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
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
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
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.
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.
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
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
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.
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
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
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
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
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."
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."
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.
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."
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.
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 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
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
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
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.
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.
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.
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.
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."
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
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.
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.
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.
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.
According to our best, most realistic estimates, here's how things
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.
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
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,
- 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!