Jun 2006
Does peak oil really matter? I'm not sure it does. (Or at least, not in the way many assume.) And does it really matter that the USA has two trillion barrels worth of recoverable oil shale resting in the shadow of the Rockies? Not really. I don't think so anyway.
Before you spit out your coffee, let me explain. (If I'm too late, I apologize.)
The energy bull market we are in the midst of is being driven by four things: developing world growth (China, India, Asia, Eastern Europe); geopolitical risk (Iran, Venezuela, Russia, Nigeria); a powerful wave of hard-asset investment (hedge funds, pension funds, commodity funds, institutionals); and last but not least, the strong prospect of serious dollar decline.
While playing an indirect role, the peak oil phenomenon has not kicked in as a direct price driver for energy yet, and may not do so for a while. It is true that Saudi fields are looking sketchy to some outsiders, elephant fields in Mexico and Kuwait are declining, and new replacement reserves are getting harder and harder for the globetrotting oil majors to find. But there are more factors there than meet the eye. The toughness of finding new replacement reserves, for example, is arguably more of a geopolitical issue—it has a lot to do with state-run energy behemoths muscling out the private players where the pickings are good.
When push comes to shove, we may actually tap America's vast store of oil shale. But it won't be today. Nor tomorrow. Nor the day after. That day will be many, many years into the future, if ever. There are just far too many logistics problems yet to be solved… technological issues, water issues, power issues, labor issues, political issues, and so on.
As noted before, the West is famous for NIMBY and BANANA politics ("Not in My Back Yard" and "Build Absolutely Nothing Anywhere Near Anybody"). Trying to develop oil shale deposits in Colorado and Utah could quickly blow up into the biggest NIMBY / BANANA double-whammy environmental debacle of all time.
For those of you who worry what the overhang of recoverable US oil shale might do to energy stocks, a simple question. Remember Canada? Our neighbors to the north are sitting on their own private Saudi Arabia too, in the form of the Athabasca oil sands. We've all known about that for a while. And those oil sands are being developed at flat-out top speed. Because the Athabasca region is so sparsely populated, Canadian oil sands have virtually none of the NIMBY / BANANA headaches a US oil shale project would face.
Yet, consider why oil is still in the $60's and $70's with all that northern bitumen just ready for extraction. How can it be that the price of crude is so expensive, when there is so much recoverable oil in the ground... and North American ground to boot? Because the whole trick is getting the stuff OUT of the ground.
Imagine a magic gas station with tanks that never run dry. Infinite amounts of gasoline for all! Now imagine that this magic gas station has to serve thousands of cars from a single island of pumps. It doesn't matter that the tanks are bottomless. The problem is distribution, i.e., getting it out of the ground.
With only six pumps and thousands of cars waiting to fill up, you are going to get gas lines hundreds of cars long. And that gas is going to be very expensive, even though there is plenty of it (an infinite supply in our example), because high prices are the clearing mechanism for determining who wants fuel the most when real-time availability is limited. The problem is a bottleneck in extraction and distribution.
This is analogous to our present day scenario, and the main reason I don't think peak oil matters in the way that the public understands it.
The high cost of energy is being set at the margins, and driven by an intersection of demand and geopolitics. Secular demand for energy is growing at such an aggressive long-term clip that available supply sources are running flat out to supply it. Oil fields have a maximum rate of output per day; if you push an oil field too hard, you risk permanent damage and a loss of some of the reserves. (It's a good thing substitution technologies are already starting to kick in, because if they weren't, prices might be even higher.)
In one sense, this bottleneck problem is at the heart of the entire commodity boom. The reason that, say, base metals get really expensive when everyone wants them is not because there aren't enough base metals in the ground. It's because we can't get them out of the ground fast enough!
Consider that mining companies of all sorts, including the oil sands players, are suffering from a shortage of truck tires right now. Some companies are laying down sheets of plastic on their roads to get more life out of the truck tires they can find. On top of that, skilled mining labor is in incredibly tight supply. (Need a good job? Come out to rural northern Nevada and you can make $20 an hour driving a haulpack. The mines are desperate for new drivers.)
It is an infrastructure problem... a bottleneck problem. The fact that there are billions of barrels worth of recoverable oil in the form of North American tar sands and shale doesn't really matter at this point. ‘Peak infrastructure,' relative to accelerating demand, is perhaps as good an explanation as ‘peak oil' for what we see all around us. At some point, the world's inadequate extraction and distribution infrastructure for energy and metals will finally catch up with demand—and when that happens, the commodity boom will be well and truly over. But that day is far off, probably a decade away or more.
The main point here is that the long-term energy bull market we are in is more of a demand-driven "infrastructure arbitrage," playing out over a period of many years, than a peak oil phenomenon in the popularly understood sense. By the time peak oil really kicks in, which it will, things on the ground could look quite different. (And we will hopefully be much further down the alternative energy road by then, enabling us to better deal with the strain.)
