The serious but invisible debate over “new” oil

Last week, before US House Speaker John Boehner shut it down, the federal agency called the Energy Information Administration announced that the United States will become the world’s largest producer of oil by 2020. Production in 2011 was 10 million barrels a day; by contrast, Saudi Arabia pumps 12 million barrels a day, and exports most of it, while we consume all ours plus another eight million barrels a day brought in mainly from Canada, Venezuela, and Mexico.

Here’s the rub: The “new” American oil isn’t like oil used to be when it came from Beverly Hillbillies-style gushers. The new stuff is fracked from “tight” formations: It takes much more energy to produce oil in the US than it ever did before.

A growing segment of the economics profession seems to be noticing this phenomenon, even as traditional economists who work for big oil companies and the consulting firms that advise them just keep counting the barrels.

Right now, these are parallel conversations. The environmental economists and the ecologists and some renegade former oil-industry geologists discuss, mainly among themselves, various disaster scenarios and how to cope with them. Many predict such dire outcomes as an end of economic growth because the “new” oil becomes so expensive that nobody will be able to buy it. Some predict sudden “cliffs” that we will fall off because debts won’t be able to be paid. Meanwhile, mainstream economists, including even the progressives among them, just keep thinking about economic growth the way they’ve always thought of it—as the normal way of the world, with most of the debate being over the distribution of the proceeds of growth, not over whether the wheels will continue to turn.

Except for a brand-new, just-announced old-fashioned oil gusher just identified of Canada’s east coast, all—all—of the “new” oil (and natural gas) that has made the USA the world’s largest producer of energy is being produced via hydraulic fracturing, or “fracking.” This and other new methods of injecting water or other substances into deep strata of shale is what has allowed the oil industry to get access to previously inaccessible hydrocarbons, which are then liquefied and refined into fuel.

Fracking, and the costs of extracting and refining this “new” stuff, is where the two conversations start to come together.

We’ve seen it already in New York State. So far, anti-frackers have prevailed based on their arguments about the costs of fracking outweighing the benefits. Agricultural interests who are concerned about groundwater contamination have joined with urban environmental activists to press state government to embrace other sources. Only in France, where 66 million people live in an area about five times the size of New York State and still rely mainly on nuclear reactors for electricity, have anti-fracking coalitions prevailed; everywhere else in Europe, just like everywhere else in the USA and Canada, the fracking frenzy is underway.

A time for green despair?

The air of triumphalism among oil-industry pronouncements is unmistakable. The chief economist of British Petroleum, Christof Ruhl, is a typical voice: He hails the “revolution” in production that has led the US toward its new status as a global leader in overall energy production and, soon, as the global leader in oil. Ruhl praises the American regulatory environment, especially since the election of Barack Obama, which is when the great boom in oil production began.

But cracks are showing up in the pro-fracking narrative. Oil Industry newsletters and websites pour out the data every day, and the data are still, currently, overwhelming positive about the size of the new production from places like the Bakken formation in North Dakota, the Texas sites in the Permian Basin and in the Eagle Ford formation, and other “tight” geology that until recently, very recently in fact, yielded nothing. But those websites also contain stunning news that doesn’t quite make it to prime time—like the announcement from Shell Oil last week that it was abandoning a potential lode of 80 billion barrels in the Rocky Mountains. Why? Because the energy inputs that would be required to get at that bonanza simply cost too much. The net energy yielded would still have been greater than the energy input, but a full calculation of the “energy return on investment,” or EROI, did not at all look like in the olden days, when one unit of energy put in could yield 100 in output. This was looking more like a 2-to-1 proposition. And with those numbers, Shell Oil couldn’t convince itself that the payback would be reliable enough, long enough, to justify the investment.

That problem—the much lower EROI of the “new” oil—was a major focus of a meeting of the United States Society for Ecological Economics held in Burlington, Vermont this past June.

This gathering of economists is different than the usual colloquia of number-crunchers, in that it includes physicists and engineers and geologists, which is to say, folks who have some training in how the physical systems work. Public-policy wonks join in, too, and contributed to the discussion of how the elusive concept of sustainability might actually get implemented through the legislative process at the city, region, and even the state level.

The good news: The conversation about alternative energy now includes number-crunchers who, with some input from physical scientists, understand that the New York State approach, the French approach, and (no surprise here) the Vermont approach to energy planning is sensible because these places are at least trying to prepare for the limitations of the “new” oil.

Timelines?

Some of the physicists commenting on the “new” oil question whether humans, in the aggregate, will get to renewable sources of energy in time to replace the stuff that is either too expensive or too dirty to use. A barrel of crude oil this week priced out at around $102; during the global financial crisis of 2008, the recession was made much worse because oil went up to $150 a barrel. The scramble for alternatives has yielded some focused effort in some places, like Germany, but there are some unintended consequences, too: Though the Germans now produce more than 30 percent of their electricity from wind-turbines and solar arrays, they’re also using more high-sulphur coal. And some alternatives are a bust: The EROI of new “fracked” natural gas may be only 17-to-1, compared to the old Beverly Hillbillies oil EROI of 100-to-1, but bio-fuels just won’t ever get much above 5-to-1.

Wind-power is getting better, thanks to better gearing; the EROI for the new turbines approaches and sometimes exceeds 20-to-1, which is about where oil is these days. Solar power is also more and more efficient, at an EROI of more than 10-to-1 now and headed north. Solar-generated electricity from photo-voltaic cells also has some other benefits, besides the longevity of its equipment, including the fact that solar panels don’t create weird weather consequences in the immediate vicinity of a passive collector, while wind turbines not only work on but create turbulence.

In anti-fracking, anti-nuke New York, there’s an aggressive wind-turbine program, and an aggressive solar program, the latter focused mainly on retrofitting individual industrial and commercial users with rooftop systems to generate electricity to supplement what they draw from coal- and gas-powered plants.

But not every place is going to go green. A new source of liquid oil, this one off the coast of eastern Canada, is being developed by Norwegian experts who know all about setting up offshore rigs in stormy wintry seas. The Canadians are talking about a pipeline to take all that filthy tar-sands oil, whose EROI is only about 5-to-1, east to Toronto and on to Nova Scotia, where they can refine it and then export it to their new best friends in China. Malaysian investors are offering to invest tens of billions of loonies in a liquefied natural gas depot near Vancouver, the better to help the Canadians export their new bonanza of fracked gas.

Given the anti-government behavior of Tea Party types in Washington, it will be up to State and local governments to figure out policy alternatives to going broke buying the “new” oil or going into Venus-like climate conditions if we keep burning all that the Canadians pump our way. Here’s hoping that the PR apparatus of the biophysical economists expands beyond Burlington, Vermont, where they confer among themselves while the rest of us read the oil industry’s rags—the New York Times, the Wall Street Journal, and the rest—and thus still believe that we’re on the side of the angels as we drive ourselves around in “fuel efficient” cars.

Bruce Fisher is director of the the Center for Economic and Policy Studies at Buffalo State College. His recent book, Borderland: Essays from the US-Canada Divide, is available at bookstores or at www.sunypress.edu.