Peak Oil - Energy and Capital

'Peak Oil Demand,' Yes... But Not the Nice Kind

When oil crossed $120 a barrel for the first time in May 2008, oil cornucopians knew they were in trouble...

Prices had quadrupled in just five years, yet had failed to bring new production online. Regular crude had flatlined around 74 million barrels per day (mbpd). The case for peak oil was looking stronger with every new uptick in crude futures.

The following month, prominent peak oil critic and cornucopian Daniel Yergin of IHS-CERA changed his stance: The peak oil threat would be neutralized by peak demand. Gasoline consumption had peaked in the U.S. and Europe, he argued, due to the combined effects of increasing efficiency, biofuels, and the recession.

In 2009 the peak demand story seemed confirmed, as prices stabilized around $70 in June, and U.S. consumption remained well off its previous high. Most people thought the nearly 2 mbpd decline in U.S. petroleum demand from 2007 through 2009 owed to efficiency and people driving less.

In reality, only about 15% owed to reduced gasoline demand. The other 85% was lost in the commercial and industrial sector: jet fuel, distillates (including diesel), kerosene, petrochemical feedstocks, lubricants, waxes, petroleum coke, asphalt and road oil, and other miscellaneous products.

Very simply, when oil got to $120 a barrel it cut into real productivity, and forced the world's most developed economies to shrink. At $147, it wreaked serious damage.

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As I explained in "Investment Themes for the Next Decade," the new normal will be cycles of bumping our heads against the supply ceiling, falling dazed to the floor, rising back to our knees, then finally standing... only to bump our heads against the ceiling once more.

Scooters Will Kill SUVs

Two interesting news stories crossed the wire this week, which portend badly for the world's #1 net importer, the U.S.

The first was a Reuters report that the last quarter of 2009 had "wiped out" the equity of Mexican state oil monopoly Pemex, leaving it $1.4 billion in the negative. Falling crude output, falling refining margins and a burgeoning dependency of the state on its revenues had squeezed it to death.

Not only did the report offer further confirmation that the oil export crisis has arrived, but it also confirmed my growing suspicion that the oil production everyone has assumed will come online in five to ten years might, in fact, fail to materialize. Negative equity companies have a hard time raising capital for new exploration.

The second was a Bloomberg report that Saudi Arabia had agreed to double its oil exports to India, to some 866,000 barrels per day. India indicated separately that its onshore production of oil may peak this year.

This adds to the pressure on Saudi Arabia's exports, whose oil shipments to China have been growing at a rate of 11%-12% per year and now stand at roughly 1 million barrels per day (mbpd). China has eclipsed the U.S. as the primary bidder for Saudi oil, while U.S. imports from the Persian nation have fallen to a 22-year low.

The last two years have seen the marginal buyers of oil shift decisively to the non-OECD countries. A gallon of fuel delivers so much value in China and India (think peasants on scooters), that even at $120 a barrel, remarkable economic growth rates are possible.

In major oil exporting countries like Saudi Arabia and Venezuela — where subsidized gasoline still sells for under 25 cents a gallon — the appetite for fuel grows steadily every year with little thought given to efficiency.

It's a different story in the U.S. For debt-laden consumers, an extra $50 or $75 to fill up the tank on an SUV every week sharply reduced discretionary income and starved the economy of its most fundamental driver: consumer demand.

The Real Meaning of Peak Demand

The most promising effort I've seen to quantify the role of efficiency in peak demand was a report in October of last year by Paul Sankey of Deutsche Bank entitled, "The Peak Oil Market." My initial excitement quickly gave way to disappointment as dug into it, however, as I realized that its confident assertions were unsupported by the data.

I applauded the effort enthusiastically — and I hope to see more serious work along the same lines — but it fell far short of proving that energy transition can be accomplished under the status quo of economic growth, let alone its optimistic twist on "The end is nigh for the age of oil."

The fact is that peak demand in the OECD is not merely a function of efficiency gains and biofuels substitution, aided by a temporary recession...

Instead, peak demand will be the result of a permanent state of increasing depression in which non-OECD countries not only more than make up for the loss of OECD demand, but outbid them for the marginal barrel.

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As we enter the post-peak phase of global oil supply sometime around 2012-2014, the price that heavily import-dependent countries like the U.S. would have to pay for that marginal barrel will become increasingly intolerable. In a weakened economy, $100 a barrel (or less) could be the new $120.

The true import of peak oil, therefore, may not be sustained high prices, but economic shrinkage. Demand will be destroyed long before oil gets to $200 a barrel, but it will not be destroyed by improved efficiency.

From where we stand today, it's hard to make an argument for economic recovery. Persistently high unemployment rates, broken state and federal balance sheets, and an inflationary depression will continue to cut into petroleum demand.

We spent the last several decades offshoring the fundamental value-adding sectors like energy production and manufacturing, and now our FIRE economy — finance, insurance, and real estate — rests entirely on real value created elsewhere.

The reason is simple: Energy is the only real currency.

Every dollar of fiat currency or GDP was ultimately derived from cheap energy. Trying to print your way out of energy decline is like prescribing ever-higher doses of aspirin for a headache caused by a brain tumor. Yet those at the levers of monetary policy are, by all appearances, completely ignorant (or in willful denial) of this fundamental fact.

The vogue prescription for the sovereign debtors at greatest risk of default (see a Top 10 list) is "austerity measures." The theory is that a period of belt-tightening will stanch the fiscal bleeding until economic recovery puts everyone into the black again.

Yet, if primary energy supply is declining, and the rising star of developing economies is inexorably cutting into the supply available to developed and indebted economies, then there can be no recovery.

I have joked on Twitter that I'm expecting an "M-shaped recovery," where we're now on the second hump. A more accurate image is slow strangulation.

Two Questions for Recoveryistas

Those who would argue for economic recovery must answer two intractable questions.

The first is: Where will the energy come from, as more of the world's net exporters become net importers?

Britain, Argentina, Indonesia, and others have become net importers in recent years. Mexico and Columbia are expected to follow suit within a decade. Clearly, we can't all be net energy importers.

There is also the obstinate fact that aggregate net energy — the energy you get in return for investing energy in its production — has been dropping steadily. Oil net energy dropped from 100 in the early 1930s to 11 or less today. Net energy for natural gas is now in decline. We don't have adequate data to know yet, but coal's net energy is probably in decline too. Meanwhile, the net energy of all substitutes is low: wind, 18; solar, 6.8; nuclear, 5-15; all biofuels, under 2.

It is not surprising that a study of the Herold database (Gagnon, Hall, and Brinker, 2009) showed the amount of oil and gas produced per dollar spent declined between 1999 and 2006.

The second question is: If the creeping infection of sovereign default continues to spread to more countries, where will the money come from to bail them out?

The answer has been, and continues to be, more aspirin. Without more cheap energy, monetary tactics to play the game into overtime will not only be futile, they will only draw us closer to the edge of the net energy cliff.

All of which begs a final question: If the answers are transition to renewables, and rebuilding our infrastructure for high efficiency, then where will the money and energy to do it all come from? And lastly, how long will it hold out?

Without cheap energy to fuel the growth that is hoped to pay off the accumulated debt, austerity will become an everyday reality — not a short-term fix. A reality that slowly sinks in for the rest of our lives, as net importers become progressively poorer.

The peak demand argument is a good one... but not for the nice reasons.

Until next time,

Chris

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China The Vampire Squid of Commodities

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For my final report on the 2009 ASPO peak oil conference, I must address the world's new prime mover of commodity demand: China.

With flat-to-declining economic growth rates in most of the rest of the world, the Red Dragon has emerged as the dominant force driving global demand for natural resources.

Adam Robinson, a Vice President at RBS Sempra Commodities who gave an excellent talk on the oil trade and its relationship with the recession, noted that China's willing to buy oil in size at $55 a barrel for its strategic stocks, providing a natural floor for global prices.

Steven Kopits, the managing director of Douglas-Westwood LLC, said China will overtake the U.S. as the world's top consumer of oil by 2018. In fact if supply is available, he thinks it could double U.S. consumption by 2025.

Tom Petrie, Vice Chairman of Bank of America Merrill Lynch, essentially agreed. In his model, all of the growth in oil demand through 2030 comes from non-OECD countries, with China accounting for fully 43%. The IEA anticipates that absolute oil consumption in the OECD will fall over next 20 years by about 3 mbpd, while China's increases by 9 mbpd.

Investors are looking at the convergence between falling OECD oil demand and rising demand in non-OECD, Robinson explained, and after taking monetary policy into account, the see commodities winning either way.

His reasoning is astute: Even if the Fed's fiscal stimulus turns to drag, and we don't get the recovery, then where does the dollar go? Down - which will be bullish for commodities. And if we have a V-shaped recovery, demand and prices will rise - again, bullish for commodities.

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Voracious Demand

In his presentation on China's oil and gas balance, Michael Rodgers of PFC Energy made one thing abundantly clear: China's domestic oil production has nearly peaked, while its demand for oil is only going up.

China currently accounts for about half the total oil production of South Asia, Southeast Asia, and Australia combined:

Source: PFC Energy

The crude oil reserve balance for Asia went negative in the early 1980s, when the region began producing more oil than it was discovering. Like the rest of the world, most of its current production is from large reserves discovered in the 1960s and 1970s, supplemented by smaller discoveries since. The region's current deficit is about 1.5-2 billion barrels per year.

Source: PFC Energy

After years of continuous increase, China's oil production base is now in decline with overall depletion levels of 60%. Fields producing prior to 2000 are generally declining at rates of 5-7% per year, but mature fields are declining by as much as 16-20%. China expects enhanced oil recovery (EOR) technology to bring the overall decline rate to 6.7%.

New fields should allow it to maintain a production plateau around 3.6-4 mbpd for another 8-10 years in the PFC forecast. But then China will see a "catastrophic" drop in production as mature fields, accounting for 3 mbpd of production now, fall to about 1 mbpd by 2020.

Against a GDP growth rate of 8-8.5%, the stagnant supply picture means that China's demand for oil imports will grow from 4 mbpd today to over 10 mbpd by 2020. China now constitutes 7.5% of global GDP and 9% of global oil demand, which will soon grow into the teens.

An appetite like that, Rodgers said, means China must do exactly as it has been doing: aggressively compete with the rest of the world to secure reserves, and export workers.

The picture for natural gas is slightly better, but also points to sharply increasing imports. China's gas consumption is expected to rise from 7.6 billion cubic feet per day (Bcfd) in 2008 to over 30 Bcfd by 2030. Domestic production should keep up with demand until around 2014 — at which point imports will have to pick up the slack - and peak around 2020.

China is already building pipelines from every possible direction to import gas. I'm sure I'm not the only one who, looking at the following map, thinks "vampire squid."

Source: PFC Energy

China's demand for coal is just as astonishing: In just the last four years, Kopits observed, its increase in demand for coal was equivalent to the total U.S. coal demand.

Vince Matthews, director of the Colorado Geological Survey, rounded out the picture with some stunning facts on the demand for minerals and other commodities. China is:

The #1, #2 or #3 producer in the world for 15 of the most important commodities;
The #1 importer of copper, accounting for more than 40% of world demand;
Both the #1 producer in the world of iron ore and the top importer;
The #1 car manufacturer in the world, and the #1 car market. (Petrie later made a similar point: China is now second only to the U.S. in first-class interstate highways.)

Consider this little factoid: China built 70,000 new supermarkets in 2005 alone. For a little perspective on that number, the 2002 census counted about 150,000 "food and beverage stores" in the United States.

That voracious demand drove up prices across the board. Matthews ran down a list of price increases from various months in 2003 to the present:

Copper up 307%
Scrap iron up 559%
Molybdenum up 997%. Exports from the U.S. doubled, most of which went to China.
The average price increase of major metals was 379%, and the average price increase was 746% for 15 other industrial metals.

Although prices for many of the metals fell sharply in the commodity crash last year, they're now staging a comeback, driven by Chinese demand.

Worse, most of these metals are bought via long term contracts, not on the spot market. When those contracts expire, Matthews expects spot prices to spike again.

Even cement demand was disrupted when China when began importing it in 2003, resulting quickly in price spikes and shortages in the U.S. China now consumes half of all the cement in the world.

The resources causing the most consternation, though, are the rare earth elements. As I discussed a few weeks ago, China has a virtual corner on the world supply of these crucial elements, which are used in wind turbines, solar equipment, parts for hybrid cars, and many of the other solutions for a post-peak oil future.

The U.S. now imports between half and all of its supply of the rare earths, putting it at China's mercy for some of the raw materials that would be needed for a "Made in the U.S.A." renewable energy revolution.

Indeed, Matthews believes that China intends to take advantage of its position by clamping down on its exports of rare earths, to bring world manufacturing to them.

But perhaps this should not unduly alarm us.

If China is clear-headed and deep-pocketed enough to invest in the energy solutions of the future while we are not, and they can build them faster and more cheaply than us, then maybe it's time to stop worrying and learn to love our new Chinese overlords.

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Outmaneuvering America

Rodgers has no doubt that China understands peak oil and expects future supply disruptions, which is why it's accumulating foreign assets and diversifying its import options.

Peter Dea, the president of oil and gas exploration and production company Cirque Resources LP, made the same point a bit more obliquely, rhetorically asking if China had no doubts about the future of oil, why would they have recently outbid Exxon Mobil for new drilling in Ghana?

Putting a finer point the difference between the strategies of the U.S. and China, Dea wryly observed that the U.S. has potential for offshore drilling for natural gas, but "it won't be developed until the U.S. takes energy resource planning as seriously as China does."

That doesn't appear to be in the offing any time soon. Washington doesn't seem to understand the commodity markets at all, Matthews said, nor the shrewd moves that China is making. While Japan already has a strategic mineral stockpile, and China is quickly amassing one, the U.S. is selling off its key minerals: "The lack of knowledge and concern over it in Washington is horrifying, and I can't explain it," he moaned.

Well, I have explained it: America has no energy plan, and we won't have one until we give up our fantasies about energy independence or drilling our way out, admit that oil is peaking, and get serious about planning accordingly.

While America was busy with its hallucinated wealth meltdown and trying to raise some cash by selling assets at garage sale prices, just one of China's three major oil companies, CNPC, secured 75 resource projects in 29 countries.

Another of the three, energy giant China National Offshore Oil Corporation (CNOOC), just bought oil assets in the US for the first time. The size of the deal for four deepwater exploration licenses in the Gulf of Mexico was undisclosed, but Norway's Statoil, the seller, characterized it as "small."

Still, the purchase is bound to make it more difficult for China to maintain a low profile as it snaps up resources.

Perhaps that's why it has begun trying to cover its tracks: China OGP, an oil industry newsletter issued by Xinhua news agency, recently announced that it would no longer publish data on China's stockpiles of crude oil, gasoline, and diesel. (As if that data weren't hard enough to get already! Killin' me.)

The lesson on China for retail investors should be clear: Buy domestic reserves while they're cheap, and hold ‘em, hold ‘em, hold ‘em.

Until next time,

Chris

Editor's Note: This article is the final part of Chris's six reports from the 2009 ASPO Peak Oil Conference. See also Part 1, Part 2, Part 3, Part 4, and Part 5.

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No Plan for Oil Shortages in North America

On Halloween day this year, I killed part of a beautiful afternoon at a local shooting range with a buddy. It had been quite a while since I did that, and I needed the practice.

[I know some of my gentle readers might find it a little shocking that a peace lovin' hippie like me would do target practice, but I was raised with it. My parents put us boys through the NRA's gun safety program at a fairly early age, before agreeing to take us hunting. Later I was certified to carry a weapon in the line of duty as a security officer. I've always had a healthy respect, if not real love, for guns.]

I was taken aback when I walked in the door at the nondescript, low industrial building. The place was packed. I could hardly find a place to stand and I waited about 15 minutes just to speak to a clerk. The registers were ringing constantly, taking in $100-$300 totals at a whack. Where I come from, we call that a gonga business.

The gun business has been strong this year, without a doubt. Guns have been flying off the shelves and ammo shortages have been common (and surrounded by conspiracy theories).

Unfortunately, most gun makers are small private companies that make high specification steel, leaving Smith & Wesson (NASDAQ: SWHC) as one of the few good tradeable stocks in the sector. And it has done nicely: up 62% YTD after declining from a huge rally in the spring.

Clearly, the general public has had an increased appetite for guns. And let's not kid ourselves — they're not planning to go deer hunting. It's about fear in an increasingly chaotic world and demand for better personal defense.

From an energy standpoint, that fear is certainly justified.

No Plan for Oil Shortages

At the 2009 ASPO Peak Oil Conference, the security outlook for North America was given a surprising twist by Rick Munroe, a Canadian farmer who learned about peak oil some years ago and decided to find out if the military or the government was doing any planning to address the problem.

His efforts turned up three good studies: Alan Smart (ACIL Tasman, 2004); Kathy Leotta (PB, 2004); and Helen Peck (Defence Academy, 2006). But within the actual gears of government, he found naught but denial.

One government official assured him that because Canada is a member of the IEA and has 200 years of oil supply in the tar sands, people should relax. (If you don't immediately realize what a cretinous statement that is, see "The IEA'S Come-to-Jesus Moment" and "Tar Sands: The Oil Junkie's Last Fix," Part 1 and Part 2.)

Munroe found numerous studies about peak oil by the GAO (U.S. Government Accountability Office), which were apparently dropped from any further consideration. As early as 1981 the GAO wrote: "It is questionable whether an adequate organizational structure exists which could effectively manage a crisis."

The IEA's messaging has been clearer. In 2005 it warned that pre-planning is critical, and that the public must be primed and well informed in advance. Yet their strategies for dealing with the impending oil crisis are laughable, boiling down to a short term "surge" in production, and drawing down emergency reserves-at most, a 90-day solution.

Munroe offered a quote by Dr. Helen Peck, a lecturer at Cranfield University in the UK and an expert in complex systems, energy security, and national emergency planning, that highlighted the relationship between food and energy I wrote about in my last article: "The fundamental problem is that it is the very efficiency of the nation's food and drink supply chains, under normal circumstances, that make them so vulnerable under abnormal ones."

Those who try to plan for such emergencies know that in the absence of a plan, the public usually responds to shortages with panic buying and hoarding. Preventing such an outcome requires top-to-bottom pre-planning.

Yet those who have tried it found that mandatory measures are hard to implement. Energy expert and veteran government researcher Roger Bezdek explained at the 2007 peak oil conference that he worked on an oil rationing program in the 1970s, and it was "a nightmare." The team found that they could not improve upon the market, and indeed, he now believes that many of the problems we had in the 70s were due to government interference in the markets.

In his research, Munroe found a confidential report by the IEA explicitly stating that in the event of a crisis, the market should be left alone and allow price spikes to pass through to all consumers. And as recently as 1996, he says, the GAO expressed its faith in the principle by writing "physical shortages. . . are virtually impossible in a market economy."

We know something about what the market does when supplies run short. It caused oil prices to triple up through last July. In fact that outcome was actually anticipated by a 2005 intelligence exercise called "Oil Shockwave," in which nine former White House cabinet officials convened to simulate what would happen if 4 mbpd of global oil supply were suddenly lost. The predicted result was a near-tripling of the world oil price.

U.S. Secretary of Defense Robert Gates was one of the participants in the exercise, and commented afterward, "The threat is real and urgent, requiring immediate and sustained attention at the highest levels of government."

Yet, four years later, not one city, state, or federal government in North America has a plan to deal with the effects of an oil shortage. The official plan is to have no plan.

We can rest assured that the government won't be on our backs the next time there is a supply interruption. As long as we can pay — even if gas is $7 a gallon — there simply cannot be physical shortages! Hurrah!

Grid Security

The U.S. electrical grid has its own peculiar security issues, as Scott Pugh testified in his presentation at the conference. Pugh is a former captain of the U.S. Navy and now serves with the Department of Homeland Security (DHS).

Few people know this (I certainly didn't), but our national grid has three parts: East, West, and Texas. A major grid fault can take down the entire western or eastern halves of the country without affecting Texas, so, Pugh quipped, "Texas can secede from the union any time they think they should."

It's a good option to have. U.S. grid power is generated by over 1,400 power plants and passes through some 25,000 substations in a network of transmission and distribution lines, all of it privately owned by hundreds of transmission utilities & generating companies. A shutdown at any one of those points can take down large segments of the grid.

In an effort to assess the grid's vulnerability, DHS and DOE staged a cyber attack test in 2007 to see if they could shut down a substation by damaging it with a cyber attack. They succeeded. Subsequent war game scenarios produced frightful results.

Yet, as it now stands, the agencies are primarily working on alternative ways to respond to an attack, and praying for a rapid smart grid transformation which should make more fine-tuned grid control possible. In any case, their hands are somewhat tied, said Pugh, because the government doesn't see fit to interfere too much with the privately owned grid infrastructure.

Laissez Faire or a Dereliction of Duty?

It may be the most heinous dereliction of duty ever witnessed in the history of democracy, but that's where we stand in North America. While the UK, Australia, and New Zealand continue to work hard on contingency plans for an oil emergency, we remain in widespread institutional denial, complacent that our fuel supply will be assured by the wise hand of Mr. Market.

We don't need no stinking plans. Panic buying and hoarding — pshaw! We're going to do the job the free market way, through voluntary demand reduction and switching fuels! Remember how the financial markets worked so much better after the Phil Gramm era of deregulation?

If a supply interruption event should happen, and farmers can't get fuel to plant their crops when the seasons dictate. . . well, the resulting food shortages and price spikes will simply have to be the cost of doing business in a free market system. And if oil and gas companies, airlines, trucking companies, farmers (and, well, just about everybody), can't swing with increasingly frequent fuel price spikes and crashes — then I guess we don't need them.

Our government's blithe laissez faire attitude toward the threats of fuel shortages and grid attacks may be intellectually comforting to free market champions, but I'm willing to bet that should such events seriously compromise national security, they'd turn authoritarian in a heartbeat. . . and that includes me.

After seeing these presentations my first thought was: This is utter insanity. We need to nationalize the grid and prepare for deliberate fuel rationing ASAP.

It's not that the government doesn't know about peak oil. Some of the most important studies on the subject and on its likely effects have been produced there. Indeed, Pugh asserted that the military definitely gets peak oil because "they're paying for fuel in money and blood daily." Their primary focus is on using it more efficiently, he said, but they don't worry about shortages because "there's always going to be enough oil for the military."

I'm sure that's true. But I'm not at all sure it's something we want to test.

Failing to plan is planning to fail. The government's weak, bumbling federal response to Katrina is still relatively fresh in the national psyche. And there is a growing awareness among the rank and file that the free market's ability to govern itself failed miserably in the financial meltdown of 2008, and laid a heavy burden of debt on the next several generations of citizens.

Is it any wonder that people are starting to think about personal defense? About being able to generate and store their own electrical power? About growing their own food and putting up some extra canned goods, water, and batteries in the basement, "just in case?"

Until next time,

Chris

The 2009 IEA Oil Report & World Energy Outlook

The International Energy Agency (IEA) released its annual World Energy Outlook (WEO) this week — a report I always anticipate eagerly. Hey, it's like Christmas for energy geeks.

The IEA found coal in its stocking though, after a report the previous evening in the UK's Guardian newspaper cited unnamed whistleblowers alleging the agency had been distorting its true view on peak oil in order to prevent public panic.

The internal sources claimed its analysts did not really believe that global oil supply could rise to the level in the official forecast, but that the agency had bowed to U.S. pressure to paint a rosier picture.

The quotes were unquestionably damning:

The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this. . .

Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources. . .

We have [already] entered the 'peak oil' zone. I think that the situation is really bad. . .

. . . imperative not to anger the Americans. . .

Peak oil analysts nodded their heads in agreement. It was hardly a revelation.

John Hemming, the MP for Britain's all-party parliamentary group on peak oil and gas (yes, they actually have one — jealous?) was gruff: "Reliance on IEA reports has been used to justify claims that oil and gas supplies will not peak before 2030. It is clear now that this will not be the case and the IEA figures cannot be relied on."

I've critiqued the reports of the Energy Information Administration (EIA) and the IEA many times over the years (here, here and here), and concluded that both agencies understood the reality of peak oil well enough, but somehow had been pressured to spin the story in the most optimistic way possible. Either that or they had some seriously schizophrenic people.

I have no doubt that a cohort of government and industry representatives from the U.S. and other OECD countries (at whose pleasure the IEA serves), have made their preferences known to the IEA leadership, and possibly reminded them who's their daddy. After all, the agency was created after the 1974 oil crisis for a fundamentally political purpose: to safeguard the West's energy supplies.

To be clear, my analysis of the agency's data supports the allegations. Uncertainty has always been used to put an optimistic spin on the reports.

Several years back, it was the uncertainty around enhanced oil recovery and new discoveries, and the potential for higher prices to increase recoverable reserves

When conventional crude flatlined at 74 mbpd in 2005, despite a tripling of prices afterward, the emphasis shifted to the unrealized potential for non-OPEC supply.

When that didn't pan out, the potential for unconventional sources such as natural gas liquids, tar sands production, extra heavy oil, coal-to-liquids, and biofuels defined the optimistic gray zone.

There were also a few disturbing discontinuities along the way in which report summaries didn't quite match up with the details in the later chapters. Various kinds of unconventional fuels began creeping into the "conventional crude" category.

The spin was absolutely detectable to a sharp eye.

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Concealed Clues

At the same time, another transformation was taking place.

The edges between the solid data and the gray zone gradually became sharper. Over the last few years, the agency's estimates for peak oil production fell from 120 mpbd to 105 mbpd. . . but oddly, their forecast for the date of the peak remained stubbornly around 2030. Curves were gradually flattened, but reached the same point. Simple head-scratchers like that.

The language of the reports also grew in clarity and intensity, alarming critics. By last year, it had become downright shrill: "The world's energy system is at a crossroads" . . . "global trends. . . are patently unsustainable". . . "the era of cheap oil is over". . . "Time is running out and the time to act is now."

This year, they admitted what many of us had already figured out: non-OPEC supply has basically peaked, yet forecasted that global oil supply would still rise from 84.6 mbpd in 2008 to 105.2 mbpd in 2030.

They then devoted fully half the report to a "450 Scenario" in which a vigorous global investment in efficiency, renewables, carbon capture, and nuclear power averts global disaster by keeping atmospheric CO2 concentration below 450 ppm, with a price tag of $26.5 trillion (in 2008 dollars).

The good news now is the situation isn't quite as dire as we thought it was last year. Their cost forecast has come down from $35 trillion, and they now think the world will only need to come up with 45 mbpd in additional crude capacity (another four Saudi Arabias) not 64 mbpd (another six).

Indeed, the divisions between reality and fantasy in this report grew sharper still.

They worry at length about the effect of the global financial crisis on investment in new energy supply, yet still imagine the world will spend about $1.5 trillion a year on new supply infrastructure.

While envisioning a massive investment in efficiency and renewables in the 450 Scenario, they observed that low oil prices, receding investment in cleantech in 2009, and general economic malaise could mean slower growth rates for the solutions.

They forecast that OPEC alone would come up with 17.5 mbpd in new supply — 85% of the global increase — but expect the Middle East to spend only $1.9 trillion out of a global total of $25.5 trillion.

In an extremely dubious scenario, they see global natural gas supply growing faster than demand, eventually resulting in a massive glut. At the same time, they published for the first time a detailed, field-by-field analysis of nearly 600 major gas fields, accounting for 55% of global production. It showed an average 5.3% post-peak decline rate for the world's largest gas fields, and a global production-weighted decline rate of 7.5% for all post-peak fields — very similar to the decline rates they published (again, for the first time) last year on oil fields.

While noting that nearly all of the growth in global energy demand will come from the developing world, and that much of the investment capital needed to obtain their 450 scenario will need to be invested there, they also expressed significant uncertainty about those prospects.

Most telling, however, were the comments made in the press conference at the report's unveiling.

When a reporter asked why they're still sending a signal that the world will come up with another four Saudi Arabias of supply in their reference scenario, when no one believes that is possible, IEA chief economist Fatih Birol tipped his hand:

This is not the scenario we think is — first of all — likely; this is not the scenario that we want to happen. . . This is the scenario that, if it happens, we are going to have an accident in terms of climate, in terms of energy security, and other things, and it is the reason why we are pushing the 450. . . We push the 450 not only for the climate change reasons. . . it is also for the energy security reasons. And it is the reason why our ministers in October have endorsed our work in general. . . We think this [report] is a driver for [policies developing around climate change].

Essentially, he admitted that they deliberately tilted the report toward climate change with an expressly political purpose: to motivate capital and policy in the direction of a decarbonized energy supply. And they did that because it was politically expedient, with all eyes now on the upcoming Copenhagen summit on climate change.

Finally, the agency's highly-nuanced, limp denial of the whistleblower allegations was well salted with impassioned pleas to reckon with their 450 Scenario, reiterating that "the era of cheap oil is over." Birol even emphasized that the IEA had decided to make their data on oil depletion available on its web site for the world's free and transparent examination — a clue that was not concealed, but painted in fluorescent orange.

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The Climate Change Stalking Horse

I have considerable sympathy for the IEA. It's not easy to follow your heart and tell the truth for the benefit of humanity while the boss man is glaring at you and pulling a finger across his throat. Of course their report is politically distorted.

Yet, as I highlighted the key points in the report's executive summary and mentally ticked off the articles I've written on each one over the last few years, I realized how far the IEA has really come. They may have no choice but to walk a tightrope in an intense global spotlight, but they're backing into the truth as quickly as they think they can. For that fact alone, despite its flaws, this report gets my thumbs-up.

Regarding the IEA's Reference Scenario, my view remains basically unchanged from what I said this time last year: "Here's my prediction: their 2010 report will state that the new peak is only 95 mbpd, at a cost of over $30 trillion. And by 2012, they'll admit that the peak was in fact in June of this year, at 87 mbpd. By 2030, fully 20 years past the peak, world oil production will likely be under 70 mbpd."

As for the 450 Scenario, I continue to believe that climate change is a backwards approach to the problem. I have seen no serious rebuttals to the studies by Kjell Aleklett and David Rutledge calling into question whether the world can even get to 450 ppm when peak oil, and then peak gas and peak coal, are properly considered. (Currently, no climate change scenarios have any cognizance of fossil fuel peaking whatsoever.) In e-mail correspondence this week, Aleklett told me that he will soon have two new newspaper articles published in his native Sweden (which will be translated to English) that demonstrate on scientific bases that all of the IPCC scenarios are wrong.

But even that is not important.

Climate change is merely a stalking horse for the IEA. Whether we focus on energy or on climate, the ends are largely the same. And the IEA has astutely recognized that there's a whole lot more public momentum and investment money to be focused on climate change than there is on dour old peak oil.

What the 2009 WEO Really Means

I could go on for pages and pages, as I have in the past, pointing out the discrepancies and critiquing the scenarios. But that's not really what this report is about.

Never mind the outlandishly optimistic oil and gas production scenarios. We can throw out the 450 Scenario, as well. They're wrong, and we all know it — wink wink, nudge nudge.

The IEA doesn't believe either one of its scenarios any more than they believe humans roamed the earth with dinosaurs. Some stories are meant to be read as parables.

The internal message of the 2009 WEO is clear: The world is facing an energy crisis of epic proportions. The path we're on is precarious and unsustainable. (The word "sustainable" occurs 18 times in the report, which I'm sure is a record, and Birol repeatedly emphasized the phrase "energy revolution" in his comments.)

There is a way to avert disaster, but it's going to require the world to commit an incredible amount of capital to the energy sector for many decades to come. And if we fail to rise to the challenge, we'll be dead in the ever-rising water.

That, of course, is our entire raison d'être here. To motivate capital, rise to that challenge — and make some cheese in the process.

And making cheese is exactly what people who see the forest for the trees have been able to do — not just by questioning what is fed to them via sugarcoated goverment reports. . . but also by following the guidance of experts.

My work gives me the pleasure of working with people who know how to surpass the cold feet many investors have these days and invest with success. My colleague Ian Cooper is one such person. Members of his Pure Asset Trader have been having nothing but success, in spite of the market's volatility. In fact, they're trading with a 94.2% success rate. You can read more about Ian's service here.

Until next time,

Chris

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The Outlook for Oil Prices

Welcome to the Energy and Capital Weekend Edition — our insights from the week in investing and this week's top stories from Energy and Capital and our sister publications.

What started out as relatively quiet week for oil prices turned out to be quite an interesting week for oil bulls:

On Monday, oil prices quickly rose above $80/bbl as Hurricane Ida moved into the Gulf of Mexico, despite being so late in the Atlantic hurricane season. The storm's effect didn't last long. By Tuesday, Ida was downgraded to a tropical storm, easing its threat on the oil and gas rigs operating in the U.S. Gulf of Mexico.
While nearly every oil producing state in the U.S. is struggling, North Dakota has managed to boost their production to more than 230,000 barrels per day. In fact, North Dakota has remained virtually untouched by the recession, due largely in part to this Recession-Proof Secret. If oil prices remain above $60 per barrel (a very likely scenario), the state's crude production is projected to reach 400,000 barrels within the next five years.
Putting further pressure on the oil industry, an alarming story was released by the Guardian on Tuesday. An unnamed whistleblower from the IEA stated that the U.S. has played an influential role in the IEA's data. In other words, the IEA has been distorting the rate of decline from existing oil fields. It appears that Peak Oil Reality has struck a new chord with the public.
Unfortunately, the news wasn't enough downplay a stronger dollar. As you can see, it's no coincidence that oil prices have been on a hot streak since early March:
What started out as a rally for the U.S. dollar on Wednesday and Thursday wasn't enough; Bloomberg reported on Friday the news that the dollar declined as a global economic recovery spurred demand for higher-yielding assets.
However, it's not just a dollar story. Asia has developed a craving for all things energy; China's oil demand is expected to pick up sharply in 2010 as an economic recovery picks up speed.

Below, my colleague Chris Nelder continues his reporting from the 2009 ASPO Peak Oil Conference.

But first, in case you missed some of our top stories this week from Energy and Capital or our sister publications, you can find them here.

Enjoy your weekend,

— Keith Kohl

Global Desalination Investments: Where Abu Dhabi is Spending Oil Profits
Energy and Capital Editor Nick Hodge reveals why the Middle East is interested in more than just oil.

Trading Success: The Investment Strategy that Made these Investors Millions
Wealth Daily Editor Ian Cooper isn't an ordinary trader. While most investors are still recovering from the latest market crisis, Ian is using that volatility to his advantage. And so far, he's managed to trade with a 94.2% success rate. Find out what his secret is.

The Backside of Peak Oil: The Last Bright Spot in U.S. Oil Production
Energy and Capital Editor Keith Kohl points readers to one of the few places left in the U.S. where oil production is actually increasing.

Fibonacci Retracement: How to Use the Fibonacci Numbers to Trade Stocks
Wealth Daily Editor Steve Christ shows readers how to use Fibonacci numbers in their own investment strategy.

China Gold Reserves: The Price of Gold Hinges on China
Wealth Daily contributor Adam Sharp answers the question of whether the world's largest gold consumer is about to increase their gold production.

Peak Oil Reality: Closer to Peak Oil than Officials Have Admitted
After the breaking news on the IEA's political agenda came under the global spotlight, Wealth Daily Publisher Brian Hicks weighs in on the importance of peak oil.

Smart Grid Stocks: Wires, Lights, and Energy Networks
Green Chip guru Nick Hodge reports on why investors stand to make a fortune on the future of smart grid technology.

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Can the Free Market Keep Us Safe?
— Chris Nelder

On Halloween day this year, I killed part of a beautiful afternoon at a local shooting range with a buddy. It had been quite a while since I did that, and I needed the practice.

The gun business has been strong this year, without a doubt. Guns have been flying off the shelves and ammo shortages have been common (and surrounded by conspiracy theories).

Clearly, the general public has had an increased appetite for guns. And let's not kid ourselves - they're not planning to go deer hunting. It's about fear in an increasingly chaotic world and demand for better personal defense.

From an energy standpoint, that fear is certainly justified.

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Yet, four years later, not one city, state, or federal government in North America has a plan to deal with the effects of an oil shortage. The official plan is to have no plan.

Grid Security

Laissez Faire or a Dereliction of Duty?

After seeing these presentations my first thought was: This is utter insanity. We need to nationalize the grid and prepare for deliberate fuel rationing ASAP.

I'm sure that's true. But I'm not at all sure it's something we want to test.

Until next time,

Chris

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Oil and Gas Outlook

I have just returned from the annual conference sponsored by the U.S. contingent of the Association for the Study of Peak Oil (ASPO-USA) with a wealth of new information and perspective to share, so this will be the first of a series of reports.

I look forward to the ASPO-USA conferences all year, because they consistently deliver good, solid data on the state of energy and afford an opportunity for vigorous and stimulating discussion with some of smartest and up-to-date experts in the world-particularly over dinner and drinks late into the night. This year was typically outstanding.

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As usual I took detailed notes, which will be uploaded in the weeks to come. But I'll begin with some high-level updates on the key aspects of the peak oil study.

Past the Peak?

Perhaps the thing that struck me most was how much the outlook on peak oil has changed since the first conference in 2005.

Those who thought conventional oil had probably peaked back then were considered extremely pessimistic, where the consensus view saw the peak another 5-10 years off, and the optimists put it 20 years away or more. Some thought the peak rate of "all liquids" would be around 100 million barrels per day (mbpd), up from 85 mbpd at the time. Most thought non-OPEC production would increase up through 2010. Biofuel boosters were sunny about their future.

Four years later, the view on oil and biofuel has grown considerably worse.

We now know that conventional crude did in fact hit its peak-plateau in 2005, having remained around the 74 mbpd level ever since. The expected growth from non-OPEC mostly failed to materialize, as depletion of mature fields took its toll and the cost of new projects soared—especially for deepwater and production from marginal sources. More pessimistic observers now think the 87 mbpd all liquids peak recorded at the height of the 2008 boom was the peak, and the more optimistic ones have cut their expectations to under 100 mbpd, with 90 mbpd looking more likely.

Biofuels now have a black eye from the corn ethanol frenzy of 2007-2008, which has all but collapsed. Ethanol from algae and cellulose still looks about as far in the distance as it did in 2005, as no one has figured out how to produce either one at commercial scale or with an acceptable net energy return. And biodiesel has remained a minor player, with little expectation for it to scale up any time soon.

But the most surprising change has been the outlook for North American natural gas. In 2005, the majority of observers seemed to think it had peaked for good, and saw gas prices remaining in a high range of $11-15/Mcf. I don't think any of them expected the recent boom in North American shale gas, and there was certainly no suggestion that gas prices would crash to nearly $2 this year.

In fact the main worry about gas now seems to be that the shale gas boom will prove to be short-lived, and sucker us into building more vehicles and infrastructure to use it just as it sputters out. We only have a couple of years of data to work with on shale gas wells, and the only good data is from the Barnett Shale.

Running down the depletion numbers on shale gas, analyst Arthur Berman found that in the first year of production decline rates have been in excess of 50% for Barnett wells, and 90-95% for Haynesville Shale wells. The average well in the Fayetteville Shale is "profoundly non-commercial" he said, and predicted that most shale gas wells will be abandoned in less than five years after their first production because the output will be so low.

There is also a fear, which I have articulated previously, that with an average production cost of $7-8/Mcf for shale gas and prices through most of 2009 staying around $4 or less, new wells simply haven't been getting drilled. The effects of that lapse should show up next year and cause our "glut" to disappear quickly, taking prices much higher.

Supply Decline Rates

With the end of growth in the rate of global oil production now either in the past or looming in the next few years, attention is progressively focused on the depletion rates of mature oil fields and the rate and date of overall decline.

Most observers believe the globally averaged depletion rate has risen from 4.5% per year in 2007 to about 5 - 5.5% now, which will accelerate to around 6.5% per year by 2014. This is more or less in line with the average rates from IEA's report last year. Petroleum geologist Chris Skrebowski pointed out that a 5% per year decline rate means a loss of 4 mbpd per year, equivalent to all the volume of biofuels, tar sands and heavy oil combined, or losing the entire North Sea in about 14 months, and that it would be a huge challenge to replace those lost volumes.

Analysts using the Megaprojects database (of large oil projects started up after 2005) generally agree that production will peak in the 2009 - 2010 time frame. Net new supply each year is expect to begin declining around 2014 - 2015 as depletion overwhelms new projects. Supply may reach as high as 92 mbpd in 2010, then plateau to around 89 mbpd in 2014, then decline to 84 mbpd in 2020 and 78 mbpd in 2030.

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That view was generally in line with comments from oil consultant and former head of exploration and production for Saudi Aramco, Sadad al-Husseini, in a video interview clip. Seeing insufficient large new projects in the next 5 - 6 years to compensate for decline rates of 6.5% in non-OPEC and 3 - 4.5% for OPEC, he expects a shortage of capacity in the next 2 - 3 years.

The poster child for decline rates is, of course, Mexico with its crashing Cantarell field. Matthew Simmons projected that its decline would end Mexico's long era as an oil exporter in 18 - 36 months. David Shields, an author and expert on Mexican oil production, delivered a devastating indictment of the country's political leaders and its oil company Pemex, asserting that Pemex officials knew exactly what Cantarell was going to do as far back as 2002, but said exactly the opposite in public. A chart that Pemex shared with the Mexican Senate showed that production from its largest fields would fall to 1 mbpd by 2017, a full 1.8 mbpd lower than the official forecast of about 3 mbpd. If political manipulation is distorting the public impression of Mexico's near-term oil potential (and I believe Shields on this point) then it could be very bad news for the U.S., for which Mexico is the #3 source of oil imports.

Demand Growth Rates

On the whole, I would say there is now a strong consensus (at least among analysts who prefer data to faith) that global oil production will begin to decline in the 2012 - 2015 time frame. The later-dated estimate is based on the notion that the global recession of the last two years has probably given us that much longer before terminal decline sets in.

Peak oil deniers who have projected continued growth for many decades hence and ultimate peak rates of 120 mbpd or more have obliquely capitulated in the face of the recent evidence and switched to a "peak demand" argument: It's not that supply couldn't keep up for geological reasons, it's that demand wasn't strong enough to support high enough prices to raise supply further.

It's a classic tactic to try to change the game if you can't win it, but the peakers aren't buying it. As Skrebowski pointed out, the peak demand argument only really holds for the OECD, where demand is off a few percent from the peak.

The real demand story is shifting quickly to the developing world, particularly China. Analyst Steven Koptis projected that China would overtake the U.S. as the top consumer of oil by 2018, and if supply is available, would double U.S. consumption by 2025.

Indeed, as petroleum geologist Jeffrey Brown pointed out in his presentation of the Export Land Model, the U.S. has already been outbid by Kenya for oil. According to the model he developed with Dr. Samuel Foucher, the top five oil exporters in 2005 will in aggregate reach zero net exports by 2032, and most of that will be shipped early on. In just three years, they shipped 1/5 of their total expected net exports after 2005.

Petrobras' Promise

As a counterpoint to the generally gloomy data on global oil supply and demand, a razzle-dazzle keynote was given by Dr. Marcio Rocha Mello, president of HRT Petroleum and a 24-year veteran of Brazil's oil company Petrobras (NYSE: PBR). He asserted that the recent pre-salt finds in very deep formations off the shore of Brazil, like the much-hyped Tupi field, indicated that there was a great deal more oil in the pre-salt layers—we just need to drill deeper.

In an extremely animated presentation that at times seemed more like a carnival sideshow than a serious analysis, Dr. Mello served up combination of stratigraphic charts and contrarian theory to make the case that between the pre-salt of Brazil, West Africa, the Congo basin and the Gulf of Mexico, there are another 500 billion barrels yet to find.

While entertaining and humorous, I don't think Dr. Mello made too many converts in the room. As former BP oil exploration chief Jeremy Gilbert pointed out the following morning, none of the alleged pre-salt oil is yet proved, and in fact he'd be surprised if there were 5 billion barrels of proved oil there. "Don't confuse passion with precision" he warned, and noted that it would take 20 - 30 years to prove the resource. In short, it doesn't change the peak oil story at all. By the time pre-salt barrels come online, we'll be well down the back side of the production curve. Rising resource nationalism in Brazil also bodes poorly for very many of those new barrels to make it to foreign markets.

I'll conclude this report with a brief comment on oil prices. As I mentioned in my update three weeks ago, the outlook for oil prices has been murky for months as they traded in a $60 to $75 range. I was long oil but cautiously bearish, and watching for signs of a new signal. This week, that signal came as oil breached the $75 level and touched $78 this morning. It's a decidedly bullish move and I think it portends higher prices to come, at least in the near term.

I took the opportunity to beef up my oil exposure with positions in EOG Resources (NYSE: EOG) and, naturally, Petrobras. Even if Dr. Mello is wrong about the pre-salt, Petrobras is one of the most sophisticated and aggressive oil companies in the developing world, and they are positioned better than most to mint money for years to come. And if he's right...well, it will be a great position to hold long term.

Stay tuned to this space for much, much more from the cutting edge of peak oil analysis in the coming weeks.

Until next time,

Chris

Energy and Capital

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High Speed Rail: A No-Brainer

"'Boondoggle‘, 'Loss-making whim‘, ‘Monument to bad territorial planning'. . .

Such are the arguments of high speed rail critics, as the United States finally gets on board the passenger rail revolution that is sweeping the world.

But that quote wasn't about the U.S., and it wasn't about today's debate.

It came from an essay by José Blanco López, Spain's minister of transport and public works, which was published in a new pamphlet from SERA, a sustainability activist organization within the government Labour party. He was talking about the two decades of opposition that conservatives had mounted against the country's progress in building a high speed rail system.

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Starting with a line from Madrid to Seville in 1989, Spain pursued an aggressive and determined commitment to high speed rail that, by 2012, will produce the longest system in Europe. This year alone, most of the country's €19 billion development budget will be invested in high speed rail. By 2020, López says, more than 90% of the country's total population will be within 31 miles of a high speed train station.

Here he put his country's achievement in perspective:

Shielded behind overly simple, short sighted cost-benefit analysis, critics complained with those arguments against high speed projects over years, until the success of each one of the new corridors proved them wrong and showed that in troubled economic times, the best investments for a society are the ones which improve equality.

History has proved rail's critics wrong in Spain, as economic development and rider enthusiasm followed it everywhere it went.

Cretinous Shortsightedness

Even so, ever unwilling to learn from the successes of the rest of the world, the U.S. is now starting the same effort at about the same place as Spain was 20 years ago.

The president of the U.S. High Speed Rail Association, Andy Kunz, appeared on Fox Business last Friday to make his pitch. And what argument did the show's overcoiffed co-host raise? "Amtrak has been in the red for years and years and years, and nobody in charge over there seems to be able to turn a profit, despite the fact that everybody I know takes the train from New York to Washington D.C., the Acela. It's just not working though financially," she whined.

After Kunz explained that that the Acela leg (with a maximum speed of only about 100 mph) was in fact profitable, and that the rest of the system needed to be upgraded so that it was equally attractive and profitable and capable of speeds over 200 mph, the host pressed on: "How do you get people to ride it?" Kunz patiently explained his point again, and pointed out that when Europe opened its new high speed lines, they filled up with riders immediately. The hosts then tossed off a quick wisecrack about the Chunnel and muttered about the need for profitability, but assured the audience that "Nobody more than Fox Business wants to see new ventures succeed."

Be that as it may, one wonders why Europe's success would not convince them that high speed rail would be a good thing for this country. A projection from rail proponents FourBillion.com indicates that building the 9,000 miles of high speed corridors identified by the U.S. Department of Transportation would create 4.5 million permanent jobs and 1.6 million construction jobs, save 125 million barrels of oil, eliminate 20 million pounds of CO2 per mile per year, reinvigorate U.S. manufacturing, and generate $23 billion in economic benefits in the Midwest alone — all alongside a long list of intangible side benefits.

Putting aside the cretinous shortsightedness and obstinacy of conservative media, let's take a look at what the rest of the world is doing.

A Global High Speed Rail Explosion

The UK's Labour party is also pursuing an expansion of high speed rail, having commissioned a study on building a new line from London to the West Midlands and extensions to the north. Currently, Britain has only one high speed line, the 69-mile-long "High Speed 1" link from London to the aforementioned Channel Tunnel ("Chunnel") to France. The Tories have offered their own £15.6 billion plan, so it seems likely that Britain will soon have a new high speed project.

France, as I mentioned last year, already has the wonderful 200 mph high speed TGV network, with 1,100 miles of track, more than 400 trains and the third-highest ranking of rail passengers per year, behind Switzerland and Japan. Personally, I found it to be the most enjoyable travel experience I have ever had.

Bombardier's ZEFIRO 380

This week, the Chinese government awarded a $4 billion contract to build 80 high speed (236 mph maximum) electric train sets for the new 3,700-mile-long high speed train network it is building. Half of the contract went to Bombardier Sifang, a Chinese joint venture with Berlin-based rail giant Bombardier Transportation (TSE: BBD.A). The company will begin delivering the trains in 2012 and finish by 2014— boom, done.

Bombardier is already building 20 sleeper trains for China and another 20 passenger trains, in addition to the 500 high-power electric freight locomotives that it contracted to build for China in 2007.

Russia is taking the plunge into high speed rail as well, spending nearly $1.5 billion to upgrade 401 miles of track between Moscow and downtown St. Petersburg, and buy eight electric Sapsan trains made by German conglomerate Siemens (ETR: SIE) with a top operating speed of 217 mph. Four runs a day will make the trip in less than four hours, compared with an average five hours to make the trip by airplane, including the time wasted getting to and from the airport and running the check-in and security gauntlets.

Meanwhile, Back in the States. . .

Calling the U.S. "a developing country in terms of rail," a Siemens representative told the New York Times last week that his company was a candidate for a proposed high speed link between San Francisco and Los Angeles, along with Bombardier and Japanese bullet train manufacturer Hitachi.

The California line is on the short list of high speed rail priorities prepared by the America 2050 group, ranking it fifth nationally in terms of ridership demand behind four other lines for the Northeast.

High Speed Rail Phasing Map by America 2050. Source.

SCNF, the French company that runs the TGV network, has submitted its own plan to the U.S. Federal Railroad Administration (FRA) for four 220 mph corridors in California, Florida, Texas, and the Chicago-Midwest area. The company believes it could open the first line from Milwaukee to Detroit by 2018 and be in full operation by 2023. The costs would be recouped quickly, according to SNCF, returning triple the $69 billion cost of the Midwest corridor within 15 years in environmental and other benefits.

All Costs Considered

Building America's high speed rail network will be expensive — about that, there is no disagreement. The $8 billion appropriated for high speed rail in the stimulus plan was dwarfed by the $103 billion in applications the FRA received for the funds, and is a small fraction of what the total network will cost. The California run alone will probably cost over $40 billion to construct, and that's after the state's existing commitments to building support networks and light rail links.

On the other hand, as the director of the BART light rail system pointed out this week in his testimony to San Francisco city supervisors with the city's Peak Oil Preparedness Task Force, the U.S. currently spends as much on parking as it does on national defense. I haven't run the numbers, but it seems within reason that if that is the case, spending that money instead on high speed and light rail would cover a very large part of the total cost.

Indeed, all of the cost arguments I have heard against rail are incomplete and wrong.

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The true costs of remaining committed to our current road and air infrastructure are never taken into full account. . . like the health care costs of polluted air; the cost of continuously maintaining roads, bridges and tunnels; the availability of materials (remember, several cities in America literally could not buy asphalt during the oil frenzy of last year, because refiners were cracking every last lighter molecule they could from the crude); the trillions of dollars we are spending on oil imports and defense operations in oil producing regions of the world; the billions' worth of damage that our current ways do to the environment; the insurance costs of keeping up 240 million cars and light trucks; the damage and death that those millions of drivers cause; and so on, ad infinitum.

Rail is cheaper, safer, and better on every single count.

When the boundaries are properly defined, the entire transformation of transportation from liquid fuels to renewable electricity would create millions of permanent jobs, and could probably pay for itself.

But the cost isn't really the point anyway.

The Future: A No-Fly Zone

America still has no energy plan, let alone a plan to address the looming threat of peak oil. With the decline of global oil production starting around 2012 already "baked in," due to a lack of sufficient oil megaprojects, we desperately need to start making tracks toward a high speed rail infrastructure. . . or face a painful future of fuel shortages and economic dislocation (at best).

No part of our transportation system is as vulnerable to volatile fuel prices as the airline industry. It was built on the expectation that oil would rarely cost more than $40 a barrel, and it is completely dead if oil stays over $100 a barrel. Last year's oil price spikes put many smaller carriers out of business and cost the major carriers billions. Then the operators who had the largest hedges against rising prices last year got whacked again as prices plummeted.

For my money, the airline industry may as well be dead. Not just because of the damage that oil price volatility has done and will continue to do — and not just because the experience of air travel has become a painful routine of delays and personal insults — but because it's so inferior in every way to high speed rail travel for distances under 500 miles. The TGV line from Paris and Lyons virtually eliminated air travel between those cities, and the high speed line from Madrid to Barcelona cut air travel in half in the first year of its operation.

Forward-looking investors would be wise to accumulate long positions in some of the major players in high speed rail, which have enjoyed a very nice rally over the last three months, as the next wave of investments in it began to hit the press:

I continue to believe that rail — particularly high speed rail — is the longest safe bet one can possibly make. As I have explained in this column over the last several years, we simply cannot replace enough gasoline- and diesel-burning cars with ones that run on electricity to address the peak oil challenge in the time we have left.

Like compressed natural gas vehicles, PHEVs and EVs are "silver BBs" that will help cushion the blow, but in the long term and for the majority of miles traveled, rail is truly the only answer. 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.

The serious pursuit of high speed rail would also make a real and significant dent in CO2 emissions, and enable part of the urgent transformation we must accomplish from liquid fuels to renewably generated electricity. As Lord Andrew Adonis, Britain's transport secretary, put it in the SERA publication: "High speed rail is now pretty well a ‘no-brainer' transport strategy for the 21st century."

The rest of the world is already kicking our butts in deploying renewable energy. China is running circles around us in long term resource planning and buying up every hard asset under the sun. And compared with the rest of the developed (and developing) world, we're bringing up the rear in rail.

But it doesn't have to be that way.

It's Go Time

If you've watched any of the new Ken Burns series on America's national parks, you know that protecting the common good has always been a struggle against vested interests and conservatives resistant to change. It took strong-willed men of vision like Teddy Roosevelt, John Muir, and Stephen Mather to override the opposition and do the right thing for the future. We need that kind of leadership now.

If I were President Obama, I would direct the Department of Transportation to immediately begin transforming America's infrastructure to one based on electric rail, regardless of the long-term cost, starting with the highest potential traffic and fuel savings and working our way down the list from there. I would do as the French did when they created the TGV: Declare eminent domain and lay in the high speed rails where they make the most sense. I would restrict federal funding for roads and bridges to critical maintenance projects where rail can't take over the load in time — with not a penny more spent on new car-based infrastructure. I would forbid any subsidies for cars and trucks with a fuel economy of less than 30 mpg. I would move all subsidies for fossil fuels into renewable energy — then double or triple them — to ensure that we can run that new electric infrastructure cleanly. I would bind Congress to my purpose and ride roughshod over the objectors, making it my number-one priority.

I know it may seem hard to believe, with oil holding steady around $70 and gasoline around $3. . . but if you haven't studied the data, then take the word of a guy who has: We're in serious trouble, folks. The Armageddon of transportation is dead ahead and we need to move aggressively and determinedly to head off the peak oil challenge. Rail is hands-down our best and biggest shot.

Until next time,

Chris

Investor's Note: Have you heard of the 'R-Track System' before today? My colleague, Nick Hodge, has been utilizing this investment strategy — and he's delivered 45 winning trades within the last 12 months. But please don't take my words for it. . . I want you to see this one for yourself. He lays it all out here.

Peak Oil Update

Everyone who follows the peak oil story has by now seen some of the editorials that blanketed the press over the last few weeks, attempting to debunk it and disparage its adherents. I responded to the worst of them three weeks ago.

Michael Lynch fired back quickly, saying that my article "tops them all" and alleged that I had predicted $500 oil with a global depression.

I'm flattered, but as my longtime readers know, that was quite a mischaracterization.

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Lynch was referring to my July 28, 2008 appearance on Yahoo! Finance's Tech Ticker show with Aaron Task, wherein I explained the important concepts of the peak oil study, alongside some of the key data.

Here's what I actually said (emphasis mine):

Task: "Where do you see oil prices in 10 years?"

Nelder: "That's impossible to say. If demand holds up, which is going to be primarily due to continued growth in Asia and the Middle East, then the sky's the limit—it could be $500 a barrel, for all I know. If we have a major episode of global depression that sets in and demand really—[Task: which may be a possibility]—it's a likelihood!—then I think oil will come back down when that happens, but at what point does that happen? When oil's $200, when oil's $300 a barrel, and then it goes back to $250? You know—it's going to be something like that."

We all know what happened after that: Demand fell, a major episode of global depression did indeed set in, and oil did come back down.

Now I'll admit that I was dead wrong about the floor for prices being around $120, nor did I know that when $147 a barrel had printed two weeks earlier, it would turn out to be the all-time price peak. Such are the perils of price forecasting, which I have tried to avoid ever since.

On the other hand, nobody expected crude prices to run the gamut from $147 to $33 and almost halfway back again over the course of a year. Thus did the market make fools of us all. I quite rightfully expected prices to keep on going up, had oil demand continued to rise after last July in keeping with its long history. And nobody knew that $147 was the peak price until it had faded into the rear-view mirror.

In the same way, we can't know for sure when the supply of "all liquids" has peaked until that date is also well behind us. Not coincidentally, the current record flow rate for all liquids production is a rounded 87 million barrels per day (mbpd), which occurred along with the price peak in July 2008. ("All liquids" includes conventional crude plus unconventional hydrocarbons such as natural gas liquids, "extra heavy" oil, synthetic oil made from tar sands, refinery gains, liquids produced from the conversion of coal and natural gas, and biofuels. Regular conventional crude production topped out in 2005 at just over 74 mbpd, and has remained at roughly that level ever since.)

Honest analysts know that one of the keys to oil pricing is the amount of spare production capacity, because oil is priced at the margins. When that spare capacity fell to around 1% of total supply last year, it created a tradeable opportunity that attracted speculators, driving prices still higher.

When global demand recovers, prices will spike again, because new drilling into progressively marginal fields will be unable to keep up with the decline of mature oil fields. This is one of the key concepts of the peak oil study.

We now know that the global economy's maximum pain tolerance point is around $150 a barrel. However, it may not have to rise that high next time to destroy demand and cause prices to fall because the global economy and the overall credit environment are now substantially weaker. At the same time, it's not unthinkable that gasoline prices could again reach the $4 range; refiners are operating now at substantially lower levels due to the compressed crack spread.

Therefore, oil prices will continue to have a volatile stair-step pattern for a long time, as we keep bumping our heads against the supply ceiling.

So the next time you hear a peak oil denier who has spent the last several years blithely asserting that oil will soon be back to a nice comfy $30, or that technology is increasing reserves all the time without addressing the question of flow rates, ask yourself how credible he is.

Reviewing My Track Record

Now take a look at my track record. I have written an exhaustive book on peak oil (which geologist and peak oil expert Colin Campbell called "the best job I have seen in describing the Peak Oil issue in a sound and very understandable way"), and over 150 articles since 2003, in which I have explained the theory behind peak oil; showed the actual supply and demand data; put new discoveries into perspective; discussed the relationships between oil and the economy; and tried to peer into the future as accurately as possible.

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So far, I have seen no serious factual rebuttals to my arguments. The counter-arguments, like the most recent ones from the peak oil deniers, are generally simple expressions of faith: Faith in technology, faith in the markets, and faith in humanity. They aren't supported by the data. Unfortunately, cars and power plants don't run on faith. Faith can't cook your food or keep your house at a reasonable temperature. And economies don't keep growing without a continually increasing supply of cheap energy.

Other than that Tech Ticker appearance, my price guidance has actually been pretty good for the last three years. (Perhaps that's why Lynch cited—and mischaracterized—that one call.) I knew when prices were too low, and put out contrarian bullish calls at almost exactly the right time for oil and natural gas. And when oil prices bounced back up to $60 in May, I said it would be prudent for investors sitting on double-digit gains to take some off the table. I also said that when prices neared $70, they would likely cool off. So far, so good. (Oil generally has been bouncing around the $70 level since May.)

The near-term future of oil prices is, in some ways, even murkier now. . . with upward pressure applied by a dollar that has been falling since March, and downward pressure applied by high inventories and falling crack spreads. My gut feeling is that they are currently in a kind of equilibrium, but it's hard to support that quantitatively. For the last few months, my guess has been that oil would be range-bound somewhere between $60 and $75, and I think that could remain the case for a while yet.

However, I also see an increasing risk that we could have an episode of dollar strength and a selloff in equities and commodities before the end of the year. That's a discussion for another day, but at this point the downside risk for oil feels like it's strengthening, and the rally in equities is starting to feel silly. A strong correction seems due - but try telling that to this ever-irrational market. I am still long commodity stocks because the getting has been very good, but my stops are tight and I'm prepared to get short at the first sign of trouble.

Again, contrast those calls with the repeated assertions of Lynch and Yergin that oil will soon return to a hallucinated "mean" in the $30-$40 range.

Warning Signs of Peak Oil Increasing

Putting the troublesome questions of price aside, though; let's get back to the increasing indications that peak oil is indeed upon us.

For the last year, I have warned in this column that volatile oil prices and a weak credit environment were putting the hurt on investment in new oil production, leading to a lack of expected supply from new drilling in a few years. This week, French oil giant Total echoed that warning, saying that it had slashed 4 mbpd from its estimate for oil production in 2015 and that the world would face a supply crunch by the middle of the next decade.

I give Total credit for owning up to a future supply crunch where few of the other oil majors have and I agree with their assessment. The data suggests it's now all but a foregone conclusion that the world's oil supply will begin its inevitable decline around 2012. By 2015, the world will realize that the good ol' days of cheap oil and continual economic growth aren't ever coming back.

Ian Reid, a senior executive at the Australian investment bank Macquarie who had 16 years of experience in the oil industry, apparently agrees, telling Reuters this week: "This is our view - capacity has pretty much peaked in the sense that declines equal new resources."

He believes that the lack of investment this year, in addition to rising resource nationalism (e.g., Brazil) and the declining prospects for discovery, will wipe out the current spare production capacity of 5.2 mbpd by 2012, causing global oil production capacity to fall from 89.6 mbpd this year to 87.3 mbpd by 2015, while demand rises to 90.9 mbpd.

If you're now thinking that BP's recent Tiber field discovery in deepwater Gulf of Mexico and the other "giant" finds of the last few years give the lie to peak oil, allow me to put them in perspective. As I wrote last week, the amount of actually recoverable oil from Tiber is probably less than 1 billion barrels, and this oil might take as long as 10 years to come to market, at a development cost in the low billions of dollars. We have no way of knowing what the all-important flow rate might be at this point, but using other nearby fields as a benchmark, let's assume it might achieve a maximum rate of 200,000 - 300,000 barrels per day in 10 to 15 years' time. Meanwhile, the world stands to lose about 4 mbpd of supply capacity each year, starting somewhere around 2012.

In other words, we would need to make a discovery like Tiber roughly once a month in order to significantly change the global supply curve, whereas we're actually making such discoveries more like once a year.

Don't be fooled. Peak oil is here, and the low prices of the last year are only setting us up for less supply just a few years down the road. Understanding the complex reality of global oil production is a recipe for investing success, but thinking that the next 20 years will be anything like the last 20 will lead to certain failure.

Play your cards accordingly.

Until next time,

Chris

Investor's Note: Although production from these recent offshore discoveries is still years away, there's one area in particular that has been on a hot streak lately. In fact, it's the reason why North Dakota's production will soon overtake Louisiana and become the country's 4th largest producer. Right now, it's only a matter of time. Of course, the majority of my readers have had tremendous success investing in these small, prospective oil plays. We've put together a free report that will help you find some of those profits for yourself. You can read the full report here.

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.

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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.

Peak Oil - Energy and Capital

'Peak Oil Demand,' Yes... But Not the Nice Kind

Scooters Will Kill SUVs

The Real Meaning of Peak Demand

Two Questions for Recoveryistas

China The Vampire Squid of Commodities

Voracious Demand

Outmaneuvering America

No Plan for Oil Shortages in North America

No Plan for Oil Shortages

Grid Security

Laissez Faire or a Dereliction of Duty?

The 2009 IEA Oil Report & World Energy Outlook

Concealed Clues

The Climate Change Stalking Horse

What the 2009 WEO Really Means

The Outlook for Oil Prices

No Plan for Oil Shortages

Grid Security

Laissez Faire or a Dereliction of Duty?

Oil and Gas Outlook

Past the Peak?

Supply Decline Rates

Demand Growth Rates

Petrobras' Promise

High Speed Rail: A No-Brainer

Cretinous Shortsightedness

A Global High Speed Rail Explosion

Meanwhile, Back in the States. . .

All Costs Considered

The Future: A No-Fly Zone

It's Go Time

Peak Oil Update

Reviewing My Track Record

Warning Signs of Peak Oil Increasing

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

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