Deepwater Oil - A Symbol of our Times

The disaster currently unfolding in the Gulf of Mexico is raising some very good questions about the lengths that we go for oil and I've been pleased at the coverage of it in the media. But the disaster is about more than just the intersection between oil/energy and the environment. It is a central symbol of our times, and I want to share some thoughts that I have about the spill and what it means.
Mike Tidwell, author, journalist, and president of the Chesapeake Climate Action Network was on NPR today, trying to put the spill in perspective. Tidwell stated that the well that erupted and led to the explosion on the Deepwater Horizon rig was one of 35,000 wells in the Gulf of Mexico. His point was that with this many wells, it was simply a matter of time before the odds caught up - that some human error or foible of nature caused the law of averages to rear its ugly head. There is probably some truth to this, but what is neglected is the nature of the well that was being drilled by the deepwater horizon. It was the deepest well that had ever been drilled. Ever. The reservoir rock containing the oil that the well eventually bore into was under 6 vertical miles of the Earth's crust, which was itself below 6,000 feet of ocean water, and hundreds of miles from the nearest shore. Think about it...if you had to come up with a plan of how to extract oil out of porous rock lying that far under those conditions, how would YOU go about getting it out? How would you even set up the equipment to start drilling above a mile of turbulent ocean water? If you're scratching your head, believe me, you're not that daft. It pushes the limits of what's technically feasible. There's a reason petroleum engineers are the highest paid profession coming out of college. Just look at the piece of equipment it takes to drill this hole:


It reminds me a little bit of one of those shots from Star Wars, where an enormously complicated spaceship slowly drifts by a stationary camera, and you are thinking, "Where is the end of this thing, it just keeps going!" As you can imagine, such a colossal hunk of steel, and engineering costs a LOT of money! The suggestion that somehow BP was recklessly digging a hole out there is a bit disingenuous. There were four separate valves built in to ensure that the well did not rupture and incur damage to this rig (The rig itself is mobile, by the way, it is responsible for drilling many many wells, which are subsequently linked to pipelines that bring the oil to shore.) BP most certainly did not want to lose this piece of capital investment. What they did not do was install a fifth layer of redundancy - another half-million dollar piece of equipment - to protect against a blowout, which admittedly is more common in e.g. North Sea oil production.
So back to the significance of this particular well. I already mentioned it was the deepest well in history, and that the Deepwater Horizon was pushing the limits...in uncharted waters, if you will. Why not stick to the playbook, you might ask - with such obvious risks involved? Well, the answer is, because this was the next economic place to drill for oil. You can't simply drill a surface hole on dry land in the middle of Texas and have oil gush out of the ground, like you could in the good old days. No. That was the low-hanging fruit. Why go after oil 7 miles below shifting seas when you can spend a few bucks and get a gusher right next to your house, right. Well this is where we are at. Yes, there is plenty of oil left under the ground, but it's increasingly in smaller and smaller pockets in harder and harder to reach places. And the oil that's found so far under the seas is packed into rock at enormous temperatures and pressures. It requires tremendous costs to extract it. There is still some cheap and easy oil left, but it's in the hands of Iran, Saudi Arabia, and other direct or indirect supporters of Islamic fundamentalism, and nationilized, so that it is off-limits to Western oil companies. But even, that, too will be history in the not-so-distant future. The point, however, is that the marginal barrel of oil - the source of the next economic barrel of oil in the world is in places like the deepwater Gulf of Mexico. And the cost of this marginal barrel is rapidly increasing. A mere 7 years ago, the marginal cost of a barrel of oil was $15. Now, to bring online the next new barrel of oil, the cost is $70. This is almost a 5-fold increase! Since there are 42 gallons in a barrel, this means that the bare costs of getting the marginal barrel of oil out of the ground are $1.67 per gallon. Once the oil is processed into gasoline, profits are extracted by the sellers of the gasoline (and the oil-companies themselves), and the government taxes it to fund roads, bridges, and other car-related infrastructure and safety measures, you're looking at a bare-minimum cost of $2.50 per gallon (I use 80 cents as a rule of thumb for the spread between crude oil and gasoline at the pump. It's higher here in Washington and other states that tax higher). Anything less than that means that the marginal producers are losing money and will go out of business. Trust me, this will only happen during a strong economic downturn or worse (as was the case, when oil prices dropped to $30 a barrel, briefly during the past recession). But now the economy at least thinks it has new legs, so prices have surged to at least above the marginal cost of production (currently crude oil is selling at $86/barrel), as they should in a healthy market.
Scene V: Enter stage right the explosion aboard Deepwater Horizon. BP has generously offered to cover all costs associated with the oil spill (because it's the law.) In reality, they're only going to have to cover those costs which are directly economically quantifyable in the near future. They're not going to have to pay for a host of externalities that will be too peripheral to link directly to this disaster, or to pay for things that many people value, like the cleanliness of the gulf, the lost beauty of the beaches, or the death of fish, birds, and other creatures that are not exploited in commercial fisheries. Even still, they will pay a pretty penny and the U.S. is going to reconsider what it allows oil companies to do, and require very draconian and even more expensive measures to be able to make the case to the public that this isn't going to happen again. All of this will be passed on to the consumer because it will mean that the marginal cost of production is going way higher in the near future. Oil companies are only going to play this wild gamble if they can make sufficient profit to buffer themselves against these kinds of risks.
So why is this a symbol of our times? It is a classic case of diminishing returns - or to put it as Jospeh Tainter would, 'declining marginal returns on investments in complexity.' This is the thesis of his 1990 watershed book 'The Collapse of Complex Societies', where he offers this simple economic truth as the driving force behind the collapse of previously dominant empires. I will get to writing a review of this book at some point in this blog, but you can get a bit of a better backgound in John Michael Greer's April 28 blog post at http://thearchdruidreport.blogspot.com/. We can see this theme around us everywhere in our society. It's embodied here in spending more and more money chasing smaller pockets of harder to reach oil in harder and harder to reach places. It's embodied in us spending outrageous amounts of money on expensive high-tech medical equipment across the board that might save a few more lives, but is not, as a science, making any more leaps in improving health outcomes for the developed world or extending life expectancy. It's embodied in techno fixes, like the proposed development of 'clean coal' through carbon sequestration and storage. It's embodied in all of the myriad of techno fixes that we apply as a society to fix the problems we've created as the result of other technologies that were designed to fix other problems. As David Korowicz puts it in his report 'Tipping Point',
"In 1897 J.J. Thompson discovered the electron, then the cutting edge of physics, all on a laboratory bench. The understanding of this particle laid the foundation for the digital infrastructure upon which much of the world relies. Today it requires a 27km underground tunnel, 1,600 27 ton superconducting magnets cooled to less than 2 degrees above absolute zero, and the direct involvement of over 10,000 scientists and engineers to find (possibly) today's cutting-edge particle, the Higgs boson. In the 1920‟s Alexander Fleming discovered penicillin, with a huge benefit to human welfare, for a cost of about €20,000. Today it costs hundreds of millions to develop minor variations on existing drugs that do little for human welfare.
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Science and technology are an exercise in problem solving. As generalised knowledge is established early on in the history of a discipline, the work that remains to be done becomes increasingly specialised. The problems become more difficult to solve, are more costly, and progress in smaller increments. Increasing investments in research yield declining marginal return45. We see this in the growing size of research groups, levels of specialisation, and the knowledge burden"

The point is that we as a society only know how to solve problems with more complex and challenging solutions, and at a smaller and smaller benefit. We apply high-tech solutions left and right and hail technology as our savior. This is really a remnant from the recent past, when technology really did allow us to make huge leaps, and thus to increase our societal wealth by leaps and bounds. We don't understand that this is no longer true. We blame governments and corporations (and to be sure, this is a complex world, and a great deal of social and economic inefficiency and injustice is doled out by both of these institutions), without grasping that the principle driver behind the fact that we are collectively getting poorer is that we are spending more and more for less and less in order to try to solve our growing slate of problems. This leaves less and less of the societal surplus - the pie if you will, to split up amongst ourselves as the spoils of our labor and our genius and creativity. We live in a constrained world, and this fundamental driver will only get worse. The ONLY solution set we have that can truly make us richer again is to sacrifice the sacred gains of industrialization, and return to our simpler roots. Only now with so many more people on the planet, we will have to do so in a way that is extraordinarily sensitive to the environment that we all share. I'll try to flesh out some of those solutions in some later post.

Nickster