Perry Arnett's Scenario

On Oil Accounting and Life After Peak Oil

                                          17 February 2004

"There must be a way of knowing how much oil currently exists."

                                                * * *

The answer is long and convoluted but it goes something like this [not exactly, but "something like"...]:

"P5, P50 and P90":

Natural resource discovery values are reported as statistical probabilities; e.g. I could say:

a) there is a "P5 chance" that you have one barrel of oil in your bathtub - and that could be a true statement

b) there is a "P95 chance" that you have 1000 barrels of oil in your bathtub - and that could be taken to be a false statement

c) or - there is a "P50 chance" that you have between 1 and 3 barrels of oil in your bathtub - and that could be either true or false,
depending upon the facts.

So the point is: which P number does the geologist report to his boss? and which P number does his boss report to his boss?

They will usually say something like "there is a 95 percent probability of there being one barrel of oil in this new discovery; and there
is a 5 percent probability of there being 789 gazillion barrels of oil in this discovery, and there is a 50 percent probability of there
being 100,000 barrels of oil in this discovery".

1) a geologist finds the stuff - oil; he reports it to his boss and inflates the projected size of the discovery by some small percentage to
make himself look good [...just human nature...]

2) the boss passes the geologist's findings up the ladder adding a small percentage to make HIMSELF look good.

3) it goes like this being repeated until the numbers are published by the oil company who is hoping to sell more stock so the ad
agency inflates the numbers some more! Or, for some strategic reason, they may report numbers LESS than there really are!
(Following that through the line of reporting and fudging and reporting and fudging, which aggregate number is it that got reported in
the text books we all read in high school?)

4) so at this point (maybe 100 years worth of fudging!) NO ONE knows how much oil there really is there to be extracted. (Witness
the recent announcement by Royal Dutch Shell Group that they had been telling the world (forever...) that they had 20% more oil
reserves than they now admit that they really have...; and today's announcement by El Paso Gas of a 41% reduction (!) in its proved
reserves)

So the only way to really know how much oil there really is, is to backdate the production numbers from EACH well and sum the
totals.

The problem with that is that all companies, and all nations fudge the numbers (up or down) for various reasons: competitive
advantage, national security, finance, stock sales, etc.

So, the lesson is that NO ONE knows how much oil there ever really was in the ground, and no one knows how much oil has been
taken out of the ground, so no one knows how much oil is left in the ground! There are numerous estimates, but no hard facts.

What most everyone DOES seem to agree with, however, are these assumptions: That -

1) oil is a finite resource

2) as oil is extracted from the earth there is less of it remaining

3) the earth's crust can only contain so much oil

4) the geology of how oil is formed and where it is trapped suggests that most of the oil in the earth's crust has already been found

5) oil began to be exploited generally, in about 1860

6) taking all the best guesses since that time, about half of the assumed oil in the earth has been used, leaving about half the oil in the
earth yet to be extracted

7) The problem with #6 is that world oil-consuming population is increasing so fast (e.g. China and it's associated auto industry...)
that the half remaining will be used in 1/5th? to 1/8th? the time it took to use the first half! [the slope going up was difficult, but gentle;
the slope going down will be steep and torturous...]

8) there are folks all around the world who glean every report from every oil company and government and wildcatters and rough
necks trying to put one more decimal place to the numbers, so while it can be stated fairly accurately that no one knows how much
oil there was, or is, or remains, the best informed estimates - because they are so diverse - are probably not too far from reality.

9) if you then throw in factors like Iraq, where no one knows how much oil was extracted during the past 15 years or so, and no one
really knows how much oil there was to begin with there, it makes the suppositions of some begin to ring true that there may have
been far LESS oil under Iraq than most originally thought, and that more of it may have already been exploited than most originally
thought; so you may find (in the future), that Iraqi oil was not worth the war to get it!

10) the extraction/production of most natural resources can be generally plotted by imagining a standard parabolic curve where initial
extraction begins at zero on the left, gently rises over time to the right until reaching a 'peak', then gently falling over time until reaching
zero again. This is called the "Hubbert Curve" or Hubbert Peak after the geologist who discovered it. If it looked as I have described
it, it would be symmetrical. But in the real world it is not symmetrical but is rather, up and down as extraction activities rise and fall.

11) thus, one definition of the 'peak of oil' production is that time when about half the oil that there is has been extracted, leaving
about half the oil remaining to be extracted.

Why is this such an important thing to discuss?

While new discoveries and increasing production were possible, growth was possible. When energy resource discoveries peter out
and production tops out and begins to decline, EVERYTHING else in life dependent upon energy has to decline with it. So 'peak oil'
is a point that takes on an importance barely understood by most, but that's why its placement in time is so eagerly sought after.

FWIW: I personally think we passed 'peak' by 1999/2000; some say 2000, others say 2003, others say 2007, the USGS says
2030(!), etc. [the most optimistic estimates are dire, so the least optimistic estimates are perceived as being cataclysmic!] Take your
pick. But when I see what I see on the international economic scene I am left with no sense other than that the peak of world oil
production has probably already passed. I seem to be in pretty good company since Deffeyes and Heinberg and Goldstein and
Duncan and Simmons and Bahktiari all seem to have the same view.

12) but the point of peak oil is not so much WHEN it occurs, but rather the effects on our lives AFTER it occurs!

An example: My granddaughter is one year old. She would normally graduate from high school in, say, 2020 (16 years from now).

The natural gas 'cliff' will hit 2007-2010; (because natural gas production is largely self-pressurized in the well, when a NG well quits
it is usually sudden and without any previous signals, unlike an oil well where there are signs in advance of its depletion that it is
beginning to "go dry"; thus the 'end' of NG is described as being not a peak, but rather as a 'cliff'). As the NG cliff is reached,
electricity generation will be the first to be effected and with that, will go primary industries like mining, smelting, metal fabrication and
the like. [witness the shutting down ALREADY of aluminum smelters in the Pacific NW, and fertilizer and ammonia production
facilities all over the world - due to electricity costs/availability ]

The first major effects of oil peak will have occurred by ~2012? - this coming just a few years after the NG cliff!; the availability of
electricity in the US will soon be on a par with electricity availability in say, China or Ukraine now; spotty, rationed, rolling blackouts,
and less and less of it each month, until -

Some day soon, ~2010-15? the Net will go down - and never come back up; some time after that ~2015-2020? the US electrical
grid will go down, - and never come back up.

As soon as those two events occur, life "as we know it" will have been changed forever.

All chemical processing, petroleum refining, mining, agriculture, auto manufacturing, all telcom-driven international credit, finance and
banking will cease; (by 'all', I mean such a large percentage of the existing activity as to call it 'all' for our purpose here). Auto
manufacturing will have ceased by ~2012-2015? (there being either or both no gasoline with which to drive them and little electricity
with which to make them); used SUV's may be selling for a loaf of bread or a pound of sugar by ~2015; by ~2015 there will
probably be no air travel except for very high mucky mucks in government - which will be so rare people will step outside and point
up in the sky again....;

Most schools and universities will have closed by ~2017-2020? - no heat, no lights, no money for teachers, no Internet, no need...;
roads and freeways will have been so unmaintained that by ~2013-2016? they will be effectively useless.

Elevators in most buildings will have stopped running by ~2012-2105?, making commerce, insurance, banking, pensions, annuities,
bond, commodity and equity markets dysfunctional.

I've left out the obvious "resource wars" (oil, NG, water, chrome, molybdenum, etc....) currently, and soon to be "in a theater near
you"...

Y2K: Y2k was the perfect reverse analog to the future. Why? because all the stuff that might have happened didn't, which is the
reverse of what lies ahead. Why is that? Y2k didn't happen, largely, because things were fixed, or remediated. But there is no
remediation for a dry oil well. There is no remediation for a dry natural gas well. There is no remediation for the loss of the cheap,
readily available, high content energy sources the world has been living off for the past 150 years. When they are gone, they're gone.
And most of our lifestyles with them.

So - what should my daughter be teaching her daughter as skills necessary for survival, and a high quality of life, for life after 2020?

Perry in Utah

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