M. King Hubbert: Bad Money Drives out the Good Science

Byron King refutes a Forbes Magazine column by Peter Huber on the Peak Oil theory of M. King Hubbert.

At the beginning of his article, Huber manages to say something nice about Hubbert: “In his day M. King Hubbert was a great geologist who spent his life studying the planet’s deposits of oil and gas.” Here is some more of what Huber said about Hubbert:

“Hubbert was born in 1903. By 1949 he had concluded that the fossil-fuel era was going to end, and quite soon. Global production would peak around 2000, he predicted, and would decline inexorably thereafter. By 1980 the aging Hubbert was certain that the impending crisis ‘was unique to both human and geologic history…. You can only use oil once. You can only use metals once. Soon all the oil is going to be burned and all the metals mined and scattered.’ Indeed we would soon be forced to abandon our entire ‘monetary culture,’ replacing it with an accounting tied to ‘matter-energy’ constraints. An editor of Geophysics magazine summarized Hubbert’s views in 1983: ‘The science of matter-energy and the historic system of finance are incompatible.'”

If you read his entire article in Forbes, Huber presents a summary of a few of the key concepts that Hubbert advanced during his long professional career. When Huber quotes Hubbert, he appears to provide an accurate, albeit abbreviated, interpretation of what Hubbert believed and taught to many people (including me, during a seminar that Hubbert conducted at Harvard back in the 1970s).

But Huber says what he says about Hubbert through gritted teeth. Here, for example, is Huber’s very unsubtle kill-shot at Hubbert: “But as he got older, (Hubbert) simply lost it. His ‘Peak Oil’ theory — which many people are citing these days — is a case study in junk economics.” In Hubbert’s absence, I hope that Whiskey & Gunpowder readers will bear with me while I defend his legacy.

M. King Hubbert: Sophomoric, Irrelevant “Junk Economics”

Huber explains and justifies his ad hominem assault on the departed Hubbert as follows: “Today this same nonsense (Hubbert’s ‘matter-energy’ system) is often dressed up with numbers in an analysis that’s dubbed ‘energy return on energy invested’ (EROEI). According to this theory it can never make sense to burn two units of energy in order to extract one unit of energy.” Huber is absolutely misstating a critical point of the Peak Oil message with this latter comment, but let’s hold the thought while we continue reading what Huber is arguing.

Huber’s states: “Put another way, (EROEI) — a sophomoric form of thermodynamic accounting — is always negative and always irrelevant. ‘Matter-energy’ constraints count for nothing.” Huber is absolutely misstating this point as well, but we will keep our powder dry for just a bit longer.

Further along in his article, Huber explains his reasoning: “In the real world, however, investors don’t care a fig whether they earn positive (EROEI). What they care about is dollar return on dollar invested.”

That’s enough for now. You get the picture. Let’s connect Huber’s dots. According to Huber, Hubbert’s Peak Oil theory is “junk economics.” Huber believes that EROEI is “sophomoric” and “irrelevant.” And Huber states that Hubbert’s matter-energy system is “nonsense” whose “constraints count for nothing.” After all, states Huber, we are talking about “the real world” in which all that “investors…care about is dollar return on dollar invested.”

Wow. Where does one start when dissecting Huber’s argument? No sniping from a distant tree line, here. Let’s assault his position “force-on-force,” as they say down at the War College.

Let’s start with Huber’s use of the term “junk economics,” as if much of what passes for modern economic theory is not junk in and of itself. Just take a peek between the lines of what pass for economic tracking statistics in the United States, particularly the so-called “hedonic adjustments” that go into government calculations of price inflation. Junk-goes-in, junk-comes-out. People make national policy based on this crap. But I digress.

Peak Oil has only a remote relationship with modern “economics,” junk or otherwise. The premises underlying the theory behind Peak Oil are rooted in a few pretty basic geological concepts.

The Earth has only so many sedimentary basins comprising its continental crust. Within the crust, there are only so many geological formations in which oil has ever formed over the past 600 million years or so. If you are wondering, it is safe to say that no oil ever formed before that time. The so-called “abiotic oil” crowd is just howling at the moon. But that is another topic for another time.

Also within the continental crust, there are only so many geological formations in which liquid and mobilized oil has ever been trapped and preserved. Oil-bearing formations are rare in both time and space. For now, you need to appreciate that the underlying science of petroleum geology is complex. People write thick books on the subject. And just so you know, there is no oil to be found in the oceanic basalt parts of the crust of the Earth, which is about 70% of the Earth’s surface.

It is usually difficult to locate these rather rare deposits of oil within the continental crust, and it is certainly not easy to extract the substance. To make a long story short, and according to the Hubbert theory, there is an upper limit on how much oil has been and will ever be available for mankind to withdraw from the Earth’s sediments. When about half of that oil has been located and extracted, worldwide production of oil will “peak.” Then and thereafter, worldwide production of oil will enter into an era of irreversible decline. So the shorthand term for the concept is “Peak Oil.” Get it?

M. King Hubbert: Economics…Who Needs It?

Another way of addressing Huber’s criticism of Hubbert’s work on the Peak Oil theory is that you can have geology without economics. But Huber seems to neglect the point that you cannot have economics without geology. So Huber is simply confusing dissimilar concepts when he infers that Peak Oil is some sort of an “economic” argument, “junk” or not.

Allow me to amplify the theory behind Peak Oil, by going back to a generally accepted starting point when Colonel Drake dug the world’s first commercial oil well at Titusville, Pa., in 1859. Since that year, mankind has located about 2 trillion (yes, “trillion” with a “t”) barrels of recoverable oil, or about 90%, of all of the liquid, mobilized oil in deposits that the best geological estimates state are out there to be found. And since 1859, mankind has produced and burned or consumed about half of that oil. Now, you do the math.

As no less an authority than Dave O’Reilly, the CEO of Chevron Corp., has stated, it took mankind about 140 years to produce the first trillion barrels of oil from the Earth. At current rates of production, it will take fewer than 30 years for mankind to produce and use the next trillion barrels. Using Chevron’s numbers, it appears that mankind is at or near the “peak” of oil production, and fast closing in on the backside of the oil production curb. There is no “junk” here, just basic geology.

If the “Hubbert’s Peak” approach to world oil supplies is some form of “junk,” then why is it a topic of discussion in every oil ministry and energy department of every serious government in the world? A senior manager of Mexico’s PEMEX has recently been quoted as stating that “Mexico is in the middle of Hubbert’s curve.” Senior managers and policy makers from Norway and Great Britain, to Kuwait and Iran, to Indonesia and China have given talks on the Peak Oil concept. Generally, they are setting policy as if Peak Oil is here, if not just on the near horizon. Huber needs to get out of the office a little more often.

Continuing our examination of Huber’s article, and according to Huber’s own phrase, Hubbert the geologist was not part of “the real world.” Really, it is funny when you think about it. Hubbert, who spent his life studying in the field of Earth sciences, was not part of Huber’s so-called “real world.” What “real world” does Huber inhabit?

Huber gives us a clue when he declares that “investors” are living in “the real world” when they chase that “return on dollar invested.” Ah yes, the “real world” of “investors.” These are the same folks who own pieces of hedge funds and blocks of stock in Google. These are the members of the class whose stockbrokers and investment bankers on Wall Street pay themselves mega-bonuses at the end of each year in which they avoid going to jail. Yes indeed, those “investors” are the salt of the Earth, the “real world.” Pass the Kool-Aid, please.

M. King Hubbert: Let’s Use Dollars as Drill Bits

Huber labels the concept of EROEI as “sophomoric form of thermodynamic accounting,” explaining that “(a)ccording to this theory it can never make sense to burn two units of energy in order to extract one unit of energy.” Who is being sophomoric here? Huber is absolutely misstating a critical point of EROEI. Using “energy” to recover “energy” has been a part of human existence since the first cave man broke a sweat while chasing game or gathering firewood. But imagine what would have happened if the cave man had not recovered more “energy” in the form of meat or warmth than he spent running across the prairie.

Huber seems to be arguing that all that is required to drill an oil well is “dollars.” No. Dollars are just the means of settling the financial account of what occurs. Huber is arguing a conclusion, and ignoring the true fundamentals of what has to happen out in the real “real world.”

It takes energy to drill an oil well. It requires energy to make steel, and to construct a drilling rig. It takes energy to transport the drilling rig to the site. It takes energy to run the engines that drive the drill string into the ground. It takes energy to manufacture the cement and casing with which you complete the well. It takes energy to run the pumping equipment. You get the picture. And then, at the end of this expenditure of energy, you begin to extract oil from the ground. Now we can ask, “What is the EROEI?”

In the good old days of the oil biz, when oil wells were relatively shallow and most of the world was as yet undrilled, you had EROEI numbers of 100 and more. That is, for every unit of energy that went into drilling and completing a well, you recovered over 100 times that amount of energy in the form of oil. EROEI was so favorable that people came to take it for granted, as some sort of immutable law of nature. Oh for the good old days, right? But that was then, and this is now.

In recent years, the global search for oil has burned up more energy (and in actual fact burned up more oil powering the rigs and drilling ships offshore) than has been “found” in the form of new oil discoveries. In this respect, EROEI is currently a negative number when it comes to the search for oil. It is the equivalent of the above-noted cave man not finding more meat and wood than the energy equivalent of what he is sweating away and burning up while out on the hunt. Eventually, something has to give.

M. King Hubbert: Fantastical Discoveries

This worrisome statistic, of more oil being used in exploration than is found by new discovery, tends to be masked by annual increased in reported world “oil reserves.” Each year, it appears that the world has “more oil” on its books than in the year before. But this statistical increase in reserves is due to companies and nations increasing oil reserves through development and extension of known production. There is little in the way of “new” discovery of “new” oil reserves going on in “new” frontier areas. Even the most favorable statistic tells us that mankind is finding only one barrel of “new” oil discovery for every four barrels of oil being produced and consumed.

In his article, Huber shows that he is capable of understanding the point of those he criticizes, while at the same time mangling that point with sophistic logic. Huber writes, “(The EROEI) crowd concedes, for example, that the world has centuries’ worth of junk oil…in shale and tar sands — but they can also prove it’s irrelevant. It takes more energy to cook this kind of oil out of the dirt, they argue, than you end up with in the recovered oil.”

I am not aware of any real professional in the energy field who seriously refers to so-called “oil shale” or “tar sand” as “junk oil,” at least not without a sense of wry humor implicit in the expression. Technically, oil shale is a type of rock that contains kerogen, which is an immature form of oil, lacking several more millions of years of geological maturation in the underground. Tar sand is another type of rock that contains bitumen. Bitumen is a hydrocarbon, with an emphasis on the word “carbon,” that is all but immobile.

Neither kerogen nor bitumen is truly “oil,” and neither substance is amenable to production by traditional oil-drilling methods. Still, if you had enough barrels of either one of these substances, and you were somewhere near a refinery, you could utilize them to make gasoline, kerosene, and all of the other substances that are common to this age of petroleum. But these substances are not really the type of “oil” on which mankind has grown to depend in the past century or so. And whatever they are, they are not “junk.”

M. King Hubbert: One Cost: A “Grave” the Size of Florida – One Football Field Deep

It is hardly controversial to make the point that recovering kerogen and bitumen on an industrial scale requires immense amounts of energy for the extraction of the raw material. And then you have to upgrade the product to a point at which it can be refined. All of this requires a massive associated industrial infrastructure. It requires lots of steel, lots of electricity, lots of diesel fuel, and natural gas and fresh water. It also requires a political willingness to turn large areas of land into strip mines. In the case of the Alberta tar sands, for example, we are talking about a disturbed area larger than the state of Florida, dug out to a depth of about 300 feet.

And yes, Huber is correct when he writes that many thoughtful people note that it can “(take) more energy to cook this kind of oil out of the dirt…than you end up with in the recovered oil.” This is the negative EROEI of which we speak, which is so worrisome over the long term. A negative EROEI means that mankind is throwing “good” energy away to move “dirt” and, in the end, recover low-grade raw hydrocarbon material that requires even more energy to upgrade to some useable form. It is like the old joke about the salesman who sold his goods at a loss, and when asked how he would ever make it all up, answered, “I will sell in volume.”

Huber continues, in his diatribe against those who focus on the concept of EROEI, by characterizing the belief of that “crowd” that “a negative (EROEI) can only mean energy bankruptcy. The more such energy investments we make, the faster things will grind to a halt.” Not to put too fine a point on it, yes. Exactly! Bingo! But despite describing the issue, Huber is missing the import of the notion that mankind is burning up “good” energy to recover “bad” energy. Like the cartoon character Alfred E. Newman, Huber is just not worried.

Huber gives us the benefit of his reasoning along these lines: “The economic value of energy just doesn’t depend very strongly on raw energy content as conventionally measured in British thermal units (BTUs). Instead it’s determined mainly by the distance between the BTUs and where you need them, and how densely the BTUs are packed into pounds of stuff you’ve got to move, and by the quality of the technology at hand to move, concentrate, refine, and burn those BTUs….”

To amplify this line of thinking, I will quote more of Huber: “(D)ifferent forms of energy command wildly different prices. Invest 10 units of 10-cent energy to capture one unit of $10 energy and you lose energy but gain dollars, and Wall Street will fund you from here to Alberta.”

So according to Huber, as long as investors can “gain dollars,” they will “fund you from here to Alberta” to develop “technology” to utilize “10-cent energy,” to “move” BTUs and ultimately to recover “$10 energy.” This glib statement of accounting may have been true on the front side of Hubbert’s Peak. But can Huber, or anyone else, say to a certainty that it will also be the case on the backside of the peak? Would you bet your life on it? Because that is what Huber is asking you to do.

Huber’s paradigm is a world in which available energy supplies have been increasing year after year, decade after decade, and particularly energy supplies from traditional sources of oil. From the days of Colonel Drake in 1859, it has been all uphill. Just throw some “investment” at the problem, and presto, you have oil. Now, however, the world is about to roll over the top of Hubbert’s Peak, and head back downward toward those pre-1859 days. And what is Huber’s plan? Throw money at it?

Huber provides an analysis that all but proves that the current form of market economics, denominated in depreciating fiat dollars, will consume a declining oil resource base faster and faster, in an effort to recover lower and lower grades of alternative energy resources. Another way of saying it is that ignoring negative EROEI will drive us as fast as possible off the energy cliff. According to Huber, it is economically rational to consume substantial amounts of currently available energy (and steel, water, etc.) to turn, let’s say, 2 tons of tar sands into one barrel of bitumen.

It may work for a while. Canada will develop her tar sands, and use natural gas to upgrade bitumen into oil. People will go about their lives, pretending that tomorrow will be just like yesterday except for the rising price of gas for the SUV.

But is this the basis for a long-term energy strategy? What will happen during, let alone at the end of, those 30 years to which Chevron’s Mr. O’Reilly has referred? If I have to choose between modern economic analysis and classical geological resource base analysis, I think I know which is the junk.

Until we meet again…
Byron W. King
December 8, 2005