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Gail Tverberg

Gail Tverberg

Gail Tverberg is a writer and speaker about energy issues. She is especially known for her work with financial issues associated with peak oil. Prior…

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Despite Huge Resources Only a Small Amount of Oil is Recoverable

The world holds a huge amount of oil resources. Besides liquid oil, there is very heavy oil in various forms. There is also liquid oil trapped in oil shale, oil in very deep water, and oil that in not yet fully formed (still kerogen) in shale oil. Some would like us to believe that eventually, all of this can be extracted, so there is no issue with peak oil.

How do we explain that this cannot really happen? The way I think of the situation is that our resources are of varying “quality”, or ease of extraction. If we order them from highest quality to lowest quality, they would probably form something like a triangle (or perhaps the shape would be more like a rectangle, if the high quality resources are closer to equal in quantity to the low quality resources—it doesn’t matter too much for this discussion).

Oil Resources
Figure 1. Schematic diagram of economic and non-economic resources

It seems to me that above some imaginary line, resources can be extracted and producers can make a profit selling them, and the economy can use them successfully. Below the imaginary line, the cost of production will be so high that if a price that is adequate for a producer to make a reasonable profit is charged, the high price will send the economy into recession.

What separates economic and non-economic resources? It seems to me that exactly where this line changes over time, depending on technology (tending to lower the line, as improvements are made) and tax rates (higher taxes tend to raise the line). Basically, the line separates what is affordable for the economy, and what is not.

What we think of as affordable seems to correspond in practice to what economists talk about as the level of demand. If there is high demand, then a high price seems affordable. But where does this high demand come from?

It seems to me that this high demand comes from wage-earners who have earned enough income and businesses that have earned sufficient cash flow that they can afford goods made with higher priced oil.  In terms of Professor Charlie Hall’s cheese slicer model of how energy is used, it comes from an economy that has fat red discretionary income arrows.

Reinvestment Process
Figure 2. Charlie Hall's Cheese Slicer Model, showing arrows for various components of the reinvestment process. This version is theoretically for 1970.

But how does an economy get fat discretionary income arrows? These are really affected by two things:

1. How much energy is used to make energy – the Energy Return on Energy Invested (or EROI) that we read about. The less energy that is used to make energy, the more energy there is for other purposes, and
2. How much energy is required by society to maintain its infrastructure. The more energy that is needed for maintenance, the less is available for other purposes.

What is happening now is that we are moving to lower and lower quality resources (lower EROI resources), so the red arrows are getting thinner and thinner, leading to a smaller proportion of funds for discretionary purposes, and hence lower demand.  Also, our infrastructure is taking more and more off the top, because as we build more of it, it needs more maintenance.

Cheese slicer model 2030
Figure 3. Charlie Hall's Cheese Slicer Model, as of 2030.

If prices could keep rising higher, say to $500 a barrel, the dividing line between economic and non-economic resources in the triangle diagram at the top of this article would drop very low, and we would not have to worry about peak oil. Pretty much all of the resources in the triangle diagram would become economic.

It is the fact that demand is not high enough—that is, the red consumption arrows are not thick enough—that keeps prices from rising high enough to extract oil from all of the types of resources. This is what acts to limit oil resource use, even though to the casual observer, there would seem to be no problem in using all of the low-quality resources that are available.

By. Gail Tverberg

Gail Tverberg is a writer and speaker about energy issues. She is especially known for her work with financial issues associated with peak oil. Prior to getting involved with energy issues, Ms. Tverberg worked as an actuarial consultant. This work involved performing insurance-related analyses and forecasts. Her personal blog is ourfiniteworld.com. She is also an editor of The Oil Drum.

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  • Anonymous on March 02 2011 said:
    If the price of fossil oil rises to $500/bbl, alternate sources of energy (biofuel, especially algal-based) will stabilize the price of liquid fuels well below the $500 level. The "peak oil" crisis is not the world running out of oil, per se, it is the crisis in the fossil oil extraction industry when the price of extraction equal or exceed the cost of alternative (and equally convenient) energy sources. The economies will equilibrate; chaotically if the transition is too rapid. Forward thinkers are more concerned with the time-induced chaos than the price.
  • Anonymous on March 02 2011 said:
    While alternatives to fossil oil certain seem a good idea, the problem with them is there is no indication they can produce the quantity of liquid fuels needed. Can they eventually? Perhaps, but your period of chaos while that development takes place is going to be ugly as the price of oil will not only be fueled, pun intended, by the actual supply and demand ration, but also by the fear factor of investors who drive prices up. It will not be a pretty day when oil shocks first hit. Hopefully an alternative breakthrough, particularly algae, will occur before then.
  • Anonymous on March 03 2011 said:
    Fine grained rocks rich in immature kerogen have been called oil shale and the product of heating them shale oil for more than 150 years. Recently, liquid oil from fine-grained rocks like the Bakken Formation has been called shale oil and the rocks oil shale. I have suggested that the latter two term be changed to shale-hosted oil and oil-producing shale, but it is unclear whether this will catch on. A lot of people have also quibbled with the term shale, as this was defined as laminated argillaceous mudstone in 1747. I think the battle on shale is already lost, and all of the mudstones, ranging from argillaceous to siliceous to carbonate-rich, will ultimately be called shale, which was always a casual term, applied in multiple different ways.McCabe showed (1998) that reserves are oil we produce in ten to fourteen years, and resources 50-60 years production; it is unwise to project ultimate production, and presumably the related global peak too precisely.

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