HUPPERT'S PEAK?

Welcome to Charge: the future of energy
HUBBERT’S PEAK OR BUST
BY Daniel C. Sweeney

Last week in certain business publications such as Barron’s and Forbes one read suggestions that cheap gas was coming and would be here to stay. $1.25 per gallon for the next twenty years was one prediction. I mention this because I was in the midst of interviewing vendors for an upcoming ethanol and fuel alcohol report and one of my sources brought it up. “If it’s true we’re f_cking toast!” the source remarked.

He’s right of course. If really low prices come back and stay back, the alternative fuels industry is probably going to collapse. Some people will continue to buy biodiesel because they’re “green”, while ethanol might find a place as an octane booster, but that will be it. Otherwise it will be business as usual. And who knows, after a couple of more Republican administrations, leaded gasoline might come back.

Actually, these predictions are nothing new. Exxon-Mobil has been strenuously urging against the U.S. investing in alternative energy because with more than 3 trillion barrels of crude waiting to be pumped (their projection), we certainly don’t need it. In fact it would be a gross misallocation of resources and a big government boondoggle. Of course this is the same company that airily dismisses global warming as junk science, but to some minds that puts them firmly on the side of the angels.

We’ve been here before. Back in Carter era—that age of confusion that brought us stagflation, the Disco Duck, cocaine, and less is more—alternative energy advocates briefly proliferated then quickly got their comeuppance come Reagan’s “morning in America” with its cheap gas, junk bonds, and hostile takeovers. Everyone drove gas guzzlers to the Predator’s Ball, and the alt energy guy looked like a prize horse’s ass.

Buck twenty-five gas, I thought when I read the business stories, many of which suggested that such a happy state of affairs could only occur if all branches of government remained in Republican hands. What if they’re true? That would make me a prize horse’s ass as well for trying to start an alternative fuels journal.

Does that mean I should pray for high oil prices? That’s kind of like praying for jihadist victory in Iraq to support my position that the whole thing was a ghastly mistake. No one in good conscience can hope for either outcome, even though one believes that either or both might occur.

What I like to say in such circumstances is that I strive to determine what will happen, not what should happen. Bad news can be good news if you use it to avoid certain catastrophe.

So what are we to make of this? Is cheap oil really on the way?

I have avoided much discussion of peak oil in this blog simply because so much has been written on the subject and because I don’t believe I have much in the way of original insights to offer. I happen to believe that the age of cheap energy is passing, but I don’t necessarily believe that the world or the United States will hit a wall. All kinds of expedients are possible involving biomass conversion, enhanced oil recovery, extensive exploitation of unconventional fossil fuel, nuclear energy, and radically different transport systems. In other words, Homo sap needn’t merely engage in business as usual until the point where it’s no longer possible and then endure the collapse of civilization.

Having said all this, I would bring up one fact in regard to oil that almost no one disputes. The rate of oil discovery has been declining smoothly and sinusoidally since about 1970. We are already way, way down on the bell shaped curve, and all of the new seismic imaging and enhanced recovery technologies haven’t made any real difference. That means that if Hubbert is right about a 40 year lag between the peak of discovery and the peak of recovery, we can expect a decline of conventional supplies to begin about 2010 which happens to be near to the median figure for peaking among petroleum experts.

Exxon-Mobil’s figures are approximately three times higher than the low estimates for proven reserves and they’re much higher than anyone else’s. Exxon could be right or they could be disingenuous. There’s no knowing.

What can be said is that ethanol stocks have been hammered on the basis of such news and the first wave of fear is advancing through the alternative fuels contingent. The fear is particularly pronounced among the older players with a living memory of the Carter years. If the industry collapses again it is unlikely to be revived unless and until a scarcity of conventional oil reaches a crisis point and maybe not even then.

What an irony it would be if oil prices briefly declined to say $20 per barrel and stayed there for a couple of years and then shot up to $100 and did not decline thereafter. Investors, having taken one bath on renewables would not take another no matter how bad the oil crunch got, and consumer’s would have no choice but to pay as much as the market demanded with what effects upon the economy one can scarcely imagine.

Robert Samuelson, a Nobel prize winning economist, recently wrote a piece in which he maintained that ascending oil prices have been harmless because industrial productivity has been rising much faster in the U.S., thus ensuring prosperity for the future. No one else is arguing double digit productivity increases but then who’s going to argue with a Nobel laureate. Not the kid. So not to worry. We’re impervious to oil spikes. And if that’s really true, we don’t need alternative fuels no matter how bad it gets. We’ll just get more productive. Come to think of it, I must have been a horse’s ass all along. There never was a problem and there never will be.