Friday, July 3, 2009

Peak Oil and Unicorns Both Mythical

Peak oil is a subject that comes up from time to time, as the scare-mongers who do not understand the oil industry, nor the world-wide energy industry, completely miss the mark. Peak oil is a theory that maintains that the Earth's supply of oil is finite and that we have reached the maximum of oil discoveries and production rate. The theory maintains that as demand for oil increases, production cannot keep pace so a huge price increase in oil will result, thereby disrupting all economies in the world. The Peak Oil hysterics shriek that "we" should immediately stop using oil, and switch to renewable, sustainable, energy supplies.

Peak oil, however, is a myth.

As the graphs in the following link show, the real price of gasoline (U.S., regular) has steadily declined since 1919. This is deadly data to the peak-oil believers. All during this period (1919 to now) peak-oil believers have sounded their alarms. Peak oil never happened, and never will. Oil price increases are due to temporary market distortions, and nothing more. Technology for finding oil improves much faster than oil consumption, thus driving the price down in real terms. Technology is improving faster and faster, with better computers, more sophisticated production techniques, economy of scale in transportation (ships, pipelines, refineries), and vehicles that achieve higher miles per gallon. All these drive the cost of gasoline down.

As ExxonMobil’s executives state frequently, what is keeping the price of oil up is restricted access to known oil deposits around the world. The Saudis and others in OPEC knew what they were doing when they nationalized their oil assets, kicked out foreigners, and restricted the production of oil so as to increase the price and thus their revenues. Smart guys, have to admire them for that. Those steps not only increased prices, they reduced production and thereby extend the life of the oil fields.

Peak oil is a myth, just as unicorns are mythical.

Just a bit more elaboration on why oil production technology improves. Better seismic geologic data interpretation through improved computers and software allow drilling companies to drill fewer dry holes and hit oil more frequently. Directional drilling allows much more oil production from a given field. Secondary and tertiary production techniques allow much more oil production from a given field. Deeper drilling is possible at lower costs than ever before. Drilling in deep ocean water is possible and cheaper than in decades past. It is a little-known fact that oil companies are prolific inventors, as can be seen from the patent records in the U.S. ExxonMobil, to name just one, receives roughly one patent per day, on average.

We can expect that gasoline prices will drop further as automotive standards change, especially those standards that mandate improved miles per gallon. With the California Pavley standard now approved by the U.S. EPA, (this occurred early in July, 2009), and the U.S. Federal gas mileage standards modified to match California's the normal demand for gasoline will decline. Prices for gasoline will also decline, except as offset by very expensive corn-based ethanol and taxes.


The grand game that is being played out around the world involves oil, natural gas, and renewable energy, also automotive technologies, and now climate change legislation. The stakes are high, the players are world-wide, and opportunities for making and losing vast fortunes exist.

OPEC's role in the game includes adjusting the flow of oil into the world market, which is their only move. Increasing oil production does several things: it decreases world oil prices, and shortens the lifetime of the oilfields under OPEC control. But, OPEC oilfield lifetimes are still measured in dozens of decades, perhaps hundreds of years. The real impact is oil price. As oil prices decrease, so does the incentive for alternatives to oil-based transportation systems such as bio-fuels, hybrid vehicles, and pure electric vehicles. In contrast, higher oil prices due to OPEC production reductions lead to not only more incentives for alternate-fuels, but can make oil-alternates more attractive, too. The oil-alternates include tar sands, coal-to-liquid plants, and shale oil. OPEC leaders try very hard to maintain oil price as high as possible without providing incentives for the oil-alternates to be produced and become a competitor to oil.

Enter technology improvements. Natural gas vehicles compete directly with oil-based transportation fuels gasoline and diesel. Some might wonder why the U.S. does not promote CNG vehicles, but instead appears to disfavor them. T. Boone Pickens understands the game, and knows the crucial role that natural gas vehicles can play. CNG cars with hybrid technology are a complete game-changer. With natural gas at historic low prices, currently around $4 per million Btu, the fuel cost per mile is much less than with gasoline. Governments enter the game when they provide rebates or tax credits for non-petroleum vehicle systems such as CNG and hybrids.

Another technology improvement mentioned above is improved gas mileage. Both California, and now the U.S., have laws that mandate 42 miles per gallon from new passenger cars by 2016. Other technology improvements exist, for example the Tata Motors car in India, and the BYD hybrid car from China. The USA has several advanced hybrids, and battery makers are in a furious race to produce better batteries for the transportation market. Infrastructure improvements also are in the works, with at least one company offering a battery-change service that will not take any longer than filling a gasoline tank. The electric car with a low battery charge would pull into a service station, and have the battery exchanged for a fully-charged one within 5 minutes.

Another factor in the grand game is world-wide demand for transportation, whether as gasoline, diesel, CNG, or electric vehicles. Some countries in the world have mature or shrinking transportation demand, while others are increasing. The economies of India and China are mentioned frequently as increasing the demand for transportation fuels, while the US and Europe are stagnant or decreasing. Note that hydrogen fuel cell vehicles are a joke, not worthy of consideration. Even Honda, a leading manufacturer of a fuel cell hydrogen car, admits that the manufacturing cost is outrageous and their cars for lease are for marketing purposes only. Their construction costs are on the order of $250,000 each, and the operating costs for hydrogen for the fuel cells is many times the cost of gasoline. Fuel cell cars are not part of the game.

The net effect of these technology improvements in the grand game is the same as OPEC increasing production, that is, it drives down oil price. The demand for oil decreases as the technologies become more accepted and in use, so OPEC can cut production. These also further delay the day when the oil-alternates will become economic, and increase the operating life of OPEC oil fields.

A fascinating window into the future, especially the oil future, may be found by watching oil commodity futures prices. One is available from, with contracts out eight years. As I write this, the contract for December 2017 is priced at $89.30 cents per barrel. The closing price for oil today was right at $67 per barrel. If peak oil were imminent, crude futures price eight years from now (2017) would be a lot more than $89 per barrel. In fact, one can also look at oil inventories and note that these are at historic highs. This also indicates that the price of crude oil is about to drop due to oversupply in the market.

The game is grand. The game is fascinating. The game provides immense opportunities for profit, and for loss. As my old buddy Todd Wehner says, Stay tuned, sports fans. This is about to get interesting!

(Note about my old buddy Todd Wehner: we grew up together from 3rd grade, including every grade through college graduation - except for two years when he went off to a fancy private university. He values his privacy, but I can safely say he has done quite well. He is one of the smartest people on the planet, and one of the funniest. We played intramural softball, and he not only managed our team, also played a position, and kept the scorebook for each game. He has a phenomenal memory, and never missed a play even while he was on deck, batting, running the bases, or playing the field. He just remembered everything and wrote it all in the scorebook when he was in the dugout. )

Roger E. Sowell, Esq.

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