Weekly Review

The March 28, 2011 edition of the ASPO-USA Peak Oil Review had a brief which I found of considerable interest. It stated:

A perspective paper in Journal of Chemical Technology & Biotechnology makes a case that conversion of biomass to cellulosic ethanol is the most efficient and productive use of biomass to create a high-octane, environmentally friendly transportation fuel. (3/23, #17)

I found it to be of considerable interest because there is a proposal to build a commercial cellulosic ethanol biorefinery in the eastern Upper Peninsula of Michigan not far from where I live.

Based upon information provided by the corporation proposing the biorefinery, Frontier Renewable Resources LLC, owned by Mascoma Corporation and J.M. Longyear, I would not consider cellulosic ethanol to be efficient from an energy perspective.

In a Brookings Institution presentation in early 2009, UCSD economist James Hamilton suggested that the government think of using the US Strategic Petroleum Reserve (SPR) to counter high oil prices. Although the suggestion failed to gain traction at the time, recent upheaval in the Middle East is once again putting the future of the SPR back on the agenda. Should the reserve be drawn to cool oil prices which have surged on the back of lost Libyan crude output? I must admit I was somewhat cool to the idea when Hamilton published his Brookings paper, but his suggestions often prove prescient and therefore deserve closer examination. Indeed I became much more convinced when I saw a Federal Reserve presentation on short term oil prices, which largely concluded that the institution has little insight into short term oil price movements. Given the potential impact of oil prices on the economy, the Fed does not have the luxury of such ignorance.

The SPR was established in 1975, after the first oil crisis, with the purpose of providing a critical petroleum reserve to the US which could be drawn in the event of war or embargo. This seems sensible enough. A large and militarily critical power like the US should avoid being held hostage to energy exporters like the Gulf states and Russia. But the oil-price spikes of 2008 show that oil prices can substantially damage the US economy even without hostile acts by other countries.

In 1999, I wrote a paper concerning the production decline of North Sea oil fields and made projections for the future of Norwegian and United Kingdom (U.K.) oil production (crude + condensate). For comparison purposes, I compared my projections with those by the U.S. Department of Energy/Energy Information Administration (US DOE/EIA). Table I is from that paper.

Restrictions on world oil production can be divided into four categories:

1. Geology

2. Legitimate National Interests

3. Mismanagement

4. Political Upheaval

Consider each in reverse order:

Political upheaval is currently rampant across the Middle East, resulting in a major spike in world oil prices. No one knows how far the impacts will go or how long it will take to reach some kind of stability and what that stability will mean to oil production in the Middle Eastern countries that produce oil. We are thus relegated to best guesses, which span weeks, months, or years before there are clear resolutions. One pre-Middle East chaos country limited by political upheaval is Iraq, which is believed to have the oil reserves to produce at a much higher level, but Iraqi government chaos has severely limited oil production expansion. In another long-standing case, Nigeria has been plagued by internal political strife, which has negatively impacted its oil production.