Dave's Energy

Thursday, August 31, 2006

Peak Oil musings, once again

This latest article on peak oil: Peak Oil Forecasters Win Converts on Wall Street to $200 Crude prompted me into a discussion with a colleague, the gist of which I post here...

I find the article well-written and fairly balanced...the author at least concedes that both sides have an opinion worth discussing. Moreover, he as assembled in one article many of the most outspoken voices on both sides of the argument and he leaves the reader to make his or her own assessment of who is "right" (maybe both are). On that note, what I always find interesting is that the people who tell us that the peak oil theory is hogwash very often make arguments that do not actually address the initial theory. Such as this quote in the article:


  • "Alex Cranberg, chairman of Denver-based independent oil company Aspect Energy LLC, calls the peaksters Chicken Littles -- misguided souls who think the sky is falling.

    Like many oil-industry vets, Cranberg, 51, says market forces and technological advances will ultimately cure our energy ills. As oil prices rise, companies will be more willing to hunt for crude and extract it. They'll invest in expensive deep-water wells and new technologies to wring more oil from existing fields. Consumers will start conserving energy. Even now, stock market investors and Silicon Valley venture capitalists are pouring billions of dollars into companies developing ethanol, solar power and other alternative sources of energy."

What you should notice is that Mr. Cranberg doesn't present an argument against oil production peaking, but rather suggests that we have ways of getting more if prices stay high and that people will use less. So his argument is more about the price oil of than the volume. I am inclined to believe Mr. Crandall is right, that higher prices will spur supply and decrease demand....however, this still doesn't preclude the validity of the peak oil argument. That is, maybe we can maintain production volumes at a high level, but growing volumes enough to meet demand likely won't happen, even if we don't see a peak just yet. Population growth alone will put too great a strain on the system, and the maturity of existing reserves will ensure that we will fight an increasing production decline curve over the next 20 years. That is the key to the peak oil argument - the law of large numbers in some sense - that at some point your growth makes you too big and the amount of new discoveries can't offset the losses from the older fields in mature basins. The final factor is that while technological advances will allow us to extract our existing reserves faster, those advances may have less impact on extending actual recoverable oil.

The bottom line is what I have been saying for years: we're not running out of energy, necessarily, but we may have run out of really cheap sources of energy. Our way of life has been built on cheap energy, and the U.S. uses more energy on a per capita basis than anyone else. With all that in mind, I believe that the greatest impact we can have on the extension of our finite resources is not on the supply side, but rather on the demand side...and therefore I would suggest that efficiency be our primary policy goal in order to solve both short-term and long-term issues. This does not come free or easily, but we as a society will not start treating energy as a finite resource as long as "thought leaders" keep telling us that everything will be OK if only oil companies would stop acting like capitalists (the only thing that has saved us at this point is pure, not-so-unbridled capitalism).

I would love to find new ways of reducing consumption while maintaining our existing habits (suburban sprawl and long commutes, disposable everything, long-distance travel), or finding truly renewable sources that are economical and scalable. I don't need a single-solution silver bullet -- a conglomeration of many solutions will likely be our end game. Nuclear is key, as France and Japan have figured out. Wind will have a niche, as will solar. Crude oil can be partially displaced in the transportation sector by natural gas or coal by conversion technologies that allow those hydrocarbons to be liquefied (but those solutions carry their own obstacles). And after 30 years of making cars larger and more powerful, maybe our excellent engine technology will turn to creating absolute efficiency gains instead of relative efficiency gains with added power (maybe, but nobody will care if prices drop in their inevitable cyclical manner). Unconventional resources (oil sands, etc.) will grow, of course, but only if prices remain high enough.

Meanwhile, our hydrocarbon lifestyle means that we (as investors) want to own the lowest-cost sources of the stuff, be it crude oil, natural gas, coal, or electricity generation, because until traditional sources are replaced (when?), the last barrel standing will be extremely valuable.

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