Report on Natural Capital: Oil
World data on pumping oil stocks out of the ground is normally defined as "oil production". Our first job in this section is to correct faulty language that provides inaccurate information to our shareholders. Oil, as a non-renewable stock of natural capital is not "produced", but is extracted and depleted by human beings for energy use. Nothing is produced. The earth produces oil over geological time periods from plants that have absorbed solar energy.
Few subjects elicit as much controversy as the remaining reserves (Estimated Ultimate Recovery=EUR) of world oil. Many estimates have been done over the years, with the most common estimate being approximately 2 trillion (2000 billion) barrels. For purposes of this report we will use this figure.
Many of these estimates are based on the work of M. King Hubbert, a geologist who worked for Shell Oil Co. and later for the U.S. Geological Survey. Hubbert applied mathematics, geology and physics to the question of remaining oil supplies. He correctly predicted the peak of US oil extraction in 1969, and using his methods Campbell and Laherrere produced the curve, shown below, accounting for the OPEC oil embargo in the 1970s. This predicts world oil extraction to peak in about 2004, and decline thereafter.
Using these methods Richard Duncan and Walter Younquist have calculated the estimated ultimate recoverable (EUR) oil from the 42 countries which extract 98% of world oil:
The total world oil depletion by 2000 was 916.2 billion barrels representing 45.9% of the original total of 2 trillion barrels.
U.S. oil depletion by 2000 was 209 Gb out of an original endowment of 271.2 Gb, representing total depletion of 77.1% by 2000.
Flows and losses
From 1991-2000 world oil extraction totaled 252.8 Gb (billion barrels) - 12.7% of the total original oil stock. Using Dubai spot prices of oil for each year this represents a natural capital loss of $4,993 trillion (2001 US dollars). At this rate the remaining 1079.8 billion barrels would last 42.7 years.
In the period from 1990-200 30.2Gb of oil were extracted in the United States representing 21% of the total original endowment. At this rate the 62.2 Gb (billion barrels) remaining will last for approximately 20 years. However, the U.S. consumption rate is far higher than can be met by domestic sources of oil.
Since oil is a non-renewable resource economics tells us that as it becomes scarce the price will go up and substitutes will be found. However, an exact substitute for oil is very unlikely due to the unique Energy Rate of Return (EROR) of oil. Also, market prices tell us about current demand and the rate of oil extraction taking place today, but tell little about the total supply of oil remaining in the Earth (Lawn 2004).
The amount of energy obtained compared to the amount of energy invested in extracting or creating the energy is known as the EROR (Energy Rate of Return). Prior to large scale depletion, fossil fuels had the highest EROR. This means that money invested in oil provided a far greater return than any other energy source. As oil becomes harder to find and the most easily accessible wells are depleted, EROR declines.
Weak and Strong Sustainability
For non-renewable resources, the idea of investing the proceeds of extraction, especially into alternatives to replace the original resource is known as "weak sustainability". It is called "weak" because the original resource is replaced by a substitute, compared with "strong" sustainability where the resource is considered irreplaceable and depletion is adjusted to consider the needs of future generations. The application of strong or weak sustainability depends on the type of resource. Some resources such as oil may be replaceable, others such as the ozone layer or water are not. The substitution of alternative energy sources for oil is well underway. Some oil companies, notably BP and Shell have diversified into being energy producers and have invested in solar, wind, and fuel cells. This fulfills the desirability under weak sustainability of investing some of the proceeds of non-renewable resources into renewable replacements.
Report on Natural Capital: Wind & Solar Power
Investments for installed wind energy from 1990-2000 at the prevailing price per kwh each year amounted to $5.5 billion dollars. Investments in installed photovoltaics amounted to approximately $6.2 billion from 1990 based on an average cost of $5 per watt. The energy rate of return on wind energy is much higher than for photovoltaics, but both are renewable and neither adds CO2 to the atmosphere. Together the investment amounts to $11.7 billion. This is only 0.2% of the natural capital loss of $5 Trillion for oil depletion from 1990- 2000, but is a step in the right direction.
This is a chapter from Earth, Inc. Shareholder Report (e-book).
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