1. Jun-15 1 ECONOMIC IMPLICATIONS OF LIQUID FUEL MITIGATION OPTIONS IN THE USA Presented at the “Time for Action: A Midnight Ride For Peak Oil” ASPO-USA World Oil Conference Boston, Massachusetts October 2006 Roger H. Bezdek. Ph.D. Management Information Services, Inc. www.misi-net.com

2. Jun-15 2 Economic Implications of Peak Oil Summary of 2006 U.S. Peak Mitigation Study Recent U.S. Oil Import Reduction Study Results Findings and Conclusions Questions and Caveats U.S. Government Progress on Peaking Views are the author’s, except where noted THIS PRESENTATION

3. Jun-15 3 No, we’re facing a liquid fuels crisis

4. Jun-15 4 World is Consuming More Oil and Finding Less

5. Jun-15 5 When Will Peaking Occur? Different Approximations Lead to Different Forecasts Forecast Source December 2005Deffeyes (U.S.) 2006-2007Bakhitari (Iran) 2006-2007Simmons (U.S.) 2009 - 2010Skrebowski (U.K.) 2010 Campbell (Ireland) Before 2010Goodstein (U.S.) After 2010World Energy Council 2012 Weng (China) 2016 Doug-Westwood (U.K.) After 2020CERA (U.S.) 2030 or laterEIA (U.S) / Exxon Mobil 5 years 5-15 years > 20 years Already

6. Jun-15 6 What Might Happen at Peaking? WORLD OIL DEMAND grows each year in a healthy world economy WORLD OIL PRODUCTION reaches a maximum & then declines Supply cannot meet demand PRICES INCREASE SHORTAGES DEVELOP Time

7. Jun-15 7 Learning from Two Oil Shortage Events BRIEF oil interruptions in 1973 & 1979 caused…. + Inflation + Recession + Unemployment + High interest rates World oil peaking impacts could last for DECADES. The world’s first forced energy transition. No quick fixes!

8. Jun-15 8 Oil PRICE INCREASES HAVE CAUSED U.S. RECESSIONS 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 19691971 1973 19751977 1979 19811983198519871989 1991 199319951997199920012003 0 10 20 30 40 50 60 70 80 Recession OIL PRICE (2003 $ per barrel) Over 30 years, four recessions followed oil price spikes.

9. Jun-15 9 _______________________________________________________________________________________________________________ Remember the 1970s? Stagflation... recession. That was only a short-term disruption.

10. Jun-15 10 Forecasting Oil & Gas Supply Is Difficult! DOE EIA Forecasts of N. American Natural Gas Supply to U.S. Looks good Trouble! 4 years U.S. EIA says no world oil problem before 2030.

11. Jun-15 11 Two Studies of Mitigation Options Both studies prepared for the U.S. DOE, National Energy Technology Laboratory February 2005 study (“Hirsch Report”) Assessed world mitigation supply and demand options Analyzed three mitigation scenarios Derived policy implications for required mitigation timeframes July 2006 study (“Bezdek Report”) Assessed economic implications in U.S. Estimated detailed impacts of four mitigation options Derived policy implications for U.S.

12. Jun-15 12 2006 Study Objective & Approach Explore imported oil reduction and/or peak oil mitigation -- U.S. only + Time required to save & produce liquid fuels + Costs + Economic, fiscal, tax, & jobs impacts. Assumed crash program implementation to define a best case. Adopted an unspecified starting date – “t 0.”

13. Jun-15 13 Option Worldwide Study U.S. - Only Study Vehicle Efficiency Coal-To-Liquids Enhanced Oil Recovery Gas-To-Liquids Shale Oil Heavy Oil/Oil Sands Not Ready Assumed ready Physical Mitigation Options & Their Applicability Small U.S. an Importer

14. Jun-15 14 Implementation Assumptions Mitigation TechnologyPrevious Assumptions for the World Assumptions for the U.S. in This Study Vehicle fuel efficiency Ramping up to a 50% increase in vehicle fuel efficiency after 8 years Same Coal-to-liquids Five (5) new 100,000 bpd plants/yr. 4 years to build Three (3) new 100,000 bpd plants/yr. 4 years to build Enhanced Oil Recovery World oil production increased by 3 mbpd after 10 years / 5 year delay 175,000 bpd each year after 4 years construction delay Oil Sands/Heavy Oil 2.5 MM bpd of incremental production achieved 13 years from a decision to accelerate None Gas-to-liquids 1 mbpd achieved in 5 years None Oil Shale None 3 new 100,000 bpd plants/yr. 8 year delay

15. Jun-15 15 Methodological Approach & Databases Well-Established Models + MISI economic model & databases + U.S. Commerce Dept. models + Census Bureau/BLS industry/occupation data Labor force data within each industry for 800 occupations and skills State and regional data

16. Jun-15 16 ____________________________________________________________________________________________________ Coal, Oil Shale, and Alternative Liquid Fuel Plants

17. Jun-15 17 The Delayed Wedge Model Prepare Produce Impact Barrels/ Day 0 10 2030 Vehicle Fleet Fuel Saved Actual Wedge Approximation Time - Years

18. Jun-15 18 0 2 4 6 8 10 12 14 16 02468101214161820 Millions of Barrels Per Day Vehicle Fuel Efficiency Coal Liquefaction Oil Shale EOR Years after Crash Program Initiation U.S. Crash Program to Cut Imports Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

19. Jun-15 19 Mitigation Impacts if Initiated in 2006 (forecasts based on EIA projections) Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

20. Jun-15 20 Mitigation Impacts if Initiated in 2016 (forecasts based on EIA projections) Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

21. Jun-15 21 0 2 4 6 8 10 12 14 16 CTLOil ShaleEORVFEAll 4 Options Millions of Barrels Per Day Contributions After 20 Years of Crash Programs Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

22. Jun-15 22 CTL VFEEOR All Jobs - Millions Jobs Created Annually in Year t 0 + 20 Oil Shale 1.4 1.2 1.0 0.9 0.6 0.4 0.2 0 Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

23. Jun-15 23 $0 $20 $40 $60 $80 $100 $120 $140 VFEOil ShaleCTLEOR 2004 Dollars Per Barrel Cost of Each Mitigation Technology Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

24. Jun-15 24 Crash Programs Will Escalate Liquid Fuel Production Costs Possibility 1 Possibility 2 Possibility 3 U.S. 20 year capital costs based on N plants = $2.6 trillion $4 - 6 Trillion Cost (20 years) Likely Due to Cost Escalation th

25. Jun-15 25 The Mitigation Initiatives Will Create $100’s of Billions of Sales For Industries Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

26. Jun-15 26 Occupational Jobs Created by the Mitigation Options Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

27. Jun-15 27 The Mitigation Initiatives Will Create Billions of Tax Revenues Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

28. Jun-15 28 Benefits to a State of a Small (30,000 Barrels/Day) Coal Liquefaction Plant Development & construction expenditures: $2.5 billion Annual O&M expenditures: $400 million Direct development & construction jobs: 2,000 + Development & construction payroll: $100 million Annual direct O&M jobs: 400 Annual O&M payroll: $25 million Total new jobs annually: 1,000+ Annual state & local govt. tax revenues: $10 - $20 million Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

29. Jun-15 29 Findings (1) Mitigation options can contribute significantly to saving and production of U.S liquid fuels It will take decades for significant impact Costs will be in the trillions of dollar range Cumulative 20 year impact would be: Savings and production of 44 billion barrels of liquid fuels Requirement for over $2.6 trillion of investment (minimum estimate) Over 10 million employment years of jobs created Total industry sales of over $3 trillion occurred Over $125 billion of industry profits accrued Over $500 billion in federal government tax revenues accrued Nearly $300 billion in state & local government tax revenues Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

30. Jun-15 30 Findings (2) U.S. is endowed with needed geological resources, capital, labor, and management to undertake such an effort Aggressive mitigation programs would have substantial benefits for U.S.: Enhanced energy security Trillions of dollars of industry investment and sales Hundreds of billions of dollars of industry profits Rejuvenation of many U.S. manufacturing industries Hundreds of billions of dollars of tax revenues Millions of jobs Elimination of most U.S. oil imports Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

31. Jun-15 31 PRES. BUSH: “REDUCE OIL IMPORT DEPENDENCE” FIRST THING TO DO: STOP DIGGING! (forecasts based on EIA projections)

32. Jun-15 32 If crash mitigation programs were initiated in 2006, it may be possible to stabilize U.S. oil imports by 2016 Mitigation options may reduce the total level of U.S. imports from current 13 mbpd to: 12 mbpd in 2016 6 mbpd in 2025 However, this depends on crash mitigation being started in 2006. If delayed, oil import gap may not be closed for two decades. If implementation is delayed until 2011, mitigation options may change total level of U.S. imports from current 13 mbpd to: 15 mbpd in 2016 12 mbpd in 2025 Thus, U.S. oil imports would increase from the current 13 mbpd and may not be reduced below that level until about 2025. Source: Roger H. Bezdek, Robert M. Wendling, and Robert L. Hirsch, Economic Impacts of U.S. Liquid Fuel Mitigation Options, DOE/NETL-2006/1237, July 8, 2006.

33. Jun-15 33 Interpretation of Study Findings Controversy over interpretation; findings have various implications for ASPO and others: Costs and benefits of liquid fuel requirements What is required to maintain “current energy regime” Implications of maintaining “current energy regime” What is required to change “current energy regime” Time & $ required to transition to a “new energy regime” How to get from “here” to “there – the new energy regime?” What is “there”? When is there: 2020? 2025? 2030? Major finding: Problem is of enormous scale, will require decades to resolve, and will require $ trillions investment. No easy, “painless” solution

34. Jun-15 34 Growing Oil Shortages Will Induce Growing World “Demand Destruction” Supply Supply & Demand in Balance Minimal Disruption RecessionDepression Demand Destruction

35. Jun-15 35 What About “Demand Destruction” Is demand destruction the solution or the problem? It is always the “default solution:” Absent mitigation options, it will always equate oil supply with demand However, demand destruction is an euphemism for recession, depression, mass unemployment, etc. People – & governments – will not passively accept massive demand destruction and may opt for desperate alternatives Therefore, objective should be to use mitigation options to minimize and control demand destruction

36. Jun-15 36 Peak Oil Progress in the U.S. It’s a start President Bush: U.S. is “addicted to oil” & must reduce oil imports Studies and plans being developed by Federal agencies: Dept. of Energy, Dept. of Defense, Unconventional Fuels Task Force, DOE labs Studies and plans being developed by state governments, SSEB, Western Governors Association, other groups Many states have passed alternate fuel legislation & are issuing mandates & building plants U.S. Congress: Study mandated for GAO, Congressional Caucus formed, incentives legislation passed Independent initiatives: National Academy of Sciences, National Coal Council, National Petroleum Council

37. Jun-15 37 Concluding Remarks Earlier (2005) world peak oil mitigation study has provided estimates and guidance Experience: Peaking could come with little warning & sharp declines. The new U.S.-only study provides time, cost, industry, job, & skill estimates: Scale is enormous & poorly recognized. Definition of “Peak Oil” needs to be clarified – some analysts keep expanding the definition of “oil.” The U.S. Energy Secretary has talked of peak oil, & some U.S. government activities are underway. It’s a start.

38. Jun-15 38 THREE POLICY RECOMMENDATIONS 1.The federal government should increase vehicle fuel efficiency standards and initiate substitute liquid fuels mitigation options. 2.State and local governments should encourage smart growth, telecommuting, mass transit, and other transportation fuel efficiency options and facilitate and expedite the siting of substitute liquid fuels plants. 3.All levels of government should educate the public to the fact that we face a serious liquid fuels problem that will require controversial and unpopular measures to reduce demand and increase supply.

39. Jun-15 39 It might happen again!

40. Jun-15 40 LOCAL CONTACT INFORMATION While in Australia through July 6, Dr. Bezdek can be contacted via ASPO Australia Association for the Study of Peak Oil and Gas www.ASPO-Australia.org.au International Australia