The Great Simplification with Nate Hagens - Arthur Berman: "Peak Oil - The Hedonic Adjustment"

Episode Date: January 18, 2023

On this episode, petroleum geologist Arthur Berman returns to unpack the development and drawbacks of 'peak oil'. Art explains how our institutions have redefined what is considered oil, which has created an illusion of constantly growing oil production. The reality is that - circa 2023 - fully 40% of what is called oil is comprised of things that are 'not oil'. What does this imply for global peak oil? Is peak oil, an observation which has been around for decades and repeatedly proven 'wrong', even relevant today? Is a specific 'peak' date even helpful or should we be focusing on the logical implications of a declining primary resource for global economies? And then, what should we do About Art Berman: Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and is currently consulting for several E&P companies and capital groups in the energy sector. For Show Notes and More visit https://www.thegreatsimplification.com/episode/54-arthur-berman To watch this video episode on Youtube → https://youtu.be/CDBJdQnjE2o   

You're listening to The Great Simplification with Nate Higgins. That's me. On this show, we try to explore and simplify what's happening with energy, the economy, the environment, and our society. Together with scientists, experts, and leaders, this show is about understanding the bird's eye view of how everything fits together, where we go from here and what we can do about it as a society and as individuals. Peak oil, a phrase that was on a lot of people's minds and lips 15 years ago. We don't hear about it so much anymore. What happened? Did it disappear?

Was it discredited? Was it debunked? Was peak oil no longer real? The core tenets of this podcast, the great simplification, treat peak oil as a given. I think 15 years ago, people focused, which would be the, date of peak oil because that will change everything. We've now learned that things are a little bit more complex. There's geopolitics. There's money. There's decline rates. There's new drilling,

etc. But peak oil is a reality, a present reality. And it is the decadal observation of the century-long and millennium-long carbon pulse, which we're all living through. I think the important questions not only are when the date of global oil production will hit a maximum, but how quickly will it decline after that? And will the shortfall in oil availability that is needed to power global economic growth result in either a financial kind of rubberband dynamic or some sort of geopolitical, competition for the remaining exports. With me today is my close colleague, Art Berman, who in sharing some graphs with me, we discovered something fascinating and disturbing about U.S. oil production. So today we're not going to talk so much about the date of peak oil as the stealth adjustment

of the quality of what we call oil. This is a very important podcast, and I'm very fortunate to have Art sharing his graphs and analysis and wisdom with me. Please welcome Art Berman. Art Berman, great to see you. Good to see you, too, Nate. Should I tell the public my nickname for you when I call you?

You're welcome to. Senior Petrolio. I am guilty. So I'm having you on is kind of this bonus unscheduled podcast because, as you know, but no one else knows, whenever I'm about to make a big public or government presentation, I call you, Art, I need some updated graphs. And I've used your graphs for almost a decade. And in doing that last week, I needed an update on peak oil.

And in the creating of the graphs, you did a lot of sleuthing and data collection. And we discovered some things. And that's what we're going to talk about today. because in 2019, I started publicly stating that there was over a 90% chance that fourth quarter of 2018 will be known as peak oil. And here we are three and a half years later. And you sent me some charts that speak to that. And that's what we're going to talk about today.

But we didn't on our first. first podcast really talk about peak oil. Maybe we could just do that very briefly. Sure. So from your perspective, art, what is peak oil and why is it important? So I'm an earth scientist. I'm a geologist. And although I know some things about economics and all those sorts of other subjects, I look at peak oil from an earth science perspective, which is to say an Earth systems perspective. And I've been in the oil business now for over 40 years. And what I see is that this business has gotten increasingly complex,

just like all other human systems. And what that has meant is that oil is harder to find. And when we do find it, it is much more complicated, or complex, they're not the same thing, but I think you know the difference to produce. And, of course, that has implications for cost. But about halfway through my career, which is to say in the 80s, the industry became incredibly risk-averse. In other words, it started getting a lot of pressure from investors. And so we stopped taking risk. And that ultimately led to the shale plays, which were viewed as a no-risk proposition.

The oil's there. All you got to do is drill it and kabum. You know, you're in good shape. The problem, obviously, with that is twofold. Number one, these are incredibly complex reservoirs to drill and produce. And number two, once you're done with the shale plays, you haven't been exploring for 25 or 30 years. So what are you going to do?

And so as I look at it, and again, I could go on about price, and inflation adjustment, but I won't because I think you have some ideas about the economics and the link to ecology and human behavior and some other things. But just keeping it as simple as possible, there are just some basic Earth systems constraints that have bothered me for half of my career. And as much as I try to get on board with, oh, well, technology will save us, or, you know, we're going to find, I keep coming back to the same conclusion, which is it's, it's not really changing. And then the subject we're going to dive into once we get through with the peak oil part is the issue of oil quality. And so much of what we call oil today is just not, it's just

not even oil. So I'm just going to leave it there. That's, that's the concern that I have. Well, let me define peak oil then very simplistically that humans extract energy, fossil energy in this case, and we expand the scale of that and eventually we will hit a maximum of the amount that we extract from the earth. And then from that point forward, there will be less, either a little bit less or gradually accelerating to more or a sharp decline or some amount less. reason it's important is energy underpins our economy and oil, liquid at room temperature, incredibly dense, very cheap used for our global transportation system, is the master energy resource. So once it peaks and starts to decline, we still have plenty of oil. And a climate change activist would say too much oil. But what we don't have is the enough to continue

economic growth at the level required to pay back and maintain our existing financial claims. So peak oil to me always meant an inflection point of the growth and the monetary and currency system. But here's, okay, I'm going to tell you why I don't like the concept peak oil, but maybe if you want to opine on that first. You know, what problems do you have with that concept? I mean, the oil drum was 15 years ago. And, you know, here we are.

And there were a lot of people that were clamoring that 2008 was the peak. And then we would be in perpetual decline. But here we're not. So do you want to say what problems you have with peak oil briefly? Sure. So the problem that I see with peak oil is that we, we very quickly, and I was engaged in it, you know, even before we met, is that we got involved with trying to predict the peak without really worrying about any of the underlying causes or

reasons that we were even talking about a peak. And everybody got, you know, obsessed with, well, it will be 2008 or was it 2005 or is it going to be 2012. And to me, that's where ever movement, if you will, falls apart. It forgets why it started. And so I go back to 1931. And King Hubbard, who was the fellow who at least is blamed for the peak oil concept, he and a fellow named Howard Scott came up with an idea that basically what you said, 1931, that since energy underlies the entire economy, those guys wanted to get rid of money. And so, and they wanted to replace it with what they called energy certificates. And energy certificates were going to be based on what the energy cost was to produce everything.

And nothing else. So money was going to be a thing of the past and everything would be denominated in energy. Now Hubbard, of course, went on and he had some interesting ideas. He had some crazy ideas too. But that was where he started. And despite the fact that Hubbert worked in the oil business, he worked for Shell. He really wasn't a petroleum guy. He was a resource guy.

He was a statistician. And his concern, or where he left all of this after his infamous speech in San Antonio, I think it was in 1956, where he actually showed his data predicting the peak of U.S. oil. The part that everybody forgets is what he said. And what he said was that if we can somehow solve our, basically our social and psychological problems and not destroy ourselves with nuclear weapons and somehow get population under control, then we could begin to talk about how to apportion our energy resources. resources correctly for perhaps 300 years. Now, clearly we failed on all three of his criteria.

So to me, that was always the core of peak oil, not because King Hubbard invented it, but because what he said made a lot of sense to me. And he said it, you know, 90 years ago for crying out loud. So that's, that's my perspective, mate. Actually, I think it was Shell Aliquet that coined the word peak oil. Not the concept, but the but the term. So here's here's the here's some of the problems that I have with the concept and the term. And then we'll get into some data. So correct me if I'm wrong, but there's at least two things going on. There are all the existing fields and wells that were drilled in the past that are continuing to produce oil. And if you aggregate all of those with no new drilling

at all, they are declining at something like 6% a year. So that's like all the stuff in the past. And then on top of that, we're having new discoveries and new investment and new drilling and new fields, maybe in the Arctic or in the ocean or in a new shale play in the U.S. And we're adding that production on top of this large number of declining wells. And as long as the net of those two is increasing in total, we are making new production highs over time. Is that correct? That's right. So here's one thing that I got wrong when I wrote about this stuff 15 years ago.

I wrote my PhD on the concept of net energy, which is it takes energy to get energy, which is obvious and correct and important. and I thought that as oil depletion would accelerate, that we would need a lot more energy to allocate to the energy sector and therefore GDP would decline. The first part of that was right. The second part was wrong because when we have to drill more and hire more rigs and have more trucks extract water and all the other complex. resource and energy inputs into drilling, that all actually adds to GDP. So one of the problems with the term peak oil is it's a moving target because even as net

energy is declining, GDP represents gross energy until we have an actual shrinking economy, then that will change. So that's what's been going on lately is we've been growing. the total amount of global oil production, and as we're going to talk about in a moment, it's not even oil that we're growing. But we're gradually, slowly turning into what I call a Mordor economy, which is more and more of our energy is directed to the energy sector, meaning that the rest of the world has to pay higher prices or use less because the energy sector is,

is pulling that up. And we hit a low as a society in 1999 of around 5% of our energy going to the energy sector. And now it's 10% or above on route to something larger. So I do totally agree with you that the focus on the date of the peak, and I've been guilty of this, belies the fundamental reality, which is we've based an entire civilization. on this. And let's not worry about what day the peak is. The peak is soon. And what are we going to do with our financial system, with our geopolitical, who's getting what share of the pie, all these sorts of

questions are important. Now, let's get to the point of this podcast. So I actually, I had some things wrong, but I actually had some things right as well. Let me read you the first paragraph from the very first article I wrote on the oil drum in 2006. Peak oil will silently morph into peak liquids. This is relevant because the definitional layers that we add on top of crude oil are not equal in what they provide to society. It is also relevant. in that the logistical heuristic used by M. Kig Hubbard was not intended to include corn and sugar cane-derived ethanol, tar sands, or natural gas liquids in its predictive theory of oil basin decline. The concept of peak oil, already not widely believed, will start to be very confusing and probably

even more combative. In essence, we need to either, A, adjust EIA data to exclude growing biofuel NGL and coal liquid inputs, or B, recognize that for practical peak oil societal impact purposes, we really do primarily care about the net liquid fuel available and the costs of same, which would require categorical adjustments and handicapping for energy quality. Well, one thing that hasn't changed in 16 years is I still use a lot of words. But what do you, first of all, what do you think about that statement? I'm assuming you largely agree with that. Oh, I think it's absolutely dead on, Nate.

And I say that after a, fairly deep dive here in the last week or two into just exactly what is it that we call oil. And I've known this. You've known this for a long time. We've all known, I say all of us that have been interested, deeply interested in energy, that there's always been a substantial component of strange things like, you know, natural gas liquids and refinery gain and all of that. But until, for me at least, until I actually immerse myself in the data and make graphs, it never quite sinks in to what extent that has become the truth and the reality. And that was really the aha, not that any of it surprised me.

It was the magnitude of it that surprised me. So let's look at the headline numbers. I have said publicly often that peak oil is likely with 90% odds to be November of 2018. Can you give us an update on where this stands? Yeah, so November 2018 world production was somewhere in excess of 100 million barrels a day. 2020, the world fell apart. And we had negative $37 a barrel oil price for a while. And we had no place to store oil, which is why it got to negative 37 for one day.

And production dropped many, many million barrels. And in about mid-2020, we kind of got our act a little bit together, or at least we put some band-aids on it. And since then, oil production has been increasing. And as of November, we're up to 100 million barrels a day. So you look at the data and say, well, we're almost there. We've 99% recovered to that peak level in November of 2018. And looking at the slope of that recovery, you'd say, well, Nate, you're going to be wrong.

because we're going to get past that 102 million barrels a day, probably next year, the year that we're in right now. So that's that that's the update. Yep, probably, unless there is an eminent global recession and. Or a big war or something like that. Just briefly to point out, though, is each time these things happen, that underlying decline rate, becomes a larger loadstone relative to the new drilling. So we may make new highs, but we're not going to go to 110 or 120 million barrels unlikely, right? No, and if you look closely and, you know, when we do look at this data, you see that the rate of increase does appear to be slowing,

but nonetheless, I mean, so that, but that, you know, that's the superficial reality. So all we're looking at is everything we call oil and it says, well, you know, life is good. And all of you peak oil guys are wrong again. Okay. So you have much better data for the USA than globally. But let's let's look at another chart. Has the U.S. surpassed the 2018-19 peak recently or not? Yes, it has. So for the United States, that peak actually wasn't in 2018. It was just before COVID shut us all down. The U.S. is sort of on its own timeline here. But that peak, monthly peak, was about 20 and a little bit million barrels a day. And as of last month, we're at 20.8. And so we've now beaten that that level. And so all of the things that you and I have also said, at least superficially, just looking at everything we call oil, we're both wrong. So in the creation of this chart, what did you discover? Well, I discovered a couple of things.

And so the first thing I did to this chart was to segregate it into what is. actually oil and what is what I call production of non-petroleum. Now petroleum is a word that, I mean, it's a Greek word and it means rock oil. Okay. And so everything that comes from oil, I'm calling in, you know, here oil production and we can split hairs and argue esoterically about that. But the non-petroleum fraction is everything else, which is to say things that come from plants, you know, the biofuels that you were talking about. The natural gas liquids, they don't come from oil. They come from natural gas. Natural gas is a hydrocarbon, but it's not petroleum. It's not a liquid petroleum. And it does contain some liquids that we can talk a little bit about how they get separated out.

But again, they don't have anywhere near the energy content or the heat content of crude oil. And then there are other funny things in there like refinery gain, which is a volumetric expansion that just happens when you refine something dense like oil into less dense products like gasoline and kerosene. And what I found when I made that graph was, holy cow, what we call oil, only 60% of it is actually what I would call oil. So 40% of what we're counting as oil and saying, okay, no problem. We're already ahead of it in the U.S. and we're almost there in the world is because this large portion that doesn't even come from oil is growing at a faster rate than, the oil production is. So all of a sudden we're back to peak oil again. 4% or 40%?

40% of what the international energy agency and the energy information agency in the USA call oil in their production reports is not oil? It's not oil. I'm not saying it has no value. No, I know, I know. But it's not. It's not. doesn't even come from oil. It's not a petroleum product. Okay. And you listed out several things. There's ethanol, there's refinery gain, there's natural gas plant liquids. What else? No, there's all sorts of funny things. You know, there's, you know, like there's, you know, there's, there's, there's, there's asphalt. And there's things that, you know, that actually come from petroleum, but are not used as a fuel. And so in these natural gas liquids for instance, the biggest single component is ethane. Natural gas liquids are the largest non-petroleum

component, but what do we use ethane for? We make baggies out of it for the most part. I mean, it could be used as a fuel, but it's not used as a fuel. And so I'm not in any way criticizing the EIA or the IEA or any of these organizations. I'm just saying, look, this is how they, this is their accounting system. And it's useful as far as it goes. But for those who are deeply concerned about how we're going to maintain our civilization, since it's based on oil, we better look at how much of that is actually oil. And what we have to discount, as you said earlier on, all the rest of it so we can actually look at how does our future seem to us. us. Well, one of the, one of the biggest benefits that we get from oil is it's energy density,

how much BTUs are smashed into a tiny little bit of volume. So there's a lot of heat potential there. What is the heat potential of natural gas liquids relative to oil? Well, it's a lot less. And so, you know, in rough numbers, it's like 67%. So, you know, it's, you know, it's 33% less heat content or energy density than oil. And that assumes that you're going to use it all as a fuel. And I just told you that 55% of it's used to make baggies. So, you know, we have to, we have to start, you know, understanding what are we really talking about here? So in the same way that the Bureau of Economic Analysis might create, create a CPI metric that over time, since people are poorer and they don't want to show high

inflation, they're now eating hamburger instead of steak, and therefore they don't show much of a headline. This is like a hedonic adjustment for peak oil. Yeah, it's it's hamburger helper. So what percent of our oil production in the gross sense is natural gas liquids? You said It's 40% of all those things. What percent is NGL? Well, again, you know, it's, it's, it matters whether you're talking United States or world. Just the U.S. U.S., it's 30%.

So 30% of what all the energy hedge fund managers and everyone looking at how much oil we're producing, 30% of that is natural gas liquids, which have two thirds only of the, the heat content, and there's a big component of plastic baggy inputs in that figure as well. Precisely. And if you look at that 2020 COVID drop that, you know, shows up in every graph of just about everything, but certainly oil production, there was a huge jump in that relative percent of NGL in the year 2020. Why?

And so it went because. the oil production dropped and the NGL production didn't. Where do we get NGLs from? Is that a byproduct of drilling for natural gas? It is natural gas. Okay. So natural gas gets produced, some of it with oil and some of it all by itself. And in the ground, you know, buried at great depth and temperature and pressure, it's it's all a liquid okay or I'm sorry it's all a gas and when it comes to the surface and you reduce the pressure then some of it drops out as a liquid so is that kind of what we do with creating lNG to ship across to Europe like we're doing what mother nature does it's the reverse we take

we take methane, which is the lightest fraction of natural gas, and that's exactly what we burn in our stoves and our furnaces and all of that, and we cool it. We put it under tremendous pressure and drop the temperature to something like, you know, almost 300 degrees below zero, and we force that methane to precipitate into a liquid. We put that into pressurized containers on a tanker, send it wherever somebody wants to buy it, and then when it gets there, then they have a special terminal that regassifies, that lets off all of that pressure and allows the gas to come back to room temperature, and then it turns back into a gas. So if we hypothetically were running low on oil and society is fundamentally dependent on oil, not natural gas or coal, though those are also important.

Could we boost, dramatically boost our natural gas production and turn it into, turn at a loss, at a cost, turn it into liquids like you just said that could be used for oil? with a lot of baggies as an externality? Well, no, you can only turn, I mean, so just turning it into a liquid, like I just explained with methane into, you know, into LNG. I mean, you can't burn it at 300 degrees below zero. Right. And 10 times the atmospheric pressure. So you're stuck, you're in the same place.

And once you've allowed that to come back to room or surface temperature, it has no liquids in it to begin with. It's just methane. It's the simplest hydrocarbon molecule. It's just carbon and hydrogen. So to your question, though, natural gas, much of it contains other things like, you know, like ethane, like butane, like propane, like pentane, and those are liquids at surface temperatures and pressures. all right, and we remove those from the natural gas because the gas pipelines don't want have anything to do with that because they mess up their pipeline process. And so we strip those out in a plant.

And that's why it's called natural gas plant liquids. We send the natural gas to a plant where they, through gravity and some screen meshes and a few catalysts, they force all that liquid to segregate by gravity away from the natural gas. They send the natural gas, the methane, off in a pipeline to your heater or your gas stove, and then we have some fraction of liquid that remains. And those liquids, none of them have anywhere near the heat or the energy content of crude oil, but they have more than methane. So they're, you know, they're good for things. So what do we use those for? Well, you know, you go out and you buy, you know, we used to when people smoke cigarettes, I guess they still do, you go out and you buy a bick lighter. All right. Well, that's butane. Or when you light your, you know, your gas, your charcoal grill, you buy something at the supermarket, that's butane. Propane for people like you that live in the country and don't have the benefit of piped methane to your house. You, you.

a guy comes out and fills a tank with propane and you heat your house with propane. So propane, you know, it's good stuff, but it's not crude oil. It doesn't have anywhere near the heater, the energy content of crude oil. So all the world's existing oil wells are in aggregate decline of something like 6%. Right? Right. And we're adding new drilling around the world. new fields, new discoveries.

But much of what we're adding, and what we're adding at an increasing rate, is effectively local additions from the heat and energy quality standpoint in the form of NGPL and other things. Well, that's right. And so when we look at part of the complexity that I talked about,

the biggest complexity in continuing to find and produce oil is that it's deeper. And the deeper it gets, the hotter it is. And the hotter it is, the farther it is, the farther along the natural thermal maturation process it is. And so the earth is like a refinery. And so most of the oil that we're finding today, it has a larger percentage of natural gas in it than the oil that we found, say, 50 years ago, simply because the earth, it was from a

part of the earth that was shallower, and therefore it wasn't naturally refined as much. So a higher and higher percentage of what we produce when we find oil and gas together is natural gas. Conversely, less is crude oil. And the crude oil that we find is a lighter grade of crude oil. that also has a lower energy density, not hugely lower, but, you know, six, seven, eight percent lower. So the shale oil that people talk about doesn't have the same energy content as the crude oil, say, that's produced at Gawar. It's, you know, it's discounted by seven or eight percent, and a huge amount of it. So when they talk about, oh, well, you know, our wells in the Permian are making a billion barrels a day. Well, that's a million barrels of oil equivalent. They're converting a whole

ton of natural gas into its oil equivalency number, even though it's still natural gas and not oil. So it's kind of stealth peak oil in a way. That's a good way to put it. Absolutely. Okay. So I'm looking at the charts you just sent me an hour ago. Look at number nine. Can you describe what is going on. We've been talking about the United States. Can you describe what's been going on globally? Okay. So this is a, first of all, it's an incremental chart,

which doesn't change anything about it except that it makes it easier to see the volumetric relationship. So the blue is everything that is crude oil and, condensate, condensate being the light liquid fraction of crude oil, lighter than crude, but still, you know, in that 93% of energy content. So the lion's share, if you will, is crude oil and condensate. But then so, but then the other stuff, the hotter colors, that's everything else. Okay. So you can't really see the hottest of the, the orange very well. So I've put a little arrow there. That's refinery game. And refinery gain is strictly, as I said before, it's simply when you refine, when you change something more dense into less dense refined products, you get a volume expansion. You start with one barrel and you get 1.15 barrels out because the stuff coming out is a lower density. So you get a little pop from that. The next, the next category up is what's called other.

other, those are a whole slew of products that are not used as fuel. They are from, they are technically from petroleum, but they're, they're things that we just, we simply do not use as a fuel. And then the highest category is NGL, which is natural gas liquids or natural gas plant liquids, which we've been describing in some detail. Now, the world has a slightly different breakdown of those percentages than does the United States. And as it turns out, the percentage of natural gas liquids is not quite as high, but it is high and it's growing. So, again, the United States is just a more mature petroleum province and a more advanced economy. So the rest of the world's getting there.

An observation and a question. So 25 years ago, the amount of oil that we produced was almost all oil, crude and condensive. Correct. But the amount of the other things, the refinery gain, the other and the NGL globally, according to this chart, are now what percent of the total oil? I don't have it on the chart, but I'm going to say it's like 20 or 23%. Yeah, yeah. Yeah, that's a big deal. So what is the NGL mostly being used for?

The NGL is mostly being used to make plastics. And it's being used, as I said, for, so the biggest portion, which is ethane is used to make various kinds of plastics. The butane and the propane, which are the other biggest components, are used for other stuff, you know, like heating homes and cigarette lighters. But the point that I think, you know, before I move on, because you made an excellent point, and that is, you know, you go back to the early mid-90s and almost everything we produced was crude oil and condensate. All right. But look at how much less the world used back in those days. So we were only, I mean, we were only using 70 million barrels a day of whatever you want to call oil back in the mid-90s. And today we're using

more than a hundred of whatever you want to call oil. So the world has used half the oil that it's ever used since 1995. Half the world's production and use has come in the last 27 years. So the rate of use has accelerated tremendously, and that's not surprising because look at the population. I have a bunch of questions, Art. So the U.S., you said, is closer to the higher thermal mother nature refining. We have lighter oil here, which we talked about on your last podcast,

which was quite excellent on diesel and refining. And I encourage people to watch that. But combining the message of that with what you just said now, what are the implications for the United States where a lot of what we're terming oil is for plastics and baggies, et cetera. And we have a lot of light fraction sort of crude. So we're like set up for driving and putting fruit and food in bag in quart freezer bags. I mean, how does this position us? peak oil currencies financial markets aside what does this suggest as far as risks for the u.s economy given the the natural gas liquid and our light oil situation the u.s. is set up

to sell stuff okay i mean that's what we do we're an energy launderer we are absolutely an energy launderer. And so that means that we have to buy other people's oil because ours is super light. And, you know, I'm not, I'm not, I'm not criticizing us. We have reduced our imports a lot in the last 20 years. But we've reached, we've reached a level where we just can't use any more of our light crude oil. We just can't. And so we send it overseas. We're exporting, you know, something like three and a half. 4 million barrels of crude oil like crude oil a day because we just don't need it. We can't do anything with it. And we are importing 6.5 or 7 million barrels a day of heavier oil from, you name your source, but people who produce refinery ready oil, which is, you know, has higher energy

density and, you know, it's thicker oil because we need that in our refinery. in order to produce things like diesel, which is the biggest cash cow in the world. And it is a fairly heavy, it's a fairly heavy compound. And if you look at its heat content, I mean, diesel, depending on, you know, how it's produced, I mean, it can actually have a greater heat content or energy content than crude oil. Maybe describe to our listeners slide 11 that I will put on screen. Yeah, so slide 11 shows what all of the various refined products that come out of a refinery, whether they come from natural gas or they come from crude oil.

And it shows the amount, the energy content, and it shows the percent. and it shows the percent of what, you know, of the total product that's produced. So for instance, you know, if we look at something like, you know, like crude oil, which in this graph is in red. All right. So its heat content is, you know, is something like, you know, 5.7 British thermal units. million BTUs per barrel. And we look at diesel and it's actually slightly higher. Okay.

It's, you know, it's one percent more than crude oil because it's one of the densest products that we make heating oils even a little higher. And residual is even higher. But look at all of the other stuff down the line. The gasoline, it only has a heating content of 89% of crude oil. oil, butane that we talked about for, you know, cigarette lighters. It's got 74%, propane, 67%. And then you get all the way down to ethane, which has got less than half the heating content. So, you know, these are, these are the realities. 40% of our oil now is natural gas liquids. And the main component of natural gas liquids is ethane and ethane is 49% of the heat content of what we used to consider as crude oil.

Correct. How many people know that? In your field, in your field? I think a lot of people have like a notional sense that that's true. And I say that because before I made these charts a couple of weeks ago, that's pretty much what I had. I think I had a, you know, a stronger sense that these numbers were lower than the average person in the oil business. The average person in the oil business is real smart, but isn't focused on this stuff. I mean, that person is focused on what he's paid to do, which is where do we drill the next well?

How do we optimize production? You know, how do we make the economics work? The stuff you and I are talking about is related to the system. You know, how is the serving civilization, the economy, economic growth? And that's, that's, you know, people are not, they're not paid to look at that. Well, somebody in the company is, but they're not. The heat content, uh, is ultimately what's, what's powering our system, but everything in these charts is sold somewhere, uh, like it's used.

Um, so someone is buying all these other things towards, some economic activity. So the fact that we're growing the total amount still results in an economic output. It's just not the flame is dwindling. Exactly. That's why I said, I mean, the United States, I mean, we're in the business of selling stuff and we do it very, very well. We are the oil engine. We're also in the business of buying stuff, though, writ large, but you're You're talking about energy and oil products. Yeah, sorry. I absolutely am talking about that.

So my point is that the U.S. oil industry, refining industry, petrochemical industry, is doing exactly what its investors expect from it. It's maximizing shareholder value. It's maximizing profit, ROCE return on capital employees doing all the stuff that everybody wants it to do, demands that it do, but it's not necessarily doing that for the well-being of the United States. And I take that phrase directly from M. King Hubbard. But no one's doing that.

We're in service to the superorganisms and corporations are miniature superorganisms. It's no one's fault. They're following the rules that were set out. Let's get back to, I want to make sure that we cover your main points graphically. Looking at your slide eight, there's two things that we didn't talk about. So you said that 40% of what the EIA and other people label as oil is not oil. We talked about natural gas liquids and refinery gains. What is the light orange fuel ethanol?

Is that corn ethanol? And then what is the renewables and oxygen at the little yellow? on top. So going through this systematically, what we see is that we've got this big swath of blue, which is oil. And of that, we have two categories. One is conventional oil, the other's tight oil. And conventional oil, this is United States, is at best been flat forever. It's actually declining a little bit. And all of the growth is in tight oil. And we've discussed how it has a slightly lower energy density and it's, you know, it's lighter and all that. And a much faster decline rate once the wells drilled.

And as we've discussed before, everything newly drilled in the United States has a much higher decline rate, a stunningly high decline rate of, you know, like 40. Well, we might want to, you don't have that graph in this deck, but briefly, you should show that that basically, if we stop drilling in the United States today, our total amount of oil, and I don't know how natural gas liquids fit into that, would drop by 40% in the first year, and then another double to just the second and third year, because it is truly the Red Queen phenomenon

that we have to keep drilling in order to offset the steep decline of the light oil, the tight oil, which is a much, the largest fraction of our oil right now. It's more than, it's about 60%. Yeah.

So we've talked about refinery gain. We, you know, that's just the volumetric expansion of taking something real dense and splitting it into lower density products like gasoline and kerosene, et cetera.

Fuel ethanol. I mean, fuel ethanol is something that, you know, 10 or 15% of everything you put in your car or your truck is not gasoline anymore. It's fuel ethanol. And that was a change that came about in the early 2000s, I think during the Bush administration, when oil prices got real high. And the idea was, well, we need to conserve our gasoline. So if we add fuel

ethanol, which is basically alcohol, it's denatured alcohol, then we can make our gasoline go further. Well, fuel ethanol comes from corn. Most of it's corn. You know, we can make whiskey with corn. We can make another kind of alcohol, denatured alcohol, to put it mixed with gasoline. And that's from corn also. And we can make tamales and chips. Well, if we are interested in Signor Petrolio, we like all those things.

Well, if you're someone that actually is, living and wants to have food to survive, you're also interested in those things. And I like those things. Renewables and oxygenates. Hold on, just a quick side note there. You probably don't know this, but it was my one time that I was in the journal Science was in 2005 talking about this on the fact that corn ethanol was hardly, net energy positive. And it was more of a energy conversion than an energy source because we use fossil fuels

to grow the corn and natural gas to dry the corn and the whole process to convert this corn into usable liquid fuel for vehicles. But again, just like ethane or natural gas liquids, ethanol also has a lower heat content per gallon, correct? Well, it does. And so you need, yeah, you basically, you don't get the same range. You fill up your tank with 15% ethanol and your car doesn't go as far as if you've filled it up with 100% or or the flex fuel vehicles that have up to 70% or whatever it is. They even have a lesser range? For sure. Yeah. And the other thing, of course, is that you're competing, you're using food, for fuel. And so that has the effect of you use less of what you grow to feed people. And it also

increases the cost of agricultural land, which, you know, and again, we get into this whole complexity cascade that, I mean, it seemed like a pretty good idea to somebody when we did it. But when you actually start analyzing it, we wish that we hadn't. Most people wish we wished we, we hadn't done it, but we're stuck with it. You know, it's a million barrels a day. Why are we stuck with it? Why couldn't we wind that down with a three-year phase-out or something? Oh, we could physically do it, but I mean, all the farmers would scream.

You know, all the congressmen who support those farmers would scream. I mean, you know, we can't do anything unless everybody agrees that it's, you know, that it suits their constituents. And so the likelihood of that happening, I think, is very close to zero. We could do it very easily. Okay, back to slide eight, you were about to talk about the renewables and oxygen. Yeah. So there's a very small percentage of all of this that, you know, the renewables, those are, you know, those are things like biodiesel.

Those are things like, you know, you mentioned, you know, you can actually create some sort of fuel from coal. It's such a small percentage that I don't really even want to talk about it because it's something that gets a lot of press, but it doesn't contribute hardly anything to the bottom line. And oxygenates are just things to, you know, to increase the oxygen content to make it burn hotter, okay? But it doesn't last. You know, it's a decline rate kind of problem. So the real message of this graph and every. other one that I've shown so far is simply that any way you look at it, whether you look at the world, whether you look at the United States, which of these components you focus on,

whether you look just at the composition of the natural gas, whether you look at the composition of the oil, you keep coming back to the same thing, and that is that oil ain't what it used to be. And that has implications. We don't get as much energy. out of what we call oil today, as we did a few decades ago back when, you know, I mean, I was still 20 years into my career in the mid-90s. And so the world, I mean, the basis for our energy proposition has fundamentally changed. But the only thing people pay attention to is the top line. Are we producing 100 barrel, 100 million? barrels a day, we're producing 95? Because if it's only 95, that's bad. If it's 100, that's good.

But we're just looking at how much we cranking out. We're not looking at what goes into it. And what we therefore get out of it. And so with those big impressive numbers that people use all the time to say, oh, peak oil, that was just a bunch of alarmists. You know, those guys didn't know what they were talking about. They're clearly wrong. And I'm not trying to, you know, defend people. oil or criticize those that criticize peak oil, but I would say that neither of them really knows or knew what they were talking about. They were each focused on an end member and not actually looking at how all of the stuff interrelates across the spectrum from crude oil to natural gas liquids or renewables and

oxygenates. And when you do, we're just, you're back to your your dissertation, the net energy. that we get out of it is lower than where we were not very long ago. So the bottom line, if the economy holds up in 2023, we could pierce a 2018 quarter for new all-time record of what is considered oil, but that's actually all liquids. the fine print, the hedonic adjustment, as it were, is a massive fraction of what we're considering oil. In the United States, 40% is natural gas liquids and other things that have lower heat content and can't be directly used as oil. That's correct. That's absolutely right.

And if you break out the crude oil fraction of all of this, what you find is not only are we nowhere near recovering even to the late 2018 level, but the rate of increase of crude oil and condensate production is either flat or in decline. So the future, at least with the limited data we have right now, is not real encouraging for us ever getting back to the 85 million barrels a day of crude oil and condensate that the world produced just a couple of years ago. If there was an energy-related Nobel Prize called the Hubbard Prize or something, you should deserve one for your energy sleuthing on this. You're a real pit bull once I give you a question and a challenge. You come up with these charts and graphs and you double check them. And I'm grateful for your curious and diligent mind. Well, thank you, Nate. I love a challenge.

And many years ago, I was giving a talk. And I guess somebody thought it was depressing. And he said, what motivates you to, you know, to give, to do this kind of research and give these kind of talks? That, you know, it was a fair question. And the answer I gave him still remains, and that is that I'm fascinated by what I don't understand. And so I'm not, I'm not a doomsder. I'm not trying to bring people down.

You know, I'm not here. I mean, I'm a scientist. I'm describing the state of things. In this case, the state of energy. And to me, it's neither optimist. or pessimistic. It's just what it is. And when I find out, gee, I misunderstood that or I only understood it partly, you know, that motivates me to understand it better. So I have a lot of takeaways from this conversation, but the simplest one is when is peak oil is really not a

helpful question because of everything we just discussed. However, the broad concept that oil will peak and decline has massive implications for society in our future. Those are the two major takeaways, and how did we somehow get here and nobody noticed? That would be it. Well, maybe the answer to that question is because we, and I say that with a very broad Stripe cared about identity and making predictions and being right about something when the larger story was so complex and so vital that now there's this cry wolf thing. Can you believe it, Art, that here we are, 16 years after I wrote that article, no one cares or understands

about peak oil anymore. I think the bullets were spent. in 2007, eight, nine, ten. And we're in such a more of a dire situation today, oil-wise, geopolitical wise, financial overshoot wise. And now what are we here? Oh, we're not going to need oil because of peak demand or there's plenty of oil for a hundred years. I think peak oil, not to us and the circle of people that we do analysis with, but to the broader public, peak oil has been debunked. Yeah, it's a, it's a, it's a failed, it's a failed idea. And it's interesting that, that so many people talk about it as if it's a theory.

They call it the peak oil theory. And whether it was right, wrong, or, or, are neutral, it was never a theory. It was an observation. It was a simple, it was an empirical kind of thing and said, hey, you know, we have, we have a limited volume of this stuff at some point we're going to we're going to have to spend a whole lot more money and work a lot harder to get what's left i mean that that that was never a theory and that was never wrong but you know it's fascinating that we talk about you know things that happened 20 years ago. But when Hubbard gave his talk in 1956, the company he worked for, Shell,

immediately launched an investigation of him to find out where he would. Oh yeah, yeah. They launched an investigation of him to find, to show where he was wrong, which of course they, they never could do. They could never do it. He ended up being right about U.S. oil, in 1970, because at that time, just like Malthus or Erlich didn't know about the fossil carbon pulse and globalization and debt, he didn't know about the Gulf of Mexico, the North Slope, and then shale oil. He was just projecting, you know, conventional crude, right? And he and he was, the point of what he was doing was not any kind of gloom and doom. He was just saying, hey, guys, you know, we got to start working on.

other stuff. And by the way, he was big into nuclear. He thought nuclear was a big part of the energy solution. But he was simply saying, we need to think about this. We've got to get our population under control. We've got to get our consumption under control. And we got to make sure we don't kill each other with nuclear weapons. And surely there's a way that we can figure out how to make this last as long as we need it. I mean, that was all he was saying. And yet the controversy that he raised was greater, I think, at the time than anything that the people in peak oil experienced 10 or 15 or even, you know, a few years ago. I mean, he was really on the hot seat. Yeah.

Well, it's, it's, it's threatening to the status quo to say that there may be less in the future. And so what's happened the last 15 years is we've kicked a hell. of a lot of cans, rule changes, too big to fail, quantitative easing, artificially low interest rates, all to, you know, the larger straw, which is the shale experiment. And yeah, this might go on for a while longer, but after it stops, there's, I think, a dozy of a hangover because we've been, you know, consuming. beyond our means for a long time and this decline rate that underpins what you've discussed isn't going away. And so we're trying to offset that. And not only that, but the stuff that we're offsetting it with isn't worth as much from an

energy heat standpoint. So this has all been super helpful art. Let me put you on the spot here. What else are you curious about? and what might you like to discuss on a future podcast appearance here? Well, I'm really curious about when the world will realize that all of the alternatives to oil are basically only good for electric power generation. and electric power generation is a relatively smaller portion of the total energy consumption that we have.

And so I'm not, again, being critical or saying anything other than observation. And that is the idea, the fact that people think that somehow renewable energy is going to solve everything we've been talking about, it's simply not true. It cannot. We, you know, we can't do all the things that we need to do in our civilization just with electric power. And so in a way, we're solving the easy part of the problem and convincing ourselves that once we finally get it right, we'll have the whole thing solved. And again, I'm all for renewable energy. I'm totally in favor of, renewable energy, but it's simply not going to solve any of the stuff we've been talking about today. Well, you know, I agree with that. In my writings, I say renewable energy can power a great civilization, just not this one. So you have, I'll give you six weeks to come up with those charts and graphs, and we'll talk

again. Okay, Nate, that sounds good. Mucho gracias, signor Petrolio. This has been great, very helpful. I hope people understand the importance of what you've. laid out here, I found it fascinating and it makes total sense now that I've seen the graphs. Well, I enjoyed the research and hopefully this will get a few people thinking and asking questions. And if not, we'll find another subject that maybe we'll get their interest in a

different way. Thanks so much, Art. I'll talk to you soon. My pleasure, Nate. Always good to talk to you. If you enjoyed or learned from this episode of The Great Simplification, please subscribe to us on your favorite podcast platform and visit the great simplification.com for more information on future releases.