Folks,

I was interviewed this week by veteran newsman Harry Fuller on ZDNet (a part of CNET), and am reposting his article. The original is here.

July 1st, 2008

Oil climbs peak, economies plumb depressions and the future will not imitate the past

Posted by Harry Fuller @ 2:45 pm

To maintain any modicum of modern life countries and individuals will increasingly turn to electricity generated from renewable sources. There is no way to dramatically increase the world’s oil production, now or in some dreamy future. All the major fossil fuels will be in declining supply by 2025 or sooner if we ramp up use of coal or natural gas to replace crude oil.

Credit to: Euan Mearns and Luis de Sousa of TheOilDrum.com.
Click on chart to see where it leads.

Those are three of the conclusions in a new book from Wiley. The title summarizes the thesis: Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century. The 20th Century was the century of oil-based energy and materials. The 21st Century will be the century of After-Oil. I got a chance to speak today with PROFIT FROM THE PEAK co-author, Chris Nelder.

Nelder spent years studying the world’s energy use and supplies before he became involved in this book project which just focused his efforts even more. From a background of technology writing, solar energy and software businesses, Nelder brings a critical eye to the theories and data used to bolster whatever argument fits the arguer’s goal.

CAN’T WE DRILL OUR WAY TO OIL SECURITY?

My first questions to Nelder: Did you trust the Saudis’ figures on their oil reserves? Where did you go in researching for the best possible data on crude oil supplies? His answer was Association for the Study of Peak OilandGas.

There’s a daunting avalanche of evidence and data to back up the growing belief among oil analysts and oil speculators that the daily or monthly supply we have now will not be greatly surpassed at any future date. My guess: you don’t wanna short oil. Nelder says the global crude oil production is AROUND 87-88 MILLION BARRELS PER DAY. He estimates it could eventually hit 90-million for a short time, but that minor growth will not begin to meet demand. Thus energy prices will not sometime begin to decline sharply. And within fifteen years we will start to see production declines on a global scale.

RUSSIA IS A BAD EXAMPLE

Oil output is already dropping in Russia. They reached peak production at over 11 million barrels daily back in 1987. Russia will drop in production again this year and will not top 9.8 million barrels per day. It seems the old Soviet Union did one thing right: it spread out oil production between the highly rich and more marginal fields. When the government controls were lifted after the Soviet Union collapsed, the oil barons of Moscow quickly depeleted the country’s richest fields. This factor is not minor: Russia still produces one-tenth of the planet’s oil and is a major source outside of OPEC.

The International Energy Agency has just reduced its forecast for oil production in 2010. Nelder said most of the IEA’s revised estimates reduce the supply expected globally. But the IEA still expects 100-million barrels per day, or more, in some future time. Nelder is clearly not buying that.

Russia’s an example of why Nelder sees no simple solution to the current energy prices and their rippling effects across the economy. He finds the best hope in changing technology and rebuilt infrastructure, not based on coal and oil. Electric rail transit so fewer people are driven to use their cars. Airline travel reverts to its beginnings, becoming ever more expensive and a province for the rich. I would add that’ll pressure American business to copy other nations and provide longer vacations, if it takes five days on a ship to reach Hawaii from L.A…

Nelder said he sees electricity becoming the basic type of energy and most vehicles will no longer burn liquid fuels of any kind. The electricity will more and more be generated using renewable sources. That’ll take a lot of capital and a lot of change and we are moving too slowly now to avoid disruption, Nelder fears. The renewable energy contribution to the world supply now is about 1%. Even if it doubled every year it would not begin to keep up with growing demand. The IEA estimates the globe needs a $45 trillion investment in energy business and research. That even dwarfs the American military budget, the world’s largest focused spending effort right now.

Current levels of renewable investment and component production are not nearly enough to ease the dependance on fossil fuels. Right now, Nelder says, any energy sector investment that’s rational is a good one. He didn;t need to add, even on oil driling rigs. Much money will be spent trying to ooze out those last few million barrels. Energy and food will be the crucial materials in the coming decades.
Countries that are most dependent on oil or imported energy of any kind will hurt the most in coming decades. Poorer nations will see widespread food shortages. Nations like Japan, New Zealand and Australia that are heavy energy importers will suffer. The world econojmhy will suffer an extended depression. Nelder said some small nations are prepared. Denmark and Iceland are nearly energy independent already. I can add that several European Union members from big Germany to tiny Portugal are rapidly moving away from fossil fuels.

Nelder: Investing in renewable energy production is costly up front but once built the raw material is free. Wind. Solar. Tidal. Geothermal. He says any one of those technologies, fully exploited and wisely deployed could supply the planet’s energy needs. But getting us unhooked from oil? We can’t go cold turkey so the treatment will take numerous interventions.

Nelder: We have used up our easy to get and best sources of all fossil fuels. Many of the world’s richest oil fields are thirty-fifty years old and pumping less each year. We’re working our way down from anthracite, through bituminous and subbituminous coal, and lignite, because we have used the highest energy content stuff first. There is a good deal of coal left of all kinds, but like oil (where about half of it is left) what we should care about is not how much remains, but the rate at which we can extract energy from it. There’s still some anthracite left, but its overall contribution to the current coal mix is small, and declining. Meanwhile moving all that coal gets more and more expensive because we still generally use petroleum-based fuels to haul large amounts of coal. You see where this is going? The same process is at work in the oil fields where the best and easiest aqccessed crude has been used up. More and more technology and CO2 pumping and hot water pumping and energy-intensive processes are needed to pump the crude.

Deep-sea drilling can provide some more oil from unused oil fields. The equipment is very expensive. One drilling ship costs over a half-million dollars per day, and it can drill for weeks and find nothing. That will be reflected in your price for gasoline. Nelder says there is no way the globe can produce enough deep-sea drilling rigs to make much impact, even if all the wells are great producers. Deepwater oil wells deplete more quickly than those on land.

Nelder cited the infamous Mukluck exploration off the Alaskan Coast in 1983. Over $1.6 billion spent in 1983 dollars (more than double that today) and a dry hole was all they found. We car drivers paid for that drilling, not to mention the tax write-off that taxpayers picked up. Such risky ventures that fail will become more common as oil prices soar.

Early in our conversation Nelder said one of the worst parts of dealing with energy: there is so much BS in the petroleum industry and so many key people in the business operating on false assumptions.

Nelder actually likes oil, says we should burn up less of it because we need it for so many other things from medicines to plastics. Let’s conserve. That’s the easiest thing to do, he says. Be more efficient. Save some of this precious oil for future generations.

A WHOLE MOUNTAIN RANGE OF NASTY PEAKS

All the currently widespread energy sources are bound to peak, according to Nelder’s research. Coal will peak by 2025 unless we continue to increase our use. That will just hasten the decline. Nelder says “clean coal” is a just a bumper sticker, not a technology being deployed commercially.

Nuclear will also peak around 2025. U235 is now costing ever more to find and refine. Rebuilding old nuclear power plants is just too expensive to expect because higher oil prices are raising the cost of materials from steel to concrete.

Natural gas produces 20% of America’s electricity, and it’ll peak around 2020. He says the cost and technology for LNG makes it highly unlikely there’ll be a growth in that industry. And, he pointed out, the ideal terrorist target would be a ship loaded with LNG. Like a hydrogen bomb, he said. So nobody wants the ships or LNG plants anywhere near them. Natural gas will remain primiarily in pipelines.

Nelder said the best move he’s made in light of current oil prices: working at home. He now drives about twenty miles per week. That’s not even an average daily commute for all those poor folks on there on the Interstate.

NELDER’S BLOG AND THE NEWSLETTERS

Here’s where you can find Chris Nelder’s blog on energy and investing.

Here’s the overall Energy and Capital newsletter site.

Interested in cleantech companies and investment there? Here’s the GreenChips newsletter.

On the latter site, here’s a piece on why this one contributor thinks algae biofuel can challenge oil.

A newsman since 1969, Harry Fuller has worked for CBS, ABC, CNBC Europe, CNET and was founding news director at TechTV. See his full profile and disclosure of his industry affiliations.