Bill Totten's Weblog

Monday, January 24, 2005

Peak Oil in the Mainstream

The Coming Oil Crisis

by Dan Ackman

Prophets Of Doom column, Forbes Online (January 13 2005)

The world economy has gotten fairly comfortable with oil at $45 a barrel. But how will it react to paying $100 a barrel three years from now? Or $150 in five years?

That's what the future holds according to Stephen Leeb, president of Leeb Capital Management and author of The Oil Factor (Warner Books 2004). The result, Leeb says, will be double digit inflation - if we're lucky. If we're not, it will be a severe depression. We asked Leeb to explain the gilding of black gold.

You say the price of oil will rise much higher than it already has. Why?

"The problem we have is that there are 2.3 billion people in Chindia", Leeb says, using shorthand for a combined China and India.

"Today, China and India use the energy-equivalent of 5.5 barrels of oil per person per year, while rich nations use 39. No matter how rosy your thinking is as to the global supply of oil, there is no way there is going to be enough to satisfy the demands of an extra 2.3 billion people coming online."

As China and India become rich nations, the demand for oil could grow at 6% per year, compared to 2% recently. Currently, the world has almost no excess supply. The planet is operating at anywhere from 95% to 99% capacity, Leeb says. "There is no margin for error". The only way the system can respond is continued price increases.

How bad will it get?

At the end of 1999, oil was trading for around $10 a barrel. Since then, it has risen by about 29% per year. Simply extending the trend line means that oil will be at $100 a barrel in about three years and at $160 in five years, Leeb says. If prices rise the way they have in the last year, the resulting levels will be even higher, and that's without any major geopolitical crisis in the Persian Gulf or anywhere else. "It's not a heroic position", Leeb says. "But I don't know how you avoid it".

What will the result be?

We'll see historically high inflation of 11% to 15%, according to Leeb. "That's not even so unusual", Leeb says. He notes that the US has had bouts of inflation at that level during the two world wars and in the 1970s at the tail end of Vietnam.

"We're kind of overdue", he says.

Economically, the US is already on a kind of war footing, with the war on terror, Iraq, massive military spending and a shortage of a key commodity, specifically oil.

"I hope I'm wrong", he says. "I've never wanted to look more like an idiot than I do right now. But I don't see it."

The "optimistic" side of the scenario is that you can live with high inflation, and even make money with the right investment strategy. Leeb favors oil stocks like ExxonMobil and BP and traditional hedges like real estate, and is especially high on oil service stocks like Schlumberger and Transocean.

When and why will it bottom out?

"I don't see it bottoming out soon", he says. "I think it's a decade - or generation - long problem. A depression would stop it. But as long as the Federal Reserve keeps real interest rates negative, that can be avoided."

The better outcome may be that "as energy prices continue to rise, we'll organize a worldwide effort to develop alternative energies", Leeb says. "Maybe that will even bring the world together".

The End of Oil?

by Mark Williams (Febuary 2005)

Massachussets Institute of Technology

If the actions - rather than the words - of the oil business's major players provide the best gauge of how they see the future, then ponder the following. Crude oil prices have doubled since 2001, but oil companies have increased their budgets for exploring new oil fields by only a small fraction. Likewise, US refineries are working close to capacity, yet no new refinery has been constructed since 1976. And oil tankers are fully booked, but outdated ships are being decommissioned faster than new ones are being built.

If those clues weren't enough, here's a news item that came out of Saudi Arabia on March 6 2003. Though it went largely unremarked, the kingdom's announcement that it could not produce more oil in response to the Iraq War was of historic importance. As Kenneth Deffeyes notes in Beyond Oil: The View from Hubbert's Peak, it meant that as of 2003, there was no major underutilized oil source left on the planet. Even as established oil fields have reached their maximum production capacity, there has been disappointing production from new fields. Globally, according to some geologists' estimates, we have discovered 94 percent of all available oil.

The Saudis' announcement arrived right on schedule - at least, once the three-year delay imposed by OPEC's anti-US embargo and production cutbacks of the 1970s was factored in. In 1969, the prominent geologist M King Hubbert predicted that a graph of world oil production over time would look like a bell curve, with a peak around the year 2000. Thereafter, he argued, production would drop - slowly at first, then ever faster.

Hubbert had a track record as a prophet: his 1956 forecast that US domestic oil production would peak in the early 1970s proved correct. Kenneth Deffeyes, who started out in 1958 as a young petroleum geologist at Shell's Houston labs working alongside Hubbert, became so convinced by the man's theories that by 1963 he had left the oil business, except for occasional consulting work; he is now a professor emeritus of geosciences at Princeton University. In Beyond Oil, Deffeyes takes readers through Hubbert's analysis in a highly readable style, even boiling down the complex mathematics into a few pages of graphs.

The prognosis? Deffeyes has no doubt that by 2019, the year in which Hubbert's theories indicate global oil production will drop to ninety percent of current rates, human ingenuity will have found replacement energy sources (see "What Energy Crisis?", below). But Deffeyes is optimistic about the long term only because he believes that by 2010, pressures will grow so intense that they'll create the resolve necessary to develop a new energy economy. In the short term, he foresees continually rising oil prices that force industry after industry closer to the wall. He fears not just escalating resource wars around the world but also mass starvation in some countries, since the 6.4 billion people living on the earth today are fed thanks largely to the successes of the 20th century's "green revolution", which, among other innovations, brought petrochemical-based fertilizers into wide use.

Because fifteen years ago we failed to begin developing the new energy sources and technologies we need now, Deffeyes argues, in the immediate future we'll have to rely on what we've got. In Beyond Oil, he examines how we might optimize the use of our geologically derived energy sources.

Deffeyes suggests that coal will make a comeback and that Fischer-Tropsch conversion - the process by which the Nazi regime turned coal into gasoline to keep its Panzers running during World War Two - might become commonplace. He grants that there'll be an outcry over the ecological costs of burning coal; similarly, there'll be much agonizing as nuclear power plants are again rolled out. But Deffeyes believes that M King Hubbert, whose 1956 paper predicting the US oil production peak is titled "Nuclear Energy and the Fossil Fuels", was right: nuclear power will be part of our response to decreasing reserves of oil and natural gas, as necessity overrides any political opposition.

Ultimately, says Deffeyes, we may just have to resign ourselves to relying more on coal, wind, and nuclear fission for electricity - and switching to high-efficiency diesel and hybrid automobiles - in order to ration our remaining oil reserves for as long as possible. Abundant energy from fossil fuels was a one-time gift, Deffeyes concludes, that lifted humanity up from subsistence agriculture and has led to a future based on renewable resources.

What Energy Crisis?

Question and Answer with Peter Huber

by Spencer Reiss

Peter Huber, an engineering professor turned telecommunications lawyer, doesn't worry whence the next electron will come.

Q: The idea that we're running out of energy is deeply ingrained. How can it be so wrong?

A: It's very easy to get pessimistic about energy. Energy doesn't just drop into your lap. The idea that demand will someday outpace supply seems obvious. But historically that hasn't happened, and there's good reason to suppose it won't, because the factors that determine supply are overwhelmingly technological. And our technology improves very fast. Energy technology in particular is advancing faster than it ever has before.

Q: Why is your new book, The Bottomless Well, subtitled The Twilight of Fuel?

A: What matters isn't the price of a barrel of oil. What matters is the price of getting mom and the kids to the soccer field. And that depends on two factors: the cost of the fuel and the cost of all the hardware, the technology, we wrap around it. Fuel is an ever diminishing part of the equation.

Q: You mean efficiency saves the day?

A: The opposite: efficiency always leads to more consumption, not less.
Hybrid cars and semiconductor lights are very quickly going to be cloned into all sorts of new applications that don't even exist today, and total energy consumption will rise, not fall. One highly energy-efficient Nintendo machine per teenager consumes far more power in the aggregate than one ENIAC per planet.

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Bill Totten


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