Peak Oil - Energy and Capital

Peak Oil and the IEA

"The global peak in oil production will be the single greatest event of our generation. And I'm still surprised to find that some people fail to believe that peak oil is right around the corner."

That's what I told my Energy and Capital readers in 2007. Interestingly, that was right about the time the Saudis believed that $50 per barrel was an "optimal" price.

Since then, we've followed oil's unprecedented rise to $147 per barrel last July and subsequent fall due to the financial crisis. The turmoil has caused oil prices to plummet back to $60 a barrel. Now, whenever I hear people say that cheap gas prices are back for good, I can't help but sigh. They just don't understand the impact that peak oil will have on our society.

Named after geophysicist M. King Hubbert, peak oil refers to the point when global oil production reaches a peak. I'd also like to take a moment to reiterate another point I've made over and over again to readers: Peak oil is not about how much oil is left in the ground, but rather the rate at which we can produce that oil.

I'm pretty sure my readers have seen the classic bell-shaped curve at one point or another, even if you've never taken a Peak Oil : 101 class. Fifty-two years ago, Hubbert delivered his famous speech to the American Petroleum Institute, accurately predicting the year that U.S oil production would peak.

Let's fast-forward to 2005, when the Hirsch Report was released. The report, created for the U.S. Department of Energy, presented another dire warning that peak oil was upon us. The Hirsch report came to several conclusions on peaking oil production. In essence, it will take an enormous amount of time and money to mitigate the effects of peak oil, which can take up to two decades.

On Wednesday, you can tack on another date to remember after peak oil.

Peak Oil and the IEA

In two days, the International Energy Agency will release their annual energy report.

So what can we expect from the IEA this year?

For starters, we can say goodbye to cheap oil again.

Shrinking Oil Investments Can Be Your Gain

Royal Dutch Shell's CEO Jeroen van der Veer recently warned us that, "If the oil prices stay volatile I'm afraid there will be too much slowdown in investment."

And so far he's been right on the money. You see, the IEA reported that oil and gas budgets have plummeted 21% in 2009. That comes out to almost $100 billion less than last year! Even the Saudis believe another price spike will send crude oil rushing back to last summer's record of $147 per barrel.

But here's the dirty little secret, you don't have to miss out on the profits this time around. Of course, taking advantage of oil's next price spike can be easier than you think, just let me show you how...

Learn more here.

Despite cutting their forecast for global oil demand by 10 million barrels per day in 2030, triple-digit oil prices are in our near future. The IEA expects prices will remain above $100 per barrel through 2015, rising to $200 in the next two decades.

The problem comes down to supply as oil producers fail to make up the shortfall of global demand. As expected, most of the supply growth will come from OPEC, which controls roughly 40% of the world's oil production.

The part we'll be paying particular attention to, however, will be the rate of decline in existing fields. Two weeks ago, information on the upcoming report was leaked, which said fields were declining at a rate of 9.1%. The IEA was swift to react to the leak, dismissing the news as "misleading" and saying that the figures have been revised.

Don't forget that we were told by CERA that the average rate of field decline 4.5%, which means producers need to find over 3 million barrels per day just to maintain production levels.

Even if you don't see the seriousness of field decline, take a note from Pemex's latest woes.

If Cantarell has taught us anything, it's that peak oil is a reality. Output at the once-massive Mexican oil field fell 14% in September, producing 2.7 million barrels per day that month. Three years ago, production from Cantarell made up 65% of Pemex's total output.

Today, Cantarell's share in total output has dropped to 35%.

Playing Peak Oil

Don't let the doom and gloom get to you too much.

People keep saying that renewables and alternative energy sources will succeed oil for the world's energy throne.

I completely agree.

Unfortunately, I don't see that happening overnight. The hard fact to swallow is that our world is still hung up on fossil fuels. It would be foolish to ignore this simple truth: Approximately 86% of the world's energy comes from oil, coal and natural gas.

For investors, Wednesday's energy report will represent a turning point in peak oil awareness. From here on out, the energy game will change forever, and those of you savvy enough to recognize that will be envied by the panicked sellers of today's market.

People constantly ask me why I haven't sold off my energy companies yet. When I explain my long term positions to them, all they can do is nod and rush to cancel a few of their trading orders. Over the next few weeks, we're going to take a closer look at exactly how peak oil will affect your investments.

Until next time,

Keith Kohl

Energy and Capital

P.S. As I mentioned, renewable energy will have to fill oil's void over time. Not overnight, but through years of transition and billions of dollars of investment.

Incidentally, my colleague, Nick Hodge, has discovered three wind stocks that will take off when the IEA releases its report. Here's the full report on how you can properly position yourself to take advantage. But you have to hurry, the IEA is releasing its damning evidence in just two days!

Also, for those of you who are history buffs (like myself), I've tracked down Hubbert's original 1956 presentation to the American Petroleum Institute. If you're interested in reading it, you can find it here.

Highlights of the Peak Oil Conference, Part 2

(This is the second part of a two-part article; see also Part 1.)

To wrap up the macro outlook for oil, I selected this excellent Schlumberger slide from Herman Franssen's presentation:

The rapidly growing gap between expectation and reality could hardly be made more clear than that. Spare capacity cannot be significantly expanded, demand projections cannot be met, and prices will have to rise back into the stratosphere. We are now poised, it would seem, at a turning point, with far-reaching effects.

The End of Globalization

Jeff Rubin, the Chief Economist, Chief Strategist, and Managing Director of CIBC World Markets put his spotlight on those effects with a short but very pointed video presentation entitled "Triple Digit Oil Prices Will Reverse Globalization." Rubin has long been on the peak oil trail, and has used his knowledge profitably in his economic forecasts. Transportation costs have finally become so high, he said, that global trade is now about shipping and logistics, not about seeking the lowest global labor cost.

For example, the cost of shipping a standard 40' shipping container from Shanghai to NY went from $3000 a few years ago to about $9000 today. (A commentator on CNBC last week noted that it now costs more to ship a load of iron ore to China than the ore itself is worth.) The cost of shipping ore to China to make hot rolled steel and then shipping it back to the US adds about $90 to an $800 unit of finished product, according to Rubin; consequently US steel production is actually making a rebound after a long period of losing out to China.

Steel isn't the only industry that is benefitting from the reversal of globalization. With oil at $100, Rubin calculates that transportation costs are 40% of total shipping costs. At $200, transportation is 80% of total shipping costs. And at $150, tariff rates quadruple. "This would take us back to the 1970s," he warned, and suggested that the right prescription is to reverse globalization deliberately, until transportation costs become incidental. (I should note that Matthew Simmons has also called for an end to globalization, as well as a resurgence in local manufacturing and telecommuting, to reduce oil demand.)

Few people in the realms of policy and business seem to have gotten that memo, however.

Presenter Herman Franssen of International Energy Associates put a slightly different spin on the question, suggesting that a huge increase in oil demand from China and India could spell the end of globalization as the center of global industrial activity shifts to Asia. A doubling of cars is expected worldwide between now and 2025 as the population of the developing world seeks a First World standard of living. China and India together have 2.4 billion people—eight times the US population—but currently consume only about half the oil the US does. As their economies develop and their oil requirements rise, they will consume more of their own oil production, and they will compete more and more for dwindling global oil exports. (Later in the conference, Kjell Aleklett declared that the price of oil in the future will be set by whatever the Chinese are willing to pay for it, since they will become the world's first and most important customer.) They will also increasingly become their own top customers, and their labor costs will increase.

All of these trends will tend to reverse globalization. This will be good for the US economy as manufacturing capability is repatriated. New jobs will created, and domestic producers like United States Steel Corp. (NYSE: X) could once again be excellent long-term investments. At the same time, the price of everything will go up, and we will find it increasingly difficult to fill an SUV with cheap stuff from China on our trips to Wal-Mart. There will be a bright side to that, too, though. I remember when "Made in USA" was stamped on almost everything we bought, and it was a mark of pride and quality. I, for one, would like to see those days again.

China and Coal

As China becomes the world's dominant economy, coal takes center stage in the energy complex. Several presentations focused on the implications of this. David Fridley of the China Energy Group at the Lawrence Berkeley National Laboratory offered a few key facts:

80% of China's electricity is generated from coal
Just last year China added 105 GW of power generation—equivalent to building California's entire electrical base twice a year—almost all of it from coal.
China has world's third largest reserves of coal.
China is becoming a net coal importer, largely due to price differentials between imports and exports. When prices were very high this past summer, China was tamping down on domestic consumption (in part to prepare for the Olympics) and vigorously exporting coal, but now with prices having fallen they're importing again and consuming more of their own supply.

Underscoring the intensity of China's coal usage, ASPO-USA co-founder Randy Udall remarked later in the conference that 4 million Chinese would enter a coal mine that morning, and 100 of them would die within the week.

Recognizing that petroleum is increasingly limited and expensive, China is also dramatically expanding its coal-to-liquids (CTL) and coal-to-chemicals efforts. China's CO2 emissions are consequently expected to exceed that of the US by 2010, and effectively wipe out the CO2 reductions by the entire EU under the Kyoto accord. Soot from China's coal burning is now the largest source of mercury deposition in California.

China is the world's top producer—by a wide margin—of both cement and steel, most of which is consumed domestically. Both are extremely energy-hungry industries, and have caused China's growth in energy demand to far outpace its growth in GDP. China is also the #1, #2 or #3 producer of all major metals. It is both the #1 producer and the #1 consumer of iron ore, the #1 importer of copper, and the #3 car manufacturer.

To satisfy its enormous demand for all basic materials, China has been buying up raw material resources wherever they can, worldwide, and competing with us directly for nearly everything. According to Vince Matthews of the Colorado Geological Survey, China now controls 98% of the rare earth metals worldwide, and their all-encompassing centralized strategy will eventually corner the global markets for most materials.

Like oil, the worldwide prices for raw materials are thus increasingly set by China's demand. The cement shortage in the US for the last several years was a direct result of China's increased demand. Conflicts like the one in Sudan, and disputes over resource claims with Vietnam and the Philippines, are also direct results of China's voracious appetite.

Although the financial market meltdown has dampened the rate of China's growth from nearly 12% last year to an estimated 9% this year (with similar numbers for India), and brought down commodity prices from their summer highs, demand for basic materials in these rapidly developing countries is still enormous. China's average growth rate over the last 4 years has been 10.4%.

That demand should help to put a global floor under commodity prices. We didn't get the post-Olympics bump in coal and oil demand that many of us expected, because the world was reeling from the fallout in the financial markets and guidance on demand for basic materials was falling. My estimation is that much of the fast money that was long commodities has now been shaken out, and commodities may now be priced near the low end of the forward range.

In fact, it's hard to imagine coal demand going anywhere but up. David Hughes gave a typically shocking presentation on coal, with numerous "hockey stick" charts showing the relationship between energy and population. The rate of coal consumption has shot up since the 1980s, as oil and natural gas became harder to produce and more expensive. Consider these facts:

Coal accounts for 29% of the world's primary energy consumption, second only to oil.
China has been building a new coal-fired power plant at the rate of over one per week. China is on track to have 5000 more coal-fired plants over the next 6 years. Over the same period, India will have 200 more.
In the US, there are currently 28 coal-fired plants under construction, with even more in Europe.
Seaborne supplies of coal are tight, and prices have doubled in the last two years.
On an energy content basis, the US reached "peak coal" in 1998, although the volume produced keeps going up. Global peak coal will likely be in the 2025-2030 range.

Can Alternative Fuels Fill the Gap?

Michael Webber, the Associate Director of the Center for International Energy & Environmental Policy at the University of Texas at Austin, focused on CTL for his presentation. Although CTL fuels have excellent performance characteristics and have been approved by the US Air Force as an alternative liquid domestic fuel, their carbon footprint is much higher than that of other fuels, and the Energy Independence and Security Act of 2007 essentially blocks their use by setting emissions limits. CTL also requires high energy and water inputs, leading to the running joke that the cost of CTL is always the price of oil plus $10/barrel. CTL probably isn't feasible without government subsidies, he says, and carbon capture and sequestration technology (CCS) only really works—if at all—when attached to power plants, not to millions of tailpipes.

Pamela Tomski's of EnTech Strategies also addressed the future of CCS. Her outlook was cautiously optimistic, pointing out that global growth in coal consumption is basically a foregone conclusion, and that CCS can and should be pursued as much as possible with a goal of capturing at least 1 billion tons of carbon per year by 2050 (equivalent to about half the carbon output of today's US coal plants). However, the scalability of CCS remains to be proven. The cost of CCS is high too, incurring an energy penalty of 20-40%, and ultimately contributing 40-80% of the increase in grid power costs.

Moving on from CTL to other alternative liquid fuels, fuels engineer Robert Rapier tried to separate some facts from fallacies about biofuels, and gave an interesting overview of various biofuels including corn ethanol, sugarcane ethanol, cellulosic ethanol, methanol, butanol, renewable (or "green") diesel, algal biodiesel, and regular biodiesel. He was quick to debunk the notion that the US could emulate Brazil's success with sugarcane ethanol, because we do not have its crucial tropical climate, and noted that even in Brazil, oil still accounts for 90% of its energy needs. To be like Brazil, he said, the US would have to either quadruple its domestic oil production or cut consumption by 75%. After reviewing the various limits to each type of biofuel, Rapier concluded that none of them are true long term solutions, and that we should be focusing our efforts on reducing our demand for liquid fuels instead of trying to increase supply.

If CTL and biofuels can't provide an alternative liquid fuel regime, then we must wonder what the future of the airline industry looks like. (I wrote about this in May, "Say Goodbye to Cheap Air Travel.") We have already seen some 30 small carriers go bust in 2008, and the chief executive of British Airways warned last month that we could see an equal number disappear before the year is out.

Michael Boyd, an expert on the airline industry, kicked off his presentation with the quip that an airline is an excellent investment, if you use your ex-wife's money and get even. The air travel industry is facing numerous challenges, and fuel costs are gradually shrinking fleets and reducing service, which will have knock-on effects on business and spending patterns. The airline industry currently has only about a 14% profit margin, he said, which is easily jeopardized by rising fuel costs. Hedging fuel costs as Southwest Airlines did (to become the only large profitable airline in Q1) only works at low price levels. At $100/barrel oil, he said, every airline in the world is obsolete. Despite its imminent threat, he said, most people in the airline industry still don't know about peak oil.

Renewable Energy: Our First and Last Resort

If CTL and biofuels can't fill the gap in traditional fuels, then somehow we must find a way to fill it with renewable energy. Analyst Paul Gipe presented a bold but plausible scenario under which the three-quarters of US electricity currently produced from fossil fuels could be replaced with renewables. He determined that it could be done, in theory, by deploying thousands of wind turbines, but only after we cut consumption to something approaching a European standard, and only with a vigorous commitment to build the new infrastructure at a much faster pace, at a cost of about $5 trillion.

Since renewable energy technologies produce electricity, and not liquid fuels, this raises the question of what the future of transportation looks like. A series of presentations on the final day of the conference explored options ranging from vehicle-to-grid storage technologies, to plug-in electric hybrids, to 100% electric cars and scooters, to bicycles, to autonomous (self-driving) auto technologies, to innovative "Pod Cars" that work like trains made up of interlinked, individual, self-piloting cars.

The conference concluded with a panel discussion focused on how to do a better job of getting the peak oil message out, and motivating communities and decision makers to take action. I think the overriding sense of it was that we are truly out of time and far too late in our responses to the peak oil threat, but that we must use that knowledge to galvanize us into action, and reach out to everyone we know in an effort to inform and prepare for the changes that will soon be upon us.

I hope you found this summary useful. Clearly, our focus on energy stocks and commodities as an investing theme is well warranted, and the game is far from over. For further reading, see my complete notes from the conference and the slide decks themselves, linked into the headings of my notes.

Until next time,

Chris

P.S. As crucial as they are, energy and commodity prices must rise again from their current levels. If you have a little speculative money to put to work, you really can't ask for better pricing than what is on offer today. The last few weeks alone have seen days when you could score double-digit gains in a single day by buying high-growth fossil fuel stocks and high-yielding energy trusts, like the ones we have selected for the $20 Trillion Report. Find out more about the $20 Trillion Report here.

Notes from the 2008 ASPO-USA Peak Oil Conference

Chris Nelder's Notes on the
2008 ASPO-USA Peak Oil Conference

September 21-23, 2008
Sacramento, CA

Proceedings: http://www.aspo-usa.org/aspousa4/proceedings/

These are merely my notes, of the key points I picked up during the conference. I hope these notes will be useful to others as an index to the volumes of material that were covered. Any errors or omissions are undoubtedly mine. Please send any comments/corrections to me.

My coverage is no doubt incomplete because I can only type so fast and much of the material went by very quickly. Consider this document an index, and go back to the source presentations to double-check the data.

My personal comments are shown in [brackets]. (?) indicates information that I probably got wrong.

Since no one can be in two places at once, I could only cover part of the split sessions that occurred simultaneously. So coverage of these sessions is limited.

For bios on the speakers, see http://www.aspo-usa.org/aspousa4/ConfirmedSpeakers.cfm

For the presentations, see http://www.aspo-usa.org/aspousa4/proceedings/ (some presentations may not be posted yet; check back)

See also the list of others' notes from the conference at the end of this document.

Please email me any comments or corrections.

Your humble scribe,
Chris Nelder
Energy Analyst
http://www.energyandcapital.com

DAY 1 – SUNDAY, SEPTEMBER 21, 2008

1:30 pm – 3:00 pm

Reporting the Oil Story – panel discussion

Erica Etelson, San Francisco Chronicle

Bart Anderson, Energy Bulletin

Neil King, Wall Street Journal

John Theobald, University of California at Davis, Moderator

Started with a hilarious clip from The Daily Show with Jon Stewart.

Neil King

A "sea change" this year in reportage on peak oil. A higher acceptance of the notion, primarily driven by price & public alarm.
If the price remains below the pain threshold, we may see coverage diminish and a loss of momentum in more efficient vehicles etc.
It's been a very strange year for the oil business, with wicked volatility but no major geopolitical events. What lessons should we draw from this? What are the bigger concepts?
Various factions…from techno-optimists to hardcore doomers. Analysts, journalists, traders…all focus on different aspects of the story, be it inventory levels, or official announcements, or trading patterns.
The Oil Drum is one of the few domains where the conversation is factual and interesting and intelligent. But there is an element of willful blindness also that we are working against in the media; when gas prices fell below $4/gal, a lot of ears started to close.
"Our problem is that the supply is old and the demand is young." – quote he heard at an IEA meeting in Paris last week.
Doomers vs. arch-optimists: the reality will lie somewhere in between, but where?
He ran a couple of informal polls amongst his contacts to predict the price of oil 6 months in the future…and everybody was very wrong.

Erica Etelson

Peak oil was one of the most censored stories of 2005, but we're past that now. Still, many articles seem to studiously avoid the term.
Google the term "peak oil" and you find yourself in a deep, dark realm where the collapse of society is a foregone conclusion.
Media has short attention span and when the pain/price level falls, media coverage falls too. Most journalists would be happy to see the price fall and stay down so they don't have to write about it anymore.
The framing of the story is a problem. It's currently framed as an industry problem, with no sense of government accountability, even though gov't has known about this issue for decades and done nothing about it. The Hirsch Report in 2005 should have been greeted with screaming headlines, likewise the GAO report; in fact there were no headlines at all. Journalists have failed to hold politicians' feet to the fire or ask them the hard questions about these glaringly serious issues.
Industry isn't going to somehow save the day with some new technology. Journalists really need to ensure that stepwise changes are made. E.g.,
- Ask for meetings with the editorial boards of news organizations.
- Contact ombudsman's office for newspapers and ask for coverage.
- Don't forget about local media. Write your op-eds and letters to the editor. At the highest levels of government, they're asleep at the wheel, but at the community level, there is much being done.
- Try to reach sympathetic ears in your alumni networks & publications.
- Minority journalists for communities of color need to get the word and get the word out faster, because they will be hit by the effects first and worst.
There actually is quite a bit of good reporting out there, but we don't make adequate use of it. Every time you see a good article on peak oil, send it to everyone you know, including elected officials.

Bart Anderson

The peak oil meme is more common now than it was, but the understanding is very shallow and driven by price pain.
Oil isn't the only crucial thing at peak. Consider peak phosphorus!
Presentation: "The Evolution of Peak Oil Coverage"
- Problem at the beginning: little awareness; media & gov't uninterested; nowhere to publish; few ways to communicate
- Around 2004, some new books (Simmons, Kunstler, Heinberg, Goodstein, Deffeyes); a few media mentions; new sites (peakoil.com, Energy Bulletin, LATOC, etc.)
- Around 2005, new communities: ASPO-USA, TOD, PCI; personal blogs & new writers; documentaries ("The End of Suburbia"), Gov't reports (Hirsch Report, GAO Report); media interest (but little depth)
- 2008: Mainstream now, with more books, web sites, documentaries, new writers, investors, regular coverage in the press esp. the financial press, and a spike in prices.
There are now 4.3 million hits on Google for "peak oil". New interest from industry and governments, and local groups (PCI, Transition Towns)
A continuing role in critiquing energy technologies, lobbying, monitoring, & working with media and allies (investors, planners, environmentalists)
What we've done right: networked, non-hierarchical; non-partisan; more volunteers; welcoming; stimulating, constant stream of content ("like an ongoing graduate seminar")
Limitations: It's all volunteers; limited to information and persuading – we can't actually do things; narrow demographics (mainly white technical professional males in English-speaking countries)
Trends: climate, politics, economics, food & ag, urban design & transportation
Other peaks: fossil fuels (nat gas, coal, uranium), other minerals (phosphorus), water, eco-systems (we have only a 13-year supply of indium at current rates(?))
New voices: Third World, women, farmers, blue-collar workers, small business, artists

Q&A

What about the "drill here, drill now" crowd? What about peak oil and invading Iraq?
Kjell Aleklett: How do we reach non-English speakers? How do we share materials that originated in other languages to English-speaking audiences?
Chris Nelder: How can we improve the factual reporting of peak oil? Etelson: Send the Peak Oil Media Guide to editorial boards. Anderson: Contact the writers directly, be nice, don't be accusatory. King: Try to establish a dialogue with journalists and editors.
How do we get economists involved? Anderson: economists are not our friends, they are a hotbed of opposition! Try to find the sympathetic ones. Etelson and Anderson: Paul Krugman, and the editors of Freakonomics are sympathetic.
Mike Ruppert: Optimistic stories are always above the fold; negative stories are always on p. 22. What's up with that? King: Disagree; new articles on difficulties of oil sands, shales, offshore, etc. have regularly appeared on p. 1 of the WSJ. There is a greater sense of urgency about peak oil now than there once was.
Ron Swenson: Desperation is driving us to oil shale, tar sands, extreme technology, etc. with greatly over-optimistic expectations, while at the same time solar and other renewables are regularly dissed. Can coverage become a little more balanced about renewables, or an improving trend? King: There are a lot more energy ads now than ever before. Energy stories of all kinds are certainly dominating the news.
Etelson: I write about permaculture regularly but I don't call it permaculture because I want to get it published.
How can we get more politicians to talk about it? King: Roscoe Barlett has been giving his talk many, many times to a mostly-empty chamber. It's a hard thing to get politicians to talk about a story that nobody wants to hear.
Liz Warren (who covered peak oil as a "most censored story" in her thesis): We seem to expect media to be entertaining; how can peak oil be presented in a more entertaining way, and how can we reach youth? Etelson: Youth are particularly interested in community gardening, permaculture, etc. King: Props to Oily Cassandra and KrisCan! [Hear, hear!]
Do IEA officials express privately a different sentiment than what is reported? King: Yes, absolutely, there are folks at EIA, IEA, Saudi officials, even President Bush who know that the options are limited going forward.

3:30 pm – 5:00 pm

Analyses from The Oil Drum – panel discussion

Robert Rapier, Oil Drum Contributor, R-Squared Energy Blog, Accsys Technologies,

Jeff Vail, Oil Drum Contributor, Davids Graham & Stubs LLP

Brian Maschhoff, Oil Drum Contributor

Kyle Saunders, Oil Drum Editor, Moderator

Robert Rapier: "The Energy Information Providers"

His first ASPO conference because his previous employer, ConocoPhillips, didn't want him to come!
Review of the most common energy information agencies: EIA, IEA, CERA
EIA is good for:
- Current data on exports, consumption, optimistic forecasts, etc. Good statistics. Outlook reports, etc.
- This Week In Petroleum (TWIP) – weekly – has the power to move markets because it has the inventory updates.
- How I use the EIA: To debunk the claims made by confused politicians, etc. To get good shared information, e.g., import data. For current reporting, e.g., gasoline stocks during a hurricane.
What I don't use the EIA for:
- Price forecasting: over the past 12 years, have been consistently wrong, by as much as 127%. Average error was 53%.
- Supply forecasting: consistently too optimistic. But the problem is that everyone uses their forecasts for policy planning!
- Zoom in on 2008 Annual Outlook: expects oil imports to suddenly drop after a long period of constant growth!
IEA (International Energy Agency): Energy policy advisor to 27 countries
- IEA Oil Market Report, World Energy Outlook, other good reports, special reports, statistics on oil, natural gas, coal, etc.
- How I use the IEA:
  - Monthly OMR (Oil Market Report) has the most current estimates of world oil supply. Excellent source of worldwide inventory data, world refining margins, etc.
  - Understanding supply/demand risks. Watch the charts, e.g., stock builds, days of forward cover.
  - IEA has adopted a more pessimistic tone than the EIA….downward revisions of OPEC spare capacity, impending supply crunch, "peak lite"
CERA:
- Clients are big oil companies, and CERA reports the story they like.
- Forecasts have been terrible since 2002. E.g., prediction of $20s - $30s in 2005 for oil price, actual was $65/bbl
- Forecasts of supply wildly overdone
- In 2008, they reversed course and noted a "perception" of supply issues.
Misc sources:
- BP Statistical Review of World Energy
- Drumbeat on TOD
- Oil Price information Service (OPIS)
- Platts
The major agencies do a great job of reporting data, but a terrible job of forecasting. Government and business leaders who depend on this data for their decisions will be badly misled.

Jeff Vail: "The Geopolitics of Energy"

"Rational extraction sets the stage for geopolitical problems." Geopolitical challenge rises as geological challenges increase (?)
"Market-driven conservation & efficiency increase in elasticity." More extreme measures are needed to ensure supply.
"Highly theoretical disputes drive very real conflict." Oil as a subset of the intersection of "nation" and "state." E.g., disputes between legal owners and moral owners of oil resources. How do you meet the needs of all stockholders together?
"Actors seek to secure their slice of a shrinking pie." If we seek to maintain our current share of energy supply as others' shares shrink, who loses? Pipelines are a good example of this, predetermining who has access and who doesn't. "Military adventurism."
"Tactical evolution increases geopolitical threat to energy."
"These developments act as positive feedback loops"
"Geopolitical feedback loops exacerbate peak oil" [interesting graph!]…Production under geopolitical reality (feedback loops) will make the reality considerably worse than the geologically feasible production curve.
"This is a global feedback system." Mexico's events affect Iraq, affects Nigeria, etc.
"'Solving' symptoms leads to alternative negative outcomes." A lesson in unintended consequences.
"Addressing causes requires radical restructuring." Radically: Decentralized? Renewable? Vernacular modes of consumption? Realistic? What is a realistic way to choose and then implement an approach to stopping geopolitical feedback loops? Really, geopolitics is a force of nature.
Our energy future isn't solely determined by what is possible geologically, politically, or economically. Geopolitics can always trump those factors.

Brian Maschhoff ("JoulesBurn" on TOD): "Saudi Aramco and the Art of Oilfield ‘Maintenance'"

What does "maintenance" mean? It really means production…maintaining a certain level of production. But "production" isn't right either, because you're not making anything, you're extracting.
Maintenance: Putting wells where no well has gone before (unswept zones). Reworking existing vertical wells (simulation, horizontal tracking)
What about existing Saudi Aramco megaprojects? 2003-2011…delays are common. A lot of inflated numbers on the heavy oil side for KSA
Madness: Monitor Saudi Aramco from the comfort of your own home. Classify and quantify oil field infrastructure from satellite photos. On a paltry budget. But we can't measure oil flowing from wells, nor make money from doing it.
Methods: Google Earth, Digital Globe imagery (Quickbird Satellite), finding wells, counting, aligning and comparing imagery with dated maps (find what has changed)
"Jeopardy!" slide…what fields are really being discussed in the press?
Looking at satellite photos, it can be tough to distinguish what is what…e.g., gas wells vs. oil wells.
North Ghawar shows major overhaul, after 40 years of operation. [Numerous slides showing progression of oil wells drilled in various parts of Saudi Arabia.]
Diagnosis: Old production is being replaced daily. But they're running out of dry rock in Ghawar. Still a lot of oil, but they're out of giant fields. Expanded production will depend on a collection of a lot of smaller fields.

Q&A:

How concerned is the US military and what are they doing? Vail: Studies are being conducted into the energy footprint of various options. Military is clearly concerned but they may not yet understand the long term implications of it.
Why didn't Robert Rapier include USGS data? Because the data is pretty worthless.
What about population? Vail: Third world is getting priced out, but there don't seem to be any good (implementable) and equitable solutions.
How much oil is left in Saudi Arabia? Maschhoff: We can only go by the information they put out there.
When will Russia's exports fall to zero? Vail: Russia is one of the few cases where population (decline) is actually working for them. But Russia is also exerting more control over the FSU countries that surround them.
What about water? Vail: Used to work on water reclamation. Water is even less substitutable than oil.
On a question about unconventional oil production, Rapier: "It's a fact that there is more than a trillion barrels of oil in shale; it's also a fact that it will take more than that to get it out."
On the Pickens Plan: Maschhoff: Transportation fuel is a huge gaping mouth that you can throw anything into and it still won't be enough.

6:30 pm – 7:30 pm

Dr. Peter R. A. Wells: "OPEC Dilemmas, Issues, and Responses"

Introduction by Steve Andrews; Toyota has known about peak oil since 1992, internalized it, and thus became the Prius.
OPEC produces 42.8% of the world's crude, proportion will grow as time goes on
When OPEC increases capacity, they get stuck with a loss in demand. How much spare capacity should they invest in? Spare capacity currently 1.5 million barrels per day (mbpd)
OPEC is diverse; price hawks in Venezuela, Iran, Iraq; others like Qatar, KSA and Kuwait with higher per capita GDP are less keen on expanding capacity
Decision making is very slow; national heritage, timing of investment, etc…save some for the grandchildren. When should they time the investment? How not to get stuck in the same situation they were in the in the 1980s? Why expand to reduce prices? Politics…Iran, Iraq, Venezuela, Nigeria, Kuwait
Fields are old, and there is competition between the old & newer producers. Kuwait, Qatar, UAE, KSA: $1,5 trillion invested, mostly in the US. They don't want the price to go too high for demand destruction, and they don't want to hurt the US too much for the sake of their investments.
New production capacity is also high risk.
Exploration success in OPEC peaked 40 years ago
The large OPEC fields are mature (fields >2 billion bbls reserves)…not much has been discovered to replace the older fields. Fields are being replaced at a very conservative rate.
World liquids supply model: OPEC is expected to make up the loss for non-OPEC supply.
Crude oil makes up 86% of the "crude oil" supply [the rest is natural gas liquids, etc.] (?)
But it's not just geology; marginal cost of supply alters the mix and the size of reserves
Balance & interaction between geology, money and politics. Balance affected by long lead times in supply projected 5-15 years forward, and ultimately the finite nature of supply. Insufficient spare capacity leads to high oil prices and demand destruction. Excess spare capacity weakens oil prices and can reduce supply at the margin.
Most of the time, spare capacity doesn't matter to price. It mattered in the 1980s when there was too much spare capacity, but that floor was set by the needs of the KSA budget and it stuck for 20 years. Around 2002, KSA capacity started to fall, in part due to increasing demand from China, but there was also the declining production from non-OPEC. Then price started to rise dramatically. Now high prices will lead to some new capacity and a short period of lower prices.
We have produced 864 billion (bn) barrels (bbls) to date; 1,111 bn remaining & TBD (HIS data)
According to USGS/CERA, another trillion bbls remain to be discovered. But we have nowhere near that.
Enhanced Oil Recovery (EOR): In US peaked around 2000 via miscible non-hydrocarbon gas injection (CO2, N2)
US EOR: specific to field, reservoir, oil type, location…works best in poor reservoirs with light oil; not so much for deepwater. No gains for light-medium oils in good quality reservoirs
Global EOR: potential 220-470 billion barrels (CERA: 592 billion barrels) and most of that is in OPEC, so we won't see it for a long time in the future.
Total potential: ~ 3 trillion barrels
Peak around 2012-2013 for conventional crude. (CERA estimate way, way higher, assumed to be filled by exploration success and EOR)
Methodology: using simulation model approach to crude forecasting, using probabilities, time between discovery & first production, field-by-field specs
EOR: good match to historical production for non-OPEC.
Most non-OPEC, non-FSU EOR projects are offshore (80%!) (?)
625 bn bbls produced, 530 bn to go for non-OPEC; we're at the peak for non-OPEC.
Most of OPEC is "above ground" risk; for non-OPEC, "below ground"
OPEC: issue is not reserves but maximum sustainable rate and pace of getting there.
KSA field-by-field assessment: total remaining: 278 bn bbls; production to end of 2007: 115 bn bbls
Iran: produced to end of 2007: 61 bn bbls; Total remaining: 90 bn bbls
Iraq: produced to 2007: 31 bn bbls; remaining: 177 bn bbls

Venezuela: 58 bn bbls produced by end of 2007; remaining: 322 bn bbls…will mostly be produced after 2020 because it's undesirable heavy oil
OPEC production forecast: Will reach 40 mbpd, no higher, mainly due to political decisions
Challenges for OPEC
- Balance creation of capacity to guesstimate future call on OPEC
- Difference between non-OPEC liquids and demand
- Excessive investment needed…
Natural gas liquids (NGL): Peak around 2020; non-crude oil liquids (CTL, GTL, tar sands, etc) peak around 2025 (?)
Peak liquids: ~98-105 mbpd around 2020 (2017-2030)…demand has surprisingly little impact
World crude oil peaks around 2015; around 2015 will be a major crisis in price.
Other liquids like biofuels, tar sands, etc. help to defter world liquid peak by 3-5 years, but cannot ramp up quickly. They take a long time & a lot of investment.
Does not believe that north Ghawar is about to water out. They will have to start EOR in the region within the next few years because it will then begin to water out.
Re: Kashagan, the problems are technical and environmental. Expensive gas extraction & processing & reinjection; also impacts on sturgeon. 2013-2015 is when oil production might begin, and will ramp up slowly, disposal of sulfur will be an issue.
Estimating yet-to-be-discovered oil is "an opinion." About 300 bn bbls yet to be discovered; few oil geologists agree with USGS.

DAY 2 – MONDAY, SEPTEMBER 22, 2008

8:00 am – 8:30 am

Opening Remarks

Debbie Cook, Mayor of Huntington Beach, CA, ASPO-USA board member

Steve Andrews, Co-Founder, ASPO-USA

Kjell Aleklett, President, ASPO-International

Andrews: Comments about the meltdown in the markets…we are at the most severe point in the markets in our lifetimes.

There will be an update on the bet with CERA. ASPO does not believe that world oil production will reach 100 mbpd by 2017…

Kjell Aleklett

ASPO International formed in May 2002 by Aleklett, Colin Campbell and others.
Some general comments about what peak oil means, and a brief history of the organization.
Reviewed some per capita data from various countries.
Discussed the impact of the net export problem.
Regarding African production, "It's the biggest robbery in history."
Quoting King Abdullah of Saudi Arabia: "The oil boom is over and will not return. All of us must get used to a new lifestyle."
Made a bet with Tony Hayward (of BP) that in 10 years, oil production will be lower than it is today, and the amount of the bet is the price of a barrel in 10 years.

Watched a clip from the movie Three Days of the Condor

8:30 am – 10:00 am

OIL: Once Cheap, Never Easy

Panel discussion

Ken Verosub, Professor of Geology, UC Davis

Gill Mull, Alaska Geological Survey, retired.

Jeremy Gilbert, Barrelmore, Ltd. formerly BP Chief Petroleum Engineer

Sally Odlund, ASPO Board Member (Moderator)

Gill Mull is ill and was unable to attend but his presentation is posted online.

Ken Verosub: "Petroleum 101"

Recalling Sinclair oil company and the notion that oil comes from dead dinosaurs. Oil in fact calls from small marine micro-organisms in the ocean, which fall to the bottom when they die, to become incorporated into source rock as they decay. A porous rock like sand or carbonate reef then must be deposited to collect the material. On top of that there must be a cap rock to secure the deposit in a trap, and keep it from migrating to the surface. Then the organic material must be cooked at just the right temperature: the "oil window." Most oil comes from rocks that are hundreds of millions of years old.
Reviewed various kinds of stratigraphic traps.
Reviewed seismological methods of surveying traps, like "thumper trucks" and "geophone arrays" that listen for the thumps, on up through 3-D computer models.
All of the easy oil has been found. Efforts to find oil are getting more extreme and technologically complex.
Reviewed the rough bell curve of an oil field's production, the Hubbert Curve, and his correct prediction of the peaking of US oil production in 1971.
Discussed the relationship between discovery and production curves. We are long past the peak of oil discovery, and have been running a growing deficit for years.
Ridiculed the scientific illiteracy of Newt Gingrich's "Drill here, drill now, pay less" campaign, and the unsubstantiated claims of Wall Street analysts who claim that we just need to drill more (most of whom, thankfully, probably don't have jobs anymore)
Deepwater offshore is where much of the remaining oil is to be found. But we won't find any big fields…reviewed Hubbert Curve of oil discovery, showing the declining size of oil finds.
Even if we did have some large new finds, it takes about 10 years to bring any of it to market.
How much time do WE have left?:
- Total US reserves: About 20.9 billion barrels
- Total US daily consumption: 20.7 mbpd, of which we import 11.7 mbpd
- Domestic oil, daily consumption: 9 mbpd
- US domestic oil, annual consumption: 3 billion barrels per year
- 20.9/3= 7 years
- So: we only have until about 2015 +/- 2 years for remaining domestic production!
Global competition for remaining oil, with a likely global peak around 2010, means that prices must rise to resolve the tension.
World:
- 32 billion barrels per year (bpy), call it 35 billion bpy/365 or ~100 mbpd is the theoretical peak.
- Again: 2015, +/- 2 years…"It's crunch time!"
Official future production estimates defy this reality…
As consumption rises fairly slowly in industrialized countries, it's rising much faster in developing countries, leading to a fairly sharp global increase in the rate of oil consumption.
"This is a global problem!" In China, everybody wants to drive an SUV, and aspire to a US standard of living.
Since 1965, US consumption has increased 70%, while China's has increased over 3000%
100 mbpd on the chart is likely to be around 2016, the maximum theoretical peak.
"In about 7 years, demand for oil will exceed maximum total oil production. Then what happens???"
Why can't we be like the Europeans, and use far less oil per capita? Are you ready to live like a European and cut your oil consumption in half? Then which two of your family's four cars are you willing to give up? Which processed foods will you give up? Which half of your wardrobe? Etc.
But because there are so many more people in the developing world than in the US, a 50% reduction in our energy consumption only gives them a 33% gain. Inversely, if the rest of the world were to increase their consumption by 100%, we would have to reduce ours by 80%.

Gill Mull: "Alaskan Oil: Prudhoe Bay Discovery and Outlook for North Slope Oil"

Mull is ill and unable to attend, so some slides were highlighted by Sally Odlund of ASPO.
TAPS has min capacity of 200 Kbpd to keep it flowing.
Some photos and maps of ANWR and various wells
Alaskan oil production peaked in 1988
ANWR has surface seeps, rich source rocks with anticlines and caps
P50 [50% probability] estimate for ANWR: About 10 billion bbls in aggregate
All of the new fields put together can't come close to overcoming the peak profile caused by the North Slope

Jeremy Gilbert: "Peak Oil Global Overview, An American Wake Up Call"

"It's time for you guys to wake up!"
First wake up call: [ASPO conferences in] Uppsala 2001, then Denver 2005….Now, after 7 years, what's changed?
While America slept:
- Discovery rates continue decades-long fall
- Calculations suggest reserves can't meet demand projections
- Some recognition of political, investment risk in developing resources
2008: No improvement in resource situation. New, more accurate calculations of supply define earlier and clearer peak. Political will to increase supply clearly absent; prices not stimulating investment to increase supply.
IOCs are not investing the way we have hoped and expected.
Oil consumption per capita: The US, Canada and the Middle East use the most by far, and there has been little changed on a per-capita basis. [Excellent morphed maps!]
IEA's wake up call: "There are three problems: Geology, investment, and policy of main producers. These, taken together, make the future of oil very difficult." – Fatih Birol, IEA Chief Economist
Some wild statements of wishful thinking… "In your dreams"
- The explorers will fix it; there's lot of oil out there - think of Jack and Tupi; add in the OCS (Outer Continental Shelf) and ANWR (Arctic National Wildlife Refuge)
- Worldwide reserves/production ratio is still 40, there's lots of time to find other energy sources.
- Technology will deal with the problem: add just 10% to recovery efficiency and we're fine.
While we still have people like Kissinger and Gingrich giving us palliatives, we're not in a dream, we're in a nightmare.
Discovery peaked 40 years ago; production increases all the time, but what we're producing is the oil we discovered 40-50 years ago. Once the cushion of discoveries from the 1940s-60s is used up, where will we turn? We discover about 1 for every 4-5 bbls we use today.
If all of the OCS were opened to exploration, we might get a 20% increase in reserves. You have to look 15-20 years ahead to see any substantial amount of that oil come to market. "This is not going to help you!" It will not move the peak.
The reserves/production ratio…oil production doesn't go flat and then hit the end and plummet to zero; it declines in a curve over time.
The world falls from ~85 mbpd to ~18 mbpd in 40 years, and ~8 mpbd in 60 years! So yes, the oil will be produced, but not at nearly the rate we now have.
New technology: Little indication that recovery efficiency is increasing in established fields. Main benefits seems to be in dealing with unexpected problems and in finding small accumulations.
We're trying harder and drilling a lot more wells, which close to doubled over the last few years, but production has been flat.
Russian oil production was counted on to keep non-OPEC production growing. But their production has fallen from about 9.9 mbpd in 2007 to about 9.7 mbpd in 2008. It looks as though their production has peaked (for whatever reason).

Consider that energy growth is relative to GDP growth, then realize that non-OECD is way behind us.
High gasoline prices produced a decline in gasoline consumption growth since December 2007, with about 100-150 kbpd of gasoline consumption decline per month
Looking at long queues for fuel when shortages developed in China and Scotland recently.
WAKE UP, AMERICA!

Q&A

Gilbert: The biggest problem is the general ignorance of the oil supply/demand situation. Proposes that those who take a 10-hour class in supply and demand on oil get a 10% cut in their income tax. [If I may: A capital idea!]
Verosub: The message needs to be that the problem is real, it's huge, it's global, and it's transformational. Some people will die from famine, disease, etc., but civilization as a whole will survive. This will change the world in a way that we have not seen since the industrial revolution! We need to throw resources at this problem in an international way. And we should stop throwing money away on space trips to Mars, bad biofuel policies, bridges to nowhere and other wasteful projects.
Gilbert: Can't account for Nansen Saleri's much more optimistic expectations for reserve growth. New tech does in fact give higher efficiency & greater recovery, with recovery factor increasing from 30% of oil-in-place years ago, to as much as 50% today, but we need that new technology to deal with the more extreme characteristics of the remaining fields. [The implication being that net production will not grow due to EOR.)
The fact that remaining oil is largely heavy and sour will make life more difficult.
Verosub: Cuts will be in manufacturing, food production, etc., not just driving less.
Gilbert: About a half-trillion dollars per year flows into the Middle East for oil. We'll see wars, we'll see famine, we'll see increased blackouts and shortages.

10:15 am – 11:45 am

Pipedreams: Oil & Gas Delivery Bottlenecks

Panel discussion

Morey Wolfson, ASPO-USA Board Member, Utilities Program Manager at Colorado Governor Bill Ritter's Energy Office

Matthew Simmons, Simmons & Co. Int'l

Randy Udall, ASPO-USA Co-Founder (Moderator)

Udall: Check out good report on shale gas by Deutsche Bank Securities Inc. research analyst Shannon Nome, "From Shale To Shining Shale: A Primer On North American Natural Gas Shale Plays" [I was unable to find this online.-CN]

Morey Wolfson: "Google Earth Fly-over Global Energy Infrastructure"

A breathtakingly fast, head-spinning tour of major world energy projects using satellite photos from Google Earth. [To see it, first install Google Earth, then open this file: ASPO-USA_Global_Energy_Infrastructure.kmz]

[I could only take very fragmented notes of this presentation, it went by fast. I'm not sure I got all the stops. Notes are from Wolfson's verbal commentary.]

Sakhalin Island, a huge Russian project, $20 billion project. Massive time and cost overruns.
China: Three Gorges Dam. Huge hydro project (600' tall, 1.5 miles long).
China: coal fired generating station. China will build about 1 plant a week for the next decade. China has overtaken the US as the top emitter of GHG.
Newcastle coal plant in Australia…largest thermal coal facility in the world. Japan is their top coal customer.
Australia: Uranium mine…Oz has the largest uranium reserves in the world
Bangladesh: At sea level, likely to have mass refugees from rising sea levels
Ras Tanura refinery in Saudi Arabia
Ghawar field in KSA, producing 5 mpbd
LNG terminal in Qatar, the largest gas exporter in the world. New export facility is the largest such facility in the world.
Nuclear reactor in Iran…expected to build 6 new plants by 2021
Antwerp refinery, with 360 kbpd production, second largest in UK (?)
Copenhagen wind farm, a huge offshore wind farm.
Nigerian port, largest exporter of oil in Africa.
Brazil: sugarcane ethanol facility.
Columbia: a coal port from a nearby coal mine (world's largest open pit coal mine)
Venezuela: oil port facility
Gulf of Mexico, Thunder Horse oil platform ($1 billion platform)
Houston Ship Channel, approx ¼ of US refining capacity
Lake Charles LNG importation terminal
Iowa corn ethanol facility…US uses more ethanol than any other country in the world
Palo Verde nuclear facility outside of Phoenix, AZ
Nevada CSP plant – 64 MW
Palm Springs wind farm
Powder River basin in Wyoming, huge coal operation, 25% of US coal production
Alberta tar sands project
Alaska pipeline, terminal in Valdez, AK
Choke points: The Strait of Hormuz, where 25% of the world's oil is moved
Pakistan: Gwadar Port, project in partnership with China
Red Sea strait, 3+ mbpd flows through
Suez Canal, transports 4 mbpd
BTC pipeline
Turkish straits, 2.4 mbpd flows through there
Strait of Gilbraltar
Panama Canal, 0.5 mbpd flows of oil…may not be expanded because the Northwest Passage is now a reality (saving 4000 miles)
Straits of Malacca, a chokepoint in Singapore

Udall: Coal train leaving Powder River basin is about 150 miles long (?!)

Matthew Simmons: "Grappling with Energy ‘Risk'"

[See video and related interview at the conference here.]

Aging Infrastructure, Workforce, etc.

The combination of Ike, Bernanke and Paulson made for a week that will go down in history. How casually we take the concept of risk!
Era of deregulation, "transparency," globalization of capital markets and securitization were suppose to take out "financial risk"
Derivatives were supposed to disperse risk "elsewhere." Risk has reached 300 or 400-to-1 in some cases. We've made a situation that is far worse than the 1920s.
Proper size was deemed to create a system that's too big to fail
LTCM was a prelude…Enron happened 7 years ago and was a prelude to what might happen next
And the lava gushed…Merrill, Fannie, Freddie, Lehman…
Risk is a very real term, still exists, leverage can be extremely dangerous. The greater the risk, the faster big systems can fail
Peak oil and gas has ominous parallels to financial crisis. Most observers do no graphs of peak oil, (?) or how savage a post-peak world can be
Were Gustav and Ike the initial tremors of the big bang crisis?
Recent collapse in petroleum prices created a false sense of security
Hurricane aftermath: GoM has been offstream since early Sept (~30 million barrels not produced)…many plants still not producing…LOOP pipeline and HSC were crimped. This is all draining inventories.
Could we have a "run on the bank" with fuel stocks like we have in the financial system and breach MOL [minimum operating levels]?
Topping off tanks literally creates a run on the bank.
An example of how fast we could break the bank:
- 220 million vehicles
- 20 gal capacity each
- Average tank has 5 gals in it
- Topping off ~15 gallons x 220 million = stock draw of 78 million barrels.
- Current finished stocks: ~87 million barrels!
What happens when stocks deplete?
- Food supply in jeopardy within a week
- Economy slows to a crawl
- Financial markets panic
- Energy risk is finally grasped.
If heating oil also becomes scarce, a cold winter will be a disaster in the US. A few weeks of winter could deplete usable stocks. 9-10 million homes rely100% on heating oil for winter heating.
What are the odds? No one knows. Reported petroleum stocks are only estimates; there is zero data on secondary/tertiary stocks. The odds of this eruption occurring are higher than another hurricane occurring.
"How could the world's most prosperous, advanced society move into harm's way so fast?"
Peak Oil is like Gustav/Ike squared. The ebbing of supply is equivalent to current crisis…are we flying blind into a Cat 6 storm?
We need to demand country-by-country production data, including key fields, various grades…
Key fault lines:
- Energy intensity to create usable petroleum from unconventional crudes (shales/tar sands).
- Drilling rig tightness & shortages, but we have no data! (No rig count! We just have estimates).
- We lack realistic expectations…
Is the size of oil markets "too big to fail?" 85 mbpd is the world's largest single industrial market by several fold. But there are no regulators like the Fed, etc.
Other risks:
- The straits: Malacca, Hormuz, Yucatan/Cuba passage, etc.
- Key facilities: Abqaiq, LOOP, TAPS
What about insurance? SPR is limited and should not be used to manage prices. Untested EIA member country energy stocks. Line fill in pipelines and tank bottoms, then we're out of gas (finished product). Afterwards, we are in an uncharted sea and probably "out-of-gas."
Could an energy pandemic really happen?
Most global leaders have no idea of any of these risks. Peak oil is still barely understood.
It took 5 months to melt down the whole financial markets.
Energy markets could unwind in less than 30 days. Risk is real, energy risk is real risk squared.
Rust is also energy risk squared. 98% of the infrastructure is built out of steel…a ticking time bomb.
Energy oxymorons:
- Energy independence: 100% impossible.
- Improved technology: zero impact on any of these risks.
- More drilling: we have no spare rigs and few places to drill with timely high impact.
We live in a dark world of hidden data on energy.
All past great crises were also ignored until we hit the tipping point.
Peak oil is the singular and most ominous risk of the 21^st Century.

Q&A

Topping off tanks could cause shortages, and it will take a long time to rebuild the supply cushion. Running out of food is the most serious implication. Shelves can go empty in 5-7 days.
This last week was potentially the "big bang"
The Council on Foreign Relations (CFR) hasn't had a serious energy event since 2004. They're almost energy illiterate, despite being geopolitical experts.
If we radically increase tight sands and gas… Barnett Shale has saved us from some serious gas supply issues. Net energy of Barnett Shale (traveling 70-80 miles per day to the rig, plus transport of rock, etc.) is questionable…it could be a net energy loser. We have real limitations of rigs, people, etc. We're not gonna flood the world with shale gas.

I wouldn't want to be in a presidential cabinet for one minute…
Peak oil is so much more real, and more immediate, and serious than global warming, but we have a large consensus about the latter (when the data is even less clear) and near total illiteracy on the former.
Comment on Peter Wells' more optimistic assessment of KSA reserves last night: We really don't have any idea how much is there. 110 billion proven, 260 billion est. What we really need to know is how much is light sweet, and when/how fast will the largest fields decline?
If I could get over the worry about people topping off their tanks, I'd be more optimistic. We're going to have to rebuild our energy infrastructure. The Starbucks economy came to a grinding halt, and we're going to have a long period of Wall Street remorse.
Dr. Sadad al Husseini says that the world basically has no spare production capacity left, and I believe his estimate.
The fact that we have to guess at the global depletion rate should make us all nervous. Why don't we have better data on depletion?
When will it be possible for an American politician to tell the truth about energy? I think it's possible, based on my experience in speaking before many audiences in the last several years.
Re: the new IEA report in November…Birol has been working on it full time for months. For the first time we'll have a supply driven model. Birol is having a terrible time finding any significant pockets of good news. All of the agencies are under incredible pressure to cheer up their news. Stay tuned for November 15, it should be a shocker!
We need to liberate the workforce and let people work from home…that day might finally be here.
We can't actually ration anymore. What we did in the 70s with even-odd days required service station attendants…only about 1 out of 4 stations has attendants anymore! We will need to print up rationing coupon books like we did in WWII to prevent a "run on the banks" in gasoline. Evidence suggests that many people are running around with $5 or less worth of gas in the tank!
Get rid of vulnerable investments. Buy infrastructure companies because we have to rebuild everything (Baker Hughes, SLB, RIG, etc.)
Re: the Energy Watch Group report saying that oil actually peaked in 2006. EIA's databook shows that 2005 production was the all-time peak near 74 mbpd, slight decline since then. Newest data just barely exceeds that all-time peak, but it is subject to further revision. It's very hard to imagine how we could ever get to 75 mbpd of crude.
Should we try to print our way out of the financial crisis? We're lucky that foreign countries are still willing to ship us any oil!
Check out The Hunt for Black Gold program on CNBC with Maria Bartiromo, including an interview with Simmons this Wed night!

12:30 pm – 11:45 am

Awards

Julian Darley, John Theobald and The Oil Drum received awards

Jim Buckee, Talisman Energy: "Peak Oil and Resource Nationalism"

World oil field sizes: the top three fields (Ghawar, Burgan, Cantarell) are huge compared to everything else. Ghawar is unknown, but the other two are in decline.
97% of the world's known reserves are in 10% of the fields.
Prudhoe Bay (and indeed all fields) go into exponential decline.
Samotlor, Forties, West Texas – all in terminal decline. [Charts showing numerous fields in terminal decline.]
On average, fields decline after 50% has been produced, on average decline at 10% pa. Depends on quality of the reservoir, facility constraints, etc.
Demand growth 1.5% pa. World decline: 5-7% pa. Decline will be 50-60 mpbd in 10 years (6 Saudi Arabias).
[Numerous detailed maps and charts on Saudi oil fields…Abqaiq is good, north Ghawar is good, but south Ghawar is bad.]
Ghawar 174 x 16 miles…190 bn bbls OOIP (assuming 60% recovery factor). Reserves 80-90 bn bbls… 5 mbpd current production.
Cantarell…massive decline rate
Sadad al Husseini: "natural declines in existing capacity are real," getting KSA to 12 mbpd of production would "wreak havoc within a decade."
Chairman Farouk Al-Zanki: Burgan "peak output in 2007 at 1.7 mbpd not 2"…reserve uncertainty
Daqing (16 bn bbls): liquids 3% decline
Alternatives: rate vs. volume. World NGL production will peak in 2010-11 (over 9 mbpd)
World XTL (anything-to-liquids)…peaks at 2.5 mbpd in 2012.
If conventional oil reserves are 750-1000 bn bbls, decline is 50-60 mbpd over 10 years. NGLs (probable), yet to find (10-20bn bbls), EOR, plus bitumen/extra heavy all together equals about 300 bn bbls, and can't make up for conventional decline.
Why Majors are quiet on peak oil:
- In a big company, CEOs are advised by economists: "commodities always go down," "ingenuity overcomes scarcity," …Club of Rome, Malthus cast ridicule on scarcity arguments
- "There is plenty of oil we could get at it" - ignores volume vs rate argument!
- "Low cost producer wins" – true but opportunity missed.
- Political implications? Heavy implications!
- There are signs of change: "end of cheap oil"
- Predicting oil price is difficult
Industry Outlook
- Exploration is tough – F&D [finding & development cost] is rising
- Industry is extremely tight: people, services, equipment
- Costs have doubled in the past 3-4 years
- Industry fights declines every day
- No opposite of a train wreck. Things don't suddenly get better than they have been.
Resource nationalism is rampant!
- Host gov'ts want sovereignty and control, not tax collection. Also a rebalancing of power and status with the West.
- Mineral resources deplete – finite pie to cut up
- Not limited to OPEC!
- But oil in the ground has no value!
- Governments should maximize value…leave some in the ground
Various slides on the share of revenues depending on the PSCs [production sharing contracts]
Resource nationalism
- IOC [independent oil company] motivation is to grow production, reserves, hence revenue
- But host government motivation is more complex
- How much money is enough? An empty purse is bad but in high prices other factors play
- Do mechanisms exist to spend money usefully?
- What to do with petrodollars?
- Oil as a weapon (Venezuela, Russia, etc.)
Current account balances are terrible for India, China, etc., and are huge for Venezuela, Libya, etc. Remaining fields with access to outside investors have extremely low financial returns.
Rise of the NOCs [national oil companies]
- Libya takes 55% from Oxy
- Shah takes 55% from Anglo Persian
- Venezuela takes 60%
- KPC took over Gulf Oil, etc.
Majors are rather minor in terms of reserves! Exxon, the largest of the "majors" is only #17 worldwide in terms of reserves!
Rise of the International NOCs (INOCs): Statoil, Yukos, BP-TNK, etc. Benchmarking and chest thumping. ONGC, CNPC, Sinopec, CNOOC etc. are serious competitors.
NOCs have problems
- Uneasy relationship between NOC and government
- Often used as a piggybank by gov't, starving reinvestment (Pemex, Petronas)
- Upper echelons often choose other than by merit
- Corruption – money siphoned off
- Contract and sourcing sub-optimal
- NOCs reflect the national culture…deference, unwillingness to say no, promotion by status or age, bad news messenger gets shot…
- Inefficient: $15.28 revenue per barrel for IOC vs. $5.25 for NOC
Exports fall faster than production. Population growth, food prices, subsidies for fuels, etc. In Indonesia, subsidies are 30% of the state budget!
NOCs and INOCs get priority
But NOCs provide more certainty for complex projects, and are aligned with host governments (as opposed to service companies)
Not all governments want neo-colonialism
The problem of reserves stalls progress.
- Oil companies are partly valued in the stock market by booked reserves
- In order to book reserves there must be "ownership"
Gap between supply and demand increases relentlessly between 2005 and 2050. The world is expected to consume over 693 bn bbls of oil and over 2,500 tcf of natural gas from 2005-2025. By 2050, oil is very expensive and limited to transportation.
On the demand side, OECD is still falling but non-OECD is still growing
World produces 30+ bn bbls pa, replaces < 10 bn bbls
World's reserves dominated by large fields
Signs of decline in largest fields
Alternatives can't offset decline rate
Nationalism reduces access for IOCs, reduces efficiency
Demand is still increasing
Price of oil is going up

Q&A

Natural gas and oil have different uses, so gas is a very limited substitute for oil. Not enough overlap. Thermal equivalents of oil and gas reserves are about the same!
But peak gas is actually about 5-10 years after peak oil.
Is it possible that the Club of Rome predictions could be true, but late?
Ingenuity will not solve this problem.

1:30 pm – 3:00 pm

Economic Impacts of $100 Oil: Energy is the Original Currency

Panel discussion

Jeff Rubin, Chief Economist, CIBC World Markets

Herman Franssen, International Energy Associates

Jim Puplava, Financial Sense (Moderator)

Jeff Rubin: "Triple Digit Oil Prices Will Reverse Globalization"

Rubin was unable to attend, but a video presentation of his remarks with charts was shown.

Transport costs have to become incidental. Globalization must be reversed.
At $100 oil, transport costs are 40% of total shipping costs. At $200 oil, it's 80% of total shipping.
Global trade is now about shipping and logistics, not the lowest labor costs.
At $150 oil, it will be a quadrupling of tariff rates.
This will take us back to the 1970s…
Cost of shipping a standard 40' shipping container from Shanghai to NY: Went from $3000 a few years ago to about $9000 today.
Cost of shipping ore to China to make hot rolled steel and then shipping it back to US adds about $90 to an $800 unit. Consequently US steel production is actually up now.
Who would have thought that high oil prices would breathe new life into the Rust Belt? But that's what's happening. And it's not just steel – it's in many industries and products.

Herman Franssen: "Adjusting to a High Cost Energy Economy: Winner and Losers"

OPEC meeting in Sept 2008. OPEC leaders are getting very worried. Price hawks wanted to cut production to defend price, but collapse of US financial markets took prices back up again.

US inventories are below the 5-year average. Inventories for gasoline are extremely low – panic in Arkansas and elsewhere for gasoline supply.
Will be surprised if this year's global demand growth is over half a million barrels per day. IEA estimates 0.69 mbpd growth (0.8%) for 2008, 0.89 (1.0%) for 2009. (IEA, Monthly Oil Market Report, September 2008)
Huge increase in demand in OPEC this year.
North America supply growth in 2007-2009 depends on biofuels and tar sands growth
Call for OPEC oil down in 2009 (~ 1 mbpd less than in 2008) according to OPEC. This is a function of weak demand, strong supplies (crude + NGLs + biofuels)
OPEC's view was that non-OPEC supply would increase by 10.4 mbpd even without Angola and Ecuador over 2000-2008!
EIA thinks surplus capacity will increase by over 1 mbpd in 2009
OPEC believes OPEC spare capacity will grow from 3 mbpd in 2008 to 6 mbpd in 2010! [Ed: 3 mbpd of spare capacity today is highly doubtful.]
No major energy legislation between Carter and second term of GW Bush
- Post 1980: Energy left to market forces. By contrast, Europe and Japan increased fuel taxes; Europe moved to diesel (25% more efficient) and Japan developed the hybrid engine.
- 1985-2006: US oil consumption rose by 5 mbpd; Europe's by 3 mbpd. US oil production fell from 10.6 to 6.8 mbpd; Europe's rose from 4-5 mbpd…
- Result: Expanded EU of 450 million people and Japan's 130 million people consume about the same volume of oil as the US with 300 million people.
Revised EIA Outlook for energy through 2030 of March 2008
- March 2008 EIA Outlook: US oil consumption to rise from 21 to 25 mbpd by 2030.
- Oil imports stable at around 12.2 mbpd in 2015, rising to 12.7 mbpd in 2020…
US slowest in the move towards efficient cars, behind EU, Japan, China, Australia, Canada, and California.
Oil consumption is an indicator of the wealth of nations.
Huge increase in demand in China and India spell the end of globalization?
Expecting about a doubling of cars between now and 2025
With 9.5 billion people by 2050, we would use 138.8 mbpd worldwide at 1% demand growth!
A French study showed that if there were absolutely no constraints on further oil development, liquids production would peak at around 2020-2028 just shy of 100 mbpd.
The oil supply outlook;
- Assume that supply will always meet demand at reasonable prices
- If projected supply fails to materialize, "there is no Plan B."
IOCs only have access to 6% of the world's remaining reserves. Oil reserves held by new Russian companies: 6%. Less than 25% of worldwide reserves are accessible to private international capital.
What kind of peak? Mt. Massive, CO (long flat "peak") or Mt. Rainier (peak with short plateau at top) or Matterhorn (sharp peak)
As regards OPEC, "they may be sons-o'-bitches, but they're our sons-o'-bitches"

Andy Weissman: "Time to Stop Playing Russian Roulette with the U.S. Economy –Urgent Need for a Realistic Strategy"

Electricity & gas crisis could be just as severe as peak oil. Impact of $100/bbl oil not limited to transportation.
Electricity & nat gas = 56% of total energy use
Could lead to $150/200 bbl electricity
Global LNG price already near parity with oil. Spot price already near parity this winter despite multi-year low US imports
While prices could moderate in '09 and '10, premium pricing likely by early next decade.
We'll see shortages of global LNG by 2012-2013.
Potential doubling of both nat gas and electricity prices.
- Half a trillion dollars per year increase!...$5 trillion impact over 10 years.
- Prices exquisitely sensitive to supply/demand balance as first part of 2008 demonstrates
Need new approach to energy planning.
- Needless supply risks should no longer be tolerated
- Future of US & global economies at stake
- Requires far more realistic, more hard-nosed approach to developing comprehensive strategy.
- Critical not to over-rely on lowest common denominator, feel-good solutions. Feasibility & cost-effectiveness must be rigorously demonstrated.
- Minimizing consumption growth & ensuring reasonable supply are not competing strategies!
Five essential steps
- Far greater sense of urgency required. Few other issues likely to affect nation's future as deeply.
- Replace EIA to provide realistic estimates of supply & demand. We can't tolerate bad forecasts any longer! We're currently flying blind! Estimates mislead rather than inform. Requires a new National Energy Security Supply Board. There is absolutely no time left to develop a comprehensive program to meet our energy needs. The precise date of the peak isn't that important when it takes 7-10 years to develop mitigation strategies. Until the federal government issues more realistic numbers, the oil companies aren't going to do anything different.
- Develop comprehensive national energy strategy applicable to energy use across the board. Must include electricity & natural gas, not just oil. Integrated planning essential. Market will ruthlessly seek out lowest cost BTUs and push prices to parity.
- Maximize use of all cost effective domestic resources that can be developed in an environmentally sound manner. What's going on is crazy at the national level! We can't afford to rule out resources or rely on pipe dreams. We have no national energy plan, nor an effort to develop one. Instead we need the most rigorous planning possible.
- Use best expertise available to evaluate limitations of every supply option in objective, cold-blooded manner. Include limitations on available capital.

Jim Puplava: "The Economics of Credit – The Worst Is Yet to Come"

Recession vs. "Muddle Through"
- Chicago Fed National Activity Index, using 85 indicators, shows that we are likely heading into a recession
- Fed of Philadelphia, State coincident indexes showing distress in the economy
Data on losses and writedowns
Credit crisis phases:
- Phase I: writedowns, raise capital
- Phase II: Bailouts
- Phase III: Monetization
Debt tsunami: US nat'l debt went from $1 trillion in 1998 to $9 trillion in 2007
US Fiscal Crisis – Baby boomers 78 million @ $50K year in SS payouts = $4 Trillion annually!
Current future liability of the US government: $70 trillion
Inflation on the wane: PPI less Fed funds rate near all-time high
Commodity bubble: corn and barley supplies are near all-time lows. Copper and aluminum inventories extremely low.
[Good charts on relationship between energy and population.]

Q&A

Weissman: We have an increasingly unstable situation, and it's frightening.
Franssen: We must hope that the EIA will start to take depletion into account properly in their models. Latest IEA models assume sharp increases in imports, totally unrealistic. So the price mechanism will resolve the tension.
Weissman: When you take the covers off the energy data, it's ludicrous to think that non-OPEC oil will increase. We're talking about the wrong set of solutions right now. We need to talk about the impending oil crisis in a whole different way.
Franssen: Viable scenarios for taxing oil consumption to reduce demand? Not a snowball's chance in hell that any politician will support more taxes. Consumers stretched to the breaking point couldn't take it anyway.
Puplava: 90% of the time, the markets are irrational, so they're not a good allocator of resources in the short term, but in the long term, they basically are good at it. Weissman: if we wait for markets, which respond to very short term signals, to address this long-term challenge, we will be very disappointed in the results.
Franssen: If OPEC suppliers were fully rational, they would either freeze or lower the current levels of oil production, but they would never tell us!

3:30 pm – 5:00 pm

4 Billion New Consumers: What Asian Growth Means for East, West and the World

Panel discussion

David Fridley, Lawrence Berkeley National Lab

Vince Matthews, Colorado State Geologist

John Theobald, ASPO-USA, UC Davis (Moderator)

David Fridley: "China and Energy in the 21^st Century"

[Missed first part of presentation]

80% of electrical energy is generated by coal in China
Just last year China added 105 GW of power generation (equivalent to building California's entire base twice a year) almost all of it from coal.
China has third largest reserves of coal. China is moving toward net coal imports, largely due to price differentials with imports/exports
CTL and coal-to-chemicals is growing.
- Total CTL capacity is forecast to reach 50-60 mt by 2020. Current CTL requirements: 4-5.5 ton of coal per ton of product; 10 tons of water per ton of product.
- Shenhua is commissioning a 1 million ton direct coal liquefaction plant in 2008
Coal-to-chemicals production, targets & requirements
- Methanol production is displacing biofuel production
- Coal is increasingly viewed as a chemical feedstock
- In 2007 China consumed 9 million tons (Mt) of methonal; 2.7 Mt blended with gasoline
- 2010 production capacity is expected to reach 39 Mt
Can China produce the coal it needs?
- If Chinese steel and cement peaks in 2015, and all Asian countries meet their efficiency targets, and we don't have a global financial meltdown, then the scenario shows that the IEA's demand-driven forecast shows a gap opening by 2015.
- EWG report supports similar outlook (actually worse)
- Prime coal exporting countries to China are declining: Vietnam, Indonesia, Australia (short term problems)
- Chinese coal imports increasing for a lack of alternatives; India way up due to cost issues; Japan due to nuclear & LNG problems.
China's CO2 emissions just from coal will exceed total emissions by US by 2010. China wipes out the entire EU commitment to Kyoto by 2012.
China's crude production has plateaued, imports are skyrocketing. China is 50% oil import dependent. Decline rate is 4% pa. Daqinq looks a lot like Prudhoe Bay in profile.
The decline of the giant and large fields has increased the energetic costs of extraction. Energy inputs have increased to about 1/7 of the oil they produce.
China has the second-most complex refining setup in the world. But China is a diesel-based economy. Diesel demand is 40% of a barrel.

Oil consumption in China supports fewer discretionary activities than in other large consuming countries. 43% is for transportation. Most of new buildings are dependent on diesel.
Personal cars are not the main driver of Chinese oil demand! Moving stuff is. China is still a very material economy.
The first thing they have to move is…coal! 50% of China's coal now runs on rail, with very efficient rail. Inadequate coal rail transport capacity drives oil demand higher. The rest has to run by transport truck running on diesel, increasing the energy needed for transport by 16x. This is also forcing transport for other goods to road transport.
Subsidies for all fuels greatly exacerbate the problem.
Ambitious plan to expand natural gas use relies heavily on imports. Spot cargoes coming in at $22/mmbtu. They're now seeking new supplies everywhere, like Turkmenistan via pipelines through other "'stans"
China's coal soot is now the largest source of mercury deposition in California.
Major explosion in cement and steel production has caused growth in energy demand to far outpace growth in GDP. China is now the largest cement producers in the world, and most of it is being used domestically. This offset their long-term decline in energy intensity.
The loss of control led to imposition of new 2010 target of reducing energy/GDP intensity by 20%.
Quotes from a Chinese official:
- "The model of economic development that we are currently pursuing is unsustainable."
- "China's current supplies of energy and natural resources are unsustainable"
- "China's environment is unsustainable"

Vince Matthews: "China and India's Ravenous Appetite for Natural Resources – Their Impact on the US"

Population is driving growth, 1.3 billion for China vs. 1 billion for India and 0.3 billion for US
By 2030, China is likely to pass the US in GDP. Average growth of 10.4% per year for the last 4 years
World electrical consumption growth increased by 8 terrawatts in the last 10 (?) years, 2.7 from China.
2005: China opened 70,000 new supermarkets
2006: Became #3 car manufacturer
Minerals:
- China's share of world mineral production is #1, #2 or #3 of all major metals.
- China is #1 importer in the world of copper; they import about half of what they consume.
- Thefts of copper have increased all over the US. Increasing prices are the impetus; cost increased by 457% from 2003 to 2006.
- Iron ore: China is #1 producer in the world, and the #1 importer. Went from 1 to 300 skyscrapers since 2001.
- Price of scrap iron up 559% in the last five years
- Charts since 2003: [ASTOUNDING CHARTS of the price increases of all major metals!]
  - US molybdenum exports doubled; price nearly doubled.
  - Gold prices up 205%
  - Silver 367%…plantinum, palladium, etc….similar price increases.
Coal: Spot prices for coal went from $17/ton to $37 from 2004-2005, although contract price in 2004 was $24.4/ton…in 2007, $29.75. This is a natural resources driven price inflation. This is not a normal inflation and shouldn't be fixed with monetary policy.
Cement: China began importing cement in 2003, with consequent shortages in half the states in the US
Cement producers: #1 China, #2 India, #3 US
China is going around the world and tying up every raw material in the world, anywhere they can get it…buying mines, everything.
94% of US energy comes from traditional sources (coal, oil, uranium, nat gas). All have increased 200-400% in prices since 2003.
Natural Gas
- China imports NO natural gas! US nat gas production has plateaued, we now import about 16% (?) of our usage.
- Nat gas consumption in the US declined from 1971 to 1985 due to various events and policy changes, then grew again as we attempted to replace coal with nat gas for electricity generation. We import about 4 Tcf from Canada…but Canada's gas production has been flat since 2000…and production in 2006 required 5000 more wells per year than in 2001.
- Domestic natural gas production vs rig counts: as rig counts have gone up, and with nat gas at the highest price in history, production fell…it's lower than 2000 levels now.
- US nat gas production has been basically flat since 1995, but wells drilled went from 8,900 to 30,180 from 1995 – 2007
- Price of nat gas has tripled since 1999
Coal consumption in China:
- Began importing in 2006. Prices went from $38/ton to $140/ton.
- India coal growth enormous as well
China oil consumption: imports over 50%. India imports over 2/3, so does the US
Nuclear:
- China and India are both dramatically increasing nuclear…India plans 17 new reactors in 7 years.
- US generates far more than any other country in the world.
- World's 439 nuclear reactors currently need 180 million pounds of uranium each year. We've been living off the stockpile we built since Three Mile Island and consuming old weaponized uranium.
Oil shale (in Colorado) is being looked at again. The notion that oil shale is being blocked in the US is simply wrong. Open bidding was conducted, 20 proposals received, 6 approved. Companies were granted free access to the lands (without royalties) to begin production. 30,000 acres total granted for the six acres; equivalent to 60 billion bbls of oil. And yet, there isn't even an active permit to produce that oil.
Alternative energy requires significant amounts of rare metals etc. [good chart]
A 690 unit apartment complex in Beijing will use a huge ground source heat pump project.
Overall impacts:
- Coloradans will suffer from effects of inflation
- Coloradans may see increasing shortages of critical materials and pressure to produce raw materials and develop new resources.

Q&A

Fridley: China largely uses crop residues (corn husks, etc.) for home heating; wood gathering has been largely banned.
Fridley: "Clean coal" is a complete oxymoron. US is going big with IGCC gasification process about 60% (?) efficient. Whereas China has gone with a supercritical process. Accordingly, there is no real cooperation between China and US to do carbon sequestration. CCC costs about 25% of the energy in the coal.
Matthews: What about lithium for batteries? Can't really get any useful information.
Matthews: The claim that the cost of producing commodities falls over time is simply wrong
Matthews: The increasing switch from high-Btu black coal to poorer grades of bituminous coal is a treadmill. Over half the mining claims in the US in the last three years were from foreign buyers!
Fridley: 95% of China's coal production is bituminous.
Matthews: Is cement traded across oceans? Yes, 22% of US consumption is imported.
Matthews: Half of all copper ever produced is now in landfills. It's probably inevitable that we will eventually resort to mining landfills.
Matthews: Shale gas in the Rockies is a serious treadmill; you have to drill more and more to keep production flat. Decline curves tail off rapidly after first production, and it costs a great deal more than conventional gas. If we stopped drilling for a year, production would tumble.
Fridley: We are in competition with China basically everywhere for all natural resources. This is leading to conflicts like the one in Sudan. Conflict is brewing over access to resources in the South China Sea, between Vietnam, Philippines, etc.
Matthews: China already controls 98% of the rare earth metals in the world. What they're doing is far beyond what the US is capable of. Their strategy is all-encompassing and it will corner the global markets.
Fridley: The US demand for Chinese products is not the primary source of China's emissions; more like 10%.
Fridley: China has a bad data problem just like we do. Provincial governments have been feeding bad data to the central government; now that is changed and it goes directly to the central gov't so it's a little better now. New data is more discrete and hopefully will result in better policy planning now.

Robert Hirsch: Reflections on the conference so far

Terminology: "peak oil" implies sharpness, but really it's been a fluctuating world oil production plateau since mid-2004.
Onset of decline of world oil production is the greatest problem, and the timing is uncertain. (Est. 3-5% pa)
Careful attention to small numbers is important!
- 5% decrease in US oil – Recession (1973)
- 1% of world oil consumption is huge: ~860,000 bpd
- 3-5% changes in oil production cannot be identified as true trends until years later, because the plateau is that bumpy.
Time frames
- Production decline will likely start in 2-5 years, but worldwide physical mitigation will require maybe 20 years.
- A precise forecast of the decline point is impossible but not critical to planning & early action.
Consider where you have your money, and how you will adapt in your personal life: personal, business, national, int'l.
The meltdown in the stock markets is prototypical of what will happen when peak oil consciousness hits the public. It is not realized yet! The bad things that happened last week will happen again, only worse, because there are no quick fixes to the problem!
One-liners:
- "Willful human blindness" – really describes the problem we have communicating this stuff with decision makers.
- Talk about discussing peak oil and global warming in the same way isn't really quite right. When people are losing their homes, cars, etc., people will be screaming for a fix right now.
- "Peak roads" – We probably have enough roads now, but think about going up against the road-building lobby and associated special interests!
- "The proactive choir" – That's us at the conference. As we try to convince people, follow the KISS principle! Keep it simple, and don't mix the message with other things.
- Point was made that panic is probably necessary to inspire real action. As distasteful as that idea is, it's probably true.
On the issue of rates of change, we should start doing some calculations…how long does it take to build new CTL plants, etc? The more you look at it, the more you see that the problem will outrun our efforts.
This shock will have widespread effects. It will severely impact state & local budgets, further impacting services like fire and police.

With all the other pressing problems like Medicare and SS, how do we get people to focus on peak oil?
Denial…Faith in technology…Faith in government…these things stand in the way of getting the message out.
"biggest robbery in history" re: African oil production Yes, we contribute to African misery by consuming their oil, but we also have "The biggest wealth transfer in history" under way as we send trillions of dollars overseas for oil.
Kudos to the organizers of the conference!
Don't think of this as an energy problem! It's a liquid fuels problem! We can't start running cars on PV panels right now, but in the near term, we have about $50-100 Trillion of investment in the existing fleets of vehicles and ships! We have to keep that stuff running or we're going to have total anarchy. We need to have substitute liquid fuels regardless.
Re: environmental problems of hydrocarbon production. Don't think about the world of the past. Think about the world of the future. What compromises can we make? We will have to save ourselves and prioritize environmental protection. We're going to have to be pragmatic above all.
The transition will spell enormous opportunities for those who offer solutions, who will prosper amid the coming miseries.
I would love to see a politician, or a president, who will tell the straight story. But when it's said, people will freak out, so it has to be said along with a plan to get us out of the problem. Or we could see the kind of chaos we saw in 1973 when OPEC cut us off.
People have been staying politically neutral about energy and that's important; it can't be a partisan issue.
This is not the end of the US. This is not going to be like the end of the Roman Empire. I have not lost my optimism. We are going to come out on top (after a difficult period of adjustment) because we're Americans, and that's what we do.

6:30 pm – 7:30 pm

Visions of a Post-Peak Oil Future

Panel discussion

Denis Hayes, creator of Earth Day, founder of the Bullit Foundation

James Howard Kunstler, author of The Long Emergency and World Made By Hand

Randy Udall, co-founder of ASPO-USA

Richard Brenne (Moderator)

[This was a nearly impossible session to take notes for…the jokes went by quickly…but I did my best.]

Brenne gave a hilarious and ironic introduction to the panel.
Could Kunstler's apocalyptic visions come true?
- Hayes: Yes, and the financial market meltdown is a prelude. Only with radically different leadership could we avoid it. A combination of other countries mobilizing to address the threat, coupled with a great flow of venture capital, could potentially make a difference in averting it. With the right advisors, Obama could succeed in making a difference.
- Udall: How many of the members of Congress are lawyers? 4/5? Every once in a while we have a great president, and even McCain could be a great president. You need to have hope as a companion rather than fear.
- Kunstler: The long emergency is only one scenario; there are others. I just wanted to come up with a vivid description of what life might be like in the future.
What are the other things peaking you're concerned about?
- Kunstler: Well, peak women my age…and this isn't the place to go looking for them!
- Udall: Well there's impotent and "Aspo-tent"
Are we nearing peak stupidity?
- Kunstler: We're good at measuring things but not so good at doing something about them. Especially in the environmental community, there is a problem with "techno triumphalism" or "techno grandiosity." The idea that we can conjure up solutions…the idea that we're entitled to an orderly transition to the future.
- Hayes: Well we were certainly much more stupid in 1998, when oil prices were so low. We were stupider yesterday, when oil was $27 cheaper.
- Kunstler: It ought to be obvious that the airline industry is dying, and we have to restore the rail system asap, or else we're not going anywhere.
- Denis: Hell if the Italians can do it, the French can do it (Kunstler: the Bolivians do it!), the Chinese can do it, then we can do it!
Richard Heinberg's new book is called Peak Everything…let's talk about the order of things you're concerned about peaking.
- Udall: Energy, courage, and time ("Kind of a haiku of where we're at right now.")
- Kunstler: at the TED conference, the winner was this idiot who did a presentation about flying cars…right out of Popular Science 1953. The most preposterous thing you've ever heard in your life…that's what the Silicon Valley geniuses thought the future would be all about…it was very demoralizing.
Brenne ([what was that question??]...
- Hayes: the opposite of TED would be DE(b)T…between all the forms of national debt, when we refuse to tax ourselves, when our debt is 5x our GDP, options for the future are limited.
Oil, natural gas, coal, and uranium…is that the order of things to be concerned about peaking?
- Kunstler: Yes, but this is basically a liquid fuels problem.
- Hayes: Energy isn't anywhere near my top peak worry. I know how to solve the energy problem…that's easy compared to racism, religious bigotry, water shortages, the loss of topsoil…those are really tough issues.
- Udall: Peak oil just punctures everything; it augurs a new era. It could be tragic or it could be a glorious time. Thank God this banal 30 years is over. We should welcome and celebrate peak oil in our lives.
- Hayes: When you throw coal and uranium into the mix…if this were a different type of group, and you asked them which issue is their top concern, they would say climate. Iran has a very sensible approach to their long-term energy survival by pursuing nuclear. The problem isn't the scarcity of coal and uranium, it's the abundance of them!
From the localized "London fog" of coal smoke, up through the larger problem of acid rain, up to climate change which is clearly a global issue. Are we at the point where all of these problems are global, not national, and we have to think of ourselves as citizens of the Earth?
- Kunstler: that's a sweet sentiment, but it's wrong. The world isn't flat, it's ever rounder, and we're going to be retreating into our various corners. We're fooling ourselves if we think we're going to have a worldwide Kum-ba-yah and a festival of worldwide cooperation.
- Hayes: Worldwide, people are building networks in which boundaries are irrelevant, and global communities around certain things are tighter than physical neighborhoods. We must resolve bigotry and racism if we are to solve our problems. The great successes are local; fighting a freeway through town, etc. But against the combined might of all these energy industries, auto industry, etc., we have maybe $100K total on our side, yet we can still win our objectives in Congress, because we're right.
- Udall: A lot of the achievements we made in the 60s and 70s were made possible by coal and cheap oil. We must recognize our debt to cheap energy and food, or we're doomed. We have 4 million Chinese underground today in pursuit of the black rock that would be the road to prosperity. We can't go forward without recognizing our indebtedness to all forms of energy.
- Hayes: The entire science of ecology is about how you get energy in the most effective way, from photosynthesis to higher primates and everything in between. If we have an attractive future, it's information dense, it makes use of abundant renewable energy…maybe the fuels of the past are transitional bridges to the post oil and gas world.
- Udall: Flows are different from fuels. Half of us wouldn't be alive without natural gas made fertilizers. The future belongs to flows, efficiency, and conservation…but we can't go there until we recognize how we got here. We won the wars because we had more domestic oil than they did in Germany, etc. We've always had a land ethic in this country; we've never celebrated the value and beauty of energy, and this is a mystery because it's part of our genius.
What metals are you concerned about peaking? At current rates of consumption, we have basically less than 25 years' supply of most of the important metals. Does that concern you?
- Hayes: Yes. Gold is basically a storehouse of value.
- Kunstler: My book isn't an ‘end of the world' book, it basically describes a discontinuity to interrupt our assumptions and extrapolations about the direction that things are going. We're going to have to make do with less of that stuff. But I certainly believe we're going to persevere.
- Hayes: What we got out of these stocks of energy is 6.3 billion people moving up almost inevitably to 9 billion people, but at that level, the access to metals, foods, etc is much more limited than it would be if we had 2 billion people. But the world isn't necessarily better off at 9 billion than it would be with 1.5 billion people.
- Udall: We may go back to 1.5 billion, but the journey may be fascinating, or bleak…it remains to be seen.
Could we actually have a water infrastructure to support 9 billion people?
- Udall: I don't think that's the most important limit. I would argue that food is the key limit. Water is cheap and isn't the most important limit. Grain production is key, and is the source of the water limits.
- Hayes: If you depend on a finite supply of water, and you're growing exponentially, you've got some serious, albeit localized, problems.
What if the limits to all these things turn out to be bell curves.
- Udall: We're living in a strange, bizarre, amazing moment where we live like gods and goddesses…it's a moment.
Kjell Aleklett thinks we might be at peak democracy…
- Hayes: It depends on how things devolve from here. If we have self-contained and self-sustaining urban villages, we might actually have a good story for real democracy in the future. I'm interested in a principled, constitutional democracy that is removed from such forces.
Are peaks symptoms of a more fundamental problem?
- Kunstler: Some people didn't like the supernatural bit at the end of my book, World Made By Hand. The point is that our beliefs about reality, our consensus, would yield to something more magic and an apprehension of a more supernatural reality outside of the bounds of life as we know it. The biggest problem we have is constructing a coherent consensus about what reality is.
- Udall: So who is offering this new narrative?
- Kunstler: To me, this is like the 1850s, which preceded the last great convulsion that America went through, when all of our beliefs and conventions fell into disrepair. The Whigs vanished almost as fast as AIG. The Democrats were the party of slavery. The leadership of the 1850s was made of empty cravats, and into this void stepped a lawyer with a clarifying rhetoric that defined the convulsion that was going on…and that's sort of where we're at today. I want to redefine and re-brand the Republican Party as "the party that wrecked America."
- England didn't abolish slavery until we had abundant coal…Energy is key to overcoming these issues.
  - Udall: Ingenuity will substitute for energy.
  - Kunstler: We've reached peak crybabies.
  - Hayes: There are little chances for profound change in our polity. [Stories about Johnson & Nixon…] I think the Enlightenment was of crucial importance…
  - Kunstler: Don't be surprised if all of that yields to the reality of what will happen to us.
  - Udall: We had elements of paganism, naturism, etc…
- Is peak oil the best gateway to understanding the problem of resource overshoot?
  - Kunstler: it's a bitch-slap upside the head: "Yo, wake the fuck up!"
  - Hayes: I don't think people have ever had a better connection to reverence for nature than today. Pre-Enlightenment, it was all about witch hunts and craziness…
  - Udall: We've got a lot of that now…
  - Brenne: There seems to be an agreement between Islam, Christianity and Judaism that none of them can share an Enlightenment at the same time.
- (They all join arms and sing Kum-ba-yah)

DAY 3 – TUESDAY, SEPTEMBER 23, 2008

8:15 am – 9:45 am

Fuel Substitutes: Reality Check on the Prime Candidates

David Hughes, Canadian Geological Survey (ret.)

Andy Weissman, Editor-in-Chief & Publisher, Energy Business Watch

Robert Rapier, Accsys Technologies PLC

Steve Andrews, Moderator

David Hughes: "Coal: Some Inconvenient Truths"

[Some good quotes]
Something about how we've got a turkey syndrome going here: Turkeys get three squares a day, a nice warm place to sleep, and everything seems to be going just fine…until Thanksgiving.
China has been building a coal plant each week….They will have 5000 more over the next 6 years. India 200 more over the same period
In US, 28 coal plants under construction…more in Europe. Seaborne supplies are tight, and prices have doubled in the last two years
History
- Chart of phenomenal reproductive success of the human race since 10,000 BC
- Population and energy consumption since 1500…extremely high correlation
- World energy consumption is up by 190% in the last 40 years
- [Great charts on energy growth by region and fuel type!]
- Per capita world energy consumption is up 761% since 1850. The average world citizen consumes as much food (?) as the average person in 1850, but uses 2.5x more energy
- Coal is 2/3 of the total remaining hydrocarbon energy.
- 28.6% of the world's primary energy consumption in 2007, second only to oil…Lowest cost heat source.
- Double the carbon footprint of gas using conventional technology….clean coal and reduce emissions almost to that of gas
- Total world coal consumption since 1850 has been straight up…90% of the total was consumed since 1910
- Enormous world consumption of coal since 1980s
- On a Btu basis, 57% of the hydrocarbon energy we used in 2007 was coal
- Middle East has no coal!
- Price of hydrocarbons:
  - Oil: $16.15/Gj
  - Gas: $7.61/Gj
- By energy content, peak of coal was 1998, even though tonnage is going up, due to the lower energy content of Powder River Basin coal. US now imports about 30 million tons/year from Columbia
- Net US coal exports: 20% of production in 1981, now about 3%
How much coal is there? Quotes from US National Academny of Sciences, June 2007
EWG report from 2007 suggests global peak of coal in 2025, China peak in 2020.
Uppsala forecast of 2008 says peak will be around 2030
According to Dave Rutledge (of CalTech), we have 4.7 Tboe fossil fuels (oil, gas coal) and 90% of it will be consumed by 2076. Does not believe that there is enough recoverable carbon to meet the lowest IPCC projection on emissions ("production constrained projection").
EIA electricity growth: World: 92% total increase 2005-2030. Coal up 115%, nat gas up 145%, hydro and renewables will contract in market share
57% of US electricty generation will be from coal by 2030
90% of our generation capacity since 1990 is from gas, but in the future will be largely coal
What about "clean coal?"
- CO2 can be reduced by 25%, with 99% reduction in Sox, NOx, and 90% in Mercury
- The most efficient technology is ultrasupercritical (USC) combustion at 43.5%, compared to 34% for a ‘60s era subcritical plant
- Denmark is the world leader in ultrasupercritical plants
Challenges with CCS…
- MIT study 2007, "The Future of Coal": Capture of emissions typically requires about 23-37% of the capital cost, depending on the type of plant. IGCC is the cheapest.
- Best tech with heat capture vs IGCC with CCS
- USC: 43.3% efficient
- USC with heat capture: 70% efficient
- CO reduction vs Old Coal with Best tech /HC: 51% efficient
- IGCC: 38.4% efficient
- IGCC with CCS: 31.2% efficient
- CO2 reduction vs old coal with CCS: 85%
Proponents of CCS often assume there is no energy problem because of the belief that coal is so abundant
Scale and complexity of CCS…Vaclav Smil quote from Nature, May 2008…"Beware of scale!"
Managing carbon and global warming by energy intensive and complex means such as CCS, and uncontrolled geoengineering experiments with Space Shields, seeding the atmosphere with sulphate crystals, and seeding the oceans with iron filings only compounds and exacerbates the energy issue.
China will top out around 1.4 billion people by 2030…India will go to over 1.5 billion by 2030, to become the world's most populous nation
Per capita, Canada is the worst energy consumer, Europe is less than half of US per capita
China will be the world's top energy consumer by 2030
World pop in 2030 will be over 9 billion, plus adding as many cars as we added people in 2007.
Total per capita energy consumption in 2030…65x as in 1850, 89% of it non-renewable, almost all of which will peak in the first half of the century
"Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist." — economist Kenneth Boulding, early 70s
"The term ‘sustainable growth' is an oxymoron." – Albert Bartlett, 2000
Joseph Tainter 2006 - Sustainability, Resilience, Complexity and Collapse
Ever increasing complexity is one problem-solving solution to a sustainability, provided the resources are available to pay for it – both in financial and energy terms. Eventually though, it leads to collapse.
- The Sustainability Game (Tainter 2007)_
- Complexity…"The party's getting close to last call"…declining EROI
Crucial questions:
- Will we think our way down to resilience, or will we keep our pedal to the medal to collapse?

Robert Rapier: "Biofuels: Facts and Fallacies"

Currently works on wood acetylation technology to impregnate softwood with carbon to make it as strong as steel and other building products, making it a carbon sequestration technology.
Has written about 150 essays for The Oil Drum and hundreds more for his blog
The biofuel contenders: Ethanol, renewable diesel, misc. [e.g.,methanol, butanol, etc.], algae, anything-to-oil, etc.
Corn ethanol: sets up a food vs fuel crisis, and essentially is a jobs program for the Midwest. But it's just a bridge fuel…unfortunately it's a bridge to nowhere and we should say "Thanks but no thanks" [Deft, oblique reference to Palin's political statements]
- We have single oil refineries that out-produce any corn ethanol producer
- By subsidizing ethanol we're really subsidizing fossil fuels [!]
Can the US emulate Brazil?
- Sugarcane ethanol is keyed on the bagasse waste, which is a good fuel for boilers to make the ethanol (in the US we use it in animal feed). For tropical countries, sugarcane ethanol works. But it's a solution for them, not for the US.
Cellulosic ethanol…we've been working on it for 40 years. Serious logistical problems.
- A small (50 mgy) cellulosic ethanol plant would consume a small forest of trees every year
Ethanol from biomass gasification
- It's really pseudo-cellulosic ethanol
Diesel
- Biodiesel is an alkyl ester, not a hydrocarbon diesel
- Green diesel is gasification/FT process with any biomass, or hydrocracking to use waste oil via hydrocracking to make a true hydrocarbon diesel.
Misc contenders
- LS9
- Di-methyl ether…methanol produced from syngas, converted to DME, which can be used in gasoline or diesel engines
- Butanol is an industrial chemical produced from propylene and synthesis gas. Bio-butanol is produced via the acetone —> butanol —> ethanol process. Commercial production via this route is not viable
Contenders
- Our most pressing problem is energy storage, because it enables all the renewables.
- Various fuel options… [dense slide]
Can we emulate Brazil?
- Oil usage in Brazil is still 90% of Brazil's energy needs. Annual oil usage in Brazil is 4.3 barrel per person; ethanol, 0.4 per person!
- To be like Brazil, the US would have to quadruple its oil production or cut consumption by 75%
The thermal depolymerization (TDP) story
- Discover magazine had a gushing article in 2005 that was basically sci-fi…costs turned out to be much higher in 2006 update
- Hard to scale from the lab to the commercial
- Claims about ethanol are similarly overblown
Algal Biodiesel
- Algae could produce 15,000 gals oil per acre per year (1998)…
- Biodiesel costs make it a far-fetched reality…comparable to retrieving the trillions of dollars of gold that are dissolved in seawater
Techno-hustling: algal biodiesel investing hype
Where politicians fail
- By misleading the public ("we can be like Brazil")
- By changing energy policies every year, lack of long-term planning
- Lack of political courage
Solutions
- Cease the delusion of "cheap gas for everyone". Need a frank discussion with the public! Increase fossil fuel taxes…rebates, income taxes to make it revenue-neutral

- Encourage energy conservation
- Encourage alternatives
- Encourage mass transit
- Stop waging war with the oil companies; they have the experience!
- Encourage behaviors that reduce energy consumption, including rebates for solar hot water (SHW), fuel efficient cars, etc.

Andy Weissman: "Time to Stop Playing Russian Roulette with the U.S. Economy –Urgent Need for a Realistic Strategy"

Electricity & gas crisis could be just as severe as oil. All of our energy costs could go to parity (or a premium) compared to oil.
Global LNG prices already near parity with oil. Spot prices already near parity this winter. Prices could go lower in ‘09 and '10 with increased LNG supply, but premium likely by early next decade.
Demand could far exceed supply, far beyond EIA estimates, even in status quo scenario…EIA severely underestimates likely demand…projects little or no year-over-year growth! More likely, increase at least 3 Tcf/yr. Cancelling of coal-fired power plants in the last 24 months locks in the likelihood.
Adverse impact of rising grid prices on US economy could be severe …half trillion a year shock to the US economy
Natural gas demand could explode in the next decade
Demand is set to spike starting right now, but it takes years to get ready for that…
EIA just doesn't get it about nat gas demand growth for power sector, the key driver
Annual Energy Outlook reports for 2006, 2007, 2008 all badly underestimated power sector demand for nat gas. We have about 400 Bcf growth per year in recent years
Future long-term projections are equally bad: say that long term growth will be satisfied by coal. Long-term nat gas demand forecasts still assumes coal provides > 80% incremental electricity. Will only occur with CCS…
Gas use in power sector is already growing
If CO2 restrictions enacted, increase in nat gas could be staggering…CCS can't satisfy restrictions for 10-15 years!
Decision-makers flying blind: EIA understating future US gas demand by as much as 6-10 Tcf/yr (16-27 Bcf/day)…leaving producers, regulators without any reliable basis for decision-making
Potential adverse consequences from such misleading signals
We've seen this story before by expanding number of gas-fired plants, only to see prices spike.
How do we avoid being in that situation again, and having to turn to LNG?
Urgent need for a new comprehensive strategy…
Must assess energy efficiency first. Huge potential savings, esp. with PHEVs, CHP plants, etc. But programs often undershoot, are unrealistic, difficult to motivate implementation. We need radical and large-scale solutions, replacing most the commercial HVAC systems, including forced cut-backs, to achieve major reductions in a short period of time.
It's all about risks. We fall well short of our goals, resulting in spiking prices (to destroy additional demand).
On-shore production skyrocketing, but pace not sustained due to various problems…
LNG imports have been actually shrinking y-o-y, but that could change in the next 1-2 years for a temporary period of excess supply
Emerging shale plays, e.g., Barnett Shale…Studies expect a potential glut, but most of the growth in unconventional gas is from tight sands and coal bed methane (CBM) and Barnett Shale. Barnett could peak early next year…takes 10 years to reach 4 Bcf/day. Haynesville shows promise but is only getting started, and is unproven. We need more evidence to see if the other shale plays are really exciting and comparable to Barnett or not.
Conventional supply could rapidly decline over the next decade…expected decline of onshore conventional and imports from Canada.
Factors to slow development of shale gas…
US is dangerously dependent on LNG—we're already committed to that without realizing it. Growth in supply certain to level off.
Scaling nuclear…unlikely to make major contribution before 2025 or later…cost projections exploding, capacity to fabricate components limited, etc.
Wind also likely not a near-term panacea…huge long term potential with sufficient capital. Renewables' share of total US electricity in 10 years remains small.
Burden for future grid growth thus falls on coal, but without CCS its future is dubious. CCS must move forward because increase in coal consumption is basically guaranteed. Under any plausible scenario, global coal use will increase > 2 billion tons per year (tpy), but we can't achieve aggressive CO2 reduction goals without CCS.

Q&A

Rapier: If bagasse is burned instead of returned to the soil, is it sustainable? Some waste is composted, plus ash from the burning, so it's much better than the essential strip-mining of soil via corn ethanol…some studies say it is sustainable.
Hughes: World coal exports are probably tight…China and India both just became net importers. US is only a slight net exporter of coal on a net energy basis. Expect prices to remain high and supplies tight.
Weissman: Re: Barnett and other shales, much of the gas is extracted in the first 6 months, then flows quickly tail off (to a long thin tail)
Hughes: How can we achieve a planned descent to a lower energy future? The North American way of life cannot be propagated to the rest of the planet if you look at per capita data…there isn't enough energy in the world to do that. We need to forget BAU. The low-hanging fruit is efficiency, rethink infrastructure (e.g., suburbia), save fuels for their highest uses (e.g., CTL requires a lot of infrastructure). Reduce consumption, intelligent deployment of renewables. Realize scale problems! There are no silver bullets.
EROI for cellulosic ethanol and algal biodiesel? Rapier: EROI for cellulosic ethanol of 18+ is nonsense, requires that residues are burned and that has never been commercially demonstrated! The 18 for sugarcane ethanol depends heavily on the value of bagasses residues. USDA has done some highly misleading work on corn ethanol, e.g,. hide energy inputs of distillers' grains. Actual net energy of corn ethanol is probably 5% gain.
Weissman: Isn't Mackenzie Valley gas good for 5-7 years? The project has already been greatly delayed and its future is uncertain due to pipeline costs. Initial project target dates are based on hope, but reality falls short. Same problem has greatly delayed long-anticipated LNG supply. Grid operators assume that more gas will be available when it might not.
Weissman: Applauds T. Boone Pickens' Plan for getting the dialogue going. Pickens probably knows this stuff better than energy policymakers. But the full evaluation of his approach still needs to be made and quantified.
Aleklett to Hughes: China will have to go deeper to increase its coal production, how will this affect production? EROI is an issue. We're getting into thinner seams, decreasing EROI, and will need much increased investment to maintain production.
Rapier: Ethanol can be useful as an octane booster, even corn ethanol (in Iowa). Where ethanol doesn't work is as a commercially scaled substitution for gasoline.
Rapier: Algae are good for wastewater treatment and other benefits. It's a good area for research. It may have a future, but we need to clear away the hype first and do a sober assessment.
When can renewables replace traditional fuels for power generation? Hughes: I don't think there's a hope that we could replace today's scale of hydrocarbons with renewables…intermittency is an issue, and the scale is too large. We need to reduce demand. Feebates, using grid as storage, demand response, etc. all that are useful and should be pursued, but there's no way to maintain BAU.

10:15 am – 11:45 am

Burn, Baby, Burn: Fossil Fuels and Climate Change

Michael Webber, Director, U of Texas, Austin

Pamela L Tomski, Managing Partner, EnTech Strategies, LLC

Randy Udall, ASPO-USA Co-Founder

Michael Webber: "Coal-to-Liquids: The Good, the Bad and the Ugly"

Coal is an abundant resource, US has the largest reserves in the world
Coal satisfies 53% of our power generation in the US; Petroleum is only 2% (was 17% in the 1970s)…we then switched to coal deliberately to reduce petroleum use
Coal price is less expensive and less volatile than oil and gas, making it more attractive to investors.
Older pulverized coal plants had 30-35% efficiency; new plants are 40-45% efficient, with heat capture goes up to 70%, vs. nat gas combined cycle plants which are ~50% efficient.
Modern scrubbers for SOx, NOx, solids are quite effective
CTL fuels have excellent performance characteristics, esp. for aviation. Cleaner (lower sulfur) and already flight-rated for B-52 in 50/50 blends, etc.
CTL tech is well known and developed; originated in the 1920s, demonstrated by the Germans in WWII. There are dozens of Fischer-Tropsch plants installed worldwide with the capacity to produce hundreds of millions of barrels per year
Bad news: resource estimates are out of date. CTL is very expensive and water intensive, etc.
US coal definitely sufficient for 20-25 years, but might be sufficient for 100 years (NAS, 2007)
Coal reserve estimates based on older reports with questionable methodology and optimistic recoverability estimates from 1970s.
Running joke: CTL cost is the price of oil +$10/barrel. It's not clear that CTL works without gov't subsidies. Expensive up-front capital costs.
Great Plains Synfuels Plant (Beulah, ND) started 20 years ago, profitable for the first time because of high NG price. Uses 18,000 tons of lignite to make 160 Mcf (?) of nat gas
4.3 million acres are under permit for coal mining, and surface mining is on the rise. Shift to surface mining driven by demand for low-sulfur Western coal…tunnel mining has been flat for decades.
1/3 of the energy from a coal fired power plant goes up the flue; 1/3 goes to heating waste water.
Very carbon-intensive…CO2 emissions and carbon emissions from CTL are much higher than from other fuels.
Carbon balance of CTL is at best even with conventional petroleum. CCS only makes sense for large stationary point sources like power plants, CTL, GTL. Carbon capture does not work with tailpipes. CTL will never be carbon neutral.
A lot of water is needed…nat'l average for a thermoelectric plant: withdrawals are 21 gal/kWh, consumption [assume this means evaporation] is 0.5 gal/kWh.
Water scarcity can be a limiting factor for CTL plant permitting. CTL requires ~7:1 water to fuel ratio. Conventional gasoline uses 1-2.5 gal water per gal of fuel produced. Irrigated biofuels use 1000+ gallons per gal of fuel.
Outlook confusing: Unclear policy setting, technical issues, etc.
Projections of coal use vary from 70% increase by 2030 over 2005, to possible 50% decrease over the same time!
Key uncertainties: carbon policy, availability of alternative resources, CCS
Coal future is highly affected by carbon policy and energy policy…emissions policies are key
Will CCS work? Will IGCC (integrated gas combined cycle) work? What's the best way to sequester carbon? Will renewables work? At what scale, and when?
CO2 is approximately the same mass and size as other flue gases (O2, N2, H2)
Carbon capture lowers efficiency and is expensive and capital-intensive. Requires significant materials and heat input. Capturing 90% of the CO2 lowers output by 30%, and requires significant absorbing chemicals. Scalability is really unknown.
2/3 of coal is transported by railroads, which are already operating at capacity. Tonnage has increased even as rail miles have decreased. Plus delays and increasing prices. Can rail ramp up for CTL adoption?
USAF wants alt liquid domestic fuels. USAF is the world's largest energy customer. Buying fuels from the countries we attack with those fuels just doesn't feel right…deep philosophical problem for USAF. USAF goal: fuel 50% of its fleet by 2015 with CONUS sources…total demand: ~3.3 B gal/yr of jet fuel. Fuel of choice is CTL, but also looking at biofuels: algae and cellulosic ethanol.
EISA 2007 section 526 essentially blocks CTL due to emission limits! Unless carbon footprint is less than "conventional petroleum sources" then it will be prohibited. What's "conventional" though?
The Energy Problem has three components: resource depletion, national security vulnerabilities, and environmental degradation. US solution must balance these three priorities. Most options for new fuels or technologies solve one or two priorities, but not all three.
Coal is the elephant in the room. The energy transition will be partly determined by whether we replace coal with something better, or fix coal's problems.
While we have this ambiguity we don't know the way forward.

Pamela Tomski: "Commercial CCS Deployment: Current Status and Reality Check"

Assumptions:
- Population and economic growth will drive demand
- Coal will continue to dominate
- No silver bullets
- A solution to the CO2 problem should provide at least 1 Gt [gigaton, or billion tons] carbon/yr by 2050. Total US coal plants produce about 2 Gt/yr
- CCS can play a key role
- No climate change legislation this year or next but it's on the horizon
Key CCS developments:
- [Key milestones from 1991-2008]…CCS more central to the policy debate worldwide
A long list of issues that affect commercial CCS deployment…Human capital, policy, legal, technology, regulatory, NUMBY (not UNDER my backyard)
Scientific consensus is that substantial CO2 reductions are possible, 15-50% for stabilization.
Three primary CO2 capture approaches…
- Geological storage: saline formations, EOR, enhanced CBM, depleted oil & gas fields
CO2 capture pros and cons
- Commercially available but not large scale.
- Cost, cost, cost
- Energy penalty from 20-40%
- Post-combustion is retrofit opportunity.
- Oxyfuel - 100% capture potential but not commercial; O2 production energy intensive
- Only two IGCC plants in operation in the US
- CO2 transport: well-established network, ~3,600 mi for CO2 EOR. Excellent safety record. Dedicated interstate CO2 network unlikely…uncertainty about size, configuration and cost. Europe is looking at tankers for export of CO2, looking at subsea sequestration, or send to ME via tanker for EOR.
Geologic storage options. Saline formations offer greatest potential. Analogues available in oil and gas reservoirs, gas storage, acid gas disposal, long term storage tech
Injection activity vs. CO2 emissions chart: we do have experience with long term large scale injection
CO2 EOR/storage potential: increased domestic oil production of ~48 b bbl. A "clearer path" to storage.
CO2 trapping mechanisms:
- Injection > 1 km deep
- Primary trap beneath low permeability rock
- Secondary trap: dissolves in water, grabbed by capillary forces, converts to solid
Complex slide: Leaks, Releases, Remediation. Potential leakage routes and remediation techniques…
CCS systems must be close to sources and linked to storage sites.
World CCS projects under way…dozens of sites
First CCS project was Sleipner (North Sea) Snovhit (Barents Sea) in Norway, started in 1996. 1 million tons CO2/yr injected into reservoir.
Another major CCS project: Salah, Algeria…test bed for CO2 monitoring, started in 2004, 1 million ton CO2/yr injected.
World's largest storage project: Weyburn, Canada. Started in 2000. $80 million+ project by EnCana. Est. 30 m tones CO2 stored over life of project
DOE regional partnerships: field validation tests. FutureGen could have been (and may one day be) in Illinois. Would have been the world's first large scale CCS demo using IGCC tech but was quashed and is now being restructured.
Reality checks:
- Scale: 1 Gt carbon/yr = CCS for 800 coal plants (equiv to doubling the efficiency of the world's car fleet)
"Trust NO cost estimates" – CCS configurations can vary significantly on location, tech, fuel type, etc. Commodity & materials costs have gone through the roof. Methodological assumptions vary…
Roughly 40-80% increase in grid power costs estimated due to CCS costs
Mixed views of CCS: the public, NGO, institutional investors, Greenpeace, NDRC
There is currently no regulatory framework for commercial CCS. Various states are working on it, as are IPCC, World Resources Institute. EPA has a proposed rule published July 29, 2008, public hearings to be held in October.
Human Capital: energy industry faces severe human capital shortages even without CCS. CCS summer programs under way to train new people…
[Slide on policy developments]
China and India coal demand growth regardless of what US decides to do about CCS
Maslow's pyramid of energy policy needs: Access to commercial energy at bottom, then security of supply, then cost efficiency, then natural resources efficiency, then social acceptability at the top

Randy Udall: "Peak Oil and Global Warming: What's Missing from the Climate Debate"

Has studied coal emissions for 20 years…is convinced of anthropogenic CO2 issue
Warren Isley: "Man's long adventure with knowledge as been a climb up the heat ladder…"
4 million Chinese entered a coal mine this morning; 100 of them will die this week
Global carbon emissions exploded exponentially with fossil fuel exploitation since rough 1950
Some of our emissions today will still be there 500 years from now
About 2 billion of the world's 6 billion people are still cooking over animal dung and other low-density fuels, and living low on the energy food chain.
Are we taking the smoke for granted, and the fire for given?
All the EIA charts are great if you just change supply to demand. [Great snark!] Appetite for fuel is soaring in the future, and this worldview is widely shared, including among environmental groups.
In the cornucopian view, fuels are both abundant and cheap in the coming decades. World oil price projections are laughable.
IPCC models seem absurd to the peak oil community. Climate modeler responded that they are extremely skeptical of the peak oil (and peak energy) notions, "We've done a few 300-year scenarios that have some shortages in them, but even that may not be realistic. This is especially so with coal!" "Do you really think there is only another 60 years of fossil fuel left? I don't think so."
Roger Bezdek has a new paper showing that total world fossil fuel projection will peak ~2017 at ~11.5 BTOE/yr. [Wow, a more pessimistic forecast than I have seen previously.]
The gap between these two worldviews is staggering…it blows your mind…how can these views be so opposed?
What are the climate change modelers missing?
- They believe that coal is 5,000-8,000 GtC (gigatons of carbon)
- Unconventional fossil fuels: 15,000 to 40,000 GtC
- Soils: ~1,500 GtC
- Biomass: ~ 500 GtC
- Nat Gas: ~250 GtC
- Oil ~270 Gtc
Climate modelers really don't understand energy, and have dismissed out of hand any "Mad Max" type scenarios…
Nested assumptions:
- Energy scarcity is a myth
- Fuels are superabundant
- No reason to hoard or fight over them
- Globally traded from haves to have-nots
- Coal-to-anything will expand significantly
- Fuel will remain cheap for a century
What the IPCC is saying is that there is plenty of fuel for another century of exponential energy consumption
Consider Al Gore vs. Charlie Maxwell:
- Charlie says we will hit $300 a bbl for oil by 2015
Is our obsession with climate change dangerous? It's distracting us from the more immediate peril we're in. Consider the example of a suicidal pilot hijacking Egyptair 990… [tells story]
Gore's Flight Plan: Protect posterity. We're headed to 550 ppm by 2100, committing us to a 3 degree C increase, with sea level rise; global emissions must be controlled
Charlie Maxwell's flight plan: Preserve prosperity, energy is the original currency and we should save and conserve with utmost efficiency.
If oil exports are peaking, then we are facing the most serious crisis in the history of manned space flight…
How big is our "carbon budget?" James Hansen [now] says 350 ppm (which we passed 25 years ago). EIA vision (BAU) gives us over 6 degrees C increase. Path for 50% chance of avoiding delta T avg > 2 degree C is much more demanding than path for 50% chance of avoiding > 3 degrees C. Disagreement over the target befuddles global efforts.
Hansen's model of fuel peaking: you have to begin phasing out coal globally by 2025
"Wyoming boasts enough coal to weld every tie that binds, drive every wheel, change the North Pole into a tropical region or smelt all hell!" Fenimore Chatterton

Bumper sticker: "Earth First! We will drill the other planets later"
Peak oil is going to make resolving the climate problem much easier. It's really a gift!

Q&A

Webber: CCS for EOR is favored because the pipelines & infrastructure already exist…it's really a way to "practice" CCS…but the carbon balance isn't really there.
Tomski: When might we hope to achieve the target of 1 Gt C/yr? Really depends on when we start…cancellation of the FutureGen project was disappointing. Needs proper political support.
Webber: US points out China is largest emitter; China responds that they're much better per capita (and with a one child policy has avoided 300 million users)
Udall: Our "global" problem is really among about 10 nations, a quest for sustainable energy solutions. Consider the enormous funding and scientific talent thrown at climate change vs. almost nothing for peak oil, which is going to arrive with all the subtlety of an atom bomb…it's enough to drive you crazy.
Webber: Some economists are beginning to recognize environmental constraints (limits to growth), if not the energy constraints.

Lunch

"Congressman Roscoe Bartlett Award": Given to Rep. Terry Backer and Debbie Cook (Mayor of Huntington Beach, CA and ASPO-USA Board Member)

12:00 pm – 1:30 pm

Michael Boyd, President, The Boyd Group Inc.

Introduced by Randy Udall, ASPO-USA Co-Founder

Udall: A retrospective on the history of flight: The Wright Brothers, Charles Lindberg, Amelia Earhart. Today 8 million flights carry 600 million passengers each year.

Michael Boyd: "US Airline Industry Trend Forecast: Not New Metrics. A New Industry"

An airline is an excellent investment…just use your ex-wife's money and get even.
Oil prices = Change in business fundamentals. The entire system of travel, distribution and logistics is in line for major changes…It was built on cheap oil. Whole shifts in the way things are made and sold are coming.
"Just in Time" warehousing may need to revert back to the traditional
Proximity of goods & raw materials is more important than just-in-time inventory practices.
We may have a global economy in the future, but it will be different from today
Think of the air travel industry like the old Roman Empire…Barbarians are forcing it to shrink
Fuel costs reducing the number of profitable businesses using air travel.
Air cargo, charter airlines…
New fleet mixes…smaller jets are coming out, that means some of the markets they used to service will shrink too.
Less potential for new service….more potential for reduced service.
Mr. Wizard isn't coming to the rescue.
- In the past, breakthroughs in technology have offset cost increases in the airline industry.
- The average cost of air travel, adjusted for inflation, dropped 50% from 1978-2004. That's going to change, big-time.
- No tech breakthroughs will address the fundamentally higher costs of fuel.
- Conclusion: changes in business patterns. Changes in spending patterns.
Other problems:
- Air Traffic Control. No upgrades from Washington represent real improvement. Plan of delays and higher fares. Nothing is being done.
- Air Service Rationing: With no real plan, the "solution" will be to constrict the air transportation system. Gee, will airlines cut service to Phoenix, or to Pellston?
- Larger airlines, larger costs. Airports will need additional funding to accommodate new fleets. Washington has no clue.
- The funding of the industry is a joke with various small fees expected to support airport expansion, etc.
- Labor: unhappy campers. They'll leave the bargaining table with big increases. Or with strike posters. One or the other
- Environment vs. second social agendas: Air travel is a positive part of our economy. There are two things you never criticize: religion, and Amtrak.
Responding to the market
- Flights are essentially full – over 75-80% is "full"…and flights have been "full" for the last 4-5 years.
- A diverse fleet is needed to assure air access for communities!
- We aren't Europe. Very limited ground transport. No air service in a region means a problem for economic growth. We can put a man on the moon, but are totally incompetent at creating a rail network that works!
- Realities of air service: access to the globe, frequency, and matching capacity to demand.
- (Somewhere in) Mississippi, huge businesses are making parts for helicopters, rail, air, etc., but mostly for Asian companies!
- Common belief: it's all due to fuel prices. Reality: it's mostly due to myopic vision and rearview-mirror planning.
The new traffic dynamic:
- It's not just Tokyo-Newark. It drives rural America traffic, too.
- Point: a exec from Taichung isn't just going to Detroit, he's going to AL and CT and OH too. There are many interrelated economic development opportunities from a single flight
- India: highly developed economy, stable legal system, expanding investment in the US
- China: number one global economy…Chinese investment in US will grow geometrically in the next decade. Huge potential for business growth in both directions. Watch for inroads by Chinese carriers, and Latin-China growth
- US is key stopover/transfer point from China to South America
Global Portal:
- Dubai is example of being a global portal between areas. E.g., Dallas-FW, Detroit/Metro.
- A traditional airline hub inter-connects cities.
- Mega-connect points between regions, cities
- If you want to go from Sao Paolo to Asia, you're going through the US
Forecasts:
- US enplanements in 2008: -2.5% to -3.2%
- 2009: -7.5% to -9.2%
- US fleets: 100-120 small jets gone; 3-5% retirements
- Off-schedule flights (aka delays): up at least 10% from 2008
- Bankruptcies: On the margin. No majors. (Big carriers won't go bankrupt)
Myths
- There is no real over-capacity. In fact there is increasing price traction in the industry
- The hub system is outdated & inefficient: See what happens to Lubbock, El Paso & Ft. Wayne without it! There isn't one single market to support air travel for Ft. Wayne Indiana.
- Southwest is "The Model" for all airlines. They don't make any money. Without the fuel hedging, they would lose money.
Non-Solutions
- Peak period pricing. Capping flights. Penalizing small aircraft.
- The DOT has a plan to fix things: force people to pay more, or they can just stay home
- The problem is that these clowns are taken seriously.
- This isn't the 7^th avenue Subway. There are no "peak periods" per se.
- People and business can't be reservoired like water: one 747 can't replace 7 small frequent flights
US fleets will gravitate toward the mid-capacity sizes
As of June 2008 the average fare all-in was $191; net to airline was $160-ish…. Airline industry now has only a 14% profit margin. So they're nickel and diming us.
Every airline in the world is obsolete at $100/oil.
- Flying less, and parking airplanes will only make the large dysfunctional system smaller
Not "better", just "less bad"
- 20% of flights are "defect"…failed to deliver as promised. Differences between "best" and "worst" are minor. Airlines assume moving airplanes is the main objective, but it's not. "Airlines operate on automatic pilot."
- Airlines have no production management
Get the data right
- Bureau of Transportation Statistics is stuck in the Eisenhower age. Data shows that fuel consumption went down from 1997 to 2006, but that's just because they only count the big commercial flights.
Air traffic control is so bad that the industry must fly 15% more than needed. Slower flights lead to congestion the system cannot handle.
This industry will burn about 19.7 billion gallons of jet fuel this year. 15% is wasted; that's about $10 billion wasted annually. (@ $3.40/gal). This confusion is self-inflicted.
Airlines don't count wasted minutes…must manage their production lines. 20% of flights today are off-schedule, but 100% are delayed.
It's not a crisis, it's a problem. If they clean up their act they could have another 5 years before peak oil really hurts them.
- Algae, peanut oil, hydrogen, pixie dust. Air transport is oil based for the foreseeable future. And it can use a lot less fuel.
- Washington has mismanaged infrastructure for over 30 years; results can take backseat to congressional hearings.
- ATC system must be re-designed. Current DOT programs insure more waste, more consumption, more nonsense. Airlines move customers, not planes.
- We can retain and increase the benefits of a vibrant air-transportation network – it is not in conflict with environmental issues if managed properly.

Q&A

If the Boeing Dreamliner really saves 10-15% fuel, it's going to be a real competitor. There's a real need for the Airbus A380, but worldwide there's only support for about 300 (?) of them. Many airports can't land them.
Hedges on fuel only work at low levels…United just got bit by locking in costs at $130/bbl.
At $200/bbl, how would the industry fare? If it happened rapidly, 1-2 years, it would destroy demand by limiting the flights that could work economically.
Gov't supports inefficient system design
Why can't we have bunk-style instead of upright seating? Safety.
We will not start charging passengers by body weight.
People in the airline industry don't know about peak oil.
No planes in use today were designed with the expectation of oil over $50
Seats seem designed for maximum discomfort.

1:45 pm – 3:15 pm

Good clip from Three Days of the Condor

From Fuels to Flows: Is the Future Electric?

Paul Gipe, Wind-Works.org

Denis Hayes, President, the Bullit Foundation

John Geesman, Commissioner, California Energy Commission

Morey Wolfson, ASPO-USA Board Member (moderator)

Wolfson: The shrinking of the credit markets and difficulty in getting loans could seriously affect the ability of power providers to finance new plants. A new renewable portfolio standard law in CO passed even over a well-financed campaign against it. Colorado just landed a deal to host the world's largest wind turbine manufacturing plant by Vestas Wind Systems. The electric industry is changing and policymakers are finally getting with the program.

Paul Gipe: "Renewable Energy: A Challenge Worthy of Great Nations - Moving From a Nation of Consumers to a Nation of Producers"

North America (NA) is dabbling around the edges of energy policy
Complacency is not a policy, and inaction is not an option
NA RE market growth is exciting, but not early enough
Profound issues:
- Collapsing bridges, failing grid
- Oil has peaked
- Nat gas has peaked
NA must move beyond Kyoto
- Climate change not the only issue. Transport fuels are limited.
Some numbers
- US consumed about 4,000 TWh/yr
- Consider: 2 MW turbine makes one million kWh/yr, or 2 million kWh/MW/yr or 2 TWh/1,000 MW/yr (23% capacity factor)
- To meet ¾ of our electric supply (fossil fuels) we need 3000 TWh of wind per year…1,500,000 MW of wind (75x Germany's current generation)
- Canada: Eliminate 155 TWh/yr from fossil fuels: equivalent to 75,000 MW of wind
- Electric vehicle charging: light vehicles convert to hybrid: 5,000 billion km/yr, 1/3 kWh/m for EV, ~1,500 TWh/yr for EVs, or 750,000 MW of wind capacity.
- Canada: 50,000 MW of wind to support EVs
- NA: total 800,000 MW
- Need 2,500,000 MW for NA
- Heavy trucks: 365,000 in NA, is equiv to 200,000 MW/yr of wind (all-in)
- Can it be done in NA: 2,500,000 MW/ 200,000 MW/yr in 12.5 yrs, <20 years heavy truck production. Yes it can be done but not at current pace. Cutting consumption cuts time or pace necessary. We must cut consumption to do it.
Typical household consumption: Texas 14,000 kWh/yr/home vs. 6,500 for California; 3,000 for Netherlands.
We can cut our consumption by 50,000 (units?).
Plans:
- AWEA: 300,000 MW (20% x 2030)
- Pickens: 400,000 MW, $1 T
- Gipe's plan:
  - 2,500,000 MW
  - 6x Pickens plan
  - $5 trillion
  - At 50% consumption, much lower
NA biomass, solar, geothermal, etc. are all better than in Germany
NA could go 100% renewable but at lower consumption levels
Swords into Wind Turbines:
- $600 B for Iraq war could give us…[missed it; see slide deck
Aggressive targets require aggressive policies by engaging the public. 18 EU countries use electrical feed-in tariffs (FITs), including Germany, France, Spain
Advanced renewable tariffs deliver more capacity and more equitably because they enable participation by everyone.
FIT turn farms, home, and businesses into entrepreneurs
As a nation we have to move from a culture of consumption to a culture of conservation. There is no time to lose. This is a challenge worthy of a great nation, and I believe we can do it if we change our policies.

Denis Hayes: "Revolutionizing the Entire US Energy Strategy: What Will It Take?"

It's been a long time since I was at a conference where I wasn't the gloomiest one.
The financial market meltdown is a good example of a "black swan" event (ref. Taleb). Pearl Harbor was a classic political black swan event, which resulted in a huge transformation of US mfr capacity to make a war machine, in part because we had abundant and cheap oil.
We have had numerous events that could have prompted us to transform our energy regime, but we didn't.
I have a back-up plan, with reasoning by analogy and looking for a black swan.
Compared information revolution and the explosion of the computer industry to energy transformation in the ‘80s.
- In the 80s, we developed solar PV, solar thermal, zero-energy homes, EVs, CFLs, etc.
- Oil as a weapon, Three Mile Island, climate change, loss of capital to buy foreign oil, all drove the energy revolution.
- Whereas the computer revolution had limited and simple uses…games, spreadsheets.
- Carter had set goals to produce energy from renewables, saying that energy transformation will be the "moral equivalent of war" and a test of the American people.
- 20 years later, the PC revolution has been incredibly effective and has become wildly faster, more powerful, with more storage, at ever-falling prices. But what has this produced? It has fundamentally changed the structure of society…consider the impact of Amazon, of Google, etc. The information revolution is a real revolution.
- Meanwhile, the renewable energy revolution has barely moved forward, and most progress has been made by other nations.
- The similarities of the two industries are striking. Why did the information revolution blossom, while the energy revolution was stillborn?
- The federal government generated key demand for the computer revolution (for military purposes), and built the original Internet.
- In contrast, the federal government set out to consciously destroy the RE industry. Reagan totally dismantled the federal RE R&D effort. American PV industry is a great case in point. Has many, many advantages over traditional fuel. In 1998, America was the top producer of PV cells. Then, thanks to serious federal support, Japan surpassed us the next year. This was precisely analogous to the demand generated for the computer industry by federal demand. Of the top 10 producers of PV in the world today, none are in the US.
- Now, we are finally building large facilities with major output capacity for PV.
What were some key differences?
- Creative revenue models. We use Google all the time, never pay them a penny, but they make money hand over fist. There is plenty of room for creative financing for RE, beyond carbon credits, third-party financing, etc.
- Small technological beachheads transform into entire industries. Consider the iPod to transform the music industry, thence to the iPhone.
- The RE industry has never formed a "killer app" or established such a beachhead.
We have reached the inflection point for a number of RE technologies that could make a turning point for the industry.
We may not see a full repeat of the success of the computer industry…things like oil shale and fusion will probably remain unworkable…but many other technologies of the clean energy revolution are succeeding and growing.
Despite a flood of bad news from the financial industry, I am generally hopeful that a solar revolution is near.

Wolfson: In 1970, solar PV cost $100/watt. Today it's more like $3/watt. Dot-com is becoming watt-com in Silicon Valley.

John Geesman: "Feed-in Tariff (FiT) Initiative"

Former CEC Commissioner, long time investing industry. Site: www.greenenergywar.com

No matter who wins the presidential contest, we are likely to see a wartime type mobilization of energy transformation
Energy security, economic security, etc.
5-7% of our GDP is needed to solve our financial crisis; should we not be at least as equally committed to solving our energy crisis?
RE is growing now because it's the path of least resistance, the least likely to create a showstopping reaction.
RPS [renewable portfolio standards] and net metering have spurred a new wave of RE in California.
If we are to meet the Governator's emissions targets for 2020 we're going to have to generate 30% of our electricity from renewables.
Renewable energy has a great future in CA.

Q&A

Hayes: asked to comment on the list of semiconductor materials covered in Vince Matthews' presentation last night. The PV revolution can be done without them. The least expensive options now use some toxic materials, and if not encapsulated in PV cells, they would be banned in Europe (e.g., cadmium).
Gipe: Texas has adopted a FiT, would the eastern grid do the same? Not sure about the Texas FiT, but customers will pay a fee on their utility bills that incentivize the development of new capacity.
Geesman: Effectiveness of FiT vs. RPS? Consider the buyout of Constellation energy last week by Warren Buffett… Thinks FiT will win out. Gipe: FiTs are cheaper, faster, more equitable, more effective.
Hayes: The energy revolution isn't going to happen like the WWII plowshares-to-swords effort, because we don't have the leadership starting with the president to make it a national priority. Other issues like the financial market meltdown will compete for attention. Instead it will be done by driving down costs and simply working within the market. We're going to go there because there simply are no other choices in the face of peak oil.
Gipe: The states must act, beginning at the community level. We hope that the federal government will follow us.
Hayes: The recent defeat of climate change legislation went down by trying to satisfy coal-state Democrats and nuke-booster Republicans. What we really need is somebody who can capture the national microphone and mobilize the public. Effective leadership is essential.
Geesman: Both Obama and McCain have embraced GHG control proposals that would require a major transformation of the electrical generation system.
What about EROI? Gipe: Wind hits payoff in 4-6 months where the turbines have 20 year lifespans. Cutler Cleveland and others have done some good studies on this.
Opportunities for utility scale CSP [concentrated solar power]? Geesman: there are 40,000 MW somewhere in the permitting process now in CA; not clear how much of it will materialize. Some of it will be stymied by endangered species concerns, but much will move forward. It will happen.
Geesman: The most promising investment space in RE is in the area of storage. Nat gas use will probably remain steady for grid power, but simple steam cycle nat gas fired plants will be replaced by new turbine systems.
Gipe: Sees a buildout of new East-West transmission links in NA as an integrated market. We need everything: solar, wind, geothermal, etc.
Hayes: CSP plants can have built-in storage. Distributed generation on houses, V2G systems could transform the grid in ways we can't imagine now, like using your car engine to power your house when the grid goes down.

3:45 pm – 5:15 pm

Clip from Good Will Hunting

Sustainable Mobility

Dan Sperling, Director, Institute of Transportation Studies, U of California, Davis and California Air Resources Board

Bryan Jungers, UC Davis

Geoff Wardle, Dir. Of Advanced Mobility Research, Art Center College of Design

Christer Lindstrom, CEO, Encitra Corp

Ron Swenson, ASPO-USA Board Member (moderator)

Dan Sperling: "The Future of Mobility"

Exponential Growth in Mobility (passenger-km per day per capita in France)…interesting chart from 1800 to the future
Vehicle travel growing faster than Population (but not in California?!) since 1970

Transportation is vastly better today than it was 100 years ago, but the car is now a victim of its own success.
2 billion vehicles globally by ~2020, up from 1 billion today…another hockey stick chart
Vehicle ownership will continue to surge partly due to new low-cost cars. India's Tata Nano costs only $2500
15 million electric bikes and scooters sold in China last year
US car monoculture is resistant to change partly due to low population densities. US metro areas have the lowest densities. Atlanta: 6 people/hectare, Mumbai: 389
Need a new paradigm of mobility services to provide choice and facilitate aggressive polities to reduce VMT. Our paradigm hasn't changed in 80 years: transit, paratransit (jitney services), ped/bike, carsharing, digital ‘mobility' (teleconferencing)
Paris rent-a-bike system is new but already hugely popular and widespread and highly effective
Magnitude of the GHG challenge: To get to 1990 emission baseline by 2020 we have to remove 169 MMT CO2 reduction, and a huge cut by 2050
CA AB32 (2006) timeline specifies a "scoping plan" to be published by 2009…
Transportation accounts for about 38% of GHG in CA
Transportation in AB32:
- Vehicles (cars and trucks) 39 MM tons (light duty vehicle efficiency)
- Fuels 17 MM tons (low-carbon fuel standard)
- VMT and goods movement (8 MM tons)
Transforming vehicles:
- Mostly need to convert to electric drive propulsion
Transforming fuels:
- Low carbon fuel standard will accelerate the transition to alt fuels and transform the oil industry…mix of biofuels, electricity and hydrogen
- Low carbon fuel standard requires 10% reduction in GHGs/unit of energy by 2020 (implies a large proportion of low-carbon alt fuels)
Transforming travel and use of vehicles
- AB32 target of 2 MM tons for VMT (<2% of planned GHG reductions for 2020) will be increased
- Transport funding, insurance, gov't actions, etc.
- Eco-driving (CIS/GPS gives better efficiency) etc.
See his new book: Two Billion Cars – Driving Toward Sustainability
- Bryan Jungers: 100 MPG or Bust(ed) – A Re-Valuation of Energy Use & Economy
Personal motivations: economic stress over energy
Global motivations: global consciousness?
Students in teams all around the world working on new designs
Inspirations: Buckminster Fuller, Paul McCready, Andy Frank (UC Davis, father of the electric car)
Progress? Over a 15-year period, improvement of about 1 mpg
VMT demand going up relentlessly for decades
The Vision: new vehicle design – Int'l project
- Series PHEV, lightweight, 4-6 passengers (but a small vehicle)…first commercialization will be in India
- Industry thinks we're just kids. To the universities, we're a liability. To the public, an idea too good to be true. To our moms, we are hope.
- Trying to raise $1 million over the next month

Q&A

[Early QA because Sperling has to leave early]

Sperling: It's hard to compare efficiency across fuel types, e.g., fuel cell vs solar powered EV.
Sperling: Almost any GHG reduction strategy works also as a strategy to reduce oil use. Low carbon fuel standard informs oil industry by preferentially choosing cleaner fuels (over, say, tar sands)

Geoff Wardle: "Changing the Design of the Automobile Industry"

Huge parallels between the auto industry and the oil industry: "Wakey wakey!!"
We have to get radical, and FAST!
Requires big picture thinking. Must understand the total context of what we're doing. You can't talk about car design without talking about the design of the entire industry.
See www.mobilityvip.com
Imminent, unprecedented change for the established auto industry…
Emergence of China and India as major players in the energy industry
The end of artificially cheap energy – oil in particular
Scarcity of unpolluted water (because of its role in industrial processes)
Increasing awareness of public about environmental issues, urban congestion, and sprawl
Biggest impact from China and India (e.g., $2,500 Tata Nano)…this will whet the appetite for cheap cars everywhere in the world. Will put huge pressure on established car companies, cars could become commoditized. This will favor newer, more nimble car companies.
Japanese auto industry was the first major disruption to established car makers; China will be the second.
New imminent, disruptive products like the Aptera and the Tesla Roadster.
Some new players will succeed, others will fail, but it will change public perception and increase public pressure to fully recycle.
GHG are a complex relationship between vehicle operation and mfr processes, recycling, raw materials production, major challenges to vehicle design
An energy miracle tomorrow will not solve urban gridlock. It will not solve the diminishing reserves of materials, and it will not do anything about the waste stream
Most of us want to cling to personal mobility. Oil is wasted on inefficient forms of transportation…we have squandered it. ICE is only about 20% efficient. 50% of usable power lost in transmission to wheels. 1 gallon of gas invested in driver, another 20 to transport the car itself. 5/1000^thof every gallon actually does the job.
We need to redefine acceptable efficiency standards and come up with good renewable alternatives to oil.
Need to encourage urban development and new lifestyle habits
A mass migration to urban living leads to need for smarter transportation systems. Sustainability policy agendas everywhere…
Future of mass transport will remain the automobile, but in other parts of the world mass transport will be favored.
Must drastically reduce the mass and aerodynamic drag that surrounds occupants
Need to offer the public the right tool for the job, like a one-seater with minimum weight.
Autonomous driving systems…are you crazy? Bio-mimicry could be useful, but also swarming technology (cars talking to each other). Removing the human element of driving removes reason for accidents, need for safety structures, which means we can eliminate 50% of vehicle mass, and do platooning (close-together travel) at higher speeds with far less drag, and support more cars on existing roads
Alt propulsion systems are an inevitability. Too early to tell which will win out, but various systems until we figure out the whole energy and life-cycle equation.
Lightweight materials will be crucial for cars of the future, but they must be totally recyclable (e.g, not composites)
Dealing with peak oil is really important, but cradle-to-cradle is very important to future generations
So what does this mean for the auto industry? Current auto industry model is outmoded. Few car companies can make a consistently decent return on investment. Making and selling cars seems not to be a very viable business model in the future. So there is an opportunity to redefine what the business really is. A "total mobility service" seems to offer a better option.
There are lots of opportunities for the auto industry to transform into companies that offer a total mobility experience.
Auto industry needs to see this as a new opportunity to redeploy its expertise and mfr capacity, and not as a threat.

Christer Lindstrom: "A New General Transportation Mode"

www.podcar.org
Formed out of a Swedish government think-tank, leading to an MoU between Sweden and California
Objective was to rethink and see what we could do from scratch.
Is there a solution to all these problems? Pollution, peak oil, food prices, etc. etc.?
Want a great transportation system: safe, fast, accessible, automatic, comfortable, solar powered, reasonably priced, low resource impact, low footprint, personal (if we want), high capacity, exciting design [apologized for boxy Volvos]
Swedish, Polish and UK development:
- 3 mile commercial system at Heathrow
- Half mile test track in Uppsala, Sweden
- Test track underway in Poland
- Beamways incorporated with venture capital in 2008
[Movie clip about a pod car on rail design: "Vectus"…does autonomous driving, asynchronous travel]
Is this futuristic? Yes, probably, but it's pretty exciting and seems doable. 10 cities in Sweden joining forces for implementation of Podcars in May 2008. Close to $10 billion in capital committed from POSCO S. Korea, Masdar UAE and others
Vast majority of travel can be replaced by Podcars: Work, school, shopping, leisure and free time…all are highly predictable
Dramatic effects: If this works, it's at least 10x more energy efficient, solar powered, 100x less resource demanding (much lighter and seldom parked), 1000x more fun (read a book, or drink & drive!), 95% less consumption of liquid fuels for transport is not only possible, it's close to criminal not to pursue the Podcar idea further.

Q&A

Consider the Jevons Paradox: Wardle: Yes, more efficient cars will encourage more driving and possibly more congestion. Congestion pricing may help address that.
Lindstrom: If Podcars work, oil will be $25/bbl and nobody will want it! I will still have a Saab that I will drive for pleasure on weekends, powered by ethanol of course.
Jungers: Cars will need to be a lot smarter than they are today.
What about safety, roadkill, criminal activity on the Podcars? Lindstrom: crime may occur in Podcars, but those crimes will be easy to solve.
Lindstrom: Economics of Podcars are definitely viable…details available.
Jungers: There are a lot of efficiency & loss issues with hydrogen vehicles. Continuously variable transmissions are very efficient.
If the financial system goes into hyperinflation, will there be capital to build new rail etc. systems? Wardle: One reason why the auto will continue to be a dominant form of transport for the near future.
Wardle: Autonomous driving systems can make platooning feasible. We land planes on autopilot, so why don't we trust it for road vehicles? The problem will be mixing legacy vehicles with autonomous vehicles, but that can be addressed also. Acceleration and braking are extremely wasteful. Autonomous cars and platooning can yield huge efficiency gains.
Lindstrom: Platooning can be very dangerous and must be done right. Can do 1,700 people per hour with standard cars vs. 7,000 people per hour in Podcars.

6:30 pm – 7:30 pm

Our Energy Challenge: A Dialogue with Conference Speakers

Panel discussion with:

Debbie Cook

Tom Whipple

Michael Webber

Jim Hansen

Robert Rapier

Kjell Aleklett

Terry Becker

Rick Schecter

Charlie Hall announced a Call for Papers for the new ASPO publishing subgroup. Write papers [at] aspo-usa [dot] com or chris [at] getreallist [dot] com

For Whipple: What will it take to get the Washington Post to cover peak oil more? They won't until the pain gets greater. They didn't write anything until oil hit $147 and by the time they got it published, oil was back to $110.

For Becker: Will (??) publish your letter about peak oil? Yes they will do it as soon as I finish it.

For Hansen: About market risk for traders. Traders found themselves on the wrong side of the trade as they got whipsawed around, and finally they got out. Look, swings of 30% in the oil market are totally normal! Don't fixate on short term moves. Schecter: What we've seen in the markets in the last few weeks is a portent for things to come. This is sending a message to non-believers.

For Aleklett: The consequences of peak oil seem inevitable. Where can I get a great summary of the opposing view? A: The US has potential for great movements, and much media is focused on the US, but 95% of the global population lives outside the US. Look at what's happening in Asia but most Americans aren't aware of it. Things are moving to Asia in a way that many people aren't thinking about. Sinopec, for example, is the third-largest company in the world, with backing by Saudi Aramco and Exxon Mobil.

For Rapier: When might we reach 100,000 bpd from non-corn ethanol biofuels? A: It's a long time out, I'm not optimistic. You go beyond corn ethanol and biodiesel (which is small) and there is essentially nothing. Very small amounts of cellulosic ethanol. If you subsidize it enough, you can make cellulosic ethanol to 36 Bgpy, but I guarantee you will put more energy in than you get out. We'll get electric cars first.

For Webber: Peak oil isn't such a bad thing. We'll get more fit from riding bikes and walking, we'll relieve congestion, etc.

For Aleklett: Can we start treating peak oil and climate change together and not be so divisive? A: Peak oil must be ahead of climate change, because it will happen first.

For Whipple: How many congressmen have caught on to peak oil? A: I don't think it's making much progress. I think the peak oil caucus (only in the House) has about 10-12 members, and they hardly ever meet (if at all)…it's really a one-man band (Rep. Roscoe Bartlett, R-MD). I have tried meeting Senators and would-be Senators, but I haven't had much luck with them. What I did find is a desire for proof that high oil prices are due to speculators; if you don't have that kind of proof, they probably aren't interested in talking to you.

Q: Is it worth saving General Motors to get the Volt produced? A: Schecter: It's all about saving jobs. There are other companies that can probably get it done faster and better. As GDP shrinks and financial markets shrink we've got to replace that GDP with real mfr capacity, so we have to support the effort to retain mfr capacity without the financial markets driving all the GDP. Hansen: You never buy MS 1.0, so don't buy Volt 1.0.

A: How can we urge action before TSHTF? Becker: If you want intelligent action, you have to present the question in a way that they'll understand. You have to speak their language. Nevermind Washington, work with your local elected reps. I have been in the legislature for 18 years and used to run an $18 billion budget, and I know that how money is spent is key. You have to talk about economic impact and how that affects legislators. Talk GPD, unemployment, falling tax revenue, housing, prisons, road maintenance…so you have to lay out the economic impact and the role of the state to preserve services. That's how you get their attention. Whether you understand peak oil or not, you can understand escalating prices, a poor economy, and protecting their community. Needs to be focused as an economic response. Aleklett: I have been quite successful in Sweden in promoting the peak oil story, mainly by talking with industry leaders first, because they realize that this is reality that will affect their business. Volvo trucks is now making peak oil a key focus for their future production. Mercedes talked to me about it, seeking an alternative view to Chrysler and CERA.

Q: Are there commitments beyond CTL in the DoD? Webber: Yes, there is a purchase order on the street, but it's invalid…

Q: Has anyone asked Al Gore about carrying the peak oil message? A from Steve:

Talked to Gore at a recent meeting in Denver and talked him about it. Gore saw his two-page handout and said "nice dataset!" Then An Inconvenient Truth came out, Gore was on Larry King's show, and he mentioned peak oil and talked about the geologists who are interested in peak oil.

Q: Is US produced biodiesel better/worse than ethanol (?) A: Rapier: Biodiesel has a better energy return. Even Pimentel agrees about that, calling it close to an EROI of 1 (but that's probably a bit too pessimistic). For soybean it's 2-3. Conoco Phillips had a plan to make "green diesel" from animal fat, where the byproduct is glycerin. The problem is the freeze point is so high. But green diesel is deprived of incentives, and without subsidies, it can't compete with other biodiesel that does get a $1/gal subsidy. Politicians shouldn't pick technology winners. Let everyone compete on an even footing.

Q: How long will oil be traded on the futures exchange? A: Schecter: It will continue to be traded on an exchange, the question is which exchange…but only until the day we begin rationing?

Q: How can we frame peak oil so it's a more palatable/sexy message? A: Whipple: if you think through it, it becomes a very unpleasant message quickly, which is why there is so little political support. Look what happened to Jimmy Carter, the last guy who tried it! I'm fairly convinced that the financial crisis will dominate attention right now. A: Becker: Needs to be reframed as an issue of energy security. Asking a figurehead to lead the charge…Whenever you have data that can be refuted, esp. when refuting data provided by our own government, it's tough. Until and unless we can change the data set and take the gov't data away as a weapon, it's tough. So that's the mission.

Q: What about the IEA report in November, what impact will it have? A: Aleklett: If it says what we think it will, that we won't exceed 100 mbpd, it will have a big impact. In fact the real numbers will be even lower, but they have to take it in steps. I won't be surprised if they lower their 2030 target to 80-90 mbpd, which will make it a very different game in terms of the economy. When will politicians come together to make a decision? When the numbers from the agency make it look urgent.

Q: Are you willing to approach Michael Moore? …no answer

Q: What are your suggestions for energy reduction strategies? Webber: Start with solar hot water, it's the best bang for the buck. Water efficient devices because water is a big part of our energy consumption. Food is the next step: efficient refrigerators and not putting the second refrigerator out the garage where it's hot. And limit the number of kids you have. Aleklett: On avg we're making four trips per day, make them shorter and more efficient (?)

Q: Do you think Mexico's event will be the thing that really puts peak oil on the map? Hansen: Jeff Rubin has predicted zero net exports from Mexico by 2013, I think it's 2012 or earlier, at that point Mexico has no revenue from oil, which is currently 40% of their budget. Therefore immigration will have a much greater effect, and sooner. We'll see a currency crisis before they reach zero exports…so we might not be very far away from that time.

Q: Given the low levels of finished gasoline stocks and so on, when will we have rationing? Rapier: We already have price rationing and occasional shortages in the Southeast. Refiners try to run their refineries minimally. You knew we were in a precarious position because we went into hurricane season with record low inventories, which told me that shortages were imminent. As soon as the hurricane hit, some gas stations ran out of gas.

Q: Non-energy ways of limiting oil consumption? A: Cook: Vegetarianism, limiting number of children, etc.

Q: At ASPO 6 in Cork, Professor Ping from China said they were unlikely to go forward with CTL because they didn't have enough coal. Wouldn't using coal for electricity to drive electric cars make more sense? Webber: Coal for electricity is better because it's easier to control 1500 smoke stacks than 300 million tailpipes. Plus the cost aspect, air quality, etc. So coal for electricity is better for transportation. Ozone is another aspect, but it needs sunlight to make ozone, so there might be some benefits at night when running coal-fired electric cars.

Q: Please guess at what year oil might reach $200 and $300 a barrel? Schecter: 2011. Becker: No idea. Aleklett; the day the Chinese are willing to pay that, because they set the price in the future. Rapier: 2011-2012 for $200, a year later for $300. Hansen: 2012. Webber: If the dollar keeps plummeting, it could happen this year or next, because it's a function of the dollar. Whipple: If one assumes the Chinese are setting the price, it might be awhile because China does seem to be slowing down.

Q: How do we better harness the intellect, energy and commitment at this conference? One suggestion you could tell an elected official when you get home about peak oil, and what they can do about it?

Becker: I've been telling them for two years! Harnessing that energy starts with wherever you live, whoever you representatives are. You need a critical mass of lobbying locally. If you're asking them to change the world as they know it, you're asking for a big thing, you need a coalition to say it's a threat to safety and welfare. Stop preaching to the choir!

Schecter: It's important to phrase it properly, so you don't create the opportunity for someone to block the message. Focus on energy security, and target politicians and their advisors, with a focus on energy security. Suggest that we have enough political pressure at all levels to convince the federal gov't to revisit the USGS data and revise it.
Aleklett: Everybody is interested in drinking, so use a bottle and a couple of glasses, and demonstrate the problem this way. Talk about drinking, and not oil.
Rapier: If you haven't already, talk to your family. You can't sit next to me on an airplane and not hear the message…I say "some people believe this may be the case" rather than coming off as a doomer. Talk to anybody, anywhere you are. Talk about gas prices and get the conversation going that way.
Hansen: Totally agree. I talk about it almost every time I go to a party somewhere. I found success by using the climate change model, used it as bait, and gave a few talks to the U of Washington in Seattle…the climate change story got me in the door.
Webber: I am a professor, so I focus on publishing, speeches, seminars, etc. Manure could offset 1% of our energy, which no one cares about, but when it got published in an academic journal as a scientific paper, it became a media sensation.
Whipple: My message is urgency; this is a lot closer than most people think. We understand details that most people don't realize. There will be problems within months, that's my message.
Cook: Relationships are primary, and everything else is derivative. It's the people you know directly. If you go to meet an elected official, go with somebody they already know.

[End]

Highlights of the Peak Oil Conference, Part 1

As I previewed a few weeks ago ("Reflections on the ASPO Peak Oil Conference") at the conclusion of the 2008 Association for the Study of Peak Oil (ASPO) - USA Peak Oil Conference, I have cleaned up and uploaded my notes, available here.

For those who aren't inclined to wade through all 57 pages, here are some highlights.

On the whole, I detected a distinctly different tone from the previous ASPO-USA conferences I have attended. The range of forecasts seems to have narrowed considerably, and there was a marked sense of urgency in many of the presentations. Most of the presenters have been studying energy and peak oil for many years, and warning of the potential results, but we have done little about it, and have been delayed by politics and propaganda. I think the general feeling of the conference was that we are truly out of time to mobilize a response.

The presentation by Jeremy Gilbert, the former Chief Petroleum Engineer for BP, was a good example. He noted that while the world has had multiple "wake up calls" about peak oil, and that the ASPO has been doing conferences detailing the problem since 2001, nothing seems to have changed. Oil discovery peaked 40 years ago, and despite the most intensive and technically advanced drilling in history, it continues to fall. We now only discover about one barrel for every 4-5 we consume, and that trend is only getting worse.

The major international oil companies (IOCs) like ExxonMobil have not invested in future production as had been hoped; new technology has not dramatically improved recovery; and wells drilled over the last few years have nearly doubled but production has remained flat. Yet demand continues to rise and per-capita usage in the US and Canada is little changed. He rather directly chastised America for continuing to dream that exploration and technology will save the day, when the data is abundantly clear that they cannot.

The IOCs, for their part, have access to only about 6% of the world's remaining oil reserves; the reserves of Exxon, the largest of the majors, rank only #17 worldwide. The rest is in the hands of the National Oil Companies (NOCs), which take much larger shares of the revenue (around half), are often rife with corruption and have uneasy relationships with their governments. Jim Buckee of Talisman Energy noted that the NOCs are also far less efficient, producing only about $5.25 of revenue per barrel vs. $15.28 for the IOCs.

Recognizing that the remaining large supplies of oil are in geopolitically challenging areas, there was a considerable focus on the geopolitics of energy. Jeff Vail noted that oil is part of the intersection of nation and state, and that global feedback loops among nations tend to increase resource nationalism, and exacerbate the peak oil problem. Oil is increasingly being used as a weapon, and addressing the root causes of the tension will require radical restructuring of our economies. However, finding realistic solutions remains a challenge, and trumps geological factors in affecting oil production.

Supply Outlook Dim

OPEC, of course, is the geopolitical prime mover of the oil markets, producing 43% of the world's crude. A great deal of attention was given to its oil reserves, and its production outlook. Dr. Peter Wells emphasized that OPEC producers have long horizons for their investment decisions, and an increasing concern for saving some oil for future generations. Their ambition is not to pump it as fast as possible, but to seek the maximum sustainable rate. It is in their interest to keep the spare production capacity as low as possible while keeping prices rising but moderate, without disrupting the markets. He noted that the price floor for oil is no longer set by spare capacity so much as it is by the needs of Saudi Arabia's budget.

Since non-OPEC production appears to have peaked, the world is looking to OPEC to satisfy additional demand and make up for the decline of non-OPEC. But it is looking increasingly unlikely that OPEC will be able to meet that expectation, as their large fields are mature, and exploration successes peaked 40 years ago. Wells believes that OPEC production will never exceed 40 million barrels per day (mbpd), as compared to its 37 mbpd today (EIA), mainly due to political decisions.

Saudi Arabia will likely peak within about five years, after which any further growth is essentially out of the question. Prof. Kjell Aleklett, a founder of ASPO International, quoted King Abdullah of Saudi Arabia: "The oil boom is over and will not return. All of us must get used to a new lifestyle."

This is where the depletion question becomes important. If the global depletion rate is roughly 5% (a broadly accepted figure for now, but it is increasing), and today's production is approximately 87 mbpd, then we are currently losing 4.35 mbpd of capacity each year just due to depletion.

If Wells' estimate is correct (many at the conference believed it was on the optimistic side) and non-OPEC is indeed in terminal decline (which I believe is true) then the total OPEC additions won't even offset the global decline. Accordingly, we are now relying entirely on the non-crude "unconventional liquids" like natural gas liquids, oil from tar sands, biofuels, and coal-to-liquids to increase the production of "all liquids" at all.

But as Jim Buckee of Talisman Energy pointed out, even these unconventional liquids may not be able to fill the gap of crude decline. By his reckoning, conventional oil reserves are 750-1000 billion barrels, and the decline in production amounts to 50-60 mbpd over 10 years. Natural gas liquids (probable), yet-to-find oil (10-20 billion barrels), enhanced oil recovery technology, plus tar sands bitumen and extra heavy oil all put together equals about 300 billion barrels, and can't make up for the decline of conventional crude. (Something ASPO founder Colin Campbell has been saying for a long time.)

Peak Oil In Two Years - It's Crunch Time

Estimates of the global peak of oil production varied, as always, but I would say that there was a strong consensus around the 2010-2013 time frame for "all liquids." Natural gas is expected to occur between 5 and 10 years later. This is in line with the estimates I used for Profit from the Peak.

One such outlook was offered by Ken Verosub, a professor of geology at UC Davis. For the world, his calculation shows a peak around 2015, +/- 2 years. His simple math on the outlook for US domestic oil production was quite clear:

Total US reserves: About 20.9 billion barrels
Total US daily consumption: 20.7 mbpd, of which we import 11.7 mbpd
Domestic oil, daily production: 9 mbpd
Domestic oil, annual consumption: 3 billion barrels per year
20.9/3= 7 years

Therefore at current rates, our domestic oil production would be kaput by roughly 2015, +/- 2 years! In actuality though, production doesn't speed along at a high rate and then quit, but rather tails off in a bell curve. So what this really tells us is that by the end of the next presidential administration, we will be almost entirely dependent on oil imports. Verosub summed up his presentation by saying, "It's crunch time!"

As for the undeveloped oil regions of the US, several presenters noted that increased production from the Outer Continental Shelf (OCS) and the Arctic National Wildlife Refuge (ANWR) would make only a negligible difference in production and prices, due to the long lead times (roughly 10 years) and the low flow rates that might be achieved. Newt Gingrich's "Drill Here, Drill Now, Pay Less" campaign was widely mocked as being altogether unclear on the concept of oil flows. Gilbert stated that if all of the OCS were opened to exploration, it would only increase US reserves by about 20%; that's about 4 billion barrels, or the equivalent of six months of our current domestic oil production.

According to Gill Mull, a retired geologist from the Alaska Geological Survey, the P50 (50% probability) estimate for ANWR is about 10 billion barrels total, or roughly a three-year supply as compared with current US domestic production. However, due to the flow rates, all of the new fields in the region put together couldn't overcome the decline rate of the North Slope.

Simmons Warns of a Run on the Pump

The most shocking presentation, though, had to be the one given by Matthew Simmons, author of Twilight in the Desert and one of the world's top oil investment bankers. You could have heard a pin drop in a room of 500 people while he was speaking. The hurricanes and high prices have driven inventories to an extremely low level, he said, and he was very concerned about the possibility of a "run on the bank" with fuel supplies, which could easily breach the system's minimum operating levels.

He presented an example of how quickly we could "break the bank" of oil supply:

· 220 million vehicles

· 20 gal capacity each

· Average tank has 5 gals in it (an estimate supported by recent research)

· If everybody rushes to top off their tanks, at ~15 gallons x 220 million = stock draw of 78 million barrels.

· But our current finished stocks are only about 87 million barrels!

Even a few weeks of cold winter could deplete the usable stocks of heating oil, he said.

When the stocks deplete, he warned, food supply could be in jeopardy within a week. The economy would slow to a crawl, and the financial markets would panic, as the country finally grasps the energy risk. And yet, this risk is unpriced. Nobody knows the odds. Nobody does charts of peak oil, even though it has ominous parallels with the financial crisis. Most global leaders have no idea of any of the risks that face the energy markets. Whereas it took 5 months to melt down the financial markets, he said, the energy markets could unwind in less than a month.

Very sobering stuff, and that only roughly covers the first half of the conference. In part two of this article, I'll take a look at coal, China, the airlines, and renewable energy...and explain why one presenter believes that the massive increase in oil demand from China and India could, paradoxically, spell the end of globalization.

Until next time,

Chris

Reflections on the ASPO Peak Oil Conference

I'm writing this week from Sacramento, California, where the fourth annual peak oil conference by the Association for the Study of Peak Oil - USA (ASPO-USA) has concluded.

There is so much to tell you, I hardly know where to begin. In fact I have about 33 pages of typewritten notes here, which I will clean up and publish as soon as possible. You can keep an eye out for those at my blog, GetRealList.

For now, I'll just share some general observations.

On the whole, the conference was typically outstanding. I have attended three of ASPO-USA's four conferences so far, and all were packed with high quality presentations dense with information; no sleepy corporate speeches here. In fact, it's quite mentally taxing and hard to get enough sleep! Without a doubt, they are the best conferences I have ever attended.

It's also an incredible opportunity to talk with many of the top researchers, scientists, and businesses people in the field, on breaks or over dinner and drinks.

I was privileged to chat with many of the people whose work I admire, including Matthew Simmons, Charles Hall, Robert Rapier, Kjell Aleklett, James Howard Kunstler, David Hughes, Jeffrey Brown, Kyle Saunders, Alan Drake, Tom Whipple, Jim Puplava, Jason Bradford, Mike Ruppert and Jan Lundberg (and those are just the ones I can remember in my sleep-deprived state). I also had the pleasure of meeting a number of Energy and Capital readers.

As such, in some ways it is a sort of group therapy session for the "peakists." The looming reality of going over the energy hump, combined with a deep uncertainty about the ongoing market meltdown, made all attendees grateful for a chance to chat with like-minded people about our number-one worry...a subject that turns off almost everyone back home, and creates tension in many a marriage. We had a lot to talk about.

Foremost on everyone's mind, I think, was the market. How could it not be, with a $1.8 trillion in federal bailout money on the table, the markets in turmoil, the referees changing the rules of the game while it's in progress (if you were short the financials last Friday, I feel your pain).

And how appropriate that on the second day of the conference, light sweet crude shot to its biggest one-day gain ever, gaining 15% to close at $121, having risen as high as $130 intraday and triggering a temporary shutdown in Nymex trading of crude.

What we're seeing in the markets right now is unprecedented, extremely serious, and we have only a matter of days or weeks to avoid catastrophe. It's starting to look like a bad episode of 24. It's no wonder we're nervous.

The news from the peak oil world is no less nerve-wracking. Even as someone who's well familiar with much of the subject matter, there were plenty of moments that made me say "Whoa."

Many of those moments centered around the data on China. Several presentations emphasized that emerging markets are now the key factor in almost every resource. The price and availability of oil, coal, minerals, metals, and building materials are increasingly set by demand from the developing world. Accordingly, China is fast becoming our number-one competitor for every kind of resource, and is quickly overtaking us in everything from carbon emissions, to cars on the road, to GDP, to coal consumption.

The range of estimates on when the absolute global oil peak will be (or was) seemed to have narrowed considerably from previous conferences. It looked to me like consensus range is now roughly 2005 to 2012.

I noted with some interest that many projections for a whole variety of key commodities and metrics peaked somewhere in the 2012 range. Maybe those crazy Mayans were right after all.

We certainly live in interesting times. I am reminded of something Robert Hirsch said at the ASPO-USA conference last year: "Peak oil: the more you think about it, the worse it gets."

Conversely, the more you think about renewable energy and alternate modes of transportation, the better it gets. As natural gas and coal get harder to extract and more expensive, the outlook for wind and other renewables just gets better. As moving people and goods around by car, truck and airplane gets increasingly expensive, plug-in cars and rail look better and better.

Many of the presenters noted that the next 20 years would be the investment event of a lifetime. Those of you who have read my book, Profit from the Peak, know that I couldn't agree more.

To mention just a couple of examples off the top of my head: A plausible scenario in which the US manages to produce 30% of its electricity from wind. Enormous projects under way in wind and solar. Some $10 billion in capital committed globally to development of Podcars (a JPod was on display at the conference).

There is no doubt that we have some enormous changes coming to us, whether we like it or not. The future of fossil fuels has never looked dimmer, and "business as usual" isn't going to remain "usual" for much longer. For starters, we are very likely looking at the end of globalization.

That also means we're looking at a new beginning for American manufacturing capacity. The Rust Belt is about to enjoy a renaissance, as skyrocketing shipping costs force the production of everything from steel to cars to cement to renewable energy machines to come back home. Consider this: If I heard it right, Colorado just landed a deal to host the world's largest wind turbine manufacturing plant, a new plant from Denmark's Vestas Wind Systems (CPH: VWS).

There has never been more reason to fear for the future of energy, but at the same time, I have never seen such hope for it.

Until next time,

Chris

A Story Nobody Wants To Hear

As we prepared to tape the final segment of my interview with Aaron Task on the Yahoo Finance "Tech Ticker" podcast at their Times Square studio on Monday morning, the producer asked: If there is no hope of increasing the supply of oil from here, and prices are going to just keep going up, what changes did I expect in the future?

Watch Chris Nelder
on Tech Ticker

Part 1: 'Sky's the Limit' for Crude, says Peak Oil Advocate: Buy Drillers, Avoid Majors

Part 2: No Relief from $120 Oil Anytime Soon — or Ever, says Energy Expert

Part 3: The End Is Nigh: Peak Oil Proponent Forecasts Grim Future

We both laughed. Aaron flashed me a knowing grin. "Does she really want to know?" I asked him. Yes, yes she did. The tape rolled, and I tried to tell it straight.

Not only does it mean the end of personal transportation using internal combustion engines, I told him, but much, much more. It means the end of cheap air travel. It means we won't be able to keep living in the suburbs and commuting to cities. It means the end of globalization, such that we will have to relocalize our production of manufactured goods and food. Eventually, it might even mean that if you didn't grow it yourself, you won't have anything to eat!

Being an old friend of mine (we used to work together at Microsoft, 11 years ago), Aaron has heard it all before from me, and has read my book, so he accepted my perspective with a certain panache. But when we encountered the producer again after the taping, he asked if she found it shocking.

Yes she did, she said, "but by the time it happens, I'll be dead."

Oh, if I had a dollar for every time I've heard that reaction...

Afterward, I retired to my hotel room and flipped through CNN, CNBC, and the other business news shows. I shook my head as I watched the pundits worry over the future of energy, and bemoan the impasse in Congress right now over the energy bill. If you've been following the news, you know the score: The Republicans want to open the remaining federal lands to drilling, and the Democrats want the oil companies to drill on the leases they already have.

If you have read my previous articles, you know that both sides of that debate are wrong if they think their proposals can alleviate high oil prices. If we started drilling ANWR and the OCS now, it would take on the order of 10 years-about 7 years after the global peak of oil production—to begin producing a very modest flow of new oil, at which point it will be too little to make much of a difference in prices at the pump. And the oil companies don't drill on their existing leases because they know there isn't enough oil there to make it worth their while!

It seems we are still firmly stuck in denial about the future of oil. (See "Peak Oil: Living on the Banks of Denial.") The buzz over the new USGS report on Arctic oil is just the latest example. I read that report, such as it was, along with whatever additional analysis I could find, and found absolutely nothing there to get excited about. If and when that oil does arrive on the world market, it will probably be another modest flow of the most expensive and difficult-to-get oil the world has ever produced...and that will be decades from now.

The truth, as best as I can make it out, is an ugly story. If you're still alive in 10 years, you will see the end of life as we know it, and the beginning of a long transformation in which we learn to live within an energy budget that shrinks ever year. No amount of new drilling can change that fact. And the long-term trend will be toward higher and higher prices for oil, at least until a global depression sets in and reduces demand.

I know it's a story nobody wants to hear, but I tell it because I have always tried to tell the truth as I see it. I could be wrong, and I hope I am, but I have seen nothing yet to convince me otherwise.

We can blame each other until the cows come home for failing to plan for this day, but that will get us nowhere. All of the solutions are on the demand side now. Instead of crossing our fingers for some new supply of oil, we should be driving less, driving more efficient vehicles, and investing in renewable energy and electric transportation. That is truly the only way forward, as far as I can see.

A side note: Since I am a big believer in rail as part of the solution to the peak oil crisis, it was a great pleasure for me to take my very first inter-city train ride in America after the interview, from New York City to Baltimore. (I have spent most of my life on the West Coast, where there is so little inter-city train service that it almost never makes sense.) It was clean, quiet, comfortable, and cheaper than driving. Here's hoping that the rest of the country can have such an option as soon as possible!

I may have a story to tell that nobody wants to hear, but those who long for sweet assurances can always flip on the TV and find some commentator to put their minds at ease, like the one I heard on TV the morning of my interview, claiming that oil would soon be back at $80 a barrel. There will always be analysts out there willing to tell you whatever you want to hear-that Arctic oil will prove the peakers wrong, or that drilling the OCS will bring gasoline back down to a buck a gallon, or that Saudi Arabia will always ride to our rescue.

No doubt they will be much more popular than me, too. But I'm not here to be popular. I value credibility above all else.

Maybe that's why I had an old Shel Silverstein poem titled "The Perfect High" stuck in my head all day, in which a thrillseeker named Roy seeks out a guru named Baba Fats who was said to know the secret to the perfect high. But the guru tells him that he must find it within himself. This makes Roy furious, and he insists that the guru tell him the secret. So Baba Fats makes up a wild story about a mythical magical flower, and Roy goes off in search of it. The poem ends:

"It seems, Lord", says Fats, "it's always the same, old men or bright-eyed youth,
It's always easier to sell them some sh*t than it is to tell them the truth."

Until next time,

Chris

P.S. Although I do not believe that there are any supply-side silver bullets that might solve the peak energy problem, I do believe that oil, gas and coal producers will continue to see high demand for their hydrocarbons. That's why we created the $20 Trillion Report—to find the best plays and alert you to them. Check it out today and take your share of the profits while you still can.

Shadowboxing the Apocalypse

(An homage to John Perry Barlow)

If it weren't such a desperately serious situation, watching our fearless leaders trying to grapple with the energy and financial crises would be hilarious.

Anyone with more than $100,000 in their bank accounts must be having some sleepless nights right about now, as the failure of overextended financial institutions continues its brutal cascade. The federal seizure of IndyMac, and the potential federal intervention into Fannie and Freddie, have somewhat dampened the fallout, but Congress' response on Monday to Sec. Paulson's plan was tepid. As I have discussed in previous articles, by the numbers there is still a long way to fall before we hit bottom.

Merrill Lynch warned yesterday that the flagging faith in US financial institutions may hasten that long-dreaded day when Asia, Russia and the Middle East start dumping dollars and refuse to continue buying $700 billion of our debt every year to keep our listing ship afloat.

According to Brian Bethune, the chief financial economist at Global Insight, the situation is even worse: If the US Treasury does not push through a rescue of Fannie and Freddie within a mere two or three days, he said, it risks a financial crisis that spirals out of control. "We can't dither," he warned. "The markets can be brutal. We have to break the chain of contagion before confidence is destroyed."

Free-market champions like Larry Kudlow have argued that a $1.4 trillion Fannie and Freddie bailout would only increase the "moral hazard" risk, by allowing an unsound mortgage business to go even deeper into a hole of lending to try to rescue itself. Far too few of their holdings could be called a piece of moral land, they say, and I am inclined to agree on that. On the other hand, I don't think the economy can tolerate the risk of letting them fail.

In response to the crisis, Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson have been vigorously waving their magic wands before a weary band of bankers, but the Street seems unconvinced. The Dow Jones U.S. Financials Index has fallen 15% over the last week alone. (Of course, if you have been buying SKF, as I have recommended several times this year, you're up 30% over the same week, and using that to hedge your losses elsewhere in your portfolio.)

Meanwhile, President Bush continues to complain that he doesn't have a magic wand to make gas prices go down. I don't know who advised him to keep hammering on that talking point, but every time he says it, it just sounds dumber. We don't need magic wands, or for that matter bloody and costly attempts to secure by military means our access to foreign oil. What we urgently need is a sensible energy policy for the long run, and by that I mean a 100 year plan.

Unfortunately, I see very little of the kind offered from our energy cretins on the Hill. For your amusement and horror, I offer this little selection of their vast, bipartisan failure to come to grips with reality.

A Parade of Bad Ideas

I begin with Newt Gingrich's soft-money PAC, American Solutions for Winning the Future, which is largely funded by Las Vegas billionaire Sheldon Adelson, a major Republican donor and fundraiser. Their flashy new web site panders to the patriotic breast shamelessly, while promoting a "Drill Here, Drill Now, Pay Less" message. Apparently, they have gathered over a million signatures in short order on their petition to Congress, asking them to "act immediately to lower gasoline prices" by "authorizing the exploration of proven energy reserves" off our coasts.

Nice try, Newt. I assume that none of my readers were among your signatories. They know that any new drilling off our coasts could not produce any significant new stream of oil for at least 10 years, and would only slightly affect prices at the pump. Even the EIA has acknowledged that "any impact on average wellhead prices" would be "insignificant" after 2030.

For his part, President Bush lifted the moratorium his father placed on offshore drilling, saying that "as the Democratically controlled Congress sat idle, gas prices have continued to increase. The failure to act is unacceptable." Apparently he has forgotten that the Republican controlled Congresses that preceded this one, on his watch, also watched gas prices increase without actually doing anything about it.

Since Congress has its own moratorium in place, Bush knows that the gesture is purely symbolic, just as he knows that new offshore drilling would have no effect on prices until well after his successors are out of office. But it might reassure the gullible that he's trying to do something about oil supply, and score a few political points.

Seeking to score some points of her own on the issue, Senator Barbara Boxer (D-CA) expressed her "outrage" over the presidential reprieve, saying that the oil companies should drill on the leases they've already got. (We'll discuss the energy illiteracy of that claim in a minute.)

Next we have a strange and oft-repeated claim by a handful of Republican senators (and Dick Cheney) that we must start drilling in offshore Florida because the Chinese are already drilling off the coast of Cuba, and taking "American oil." In fact, there are no Chinese firms drilling off Cuba's coast, but according to the Washington Post, the claim is "just too juicy not to repeat."

The hype about oil shale must also grace our list. Bush and other boosters are trying to whip up public support for a new run at turning low-grade shale into liquid fuel (the fifth such attempt in our nation's history), touting the deposits as being three times the size of Saudi Arabia's reserves. As my readers know, such assertions are extreme exaggerations. The oil shale resource, while large, has never proved to be commercially viable and is unlikely to ever deliver more than a trickle of very expensive, synthetic fuel, which will have very little impact on American supply or prices while incurring as-yet-unknown environmental damage. Unfortunately, the appalling ignorance about energy that burdens most of America makes such wild claims useful political fodder.

On the other side of the aisle, House Speaker Nancy Pelosi struck her own pandering pose, claiming that the current economic "emergency" justified releasing oil from the SPR. Clearly, Pelosi is no more up to speed about the realities of the oil business than anyone else on the Hill. As I have explained before, the SPR is already far too small an emergency reserve, and should only be tapped in the event of severely disruptive actual shortages. It's bad enough that the Democrats were able to stop the filling of the SPR some months ago. Anyone who isn't in total denial about peak oil knows that trying to use the SPR to moderate prices is a terrible idea.

The Democrats, of course, have a growing list of terrible ideas on how to address the energy crisis. I'm sure it scores political points with angry voters to say they'll crack down on oil price "gouging" and excess speculation, but as I have written repeatedly, I don't believe either of those things are a significant factor in today's prices, if they're happening at all.

But the crowning idiocy of Democratic suggestions must remain the legislation that makes it possible for Congress to sue OPEC for price gouging, an idea so stupid that whoever conceived it should win a Darwin Award. In a way, I hope they actually try that some day. Maybe the blowback will slap some sense into them.

And so the shadowboxing continues, with both sides of the aisle feinting and jabbing against straw men, and getting us exactly nowhere in terms of real solutions. Each side blames the other for being in this predicament, while none dare whisper the one word that ought to be the first on the list: conservation. Our addiction to oil is too great to even talk about.

A silent war rages within the very breast of America. Will we continue to insist, with the mentality of a two-year old, that all the oil we want should be ours, that we have some birthright to endless growth and cheap energy? Or will we grow up, and realize that we're neither immortal nor wise, and that the world has real limits we have to live within?

Enough, Already!

While politicians do their level best to ensure that America is as confused as possible about energy, spreading their spins and racking up pander points, there are at least a few experts in the energy industry who are telling the story straight.

John Hoffmeister, former CEO and president of Shell Oil's US operations, told CNBC yesterday why he supported lifting the ban on drilling the outer continental shelf (OCS). Recognizing that OCS production is "not gonna make any material difference" in the short term, he noted that America has resisted developing those areas for 30 years, and that we're now "paying the price" for that.

He went on to explain that all of our options—including drilling for more oil and gas domestically, swapping out 200 million liquid-fuel burning cars for ones that run on electricity, and growing the 2% share of renewably generated energy up to a much more significant level—will take decades to achieve. But politicians, with their short term motivations, simply can't grapple with the long time horizons of the energy business.

Our 30-year failure to develop a sensible long-term energy policy, a period that has seen both Republican and Democratic presidents and majorities in Congress and a long history of shortsighted solutions, is ample demonstration of his point.

Regarding the Democratic assertion that the oil industry isn't using its existing leases, Hoffmeister remarked, "The industry is pursuing the leases it has, but to be blunt, the prospective nature of many of those leases is very low. And you don't go drill oil where you know it doesn't exist." That, I believe, is a true statement.

Hoffmeister explained why he chose to leave the oil business and found a nonprofit group called Citizens for Affordable Energy: to start "doing what's right in America." "Doing what's right in America is listening to the citizens that are in great pain," he said, "making the tough political choices to go after more oil and gas, and—and, as T. Boone Pickens would say, all those other forms of energy that are out there, and do it all."

That has been my position all along, because the way I tally the numbers, even if we do it all, and do it well, we're still likely to come up quite a bit short.

Decrying the "politics of partisan paralysis," Hoffmeister said "It's not helping the American consumer or the American economy one iota. We really have to look at this as an American problem. It's not a Republican problem, a Democratic problem...It's an American problem, and I wish the two branches of government would work together." He went on to say, "The great American public has said ‘enough, let's quit the political rhetoric, and get on with solutions.'"

I only hope that's what we're saying.

(To those of you who caught the references: hey now!)

Until next time,

Chris

Oil Speculation

Editor's Note:

While some of you may know Ian Cooper from past options trading services, his 4,500% cumulative gains of 2007, and gains such as these...

Fremont General September 2007 12.50 puts - 291% in 16 days
Lennar January 2008 25 puts - 279% in 40 days
Pulte January 2008 15 puts - 224% in 40 days
New Century January 2008 25 puts - 214% in 16 days
Centex January 2008 25 puts - 207% in 40 days
Countrywide January 2008 27.50 puts - 203% in 69 days
Thornburg October 20 2007 puts - 188% in 6 days
MGIC Investments December 35 puts - 175% in 80 days
Capital One January 2008 65 puts - 160% in 59 days
Accredited Home September 2007 7.50 puts - 141% in 4 days
Hovnanian November 2007 17.50 puts - 136% in 13 days
Radian Group August 2007 60 puts - 122% in 19 days
Standard Pacific September 2007 15 puts - 111% in 2 days
Autonation January 2008 20 puts - 105% in 49 days
New Century January 2008 25 puts - 89% in 1 day

...he's decided to launch a new options service, Options Trading Pit, which will look to profit from the market's demise and well as its upside.

In fact, he's been beta testing new strategies in the Options Pit blog, sitting with gains like these:

Expedia Inc. October 22.50 put: 189% in 31 trading days
Coca Cola Enterprises November 20 put: 271% in 31 trading days
Masco Corporation October 20 put: 92% in 27 trading days
Lehman Brothers Holdings October 20 put: 313% in 27 trading days
UBS AG September 22.50 put: 165% in 21 trading days
Walt Disney Company October 27.50 put: 10% in 2 trading days

Are gains like these easily attainable? You bet... especially in today's bearish environment.

Options Trading Pit launches shortly. Stay tuned.

Today's Energy and Capital: Why Oil Speculators are Not to Blame

Oil speculators have been blamed for skyrocketing oil prices... but it's not their fault.

It's a supply and demand issue.

Even Warren Buffett agrees. "In my lifetime, up until the last year or two, there's been a huge amount of excess supply available," he said. "We don't have excess capacity in the world anymore, and that's why you're seeing these oil prices."

Couple that with news that world energy consumption will rise 50% between 2005 and 2030, as demand in developing countries rises 85% and oil "worst case" scenarios become plausible.

But in a witch hunt against any one, or anything, responsible for the problems, speculators are taking blame.

Ask the airlines and they'll blame the speculators, too.

Northwest and Delta are among a group of 12 carriers asking Congress to address oil speculator issues, whom they still blame for rising oil cost.

The carriers even issued a statement, saying "We are urging our customers and employees to ask Congress to act quickly to curb speculation in the commodities markets. This speculation, while not solely responsible for the extraordinary rise of oil prices in recent months, continues to make the situation much worse — harming the economy and having devastating effects on our industry."

"For airlines, ultra-expensive fuel means thousands of lost jobs and severe reductions in air service to both large and small communities," the CEOs said. "To the broader economy, oil prices mean slower activity and widespread economic pain. This pain can be alleviated, and that is why we are taking the extraordinary step of writing this joint letter to our customers."

Sen. Joseph Lieberman and Rep. Bart Stupak, too, believe oil speculation has added some $70 to the cost of oil.

Lieberman wants to ban funds or institutions with more than $500 million in assets from betting in futures markets. Stupak introduced "The Prevent Unfair Manipulation of Prices Act," accusing Goldman Sachs and Morgan Stanley of market manipulation, even though he has no evidence of such illegal behavior.

Unfortunately, the assertion of speculation and manipulation theories doesn't hold up.

Even if you restrict the blamed speculators, it won't curb higher oil cost.

According to the Wall Street Journal, "the wild assertions about speculation and manipulation are defective, and completely unsupported by reliable evidence."

"For the most part, speculators do not demand physical oil the way thirsty Chinese refiners do. There is no evidence that speculators are accumulating large and rising inventories of physical oil. But to cause prices to be above their competitive level, speculators would have to take physical oil off the market — the way that governments have done in the past with agricultural products, amassing mountains of grain and cheese to prop up their prices."

It's a fact. The run in oil prices is very painful for us all. But to focus on speculation as a culprit is misguided at best. The real culprit here is continued heavy global oil demand in the face of slowed production, supply disruptions, and a weaker dollar.

And if you need more of a reason for a rise to $150, $170, even $200, look no further than the Middle East.

Israeli-Iranian tensions over nuclear projects aren't doing much to help. There's a growing fear that in the event of war with Iran, the Strait of Hormuz (passageway for 90% of oil exported from Gulf producers) would be jeopardized. If that happens, we'd see an immediate oil super-spike.

Iran's Revolutionary Guards has already said it would impose controls on shipping in the Persian Gulf and Strait of Hormuz, which accounts for about 40% of the world's oil, if it were attacked.

Buffett and Big Oil Agree...

Big oil companies are agreeing with Buffett.

The heads of some of the world's biggest oil companies recently countered "claims that speculators were driving high oil prices, instead blaming a dearth of new supplies."

Executives from Royal Dutch Shell, BP Plc, and Respol YFP said "restrictions on where they can invest and higher taxes meant they could not help boost supplies as much as they might."

BP's CEO Hayward felt that oil speculation theories were a "myth," adding that supply-demand failures are the reasons for recent price hikes.

The Respol CEO agreed, saying, "The fundamentals in the industry are the significant reasons for having these prices."

Even Goldman Sachs and Chicago Mercantile Exchange Chairman Emeritus Melamed dismissed the theory of speculation.

The reason we're seeing higher crude oil prices is because demand for oil has risen significantly in the last few years, says Melamed. "the oil demand-supply equation in the world has changed. While there has been a massive 25 per cent rise in oil demand, the supply of the commodity has come down resulting in this current price rise."

So How do You Profit from Higher Oil Prices?

You buy domestic oil and alternative energy companies.

Making these companies even more attractive are the oil and gas discoveries and the fact that domestic explorations are more appealing given geopolitical tension.

You know as well as we do that prices would come down sharply if we started producing on our own. And it'd be a strong global signal that we're not willing to be hostages of oil rich companies.

Even the President agrees.

"Our problem in America gets solved when we aggressively go for domestic exploration," Bush said.

Listen, we're not economically pessimistic at Energy and Capital. But we won't put on the rose-colored glasses and tell you everything's fine. Our goal is to profit from the situation, which we've been doing in Energy and Capital, Pure Energy Trader and The $20 Trillion Report.

Good Investing,

Ian L. Cooper
http://www.goldworld.com

—————————————

In case you missed our other investment opportunity highlights, here's what we covered in Wealth Daily, Gold World, Energy and Capital, and your free blogs for the week of July 7, 2008.

IndyMac, a $0 Stock?: The Nail in the Coffin...
In my last position at a competing company, I recommended a buy on IndyMac January 2009 20 puts. And I wasn't the only one that saw the coming IndyMac disaster.

Lehman Breaks $20... Hands Us 143%: We nailed it... Plus, What to Watch for...
On June 3, 2008, Lehman had just broken $30 support before catching a wave of buying. But you'd have to be blind not to see that Lehman was in real trouble. It's why we recommended buying the October 25 put (LYHVE) right here in your free options blog.

Gold Moves Higher on Iranian Rocket Tests: 'Can Hit Isreal'
Gold regained ground on Wednesday as speculators resurfaced on news that Iran had test-fired nine long- and medium-range missiles, lifting the metal's safe-haven appeal in times of uncertainty.

Progress Or Complacency?: How The G8 Screwed Us Again On Climate Change
So the G8's global warming discussions are officially over. What did they decide? Well, they made a statement that calls for cutting global greenhouse emissions in half by 2050.

Investing in Solar Installers: The Other Side of Solar
It's fair to say that, so far, solar installers have been the red-headed stepchild of the renewable energy investment world. Their counterparts, module manufacturers and silicon suppliers, have been in a noticeably different boat. And rightly so.

Peak Oil Confusion - A Game Whose Time Is Up: Taking IBD to Task
Confusion breeds apathy, and that's not something we can afford anymore. I believe that the impending energy crisis is too urgent to allow misinformation about peak oil to go unanswered. So I am attempting to set the record straight.

Haynesville Shale: Two Stocks Rushing for Haynesville Shale Gas
Another week, another record. Hopefully by now you've gotten used to seeing record crude prices. As usual, we started to see a sell off after nearly reaching $145.85 a barrel last Thursday. This morning, crude dipped over six dollars a barrel before bouncing back over $141 per barrel this afternoon.

Investing in BBVA: Profits Across the Pond
MADRID, SPAIN: You can't blame Spaniards for playing to win. They're on a roll, with a European soccer championship and Wimbledon title in just the past few weeks. Now Spanish players are surging into games of chance, and their top opponent is the slowing economy.

ETF Options Trading: Make Another 58% as the World Goes Mad
Behind the unemployment stats, layoffs are surging, as corporate profits sink. According to the Wall Street Journal, UK homebuilders like Barratt Developments and Taylor Wimpey announced that, together, they'd cut 2,000 jobs.

Insiders Buy at 2-Year Lows
What's interesting is that the last time insiders bought, the stock ran from about $21 to more than $24 between March and April 2008. Hoping the stock will do the same off recent lows, we're recommending a buy. Double bottom support doesn't hurt either.

Peak Oil Confusion - A Game Whose Time Is Up

Pain at the pump is finally putting energy on the front burner in this election season, but media coverage of the issue has been fraught with misinformation.

I hate to say it, but I am beginning to think some of the confusion is intentional. From the news that Cheney's office has interfered with reporting on climate change science (what a shocker!), to the assertions of some pundits that there are 12 trillion barrels of oil yet to recover out there, to assertions by politicians that we can drill our way to energy independence, it's tough for the average person to get a real grip on the issues.

Confusion breeds apathy, and that's not something we can afford anymore. I believe that the impending energy crisis is too urgent to allow misinformation about peak oil to go unanswered.

So I am attempting to set the record straight.

For this week's Energy and Capital column, I am publishing a formal rebuttal to a May editorial on peak oil in Investor's Business Daily, which got the facts about peak oil-as I understand them-badly wrong.

It refers to a companion piece which has just been published, a "Peak Oil Media Guide" that I developed for the Association for the Study of Peak Oil - USA.

I hope my readers will find these two pieces helpful in separating fact from fiction about peak oil.

Until next time,

Chris

To the editors of Investor's Business Daily:

I feel compelled to respond to your editorial of May 28, 2008, entitled "Peak Oil: An Idea Whose Time Is Up." For a respected financial publication such as yours, I found your coverage reprehensible and rife with errors. I have to wonder if it was deliberately designed to confuse the public, or if the authors were merely deeply misinformed.

Our nation urgently needs to get up to speed on the realities of energy before we can have any sort of intelligent conversation about reforming energy policy. Articles such as yours do the public a grave disservice.

First, peak oil is a study, not a "theory." That is why the name of the world's top authority on peak oil is the Association for the Study of Peak Oil (ASPO), not the Association for the Theory of Peak Oil. The peak oil study is simply a scientific analysis and modeling of available data. More data might correct existing models, but there is no theory to prove or disprove. Likewise, politics plays no role in the scientific assessment of the ASPO's respected petroleum geologists.

Second, peak oil is not about "running out of crude," it's about the rate of oil production. You are correct "that one day the crude supply will effectively dry up," but that day, perhaps 100 years in the future, is not what the study of peak oil is about.

I will refer to the "Peak Oil Media Guide" as I address your remaining statements.

To begin with item 1, "It's not the size of the tank which matters, but the size of the tap."

Talking only about the number of barrels of oil that might exist somewhere, without also talking about the rate at which that oil can be produced, and when, is utterly meaningless.

You stated:

U.S. production is trending down again, but it's not because there's no oil. It's due to shortsighted policies that prevent the industry from drilling for the almost 100 billion barrels of crude known to be under Alaska's Arctic National Wildlife Refuge and beneath the oceans just off of America's coasts. It's because politics and political correctness block the development of Big Sky state oil shale fields, where as much as 2 trillion barrels of crude, by some estimates, sit idle.

Here's the reality.

Right now, the world is producing between 86 and 87 million barrels per day (mbpd) of oil, just 2 mbpd more than it did in 2005. The world has reached a bumpy production plateau, and will likely continue on it for another three to six years before beginning the terminal decline of global oil production.

Your numbers on oil are also questionable:

But the impact of those nations on crude prices in recent months is suspect. Global oil consumption grew 2% in the first quarter of this year over the first quarter of 2007, while production increased 2.5% over the same period. On a daily basis, roughly 85 million barrels of oil are consumed across the world, almost exactly matching the amount produced each day.

You don't state your sources, but according to the IEA Oil Market Report of May 13, the most recent publicly available global data I am aware of, the numbers are quite different:

Global oil consumption grew 0.81%, not 2%, from 85.9 mbpd in Q1 2007 to 86.6 mbpd in Q1 2008.
Global oil supply in the grew 1.81%, from 85.6 in Q1 2007 to 87.2 mbpd in Q2 2008. However, April supply fell 0.4 mbpd to 86.8 mbpd, due to declining output from OPEC and the FSU, plus North Sea outages.
Average demand in 2008 is projected to be 1.2% higher than 2007.
According to this data, supply is a scant 0.6 mbpd higher than demand.

If you will refer to "Figure 3 - US Oil Production 1900-2005," which shows the historical peaking of U.S. oil production, perhaps you can explain why you would dismiss the U.S. peak with a comment like "Yes, domestic output has peaked. But it peaked at a level 13% above what Hubbert predicted. And the peak wasn't followed by a falling-off-the-table decline. Output rose after a temporary slide."

Yes it did...and then resumed its downward course on a relentless, 38-year history of decline, as the chart clearly shows. Who are you trying to fool?

As for the fact that U.S. production peaked 13% above Hubbert's prediction, I say, "close enough." Hubbert also found that if the recoverable amount of oil in the U.S. were increased by one-third, it would only delay the Lower 48 production peak by five years. A similar calculation for world production would produce similar results. Again, when it comes to the question of peaking, flow rates are far more important than reserves.

The decline of U.S. oil production was not the result of politics, nor can any political decisions now significantly alter its future course. It is simply the nature of petroleum extraction that it ramps up to a peak and then declines, in a rough bell-curve shape. This observation has been made in thousands of oil fields (and oil producing nations) worldwide, which is why Hubbert's model continues to be respected.

If you will refer to item 2, "We are now at, or ‘close enough' to the peak," you will note that global oil production has plateaued. It may continue to rise at a negligible rate for the next couple of years, but no major increases are possible.

You seem to be among those who are laboring under the mistaken belief that the U.S. can somehow drill its way out of dependency on foreign oil, and that increased domestic production could the relieve today's "high" prices.

Nothing could be further from the truth.

In fact, the U.S. uses about 20 mbpd of petroleum, and produces about 7 of that. The other two-thirds is imported because there is no possible way that we could produce another 13 mbpd domestically, even if we drilled every single place that might have oil.

Regarding the potential of oil shale, please refer to item 4, "Oil shale: the fuel of the future...and it always will be." After four decades of fully authorized, commercial, even subsidized attempts to develop oil shale into a usable fuel, no one has ever been able to make it economically feasible. Part of the reason for that is that it's not even really oil-it's kerogen, an immature precursor to oil, and it takes an enormous amount of energy to turn it into something usable.

It remains to be seen if the energy returned on the energy invested (EROEI) for oil shale is high enough to even make its production worthwhile. Even if it does prove to be viable, it is unlikely to ever produce more than a modest flow (though perhaps a very long-lived one) of extremely expensive, synthetic oil. It is not some quickly available "two trillion barrels" of "crude," as you asserted, and it will require an enormous amount of energy, probably from coal, to produce.

As for the oil reserves of ANWR and the continental shelf, please refer to item 5, "ANWR and the continental shelf are no panacea." The flow rates from these resources cannot be known until they are produced, but we can make ballpark estimates.

Preliminary estimates by the USGS indicate that ANWR would likely only produce around 750,000 barrels per day at peak. More importantly, it would take 10-20 years to achieve that peak production level.

If all limits on domestic drilling were removed, including ANWR, it could only increase US oil production by a maximum of 2-3 mbpd. It would come online slowly, and given the loss in global oil production by the time it arrives, the additional production from these remaining domestic reserves will be underwhelming. Together, they could amount to perhaps 12-15% of our daily usage today, or about 3% of world production.

However, if we are currently on the peak/plateau of global oil production, and production starts to fall within the next five years, then 10 years from now, at a reasonable average 2.0% rate of net depletion, world oil production will be down 11 mbpd-about 12%-from where it stands today. Therefore any additional domestic production could only offset perhaps one-quarter of the global production that will be lost!

It should be obvious, after a close look at the data, that at the rate that the U.S. currently uses oil, the chance of producing all of our own needs domestically is zero.

The potential impact of increased domestic drilling on oil prices is also minimal. Since oil is traded globally, and the U.S. imports about two-thirds of the oil it consumes, the price of the oil we produce will always maintain parity with global prices. With the global supply and demand balance as tight as it is for oil, natural gas, and coal, increased production in the U.S. would make a negligible difference in U.S. gasoline prices.

The U.S. Department of Energy estimates that drilling in ANWR would only reduce the price of gasoline by less than four pennies per gallon-20 years from now!

The slight declines in petroleum consumption over the past year in the U.S. and Europe have been more than offset by the increasing consumption of countries in Asia, South America, Russia, and the Middle East. Net global consumption is expected to increase another 1 mbpd this year.

Indeed, we should recognize, as the Saudis have, that the oil we still have will only become more valuable as time goes on, and it makes sense to save some for future generations. Oil is incredibly useful and energy dense, and we use it altogether too profligately today. Burning every last bit of what remains as quickly as we can makes no sense at all. I further submit that it is irresponsible and immoral to attempt it.

One of the most glaring errors in your analysis was in misunderstanding depletion. I refer your attention to item 7, "Depletion is relentless."

The concept is simple: Oil production first must make up for the depletion of mature fields before any net additional oil can be counted. It's like pouring water into a bucket with a hole in it. The background global decline rate is generally accepted to be 4.5 - 5%.

Anyone familiar with a balance sheet should understand this concept, but you missed it when you said:

Production over the next two quarters is projected to continue rising (3.3% and 4.1%, according to estimates from Citigroup), while demand is expected to grow at a slower 1.6% pace over the next six months.

A net global production increase of 3-4% has not occurred in several decades, nor is it conceivably possible in the future, let alone the next six months, given what we know about the projects that are under way.

Clearly, you confused "production" with net production. The world's net production over the next six months would be lucky to manage a 0.6% increase, after accounting for the background decline rate.

You point out: "World output is expected to rise from 85 million barrels a day today to 110 million barrels by 2015, according to the International Energy Agency," but your information is out of date.

Surely you are aware of the Wall Street Journal's article, "Energy Watchdog Warns of Oil-Production Crunch," published on May 23, 2008, about a week before yours? It previewed the IEA's upcoming report in November, which will announce the results of their first detailed study of the depletion rates of the world's top 400 oil fields. That study has prompted them to reduce their estimate to 100 mbpd by 2015.

I should also point out that the IEA has lagged well behind other knowledgeable analysts who have consistently demonstrated why the IEA's past projections could not be obtained, and who are now of the opinion that global oil production is unlikely to ever exceed 90 mbpd.

I must emphasize that no political considerations, or faith-based economics, are needed to understand the available data and the models. The mathematics are quite clear.

Finally, I must address your quote from Peter Jackson of CERA, who said, "The 'peak oil' argument is based on faulty analysis which could, if accepted, distort critical policy and investment decisions and cloud the debate over the energy future."

I respond that CERA's projections of future oil production have been far off the mark for about the last five years straight. If anyone's analysis is faulty, it is theirs. The ASPO's has come much closer to reality. ASPO-USA has directly challenged CERA to back their projections with real money; so far, they have declined to respond.

CERA is correct, however, that faulty analysis could "distort critical policy and investment decisions and cloud the debate over the energy future." I beg you to consult more reliable authorities than CERA for that very reason. They have a lovely story to tell; unfortunately, it's wrong.

I hope you will explore the information I have provided here, and avoid making such fundamental errors in your future coverage of the oil markets, and of the study of peak oil.

Sincerely,

Chris Nelder
Energy Journalist

A New Paradigm

It was a wicked, wretched June for the Dow, which posted its worst performance for the month since the Great Depression.

Oil prices setting record high after record high, while the dollar sinks ever lower, have put the hurts on the whole economy—except for commodities and energy, which are the only two asset classes I have promoted in these pages.

It's not that I'm a genius investor or anything—I assure you, I'm not. All I do is read the writing on the wall, and tell you what I think. It's a surprisingly rare thing to do among Wall Street pundits, who seem to prefer the safety of historical patterns and chart analysis to actually looking around them.

So you have to look past the talk about how all those beaten down stocks in tech, retail, and luxury items are good buys.

They sure are: Good bye house, good bye car...

What we have here is a new paradigm. It's time to throw out the old investing playbook and make a new one.

Rather than being safe ways to play the market, index funds, diversified portfolios, momentum trading strategies, and technical chart analysis are now more likely to lose you money than increase it.

Want some proof? Here are the top-performing diversified U.S. stock-fund categories, according to MarketWatch:

Category	Q2 Avg. Return	YTD Avg. Return
Midcap Growth	5.2%	- 8.3%
Small-Cap Growth	4.2	- 11.3
Midcap Core	4.1	- 6.0
Multicap Growth	2.0	- 10.5
Large-Cap Growth	1.8	- 10.0
U.S. Diversified	0.6	- 9.7

Yes, that's right, the top performing stock funds are down 6-11% on the year. As for the major averages, they're down 12-14% this year.

A typical Wall Street pundit, trying to paint a happy face on an abysmal market, might write up the headline as "Funds beat the indexes in 2008!"

But that's not the kind of gruel we serve around here.

A Perfect Storm

Regular readers of my column know the real score: We've got a perfect storm on our hands.

As more and more of one's income is eaten up by the basic needs of food and energy, it leads to further dependency on credit, which increases the likelihood of credit and mortgage default, which further hurts the financial sector, taking down the broader markets and putting the economy in an increasingly worse position.

Oil prices are causing inflation across the board, from food to everyday goods, and by "inflation" I mean prices for everything going up, not some geeky Austrian-school definition of it.

Part of the reason oil keeps going up (apart from simple supply and demand) is that the Fed has devalued the dollar in order to stave off a financial crisis resulting from the subprime meltdown. But if the Fed tries to prop up the dollar now, and raise rates, it could bring an already-down economy to a standstill. So by averting a crisis of confidence in the banks, they brought on a crisis of stagflation for the entire economy. As the old saying goes, if the only tool you have is a hammer, the whole world looks like a nail.

The fact is, the Fed is whistling past the graveyard. Or sticking their finger in a leaky dike. Or whatever metaphor you like.

While most investors are shaking their heads in confusion and dismay over a recession that just won't go away, it all makes perfect sense to those who really understand the implications of peak oil.

I hold a very simple thesis: Without an ever-growing supply of cheap and plentiful energy, the old investing strategies simply don't work anymore, because the markets don't behave as they should.

In fact, record high oil prices have clearly failed to bring adequate new supply to market. Consequently, oil and commodity prices stubbornly refuse to revert back to the mean, as a technical analysis says they should.

A Very Nasty Period

The trends should be clear enough to anybody who reads the news.

Transportation is on the ropes. The Big Three automakers are posting huge losses after being asleep at the wheel for years, continuing to pin their futures on big trucks and SUVs even as global oil production flattened out and the peak oil story started to unfold. Now new and used car dealerships are saddled with row upon row of gas guzzlers nobody wants, and American-made vehicles with European fuel economy are nowhere to be found. It's no surprise to me that Chrysler just shut down an assembly plant, and I expect more bad news yet from the American automakers.

The airline sector is going down in flames, with fuel prices destroying the bottom line. (See my article of last month, "Peak Oil and the Rail Revolution - Say Goodbye to Cheap Air Travel.")

Truckers are trying to strike their way out of losses due to skyrocketing fuel costs, but if they can't pass on the higher cost of their fuel to the buyers of the goods they haul, which is hard to do in a declining economy, then they're going to simply run out of road.

The financial sector is down 20% on the year, and it ain't over yet, not even hardly. Hedge fund manager John Paulson believes that we're only $360 billion of the way through a $1.3 trillion writedown from the credit crisis.

Oh, yes. The subprime mess was just the beginning. Now we're getting into the option ARM resets, where borrowers have a choice about how much to pay off each month. Merrill Lynch estimates that the losses from option ARMs could add another $100 billion to the $400 billion in mortgage and subprime related losses. And after that, we'll likely see another wave of personal credit defaults, leading to yet another fat writedown for the banks.

On June 18, the credit strategist for the Royal Bank of Scotland said, "A very nasty period is soon to be upon us - be prepared," and warned that the S&P 500 could tank to 1050 by September—a 28% drop since the beginning of the year. That means that all of the gains made by the index's component companies since the end of 2003 would be wiped out.

Retail, luxury goods, tech, travel, entertainment...all in the dumper. Want a good way to hedge against recession? Pick the weak companies in any of those sectors, and short them.

Yesterday, the Dollar Thrifty car rental company blamed its poor 2008 performance on "tough operating conditions" as if this were some unexpected, nasty bump in the road, but I call it an entirely predictable result of peak oil.

Likewise, it should have been no surprise to anyone who's paying attention when Starbucks announced that it will close 600 stores, cut 12,000 jobs, and halve its expansion plans. When people can't afford to fill their tanks just to get to work, a $4 cup of frothed coffee-flavored milk just doesn't rank on the priority list.

But energy and commodities? Ahh...now there's a different story.

Energy Stocks: The Only Way to Make Any Money

In a CNBC interview on May 29, Matthew Simmons, one of the world's top energy investment bankers and a proponent of the peak oil study, explained his investing strategy. "I have a very significant portfolio that I've built up over the last 25-30 years in energy stocks," he said, "because I think it's the only way that anyone's going to make any money."

I couldn't agree more.

The investing game has changed, and those who realize it now have an opportunity to jump on the greatest investment event of the century. The growth potential for renewable energy in particular, and the associated technologies of the future, seems nearly limitless. After decades of investment and research into renewable energy, it currently accounts for only about 1% of the global energy mix, but by the end of the century, it will have to be closer to 100%.

We should expect prices for our most basic of needs, food and energy, to continue to rise until the supply and demand equations are back into balance. And it looks to me like that will be achieved mainly by demand destruction, which could take years to play out. This bear is going nowhere.

Meanwhile, energy and commodities, including agricultural commodity ETFs, are doing very well this year even as the rest of the market goes south. (For my previous recommendations in these sectors, see the Related Articles section at the bottom.) Along with traditional safe havens like gold and silver, bonds, T-bills and the like, they're really the only place to be right now.

But if you want to do really well, then you need to have a stake in some of the choice energy picks we have selected for the $20 Trillion Report.

Until next time,

Chris

Energy and Capital

Peak Oil

"What is peak oil?"

I distinctly remember the last time a reader asked me that question, I tried to offer him a solid answer. Before I wrote back, I couldn't help wondering how many people really understood what peak oil was. Back then, oil barely broke past $90 a barrel and we were being laughed at for assuming $100 a barrel would soon be considered 'cheap'.

Anyone still think $90 a barrel is expensive?

Over the weekend, the peak oil question appeared again in my email. This time, however, it was from more than a dozen of my Energy and Capital readers. I can only assume that as peak oil finally falls under the global spotlight, I'll continue getting the same question.

So in honor of those of you new to peak oil, here's a chance for you to catch up.

Peak Oil

Believe when I say that we could talk for months about the various aspects of the peak oil issue. For the sake of our newer readers, we'll stick to the basics.

Simply put, peak oil is the point when global oil production reaches its maximum rate. We're not talking about the total amount of oil left in the world (and I can't begin to tell you how many people have said to me with a straight face, "The peak oil theory is a bunch of garbage, there's trillions of barrels of oil left underground.").

The problem isn't how much oil is left, but rather the rate at which we can produce it.

If we were somehow able to put every drop of oil left in the world into one gigantic barrel of oil, yet were only given a tiny cup to draw out the oil, we'd be in a bit of trouble. Sure, the oil is sitting right in front of us, but we would be unable to get it.

Now, if I had to pinpoint when peak oil was announced to the world, in a heartbeat I would say, "March 8, 1956."

That was the day M. King Hubbert stood in front of a crowd at the Plaza Hotel in San Antonio, Texas and delivered his ominous speech. During the speech, Hubbert predicted that U.S. oil production would in the early 1970s.

You can imagine the response. After all, U.S. production that year was higher than ever before. But as you can see below, U.S. oil production peaked in 1970:

Although new unconventional plays like the Bakken formation in North Dakota are experiencing "a good old-fashioned oil boom," I doubt it will be enough to pick up all the slack. Don't get me wrong, dear reader, there's a lot of oil over there, and you can bet that producers are going to go after it. Actually, according to the Energy Information Administration (EIA), it's one of the few areas where domestic production is growing at a strong pace.

But peak oil in the U.S. is obviously in the past. Today, experts are predicting that global peak oil is right around the corner (a few even believe we've already passed it). Unfortunately, predicting the exact timing of global peak oil is a little tougher than you'd think.

What's the problem?

For starters, approximately 90% of the world's oil reserves are held by state run companies. It's kind of hard for me to watch Congress go after the major oil companies when those publicly traded companies only hold about 6% of the world's proven reserves (and don't even get me started on the ridiculous idea of suing OPEC, either).

If you made a list of the largest oil and gas companies in the world according to proven reserves, how far down do you think you would have to look until you recognized a company that isn't nationalized?

Unfortunately, most of the top oil producing countries consider their oil data a closely guarded secret, and without proper field data, all we can do is guess.

Then again, how can you not be skeptical of OPEC after they boosted their reserve numbers. Here's a look at one of my favorite examples of how shady OPEC reserves are:

Some countries managed to double their reserves practically overnight! Iraq even managed to significantly boost reserves twice in a five year time span.

Now let's take field decline into account...

Depending on who you're listening to, the average decline rate is between 4.5-8%. Not only do we need to find more barrels to make up for growing demand, but also the millions of barrels from field decline. Even taking the conservative rate of 4.5% (from CERA), that's still a considerable amount of oil.

Approximately 94% of our known oil comes from just 1500 giant and major oil fields. The problem, however, is that we aren't finding those giant oil fields anymore. In fact, discoveries of giant fields peaked back in the 1960s.

Whenever you hear about a massive discovery, there's always more to the story. Take the Tupis discovery off the coast of Brazil, for example. That field is going to take a long time and cost billions of dollars to develop.

Peak Oil Investing

You don't need to be an economist or geologist to realize that oil prices are inevitably heading higher. When the world is consuming 87 million barrels per day, yet it's stuck producing 85 million barrels, the price jump shouldn't come as a shock.

Now, I only scratched the surface of peak oil (like I mentioned earlier, this topic could go on forever). Next week, I'll give you a reason why the doom and gloom side of peak oil shouldn't get to you. The reason? Let's just say, peak oil is going to open up a number of investment opportunities for investors like us.

Until next time,

Keith Kohl

P.S. Even though U.S. oil production has been declining for over three decades, it doesn't mean you need to throw in the towel just yet. I know that most of my Energy and Capital readers have had tremendous success investing in the latest Bakken oil boom. If you're interested in joining them, you can learn more about the $20 Trillion Report here.

Energy Shortage

You can feasibly make an argument for recession, but then again you can get your head chewed off by those sticking by the two quarters of negative GDP definition.

Recession... Depression... Inflation... the arguments have raged for months. But the only thing many can agree upon is that our economy is slipping into further decay.

Unemployment just spiked to 5.5% for May - the biggest monthly increase since 1986, further proof of a dwindling economy, troubled by job scarcity, and continuing housing, credit and financial issues, coupled with higher energy and food cost on over-stretched paychecks.

The news only served to bolster oil strength, as the dollar weakened.

And, unfortunately, it'll get worse.

We will see $200 oil

Up 28% in five months, and more than 94% in a year, some investors think it may be too late to buy energy.

They may have thought the same at $80, $90, or $100... even $125. But it's the only real way to make money these days. Oil's going higher.

As much as Americans would like to ignore $150 to $200 oil forecasts, growing numbers of forecasters are still sounding the alarm.

Jim Rogers just joined that list, saying the price of crude oil has "years to go" as sources are dwindling. "I know that unless someone discovers a lot of oil, it can go to $150, $200'' a barrel, Rogers said. "The facts are the world is running out of known oil reserves.''

Morgan Stanley says prices could reach $150 in a month, as millions of Americans go on vacation.

Asia demand for oil is soaring.

Workers at Chevron in Nigeria may strike.

The dollar continues to fall.

Israel's transportation minister Shaul Mofaz has announced that Israel will have to attack Iran if it "doesn't abandon its nuclear-development program." That move alone could risk eventual damage to the Strait of Hormuz, resulting in catastrophic oil spikes.

And, according to Chris Nelder's It Takes Two to Contango,"Global demand for oil is still greater than supply, and we believe that it will continue to remain so (with perhaps a few short periods of easing), so we think we'll be dancing the contango for a good long time to come-at least until global demand destruction sets in.

As for the conventional wisdom on the Street, Lehman Brothers and others are convinced that prices are now "anomalous" and that oil is an asset bubble. They believe that global supply will increase faster than expected in the next few years to resolve the tension, and for a while that will probably "talk down" the price of oil.

But I think they're wrong. Non-OPEC supply in particular looks terminally broken to me, and any growth in OPEC supply is dubious, at best. That means you've got a buying opportunity developing here, while the market is underpricing the future of oil."

So how do you profit from it?

You buy domestic oil and alternative energy companies.

Making these companies even more attractive are the oil and gas discoveries and the fact that domestic explorations are more appealing given geopolitical tension.

You know as well as we do that prices would come down sharply if we started producing on our own. And it'd be a strong global signal that we're not willing to be hostages of oil rich companies.

Even the President agrees.

"Our problem in America gets solved when we aggressively go for domestic exploration," Bush said.

Good Investing,

Ian L. Cooper
http://www.energyandcapital.com

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In case you missed our other investment opportunity highlights, here's what we covered in Wealth Daily, Gold World, Energy and Capital, and your free blogs for the week of June 2, 2008.

Gold Mining in Brazil: Magellan Minerals Reports Final Brazilian Gold Results
Believe it or not, the Brazilian equivalent to the Dow Jones has skyrocketed 306,622% in the past 15 years alone.

India Benchmark Gold ETF: India Gold ETFs Held 4.57 Tonnes in May
Physical gold held by the exchange-traded funds (ETFs) listed on the National Stock Exchange of India peaked to the highest level ever at 4.57 tonnes during May.

Consumer Confidence Hits 28 Year Low: Inflation Takes its Bite
Here's more news from the consumer front. Consumer confidence has fallen to its lowest point since 1980. Here's the skinny.

Masco Chairman Gets Bullish: You may want to ignore him, though
Lumber and wood producer Masco Corporation (MAS) is seeing its third day of call option buying activity. But don't be so quick to buy.

Energy Efficient Transportation: How Peak Oil is Transforming Air Travel
With new energy efficient technologies being employed almost daily, we see a niche where smart investors can make serious money.

It Takes Two to Contango: Pullback in Oil Is a Buying Opportunity
A few readers have asked about the meaning of a term I used in my last column: "contango." So this week, we'll delve into the murky world of oil futures trading.

Canadian Investments: Canadian Economic Contraction Means Buy Now
It's part of a political tug-o-war that international investors must understand if they want to make money from Canadian investments.

Coal Production: Why There's Further Upside for Coal Stocks
While coal supply is bad for China, it's great news for U.S. coal companies, which are predicting that global coal demand, will outstrip supply by 25 to 35 million metric tons. Coal consumption could rise 74% by 2030. India alone is expecting for its current annual demand of 460 million metric tons to quadruple by 2031. That's great news for coal company earnings potential.

Investing in Nuclear Energy: Cashing in on Cap and Trade: A Nuclear Power Surge
Whether you call it a "cripple and rob" or by its real name, the "cap and trade" legislation currently being debated in Congress does have a certain inertia of inevitability about it.

Insider Buys More... Follow Him.
What's not to like? The Chairman and CEO just bought another 600,000 shares between $52.95 and $54.10, and he's been a steady long-term buyer.

The Tipping Point in the Peak Oil Debate

Those of us who have watched for the inevitable arrival of the peak oil crisis have been waiting for years for the day when we no longer had to fight for the acceptance of the idea, and could start getting on with the hard business of what to do about it.

And then, just like that, it happened.

Like a chorus line turning in unison from left to right, the media and the financial markets turned and embraced the notion of peak oil last week.

For convenience, let's call it Memorial Day, 2008.

CNBC devoted a whole day to peak oil coverage, allowing some in-depth discussion of the issue possibly for the first time. In the evening, it broadcast a special called "Oil Crisis."

Billionaire hedge fund manager and oil man T. Boone Pickens said he saw oil going to $150 this year, and this time, was widely quoted in the financial press. (Check out this excellent interview with him from the Milken Institute Global Conference 2008 in April.) He put the reasons behind rising oil prices plainly:

"They've got to go up, because the people that have the oil want it to go up. They're running out of oil. They're going to have to have—85 million barrels a day is all the world can produce. The demand is 87 million. It's that simple. It doesn't have anything to do with the value of the dollar. It's a fact of supply and demand. That's it."

While we might politely disagree with the legendary oil investor about the dollar part, in terms of the overall trend being about the fundamentals, he was spot-on. He took a 14 percent loss in the first two months of this year by shorting oil and natural gas, and quickly learned from the error to get long again and back into the black.

Goldman Sachs analyst Arjun Murti, the only major investment bank analyst who correctly predicted oil over $100 last year, said that oil could breach $200 this year, and $150 was very likely. Again, this time, Wall Street sat up and took notice instead of laughing.

In the last couple of weeks, when I talked about peak oil in my radio and TV appearances, I didn't get shouted down immediately, or dismissed for holding a "controversial theory." Instead, they actually listened to hear what I had to say next.

In an interview with CNN radio last week, I think the host was rather shocked when she asked me if recent predictions of $12 gasoline in the next few years could happen.

"Easily," I said, "easily." And then explained why peak oil means that prices will have to keep going higher as long as global demand continues higher, because supply appears to be maxed out. Even as demand in the developed world declines due to price-induced demand destruction, the red-hot developing economies of the world are more than making up for it.

And you could have heard a pin drop when I explained that "there are no supply side solutions to peak oil" to another radio interviewer last week.

The dialogue didn't shift because pundits suddenly understood the importance of flow rates, or because the data on reserve estimates suddenly became clear.

It was the price that did it.

With oil and gasoline making an almost a unbroken string of record-breaking prices since the start of the year, the problem finally got the attention of the media, and now they are grasping for answers. Reaching the $130 mark was apparently the last straw.

There is still much confusion over why oil prices are so high. Some blame speculators, even though the ultimate holder of a futures contract must take delivery of the oil for use in a refinery. Some still point to a "terror premium," even though oil prices have continued straight up as geopolitical events come and go. Others vastly overrate the importance of the declining dollar, or the latest inventory numbers, or pronouncements from OPEC.

At least nobody is claiming that oil will go back to $45 a barrel anymore, or that new supply in the next few years will somehow resolve the tension with unflagging global demand. Oil futures have gone back into a contango mode, indicating that fears about supply have gripped the market, prompting the Financial Times to report last week that "peak oil views" are now influencing oil prices.

IEA's Bombshell

As the Street grappled with the new reality of oil price, the Wall Street Journal dropped a bombshell that reinforced the supply question decisively. They previewed the International Energy Agency's upcoming report, which won't be out until November, on the world's top 400 oil fields, including their individual depletion rates.

The bottom line was a zinger.

For the first time, the IEA admitted that the depletion of aging oil wells, combined with the dampening effect of skyrocketing costs on new field development, means that the world will have a hard time reaching 100 million barrels a day of production within the next two decades.

Their previous estimate from only last year was 116 mbpd by 2030, which was backed up by similar reports last year from the EIA and the National Petroleum Council.

Their projected supply curves are now sharply reduced, while their global demand projections continue to show about a 1.5% annual rate of growth.

Fatih Birol, the IEA's chief economist, said: "One of our findings will be that the oil investments required may be much, much higher than what people assume. This is a dangerous situation."

For those who understand this data, this was a major, major announcement. It means that the IEA—the official energy data agency of the OECD—has given up on its long track record of ridiculously optimistic projections that supply would always meet the expected demand. They are no longer assuming that any supply gap would be filled by big OPEC producers such as Saudi Arabia, Iran or Kuwait.

Perhaps they felt emboldened to leak this preview of their findings because they realize that their credibility is at stake. They have consistently underestimated the challenges of today's oil business in their previous annual outlook reports, and their projections for both supply and price have been way off the mark.

The world's remaining undeveloped oil resources will require enormous efforts and capital to produce, including extreme technology, extreme physical challenges, and unprecedented geopolitical risks. Any increases in oil production that the world does manage over the next couple of years aren't going to come easily.

Whatever the IEA's reasons, however, the game is up. Most of the world now recognizes that we are up against a bona fide supply limit, and all the market is doing now is trying to find the proper value of a barrel of finite, nonrenewable, and diminishing petroleum.

In fact, I'm having my doubts about anything over 90 mbpd. I suspect that in another two or three years, as we reach the end of plateau at the global peak of oil production and start down the other side, the IEA will once again revise its estimates downward to match up with reality.

Those of us who have been laboring for years to explain that we really do have a supply problem and that no, drilling ANWR or deepwater Gulf of Mexico won't fix it, should take a brief moment to shout "Hallelujah!"

With all the media attention, the game of investing to profit from the peak is most certainly afoot, and we've got some excellent picks in the $20 Trillion portfolio that can produce domestic oil for under $50 a barrel.

Hold on, folks. The ride is just about to start getting interesting...

Until next time,

Chris

Peak Oil Consequences of Bush's Failed Energy Policies

Rising oil prices just seem unstoppable.

Even I was amazed to see crude pushing $130 on Tuesday. Not because it had gotten to that price, but because it got there so fast. That's 30% over where it was at the beginning of the year.

The peakers (or, if you like, the "peak freaks") have won the debate about oil supplies, and it was the price shock that ended it. I'd still prefer that the discussion revolved around flow rates—that is, whether we can really get from 85 million barrels per day (mbpd) today to 116 by 2030, as the IEA has predicted—but I'll settle for not having to see some "expert" on TV predicting that oil is going back to $45, or $25, or whatever, anymore.

At least the message that oil prices are never going back to those levels seems to have gotten through.

Last July, the National Petroleum Council joined the chorus predicting that oil supply would reach 115-120 mbpd by 2030. I lambasted them for it, along with many other knowledgeable observers.

One of those observers was Matthew Simmons, the world's top oil investment banker, who remarked, "We don't have any idea where those reserves are going to come from or how we are going to get them out of the ground. The odds of this ever happening are zero."

Simmons had argued for years that oil was far too cheap, and would soon go into triple digits. He saw $150 oil not too far into the future, and eventually perhaps $300 oil, but in mid-2007, he was widely ridiculed for it.

Well, Simmons was right. He wasn't the only one, either.

Legendary oil investor T. Boone Pickens agreed with Simmons, and placed his bets accordingly, which made him a fortune. Pickens' latest bet is that we'll see $150 oil by the end of this year.

Goldman Sachs is another. They were the only investment bank to correctly predict today's oil prices last year. Their latest prediction? $148 a barrel this year.

I think that's about right. It might even be a bit on the conservative side.

But not everyone in the oil and investing business has had the vision to see the future of oil clearly, or the guts to make such bold predictions.

Unfortunately for America—indeed, for the world—our president, with all of his experience and knowledge of the oil business, has been one of the last to come around.

The Jawbone of an Ass

When Dubya was first running for president in 1999, and oil had risen to the shocking price of $30 a barrel, he chastised President Clinton for it, arguing that he "must jawbone OPEC members to lower prices."

Perhaps he intended "jawbone" as a reference to Judges Chapter 15 in the Bible, where Samson picks up the jawbone of an ass and uses it to slay 1000 Philistines. That sort of megalomanic Christianity has been a common theme in his presidency. But some of us might read his metaphor a slightly different way...

As his campaign went on, the "jawbone" solution became a regular part of his stump speech. In June 2000, the New York Times reported:

"I would work with our friends in OPEC to convince them to open up the spigot, to increase the supply," Mr. Bush, the presumptive Republican candidate for president, told reporters here today. "Use the capital that my administration will earn, with the Kuwaitis or the Saudis, and convince them to open up the spigot."

His pitch was essentially unchanged in the spring of 2005, with oil now trading in the $50s: "I'll be talking to our friends about making sure they understand that if they pinch the world economy too much, it'll affect their ability to sell crude oil in the long run," Bush said.

When Gov. Bill Richardson was energy secretary under President Clinton, he did plenty of jawboning—or at least, he tried. In an interview with the Associated Press a few days ago, he remarked that "on several occasions they increased production and the price actually went down."

But Bush, he said, was (as they say in Texas), all hat and no cattle. "He never jawbones."

Until recently, that is.

To be fair, Bush has sent his energy secretary, Samuel Bodman, several times to try to talk OPEC into producing more oil, but he too has been frustrated. "I certainly have made my views known. Whether they respond or choose to respond is up to them and not up to me. I'm doing the best I can within the limited sets of options that we have," Bodman recently remarked.

Neither Bodman's efforts nor Bush's have produced results. Not only has Bush earned no capital with Kuwait or Saudi Arabia, he's been earning their disdain.

Last Sunday, on his second jawboning trip to Saudi Arabia this year, the president had the temerity to lecture the Saudis over their morality, social policies, and energy policy. He warned that "the supply of oil is limited, and nations like mine are aggressively developing alternatives to oil."

"Over time," he cautioned, "as the world becomes less dependent on oil, nations in the Middle East will have to build more diverse and more dynamic economies."

The Saudi leadership was swift to respond, chastising those "who are questioning our oil practices and policies." They were also quick to point out that their decision to increase oil production by 300,000 barrels a day by June was not influenced by Bush's trip. That decision was made a week prior, and was simply calculated to meet anticipated demand.

The markets weren't impressed, and responded to his trip by sending oil a few dollars higher, to over $126 a barrel.

"Bush's credibility is zero anyway," remarked Walid Khadduri, a Beirut-based consultant, on the trip. "I really don't know anyone who follows what he says, especially after what has happened in Iraq and then his Knesset speech the other day," he said, referring to Bush's apparent swipe at Barack Obama at a recent speech to the Israeli legislature, wherein he said that "some seem to believe we should negotiate with terrorists and radicals."

Once again, Bush seems to be living in an alternate universe.

Not only is jawboning the Saudis to increase their oil production a kind of negotiation with our "friends" who don't subscribe to most of our democratic ideals, biting the hand that feeds you at the very same moment is a tactic that even a three-year-old wouldn't try.

OPEC knows the score on oil as well as anyone. They are basically correct in asserting that the markets are well-supplied, and that global refining capacity for the ample supplies of heavy sour crude from sources such as Iran, Saudi Arabia and Venezuela is limited.

They also know that, as I have written about previously, the skyrocketing price of oil in recent times has as much to do with the sinking dollar as anything else. But the Bush administration has done nothing about that, so why should OPEC make extraordinary efforts to increase oil production? They would rather simply limit their exposure to the Fed's failed fiscal policy by trading more oil in euros and other non-dollar denominations.

Finally, OPEC knows that peak oil has arrived, and its members are becoming more focused on stewarding their black gold riches for their own countries' benefit than they are on trying to prop up the U.S. economy. "I think it's a mistake to have your biggest customer's economy to slow down," Bush whined, but OPEC is looking at their biggest customers going forward: not the U.S., where petroleum consumption is slowly declining, but the emerging economies of the world, where demand is red-hot.

But President Bush has continued to pretend that we can drill our way to oil freedom, if only those damn Democrats and environmentalists would get out of the way...even though he knows that's not true.

"W" Is For Wrong Way

It's not like President Bush has been oblivious to peak oil. This wasn't his first statement to the effect that oil won't last forever, although he's been careful to avoid the phrase "peak oil." Dick Cheney himself explained the reality of peak oil to the Institute of Petroleum in November, 1999:

By some estimates there will be an average of two per cent annual growth in global oil demand over the years ahead along with conservatively a three per cent natural decline in production from existing reserves. That means by 2010 we will need on the order of an additional fifty million barrels a day. So where is the oil going to come from? Governments and the national oil companies are obviously controlling about ninety per cent of the assets. Oil remains fundamentally a government business. While many regions of the world offer great oil opportunities, the Middle East with two thirds of the world's oil and the lowest cost, is still where the prize ultimately lies, even though companies are anxious for greater access there, progress continues to be slow.

Adding another 50 million barrels par day is like adding another five Saudi Arabias. Even Bush knows that's not possible. The whole time he's been talking about jawboning our friends, he has known what was to come.

And he has done his level best to ensure that America is completely and utterly unprepared to deal with it.

A president who truly cared about his country, knowing what he has known about peak oil, would have taken the galvanizing effect of 9-11 to ask his fellow citizens to drive less, to conserve, to pull together in a campaign of relocalization, and do to all that we could to wean ourselves from our addiction to oil.

Instead, he encouraged us to jump in our SUVs and go shopping.

Instead, he tried to manufacture consent to invade Iraq, and go after its oil militarily on a false pretext, which actually reduced the global supply of oil.

Instead of actually doing something to reduce our dependence on oil, or aggressively pursuing renewable energy technologies that are technically and economically viable today, he has put a big fat thumb on the scale in favor of the oil and gas business, and trumpeted the fairy tale of a "hydrogen economy" and not-ready-for-prime-time switchgrass ethanol.

He has blocked and stalled every meaningful attempt to address the climate change challenge, to the point where America now stands alone in the developed world in opposing the Kyoto Protocol. Worse, the White House has directly intervened to prevent the EPA from granting states the authority to set more stringent air quality standards. This administration has consistently demonstrated a "disregard for the law and science" in its opposition to environmental protection, according to federal judges.

Instead of asking America to reduce its dependence on petroleum, he has argued that we should crawl out even further on that limb by expanding destructive drilling off our coasts, and in our remaining wildlife refuges and natural preserves. This White House has attempted at every turn to gut conservation laws and render their enforcement toothless.

"Until we change our habits, there's going to be more dependency on oil," he admitted, but then has recommended absolutely nothing to change those habits. Instead of doing something effective, like supporting expanded rail service and requiring higher CAFE standards, the administration has sided firmly with the automakers in resisting higher efficiency and emission standards, while leaving Amtrak to struggle along on a life-support budget.

Indeed, he has actually made our problems worse, by killing the Partnership for a New Generation Vehicle program, which promised to deliver 80 mpg cars, and replacing it with a the pie-in-the-sky "Freedom Car" program, which only served to delay any real progress. Oh, and giving tax breaks to SUV drivers.

Not to mention this administration's full-throated support for corn ethanol, which has caused the painful—and entirely predictable—inflation of food prices, but which has not brought oil prices down at all. In fact it has only delayed the inevitable day when we must find ways to reduce our consumption of liquid fuels, a delay that will cost us dearly in the coming years.

"Our problem in America gets solved when we aggressively go for domestic exploration," Bush said after meeting with Afghan President Hamid Karzai a few days ago. "Our problem in America gets solved if we expand our refining capacity, promote nuclear energy and continue our strategy for the advancing of alternative energies as well as conservation," he said.

If only that were true. The nation's refinery utilization is currently at the bottom end of the normal range. Nuclear energy production cannot grow much beyond the current level (I explain the reasons for this in my book, Profit from the Peak), and it isn't going to do squat about our liquid fuel crisis. For electricity production, wind and solar are safer, and in many cases, cheaper than nuclear energy anyway.

And continuing his "strategy" for advancing alternative energy and conservation would amount to doing far too little, too late.

There is talk, and then there is action. With the Bush administration, they are two totally different things.

When you look at the actions of this administration, they are clearly focused on one purpose only: to increase the wealth, and limit the liability, of the traditional energy business. Period.

The rest of the nation has been hung out to dry.

A recent survey by law firm DLA Piper showed that 54% of its top corporate clients cited energy as the top issue that the next president and Congress should focus on, because energy costs are hurting their businesses from top to bottom. Energy costs have trumped the credit crisis, the recession, and foreign competition as their primary threat.

But you wouldn't know it from listening to Bush.

While oil and gasoline prices have hit record high after record high, and the dollar has posted record low after record low, Bush has said next to nothing, other than that he "understands" that America is hurting.

I have no doubt of that, just as I have no doubt that things are going exactly the way he wants them to. He has successfully pushed the difficult choices that this nation has to face onto the next administration, and delayed the growth of renewable energy, while thickly lining the pockets of his friends in the energy business.

Thanks for nothing, Dubya. Don't let the door hit you on the way out.

Until next time,

Chris

P.S.: Despite the Bush administration's efforts to forestall it, the alternative energy revolution has started without them...and the profits to be made in the sector are nothing short of amazing. A piece of the action can be yours when you sign up for our premium newsletters, such as Green Chip Stocks and the Pure Energy Trader.

Peak Oil and the Rail Revolution

Several years ago, when I began to realize the implications of peak oil, I wondered: Will I ever get to see Asia? Or Africa?

I had no doubt that the air travel business was in for a world of hurt, once oil prices started going up fast. And when that happened, air travel to such far-flung destinations would be out of reach for regular folks like me.

I just didn't think that day would come quite so soon. I can already see my window of opportunity to lay on the beaches of Thailand, or hike the rugged mountains of Tibet or Japan, closing.

In the last 90 days, jet fuel prices have spiked 38%, rising along with crude.

It was no surprise to me, then, to see some of the smaller carriers starting to go belly up this year. As oil has hit record high after record high, fuel costs have actually exceeded labor costs for many airlines, accounting for as much as 40% of operating expenses.

They just couldn't price their tickets high enough to keep the business aloft. Of the 769 million travelers who boarded U.S. flights last year, we might think a sizeable percentage are on discretionary trips.

(Likewise, fuel prices are hurting the trucking industry and causing truckers to strike. For some, diesel costs have spiked about 90% in the last six months alone, far outpacing the cost increase of gasoline. Who wants to operate at a loss?)

The budget carriers, already surviving on razor-thin margins, have seen their profits simply evaporate.

So far, eight airlines have officially bitten the dust:

Aloha Airlines

ATA Airlines

Champion Air

EOS Airlines

MAXjet Airways

Oasis Hong Kong Airlines

Skybus Airlines

Skyway Airlines

One of them-ATA Airlines-even left some soldiers from Vermont stranded in Iraq, unable to get home as the company went bankrupt.

Frontier Airlines is now bankrupt, too...and they won't be the last to go, either.

The bigger carriers with deeper pockets (and more unsold seats) have kept prices relatively low while burning through cash reserves as their own fuel costs mounted. American Airlines is now losing about $3.3 million a day, and at the current rate, could burn through its $5 billion in cash reserves in as little as four years. And it has the biggest cash reserve in the industry.

When you're bleeding like that, skimping on maintenance, taking safety risks like flying with inadequate fuel reserves, and nickel-and-diming your passengers will only buy you a little time.

Consequently, the bigger carriers are looking to mergers in an attempt to save their skins.

Northwest Airlines and Delta Air Lines have proposed a merger, which is now under review. The Northwest CEO recently said that the merged entity will likely be smaller than the sum of the parts, due to soaring fuel costs.

If the merger receives the approval the Justice Department and Congress, it's likely to spark a wave of additional mergers. UAL, the parent company of United Airlines, is already in talks with both Continental Airlines and US Airways, and I anticipate more to come.

Other carriers are turning to debt, to ride out what they hope is a limited era of unprecedented fuel costs.

The last of Britain's business-class only airlines, Silverjet, just borrowed $25 million from an unknown Middle Eastern investor (reputed to be an Abu Dhabi investment fund) to get it through the rest of the year...with a promise that it could borrow another $75 million in the future.

Tricky Trading

The U.S. airline sector as a whole posted an $11 billion loss in the first quarter of this year. "When all the results are in, this will be one of the worst quarters for the industry in its history," said John Heimlich, chief economist for the Air Transport Association.

Every major carrier except Southwest Airlines recorded a loss. Southwest posted a $34 million profit.

How did Southwest do it? By hedging 70% of their fuel costs. The next most hedged was Northwest, at 45%, and all the rest were under 24%. Their hedging strategy is simple: They buy fuel futures when the market is soft. Southwest is now benefitting from having the foresight to start hedging a full decade ago.

To capitalize on my own foresight, I have wanted to short the airlines so badly for several years running. But I never did, for three reasons.

One, there is always the possibility of yet another airline industry bailout by the feds, which is a deadly risk if you're short.

Two, it's a business with a long growth pattern. Airbus and Boeing are still sitting on a long book of backorders and projecting that they will double the fleet size over the next several decades. Historically, shorting the airlines has been a good way to get your head handed to you.

And three, I couldn't find any good ways to play the short side of the air industry in general. There are no airline ETFs, and for good reason. It's mostly a money losing business, with extremely slow growth rates and enormous risk and capital requirements.

There is, however, a way to profit from the airline industry collapse, which we'll get to in a moment.

One additional factor is weighing against the airline industry, and that's climate change. Air travel is estimated to account for somewhere between 4-9% of all emissions, and people are beginning to think twice about hopping a flight when perhaps a teleconference would do. Increasing public sensitivity to the climate change issue will add pressure to the industry's burden.

A Slow Boat To China

The equation is clear: skyrocketing oil prices, thanks to peak oil, are the death knell of cheap air travel. From here on out, as oil continues to rise, those cramped seats will get harder to find, and more expensive.

In time, air travel will once again be only for the rich. I expect it will end much as it began, with limited high quality service for a select clientele. Consider this: A seat on the first commercial air flight, a 23 minute hop from St. Petersburg to Tampa, Florida in 1914, cost more than $3600 in today's money.

For us regular folks, this could be our last chance to see the world on the cheap, without devoting weeks or months to the traveling part.

According to Delta CEO Richard Anderson, ticket prices would have to rise 15-20% just to cover increased fuel costs. "You can't underestimate the spike in fuel prices and how it is fundamentally changing the industry," he said.

But like most many aspects of peak oil, there may be a silver lining here. Life will slow down from its current frenetic pace, and that's not such a bad thing. Maybe I'd enjoy a long journey by boat to Asia. Like the song from 1945 says:

I'd like to get you
On a slow boat to China,
All to myself alone.
To get you and keep you in my arms evermore,
Leave all your lovers
Weeping on the faraway shore.

Out on the briny
With the moon big and shinny,
Melting your heart of stone.
Darling, I'd love to get you
On a slow boat to China,
All to myself alone.

Some things take time. It's not easy to melt a lady's heart on a mere five-hour flight.

So in some ways, I'm not going to miss cheap air travel that much. Yes it's convenient when you have to cross the country, but the whole experience has become so painful. Between the lost luggage, the cancelled flights, the discomfort, and being treated like a presumed criminal, I look at economy air travel as a last resort.

I actually opted to drive 15 hours home for Christmas for the last two years, rather than endure the 12-36 hour random experience of trying to fly at that time of year, with bad weather and cancelled flights and a crush of travelers. On a cost basis, I figure I at least broke even. But I enjoyed the trip far more, feeling like Jack Kerouac with the windows down and the stereo blasting big band music as I blew across hours of open desert on the old Route 66.

I know that some day, when fuel becomes too expensive and hard to get, I'm going to miss that experience.

But by that time, I hope to have an even better alternative: a rail ticket.

Rail: The Longest Safe Bet You Can Make

If you've ever had the pleasure of riding a modern high-speed railroad in Europe, you know why I say that.

Taking the TGV, the electric-powered French long-distance railroad, across the country from Paris to Provence was without a doubt the most enjoyable travel I have ever experienced. I boarded the train shortly before departure time without any security checks, and kept all my bags with me the entire way. I luxuriated in a huge leather reclining seat while being quietly whisked at 200 mph across the picturesque countryside. Regular service walked up and down the aisles, asking if I'd like anything to eat or drink. Or I could get up and stretch my legs and walk down to the café car if I wanted something-like a decent sandwich on a nice baguette, not some nasty air "snack." Door to door, it was a little cheaper than an air ticket, and took less time because trains go from city center to city center, not to some godforsaken outpost 20 miles outside of town.

Compared to the cattle car experience of discount air travel, it's bliss.

Comfort aside though, rail is bound to gain market share in the coming decades as the airline industry contracts. This is because rail is by far the cheapest and most fuel-efficient form of transport, requiring about a third less fuel than air for personal travel, and as little as 3% of the energy for freight.

Rail can also run on renewably generated electricity, making it a true transportation alternative for the future.

Now, I realize that the only long-distance passenger carrier in the country, Amtrak, is terminally broken and underfunded and suffering from decades of neglect. But as the rail resurgence in freight travel picks up speed, I have no doubt that passenger rail will follow.

Simon Fraser University professor Anthony Perl, author of the new book Transport Revolutions, predicts that in 2025, no more than 25 airports will be functional. Electric powered transportation and rail will be the standard transport options.

Very simply, in a post-peak oil world, rail is a no-brainer. It's probably the longest safe bet one could possibly make.

That would explain why the sector has attracted large investments from some of the wealthiest investors in the country over the last several years.

Bill Gates has become the largest investor in Canadian National Railway (NYSE: CNI). Warren Buffett and George Soros have taken large positions in both Union Pacific (NYSE: UNP) and Norfolk Southern (NYSE: NSC). And Carl Icahn has taken a $122 million stake in CSX Corporation (NYSE: CSX).

Their investments have already paid off handsomely. Consider this chart of a few of the top airlines against their rail counterparts over the last year and a half:

What else need we say?

Until next time,

Chris

Energy and Capital

$200 Oil Prediction

Murti's the Goldman Sachs guy that called for the unprecedented move above $100 just three years ago.

And how did Wall Street react?

They laughed at him, thinking it was nothing more than a Goldman publicity stunt. He first predicted a rise above $105 back in March 2005, as oil traded around $60.

Yep, for the better part of three years, his call was ridiculed. Even as oil made a pass at $70, $80, $90, $100, $105... even $110, all we heard was how the price of crude would soon collapse, as they laughed at Murti.

But Murti wasn't laughing. It was no joke. And he wasn't alone in his thinking. We called it, too, right here in Energy and Capital.

"...heck you can kiss $45 a barrel goodbye... maybe even $50! In fact, we're probably facing a price spike between $80 to $100 a barrel within the next 24 months," said Brian Hicks in January 18, 2006.

"Our resident energy expert, Mike Schaefer, believes that oil prices will continue its rise... heading to at least $80 near term... then to $105 a barrel in the next 3 years." -February 7, 2006

"...I think these estimates are a bit on the conservative side, and we should see $80 oil this year, no problem."- Chris Nelder, January 18, 2007.

But we don't expect Wall Street to recognize that. They're too embarrassed, as are the "experts."

Here's What Every Wealthy Energy Investor Already Knows...

The U.S. Department of Energy has indicated that enough electric power for the entire country can be generated by covering about 9% of Nevada with solar power systems. This is a plot of land roughly 92 miles by 92 miles.
According to M.I.T., there are over 100 million quads of accessible geothermal energy worldwide. The world only consumes about 400 quads.
The Institute for the Analysis of Global Security has stated that if all cars on the road were hybrids, and half were Plug-In Hybrids by 2025 -- U.S. imports would be reduced by 8 million barrels per day. That's about 80% of our daily consumption!

Want a million more reasons that renewable energy investors have become some of the wealthiest in 2009?

Click here for all the proof you'll ever need!

What the "Experts" Said...

"I'll make a bold prediction... in 12 months, you're going to see oil down to 35-40 usd a barrel," said Steve Forbes in August 2005.... He was WRONG.

"It's a little hard to explain why the oil price is as high as it is at the moment, because there's plenty of oil and oil products around- it's not as if there's a shortage," said Shell UK Chairman James Smith in October 2007... He was WRONG.

"Veteran oil analyst Charles Maxwell of Weedon & Co. notes that there is also a fundamental reason to expect stagnant-to-lower prices. Demand in the biggest energy-consuming nation, the U.S., seems to be moderating," said BusinessWeek in August 2006... WRONG.

"If this market can continue going lower without OPEC disrupting it, it's very possible that by 2010 we could be substantially lower than anyone is imagining. Four to 8 years from now, we could come down and break $20 a barrel," said Peter Beutel, an old analyst at Cameron Hanover, in August 2007.

And he was embarrassingly WRONG.

In 2006, Cambridge Energy Research Associates, Inc. (CERA) said, "This is the fifth time that the world is said to be running out of oil," says CERA Chairman Daniel Yergin. "It is no longer sensible to allow the issues about future supplies to be clouded in a debate grounded in a flawed technical argument."

And they were WRONG.

We could go on... but I think you get the point.

They failed to take into account peak oil, rising demand, supply erosion, and the death of the dollar, despite strong dollar policies and a reactive Fed.

Fortunately, the likes of CERA are now seeing things our way.

They now believe the price of oil could rise to $150 this year. "The world's diminished spare production capacity remains the strongest single catalyst for high prices, Mr. Yergin says."

"The world's safety cushion — the amount of readily available oil that could be pumped in a moment of crisis — is now around two million barrels a day, according to most estimates. That's just 2.3% of daily demand, and nearly all of the safety cushion is in one country, Saudi Arabia. Everyone else is pretty much pumping all they can, which makes the world vulnerable to political or other shocks."

We're going above $200...

T. Boone Pickens sees $125. (We just hit it)

CIBC World Markets' chief economist Jeff Rubin is predicting $200 oil in the next five years.

Goldman is saying that the "possibility of $150-$200 per barrel seems increasingly likely."

Even OPEC President Chakib Khelil won't rule out $200.

And it'll happen as long as soaring oil prices do not put the breaks on oil demand.

While there's a need to reduce energy consumption, the economic doomsday scenario will happen as long as there is an absence of market-cooling excess production capacity.

And as long as supply can't keep up with demand, we'll continue to see higher prices. Growth in Russian production is slowing, for example, as it is in Mexico. But, at the same time, demand from emerging markets continues to spike.

When supply finally eclipses demand, which will happen when ordinary consumers can no longer afford energy costs, then we'll see a reversal.

Right now, production quotas cannot keep up with world demand of 82 million barrels a day. Worse, oil is still too cheap, says Dr. Colin Campbell, former executive VP of Total-Fina. "the only way to control demand is to price oil realistically, allowing for time to find fuels to fill the gap between an oil economy and a renewable fuel economy."

But how do you profit from rising oil?

There's always the domestic solution, Bakken, where up to 4.3 billion barrels of oil could be recovered - a 25 fold increase compared to original 1995 assessments.

There's even a way to buy oil at $71. Pure Energy Trader will have more on this trade next week. The team is still doing its due diligence.

Oh, and if you're still hesitant and don't think $200 is realistic, ask yourself this.

In 2000, who'd have thought we'd see $125 oil?

Good Investing,

Ian L. Cooper

P.S. "Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century" co-author Chris Nelder can be seen here discussing Oil Company Profits.

————————-

In case you missed our other investment opportunity highlights, here's what we covered in Wealth Daily, Gold World, Energy and Capital, and your free blogs for the week of May 5, 2008.

The Marcellus Shale Formation: The Rush to Big Natural Gas Profits
That's why 175 landowners showed up in a meeting yesterday in Whitney Point, New York to discuss exactly how to deal with the energy companies that have suddenly shown up on their doorsteps looking to lock up their land in search of natural gas. The message at the meeting, however, was quite simple...

Wave Energy Stocks: How to Harness the Wave Energy Revolution
Since the passage of Washington State's renewable portfolio standard, requiring 15% renewable energy in the mix by 2020, there has been what some are calling a 'land rush' on the Puget's waters.

Rockefeller vs. ExxonMobil: Peak Oil: A Turning Point for Big Oil
Last Thursday, in my second appearance on Fox Business, Neil Cavuto asked me whether or not I thought it was a good idea to tax the "windfall" profits of Big Oil, and let Congress spend them on alternative energy.

Organic Photovoltaics: The Next Evolution Of Solar
In the past, we've discussed potential moves in the field of organic photovoltaics. This is what many researchers are looking to as the next evolution of solar. But after attending the Organic Photovoltaics conference in Philadelphia last week, I suspect it might be some time before we see any solid plays in this area.

The Media is To Blame for Housing: Why buy a house now?
"The financial press is worried that they might have gone too far - paralyzing the nation into recession by piling on housing. So they're finally beginning to question the indexes where they get their data, and whether the news is really as bad as it seems. Slowly but surely, headlines are changing from Don't Buy A Home Now to Is It Time To Buy? Stop listening to the media. Go buy a home."

David Lereah Comes Clean: Ex-Shill Calls for More Pain
Lawrence, by the way, has done a marvelous job in Lereah's absence, promising on every occasion that now is the right time to buy real estate. Go figure.

Emerging Market ETFs: 2 "Must Own" ETFs Right Now
Eight years into Chen Shui-ban's Taiwanese tenure, the benchmark index barely moved, even as Hong Kong's market rallied 75%, and as Shanghai's nearly doubled. But things are about to change, in a big way as we get close to May 20, 2008.

Copper and Gold Stocks: Exeter Resources Returns 719 Meters Grading 1.0 g/t Gold and 0.38% Copper
Many investors are surprised to learn that large copper mines often recover considerable amounts of gold and other metals as a byproduct of operations. This gold often generates hundreds of thousands of dollars per day in gross cash-flow for public copper production companies, making them copper and gold mining stocks.

Visa at $87.60
Six days after buying Visa (V), we're up more than $11 on the underlying stock, and up more than 130% on the Visa June 80 call...

89% and 35% in 55 Trading Days... Bank Half.
Even though we're bullish heading into the May 12 extension date, we're playing this one safe.

Russian Renewable Energy: Russia: The "Sleeping Giant" of Renewable Energy
You may know that Russia is the kingpin of the international natural gas trade. But did you know that with over 10 million residents still off the grid and leaders aiming to maximize gas exports, Russian renewable energy could be a huge boon to the country? Now we have to convince the Russians-starting with their new president.

Peak Oil: Living on the Banks of Denial

I had pretty surreal experience in TV land on Monday.

I had the privilege of appearing on the Fox Business channel, to talk about why oil prices are so high and what the future holds for oil. (See it here: Part 1 and Part 2.)

In typical TV interview format, I was set up in opposition to another energy analyst who is well known for his cornucopian views. Him on one side of the "panel," me on the other, and the moderator.

You probably know what happened next: I sat there trying to stare at a barely visible camera in a small studio in San Francisco with only an ear bud and no video, thanks to the 5-second delay from New York, while the moderator gave the vast majority of our two short segments to the cornucopian, who called me a "peak freak."

I had to grin at that one. (Personally, I prefer the less pejorative "peaker.")

As he carried on about how technology will save the day, achieving vast increases in oil extraction, and about the 12 trillion barrels of oil left to exploit worldwide, I could barely stifle myself.

Unfortunately, they afforded me no opportunity to respond to any of those points. They only seemed to want my opposing view—that oil would stay more or less permanently over $100 a barrel—to make the segment "fair and balanced."

I tried to explain the importance of flow rates, the concept of a plateau at the top of Hubbert's Peak, the limits of enhanced oil recovery, and the time it takes to bring new solutions to market, but my words seemed to fall on deaf ears.

As any student of peak oil investing knows, this stuff is complex. It's hard to talk about in TV sound bites. Especially when you have to explain the gulf between the 12 trillion barrels of original oil in place that my opponent was talking about, and the 1 trillion barrels of remaining recoverable oil that I was talking about.

Presumably, Fox Business thought it best to leave it to the viewer to figure that one out.

What can I tell ya. I did what I could with it. Another appearance is scheduled for tomorrow. Maybe I'll get a few more words in next time.

Evolution of a Peak Freak

I really can't blame the media for their reluctance to face up to peak oil. It's an unpleasant concept and it immediately strikes fear into one's heart.

I have often reflected on how coming to grips with peak oil is much like the process of grieving, as identified by Elisabeth Kübler-Ross in her 1969 book, On Death and Dying. In peaker terms, I'd describe it like this:

Denial: "There's plenty of oil out there, and we can drill our way out of this."
Anger: "Why aren't those bastards drilling our way out of this?"
Bargaining: "Well maybe ANWR, the continental offshore, the tar sands, and slightly more efficient cars will fix it."
Depression: "Oh man, we're screwed, it's too big a problem for me, I might as well give up."
Acceptance: "I'm ready for the second half of the Age of Oil and I'm going to find a way forward."

Stage One: Denial

My interview segment was an all-too-typical display of denial. Great: that's Stage One. It's a start.

Then I mused: How long have we been living on the banks of denial? And it slightly depressed me today to discover that I wrote an article by that very title back in September 2005, which I could have written today:

Energy will continue to get more and more expensive. In a short while, you won't be able to afford to fill the tank on an SUV. You will learn to like wearing sweaters, and living without A/C. If you live in a big city or a suburb, you will probably have to move. If you're in one of the red-hot real estate markets in the US, the value of your property will take a couple of sickening drops. Your money and investments will devalue. You will find it increasingly difficult to buy—or even get—food. Water will get scarcer, more expensive, and harder to clean.

Let me tell you, it gives me absolutely no pleasure to say that I was right. I've been trying to help keep this from happening for over a decade, and I've never wanted to be right less in my life

Yet, there are critics who claim that people like me are part of some unnamed shadowy conspiracy of "liberal elites" determined to destroy the economy, and other even less charitable characterizations. They say we're all congenital doom-and-gloomers.

I used to puzzle over that, until I realized that it was just denial.

Most peak oil deniers, I have found, are incredibly resistant to any sort of detailed discussion involving facts and numbers, and I have learned better than to argue with them.

But the fire in my belly says that we had better hurry up and move on here, because time is a-wastin'.

Stage Two: Anger

Stage Two seems to have arrived. Just in the last few months, we've seen it everywhere in response to food shortages, fuel shortages, panic buying, huge price increases and crazy volatility in the markets.

Over the last week fuel price spikes, panic and outrage were seen in the UK as a two-day strike shut down the Grangemouth refinery in Scotland, which in turn shut down the Forties Pipeline, taking over 40% of the UK's North Sea oil and gas production offline. As of yet I haven't seen much considered discussion about how that kind of vulnerability should inform future energy policy, but there's plenty of finger pointing going on.

In Congress, the anger was evident as well. And as usual, they came up with some terrible and short-sighted proposals.

Senator Bernie Sanders (I-VT) proposed a windfall oil profits tax, a notion supported by both Senator Obama and Senator Clinton. Such proposals always come up around earnings season for the oil companies, but they're a bad idea because oil companies have few economical prospects left, and reducing their economic prospects even further is counter-productive.

Senator Amy Klobuchar (D-MN), along with Senator Clinton and others, called for an investigation into market manipulation, speculation and possible gouging. Most senators also appear to support a temporary halt to filling the SPR (see my article of last week, "High Gasoline Prices Are Here to Stay," on why that's a bad idea.)

Credit where it is due: President Bush was right to dismiss the suggestion, on the grounds that removing 68,000 barrels a day from an overall U.S. demand of 21 million barrels a day wouldn't help bring oil prices down.

Several senators also want to close the "Enron Loophole," and make energy trading subject to federal regulation. That much I fully support, since I've still got my own anger about the way they bent me over back in 2001.

Clinton and many other senators even proposed filing a WTO complaint against OPEC to pressure them into opening the spigots a little more. Talk about biting the hand that feeds you!

Congress might as well tilt at wind turbines.

Even President Bush was forced to address the energy price issue again—a topic he has studiously avoided while America cried uncle—but he deflected the blame.

"I firmly believe that, you know, if there was a magic wand to wave, I'd be waving it, of course," he said during a news conference. "I've repeatedly submitted proposals to help address these problems, yet time after time Congress chose to block them."

As if he doesn't know that we can't drill our way out of this problem domestically!

I guess anger, like most things, comes around and goes around.

Anger is understandable, but it's not productive. We have to move on.

Stage Three: Bargaining

Bargaining seems to be the stage for our presidential contenders.

Senator McCain, joined by Senator Clinton, suggested a little gasoline tax holiday, which is akin to a first class upgrade on the Titanic.

Senator Obama called that one right, saying, "This isn't an idea designed to get you through the summer, it's an idea designed to get them through an election."

Indeed, a whole host of bargaining strategies are on offer from our leaders, such as:

Increasing production of biofuels and other alternative fuels such as coal-to-liquids (CTL), when it's already clear that the consequences of both are unacceptable, and that the contribution they could make is too little to make a tangible difference.
Raising the CAFE standard to 55 mpg by 2030, when PHEVs can already do that, and you can buy a car today anywhere in Europe that will do that. In 2030, remind me to mail them a letter saying thanks for nothin'.
Spending another $150 billion toward renewable energy research. That's great, and I'm all for it, but it's also roughly what we've already been paying every year for the war in Iraq. Given the challenges we're facing, we should be investing at least as much in domestic alternative energy and rail as we are spending on the war, which ultimately is about perpetuating a dying paradigm of fossil-fuel burning automobiles.
A lousy $1 billion for intercity rail, and $1.5 billion for public transit, when those are clearly—clearly—the most important and immediate investments we could contemplate. Instead of being at the bottom of the list, this should be at the top.

I suspect that Senator Obama may be nearing the end of the Bargaining phase, since he has quite sensibly called for a complete overhaul of US energy policy.

Moving Forward

Whoever is elected to the presidency, the next four years virtually guarantee that he or she will soon see Stage Four: Depression. There are going to be some extremely painful and difficult choices to be made.

So I hope that Acceptance will not be far behind. We have a great deal of transformation to accomplish, and very little time to do it.

Each of us has to go through this process in our own way and time. Every peaker is going or has gone through it. After five years of going through it, I'd put myself almost completely in Acceptance, although I do revisit the previous stages from time to time—another dynamic Kübler-Ross observed. It just seems to be how we're wired.

It's difficult. So I have some sympathy for every position on peak oil, including denial, because I've been there myself.

However, I have found one thing to be true time and time again: Action feels a lot better than inaction. Talking to other people about it, making plans to deal with it, and taking action helps to still that gong banging away in the brain, and relieve the tightness in the chest.

Reducing your energy consumption not only saves you money, it feels a lot better than raging at oil producers.

It also helps—a lot—to know that I can improve my odds, and hedge the inevitable losses of rising prices for everything, by investing wisely in energy. It really helps to take the sting out of a $70 fillup to see a couple hundred, or couple thousand dollar gain in the ol' portfolio.

Take a moment to think about where you are in this process, and may that reflection inform your future choices well.

Your friendly Energy and Capital peak freak,

Chris

A Peak Oil Parable

Forget about climate change for a minute.

I know, I know. It's tough to do. Especially with Earth Day upon us, along with the hundreds of corporate commercials and PR campaigns associated with it, touting everything from zero emission cars to the elimination of waste.

But there's a more pressing and serious issue: peak blue crab.

Once thought an unlimited resource, blue crabs have been harvested at maximum possible levels for years. Their succulent meat is used not only in its original state, but also refined into other, value-added products.

It seemed as if there was no limit to the use of the blue crab—from the steamed variety to soups and crabcakes. It's the blue crab's countless uses that have made it ubiquitous across the country and even the world.

No one ever thought we'd run out of crab.

Peak Blue Crab

But some years ago, murmurs originated claiming that the high use of blue crab was unsustainable; that continuing to harvest it at high levels would inevitably deplete the resource.

Some experts even said there would be a point when the maximum rate of crab harvesting would be reached, and then would subsequently decline every year after.

They said that if crab harvesting was not limited before the peak, a crab crisis would emerge in which availability dropped and prices significantly rose.

But hardly anyone listened. And no limits were set on the amount of crabs that could be harvested.

Eventually, the inevitable occurred. The amount of crabs pulled from the Mid-Atlantic's waters began to decrease. And, of course, the price skyrocketed.

I can remember—in the 1990s—when a dozen crabs cost a dozen dollars.

Today, I've seen a dozen large blue crabs go for as much as $75.

But consumers are still paying for them. The number of Saturday crab feasts has hardly declined. And seafood houses are still serving up bushel after bushel of overpriced crabs to paper-laden tables across the country.

Despite the astronomical rise in crab prices, consumer behavior has hardly changed.

Are we addicted to crab?

Peak Crab Legislation

Obviously, no politician has the pluck to propose limiting the amount of crabs citizens can consume—although they may suggest voluntarily doing so.

Instead, leaders in the prime crab-producing states are coming together to put limits on the amount of crabs that can be reaped.

Last weak, Maryland Governor Martin O'Malley and Virginia Governor Timothy Kaine pledged to make a drastic cut in the harvest of Chesapeake Bay blue crabs. The pair recently appeared together on the banks of the Potomac to announce a 34% reduction in the amount of female crabs that can be harvested.

Of course, this has led to staunch opposition from watermen, who say the cut would put them out of business.

But the governors are adamant, with Virginia's Kaine going as far as saying, "The price of inaction is greater than the price of action. We do not want to wake up in five or ten years and realize we've lost this very important part of who we are."

All that remains to be seen is how the two states will reach their proposed 34% reduction. Some ideas include reducing the number of traps allowed to be used or limiting the different techniques that can be used to harvest crabs.

To protect the watermen's livelihood, O'Malley has hinted at offering them alternative lines of work, including doing research and bay-restoration efforts.

But even though limiting the harvest of crabs today will mean the watermen have jobs tomorrow, they remain opposed. Some have even said they're being made scapegoats, with one fisherman claiming, "They [the government] try to make you think that it's overfishing, but it's not overfishing."

A Perfect Peak Oil Parable

Obviously, the current state of the blue crab industry offers a perfect peak oil parable that even Hans Christian Andersen would be proud of. In fact, if you replace ‘blue crab' with ‘oil' anywhere in this article it still makes contextual sense.

Only one question remains: Why is the government so quick to ensure we have plentiful crabs for years to come while dragging their feet in the preservation of the earth's supposed most precious resource? A resource clearly more valuable—and with thousands more uses—than simply being enjoyed with cold beer.

That is a question I and most others can't answer. But I'll tell you this.

Just like with crabs, the alternatives to oil (and obviously oil itself) will continue to increase in value until the problem is solved. And that won't be anytime soon.

Already fishermen are flocking to crab alternatives. Some are chartering private rockfish trips, while others are turning to the oyster industry. Ironically, rockfish numbers are doing incredibly well thanks to a moratorium on rockfishing imposed in the 1980s.

The same thing is happening in the oil industry. Its availability is decreasing while its price climbs higher and higher, paving the way for alternative energy industries to be ever more attractive and profitable.

The only difference is, in the case of the blue crab our elected officials are willing to acknowledge we're running out.

Too bad the consumption of blue crabs doesn't cause any undesired side effects. We'd undoubtedly be discussing the side effects—instead of the depletion—as the reason we need to get off crab.

Call it like you see it,

Nick

PS. We are running out of oil. Maybe not today. Maybe not next year. But the production levels are going to begin declining. And the technologies allowing less oil to be used are increasingly growing in value and profitability. The Alternative Energy Speculator is taking those profits all the way to the bank. We've found one company that allows big rigs to use 90% less diesel while reducing emissions. You don't want to miss this one. Read the report.

Peak Oil Australia

Australia is quickly becoming a hub for nearly every global energy trend, starting with Peak Oil.

Investors have an appetizing array of energy strategies to choose from, based on three major market movements playing out in Australia right now:

National oil production is topping out
Natural gas production is on the rise
Renewables are just revving up

A government report released recently forecast a 7% rise in Australian crude oil production for 2008—followed by a double-digit pullback in 2009.

Australia's expected jump in this year's crude output is something most OPEC nations would salivate over. But the country is heading for dryer times, as the Australian Bureau of Agricultural and Resource Economics reports:

Beyond 2008/09, Australia's oil production is projected to decline... as falling production from some mature fields offsets anticipated new additions to capacity.

But we aren't about to witness Australia's oil production peak...

Peak oil already happened in 2000, as we see in this chart from the U.S. Department of Energy:

Australia oil production

Seeing the writing on the wall, national and local governments and Australian industrial leaders are cutting a wide swath across the energy landscape, cultivating resources from geothermal "hot rocks" to uranium to clean coal.

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Peak Oil: Gas Up as Oil Goes Down in Australia's Energy Economy

Australians are also ramping up their liquefied natural gas (LNG) output, giving them a line on an up-and-coming fossil fuel source that is increasingly in demand.

Though oil output is set to peak in '09, LNG production is locked in an amazing natural gas uptrend in Australia:

Australia natural gas production

Because the stuff is easier to transport and takes up less space than the traditional gaseous form, LNG is gaining popularity in big producers from Qatar to Canberra.

As for the consumption end, China is especially eager to lock in LNG supplies for its energy-intensive economy. Fortunately, Australia is just a hop, skip and jump away from some of the Middle Kingdom's most dense population centers.

Australia is already the world's #5 LNG exporter, and it also has the potential to take the global lead in another non-traditional fossil fuel sector—clean coal.

Australia's Clean Coal Alliance Takes Off

Australia is the world's leading net coal exporter, which again brings into play prime position vis-à-vis China.

Having built over 500 new coal-fired electricity plants in the past half-decade, China's already a huge Australian client.

That's why an improbable consortium of coal industry giants and environmentalists are getting together this Thursday.

The World Wildlife Federation, the Australian Coal Association, and the mining union CFMEU are calling on the government to demand more research into carbon capture and sequestration (CCS), the technical process that may mostly eliminate emissions from the types of plants China is constructing.

The WWF has come under fire for shaking the ACA's sooty hands, but these environmentalists know that they can serve as a pivot point for another of Australia's top energy goals—renewable energy development.

Australia's Kyoto Goals Create Profit Potential

China isn't about to shut down its brand-new power plants for anybody, and Australia's 16-year economic expansion would surely be thrown off the tracks if the coal economy collapsed.

In the real world, the dirtiest emissions sources have to be targeted for reduction before elimination, and that's WWF's angle.

In Prime Minister Kevin Rudd, we have a Mandarin-speaking pragmatist who understands Australia's transitional energy economy and its global role.

While in the parliamentary opposition, Rudd's Labor party championed the development of geothermal energy derived from underground sources in some of Australia's vast Outback.

Rudd's first act as PM was to sign his country onto the Kyoto Protocol, and he has also resolved the government to the goal that 20% of all electricity will come from renewable sources like solar and wind power by 2020.
So the government is wisely committing some of its A$15 billion budget surplus to stimulate homegrown technology.

Based on my own experience tracking renewable energy start-ups, plenty of them used government seed money to eventually go public in markets like Israel, Hong Kong, and the United States.

We're forecasting a slew of potential listings in Australia. Stay tuned for the first crack at those.

Regards,

Sam Hopkins

Peak Oil: Use the Crisis to your Advantage

BALTIMORE, MD - The world has long known that oil is a finite resource. In fact, fears of hydrocarbon depletion are, in a sense, actually as old as the industry itself.

Let me explain...

Colonel Edwin Drake is popularly credited as founding the American petroleum industry. But this is not the case.

It's true that Drake drill the first oil well near Titusville, PA back in 1859. But it was Samuel Kier, inventor and businessman, who is really the grandfather of the American oil industry.

Kier — a Scotch-Irish immigrant — owned several salt wells around Livermore and nearby Saltsburg, PA. Kier also held interests in several coal mines, a brickyard, and a pottery factory but it was his salt business that really put food on the table.

In the early 1800s, Kier's salt business was booming. But by the 1840s, after years of mining, a crisis was looming as Kier's salt wells were becoming fouled with petroleum.

At first, Kier simply dumped the then useless oil into a nearby Canal. But after an oil slick caught fire, he was forced to stop. He then decided to look for some way to profit from this otherwise worthless byproduct.

With no formal training in science or chemistry, he began experimenting with several distillates of the crude oil. And in 1848 Kier developed a substance called Rock Oil (a "snake oil" type tonic whose key ingredient was the petroleum from his salt wells) and began selling the liquid as a ‘cure for everything' making him the first person to market petroleum.

Now the really interesting part to this story is this... In an 1855 advertisement for the Rock Oil, Kier prophetically urged customers to buy soon before "this wonderful product is depleted from Nature's laboratory."

Unbeknownst to Kier, these words would be echoed throughout history seemingly as the first hydrocarbon depletion warning.

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Kier did not know the full scope of his words. At the time, his message was nothing more than an advertising ploy. Nonetheless, over 150 years later we hear similar forecasts today from the world's leading petroleum geologists.

Now, as we've talked about many times before, we're not exactly running out of oil. What we are running out of is cheap oil.

The world's insatiable demand for oil will inevitability overtake our ability to produce it cheaply. Once this occurs - and it's already started - oil prices will skyrocket to unprecedented levels.

And despite the resurrection of Prudhoe Bay... the recent Gulf of Mexico discovery... Saudi Aramco's new 1.2 MMbbl/d oil field... and everything else that's push oil prices down 25% since early August, the oil bull market that will propel prices into the stratosphere is still right on track.

In fact, if anything the recent correction just offers investors another opportunity to buy in at radically low levels. And like Kier, we can use the peak oil crisis to our advantage by investing in the sector now.

But how do we know there really is a crisis and that peak oil isn't just another Y2K?

Well, one of the most compelling pieces of evidence to support peak oil that I've found throughout my years of study is the peak in oil field discoveries.

Peak Oil is Really a Two-Headed Snake

There's no denying that global oil production has been increasing for over 140 years. In fact, the world has managed to more than double its oil production since 1965 alone.

But regardless of this considerable boost in production over the past 40 years, you can bet the farm that the world will not be able to keep up this kind of increase for much longer.

You see, the thing is this... You have to find oil way before you can produce it.

But new discoveries of major oil fields peaked over 40 years ago and has followed a steady decline ever since. In fact, the last major oil field discovery — Cantarell in Mexico — occurred 30 years ago. (The newest Gulf of Mexico field, by the way, is just a mid-sized field)

"Technology is great, but it can't find what's not there. In the last five years, we consumed 27 billion barrels of oil a year, but the oil industry discovered only three billion barrels a year. So only one barrel was replaced for every nine we used."

- L.B. Magoon, U.S. Geological Survey

Since then we've been unable to find any new field that is able to produce more than 1 million barrels per day. And logic dictates that without new major discoveries, we're simply unable to significantly ramp up production.

That means the peak in global oil production is soon to follow. So, peak oil is really a result of peak discovery. The model looks something like this:

So why not just go out and discover more elephant-sized fields?

Well, that would work like a peach. But the fact is there are no simply more major oil fields to be found.

Believe me, if there were any more giant oil fields left to be discovered, the major oil and gas companies — who've already spent trillions collectively on exploration — would have found them by now.

Given geologists' sophisticated understanding of the characteristics that would indicate a major oil find, it is highly unlikely that any area large enough to be significant has eluded attention and no amount or kind of technology will alter that.

- Alex Kuhlman, author of Peak Oil Survival Guide

The bottom line is that are very few, if any at all, significant discoveries remaining to be made. And as a result of the lack of new discoveries, I believe the peak in global oil production will occur soon if it hasn't already

And as investors we need to strike while the energy iron is still hot.

Peak Oil - Energy and Capital

Peak Oil and the IEA

Highlights of the Peak Oil Conference, Part 2

The End of Globalization

China and Coal

Can Alternative Fuels Fill the Gap?

Renewable Energy: Our First and Last Resort

Notes from the 2008 ASPO-USA Peak Oil Conference

Chris Nelder's Notes on the 2008 ASPO-USA Peak Oil Conference

Highlights of the Peak Oil Conference, Part 1

Supply Outlook Dim

Peak Oil In Two Years - It's Crunch Time

Simmons Warns of a Run on the Pump

Reflections on the ASPO Peak Oil Conference

A Story Nobody Wants To Hear

Shadowboxing the Apocalypse

A Parade of Bad Ideas

Enough, Already!

Oil Speculation

Peak Oil Confusion - A Game Whose Time Is Up

A New Paradigm

A Perfect Storm

A Very Nasty Period

Energy Stocks: The Only Way to Make Any Money

Peak Oil

Energy Shortage

The Tipping Point in the Peak Oil Debate

IEA's Bombshell

Peak Oil Consequences of Bush's Failed Energy Policies

The Jawbone of an Ass

"W" Is For Wrong Way

Peak Oil and the Rail Revolution

Tricky Trading

A Slow Boat To China

Rail: The Longest Safe Bet You Can Make

$200 Oil Prediction

Peak Oil: Living on the Banks of Denial

Evolution of a Peak Freak

Stage One: Denial

Stage Two: Anger

Stage Three: Bargaining

Moving Forward

A Peak Oil Parable

Peak Oil Australia

Peak Oil: Use the Crisis to your Advantage

Chris Nelder's Notes on the
2008 ASPO-USA Peak Oil Conference