Continued from part 1
What's becoming increasingly obvious is this: the low-hanging fruit has probably all been picked. In recent years, major multinational oil companies have been reporting increasingly reluctant yields from established fields, and where new discoveries are made, the finds are smaller than in past years. These are undisputed facts.
#3: New technologies like 3-D seismic imaging and horizontal drilling will allow us to find more oil and to better exploit the oil we've already found. Also, typically, half or more of all the oil in a given field remains after initial production shuts down. Technological advances will allow us to go back and extract the remaining oil in these fields in a cost-effective way.
In some ways this is just a more specific version of the previous argument, but it merits discussion. First, 3-D seismic imaging and horizontal drilling have been in use for years now; they are known technologies which have been employed in thousands of sites worldwide. Oil producers know what they can do, and not do. And while they have assisted drillers in their quest for new oil, they have not served as the panacea for the world's oil crisis that some had originally hoped.
Take the U.S. situation, for example. The U.S. is the most technologically advanced nation on earth. Its major oil companies employ the best and brightest geologists and field technicians in the world. Yet for all our technical sophistication and knowledge, we have not been able to stop our inexorable slide in oil production from 11-plus million barrels a day to seven. Neither has any other peaked nation, including the United Kingdom, Russia, Canada or Iran.
As we said before, oil is being found every month; the problem is that finds in recent years have consistently been in the small-to-medium sized range, when what the world needs (and what major oil companies have been desperately trying to find) are huge fields which can replace the soon-to-peak monster fields of yesteryear. 3-D seismic and horizontal drilling has yet to accomplish this feat, and it may be simple wishful thinking to assume that they will.
Secondly, the idea that all we have to do is go back to abandoned fields and more thoroughly exploit them ignores a fundamental equation in the drilling business, which is known by the acronym EROEI, for Energy Return On Energy Invested.
The central question is this: in any given project, how much energy is going to have to be expended to extract the energy that is there? An even trade is obviously a waste of time; there needs to be a significant surplus of energy available to make any project economically viable, and to add to available oil reserves for world consumption.
If, as we have said, the easy oil—the low-hanging fruit, as it were—has been picked, then the remaining oil will be harder and more costly to extract, which—and this is a key point— will require significantly higher prices over a long period of time to make the hoped-for oil yield profitable . Either way, we're talking about higher prices across the board, which, as investors, is our principal concern.
The only way to circumvent the EROEI cycle is if a breakthrough technology emerged which would allow all or most of the remaining oil from previously-drilled fields to be extracted quickly and with ease; no such technology has yet appeared on the horizon.
#4: Through conservation and ever-more-efficient vehicles and appliances, we can reduce our energy consumption.
It is true that many of our appliances, electronics and heating and air conditioning systems are far more energy-efficient that they used to be. On the other hand, Americans' much-commented-upon love for large vehicles, especially large SUVs and trucks, has blunted much of the efficiency gains we've achieved elsewhere.
But while increased energy efficiency is always a welcome development, for our concern as investors it can mask the real issue—that is, how much total petroleum are we using? The answer is, more every year. Our total petroleum usage, both nationally and globally, has consistently seen steady increases on a year-over-year basis.
We are not reducing our dependence upon oil; we are increasing it with every passing year. And that increasing usage will further tax world reserves, putting continued upward pressure on prices, regardless of how efficient this or that appliance or vehicle might happen to be.
#5: We can always find substitutes for conventional crude oil. For instance, there are promising possibilities in oil shale and oil sands which we are just beginning to develop, that could supply the world's oil needs for decades to come.
It is true, there are vast quantities of “oil shale” and oil sands waiting to be exploited. But there are reasons why they have not been greatly developed to this point.
What is called “oil shale” is actually neither oil nor shale. It is marlstone, which contains no oil but an energy-bearing substance known as kerogen. Energy companies have been attempting to harvest oil shale for 90 years now, with no notable success. Recent efforts by Occidental Petroleum, Chevron, Unocal and Exxon have all failed.
The reason is that oil shale is a very difficult substance to convert to usable energy. First, the ore must be mined. Then it must be transported to ovens which heat it to 900 degrees. Hydrogen must be added, then the waste resulting from the heating process must be disposed of, which is of greater volume than the original ore, and happens to be a significant groundwater pollutant. With current technology, so much energy is expended in this process, the resulting energy yield is negligible, and the environmental issues are significant.
Oil sands, the best-known of which are located in Alberta, Canada, contain an estimated 1 trillion barrels of oil, roughly equivalent to all the crude oil burned since the invention of the internal combustion engine. A very promising source of energy indeed; but unfortunately, it too is extremely difficult to exploit.
A consortium of oil companies known as Syncrude have been mining Alberta's oil sands for several years, and now produce 200,000 barrels a day. However, it is an inherently inefficient process. Two tons of oil sand must be mined and processed to yield one barrel of oil.
In addition, for each barrel of oil produced, two-and-a-half barrels of oily waste water is produced, which is now shunted off into huge pools, which are slowly becoming small lakes. (Continuing to exploit the Alberta oil sands this way will eventually produce an oily waste pool the size of Lake Ontario!)
Thus, the environmental costs of the Syncrude project are skyrocketing, yet the net energy yield is painfully low. Currently, two barrels of oil energy are required to produce three barrels of oil—barely a positive yield. Syncrude hopes to refine and perfect the process to address the environmental and inefficiency issues, but these improvements have yet to be realized.
Summing up, all of these common objections to peak oil have one thing in common: they are based upon faith, not fact. While the grand hopes of the energy optimists may well come true—for the sake of the world's economic health we certainly hope they do—as investors our only course is to accept the facts they present themselves. And those facts suggest a greater likelihood of further oil reserve depletion, with continued upward pressure on oil prices over the long term.
What About Alternative Energy?
For years now, we've heard about our need to develop alternatives to crude oil as our main source of energy, in order to reduce our dependence upon foreign oil. These alternatives fall into two categories: Fossil-fuel alternatives and renewable alternatives. Let's look at each.
Fossil Fuel Alternatives
Chief among these are natural gas and coal, both already in wide usage. Can they replace oil as a primary source of the world's energy?
Coal
Coal, as most of us know, has a long history as a source of fuel for ovens, steam-powered vehicles, and, more recently, electrical power plants. Its primary advantage is that, despite extensive mining over the past two centuries, there is still a great deal of coal left to be mined, both in the U.S. and worldwide. Coal is relatively plentiful and, at the moment, relatively cheap. So far, so good.
There are only two problems with coal: mining it and burning it. There are two ways to get coal—opencut mines—large, surface “strip” mines—worked by huge earth-moving machines, and deep, underground coal mines. Opencut mines are, by their very nature, vastly destructive to the land. Underground mines, while largely out of sight, are famously dangerous to the health of the men who work them. There is no way to mine the world's coal and avoid the tremendous human and environmental costs associated with its extraction.
Moreover, cheap coal, like cheap oil, is relatively close to the surface. This is true of both opencut and underground mining. Such convenient deposits represent only a small fraction of the world's available coal, and as they are depleted, the cost of mining coal will rise dramatically.
When we burn hydrocarbon fossil fuels, we use the hydrogen for energy and release the carbon as waste. Because coal possesses the highest carbon content of the major fossil fuels, it is the most polluting, and the least energy-dense—therefore, the least efficient. Adding to this difficulty is the fact that the energy-density of coal falls with every passing decade, because seams producing the highest-quality coal have for the most part been exploited. The average heat content of each pound of coal is dropping, and has been for years.
Lesser-quality coal means more coal must be burned for the same energy payoff, leading to even greater pollution than before. Coal emits more “greenhouse gases” than other fuels. It receives the lion's share of the blame for acid rain. All this led the influential Economist magazine to feature coal on its July 6, 2002 cover, with the headline, “Environmental Enemy No. 1” because of its suspected contribution to global warming.
Coal can even contribute to nuclear proliferation; A large coal-burning electrical plant produces enough radioactive material each year to create two atomic bombs. This would obviously be a concern in an age of war and terrorism.
Coal is dirty—in more ways than one—and to date, technology has not progressed to the point of dramatically reducing its environmental dangers.
Natural gas
Natural gas, on the other hand, has the lowest carbon content of the major hydrocarbon fuels, thus it releases the least pollution. This is why the vast majority of electrical plants proposed in the last five years have been gas-burning plants. It is versatile; vehicles can be adapted to use it, and gas has become the home-heating fuel of choice for new construction in recent years.
The problem with natural gas is its availability. There is wide agreement within the energy community that U.S. natural gas production has peaked. More and more gas wells have had to be drilled to produce less gas than before. Because of gas's advantages, demand keeps increasing, and despite frantic attempts by the energy industry to ramp up supply, reserves are falling dramatically. As a result, the price of natural gas is skyrocketing.
Even Federal Reserve Chairman Alan Greenspan has taken notice, commenting recently, “Today's tight natural gas markets have been a long time in coming, and distant futures prices suggest that we are not apt to return to earlier periods of relative abundance and low prices anytime soon.”
Can't natural gas be imported? Not easily. Natural gas cannot be transported in gas form, so it must be liquefied, a costly and risky process. Then it needs to be shipped by specially equipped tankers to natural gas ports, of which there are only a handful in the U.S.
The hazards of this process are considerable, and the huge storage tanks of explosive liquefied natural gas at these facilities are natural terrorist targets. Thus, building new gas ports would be extremely costly, time-consuming and politically difficult. No one—in the U.S. or out—wants one of these ports in their backyard, especially since Sept. 11.
Add to this the costs and dangers of hauling tens of thousands of truckloads of highly flammable liquefied natural gas along our already-choked interstate highway system, it becomes obvious that to retool the U.S. (or any major industrialized nation) for natural gas you'd be staring down logistical difficulties of mammoth proportions (no pun intended).
Renewable energy
The four major renewable energy sources are nuclear, solar, wind and hydrogen. Each, at various times, have been credited with possessing the potential to wean us off of oil, and fossil fuels. Let's briefly consider the potential of each to achieve this goal any time in the foreseeable future.
Nuclear
In the 1950's, hopes for nuclear energy were running very high. Peaceful uses for nuclear power were just being developed, and the future seemed bright. But nuclear has it limitations. It is successfully used in electric plants, but has yet to be adapted to vehicles (the way some Americans drive, this is no doubt a good thing). So even if there were no other difficulties with nuclear power, it could never replace oil.
And, of course, there are other problems with nuclear: safety problems. The three main areas of concern are the threat of plant malfunctions, as what happened at Three Mile Island and Chernobyl, the threat of terrorism, both to the plants themselves and in the possible theft of nuclear material to make weapons, and of the disposal of nuclear waste.
These threats seem inherent in nuclear, and despite decades of effort, experts have found no way to significantly mitigate those dangers. Plant malfunctions are still possible. The threat of terrorism will be with us for many years. And while Yucca Mountain in Nevada has been proposed as a national nuclear waste depository, it remains controversial and there is still no agreed-upon location for the disposal of the nuclear waste that is produced, not only in the U.S., but around the world.
Given these limitations and genuine dangers, few energy experts believe nuclear will ever be able to replace, or even partially replace, our worldwide oil needs.
Solar
On the surface, solar power seems like a godsend. More energy is sent our way from the sun every day than the world will use in the next two decades. Solar panels themselves are inherently non-polluting, and, theoretically at least, can be adapted to power vehicles, home heating and electrical systems.
Sounds like a dream come true. And someday, it may well be. But the technology required to make that dream a reality is far from developed.
The largest reason solar has not replaced conventional forms of energy is that no one has figured out how to make a solar cell efficient enough for most applications. Raising the efficiency of solar cells on a watt-per-dollar basis is essential to solar's success.
In recent years, solar technology has increased efficiency about 5% per year. At that rate, it may take 30 years or more for solar to be competitive with natural gas or coal, and perhaps more for it to replace oil.
There are other problems with solar. The manufacture of solar cells requires large amounts of iron, and produces large amounts of toxic waste. A worldwide solar revolution would require nearly all the available iron, based on current production. And, a willingness to look the other way concerning the high toxicity of its manufacture.
But perhaps the greatest limitation of solar technology is inherent in the source of energy itself: it isn't always sunny everywhere! Solar cells cannot produce energy except in bright, direct sunlight. Such sunlight is common in the American Southwest, but not everywhere else. True, solar electricity can be stored in batteries, but after they are drained of energy they require recharging. So a long period of cloudiness can effectively shut down a solar-based power system.
Moreover, electricity has never been successfully utilized on a large-scale basis for vehicles. So even if every developed and developing nation transformed their electrical transmission grids to solar-based systems—a daunting and expensive challenge to say the least—that would still leave open the question of how we are going to power the world's cars, trucks, farm equipment, airplanes and ships, which consume the most of the world's oil.
Given these shortcomings with current technology, we are clearly decades away from a solar-powered world.
Wind
Wind power has received less attention than solar but of all the renewable energy possibilities, it is becoming the most promising.
Unlike solar, wind turbine technology has increased efficiency dramatically in recent years. With new turbine technology, wind speeds below 10 miles per hour can now produce usable amounts of electricity. Wind is plentiful in many areas where and when clear sunlight is not as frequent.