Roger Bezdek, president of Management Information Services Inc. (MISI) and coauthor of Peaking Of World Oil Production: Impacts, Mitigation, & Risk Management (the Hirsch report) talks with GPM correspondent Jason Brenno about the followup to the Hirsch report: Economic Impacts of Liquid Fuel Mitigation Options.
Jason Brenno- Could you please introduce yourself and give your background?
Roger Bezdek- Sure, I have a Ph.D. in economics from the University of Illinois in Urbana. I taught college for awhile. I worked for the federal government and I've been in private industry. I've been in the energy business for over 30 years now.
JB- What is the purpose for the second report and why was the second report a necessity?
RB- Well, the first report that we completed last year looked at the implications of oil peaking and the necessary mitigation options required and their implications basically for the world. The second report focused more narrowly on the situation in the US and was much more detailed looking at more options and the impact by industry, by employment GDP, implications for occupational and skill requirements and so forth. So, the second report is a much more detailed focused analysis of the costs and benefits.
JB- What is the reasoning behind why this report was requested? Who requested it and why was it requested ?
RB- As we completed work last year for the world situation, the obvious logical question arose, what implications are there for the US? What are the costs and benefits? What are the possibilities? And we talked with various people at DOE at the National Energy Technology Laboratory. It was universally decided that the second report would be useful and necessary.
JB- Do you feel that we have primarily a liquid fuels problem or will this problem also encompass or contribute to an electricity problem and heating problem essentially an energy crisis?
RB- The near-term problem that we are facing is indeed a liquid fuels rather than a quote energy crisis in general. How we react and deal with this near-term liquid fuels problem will determine how we resolve our energy problems in the longer term. But for the next decade or two at least, the primary problem is the demand for liquid fuel which is simply outstripping the supply at available prices. But, of course, what is happening prices are increasing very rapidly and least of all price volatility has been increasing. So, yes what we face immediately and for the next decade or two at least is a serious liquid fuels problem.
JB- What has been causing this demand, is this because the world itself is growing economically behind what the oil industry had planned for? Or is this something that the oil industry just can't keep up with? Or is it that possibly that we're seeing the limits to the oil resources that this world will ever produce?
RB- Well, the major cause of the current problems is the rapid increase in demand for liquid fuels caused by not only US requirements, but much more particularly by the increase for the demand for oil in countries such as China and India, especially China, as well as other countries in Asia. That is the primary cause and that is important to note because previous quote energy crisis that we've experienced have resulted from artificial interruptions in supply such as the embargos of the 1970s, the Iranian revolution and so forth. The current problems arise largely from very rapid and continuing increases in demand. At the same time however, the volume of oil produced has outstripped new oil discoveries for at least the past 20 years and we are beginning to see the results of that. There simply may not be large new pools of conventional relatively cheap oil available at almost any price. So you have a conjunction of several unfavorable trends which as far as any of the experts can determine may be with us for a very long time.
JB- Your report appears to be an attempt to continue economic growth through the continued development of fossil fuels, but at the present time there are no viable substitutes for fossil fuels. Was a plan to end to economic growth discussed given this reality?
RB- The reports looked at the options on both supply side and the demand side. On the demand side we looked primarily at the significant increases in transportation fuel efficiency programs which would actually reduce the demand for oil by several million barrels a day, But, of course, we also looked at for the foreseeable future what options we had for increasing the supply of liquid fuel, which the economy, especially the transportation sector runs on. The unfortunate fact is at present and for the foreseeable future, for the next decade or two at least, vehicles, airplanes, trucks, cars etc. have little option except to run on liquid fuels and we analyzed what the options were to continuing the availability of these liquid fuels into the future. At some point in time more efficient vehicles will come into play, hybrids, plug-in hybrids, electric cars perhaps, maybe in the longer term fuel cells and hydrogen type vehicles. In the next ten or fifteen years at least, the vehicles in the next transportation infrastructure will require liquid fuels. For example, there are currently 230 million vehicles in existence in the US , many of them would mean lives of 15 to 20 years. Those would be with us requiring liquid fuels for a long time into the future.
JB- How will this proposal benefit the US economically?
RB- We didn't make any proposals, but we set out various options for developing alternatives to liquid fuels as well as reducing demand for them. And for each option we indicated the investment benefit that would flow to the US in terms of industry sales, profits, jobs, employment, tax revenues for federal, state and local governments. Basically, the benefits come about because as we begin to invest in these industries and options in the US and both the demand and supply side the money is spent in the US and is not sent overseas to Middle Eastern nations or other nations such as Nigeria or Venezuela. It creates economic activity with growth and jobs in the US. Over the long term there is potentially huge benefit to the US as new industries arise, manufacturing industries are reinvigorated and so forth.
JB- One driver in oil consumption especially is the US gasoline consumption. This is primarily a result of our entire country designed for suburban lifestyle. Given the question above why is not ending of our suburban lifestyle not discussed as a mitigation option?
RB- The problem with that is the way that our country has developed with the suburban lifestyle and so forth for a period of almost 100 years. Unfortunately this evolution appears to be accelerating in that direction. For example, within the past couple weeks, either Time or Newsweek had a major story on what they call extreme commuting where people are driving 50,60 or 70 miles one way to work. By far (this) form of commuting is increasing four times as fast as general commuting. Development patterns such as that are with us and have been with us and are accelerating. The first thing we have to do is try to reverse those trends, level it off and then eventually get back to more sensible development path relying on mass transit, smart growth and more cluster development and so forth. That will occur in the future as oil peaking occurs and as oil prices continue to increase. But it has taken us a 100 years to dig ourselves into this hole, it will take us many decades to dig ourselves out. In the mean time we're stuck with the development that we have and the development that is occurring as we talk. And for the several decades at least we will have to accept that fact.
JB- So basically you don't see, being realistic, that this could be done even over the next 50 years.
RB- It would be ver difficult for the US to go back to the way it was 100 years ago. Over a period of 50 years major changes will come about. But if you're talking about 10, 20 or 30 years probably not.
JB- Could you talk about some of the mitigation strategies? Each one of them has a certain amount of growth per year based upon development of resources. What is generally the margin of error for each of those mitigation strategies and how much better or worse could each strategy perform?What are some of the margins of error?
RB- I think there are very large margins of error when one talks of new technologies projecting 10, 15 or 20 years into the future. Although I must say that when we wait out here it is probably the most optimistic case for most options. We are assuming that the technologies work when they have to, that the development and planning process for these plants and facilities occurs expeditiously. And you get massive investments when required. And the production coming on-line relatively quickly over the time period. So, if anything, these may be the upper bounds for many of these options. The vehicle fuel efficiency option we assumed relatively quickly a 50% increase in vehicle fuel efficiency of new vehicles. That is something of course which is radical change because for the past 20 years you basically you had the opposite occurring with vehicles coming on-line have been less fuel efficient due to loopholes in the CAFÉ legislation. So, the bottom line here is that we have been very optimistic with respect to the potential for each of these options. And even then in 15 or 20 year period, we may a problem.
JB- If the US does sign on to a binding CO2 treaty, one which stabilizes emissions or actually requires reducing them, how will it effect your plan?
RB- Some options it will affect it relatively little, others it will affect more significantly. It will certainly insure that any of the options utilized or envisioned would have to be CO2 neutral. For example, coal to liquid options will have to insure that all the plants constructed have built in to them 100% CO2 capture and sequestration. This is feasible and of course CO2 oil recovery injected in an oil well to get an additional oil out. It would just insure that the options themselves are CO2 neutral.
JB- But at this point in time that US hasn't agreed to any climate treaty as of yet?
RB- That is correct. We are assuming that most of these options would involve very little CO2 venting into the atmosphere.
JB- In the report, oil shale is a key mitigation strategy. What new technology has come on the scene since the first Hirsch report in order to produce oil shale?
RB- We've been looking at the Shell experiments out in Colorado where they use in situ process. It appears to be rather promising according to independent analysts who have studied it. But again I must admit at all the options we have looked at oil shale has the most uncertainty and in our study, we pushed that one farther out in terms of technical and commercial feasibility. So, I guess one could say with that option there is the highest degree of uncertainty both technically and commercially. But, if it does work, which it appears that it may, as you know oil shale resources in the US are enormous.
JB- What did you get for an energy profit for that oil shale process?
RB- The results again, depending on who you believe, are 3 to 4 to 5 to 1. That is, for every barrel of oil invested, you get 3 to 5 out.
JB- How long will each of these mitigations last?
RB- That is a good question. The short answer is hopefully as long as necessary. Certainly in terms of oil shale, there are enough shale resources to last easily 100 years. Coal, the same thing.But when you get into the question of global warming and climate change and carbon capture, you have constraints there. But how long they last and how long they are needed and at what level really depends on the alternatives coming available. If the US vehicle fleet gets much more energy efficient and begins to run on alternative fuels be it electricity, biomass or biodiesel or hydrogen or something else, then you can gradually phase down the liquid fuel options. If the alternatives do not appear then you may need some of these options for a very long time.
JB- ASPO predicts gas production will decline, even though that gas in not included in the US report. They predict that gas will decline rapidly after 2040. What generally is the plan for gas after 2040? Would that be part of another mitigation option that would have to be built in by 2020 in order to make up for the decline in gas? How does that work into this plan?
RB- That is not something that we looked specifically at since it is 30 or 40 years and potentially further out. And we did not look at it as an option even in the short term for the US. There is simply very little stranded gas available in the US. This is not necessarily true of other countries. But I think that you correctly pointed out that gas is expected to peak around 2040. The mitigation options based on our experiences would have to be started and implemented between 2020 and 2025 to avoid serious problems.
JB- At the same time of the potential world oil problem, there is a current North American natural gas crisis. How would possibly a North American natural gas crisis affect any of the mitigation options? Or is this just another report that needs special attention and possibly other mitigation options?
RB- It is certainly another subject that requires serious analysis. But basically as gas becomes more scarce and gas prices increase and gas price volatility increases, it would make the options that we proposed more commercially and economically viable. Because you need something, and it would make the coal option more attractive because you can gasify coal and create a substitute for natural gas that way.
JB- How much coal will be available for the coal to liquids process? Given the high price of natural gas, success of coal gasification technology and continued electrical demand growth it appears coal use will at least continue growth at least 2 percent per year if not more without coal to liquids technology. How long will our coal reserves last?
RB- On the basis of the estimates that we've seen, even with the increased demand required for the coal to liquids plants, our coal reserves could easily last 50 to 100 years. They are enormous; both the East and West. I think there are 38 states that have significant coal reserves. The resources aren't the problem. It is the technology, the economics and the environmental implications that would be the limiting factor.
JB- Did you account for the possibility of a peak of coal production?
RB- No. We assumed that coal production could increase as required for at least the next 15 or 20 years.
JB- Can you please state the expected lifetime of many of these mitigation options? And do you feel that they will peak or plateau?
RB- As I mentioned, the coal and oil shale resources will be there for next 50 to 100 years; and probably then some. The vehicle fuel efficiency option our results indicate that the savings will eventually plateau. Another way to prevent that is keep increasing, at least by a little bit, the efficiency requirements year by year. For example, we assume that the 50% increase in fuel efficiency is achieved can be pretty much be held at that level. Policy wise you might want to save a 50% increase by a certain year and every year thereafter vehicles have to become one or two percent more efficient indefinitely. According to that model the vehicle fuel efficiency savings would never plateau. Enhanced oil recovery using CO2 will eventually plateau because there only so many abandoned oil wells that are out there. There are many of them that might not 15, 20 or 30 years in the future but the plateau would certainly occur.
JB- So I think if I understand this correctly that this is basically a continuous project once we get the mitigation options available. It has to be monitored, we have to think of more mitigation options and possibly find a new source of energy for the long term in the future in order to make up for the day when these mitigation options are no longer available.
RB- Yes, absolutely. One of the most important things coming our work is that all the options we can think of on both the demand and the supply side are necessary. These may simply be stopgap measures for the next decade or two until we can more renewable options, efficiency options, biomass, biofuel and whatever else that may be out there. In the mean time, we need something to bridge the gap. And how long that gap will be and how many of these options we will continue to need is open to question. But right as I have indicated, our transportation sector runs on liquid fuels we are going to need enormous quantities in the next two or three decades.
JB- All the mitigation options along with the projected economic growth, electrical power growth, and the tremendous growth of China and India etc.will put a tremendous demand on raw materials, for example steel. Is it realistic that all three will continue to grow and could the $2.6 trillion necessary for investment for the cost of the mitigation options perhaps even increase dramatically?
RB- That is a two part question. Whether we have the raw materials or industrial capacity for making plants and all that is something we are looking at right now. You are correct about tremendous demand by rapid Chinese growth. They are putting strain on everything. Coal, steel, concrete, paperboard. As to the price estimate increasing dramatically, the short answer is yes. It could easily be twice of what we estimated because of what we used to figure mitigation options are end plant costs. That is the end plant being built in the most efficient and most cost effective (way). But in the near term most of the plants will be first of a kind and (could) be much more expensive than we assumed. Instead of $2.6 trillion, it could easily be 3 or 4 or 5 trillion dollars of investment required.
JB- Now, in your vehicle study, were the electric plug-in hybrids studied as a mitigation option? This technology is rapidly emerging among inventors and the other interesting caveat is the fact tht most US vehicles usually travel only 12,000 miles a year, which is about 35 miles per day. It seems to work fairly well with the plug-in hybrid concept. Was that considered in the report due to the fact that it could potentially have tremendous gasoline savings?
RB- We included hybrids and plug-in hybrids and diesel hybrids as part of the vehicles fuel efficiency option. There are various ways for the US transportation fleet to become more fuel efficient. Plug-in hybrids, of course as your know, are a minuscule portion of the market. Presumably in the future there will be a much larger share. How large a share, and how fast they penetrate is unknown is open to question. I've talked to a lot of people about plug-in hybrids and many advocates are very passionately devoted to them. But there are still some very serious economic and technical problems that have to be worked out before plug-in hybrids can be mass marketed. People have pointed out that the average trip is only X number of miles that you can use a plug-in hybrid and so forth. That is true, but for the 10,15 or 12% of trips that are much longer and require a much heavier carry capacity, are you forcing them to buy an additional car? Plug-in hybrids are much more expensive than a conventional vehicle right now. So, many issues have to be worked out but again our message is that all the options need to be investigated and stressed. There is a lot of things that can be done with today's technology which could actually increase the fuel efficiency of a conventional vehicle. Then you have hybrids, you have diesel hybrids, plu-in hybrids; so you have a whole portfolio of options that hopefully can be used to significantly raise vehicle fuel efficiency. But again over the past 20 years average fuel efficience has been decreasing, not increasing.
JB- Was the displacement of heating oil for home heating purposes considered as an option?
RB- Not as a separate option because the savings there are simply too small, the cost impediments are too large. You'll get further moves away from oil being used to heat homes but if you look at the practical problems, the reason that residences and commercial buildings are heated with oil is because the natural gas capacity isn't there. And the substitute being propane really isn't economically feasible.
JB- How much can be done in terms of things such as attempting to get as many federal, state and local government employees working from home full time or part time? Would this be a serious mitigation option that might save a lot of fuel?
RB- That is an option that could save a lot of fuel and should be very viable given today's technology, the Internet, home computers, teleconferencing, fax machines etc. The problem is that a lot of the people who advocate that have the kind of jobs that are amenable to telecommuting. But you're talking about government employees. Police can't telecommute. Fireman can't telecommute. Teachers can't telecommute. Nurses can't telecommute. The vast majority of the service workers have to be on the job doing service, either in restaurants, hotels or what have you. But there is a limit to the types of numbers of jobs for which telecommuting is appropriate. Although there are many millions of these jobs. The other thing that is institutional impediments in both the corporate world and government. Managers for some reason or another are extremely reluctant to allow their employees to telecommute, fearing that if they don't watch them eight hours a day they won't be working. For example, the federal government in the DC area has been pushing telecommuting for 30 years now and something less than 1% of employees currently telecommute.
JB- Generally auto and light truck depreciation occurs within the first five years of its lifetime. You do correctly point out that cars and trucks last for many years, I think you said the mean life is 15 to 20 years.Were there any ideas in which to have government program to buy back and remove inefficient vehicles from the fleet thus increasing fuel savings?
RB- That was not an option that we looked at but it was a question that came up a number of times in speeches that I've given around the country on this topic. The problem is that it would be prohibitably expensive. It would cost literally trillions of dollars to start buying up relatively new vehicles. The government simply doesn't have the money. The federal government is currently running budget deficits in the range 300 to 400 billion dollars a year. The national debt is approaching 10 trillion dollars. The unfunded liabilities for Social Security and Medicare are in the range of 40 trillion dollars. We're looking at some of these other mitigation options you're talking money in terms of trillions of dollars. If money was no object, everything would be fine. But the government simply doesn't have the money to buy up vehicles.
JB- In several speeches and discussions Rep Roscoe Bartlett has criticized your report's decision to use the remaining fossil fuel resources to continue to grow our present system, while potentially leaving future generations few if any resource for the future. Please discuss the pros and cons of your recommendations. Does Rep. Bartlett have a point that continuing our present unsustainable model might be a bad idea if no long term replacements are found and lead to greater problems than if we basically started now to go down another path?
RB- You're right and I talk to Roscoe a lot about this. I was at a press conference with him last week and was on a panel with him at a meeting the other day. The short answer is yes. It is something we should strive to begin to reduce our per capita use of energy as rapidly as possible. Again the transition here will take decades and decades to occur. The idea that we can reduce our energy use 50% overnight is simply not feasible. The issue of using up scarce fossil fuel in this generation or the next generation is of some concern, although as I mentioned resources in this country and the world are still enormous if you include things such as coal, oil shale, oil sand, heavy oil and so forth. But I think that it is imperative that we have to move to all these options as fast as we can, with the idea that this is a transition to a new energy regime that is hopefully carbon neutral, more energy efficient, relies more heavily on renewable resources and technologies that we can't probably dream of right now. But in the mean time, for the next decade or two or three we'll need an awful lot of the liquid fuel because of the transportation infrastructure. Not to mention the rapid growth vehicles in China. The rate at which they are growing projected 10 of 15 years and it truly mind boggling.
JB- So basically to sum that up, you can't see that another path is realistic given the way that the transition would be way too painful for the US and possibly would have some very bad implications for our economy too.
RB- Yes. Over the long term a new path is realistic and indeed is absolutely necessary. But getting to there from here as I mentioned our suburban pattern of growth and development has occurred over a period of 100 years. You just can't turn that around in a couple of years. It will take many decades to halt and then reverse it.
JB- One last question. The two percent decline rate that you stated I'm assuming is the maximum allowable decline rate. How much spare capacity will be available for the world during this transition? Do you recommend larger strategic reserves in order to deal with the inevitable political crisis that might occur?
RB- The two percent decline rate is probably not the maximum, it may be the minimum. When you look at oil problems at the peak and you talk to people in the industry, two percent is very optimistic. I would say it is more like four, six or eight percent. If that is the case, we are in much worse trouble than even we think. As to whether we should increase our strategic petroleum reserve, the answer is an unequivocal yes.
JB- Basically during this entire transition from now until we whenever come up with another alternative, there will not be major amounts of spare capacity left in the world. Is that a correct statement?
RB- That is a correct statement.
JB- Is there anything else that you'd like to add?
RB- No. The basic message that comes out of our studies is that the transition, the mitigation options will require a long time to implement, we're talking about decades here. They will require and enormous amount of investments, enormous amounts of capital. They will be extremely painful and we should have started five, ten of 20 years ago.
JB- What advice do you have for young people just getting out of college and starting a career? What would be a field for them to study or a lifestyle to plan?
RB- First off, don't buy a Hummer. Secondly, something else we're looking at is what the work force implications of this may be. I think that the energy field will be a good field to get into for the foreseeable future. And unfortunately, you look at all the energy specialties, petroleum engineering, mining engineering, nuclear engineering, chemical engineering and chemistry- any of these enery related science and engineering specialities- the enrollments have gone down, in some cases as much as 80%. So, just when we need these people the most, there not going to be there. So, anything related to the energy area, be it fossil, nuclear, renewable energy efficiency represents a pretty good career path for the foreseeable future.
