GAO asks Congress to prepare for Peak Oil

[The Department of Energy (DOE) asked Robert Hirsch to come up with a peak oil risk management and mitigation plan which was published in 2005. Nothing happened, so in 2007 the Government Accountability Office asked Congress to prepare for Peak oil because of the many risks that could suddenly force a sudden and steep decline of oil in addition to geological depletion. The GAO states that “according to DOE, there is no formal strategy for coordinating and prioritizing federal efforts dealing with peak oil issues, either within DOE or between DOE and other key agencies. While the consequences of a peak would be felt globally, the U.S., as the largest consumer of oil and one of the nations most heavily dependent on oil for transportation, may be particularly vulnerable. Therefore, to better prepare the United States for a peak and decline in oil production, we are recommending that the Secretary of Energy take the lead, in coordination with other relevant federal agencies, to establish a peak oil strategy. ”

It is easy to forget with the low oil prices we have today that Peak Oil hasn’t gone away. Low prices are actually alarming, it means that drilling and future exploration are stopping, setting us up for an even more dramatic oil shock in the future. Peak oil forces a shrinkage in economies, yet our system is predicated on endless growth of credit and debt paid back in an ever growing economy. Shrinkage is highly deflationary. Credit disappears, oil companies can’t borrow to drill, and customers are so poor that oil at any price is too expensive, and demand drops. The underlying biophysical reality is that the energy returned on invested is too low to run civilization.

Alice Friedemann at www.energyskeptic.com]

**GAO. 2007. Uncertainty about future oil supply makes it important to develop a strategy for A Peak and decline in oil production. U.S. Government Accountability Office. 82 pages**

Key Points

The U.S. economy depends heavily on oil, particularly in the transportation sector. World oil production has been running at near capacity to meet demand, pushing prices upward. Concerns about meeting increasing demand with finite resources have renewed interest in an old question: How long can the oil supply expand before reaching a maximum level of production—a peak—from which it can only decline?

In the United States, alternative fuels and transportation technologies face challenges that could impede their ability to mitigate the consequences of a peak and decline in oil production, unless sufficient time and effort are brought to bear. There is no coordinated federal strategy for reducing uncertainty about the peak’s timing or mitigating its consequences.

Peaking risks for reasons other than geological

The potential for disruptions in key oil-producing regions of the world, such as the Middle East, and the yearly threat of hurricanes in the Gulf of Mexico have also exerted upward pressure on oil prices.

Without sustained high oil prices, efforts to develop and adopt alternatives may fall by the wayside.

Political Conditions Create Uncertainties about Oil Exploration and Production

Investment Climate Creates Uncertainty about Oil Exploration and Production

85 percent of the world’s proven oil reserves are in countries with medium-to-high investment risk or where foreign investment is prohibited

Foreign investment in the oil sector could be necessary to bring oil to the world market. but many countries have restricted foreign investment. Lack of investment could hasten a peak in oil production because the proper infrastructure might not be available to find and produce oil when needed, and because technical expertise may be lacking. lack of technical expertise could lead to less sophisticated drilling techniques that actually reduce the ability to recover oil in more complex reservoirs

National oil companies may have additional motivations for producing oil, other than meeting consumer demand. For instance, some countries use some profits from national companies to support domestic socioeconomic development, rather than focusing on continued development of oil exploration and production for worldwide consumption. Given the amount of oil controlled by national oil companies, these types of actions have the potential to result in oil production that is not optimized to respond to increases in the demand for oil.

OPEC countries might decide to limit current production to increase prices or to preserve oil and its revenue for future generations.

The rate of decline after a peak is an important consideration because a decline that is more abrupt will likely have more adverse economic consequences than a decline that is less abrupt.

In the United States, alternative transportation technologies have limited potential to mitigate the consequences of a peak and decline in oil production, at least in the near term, because they face many challenges that will take time and effort to overcome. If the peak and decline in oil production occur before these technologies are advanced enough to substantially offset the decline, the consequences could be severe.

The price of soybean oil is not expected to decrease significantly in the future owing to competing demands from the food industry and from soap and detergent manufacturers. These competing demands, as well as the limited land available for the production of feedstocks, also are projected to limit biodiesel’s capacity for large-volume production, according to DOE and USDA. As a result, experts believe that the total production capacity of biodiesel is ultimately limited compared with other alternative fuels.

Furthermore, because oil production could decline even more each year following a peak, the amount that would have to be replaced by alternatives could also increase year by year.

Consumer actions could help mitigate the consequences of a near-term peak and decline in oil production through demand-reducing behaviors such as carpooling; teleworking; and “eco-driving” measures, such as proper tire inflation and slower driving speeds. Clearly these energy savings come at some cost of convenience and productivity, and limited research has been done to estimate potential fuel savings associated with such efforts. However, DOE estimates that drivers could improve fuel economy between 7 and 23 percent by not exceeding speeds of 60 miles per hour, and IEA estimates that teleworking could reduce total fuel consumption in the U.S. and Canadian transportation sectors combined by between 1 and 4 percent, depending on whether teleworking is undertaken for 2 days per week or the full 5-day week, respectively.

Uncertainty about future oil prices can be a barrier to investment in risky alternative fuels projects. Recent polling data also indicate that consumers’ interest in fuel efficiency tends to increase as gasoline prices rise and decrease when gasoline prices fall.

Federal agency efforts that could reduce uncertainty about the timing of peak oil production or mitigate its consequences are spread across multiple agencies and generally are not focused explicitly on peak oil.

For example, efforts that could be used to reduce uncertainty about the timing of a peak include USGS activities to estimate oil resources and DOE efforts to monitor current supply and demand conditions in global oil markets and to make future projections. Similarly, DOE, the Department of Transportation (DOT), and the U.S. Department of Agriculture (USDA) all have programs and activities that oversee or promote alternative transportation technologies that could mitigate the consequences of a peak.

However, officials of key agencies we spoke with acknowledge that their efforts—with the exception of some studies—are not specifically designed to address peak oil. Federally sponsored studies we reviewed have expressed a growing concern over the potential for a peak and officials from key agencies have identified some options for addressing this issue. For example, DOE and USGS officials told us that developing better information about worldwide demand and supply and improving global estimates for non-conventional oil resources and oil in “frontier” regions that have yet to be fully explored could help prepare for a peak in oil production by reducing uncertainty about its timing. Agency officials also said that, in the event of an imminent peak, they could step up efforts to mitigate the consequences by, for example, further encouraging development and adoption of alternative fuels and advanced vehicle technologies.

However, according to DOE, there is no formal strategy for coordinating and prioritizing federal efforts dealing with peak oil issues, either within DOE or between DOE and other key agencies. While the consequences of a peak would be felt globally, the United States, as the largest consumer of oil and one of the nations most heavily dependent on oil for transportation, may be particularly vulnerable. Therefore, to better prepare the United States for a peak and decline in oil production, we are recommending that the Secretary of Energy take the lead, in coordination with other relevant federal agencies, to establish a peak oil strategy. Such a strategy should include efforts to reduce uncertainty about the timing of a peak in oil production and provide timely advice to Congress about cost-effective measures to mitigate the potential consequences of a peak. In commenting on a draft of the report, the Departments of Energy and the Interior generally agreed with the report and recommendations.

Federal agency efforts that could contribute to reducing uncertainty about the timing of a peak in oil production or mitigating its consequences are spread across multiple agencies and are generally not focused explicitly on peak oil issues. Federal agency-sponsored studies have expressed a growing concern over the potential for a peak, and officials from key agencies have identified options for reducing the uncertainty about the timing of a peak in oil production and mitigating its consequences. However, there is no strategy for coordinating or prioritizing such efforts.

Agencies Have Options to Reduce Uncertainty and Mitigate Consequences, but Lack a Coordinated Strategy

In addition to these actions reducing the uncertainty about the timing of a peak, agency officials also told us that they could take additional steps to mitigate the consequences of a peak. For example, DOE officials reported that they could expand their efforts to encourage the development of alternative fuels and advanced vehicle technologies. These efforts could be expanded by conducting more demonstrations of new technologies, facilitating greater information sharing among key industry players, and increasing cost share opportunities with industry for research and development. Agency officials told us such efforts can be essential to developing and encouraging the technologies. Although there are many options to reduce the uncertainty about the timing of a peak or to mitigate its potential consequences, according to DOE, there is no formal strategy to coordinate and prioritize federal programs and activities dealing with peak oil issues—either within DOE or between DOE and other key agencies.

[Extracts from this study below]

Corn ethanol production is technically feasible, it is more expensive to produce than gasoline and will require costly investments in infrastructure, such as pipelines and storage tanks, before it can become widely available as a primary fuel. Key alternative technologies currently supply the equivalent of only about 1 percent of U.S. consumption of petroleum products, and the Department of Energy (DOE) projects that even by 2015, they could displace only the equivalent of 4% of projected U.S. annual consumption.

In such circumstances, an imminent peak and sharp decline in oil production could cause a worldwide recession.

If the peak is delayed, however, these technologies have a greater potential to mitigate the consequences. DOE projects that the technologies could displace up to 34% of U.S. consumption in the 2025 through 2030 time frame, if the challenges are met. The level of effort dedicated to overcoming challenges will depend in part on sustained high oil prices to encourage sufficient investment in and demand for alternatives.

Since 1983, world consumption of petroleum products has grown fairly steadily. The Department of Energy’s (DOE) Energy Information Administration (EIA) states in a 2006 report that world consumption of petroleum had reached 84 million barrels per day in 2005.1 EIA also projects that world oil consumption will continue to grow and will reach 118 million barrels per day in 2030.2 About 43% of this growth in oil consumption will come from the non-Organization for Economic Co-operation and Development Asian countries, including China and India, but the United States will remain the world’s largest oil consumer. In 2005, the United States accounted for just under 25% of world oil consumption.

World oil production has been running at near capacity in recent years to meet rising consumption, putting upward pressure on oil prices. The potential for disruptions in key oil-producing regions of the world, such as the Middle East, and the yearly threat of hurricanes in the Gulf of Mexico have also exerted upward pressure on oil prices. These conditions have renewed interest in a long-standing question: Will oil supply continue to expand to meet growing demand, or will we soon reach a maximum possible level of production—a peak—beyond which oil supply can only decline?

According to a 2005 report prepared for DOE, without timely preparation, a reduction in world oil production could cause transportation fuel shortages that would translate into significant economic hardship.3

In this context, we (1) examined when oil production could peak, (2) assessed the potential for transportation technologies to mitigate the consequences of a peak and decline in oil production, and (3) examined federal agency efforts that could reduce uncertainty about the timing of peak oil production or mitigate the consequences.

More than 60% of world oil reserves, on the basis of Oil and Gas Journal estimates, are in countries where relatively unstable political conditions could constrain oil exploration and production.

In the United States, alternative transportation technologies face challenges that could impede their ability to mitigate the consequences of a peak and decline in oil production, unless sufficient time and effort are brought to bear. For example:

Ethanol from corn is more costly to produce than gasoline, in part because of the high cost of the corn feedstock. Even if ethanol were to become more cost-competitive with gasoline, it could not become widely available without costly investments in infrastructure, including pipelines, storage tanks, and filling stations.
Advanced vehicle technologies that could increase mileage or use different fuels are generally more costly than conventional technologies and have not been widely adopted. For example, hybrid electric vehicles can cost from $2,000 to $3,500 more to purchase than comparable conventional vehicles and currently constitute about 1 percent of new vehicle registrations in the United States.
Hydrogen fuel cell vehicles are significantly more costly than conventional vehicles to produce. Specifically, the hydrogen fuel cell stack needed to power a vehicle currently costs about $35,000 to produce, in comparison with a conventional gas engine, which costs $2,000 to $3,000.

The level of effort dedicated to overcoming challenges to alternative technologies will depend in part on the price of oil; without sustained high oil prices, efforts to develop and adopt alternatives may fall by the wayside.

Political Conditions Create Uncertainties about Oil Exploration and Production

In many countries with proven reserves, oil production could be shut down by wars, strikes, and other political events, thus reducing the flow of oil to the world market. If these events occurred repeatedly, or in many different locations, they could constrain exploration and production, resulting in a peak despite the existence of proven oil reserves. For example, according to a news account, crude oil output in Iraq dropped from 3.0 million barrels per day before the 1990 gulf war to about 2.0 million barrels per day in 2006, and a labor strike in the Venezuelan oil sector led to a drop in exports to the United States of 1.2 million barrels. Although these were isolated and temporary oil supply disruptions, if enough similar events occurred with sufficient frequency, the overall impact could constrain production capacity, thus making it impossible for supply to expand along with demand for oil. Using a measure of political risk that assesses the likelihood that events such as civil wars, coups, and labor strikes will occur in a magnitude sufficient to reduce a country’s gross domestic product (GDP) growth rate over the next 5 years,16 we found that four countries—Iran, Iraq, Nigeria, and Venezuela—that possess proven oil reserves greater than 10 billion barrels (high reserves) also face high levels of political risk.

These four countries contain almost one-third of worldwide oil reserves. Countries with medium or high levels of political risk contained 63 percent of proven worldwide oil reserves, on the basis of Oil and Gas Journal estimates of oil reserves. (See fig. 7.)17

16 The political risk measure comes from Global Insight’s Global Risk Service. Global Insight is a worldwide consulting firm headquartered in Massachusetts. The Global Risk Service political risk score is a summary of probabilities that different political events, such as civil war, will reduce GDP growth rates. The subjective probabilities are assessed by country analysts at Global Insight, on the basis of a wide range of information, and are reviewed by a team to ensure consistency across countries. The measures are revised quarterly; the measure we used comes from the second quarter of 2006.

Investment Climate Creates Uncertainty about Oil Exploration and Production

Foreign investment in the oil sector could be necessary to bring oil to the world market, according to studies we reviewed and experts we consulted, but many countries have restricted foreign investment. Lack of investment could hasten a peak in oil production because the proper infrastructure might not be available to find and produce oil when needed, and because technical expertise may be lacking. The important role foreign investment plays in oil production is illustrated in Kazakhstan, where the National Commission on Energy Policy found that opening the energy sector to foreign investment in the early 1990s led to a doubling in oil production between 1998 and 2002.

Direct foreign investment in Venezuela was strongly correlated with oil production in that country, and that when foreign investment declined between 2001 and 2004, oil production also declined.

LACK OF EXPERTISE

Industry officials told us that lack of technical expertise could lead to less sophisticated drilling techniques that actually reduce the ability to recover oil in more complex reservoirs. For example, according to industry officials, some Russian wells have difficulties with high water cut—that is, a high ratio of water to oil—making oil difficult to get out of the ground at current prices. This water cut problem stems from not using technically advanced methods when the wells were initially drilled.

We have previously reported that the Venezuelan national oil company, PDVSA, lost technical expertise when it fired thousands of employees following a strike in 2002 and 2003.

In contrast, other national oil companies, such as Saudi Aramco, are widely perceived to possess considerable technical expertise. According to our analysis, 85% of the world’s proven oil reserves are in countries with medium-to-high investment risk or where foreign investment is prohibited, on the basis of Oil and Gas Journal estimates of oil reserves. (See fig. 8.) For example, over one-third of the world’s proven oil reserves lie in only five countries—China, Iran, Iraq, Nigeria, and Venezuela—all of which have a high likelihood of seeing a worsening investment climate. Three countries with large oil reserves—Saudi Arabia, Kuwait, and Mexico—prohibit foreign investment in the oil sector, and most major oil-producing countries have some type of restrictions on foreign investment. Furthermore, some countries that previously allowed foreign investment, such as Russia and Venezuela, appear to be reasserting state control over the oil sector, according to DOE.

GAO, Oil and Gas Development: Increased Permitting Activity Has Lessened BLM’s Ability to Meet Its Environmental Protection Responsibilities, GAO-05-418 (Washington, D.C.: June 17, 2005). 1

According to IEA, infrastructure investment in exploration and production would need to total about $2.25 trillion from 2004 through 2030. This investment will be needed to expand supply capacity and to replace existing and future supply facilities that will be closed during the projection period. National Commission on Energy Policy, Ending the Energy Stalemate: A Bipartisan Strategy to Meet America’s Energy Challenges (December 2004), available at www.energycommission.org. 21GAO, Energy Security: Issues Related to Potential Reductions in Venezuelan Oil Production, GAO-06-668 (Washington, D.C.: June 27, 2006). Figure 8: Worldwide Proven Oil Reserves, by Investment Risk

Foreign investment in the oil sector also may be limited because national oil companies control the supply.

OPEC countries might decide to limit current production to increase prices or to preserve oil and its revenue for future generations.

Uncertainty about the rate of decline is illustrated in studies that estimate the timing of a peak. IEA, for example, estimates that this decline will range somewhere between 5 percent and 11 percent annually. Other studies assume the rate of decline in production after a peak will be the same as the rise in production that occurred before the peak. Another methodology, employed by EIA, assumes that the resulting decline will actually be faster than the rise in production that occurred before the peak. The rate of decline after a peak is an important consideration because a decline that is more abrupt will likely have more adverse economic consequences than a decline that is less abrupt.

Alternative Transportation Technologies Face Challenges in Mitigating the Consequences of the Peak and Decline

In the United States, alternative transportation technologies have limited potential to mitigate the consequences of a peak and decline in oil production, at least in the near term, because they face many challenges that will take time and effort to overcome. If the peak and decline in oil production occur before these technologies are advanced enough to substantially offset the decline, the consequences could be severe. If the peak occurs in the more distant future, however, alternative technologies have a greater potential to mitigate the consequences.

Development and Adoption of Technologies to Displace Oil Will Take Time and Effort

Development and widespread adoption of the 7 alternative fuels and advanced vehicle technologies we examined will take time, and significant challenges will have to be overcome, according to DOE. These technologies include ethanol, biodiesel, biomass gas-to-liquid, coal gas-to-liquid, natural gas and natural gas vehicles, advanced vehicle technologies, and hydrogen fuel cell vehicles.

Widespread use of ethanol would require a turnover in the vehicle fleet because most current vehicle engines cannot effectively burn ethanol in high concentrations.

Biodiesel is a renewable fuel that has similar properties to petroleum diesel but can be produced from vegetable oils or animal fats. It is currently used in small quantities in the United States, but it is not cost-competitive with gasoline or diesel. The cost of biodiesel feedstocks— which in the United States largely consist of soybean oil—are the largest component of production costs. The price of soybean oil is not expected to decrease significantly in the future owing to competing demands from the food industry and from soap and detergent manufacturers. These competing demands, as well as the limited land available for the production of feedstocks, also are projected to limit biodiesel’s capacity for large-volume production, according to DOE and USDA. As a result, experts believe that the total production capacity of biodiesel is ultimately limited compared with other alternative fuels.

Biomass gas-to-liquid (biomass GTL) is a fuel produced from biomass feedstocks by gasifying the feedstocks into an intermediary product, referred to as syngas, before converting it into a diesel-like fuel. This fuel is not commercially produced, and a number of technological and economic challenges would need to be overcome for commercial viability. These challenges include identifying biomass feedstocks that are suitable for efficient conversion to a syngas and developing effective methods for preparing the biomass for conversion into a syngas. Furthermore, DOE researchers report that significant work remains to successfully gasify biomass feedstocks on a large enough scale to demonstrate commercial viability. In the absence of these developments, DOE reported that the costs of producing biomass GTL will be very high and significant uncertainty surrounding its ultimate commercial feasibility will exist.

Coal gas-to-liquid (coal GTL) is a fuel produced by gasifying coal into a syngas before being converted into a diesel-like fuel. This fuel is commercially produced outside the United States, but none of the production facilities are considered profitable.

DOE reported that high capital investments—both in money and time—deter the commercial development of coal GTL in the United States. Specifically, DOE estimates that construction of a coal GTL conversion plant could cost up to $3.5 billion and would require at least 5 to 6 years to construct. Furthermore, potential investors are deterred from this investment because of the risks associated with the lengthy, uncertain, and costly regulatory process required to build such a facility.

An expert at DOE also expressed concern that the infrastructure required to produce or transport coal may be insufficient. For example, the rail network for transporting western coal is already operating at full capacity and, owing to safety and environmental concerns, there is significant uncertainty about the feasibility of expanding the production capabilities of eastern coal mines. Coal GTL production also faces serious environmental concerns because of the carbon dioxide emitted during production.

Natural gas is an alternative fuel that can be used as either a compressed natural gas or a liquefied natural gas. Demand for natural gas in other markets, such as home heating and energy generation, presents substantial competitive risks to the natural gas vehicle industry. Production costs for natural gas vehicles are also higher than for conventional vehicles because of the incremental cost associated with a high-pressure natural gas tank. For example, light-duty natural gas vehicles can cost $1,500 to $6,000 more than comparable conventional vehicles, while heavy-duty natural gas vehicles cost $30,000 to $50,000 more than comparable conventional vehicles. Regarding infrastructure, retrofitting refueling stations so that they can accommodate natural gas could cost from $100,000 to $1 million per station, depending on the size,

Hydrogen Fuel Cell Vehicles

A hydrogen fuel cell vehicle is powered by the electricity produced from an electrochemical reaction between hydrogen from a hydrogen containing fuel and oxygen from the air. In the United States, these vehicles are still in the development stage, and making these vehicles commercially feasible presents a number of challenges. While a conventional gas engine costs $2,000 to $3,000 to produce, the stack of hydrogen fuel cells needed to power a vehicle costs $35,000 to produce. Furthermore, DOE researchers have yet to develop a method for feasibly storing hydrogen in a vehicle that allows a range of at least 300 miles before refueling. Fuel cell vehicles also are not yet able to last for 120,000 miles, which DOE believes to be the target for commercial viability. In addition, developing an infrastructure for distributing hydrogen—either through pipelines or through trucking—is expected to be complicated, costly, and time-consuming. Delivering hydrogen from a central source requires a large amount of energy and is considered costly and technically challenging. DOE has determined that decentralized production of hydrogen directly at filling stations could be a more viable approach than centralized production in some cases, but a cost-effective mechanism for converting energy sources into hydrogen at a filling station has yet to be developed.

Consequences Could Be Severe If Alternative Technologies Are Not Available

Because development and widespread adoption of technologies to displace oil will take time and effort, an imminent peak and sharp decline in oil production could have severe consequences. The technologies we examined currently supply the equivalent of only about 1% of U.S. annual consumption of petroleum products, and DOE projects that even under optimistic scenarios, these technologies could displace only the equivalent of about 4% of annual projected U.S. consumption by around 2015. If the decline in oil production exceeded the ability of alternative technologies to displace oil, energy consumption would be constricted, and as consumers competed for increasingly scarce oil resources, oil prices would sharply increase. In this respect, the consequences could initially resemble those of past oil supply shocks, which have been associated with significant economic damage. For example, disruptions in oil supply associated with the Arab oil embargo of 1973-74 and the Iranian Revolution of 1978-79 caused unprecedented increases in oil prices and were associated with worldwide recessions. In addition, a number of studies we reviewed indicate that most of the U.S. recessions in the post-World War II era were preceded by oil supply shocks and the associated sudden rise in oil prices.

Ultimately, however, the consequences of a peak and permanent decline in oil production could be even more prolonged and severe than those of past oil supply shocks. Because the decline would be neither temporary nor reversible, the effects would continue until alternative transportation technologies to displace oil became available in sufficient quantities at comparable costs. Furthermore, because oil production could decline even more each year following a peak, the amount that would have to be replaced by alternatives could also increase year by year.

Federal Agencies Do Not Have a Coordinated Strategy to Address Peak Oil Issues

Agencies Have Options to Reduce Uncertainty and Mitigate Consequences, but Lack a Coordinated Strategy

Conclusions

The prospect of a peak in oil production presents problems of global proportion whose consequences will depend critically on our preparedness. The consequences would be most dire if a peak occurred soon, without warning, and were followed by a sharp decline in oil production because alternative energy sources, particularly for transportation, are not yet available in large quantities. Such a peak would require sharp reductions in oil consumption, and the competition for increasingly scarce energy would drive up prices, possibly to unprecedented levels, causing severe economic damage.

While these consequences would be felt globally, the United States, as the largest consumer of oil and one of the nation’s most heavily dependent on oil for transportation, may be especially vulnerable among the industrialized nations of the world.

Automotive fuel efficiency could be improved. Alternatives will require large investments, and in some cases, major changes in infrastructure or break-through technological advances. In the past, the private sector has responded to higher oil prices by investing in alternatives, but investment is determined largely by price expectations, so unless high oil prices are sustained, we cannot expect private investment in alternatives to continue at current levels.

While public and private responses to an anticipated peak could mitigate the consequences significantly, federal agencies currently have no coordinated or well-defined strategy either to reduce uncertainty about the timing of a peak or to mitigate its consequences. This lack of a strategy makes it difficult to gauge the appropriate level of effort or resources to commit to alternatives to oil and puts the nation unnecessarily at risk.

For investment risk in the oil and gas sectors, the factors are: investment/maintenance risk, input risk, production risk, sales risk, and revenue/repatriation risk. We compared political and investment risk with Oil and Gas Journal oil reserves estimates.

Oil sands are deposits of bitumen, a thick, sticky form of crude oil, which is so heavy and viscous that it will not flow unless heated or diluted with lighter hydrocarbons. It must be rigorously treated to convert it into an upgraded crude oil before it can be used by refineries to produce gasoline and diesel fuels. While conventional crude flows naturally or is pumped from the ground, oil sands must be mined or recovered “in-situ,” or in place. During oil sands mining, approximately 2 tons of oil sands must be dug up, moved, and processed to produce 1 barrel of oil. During in-situ recovery, heat, solvents, or gases are used to produce the oil from oil sands buried too deeply to mine. The largest deposit of oil sands globally is found in Alberta, Canada—accounting for at least 85 percent of the world’s oil sands reserves.

Heavy and extra-heavy oils are dense, viscous oils that generally require advanced production technologies, such as EOR, and substantial processing to be converted into petroleum products. Heavy and extra-heavy oil reserves occur in many regions around the world, with the Orinoco Oil Belt in Eastern Venezuela comprising almost 90% of the total extra-heavy oil in the world. In the United States, heavy oil reserves are primarily found in Alaska, California, and Wyoming, and some commercial heavy oil production is occurring domestically. The cost of producing heavy and extra-heavy oil is greater than the cost of producing conventional oil, due to, among other things, higher drilling, refining, and transporting costs. The 2005 Venezuelan extra-heavy oil production was estimated to be 600,000 barrels of oil per day and is projected to at least sustain this production rate through 2030. Development of the heavy oil resource in the United States faces environmental, economic, technical, permitting, and access-to-skilled-labor challenges.

Oil shale refers to sedimentary rock that contains solid bituminous materials that are released as petroleum-like liquids when the rock is heated. To obtain oil from oil shale, the shale must be heated and the resultant liquid must be captured, in a process referred to as “retorting.” Oil shale can be produced by mining followed by surface retorting or by in-situ retorting. The largest known oil shale deposits in the world are in the Green River Formation, which covers portions of Colorado, Utah, and Wyoming. Estimates of the oil resource in place range from 1.5 trillion to 1.8 trillion barrels, but not all of the resource is recoverable. In addition to the Green River Formation, Australia and Morocco are believed to have oil shale resources. At the present time, a RAND study reported there are economic and technical concerns associated with the development of oil shale in the United States, such that there is uncertainty regarding whether industry will ultimately invest in commercial development of the resource. Infrastructure costs for oil shale production include the following: additional electricity, water, and transportation needs. A RAND study expects a dedicated power plant for the production of oil shale to exceed $1 billion. Examples of key challenges facing the development of oil shale include the following: (1) controlling and monitoring groundwater, (2) permitting and emissions concerns associated with new power generation facilities, (3) reducing overall operating costs, (4) water consumption, and (5) land disturbance and reclamation.

Coal and Biomass Gas-to-Liquids Gas-to-liquid (GTL) alternatives include the production of liquid fuels from a variety of feedstocks, via the Fisher-Tropsch process. In the FischerTropsch process, feedstocks such as coal and biomass are converted into a syngas, before the gas is converted into a diesel-like fuel. The diesel-like fuel is low in toxicity and is virtually interchangeable with conventional diesel fuels. Although these technologies have been available in some form since the 1920s, and coal GTL was used heavily by the German military during World War II, GTL technologies are not widely used today. Currently, there is no commercial production of biomass GTL and the only commercial production of coal GTL occurs in South Africa, where the Sasol Corporation currently produces 150,000 barrels of fuel from coal per day. Extensive research and development, however, is currently under way to further develop this technology because automakers consider GTL fuels viable alternatives to oil without compromising fuel efficiency or requiring major infrastructure changes.

Potential Production • Coal. Experts project that, at most, 80,000 barrels per day could be produced by 2015 and 1.7 million barrels per day by 2030.

Greene 2006 (also wrote this study, cited in the report: David L. Greene, Janet L. Hopson, and Jai Li, Running Out Of and Into Oil: Analyzing Global Oil Depletion and Transition Through 2050, Oak Ridge National Laboratory, Department of Energy (2003)

The debate is important because a sudden, unanticipated and permanent decline in world oil production would severely damage world economies, probably for a decade or longer. In addition, the transition from oil to some other source of energy for transportation is almost certain to have important economic, environmental and security implications. A transition to more carbon intensive fossil energy sources would increase the likelihood of major climate changes. As several have pointed out, the longer- term problem of climate change depends on the world’s decision to burn or not to burn the world’s vast fossil resources of coal and unconventional oil and gas and release the carbon to the atmosphere.

**GAO. 2007. Uncertainty about future oil supply makes it important to develop a strategy for A Peak and decline in oil production. U.S. Government Accountability Office. 82 pages**

The rate of decline after a peak is an important consideration because a decline that is more abrupt will likely have more adverse economic consequences than a decline that is less abrupt.

Furthermore, because oil production could decline even more each year following a peak, the amount that would have to be replaced by alternatives could also increase year by year.

Coal gas-to-liquid (coal GTL) is a fuel produced by gasifying coal into a syngas before being converted into a diesel-like fuel. This fuel is commercially produced outside the United States, but none of the production facilities are considered profitable.

While these consequences would be felt globally, the United States, as the largest consumer of oil and one of the nation’s most heavily dependent on oil for transportation, may be especially vulnerable among the industrialized nations of the world.

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