Synthesis Gas. James G. Speight

decline in oil production could be even more prolonged and severe than those of past oil supply shocks. Even then the decline rate is the subject of speculation but like death and taxes, the decline rate is happening! The most important variable is the amount of oil left in the reservoirs but, even then, this is subject to debate and error leaving the decline rate for fields in production difficult to assess (Eagles, 2006; Gerdes, 2007; Jackson, 2006, 2007). At best, generalities can be calculated. For example, for current fields in production a low decline rate would be followed by a more moderate decline rate which would result in peak oil in the near future.

1.5 Energy Independence

Energy independence has been a non-partisan political issue in the United States since the first Arab oil embargo in 1973. Since that time, the speeches of various presidents and the Congress of the United States have continued to call for an end to the dependence on foreign oil by the United States. Nevertheless, the United States has grown more dependent on foreign oil with no end in sight. For example, in 1970 the United States imported approximately one-third of the daily oil requirement. Currently, the amount of imported oil is two-thirds of the daily requirement! The congressional rhetoric of energy independence continues but meaningful suggestions of how to address this issue remain few and far between. The economy of the United States feeds on oil and the country consumes far more oil than it can produce.

      Generally, the concept of energy independence for the United States runs contrary to the trend of the internationalization of trade. The US government continues to reduce trade barriers through policies such as the North American Free Trade Agreement (NAFTA), the elimination of tariffs, as well as other free trade agreements. As a result, the percentage of the US economy that comes from international trade is steadily rising.

      Increased world trade is beneficial both economically and politically insofar as it is supposed to help establish amicable relations between countries. Through mutually beneficial exchange, a great deal of this increased interrelationship will, in theory, establish opportunities for personal ties that make war (or other forms of military action) less likely. However, there are also contrary cases where countries acquire the means to be more destructive, if they so choose, through expanded economic opportunities. This type of argument has been used with regard to Iran.

      Economic interdependence also makes the domestic economy more susceptible to disruptions in distant and unstable regions of the globe, such as the Middle East, South America and Africa. In fact, 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. 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 the gross domestic product (GDP) growth rate of a country over the next five years, four countries (Iran, Iraq, Nigeria, and Venezuela) possess proven oil reserves greater than 10 billion barrels (high reserves) and which countries contain almost one-third of worldwide oil reserves, face high levels of political risk. In fact, countries with medium or high levels of political risk contain 63% of proven worldwide oil reserves.

      For example, in past years, disputes leading to withdrawal of labor (strikes) by workers in Venezuela have caused reductions in the crude oil (approximately 1,500,000 barrels per day) imported from that country. Similarly, conflicts in Nigeria between ethnic groups can disrupt the amount of crude oil (approximately 570,000 barrels per day) imported from that country. Thus, in a short time and by events out of its control, the United States can suffer an oil shortage of imported oil (to the tune of 2,000,000 barrels per day) that leaves a large gap in the required 18,000,000 barrels per day currently refined in the United States.

Furthermore, the oil industry itself has been a story of vast swings between periods of overproduction, when low prices and profits led oil producers to devise ways to restrict output and raise prices, and periods when oil supplies appeared to be on the brink of exhaustion, stimulating a global search for new supplies. This cycle may now be approaching an end. It appears that world oil supplies may truly be reaching their natural limits. With proven world oil reserves anticipated to last less than 40 years, the age of oil that began near Titusville may be coming to an end. In the years to come, the search for new sources of oil will be transformed into a quest for entirely new sources of energy.

      Political and investment risk factors continue to affect future oil exploration and production and, ultimately, the timing of peak oil production. These factors include changing political conditions and investment climates in many countries that have large proven oil reserves. These factors are important in affecting future oil exploration and production.

      Even in the United States, political considerations may affect the rate of exploration and production. For example, restrictions imposed to protect environmental assets mean that some oil may not be produced. The Minerals Management Service of the United States Department of the Interior estimates that approximately 76 billion barrels (76 x 10⁹ bbls) of oil lie in undiscovered fields offshore in the outer continental shelf of the United States (which is necessary for a measure of energy security). Nevertheless, Congress enacted moratoriums on drilling and exploration in this area to protect coastlines from unintended oil spills. In addition, policies on federal land use need to take into account multiple uses of the land including environmental protection. Environmental restrictions may affect a peak in oil production by barring oil exploration and production in environmentally sensitive areas.

      The government must adopt policies that ensure our energy independence. The US Congress is no longer believable when the members of the Congress lay the blame on foreign governments or events for an impending crisis. The Congress needs to look north and the positive role played by the government of Canada in the early 1960s when the decision was made to encourage development of the Alberta tar sands. Synthetic crude oil production is now in excess of 1,000,000 million barrels per day – less than 6% of the daily liquid fuels requirement in the United States but a much higher percentage of Canadian daily liquid fuels requirement. In the United States, the issue to be faced is not so much oil reserves but oil policies.

      The economics of crude oil inventories provides the key to unlocking this mystery. The net cost of carrying inventories is equal to the interest rate, plus the cost of physical storage, minus the convenience yield. The convenience yield is driven by the precautionary demand for the storage. When the convenience yield is zero, a market is in full carry, future prices exceed spot prices and inventories are abundant. Alternatively, when the precautionary demand for oil is high, spot prices are strong and exceed future prices, and inventories are unusually low. The strategic petroleum reserve should be used to give the country a measure of energy independence and to thwart the efforts of the cartel to control crude oil – a world commodity.

A measure of dependency on crude oil can be viewed by various importing countries (Alhajji and Williams, 2003). In the United States, increasing crude oil imports is considered a threat to national security but there is also the line of thinking that the level of imports has no significant impact on energy security, or even national security. However, the issue becomes a problem when import vulnerability increases as crude oil imports rise which occurs when oil-consuming countries increase the share of crude oil imports from politically unstable areas of the world.

      More generally, there are four measures of crude oil dependence: (i) crude oil imports as a percentage of total crude oil consumption, (ii) the number of days total crude oil stocks cover crude oil imports, (iii) the number of days total stocks cover consumption, and (iv) the percentage of crude oil in total energy consumption (Alhajji and Williams, 2003).

      The dependency on foreign oil in the United States has increased steadily since 1986 and has reached record highs in the past two decades – the degree of import dependence as percentage of consumption increased from about 50% in the early-to-mid 1980s to 60% in the early 1990s (because of higher economic growth and lower oil prices on the demand side and declining US production on the supply side). Currently, 65-70% of the daily oil and oil products is imported into the United States. There have