Figure VIII-2. The delayed wedge approximation in the case of
major changes in transportation fuel consumption

Our aim is to approximate reality in a simple manner. Greater detail is beyond the scope of this study and would require in-depth analysis.

E. Criteria for Wedge Selection

Our criteria for selecting candidates for our energy saving and substitute oil production wedges were as follows:

1. The option must produce liquid fuels that can, as produced or as refined, substitute for liquid fuels currently in widespread use, e.g. gasoline, jet fuel, diesel, etc. The end products will thus be compatible with existing distribution systems and end-use equipment.

2. The option must be capable of liquid fuels savings or production on a massive scale – ultimately millions to tens of millions of barrels per day worldwide.

3. The option must include technology that is commercial or near commercial, which at a minimum requires that the process has been demonstrated at commercial scale. For production technologies, this means that at least one plant has operated at greater than 10,000 bpd for at least two years, and product prices from the process are less than $50/barrel in 2004 dollars. For fuels efficiency technologies, the technology must have at least entered the commercial market by 2004.

4. Substitute fuel production technologies must be inherently energy efficient, which we assume to mean that greater than 50 percent of process energy input is contained in the clean liquid fuels product.¹⁰⁸

5. The option must be environmentally clean by 2004 standards.

6. While domestic resources are of greatest interest to the U.S., the oil market is international, so substitute fuel feedstocks not abundantly available in the U.S. must also be considered, e.g. heavy oil/tar sands and gas-to-liquids.

7. Energy sources or energy efficiency technologies that produce or save electricity are not of interest in this context because commercial processes to convert electricity to clean hydrocarbon fuels do not currently exist.

F. Wedges Selected & Rejected

The combination of technologies, processes, and feedstocks that meet these criteria are as follows:

1. Fuel efficient transportation,
2. Heavy oil/Oil sands,
3. Coal liquefaction,
4. Enhanced oil recovery,
5. Gas-to-liquids.

In the end-use category, a dramatic increase in the efficiency of petroleum-based fuel equipment is one attractive option. As previously described, the imposition of CAFE requirements for automobile in 1975 was one of the most effective of the government mandates initiated in response to the 1973-74 oil embargo. In recent years, fuel economy for automobiles has not been a high national priority in the U.S. Nevertheless, a new hybrid engine technology has been phasing into the automobile and truck markets. In a period of national oil emergency, hybrid technology could be massively implemented for new vehicle applications. Hybrid technologies offer fuel economy improvements of 40 percent or more for automobiles and light-medium trucks – no other engine technologies offer such large, near-term fuel economy benefits.¹⁰⁹

The fuels production options that we chose are heavy oil/tar sands, coal liquefaction, improved oil recovery, and gas-to-liquids. Our rationale was as follows:

1. Enhanced Oil Recovery is applicable worldwide.
2. Heavy oil / Oil sands is currently commercial in Canada and Venezuela.
3. Coal liquefaction is a well-developed, near-commercial technology.
4. Gas-To-Liquids is commercially applicable where natural gas is remote from markets.

We excluded a number of options for various reasons. While the U.S. has a huge resource of shale oil that could be processed into substitute liquid fuels, the technology to accomplish that task is not now ready for deployment. Because various shale oil processing prototypes were developed in years past and because shale oil processing is likely to be economically attractive, a concerted effort to develop shale oil technology could well lead to shale oil becoming a contributor in Scenarios II or III. However, that would require the initiation of a major R & D program in the near future.

Biomass options capable of producing liquid fuels were also excluded. Ethanol from biomass is currently utilized in the transportation market, not because it is commercially competitive, but because it is mandated and highly subsidized. Biodiesel fuel is a subject of considerable current interest but it too is not yet commercially viable. Again, a major R & D effort might change the biomass outlook, if initiated in the near future.¹¹⁰

Over 45% of world oil consumption is for non-transportation uses. Fuel switching away from non-transportation uses of liquid fuels is likely to occur, mimicking shifts that have already taken place in the U.S. The time frame for such shifts is uncertain. For significant world scale impact, alternate large energy facilities would have to be constructed to provide the substitute energy, and that facility construction would require the kind of decade-scale time periods required for oil peaking mitigation.

Nuclear power, wind and photovoltaics produce electric power, which is not a near-term substitute fuel in transportation equipment that requires liquid fuels. In the many-decade future after oil peaking, it is conceivable that a massive shift from liquid fuels to electricity might occur in some applications. However, consideration of such changes would be speculative at this time.

It is possible that technology innovations resulting from aggressive future research may well change the outlook for various technologies in the future. Our focus on the currently viable is in no way intended to prejudice other future options. We have chosen not to add a wedge for undefined technologies that might result from accelerated research, because such a wedge would be purely speculative. No matter what the new technology(s), implementation delay times and contribution growth rates will inherently be of the same order of magnitude of the technologies that we have considered, because of the inherent scale of all physical mitigation.

G. Modeling World Oil Supply / Demand

It is not possible to predict with certainty when world conventional oil peaking will occur or how rapidly production will decline after the peak. To develop our scenarios, we utilize the U.S. Lower 48 production pattern as a surrogate for the world. This assumption is justified on the basis that Lower 48 oil production represents what really happened in a large, complex oil province over the course of decades of modern oil production development.

Our starting point is the triangular pattern of production increase followed by production decline shown in Figure II-2. Our horizontal axis is centered on the year of peaking (the date is not specified) and spans plus and minus two decades. For this study, our vertical axis is pegged at a peak world oil production of 100 MM bpd, which is 18 MM bpd above the current 82 MM bpd world production. If peaking were to occur soon, 100 MM bpd might be high by 20 percent. If peaking were to occur at 125 MM bpd at some future date, the 100 MM bpd assumption would be low by 20 percent. Since the estimates in our wedges are rough under any conditions, a 100 MM bpd peak represents a credible assumption for this kind of analysis. The selection of 100 MM bpd is not intended as a prediction of magnitude or timing; its use is for illustration purposes only.

Next is the important issue of the slopes of the production profile showing the rate of growth of production/demand before peaking and the subsequent decline in production. The World Energy Council stated: “Oil demand is projected to increase at about 1.9 percent per year rising from about 75.7 million b/d in 2000 (actual) to 113-115 million b/d in 2020 – an increase of about 37.5-39.5 million b/d.”¹¹¹ Recent trends indicate a 3+ percent world oil demand growth, driven in part by rapidly increasing oil consumption in China and India. However, a 3+ percent growth rate on a continuing basis seems excessive. On this basis, we assume a two percent demand growth before peaking, and we assume an intrinsic two percent long-run hypothetical, healthy economy demand after peaking. This extrapolation of demand after peaking provides a reference that facilitates calculation of supply shortfalls. The assumption has the benefit of simplicity, but it ignores the real-world feedback of oil price escalation on demand, which is sure to happen but the calculation thereof will be complicated and was beyond the scope of this study.

Estimating a decline rate after world oil production peaking is a difficult issue. While human activity dominates the demand for oil, the “rocks” (geology) will dominate the decline of world conventional oil production after peaking. Referring to U.S. Lower 48 production history, the decline after the 1970 peaking was roughly 1.7 percent per year, which we have chosen to round off to two percent per year as our estimated world conventional oil decline rate.¹¹² It should be noted that other analysts have projected decline rates of 3-8%, which would make the mitigation problem much more difficult.¹¹³

H. Our Wedges

In Appendix IV we develop the sizes of the wedges that we believe appropriate for our trends analysis. The categories, delays and 10-year estimated impacts are shown in Figure VIII-3. Once again, bear in mind that these are rough approximations aimed at illustrating the inherently large scale of mitigation.

Figure VIII-3. Assumed wedges

I. The Three Scenarios

As noted, our three scenarios are benchmarked to the unknown date of peaking:

• Scenario I: Mitigation begins at the time of peaking;
   

• Scenario II: Mitigation starts 10 years before peaking;
   

• Scenario III: Mitigation starts 20 years before peaking.

Our mitigation choices then map onto our assumed world oil peaking pattern as shown in Figures VIII-4, 5 and 6.

Figure VIII-4. Mitigation crash programs started at the time of world oil peaking:
A significant supply shortfall occurs over the forecast period.

Figure VIII-5. Mitigation crash programs started 10 years before world oil peaking:
A moderate supply shortfall occurs after roughly 10 years.

Figure VIII-6. Mitigation crash programs started 20 years before world oil peaking:
No supply shortfall occurs during the forecast period.

J. Observations & Conclusions on Scenarios

This exercise was conducted bottom – up; we estimated reasonable potential contributions from each viable option, summed them, and then applied them to our assumed world oil peaking pattern.

While our option contribution estimates are clearly approximate, in total they probably represent a realistic portrayal of what might be achieved with an array of physical mitigation options. Together, implementation of all of the specified options would provide 15 – 20 MM bpd impact, ten years after simultaneous initiation. Roughly 90 percent would result from substitute liquid fuel production and roughly ten percent would come from transportation fuel efficiency improvements.

Our results are congruent with the fundamentals of the problem:

• Waiting until world oil production peaks before taking crash program action leaves the world with a significant liquid fuel deficit for more than two decades.
   

• Initiating a mitigation crash program 10 years before world oil peaking helps considerably but still leaves a liquid fuels shortfall roughly a decade after the time that oil would have peaked.
   

• Initiating a mitigation crash program 20 years before peaking appears to offer the possibility of avoiding a world liquid fuels shortfall for the forecast period.

The obvious conclusion from this analysis is that with adequate, timely mitigation, the costs of peaking can be minimized. If mitigation were to be too little, too late, world supply/demand balance will be achieved through massive demand destruction (shortages), which would translate to significant economic hardship, as discussed earlier.

K. Risk Management

It is possible that peaking may not occur for several decades, but it is also possible that peaking may occur in the near future. We are thus faced with a daunting risk management problem:

• On the one hand, mitigation initiated soon would be premature if peaking is still several decades away.
   

• On the other hand, if peaking is imminent, failure to initiate mitigation quickly will have significant economic and social costs to the U.S. and the world.

The two risks are asymmetric:

• Mitigation actions initiated prematurely will be costly and could result in a poor use of resources.
   

• Late initiation of mitigation may result in severe consequences.

The world has never confronted a problem like this, and the failure to act on a timely basis could have debilitating impacts on the world economy. Risk minimization requires the implementation of mitigation measures well prior to peaking. Since it is uncertain when peaking will occur, the challenge is indeed significant.

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Continue to Part IX: Market Signals As Peaking Is Approached, Part X: Wildcards, & Part XI: Summary And Concluding Remarks.
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