Published on February 9th, 2019 | by Carolyn Fortuna0
Lessons About The Contemporary State Of Fossil Fuels — Venezuela-Style
February 9th, 2019 by Carolyn Fortuna
Ah, Venezuela — the country that the US alternately loves and hates. As recently as January, 2019, our #fakepresident made some not-so-subtle threats about US military intervention in Venezuela. The Guardian says that, given the history of “disastrous US interventions in Latin America,” the “gringo empire” may face a daunting choice between rapid escalation, including possibly sending in US forces, and a humiliating climbdown.
Venezuela suffers from foreign currency strains triggered by years of US economic sanctions, which have caused the country at least $20 billion in losses. But aren’t Venezuela’s massive debts a reflection of losing its principal resource, oil? Is Venezuela’s plight indicative of a much larger global phenomenon? Could we have moved into the Twilight of the Oil Era?
Let’s look at Venezuela, which has vast oil resources, and try to understand why it’s suddenly unable to extract them. The lesson from one country may be instructive to other oil producing countries around the world — like the US.
A February, 2019 article in Resilience titled, “Venezuela’s collapse is a window into how the oil age will unravel,” offers a fascinating outline of how Venezuela has become a country with the largest reserves of crude oil in the world but which is incapable of developing them. The article acknowledges that various elements of socialism, corruption, and neoliberal capitalism are part of the very large problem. “We’ve shifted into a new era. The world has moved from largely extracting cheap, easy crude, to becoming increasingly dependent on unconventional forms of oil and gas that are much more difficult and expensive to produce.”
Let’s follow the article’s logical argument and see what we might learn about the future of oil — and possibly soon be a witness to its last breaths.
Venezuelan oil production at its peak: In 1990, the New York Times described Venezuela as “one of Latin America’s oldest and most stable democracies” and predicted that it “is poised to play a newly prominent role in the United States energy scene well into the 1990s.” Venezuelan oil production peaked in 1997 at around 3.5 million barrels a day. Since then, it has experienced a precipitous fall, caused by serious mismanagement and the fraught economics of oil.
What is Venezuela’s oil like? Venezuela has the largest reserves of crude oil in the world. It’s called “heavy oil,” a highly viscous liquid that requires unconventional techniques to extract and flow, often with heat from steam, and/or mixing it with lighter forms of crude in the refining process. Heavy oil has a higher cost of extraction than normal crude and a lower market price due to the refining difficulties. In theory, heavy oil can be produced at below break-even prices to a profit, but greater investment is still needed to get to that point.
What’s the relationship between conventional crude oil and profitability? Global oil prices spiked as global conventional crude oil production began to plateau. That caused an increasing shift to more difficult and expensive forms of unconventional oil and gas. The higher costs of extraction and refining have played a key role in making oil production efforts increasingly unprofitable and unsustainable.
What is Energy Return on Investment? The shift to more difficult and expensive forms of unconventional oil and gas can be best understood through the concept of Energy Return on Investment (EROI). It’s a ratio which measures how much energy is used to extract a particular quantity of energy from any resource. As we are consuming ever larger quantities of energy, we are using more and more energy to do so, leaving less surplus energy at the end to underpin social and economic activity.
The commonly accepted EROI of heavy oil production to amount to is around 6:1, and the EROI for conventional crude prior to 2000 was of about 20:1.
How does quality of energy affect costs? EROI creates a counter-intuitive dynamic . Even though production may soar, the quality of the energy we are producing declines. That means its costs are higher, industry profits are squeezed, and the surplus available to sustain continued economic growth dwindles. Profit margins from exports of extra-heavy crude are much smaller due to the higher costs of blending, upgrading, and transportation and the heavy discounts in international refining markets.
Countries like the US and Canada, where extremely low EROI levels for production have been sustained largely through massive multi-billion dollar loans, have fueled an energy boom that is likely to come to a immediate and shocking end when its debts are called in.
Why does the US have such a prominent interest in Venezuela? In an interview with FOX News, Trump’s National Security Advisor John Bolton explained the focus of US attention.
“We’re looking at the oil assets. That’s the single most important income stream to the government of Venezuela. We’re looking at what to do to that. … we’re in conversation with major American companies now… I think we’re trying to get to the same end result here… It will make a big difference to the United States economically if we could have American oil companies really invest in and produce the oil capabilities in Venezuela.”
What does the profitability picture look like for North American oil exploration and production companies? North American exploration and production companies have seen their net debt balloon from $50 billion in 2005 to nearly $200 billion by 2015. The fracking industry is on much shakier financial footing than most people realize, as there is a serious gap between oil industry claims about opportunities for profit and what is actually happening in those companies.
What’s the forecast for US shale oil and gas production? US shale oil and gas production is forecast to peak in around a decade — or in as little as four years. It’s not just the US. Europe as a continent is already well into the post-peak phase, and Russian oil ministry officials privately anticipate an imminent peak within the next few years.
We’ve shifted into a new era, one that has moved from largely extracting cheap, easy crude, to becoming increasingly dependent on unconventional forms of oil and gas that are much more difficult and expensive to produce. The remarkable collapse of the Venezuelan economy invites insights into a possible future for today’s major oil producers.
The US is enjoying a revival in its oil industry, but how long can it be sustained? Sure, North American oil production will continue in the near term. Technological innovations will breath new life into attempts to mine vast reserves of more difficult resources. It’s unlikely, however, that new methods and machines will be able to avert the trajectory of increasing costs of extraction, refining, and processing before getting fossil fuels to market. The surplus energy available which we all take for granted for the delivery of public goods in our post-industrial consumerist society will become smaller and smaller.
Moreover, the environmental consequences of fossil fuel dependency are making investors rethink the financial viability of these industries, inspiring divestment due to fear of stranded assets.
As we shift into a post-carbon era, we will have to adapt new economic thinking and restructure our ways of life from the ground up. And that is making oil asset holders terrified. Venezuela’s demise is a foreshadowing of what is likely to come unless the energy marketplace wakes up and sees what’s right before their eyes.
If you’d like to read more about the Venezuelan oil unraveling, check out Resilience.