Register

Peak Oil is You


Donate Bitcoins ;-) or Paypal :-)


Page added on October 5, 2016

Bookmark and Share

Why Oil Will Power Past $100

Why Oil Will Power Past $100 thumbnail

Summary

In recent years, many factors have caused a big drop in the price of oil.

Many of these changes that have hurt oil seem permanent; trends toward alternative energy in particular are accelerating.

However, the price of oil won’t stay low forever. It will rebound and hit $100/barrel again in the next few years.

Even people opposed to fossil fuels will put up with oil for awhile longer; it’s a far better fuel than coal.

Oil is simply too indispensable for humanity for prices to stay this low.

In 2014, crude oil (NYSEARCA:USO) got hit by a perfect storm of negative factors. On the demand side, the world economy slowed, China’s entered a major spot of turbulence, the US dollar has reached multi-year highs. All these pushed the price of oil lower. And on the supply side, major technological breakthroughs revealed a more robust oil supply than we’d expected ten years ago.

Over just the past decade, we’ve gone from near $150/barrel oil and long serious discussions about “peak oil” to the idea that oil is in its twilight days. More than a few reasonable investors are suggesting the oil majors should unload their reserves now, even at today’s discounted prices, since they could become nearly “worthless” within a generation or two. A branch of the Canadian government, for example, is now forecasting what will happen to Canada if oil hits $0 per barrel in the near future.

Is this turn in sentiment justified? My friend and gracious debate partner, Finsight Funds, makes the affirmative case here.

He suggests the price of oil will never again see $100/barrel. He offers several reasons for this view, focusing in particular on which alternative energy is picking up momentum.

And right from the top of the debate, I’d like to agree with that point. Unlike in the, say, 1970s, solar in particular is making huge leaps on an affordability and efficiency basis. While you could argue solar isn’t cost efficient without government subsidies – full stop – 10 years ago, the math today is much more competitive.

In fact, I’ll go so far as to say that I could see renewables doubling their share of global energy supply and reaching 30-40% of the total pie over the next generation. We do appear to be at a point of rapid transition; a concept Finsight elaborates more on in his article.

With all that said, I don’t think a brighter future for renewables necessarily means that oil is on its last legs. In this article, I’ll argue that oil is the best and most indispensable of the fossil fuels – and while coal in particular may be heading the way of whale oil sooner than later, we’ll still have petroleum (and oil price spikes) with us for several more generations.

Oil has already declined from 48% of the world’s total energy usage in 1973 to just 35% by 2008. Despite that, actual oil usage still rose significantly over those years (source).

Global energy consumption will continue to rise in coming decades and there’s plenty of space for oil – even as a shrinking portion of the total pie – to continue serving in a few categories where it provides the most bang for the buck while renewables take a larger share of the overall picture. (All data in this article from Robert Bryce’s book Power Hungry unless otherwise cited)

Why We Still Need Oil

There are at least four main reasons why, even as environmentally-aware persons, we should think twice before kicking oil to the curb. First, oil is by far the best source of transportation fuel that we have. Yes, electric cars are coming online quickly and depending on how things develop, they may serve as a practical wide-scale replacement for combustion cars over the next 10 or 20 years (then again, they also may not – it depends on batteries).

However, even if we grant that gasoline-powered cars are heading into decline, you still need oil for transportation. How will you power airplanes, trucks, and cargo ships? It’s one thing to power a few thousand pound car for a couple of hundred miles on an (expensive) battery. It’s an entirely different matter to fly a jet across the ocean.

A 2010 Ford Fusion puts out 175 horsepower. That’s not at all impossible to do with an electric battery. A Formula 1 race car uses 750 horsepower – that’d require more than 4x the battery for the same range, a bigger challenge. A Boeing 757, on the other hand, puts out 86,000 horsepower. The technology that makes electric cars possible simply won’t work for airplanes, you’d need batteries hundreds of times more dense.

As it is, a tank of gasoline comes with more than 50x as much power per unit of space inside a vehicle as compared with the most efficient batteries we have today. You could make batteries 5x more energy-dense (well maybe, you could try) and they’d still be a far cry from what oil can provide with today’s technology. Also, gasoline can be replenished virtually immediately (as compared to several hours to recharge a battery) and gas tanks are dirt cheap and easy to fabricate, as opposed to high-tech batteries, which require rare metals and typically cost thousands of dollars.

So while electric cars are coming quickly, especially for people that don’t need long driving ranges, we’re still going to need oil (and lots of it) for transportation. There’s no practical substitute for trucks, planes, or heavy vessels coming in the near term.

Yes, you can use natural gas (NYSEARCA:UNG) to replace oil in some of these use cases. But it’s still a fossil fuel and one that is very closely tied to oil at that. The prices of oil and natural gas tend to follow each other, and profitability of major projects, such as LNG plants, are tied to the price of oil. Thus, if natural gas becomes more popular, it would likely have the effect of also boosting the price of oil, due to the moderate substitutability of the two goods. (And as for why the US probably doesn’t have unlimited cheap natural gas for the next 50 years, as some optimists are now forecasting, see this book).

Oil is simply too good at what it does – safe to transport, light, exceptionally energy-dense, and affordable, that it will remain a key fuel for transportation, especially of large vehicles, for at least the next few decades. And with annual aviation traffic growing at a 6% rate compounded (doubling every 12 years), we’ll need lots of jet fuel in the future.

Second, it’s unclear how we’d get many other goods that are oil-byproducts if we dramatically cut back our oil usage. Aside from the obvious things we use oil for, modern civilization is deeply reliant on petroleum for fertilizers, chemicals, plastics, lubricants, solvents, synthetic rubber, roofing, medical devices, fabrics and so on.

Sure, you can make (often inferior) versions of these oil-based goods, but generally at considerable time, expense and often environmental degradation. For example, you can make an alternative to asphalt out of potatoes if you really wish. But you’d soon find it a lot more expensive to pave roads for your electric cars to drive on.

While out of sight to most wealthy folks, there’s another key argument for keeping oil around. More than a third of the world’s population still depends on solid fuels, such as straw, dung, wood, and coal, to cook their meals. That’s two billion people we’re talking about. And they’re often doing so inside their houses with little ventilation.

This is both a human crisis and an environmental one. In a world as modern as ours, it’s difficult to imagine that two billion people still have to use primitive fuels to cook with, and that the people exposed to the noxious indoor air pollution this causes are primarily women and children. Additionally, these fuels are very inefficient and cause tremendous amounts of air pollution; witness the haze you find in rural areas of third-world countries such as Guatemala despite a near absence of cars.

The lack of useful fuels doesn’t just impact cooking. Wood and charcoal are widely used for heating and in place of electricity. A house where I lived in Guatemala for several months had a firewood-powered water heater. If the owners didn’t have money for firewood any given day, we’d burn trash instead. This produced fine showers, but with plenty of environmental harm attached.

Remember the massive landslides in Guatemala last year that killed at least 271 people? The cause of this is deforestation. Deforestation occurs because people cut down the forests to heat their houses and cook food. Without the forests, there’s nothing to hold up the hillsides when torrential rains come.

Give poor people propane or kerosene, and this wouldn’t happen, and you prevent both human misery and far broader environmentally degradation. Oil is a far superior fuel to charcoal and other such primitive fuels, and we owe it to the world’s poor to give them access to reliable affordable and safe forms of fuel.

Similarly, the destruction of the Amazons in Brazil is directly related to the use of biofuels – a woefully inefficient substitute for oil. This is an all too typical scene in South America:

Source

Rainforests in Indonesia are also being destroyed at a rapid rate to make inefficient fuel out of palm oil. Proponents claim these are “green” fuels, but they’re actually turning the planet brown at an alarming rate.

Rather than destroying some of the world’s last pristine natural areas, couldn’t we drill a few more wells in Siberia, the US Midwest and other such low-impact areas that are of far less importance to global biodiversity?

Finally, we still need oil because it makes the transition to alternative and renewable fuel sources easier. The world still uses roughly 70 million barrels a day of oil equivalent in the form of coal. (Amazingly, that’s not substantially less than the amount of actual oil we use)

A wise and green plan for energy transition would utilize cleaner fossil fuels, such as petroleum and natural gas, along with uranium, to aid the transition away from coal. The amount of mining and steel-making needed to base an energy grid on renewables (particularly wind) is extreme, and if we’re not careful, we’ll end up using way too much coal in this process.

Witness Germany – a top-tier developed nation – seeing rising carbon emissions and flat coal usage in recent years despite investing overwhelming amounts in wind and solar capacity. If even Germany can’t transition effectively from coal directly to renewables (unaffordable battery storage still being a key problem), it’s unreasonable to expect poorer countries not to use oil and natural gas as a cleaner intermediate stop as they transition away from coal.

Oil Remains In A Cyclical Pattern That Ensures Another Spike

Coal (NYSEARCA:KOL) still accounts for 30% of total global energy usage, and half of new energy usage between 2000 and 2012 around the world was with coal. Not only is coal not in terminal decline yet, it’s actually still a growing energy source!

It’s simply unthinkable that the world would stop using oil while coal is still so widely in use. Coal causes far more harm – both to human health and the climate – than oil does. It’d be silly to focus primarily on curtailing oil usage before taking care of our coal problem.

So oil isn’t going anywhere in the near term. There’s no plausible economic replacement for oil as a wide-adoption transportation fuel in the near term, and even if there were, we’d still prefer to use oil/natural gas rather than coal for electricity generation. So you don’t need to worry about oil falling out of use in the next twenty years.

Oil Isn’t Going Away, But Is Its Price Going Up?

That doesn’t guarantee the price will go back up, however. Critics claim that supply for oil now permanently exceeds demand.

In their favor, they make a few points. First, gasoline demand has leveled off in many places, including the US. Some of this is due to slow economies, but much of it is due to energy efficiency. Higher mileage standards, changing consumer preferences away from sprawl and long commutes, and improvements in public transportation have made a difference.

Second, the oil boom in the US unlocked a large new supply that hadn’t been forecast by the “peak oil” crowd. This is very much true, US oil production is up by 4 million barrels a day over the past five years, accounting for most of the increase in global supply over that stretch. The US now accounts for roughly 10% of global petroleum production, up from around half that a decade ago.

The camp that suggests oil prices will stay low forever expects that falling demand for oil due to things such as electric cars will kick in before supply becomes tight again.

This, I’m not sure about. The new energy finds (in both oil and natural gas) deplete quickly, unlikely traditional wells. Many of the bankrupt E&P firms collapsed because production fell off far more quickly than the companies’ geologists had anticipated – see Sandridge and the fiasco with their SandRidge Mississippian Trusts (NYSE:SDT) (NYSE:SDR) if you want a concrete example with numbers.

Many people say that the new natural gas firms made most of their money during the good years flipping land leases, rather than actually producing gas. So, durability of these new resources is a question mark.

Also, scalability to other countries is an issue. The US can see new drilling technologies take off quickly, since private individuals own mineral rights. The US is an exception here, virtually no other countries permit individuals to own mineral rights, and thus techniques such as fracking will take far longer to go global, held up by plodding state bureaucracy and far more concentrated NIMBY-ism (since foreign land owners have less incentive to permit wells on their land).

While fracking has been a big temporary boost to global energy supplies, it is not clear how long that boost will last. And on the flipside, the low price of oil itself plants the seeds for a high price later. The majority of the world’s oil still comes from states, such as OPEC members, that rely on oil prices to fund their budgets. These countries are investing far less in capital expenditures now, since they are forced to focus on mere survival, rather than planning a long-term budget.

Oil states such as Venezuela have already collapsed and numerous others appear headed in that direction if prices stay low for too long. The collapse of petro-states, by itself, takes vast amounts of oil off the market and sends the price back up. When citizens have spent decades used to living off oil, and the government suddenly can’t do its part anymore, citizens will protest, voting in radical governments and overthrowing totalitarian states.

All you need is for two countries the size of Venezuela to disconnect from the global oil market due to internal instability and you remove the equivalent of all the oil US fracking has added to the market over the past decade.

Additionally, a prolonged low price of oil will, by itself, create vast new demand in emerging markets. Unlike in the US and Europe, most emerging markets don’t care about sustainability, and will gladly use every drop of oil that they can while making a profit. Drive through emerging global metropolises, Mexico City’s fringe (pictured below), for example, and you’ll see 10-mile stretches of highway like this – stalled out traffic, with gas stations and endless low-end sprawl (source):

Emerging markets have been in a down cycle; however, signs are appearing that this bad stretch is breaking. Low food and oil prices are in fact a big part of this, relieved of inflationary tensions, consumers have more money for discretionary goods. The manufacture and transportation of these products require large amounts of electricity and gasoline. Thus, low prices actually stimulate the very economic growth needed to drive oil prices back up.

If you look at GDP growth and energy usage, they are almost perfectly correlated (to the extent economists can use Chinese electricity data as a more accurate measure of activity than official Chinese GDP claims). The next boom in emerging markets will create large new drivers of demand for oil, that much is certain.

Mark My Words: Oil Will Be Expensive Again One Day

There are plenty of things that could make oil go back to $100/barrel sooner than later. The rise of more militant and nationalist governments, which does appear to be a trend at this point, could do it on its own. Similarly, tensions are rising in the Middle East, and should the increased terrorism of late continue, it’s not hard to imagine the West’s eventual response causing a massive rally in oil.

But even excluding more black swan type factors, oil almost inevitably must rebound one day. It’s simply too useful a fuel for it not to. The low price of oil makes it exceedingly tempting to use for both monetary gains and for the betterment of the world’s billions of poor people. Sure, some environmentally-minded folks in rich countries may voluntarily swear off oil usage, but the majority of emerging markets won’t, and given demographic trends, they’ll soon be the marginal buyer of petroleum.

Even from a sustainability standpoint, it’s far better that we use oil, rather than coal, during the transition period where we don’t yet have enough renewable resources with which to power the world.

Great changes are afoot in the alternative energy sector. After decades of promises, actual technology is starting to catch up to the hype in various areas. However, the transition period will be one measured in decades. Remember that coal came into use in the early 1800s, but it wasn’t until 1885 that coal finally dethroned wood as the top fuel source in the US.

I suspect the people proclaiming the death of oil will similarly be surprised – oil has already peaked in its importance to humanity, but that doesn’t mean it’s heading straight to the grave either. Several of the things that made oil cheap recently – such as the strong US dollar, emerging market slowdown, and fracking breakthroughs are bound to diminish in importance in coming years. Oil is very much a boom and bust commodity, driven by powerful cycles that will remain in force for many years to come.

seeking alpha



70 Comments on "Why Oil Will Power Past $100"

  1. ghung on Thu, 6th Oct 2016 12:06 pm 

    Dave said; “Also good to hear you think talking down to people makes sense,…”

    Gosh, Dave, I actually deleted my usual ‘clueless-gridweenie-rant’ before posting, even though I grew tired years ago of folks making unsupported comments about things they have little understanding of, and zero experience with.

    Many of those folks think nothing about spending as much or more on a vehicle that is a huge energy sink, likely lasts half as long, gets used a fraction of the time (my energy system is used 24/7/365 and is likely net-energy positive), requires constant inputs, and keeps them in a cycle of debt. Folks are often quick to criticise alternative energy schemes, while being totally OK with their car-culture which is much more ripe for criticism.

    At least people who are early supporters of EVs are trying do something other than supporting an ICE meme that is reaching it’s expiration date. IMO, folks should be thanking those who pioneer a “Plan B” that they’ll gladly embrace when the death of the affordability of oil smacks them upside the head.

  2. Dave Thompson on Thu, 6th Oct 2016 12:19 pm 

    Ghung, “folks making unsupported comments” Solar,wind, and back up battery systems are expensive. To expensive in fact to support humans needs. Unless like you you choose to go off grid invest lots of money and have a handle on maintaining said systems. My point is once the oil age ends, your little off grid home stead is over in not to many years following.

  3. ghung on Thu, 6th Oct 2016 12:53 pm 

    Spoken like a true gridweenie, Dave. Fact is, you don’t know what will happen. At least one of us has a Plan B.

  4. Dave Thompson on Thu, 6th Oct 2016 4:03 pm 

    Ghung, sorry to inform you, since you do not seem to understand, most here in the global north use the power grid that is available for us to use. It is not cost effective to go off grid in an urban setting. The grid goes down so goes everything even someone like you in due time. Your plan “B” will last about as long as it takes the 400 plus nukes on earth to melt down with no grid tied power. Once the radiation starts spewing forth with no grid power good luck with your battery arrays. Fact is fact. You are right.

  5. ghung on Thu, 6th Oct 2016 4:36 pm 

    Gosh, Dave, sounds like every nuke plant should have a big solar array and battery set to keep the pumps going. Should only cost a few million per. Cheap insurance considering, and, unlike their backup diesels, they would be good for something instead of just sitting there waiting for the grid to go down.

  6. ghung on Thu, 6th Oct 2016 5:25 pm 

    ….and Dave, taking things to their logical conclusion, one of us in this little back-and-forth decided to take responsibility for his energy sources a couple of decades ago. I don’t buy electricity from nasty coal-powered plants or nuclear plants that could threaten our civilization. THAT WOULD BE YOU. I didn’t do this because I’m rich, or lucky, or particularly gifted. I’m none of these things. I did it because I could, after making quite a few sacrifices and figuring out that I didn’t need many of the things your society decided were “essential”.

    Those are YOUR nuke plants that could potentially melt down. Not mine. Those are YOUR coal plants that foul my air. Not mine. You are the one paying for those things. I don’t know what your situation is, and can understand how urban dwellers, either by choice or fate, may not have the options I have, the choices I made. Shit Dave, I lived in the city, and got the hell out of there. Lived in a freaking 27 foot camper for 6 years. As of this Christmas, I haven’t flown in 20 years. Our “vacation” this summer was a “staycation” I just can’t participate in, and make excuses for, a way of life that makes it impossible for so many people take responsibility for the consequences of their lifestyles.

    I’ve done my best to cut my driving, and succeeded quite well. Looking for a good used EV, even if it only gets me to town and back. I’ve reduced my consumption because of the embodied energy in all of the products we use. Why? Because I don’t want to have to own the consequences. If things fall apart and nuke plants do melt down, I want that to be YOUR meltdown; not mine, even if I have to suffer the consequences.

    You pay for these things; YOU buy into this, so do something. Write your Congressman, or anything besides telling me what does and doesn’t work.

  7. makati1 on Thu, 6th Oct 2016 10:10 pm 

    Ghung, you are going to be dragged along with ALL of your sheeple neighbors in the collapse. Climate change is going to affect ALL of us and whether you have electric or not is NOT going to be important in the long run. If the nukes fall in war or they just melt down in the reactors, either way will bring death, slow or fast. Dave is correct there. There is no place to run and hide. We built our own suicide machine when we built the 400+ nuke plants. Now we will pay the price.

    Arrogance comes before the fall.

  8. ghung on Thu, 6th Oct 2016 10:17 pm 

    Yeah, Mak, you keep saying that. What do you want me to do? Sell my stuff and hang a sign over my shoulders that says “The End Is Nigh!”? Maybe ring a little bell?

  9. makati1 on Thu, 6th Oct 2016 10:24 pm 

    Just stop bragging that you are “prepared”. You aren’t, any more than any of us are. There are no preps that will take you through the coming bottleneck of humanity. Extinction means total, not some. “Exceptionalism” is a myth.

  10. ghung on Thu, 6th Oct 2016 10:35 pm 

    What’s it to you, Mak? You ain’t my Pappy. I think you’re threatened because some of us ARE more prepared than you are so you want us to STFU.
    No.

  11. makati1 on Thu, 6th Oct 2016 11:09 pm 

    ghung, your bravado is faked. I’m glad I’m not your “pappy”. I raised decent, honest, kids, not arrogant, Texas brats.

    You are prepared for what? The Police State Dictatorship that is emerging in your country? The Greatest Depression that you are now experiencing? Or maybe the coming war with a nuclear armed foe your leaders are promoting?

    I don’t brag about my ‘preps’. I just know they are adequate for the future I see. You rely on things. I rely on people. Huge difference. Things disappear. People don’t. Not the people I am allied with here. Good luck.

  12. Boat on Thu, 6th Oct 2016 11:51 pm 

    mak,

    I assume you preppers enjoy your life style. That’s great. Your long held fear of crash should have been dispelled by now.
    At your age I would guess you will still be crying wolf, dreaming of nuclear meltdowns and nuclear war while the majority of us will drive, ac and shop our way to an electric future.

  13. GregT on Fri, 7th Oct 2016 12:06 am 

    Boat,

    “I assume you preppers enjoy your life style.”

    And I assume that you enjoy yours. That’s great. Please stay exactly where you are.

  14. makati1 on Fri, 7th Oct 2016 1:13 am 

    You are delusional as usual, Boat. LMAO

  15. makati1 on Fri, 7th Oct 2016 1:15 am 

    BTW: I do not fear a crash. I welcome it as the only possible way we will avoid a nuclear war. When the empire is brought to its knees, the rest of the world will applaud. America is the most hated country in the world.

  16. dave thompson on Fri, 7th Oct 2016 2:50 am 

    No matter how we put it urban, suburban, survivalist prepper in the wilderness of what is left, or just plain don’t give a shit till my next meal, guy (gal) living where ever. Humanity faces a precipice that has come about by over population, over exploitation, hubris and greed for money. What happens is obvious if you got kids start your splain’in now.

  17. makati1 on Fri, 7th Oct 2016 5:57 am 

    Dave, I’m glad my “kids” are all over 40. No splain’in necessary. I have lived a good 72+ years so far. My grand kids and maybe even my kids will never see that ripe old age. Nothing I can do to change it. Reality is a bitch.

  18. Davy on Fri, 7th Oct 2016 6:29 am 

    Makati Bill, on a scale of 1-10 how stuck on yourself are you? Next question is on a scale of 1-10 how upset do you get when others show superiority to your dumbass?

  19. ghung on Fri, 7th Oct 2016 8:18 am 

    Give it up, Davy. The self-appointed chief prophet, Mak, is, as usual, a classic case of the pot calling kettles black. Calling me arrogant brought a laugh, as he again projects his lack of preparation for anything on everyone else. Now he thinks I’m from Texas? Even funnier.

    Jeez, Mak, if you have accepted your personal doom, it’s fine with me. Some of us weren’t built that way, but I can understand. I would be far more doomy about my future if I lived in a clusterfuck of over 20 million clueless people. Just don’t assume that your situation is in any way like mine, or any better. That would be ludicrous.

  20. JuanP on Fri, 7th Oct 2016 8:24 am 

    My wife and I lived aboard a sailboat for many years. All our electricity came from a system that never had more than two PV panels and a wind generator and had nothing more than one PV at first. People here are confusing needs with wants. We could provide for our needs and some wants easily using renewable energy systems, but we will never have enough energy to satisfy all our wants no matter where we get our energy from. Airplanes are not needs and entertainment systems are not needs, either.

    My wife and I were always comfortable in our boat and by the standards of the majority of people living in the world today our lifestyle was luxurious.

Leave a Reply

Your email address will not be published. Required fields are marked *