I’ve Got Good News and Bad News

October 28, 2006

I am writing this in Boston while attending the (Association for the Study of Peak Oil) ASPO-USA’s conference, “A Midnight Ride for Peak Oil” (you know, the Paul Revere motiff thing).

The conference was a big draw. Held at Boston University’s School of Management, ASPO-USO did an excellent job of drawing academic heavy weights from Harvard, MIT, Cal Berkley… you get the idea. Dozens of top shelf talent and scores of aspiring top shelf talent presented, mingled, lectured, and very rarely bored about 500 attendees for the past 3 days.

The good news I got out of the conference is that we might enjoy the western, developed-nation lifestyle for several more years. The bad news is that we have driven over the imaginary cliff and that even if we pump the brakes now, it will have far less effect than if we had applied said brakes while the rubber of the tires was still in contact with the proverbial road.

Further good news is that while conventional oil and lease condensates have more than likely peaked, “all liquids” might not peak for 2 to 8 years, because of coal to liquid, tar sands to liquid, and heavy oil to liquid technologies. The bad news is really bad. There seemed to be a consensus among the scientific personnel that the Green House Gases (“GHG”) produced by these technologies would cause most of the world’s coastal regions to flood, and the higher ground to dry up and blow away, with various and sundry truly unpleasant experiences to be had along the way; a fun crowd, by any measure.

It seemed, even though the conference was titled after “Peak Oil” that the luminaries seemed to be far more alarmed at the prospect of environmental disaster from GHG’s than from a pending transportation fuel shortage and its concomitant effect on the economy and financial markets. As the greatest impacts of global warming seems to be on agriculture, it seems that these scientists, too, believe that people will be far more interested in eating than in driving.

For those concerned with the impacts of these issues to their personal experience – you are on the right track. I do not believe that there are any viable macro (society wide) solutions, only micro (individual) solutions. Oh, there will be lots of huffing and puffing and blowing, and legal billing, but I don’t see an easy transition period in the offing. So without further ado, let us get to the important points.

Oil

There was much discussion as to whether Peak already happened, or will it take another 1 to 8 years, though there seemed to be a consensus around 2005 at the earliest to 2012 at the latest. I really did not see much point in splitting hairs over the time frame. Why? When the world’s oil production peaks is not really relevant to us Americans. By mathematical necessity (Exports = Domestic Production – Domestic Consumption in the Exporting Nations), peak oil will arrive in importing countries, like the U.S. and most of Europe, several years before it arrives in the data for world oil production. Since it is nearly 2007, and the most optimistic pessimists (can I actually say that?) speaking at the conference put the date of peak out in 2012, it seems reasonable to conclude that Peak has already occurred or will occur quite soon in the U.S. The U.S. Department of Energy’s EIA data point to a peak for the U.S. in 2004. In any event, we should treat this as a risk management problem, because:

"We are heavily dependent on a resource the exact availability of which no-one seems to know - and people who insist there's no problem have not proven so. It is thus prudent to behave as if the resource was in short supply.” - Matt Simmons

We have many new projects coming on line in the next 4 years, but not a lot thereafter. Can these new projects produce enough oil to replace the production we will lose during this time frame from depletion, as well as add to total production as required to grow the economy? THAT, my friends, is the $64 question. Though there was much debate about it, we don’t need to concern ourselves with that, in my opinion. Within 10 months from today, by September 2007, we will have enough production data to answer the question. So why guess?

This is not to say that Oil could not trade down to $35 – or up to $100. It can, even if we have already peaked, and I make no prediction on the short-term price of the commodity. One must follow the data coming out the EIA.

Natural Gas

Natural Gas production (“NG”) is in such a state of crisis in North America that one of the speakers said that using NG for the purposes of converting Tar Sands in Canada into synthetic crude was akin to lighting candles with $100 bills during a blackout. Another said using NG for processing Tar Sands was “taking gold and turning it into lead”. Not one of the scientists presenting thought NG production could be expanded in North America – Peak Gas has arrived for the continent.

“Natural gas is increasingly of more urgent concern in North America than Peak Oil. If we stopped drilling right now, our production would decline by 30% next year, and 30% the year after, etc. LNG will compete against other countries, a 35% energy loss in transportation, and Not-In-My-BackYard opposition. There still exists some demand side destruction left, but then we will be close to the bone” Nate Hagens.

I love that “demand side destruction” line. Dr. Roger Bazdek, who presented at the conference and is a co-author of the Hirsch report, said “demand destruction is a euphemism for recession and depression”. This is the issue most dear to people who have spent a lifetime building a business and a portfolio.

Liquefied Natural Gas (LNG) is no panacea, according to the speakers, but we knew this. If we must rely on LNG imports we have big problems.

15% to 30% of NG is used in compressing and reliquifying LNG. Much of the NG (Methane) is lost into the atmosphere during the processes, and Methane is a much more powerful GHG than CO2. The U.S. would need at least 30 new LNG receiving terminals – in the absence of martial law it is hard to see how that might occur in the next 20 years.
Relying on LNG requires the U.S. to be MORE dependent on foreign energy suppliers than we are now.

Roughly 28% of electricity in this country is produced using NG as the input. Should the availability of this fuel decline substantially, the U.S. would either increase the use of coal, or decrease the availability of electricity to the economy. In the immortal words of Matt Simmons: “We must grow electricity, or we will not grow our economy”. The problem is that coal is an environmental disaster, and at some point, local, state and/or the Federal Governments will step in and legislate carbon emissions.

One of the scientists, Dan Schrag, Professor of Geochemistry in the Department of Earth and Planetary Sciences at Harvard University, felt that a solution to the coal/CO2 problem might be sequestering CO2 under the sea floor, in deep ocean water. He stood out as one of the few optimists.

Non-conventional reserves

While the resource base is large, the recoverable reserves from Tar Sands, Shale Oil, Heavy Oil… is less than 10% of the resource. It was stated over and over again that as far as these resources were concerned we are severely limited in our ability to deliver them to the market. Further, the environmental impacts from these reserves will severely limit their production.

Can the U.S. economy continue to grow with declining NG and liquid petroleum product inputs? I don’t think so. Yes, we have plenty of coal, but it seems the best way to sequester Carbon at this time is to leave it in the ground, unburned. Is the stock market worth 18 times earnings in a zero growth world? Can consumers service the debt of their mortgages in a zero growth world?

What about alternatives? Not one of the scientists presenting felt that any alternative fuel would have a significant impact before 2030, if ever.

Across the country from the Boston Conference a CEO of one of the world’s largest oil companies was telling his audience:

"The ease with which we all lived in the last 50 years, with cheap energy, is coming to a close," John Hofmeister, president of Shell Oil Co., told a City Club luncheon crowd Friday in Portland. "The next 50 years cannot be like the last 50 years."
“The oil demand-and-supply equation”, Hofmeister said, “now constantly flirts with crisis. Americans need to develop a sense of privilege rather than entitlement when it comes to energy use.”

I’d like to repeat that line - “now constantly flirts with crisis” - as it seems vaguely important. Also, I want to drive home that this is not coming from an environmentalist or scientist, but a hardcore, multi-millionaire capitalist with the most to lose in the kind of paradigm switch envisioned.

After sitting through a marathon of presentations, my sense was that:

Alternative energy sources (Ethanol, Bio Diesel, Wind, Solar) will have little impact.

Oil and gas availability will decline, although the date of the decline and the steepness of the decline is not well understood (which means things could be much worse, or much better, than they appear), but that in any event, it is not that far out in the future.

Coal will not be able to come to the rescue in the near term due to its impact on the environment, and because 100% of the electricity generating plants built in the U.S. over the past 7 years were NG fired plants, not coal fired plants.

Non-Conventional Resources (Tar Sands, Oil Shale, Heavy Oil) will not move the peak back at all, but will lessen the steepness of the decline. However, we might find that their environmental impacts are not worth the price of admission.

The Media is doing a great disservice to the American people with their irresponsible reporting of the issue. What I heard from America's best and brighest scientists bears no resemblance of what I see reported in the media. Presumably, the media is getting its data from these scientists. I am not a big believer in conspiricy theories - so I will chalk it up to incompetence.

We must watch closely the activites of our own environmental regulators as well as the National Oil company's of the Oil Producing Nations such as Russia and Saudi Arabia. In my opinion, their policies will impact the markets in the short term at least as much as depletion.

The potential impact of this on the U.S. economy, currency, financial markets, and real estate markets is real and unprecedented.


Greg Jeffers

Mentatt (at) yahoo (dot) com