Tuesday, October 7, 2008

Fix energy, fix the economy

Recently there has been much discussion as to the outlook for oil and gas prices, given the credit crisis. Hundreds of millions have been invested in new drilling rigs, leases, personnel and other infrastructure. The concern in the oilpatch is that the increased shale gas deliverability and the credit crisis-induced demand destruction may create a sharp, disruptive, price decline. At the same time, Fortune recently published Matt Simmons' "$500 per barrel" article.

So, what's the answer? Is it going to be $50 oil, or $500 oil? As usual, there is no simple answer. There's just a lot going on. The following is an attempt to lay out some of the key factors.

Overarching theme: As previously published (and as paraphrased from the wise words of Tom Whipple of ASPO-USA), "Worldwide oil depletion is in a race with demand destruction." Curent oil prices would indicate that the credit crisis-induced demand destruction is currently winning. The recently published EIA demand data shows a 6.4% drop in July 2008 demand, versus that of July 2007.

What could affect/interrupt demand destruction over the next few years?

  • some sort of military event, which you can probably imagine, which could close the Straits of Hormuz or damage other key chokepoints or installations. This scenario is likely the only one (save hyperinflation) which could deliver Matt Simmons' $500 pricing, over the next few years.
  • Venezuela, Nigeria and Mexico are the 3rd, 4th and 5th largest suppliers of crude oil to the US. In late September, Chavez was in talks with the Chinese to ramp up exports from a current 250,000 BO/D to 1 MMBO/D by 2012. The US currently imports about 1.2 MMBO/D from Venezuela, so presumably the Chinese increase would come at the expense of the US. Meanwhile, Nigeria appears about to blow, literally, at any time. And Mexico is reeling from "Peak Oil Posterchild", Cantarell, which has recently declined 30 % year-over-year. My guess is that Mexico will have to cease all exports by about 2010!
  • the BTC pipeline in/near Georgia is scheduled to transport some 840,000 BO/D for the rest of 2008, then 1 MMBO/D in 2009. Obviously, it is subject to further Russian mischief. This oil primarily supplies the EU.
  • the "groupthink" at the recently held ASPO-USA conference seems to have been that natural gas may be in short supply within the next few years. Two reasons. First, it seems that due to the delay/retraction of proposed coal plants (due to all the protests), utilities are being forced to "pencil in" simple, combined cycle natural gas plants as their near term solution to meeting demand. Andy Weissmann and others believe that they all may be counting on the same gas, which may not be there. Secondly, others believe that production from shale gas is not sustainable in the near term. (This author believes that shale gas as well as other unconventional and conventional natural gas sources can, in fact, supply enough gas for incremental power generation as well as for the replacement of some portion of gasoline and diesel fuels in vehicles - over, say, a 10 to 20 year term.) Also realize that other groups believe that there may be a near term glut of natural gas, due to substantial shale gas drilling and new LNG landings.
In summary, it appears that demand destruction may mask the reality of Peak Oil for a time, perhaps for a few years. This "stay of execution" is an important opportunity that should not be wasted. Namely, the next 24 months should be utilized to rapidly implement:

  • energy conservation (this is where we can have the greatest effect, the soonest)
  • mass transportation retrofits (likely optimized and marketed bus and carpool efforts)
  • natural gas vehicles and stations (start with fleets to solve the Catch-22)
  • expanded natural gas drilling (solve infrastructure & supply problems)
  • wind energy (stop the tax credit hocus pocus - fix it for a reasonable time period)
  • vehicular electrical storage research (cost effective and reliable batteries or other devices)
  • design & production of more efficient cars (lighter, smaller EV's, plug-in hybrids and diesels)
  • offshore drilling (offshore West Coast, East Coast, Florida Coast)
  • biofuels research (enzyme & pyrolysis-based cellulosic ethanol, algae-based oil production)
  • nuclear plants (fast-track & standardize the design, licensing and construction, use breeders and reprocessing to minimize waste)
  • coal plants (use best available, cost-effective clean up technology)
  • solar thermal innovations & implementations
  • geothermal and waste heat recovery installations
The good news? It appears that both Presidential candidates agree on most of the above; in fact, one group refers to their energy solution as the "all of the above" solution.

Furthermore, at least one group has advanced, albeit not very articulately, that "energy is the solution to the economy".

What is meant by this?

Well, despite my personal aversion to additional government involvement, the fact of the matter is that we face both an economic abyss, and an energy abyss. Time is short, both for the economy and for oil. Rather than spending a trillion dollars on buying toxic derivatives, or on a war, these funds would be better spent in helping private enterprise jump-start the above referenced conservation techniques and alternate energy research and implementation. The use of our hard-earned tax dollars to help accelerate these initiatives would create jobs and new businesses. The bottom-line is that solving the energy problem - which must be dealt with anyway, and soon - is the perfect solution to solving the consumption- and credit-induced economic dislocation we are now beginning to experience. There would be a third, important benefit. Energy conservation, increased natural gas use and alternate energy implementation all help lower CO2 emissions.


Ralph said...

I agree. We have all read about the 20-year, 10-year and zero-hour action scenarios. No one can predict exactly how long it will take to cushion some of the impact, but it's clear that from those studies that, say, five extra years well spent might be immensely valuable to our species and to the planet.

4038 said...

Many fine ideas expressed here. But we need to go back to the beginning and re-examine our fear of carbon dioxides causing global warming. Many qualified scientists disagree with this theory - recently one of the worlds leading atmospheric scientists discovered errors made in the original calculations (back in the 1920s). He finds that the global temperatures are self correcting and that we have nothing to fear from a build-up of CO2. This fellow resigned from NASA after they refused to allow publication of his findings - that would have curtailed all the monies NASA received for their green house gas research. Worldwide about 5 billion dollars a years are spent on such research. But the cost of trying to prevent CO2 emissions must be many, many times that amount.
Man-made global warming is a hoax. The last time the people were taken in by a hoax of such proportions was when the illuminati decreed the world was flat.

MPayne said...

4038: I share your opinion on anthropogenic global warming. I believe the proposed "cap and trade" systems to be a potential disaster for the world economies,and another way for special interests to make a lot of money and assert control.

But if energy conservation, increased use of natural gas and alternate energy ALSO lower carbon dioxide emissions, then MAYBE we can develop a consensus that those are good things, and get on with them!