fuels), water power (which already plays the most significant role in the production of renewable energy) and geothermal energy (the use of the vast heat reserves at the Earth's core). Presently, these are merely potential alternatives. And they will probably continue to represent a mere potential for as long as consumers choose fossil fuels.

High prices for raw materials aren't always indicators of physical scarcity. Metals and minerals will probably be abundantly available for several generations. And although regional dependence is increasing, there is no shortage of coal and natural gas yet either. It's only with regard to crude oil that things look different: The era of abundance could soon end.

Maybe it will really take as long as a generation until worldwide extraction peaks, as oil corporations insist. Or maybe the geologists at the Hanover-based BGR are right when they speak of 10 to 20 years. Or perhaps humanity has almost reached the point where we reach the plateau, as the skeptics warn. Of course, they have been saying this for years.

But regardless of who is right, crude oil will soon no longer be able to play the central role in the global energy mix that it plays today. BGR scientist Gerling says there are no doubts about that.

"We should have started taking this into account a long time ago," he says regretfully.


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