Friday, April 10, 2009

The Great Oil Hoax and where we go from here

If some well-informed experts are right, Saudi Arabia's oil reserves are a fraction of what they've been telling us. Why does it matter? Because everyone has believed for decades that Saudi Arabia's oil supply is virtually unlimited. That's what the Saudis have said over and over again for more than 30 years. If an oil shortage threatens to cause a recession or a market crash, we can count on the Saudis to come through. So people think. But in a private briefing, one of America's top oil experts told President George Bush exactly what I'm telling you. In fact, this same man was a consultant to the secretive task force that drew up Vice President Dick Cheney's energy plan in 2001.

In other words, the guy is a heavy hitter who knows the energy business. He warned Bush that the Saudis don't have anything near the oil reserves they claim. They already pump less oil than most "experts" think, and here's the real kicker... Saudi oil production is about to drop sharply. And it will keep going down for good. Other experts have analyzed the numbers and come to the same conclusions. If the charges are true — and I believe they are — we could be facing...
Oil at $150 per barrel and gasoline at $6 a gallon or more. The oil is running out. It's as simple as that.

But that's not what you hear from so-called experts. If you ask government officials, our intelligence agencies and even powerful Wall Street financiers, they tell you the opposite.
They say the Saudis could quickly double their oil production from the current level if they wanted to. And given a few years, they think the Saudis could produce four times as much oil as they do now.

Why 2008 was a year of crisis? The oil and gas shortages we've seen lately are nothing compared with what's on the way. When the truth comes out, it will send shock waves through the world economy. Everyone will find out too late — when gasoline soars to $5 or $6 or more per gallon. The cupboard is bare and nobody knows it. Americans used to run Aramco, the huge oil company that manages the Saudi fields. But in 1979, the Saudis booted us out and took over.
And then a funny thing happened... The Saudis started keeping everything a secret.

No one knows for sure how much oil they've got in the ground, or how much they produce each year or how much they could produce if they wanted to push it to the max.
It's all secret. Experts try to figure out how much oil the Saudis sell by monitoring tanker traffic in and out of the world's ports. That's how little we know for sure. But wait, it gets worse!

After the Saudis took over, an even funnier thing happened... Their figures for proven reserves kept going up and up and up — even though they didn't find any major new oil fields!
In 1979, the Saudis adjusted proven reserves upward by 50 billion barrels. Then eight years after that, their proven reserves magically grew by another 100 billion barrels. Their estimated reserves increased by 150% in nine years — to a total of 260 billion barrels. And they didn't find a single major new oil field!

And here's the funniest thing of all... For the last 18 years, they've claimed they own 260 billion barrels of proven oil in the ground. The figure never goes down, even though they pumped out 46 billion barrels during that period. Let's see... 260 minus 46 equals 260. Saudi math!

Based on these bogus figures, the Saudis claim they can produce as much oil as the world wants for the next 50 years. As recently as 2004, they claimed their reserve estimates are actually conservative. That's why most of the world's governments and intelligence services believe the Saudis could pump 20 million barrels of oil a day if they wanted to. Trouble is, we've got no proof except their say-so. If it were true, we wouldn't have a thing to worry about. But it's not.

It's horse hockey. Before Aramco's American owners were shown the door in 1979, they told Congress that Saudi Arabia had proven reserves of 110 billion barrels. There have been no major new discoveries, so 110 billion barrels was probably about right. And since then, about half of that has been used up. So why do the Saudis insist everything is just fine and they have 260 billion barrels of reserves? One reason is they wanted to discourage non-OPEC nations from looking for more oil or switching to alternatives.

It was a devious plan, and it worked perfectly. But that wasn't the only reason the Saudis lied about their reserves. They did it because everyone does it! Everyone in OPEC, that is.
The Biggest Lie of All: OPEC's Imaginary Oil. In the 1980s, OPEC's claim of total reserves magically leaped from 353 to 643 billion barrels without a single major discovery. Industry experts call it the quota war.

You see, OPEC had to limit how much oil each member could sell, because prices were too low. The quotas were based on... each member's oil reserves! That's right: The amount of oil OPEC would let a member pump depended on how much that member had in the ground. So it paid for OPEC members to claim the biggest reserves they could. And that's what they did.
The Saudis alone jacked up their estimate by about 100 billion. Kuwait added 50% to its reserves in one year, 1985. Venezuela (remember Hugo Chavez leads that nation today) doubled its reserves in 1987. Iraq and Iran doubled their estimates, too.

What's more, OPEC members did like the Saudis and kept their reserve estimates the same year after year, as if no oil were being pumped out and sold. Everyone claimed to have a bottomless well. Now, if you're like me, you prefer to base your financial decisions on the real world, not on a fantasy.

Let's look at how much oil there really is... In the 1970s, when Western managers were still in charge, they believed for a time that Saudi output could reach 20 million barrels a day. But by the time the Americans lost control in 1979, they figured the peak would be 12 million.
They also predicted that peak production would last only 15–20 years. 1979 plus 20 is 1999. We're past the peak, if these men were right. But we already know they were too optimistic.
The truth is that Saudi production never got to 12 million. "In all probability, output peaked in 1981 at an unsustainable level of about 10.5 million barrels per day," according to Matthew R. Simmons, a leading oil industry authority.

And yet the lies go on... In 2004, Saudi officials claimed they boosted production to 9.5 million barrels per day and maintained that level for five months. It's almost sure they were lying. The International Energy Agency is the group that keeps an eye on these things for the developed, oil-importing countries. The IEA could find no sign the Saudis were selling more oil.
As far as anyone can tell, they pump only around 5 million barrels a day, and that's all they've pumped for years.

It's déjà vu all over again. In spite of being lied to at least once, the IEA, the U.S. Department of Energy and other forecasters believe the Saudi claims. ALL their projections of our energy future ALWAYS assume the Saudis could produce 15–20 million barrels a day.
The lies have worked. Not only do Western politicians believe them, but so do many oil industry experts and investors with huge amounts of money at stake. They've been had.

Our whole economy is at risk. Your investments are at risk. Your retirement plans are at risk.
America has been so prosperous the last couple of decades, a lot of people forget what the energy crisis of the '70s was like... The price of a barrel of oil shot up 400%. Long lines formed at gas stations practically overnight. Folks had to pay four times as much for a gallon of gas, and there came a week when one out of every five gas stations in the United States had no gas to sell at any price.

The U.S. had three major recessions within 10 years after the first oil crisis in 1973. And those recessions were deep, with double-digit unemployment, double-digit interest rates and double-digit inflation:

Think 10–12% unemployment.
Think 15–18% mortgage rates.

Got the picture? That was the ‘70s. Not fun. My take is that a similar crisis will rock the nation before we solve our problem with clean coal, liquefied natural gas, oil from tar sands, high-mileage cars and safe nuclear plants. More than likely, the politicians will quarrel for years before they do what has to be done.

The hybrid engine isn't it. And the hydrogen car isn't, either
The race is on to design the car of the future. Every player in the industry is scrambling for the prize, and the winner will dominate the world car market for decades. The three big contenders are the hydrogen fuel cell, the electric hybrid vehicle and the diesel.

Let's take a look at the three cars in this race... The hydrogen fuel cell gets the most hype
Detroit put all its chips on fuel cell technology, and it's been telling us since the late 1990s that a breakthrough was just around the corner. In 1997, German-owned DaimlerChrysler actually predicted 100,000 fuel cell engines on the road by 2005. In 2001, General Motors projected about the same timeline. Even George Bush got into the act, declaring in his 2003 State of the Union message that "America can lead the world in developing clean, hydrogen-powered automobiles." It didn't happen and it probably won't. The short explanation for Detroit's failure is that the engineering problems were bigger than it thought. On top of that, the fuel cell engine costs 10 times as much as a conventional engine.

Worse yet, there's also the problem of building a national network of fuel stations where you can fill the tank with hydrogen. Hydrogen isn't found in nature in a usable form, and it's very expensive to produce. A national hydrogen rollout could cost $100 billion. There's still hope that hydrogen will come through in the end, but the National Academy of Sciences believes the "hydrogen economy" is decades away.

Meanwhile, electric hybrids roar ahead. When Toyota announced a heavy investment in electric hybrids a few years back, Detroit snickered. To Detroit, it just seemed like a halfway solution on the way to the fuel cell car. Wrong. I don't need to tell you that the electric hybrid Prius is a sensation, and Detroit is now rushing to play catch-up. It'll come out with a number of hybrid models in the next few years, many of them using technology licensed from Toyota.
What's more, the electric hybrid is not just an underpowered small car. Toyota now offers a high-end SUV hybrid with better acceleration than the standard model!
So hybrids are where it's at, right? Wrong again!

The Prius has problems. First off, the gas mileage on the Prius is not all it's cracked up to be. Consumers have noticed, and some aren't happy. What happened is that the EPA tests vehicles under ideal conditions on a flat surface. In the real world, it looks like Prius' mileage is not so hot. Also, most of the hybrid's big mileage gains occur in stop-and-start city traffic. On an open road, the conventional engine actually gets better gas mileage. When you look at the Prius' true mileage, there are plenty of conventional vehicles that do as well or better. Add in the high extra cost of the hybrid engine, and some say you have to drive the car a hundred thousand miles to recoup the extra money you pay for the fancy technology.

There's a third alternative, a "sleeper" technology that's going to surprise everyone.

And the winner is..
The humble old diesel engine — the third and final competitor for car of the future.
How can that be? Diesels are loud, dirty and smelly. A pollution nightmare.
You can hear a diesel truck from a mile away, see the soot from halfway down the block and smell the exhaust as it rolls by. Except — surprise! — those diesels you hear and smell are antiques. Thanks to new technology, diesels aren't so dirty anymore, and the gas mileage is better than ever!

Here's what happened: Europeans have to pay heavy gasoline taxes and they worry about global warming, so they invested in the diesel engine as a stopgap, just in case the hydrogen car hit a snag. As you know, hydrogen DID hit a snag. Now the stopgap looks like the winner in the great auto race. You see, diesel gets about 30% more miles to the gallon than gasoline, and those savings are real, in any kind of driving conditions. What's more, people who worry about global warming prefer diesel because it emits up to 20% less carbon dioxide.

But wait, it gets even better... Diesels have a huge, surprise advantage. Diesels now rival traditional gasoline engines for quiet, and European refineries have removed most of the pollutants from the fuel. The engines cost more, but the fuel savings almost make up the difference.

Diesel's biggest edge is something you'd never expect... You don't need crude oil to make diesel fuel You can make it from coal, plant matter or even cooking oil. (No kidding! A restaurant can invest in a cooking oil converter kit that lets you fry a batch of potatoes and later reuse the oil in your delivery truck). In India they make diesel fuel from cow dung!

Every year and, indeed, every month the world will grow more desperate for the alternative fuels and technologies. India imports more than 75% of its crude oil. It's so desperate for alternatives, it recently promoted cow dung as an important energy source. A new use for sacred cows! The problem is Asians these days are buying cars like... well, like Americans.
The Chinese would have to buy 650 million vehicles to reach American levels of car ownership. That's not likely. But a fraction of that figure will create an oil and pollution crisis big enough to finish us off.

In the vast markets of India and China, a vehicle that runs without crude oil will be irresistible. But there's still more to the diesel story... A hybrid diesel engine is the next step. A combination of hybrid and diesel technology will take the fuel savings up a notch. Make that two notches. And it will happen soon. An MIT study predicts the diesel hybrid could outperform a hydrogen fuel cell engine on both gasoline mileage and carbon emissions — within 10 years.
In other words, the hydrogen fuel cell car may never get to market. It's dead in the cradle thanks to breakthroughs elsewhere.

-Byron King

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