John Hicks/Chris Nelder: Profit From the Peak

Brian Hicks/Chris Nelder: Profit From the Peak: The End of Oil and the Greatest Investment Event of the Century (2008, Wiley)

Nominally, a book about how to make money during events that cause everyone else to lose their shirts. Valuable less for that than for the methodical case they set out regarding peak oil and its attendant resource crushes.

I normally reject out of hand books promising to make me a fortune, but gave this one a quick look to see what they had to say about peak oil. Turns out quite a bit. I wound up not quoting much of it below, since most of it was basic info in terse bullet-list style, but it provides a pretty good executive summary, plus a lot of charts which I can't reproduce. (Need to work on how to do that.) Beyond oil, they find natural gas, coal, and even uranium demonstrably peaky, then they go on to consider most of the alternatives. The profit angle only shows up in 15-20 pages of stock recommendations, which are actually useful just as a survey of the corporate players. They try to be upbeat about the future, but they're pretty devastating. They don't even bother setting up hydrogen before knocking it down. They point out that a 1.2:1 EROI for corn ethanol isn't really a positive return. They point out that technology for renewables doesn't build itself, and therefore has more limited returns than we expect. They don't get ideologically anti-nuclear but can't see much of a future in it anyway. They do rather like biodiesel, cellulosic ethanol, and geothermal in their limited ways, and of course they see growing roles for solar and wind. But the real source of their optimism is that they think a world that squanders much less energy might not be such a bad place to live. I'm not sure that adds up to a case for profit, but it's certainly a step towards cutting your losses.

From 1985 Kuwait started inflating its oil reserve estimates, which translated into larger OPEC quotas, going from 64 billion barrels in 1985 to 102 billion in 2005, before issuing a correction back to 48 billion (pp. 18-20):

The reserves restatement game began in 1985, when Kuwait reported an increase of 41 percent, from 64 billion barrels (Gb) to 90 Gb.

Then, in January 1988, Abu Dhabi and Dubai each reported a tripling of their reserves, and Iran, Iraq, and Venezuela all doubled theirs, presumably to maintain parity of production among OPEC members. And in January 1990, Saudi Arabia reported a 50 percent increase. [ . . . ]

We know that since 1984, Kuwait has produced some 12 Gb of its oil. Now, if the original 64 Gb reserve estimate was correct (implying an EUR [estimated ultimately recoverable oil] of 86 Gb) and we subtract 12 Gb, that would leave Kuwait with 52 Gb left, baring additional discoveries. And 52 [Gb] is very close (given the degree of uncertainty associated with such estimates to the 48 [Gb] now claimed.

(p. 34):

Whether OPEC doesn't increase its exports because it can't -- due to factors such as geological limits, security problems, lack of capacity, and increased domestic demand -- or because it won't -- because it is better for its long-term profitability -- or all of the above, we cannot know. And OPEC is certainly not telling.

But there is another possibility, elegantly argued by oil analyst Dave Cohen in a June 2007 article, "A Paradigm Shift." He suggests that what is really going on is that OPEC producers (particularly Saudi Arabia) have realized that they are back in control of the world market, since non-OPEC producers are pumping flat out, and that they really don't need to try to keep oil prices any lower than they are now.

(pp. 35-36):

However, at the current rates of depletion, large, integrated oil companies need to replace 137 percent of their reserves in order to compensate for depletion and increase production at 3 percent, while maintaining a constant reserve/production ratio.

Over the past three years, they haven't been able to keep up. From 2004 to 2006, the world's major oil companies managed to replace only 91 to 92 percent of their reserves, according to a June 2007 report by Bear Stearns & Co.

Meanwhile, the cost of finding and developing new oil rose by 28 percent since 2005 -- an ominous indication.

Where will the oil majors find those additional reserves? There are only two significant regions of the world where oil development is relatively young and reasonably sized new fields can be produced: the area around the Caspian Sea in eastern Asia, and Africa. However, both areas are rife with conflict between the locals and the oil companies, and both are caught up in geopolitical tensions that foster terrorism. The Caspian region is also a geographically challenging place to do anything, and an even harder place to defend. In short, it is now, and it will continue to be, very difficult to produce oil from these regions and bring it safely to market.

That leaves primarily deepwater drilling in friendly areas as the next frontier for oil. Although the first deepwater wells -- wells drilled in more than 1,000 feet of water -- were drilled in the 1970s, up until the 1990s, deepwater drilling was too difficult and expensive to make economic sense. But between the world's existing onshore and shallow-water offshore fields having largely been exploited, and the developing areas like the Caspian Basin and Africa being risky and difficult places to invest hundreds of millions of dollars in drilling rigs, combined with a historically high price for oil, deepwater drilling is the next near-term frontier.

(p. 42):

The U.S. has now burned through 70 percent of its oil. Sine its al-time production peak in 1970, the postpeak decline in production has been relentless -- despite the most aggressive drilling and production techniques ever used.

In the first quarter of 2007, oil drilling in the United States reached a 21-year-high, drilling an estimated 11,771 oil wells, natural gas wells, and dry holes. And yet, overall production continues to decline.

As we have seen, the first part of an oil field's production is easy and cheap; then it becomes progressively more expensive and difficult to produce, requiring more advanced technology and more investment of energy to retrieve declining amounts of oil.

(pp. 44-46):

The biggest contributors to world oil production are the largest and most mature fields, which are in decline. Therefore, there is little incentive to keep investing in the infrastructure that pumps, refines, and distributes oil.

According to Matthew Simmons, 80 percent of the world's energy delivery system is corroded -- literally rusting through -- and desperately in need of refurbishing. We saw the effects of this problem in March 2007, when a section of British Petroleum (BP)'s pipeline in Prudhoe Bay sprung a leak and spilled a small amount of oil.

But the public outcry and the Congressional inquiry that followed the spill almost universally failed to identify the real issue. Senators called BP's management to task for having failed to "pig" its pipelines according to standard maintenance procedures. BP acknowledged its lack of attention to the pipelines, but never admitted that it wasn't even trying to maintain them because the output from the fields has fallen toward the marginal low end of production. BP is just running down the clock on the capital investment and hoping that it can continue to use the pipelines just long enough to produce the last bit of oil. The company certainly would not see any financial justification for reinvesting in that infrastructure.

(p. 50):

The world passed the peak of discovery between 1962 and 1964 (depending on whose numbers you use). We now find only one barrel of oil for every three we produce, and the ratio is only getting worse. The fields we're discovering now are progressively smaller, in more remote and geographically challenging locations.

Seventy percent of our daily oil supply comes from oil fields that were discovered prior to 1979.

(p. 55):

The chart comes from a thesis paper called "Population and Energy" by Graham Zabel, who explains the relationship as follows: "[T]he world's population would not be anything like the six billion that it is, if not for the discovery, commercialisation , and mass use of coal and subsequently oil and gas. Vast inputs of energy into modern society have led to vast increases in population."

He estimates that natural gas will add approximately another half-billion people, but then -- barring the development of some massive, as-yet-unknown alternative source of energy -- population must decline.

Without the massive fossil fuel inputs of modern agriculture in the form of natural gas-based fertilizers, oil-based pesticides and herbicides, fuel to run big farm machinery, energy to run water pumps for irrigation, and other inputs, the world's output of food simply could not support the world's current population of some six billion people.

(pp. 59-60):

China's rapid industrialization has also led to radically increasing its coal consumption. China uses more coal than the United States, the European Union, and Japan combined. And its coal use is growing at the rate of 14 percent a year, accounting for some 75 percent of the entire world's growth in coal demand.

In fact, as coal consumption tapered off in most of the rest of the world, China's consumption grew 62 percent from 2000 to 2005, a major factor in the 50 percent growth of world coal consumption over the same period.

Several recent estimates say that China is now opening a new coal-fired plant every three days -- plants big enough to satisfy all of the electricity needs of a city the size of San Diego.

(p. 75):

Burning fossil fuels has serious environmental costs as well as economic costs, from water and soil pollution, to loss of species, to loss of ecosystem services such as cleaning the water and air. And yet, nobody ever pays those costs directly. They are externalized onto the environment: you and me, and everything that lives around us.

The Union of Concerned Scientists reviewed some studies on this subject in a 1995 article citing several estimates: "Delucchi (1995) estimates the total cost in 1991 of environmental externalities to be $54 billion to $232 billion. Human mortality and morbidity due to air pollution accounts for over three-quarters of the total environmental cost and could be as high as $182 billion annually. For the Los Angeles area, Hall et al. (1992) estimates that the annual health-based cost from ozone and particulate exposure alone to be almost $10 billion."

(p. 101):

J. David Hughes, a research geologist with the Geological Survey of Canada and an expert on natural gas in North America explains the trend this way:

"U.S. gas production peaked in about the second quarter of 2001 and has been going down and remained flat since that time. Canada's gas production hit a plateau in mid-2001. It maintained that plateau until mid-2002. And then, despite drilling a record number of holes, production went down about three and a half percent.

"We drilled another record number of holes in 2004, and production has stayed pretty much flat. So you've got no production response from all that extra drilling."

(p. 112):

The best coal -- anthracite (with 30 megajoules of energy per kilogram, or 30 Mj/kg) from Appalachia and Illinois -- has been in decline sine 1950. Our supposedly vast reserves are mainly of lower-quality bituminous coal, which peaked in 1990 and contains 18 to 29 Mj/kg, and subbituminous coal and lignite ("brown coal"), delivering a mere 5-25 Mj/kg.

For comparison purposes, the group translated the energy content of the coal produced into tons of oil equivalent. In terms of volumes of stuff mined, they found that growth in U.S. coal production can continue for about another 10 to 15 years. But in terms of energy, which is the only metric that really matters, U.S. coal production peaked in 1998 at 598 million tons of oil equivalent, and fell to 576 million in 2005.

(pp. 119-120):

While it's true that there are still vast deposits of hydrocarbons under the ground, particularly of tar sands and oil shale, the quality of those hydrocarbons is getting worse, the cost to extract them is going up, and the energy inputs needed to convert them into usable energy are going up.

Energy journalist Roel Mayer has termed the phenomenon the Law of Receding Horizons, which states that as the price of a commodity like oil goes up, the cost of producing it goes up, too, keeping that magical break-even point for some marginal energy project always just out of reach. Why does this happen? Because energy from oil is used all along the way in building a new facility and running it. [ . . . ]

This is particularly true for oil shale, which has seemed to be on the verge of profitability for decades.

James D. Hamilton, a professor of economics at the University of California, San Diego, who has followed the oil shale story for some three decades, explains: "It's remarkable that for over thirty years, the claim has always been that the projects would become economical if the price of oil went up just a little higher. I've watched oil prices go up, and then it turns out the projects still won't fly."

In the energy business, the standard joke is: "Shale oil -- fuel of the future, and always will be."

(p. 122):

EROI is a particularly important metric for oil and gas production. As we have seen from the earlier studies, early in a field's life, oil flows through the field and gushes up the well bore under its own pressure. But after some quantity of the oil has been produced, the pressure gradually drops until it has to be generated from above, to maintain the flow. And after the easy-to-get oil has been produced, getting the remaining oil out requires the injection of water, CO₂, or other substances to force oil out of the pores in the rock and make it flow to the well bore, where it has to be lifted to the surface. Clearly, the older the field is, the more energy one has to invest to recover the oil.

Now, as we get into lower and lower quality hydrocarbons, the EROI is falling, too. Oil and gas extraction in the United States now gives an EROI of about 17; the EROI of synthetic crude from Canadian tar sands may be as low as 5; and for oil shale, it is perhaps 2 or 3.

The EROI of ethanol from corn, by comparison, has been variously estimated between 1.2 and less than 1, which is why it's not workable as a true substitute for oil-based fuels.

(p. 126):

Tar sands, also sometimes called "oil sands" to make them seem more appealing, are a black, tar-like combination of clay, sand, water, and bitumen.

Bitumen isn't really oil; we know it as asphalt, when it is mixed with gravel to make road surfaces. It's a semisolid, degraded form of oil that does not flow at normal temperatures and pressures, making it difficult and expensive to extract.

In order to get some usable hydrocarbons out of tar sands, we use one of two processes: strip mining and in situ processing. The oil that is produced is heavy oil, which must be processed in a complex refinery.

Virtually all of today's tar sands production is done by strip mining. One must really see some video to get a sense of the scale of these operations, for they are truly mind-boggling. First the trees are clear-cut and the topsoil overburden is removed. Then huge shovels dig the sands and load them into the largest dump trucks in the world. Then the tar is mixed with steam and solvents, and spun in giant vats to make the bitumen rise to the top. The contaminated wastewater is dumped in huge ponds and the tailings are dumped into valleys.

(p. 150):

We are already seeing some of the unintended effects of the shift to biofuels, as farmers all over the world switch to feedstock-producing crops. For example, in Mexico, there were riots in early 2007 over the rising cost of tortillas, the number one staple food. The cause of the rise was the increasing cost of corn from the United States due to the expansion of the corn ethanol industry. Consequently, Mexican farmers set as much as 35 percent of their fields of blue agave ablaze, in order to make room for growing more profitable corn. The lost of blue agave production then caused a spike in the price of its end-product, tequila.

Similarly, a May 2007 study by the United Nations showed that the push to replace food crops with biofuel feedstock crops is having other unintended consequences all over the world. Seventeen countries have made large commitments to growing biofuel feedstocks such as palm oil trees, corn, and soybeans, and global production of biofuels is doubling every few years. But this has led to deforestation, erosion, nutrient loss, severe loss of animal habitat, increasing poverty, and the subjugation of family farmers to big international corporations.

(p. 170):

The United States is already the world's largest producer of geothermal energy, with 209 plants currently in operation and more coming online soon. But the industry is only just getting started. Currently production is limited to just five states -- Alaska, California, Hawaii, Nevada, and Utah -- and supplies only 0.37 percent of the nation's electricity.

(pp. 176-177):

The first commercial nuclear power stations started operation in the 1950s. Today, there are 435 commercial nuclear reactors operating in 30 countries, providing 370,000 megawatts of capacity -- that's 6.2 percent of the total energy produced worldwide, or about 16 percent of the world's base-load electricity.

Sixteen countries derive at least one-quarter of their electricity from nuclear power. France and Lithuania are the most dependent on it, deriving around three-quarters of their power from nuclear energy.

The United States supplies more commercial nuclear power than any other nation in the world, and currently has 104 commercial nuclear generating units licensed to operate, which constitute 11.5 percent of the nation's energy needs.

(pp. 177-178):

China is building nuclear plants at a breakneck pace -- in part, to reduce its carbon footprint. [ . . . ]

Accordingly, China has announced plans to spend $50 billion to build 32 nuclear plants by 2020. But experts from China's leading technical university, Tsinghua University, say they could build as many as 300 more by the middle of the century -- about the same as the total nuclear generating capacity in the world today.

To secure fuel for all those new reactors, Chinese Premier Wen Jiabao has recently struck supply deals with Australia and Niger. This has contributed to a rapidly escalating worldwide demand for uranium, helping to drive the price of processed uranium ore form $10 a pound in 2003 to $120 in 2007.

(p. 179):

The last reactor built in the United States was ordered nearly four decades ago, took three decades to approve and build, and became operational in 1996. That's a very long lead time. Even if the political will can be mustered to grease the skids for new plants, it's hard to imagine that lead time being shortened by much, if at all, as environmental review requirements and community resistance are greater now than they were then.

Then there is the problem of just maintaining our current nuclear capacity. Of the 104 reactors currently operating in the United States, many are approaching the end of their intended life spans. Even with 20-year extensions of their planned life spans, all existing reactors will be decommissioned by the middle of this century. Just replacing them will require building two reactors a year for the next 50 years -- in itself a dubious prospect.

(p. 180):

This is a complex topic, but essentially, like coal, uranium comes down to a question of energetics. Only the highest-quality ores are net energy positive when used in a typical fission reactor.

According to independent nuclear analyst Jan Willem Storm van Leeuwen, when the Uranium-235 content of the ore is under 0.02 percent, more energy is required to mine and refine the uranium than can be captured from it in a nuclear reactor, so it's not worth doing. [ . . . ]

Naturally, as they are consumed, the world's reserves of high-grade ore are dropping. The vast majority of the remaining uranium, and the largest deposits of it, have ore grades lower than 0.1 percent. That is 100 to 1,000 times poorer a fuel than the ore used today, making it uneconomical to mine."

(p. 204):

Consider the Northeast blackout of 2003, which plunged parts of the Northeastern and Midwestern United States, and Ontario, Canada, into blackness within two hours on Thursday, August 14, 2003. It was the largest blackout in North American history, affecting some 10 million people in Ontario (about one-third of the population of Canada) and 40 million people in eight U.S. states (about one-seventh of the population of the United States).

And why did the blackout happen? Because a high-power transmission line came in contact with a tree in Cleveland, Ohio. This small event led to a cascading series of failures, ultimately forcing more than 508 generating units at 265 power plants to be shut down, including 22 nuclear power plants. The cost of the blackout has been estimated at $6 billion.

The subsequent investigations turned up a whole host of issues, including failure to trim trees near high-capacity transmission lines, failure to maintain the electrical infrastructure, insufficient headroom on the grid, failure to upgrade to "smart cables," failure of shunting and rerouting mechanisms, problems with AC versus DC intersystem ties, and other problems.

(p. 217):

Relocalization is, just as it sounds, essentially the opposite of globalization. The more food, fuel, and other needs that can be produced locally to satisfy local markets, the less energy will be needed to transport stuff around, so the benefits in reduced fuel consumption are clear.

But relocalization also offers less tangible benefits. When consumers and producers are in close proximity, the quality of goods increases, and the market distortions that are so common in a globalized economy tend to disappear. Likewise, when consumers can see for themselves the full range of costs and benefits of a particular activity, they can make smart choices about how to spend their discretionary dollars, instead of, for example, having to wonder if that shirt they're buying was made with child labor a half a world away. In addition, money stays within the local economy, so that a community can build on its own success. Just as globalization leads to disconnected markets and suppliers and unsustainable market choices, relocalization leads toward cohesive, sustainable communities.

(p. 226):

The low-hanging fruit in switching away from liquid fuels is to focus first on transportation. In the United States, about 70 percent of our total oil use goes to transportation (gasoline, diesel, jet, and boat fuel). If we could displace that portion of consumption, we could save the rest of the oil for uses such as plastics and petrochemicals, some of which can't be made from anything but oil.

A major step in reducing our use of transportation fuel is to switch back to rail, because it is far more efficient.

(p. 229):

For the United States, the greatest savings potential of electrified rail would be in replacing car and light truck traffic with urban rail. Since 90 percent of our transportation energy comes from oil, we could reduce our oil consumption significantly by deploying everything from intercity commuter lines to local freight lines to everyday streetcars. Drake believes that with a supportive public policy, a crash urban rail building program could save 9 percent of our current transportation fuel consumption by 2020, with a corresponding 15 percent reduction in private auto travel.

(pp. 235-236):

According to our best, most realistic estimates, here's how things stand globally:

Oil: Peaking some time in the next three years, possibly already past the peak.

Gas: Peaking some time in the next three to 13 years.

Coal: Peaking some time in the next 13 years.

Nuclear: Probably peaking some time in the next 10 years, with lots of variables, but its use won't increase substantially.

Tar sands and oil shale: Tar sands production may grow from approximately 1.5 mbpd today to some 5 mbpd by 2030, but it will be unable to even compensate for the decline of a handful of mature oil reservoirs. Oil shale will never be a significant source of fuel.

Hydropower: All of the good resources have already been tapped, and due to reduced water flows (thanks to global warming) and environmental concerns, hydropower is in permanent decline. Indeed, for environmental reasons, the trend is toward shutting down and dismantling hydro plants.

Biofuels: Low net energy return guarantees that biofuels, too, will remain minor players, unable to compensate for the immense loss of energy that oil peaking represents, at least for the near future. Biofuels do have some room to grow, so to speak, but they will probably remain special-purpose fuels and a relatively small part of the overall fuel mix.

All renewables: All other renewables (solar, wind, tidal, wave, and geothermal combined) currently provide around 1 percent of the total energy mix. And making all that renewable energy equipment relies heavily on fossil fuels, for mining, smelting, fabricating, shipping, installing, and grid infrastructure.

Even at the current rates of growth, these energy sources won't be able to make up for the loss of energy from the peaking of fossil fuels. The quantities of energy we're talking about, and the time (and energy) that it takes to deploy them, are simply too vast. The CEO of Royal Dutch/Shell, Jeroen van der Veer, believes that even after accounting for technological breakthroughs, renewables could only make up about 30 percent of the total energy supply by midcentury, but we think that is optimistic.

(p. 237):

At this point we must consider the case amply proven that there are no supply-side solutions to the problem of fossil fuel peak. Trying to maintain business as usual by increasing energy supply may be possible in the short term. But in the long term, it is not only impossible; it's suicidal! The longer our energy consumption is allowed to grow, to meet the demands of growing population and growing economies, the greater will be our overhang as we pass the point of peak energy, and the more difficult will be the post-peak adjustment.

Some other books along similar lines:

• Stephen Leeb: The Oil Factor: Protect Yourself and Profit From the Coming Energy Crisis (paperback, 2005, Business Plus)
• Stephen Leeb/Glen Strathy: The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel (paperback, 2007, Business Plus)
• Aric McBay: Peak Oil Survival: Preparation for Life After Gridcrash (paperback, 2006, Lyons Press)
• George Orwel: Black Gold: The New Frontier in Oil for Investors (2006, Wiley)
• Mick Winter: Peak Oil Prep: Prepare for Peak Oil, Climate Change and Economic Collapse (paperback, 2006, Westsong)

There are many more books on profiting from more general economic collapse, mostly in response to the sinking dollar. Those I've seen are pretty superficial, but I can't guarantee that none of the above don't boil down to: buy gold!

posted 2009-04-25