Unsustainable Energy Trends

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I’ve been getting a lot of calls and e-mails from people asking about the falling prices for oil in recent weeks. The immediate explanation is that world economic activity is decelerating. Demand is falling. OPEC announced cuts in output. But the markets still believe that economic decline will trump the ability of OPEC to prop up the price of oil. Enjoy it while it lasts.

Just over the horizon, things are about to become dicey. This week, the International Energy Agency (IEA) will release a new report on the future of world energy. In its World Energy Outlook, the IEA will state categorically that “Current global trends in energy supply and consumption are patently unsustainable.”

There’s not much wiggle room in that statement. According to the IEA, despite the recent fall in oil prices, the medium- and long-term outlooks for energy supply are grim. Conventional oil output is destined to decline. Demand will still grow, however, especially in the developing world. And the twain shall only meet by prices rising to clear the market. “It is,” as our Arab friends like to say, “written.”

The IEA performed a comprehensive study of 800 of the world’s largest oil fields. And it concluded that depletion in conventional oil fields is occurring at a rate in excess of 9% per year. (That’s an average. We see depletion rates in excess of 15% in Mexico’s Cantarell field, for example.) This means that absent large amounts of new drilling, new investment in enhanced recovery and new discoveries, the current worldwide oil output will decline by over 9% per year. And if it keeps going along this trend (there’s no reason why it won’t), the base of world oil output could conceivably dry up within seven-10 years.

Don’t get me wrong. The world won’t run out of oil in seven-10 years. That’s not how it works. It’s just that volumes of conventional oil are declining. The takeaway point is that the energy markets will tighten up, like a hangman’s noose around the collective neck of the oil-consuming world. We might not quite realize it, but when it comes to oil, we are all walking that long green mile.

The investment angle for OI is that the companies that own oil reserves in the ground, and the oil service companies that extract oil and natural gas, should profit in the future. Yes, the portfolio is down. It has been a hard hit to everyone (me too) who bought into the market up until midsummer. We’ve all lived through a midsummer’s nightmare on this one.

So how long will we have to wait for this “future” to show up? Well, how long will the current worldwide recession last? I don’t know. But I do know that many energy companies in the OI portfolio are at long-term lows in share price. If you can afford to be patient with your funds, these firms should eventually stage a comeback as oil prices rise again. As I said above, “It is written.”

Says who, you ask? Written by whom? Well, how about the IEA? According to the IEA, even with massive levels of investment in the oil patch, the best estimate is that the global oil industry can reduce the rate of depletion to perhaps the 6% range. So the world energy industry will have to run faster just to keep from falling too far behind the demand curves.

Again, you need to keep in mind that current energy prices are just too low to support the level of energy investment that the world needs going forward. (Meanwhile, the U.S. government is spending trillions of dollars forward just to bail out the banks and bankers, not one of whom runs pump jacks.)

The IEA estimates that the oil industry will have to invest over $350 billion per year to counter the steep rates of decline in output. And even that will not be sufficient to maintain levels of output for traditional forms of crude oil. Thus, much of the future investment will have to go toward extracting other kinds of hydrocarbon substances.

What do I mean by “other kinds” of hydrocarbon substances? Fortunately, there are many different kinds of hydrocarbon molecules out there. The total worldwide carbon base actually adds up to a very big number, and that is NOT including the carbon that is part of the current living biology of the planet. For now I’m just discussing the fossilized carbon like oil, natural gas, bitumen in tar sands, oil shale and coal.

The big problem for the nonoil forms of carbon is affordability. That is, are people willing to pay? It takes a lot of steel and technology to transform some kinds of carbon into something we want to use. We see that, for example, in the Canadian tar sands projects. Lots of steel, concrete, labor, machinery, water and energy input – all to extract this thick, gunky crud that has to be upgraded to something that looks like diesel fuel. And the whole thing emits lots of carbon dioxide (CO2) in the process, as well.

The other big problem is whether or not there is the political will to “do carbon.” Will the governments of the world allow – let alone promote – industry to invest in the industrial base that will be required to transform the varying kinds of carbon into something that the world can use? Because the other side of this coin is ever-increasing CO2 emissions, global warming and climate change. The more carbon that gets burned, the more CO2 that goes up the flue and into the atmosphere. In essence, within about two centuries, mankind is undoing the geological work of tens of millions of years.

This is not a “global warming” article. But most nations of the developed world have governments that are more and buying into the global warming thesis more. The political gun sights are on carbon. But if we collectively decarbonize the economy, the energy supply will dry up and we’ll wish for the “good old days” when we had to worry only about Wall Street crashing. And besides, try telling the developing world not to develop. People have fought wars over lesser issues.

Do you want some numbers on hydrocarbon resources? Here are estimates of the total hydrocarbon resources in the world and the relative costs to convert them. This is my summary, based on several different government and academic compilations:

These are big numbers, right? And they can supply a lot of energy over a long time, but only if the world collectively decides to utilize the resources. If not? Well, you had better own some gold too.

The stark assessment from the IEA described above comes just as much of the world’s banking and finance system lies in ruins. Many forms of lending have dried up, and much of the former system of world commerce is just not functioning.

So the politicians, bankers and investors of the world – including us – have their work cut out.

Byron King
Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments.
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Comments

  1. […] Byron King: Unsustainable Energy Trends Just over the horizon, things are about to become dicey. This week, the International Energy Agency (IEA) will release a new report on the future of world energy. In its World Energy Outlook, the IEA will state categorically that “Current global trends in energy supply and consumption are patently unsustainable.” There’s not much wiggle room in that statement. According to the IEA, despite the recent fall in oil prices, the medium- and long-term outlooks for energy supply are grim. Conventional oil output is destined to decline. Demand will still grow, however, especially in the developing world. And the twain shall only meet by prices rising to clear the market. “It is,” as our Arab friends like to say, “written.” […]

    Reply
  2. […] Byron King: Unsustainable Energy Trends Just over the horizon, things are about to become dicey. This week, the International Energy Agency (IEA) will release a new report on the future of world energy. In its World Energy Outlook, the IEA will state categorically that “Current global trends in energy supply and consumption are patently unsustainable.” There’s not much wiggle room in that statement. According to the IEA, despite the recent fall in oil prices, the medium- and long-term outlooks for energy supply are grim. Conventional oil output is destined to decline. Demand will still grow, however, especially in the developing world. And the twain shall only meet by prices rising to clear the market. “It is,” as our Arab friends like to say, “written.” […]

    Reply
  3. Agree. That’s why this is an excellent time to invest in oil.

    Reply
  4. The Club of Rome predicted that economic growth could not continue indefinitely because of the limited availability of natural resources, particularly oil. That was in the late sixties.It seems to me that this type of predictions are based on assumptions that may come to be adjusted with the passing of time.

    Peter Carvapai
    November 20, 2008
    Reply
  5. Hi. Just a quick comment on your alternatives.

    In Australia we have a company that is developing the coal to diesel technology. Basically taking stranded underground coal, turning it into syngas and then transforming it into jet fuel or super clean diesal.

    Cost of production has been put at $28 bbl. It currently has a pilot plant in oepration and is planning a number of 20,000 bpd commercial plants. Also has MOU’s with coal companies in China, India, Vietnam Company is LINC.

    Joseph Natoli
    November 21, 2008
    Reply
  6. Peter Carapal seems to believe that since the Club of Rome’s study is coming to pass that the passing of time will somehow make things better? Or perhaps I misunderstand what he’s trying to say.

    Or perhaps he misunderstands the Club of Rome’s study. It did not say that civilization was going to crash in the late sixties. In fact, it accurately predicted that the crash would come early this century. A follow up study by the original authors (Meadows, Meadows, and Rander) in 1992 indeed demonstrated that the original study was only marginally inaccurate, and was basically on-track.

    I think Curt has a better idea: invest in oil. But only if you believe that the financial system is going to survive this cataclysm. Personally, I say invest in the means of production: in the future, top quality farmland may keep you alive better than stock certificates.

    Reply
  7. At 10% depletion rate it will take over 30 years to go to 0. Don’t take my work for it, do the arithemtic yourself:

    Total Year
    100 1
    90 2
    81 3
    72.9 4
    65.61 5
    59.05 6
    53.14 7
    47.83 8
    43.05 9
    38.74 10
    34.87 11
    31.38 12
    28.24 13
    25.42 14
    22.88 15
    20.59 16
    18.53 17
    16.68 18
    15.01 19
    13.51 20
    12.16 21
    10.94 22
    9.85 23
    8.86 24
    7.98 25
    7.18 26
    6.46 27
    5.81 28
    5.23 29
    4.71 30

    Reply
  8. An indication of the upcomming oil supply cliff. This IEA report is a matter that the press should inform the general population. It is something that Obama, “Flash” Gordon of the UK and Kevin “747” Rudd should seriously look at before holding any more G20 summits.
    The report however failed to take note of the “portable, dense energy” aspects of oil and the lack of portability and density in alternatives (including tar sands and shale).
    The global oil peak will change the demographic trends, economic outputs and political power bases of the planet. These changes have not yet been caculated because they conflict with what the powers-that-be expect the world to be like. Peak oil is a major upset. This is why the IEA watered down the report.
    The current price of oil is based on the power of bullshit. The idea of “dwindling demand” when demand for oil will rise due to demographics (all those new mouths need to be fed). Soon the price will whiplash upwards as physical shortages hit. Then when the food supply collapses and the wars start, the population will decline (rapidly). Only then, will there be demand reductions. The price of oil should be $130 per barrel right now. Watch for the following signs-
    1. Mexico stopping exports of oil as Canterell declines even further.
    2. Physical fuel shortages hitting some 3rd world nations and rural areas of Australia and America.
    3. A sudden surge in the oil price at $20 per day, and rising to $100 per day as panic sets in.
    4. Slow deliveries from OPEC suppliers, including late deliveries and accompanying excuses.
    5. More pulp sci-fi talk of alternatives from our useless politicians.
    6. No independant audit of OPEC reserves.
    Peak oil has arrived and the IEA has started to realise that somethings wrong with the oil supply picture.

    Jason, Bondi
    November 23, 2008
    Reply
  9. […] Byron King: Unsustainable Energy Trends Just over the horizon, things are about to become dicey. This week, the International Energy Agency (IEA) will release a new report on the future of world energy. In its World Energy Outlook, the IEA will state categorically that “Current global trends in energy supply and consumption are patently unsustainable.” […]

    Reply
  10. […] Unsustainable Energy Trends I’ve been getting a lot of calls and e-mails from people asking about the falling prices for oil in recent weeks. The immediate explanation is that world economic activity is decelerating. Demand is falling. OPEC announced cuts in output. But the markets still believe that economic decline will trump the ability of OPEC to prop up the price of oil. Enjoy it while it lasts. […]

    Reply
  11. We’ve been hearing scaremongering about oil running out for a while. Reality is that oil is returning to its long term price (adjusted for inflation). 50 American dollars a barrel is still too high.

    Those who think demand will continue to increase are off the mark. You are forgetting human ingenuity and flexibility, eg more fuel efficient cars & planes, Americans substituting other fossil fuels for heating oil, etc etc.

    Reply
  12. “You are forgetting human ingenuity and flexibility, eg more fuel efficient cars & planes, Americans substituting other fossil fuels for heating oil, etc etc…”

    Please release me from my bonds ! not that silly efficient market crapola again. first off it will take 10 years for the BIG 3 to retool. if they burn thru $25 Billion per quater for 10 years staving off bankruptcy, that’s $10 TRILLION.

    Are, americans going to get little fuel efficient 3 cylinder electric hybrids, or are they just going to get flacid shrivelled up SUVs ?

    If the next stimulus package is for another million miles of roads, the real answer is obvious.

    More of the same nonsense that caused this mess in the first place.

    Reply
  13. […] interesting article. Unsustainable Energy Trends By Byron King I’ve been getting a lot of calls and e-mails from people asking about the falling prices for […]

    Reply
  14. I would appreciate reading DR’s views on heavy and other non shale oil variations and the general profile & future of the deep sea deposit sector. I have read that only the US refinery crackers can deal with Timor Sea & Venezuelan heavy oil. Are the chinese upgrading refining to take advantage of their investments in AED and does this change the venezuelan paradygm? Does Petrobras gain any technological advantage from any firsts in deep sea exploration and production? I hope this is better than a request for information on demand and that other readers would have similar general interest in these topics.

    Reply
  15. USA has 2 trillion+ barrels of shale oil, that needs a technology push. But I don’t know how long the internal combustion engine can maintain its market share, this oil volatility thing is a real hassle. We in Aus need more efficient transport systems for sure, something the Govt can’t tax you on. Hmm that’s not going to happen is it?

    Charles Norville
    December 1, 2008
    Reply

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