April 27, 2005
Learn to Love Peak Oil
The Greens are so happy. They have discovered “Peak Oil”, a theory claiming oil production has peaked, supplies will decline, and prices will go skyhigh. Civilization will literally grind to a halt. We’ll all be back in trains where we belong.
The Green Co-leaders are arguing against building more roads, that further investment in aviation is plain foolishness, and Government should sell its shares in Air New Zealand. With empty tanks those birds won’t fly.
Similar predictions have been made before. English industrialists worried they would run out of coal. The Royal Navy thought it would run out of timber spars. Machine makers thought they would run out of whale oil. Computer analysts worried they would run out of the copper to connect all the PCs. Paul Ehrlich was convinced that by now we would have run out of just about everything. Fortunately, no one took any notice then. We should take no notice now.
It’s true that for the last few decades the world has enjoyed incredibly cheap oil. Even though the wells are distant, refining is complex, and fuel is subject to massive taxes, the petrol powering your car is cheaper per litre than most bottled water – including New Zealand water. (So who’s profiteering?)
Peak Oil theory claims we are using oil faster than we are discovering new supplies. We should not be surprised. Oil has been so cheap and plentiful (two ways of saying the same thing) that it has not been worth looking for more of it.
Much of the oil in known reserves needs a higher price to make it worth extracting. Some is “taxed” by environmental restraints. Now that prices are high the oil companies are exploring again. Governments are providing the appropriate incentives.
The US uses only half the oil per unit of production that it did in the mid-seventies. The vehicle fleet is hugely more energy efficient, and grows more efficient by the day. The latest SUVs uses computer controls to automatically switch from V8s to V4s in cruise mode, so the high power is delivered only when needed. Electric hybrids such as the Prius double fuel efficiency.
World population collapse is just around the corner – let’s say 2050.
This coupling of population decline with increased efficiency will compensate for increases in per capita energy use by Chinese, and others, who are beginning to enjoy our own standards of living.
Oil is one source of energy, but only one. If oil gets truly expensive the future will still be awash with energy because so many new sources are waiting in the wings – they just need oil to get more expensive. New energy sources are all around us.
All energy is nuclear. Solar energy is nuclear. Geothermal energy is nuclear.
Gravity originates in the nucleus. Hydro-dams combine solar energy with gravity. So do the tides and so does the wind.
Coal stores old solar energy. Oil stores old geothermal power and gravity.
The Earth is awash with nuclear power from the sun. There are scores of ways to tap into it and so our future will be awash with energy, while oil will give us time to make the transfer.
But surely, eventually, the oil must run out.
No – the oil will never run out.
No natural resource ever runs out. Once there were only two of us. Now there are over six thousand million of us, and yet no mineral resource has ever “run out”. As any mineral or similar resource gets scarce the price increases until it is not worth using, and substitutes step in from where they have been waiting in the wings.
Sometimes new technologies simply sweep the old ones aside. We switched from sail to steam – but not because we were running out of wind.
But let’s concede the era of ludicrously cheap oil may well be over and that the next round of oil will be more expensive because it will be more difficult to find and to extract.
What happens, for example, when petrol hits, say, $5 a litre at the pump?
At that point it is worth converting coal into fuel oil using present technologies.
Well before that happens, converting or modifying other oil-like reserves, and using more expensive forms of natural gas becomes worth while. New Zealand sits in the middle of an “ocean” of natural gas, including “frozen methane” offshore.
Waste-to-energy plants can produce electricity and new technologies can turn waste biomass directly into oil. Windmills on your roof will dissociate water into hydrogen for the fuel cell in your car. Physicist Freeman Dyson predicts that genetic engineering will soon make trees and plants much more efficient at capturing solar energy. Carter Holt may grow GM forests to burn as biomass. Dyson also predicts the development of plants which produce fuel oils directly from their roots. Every garden will have its high octane corner.
The Alberta oil sands contain the equivalent of 1.6 trillion barrels of oil, more than all of the world oil reserves combined. A higher price will turn this resource into a reserve.
A shrewd guess is that a bunch of new technologies will allow us to stabilize around a plateau of supply and demand which delivers petrol at about $2.50 per litre.
That’s twice the current price, but if your new hybrid motor car delivers twice as many kilometers per litre you will be no worse off.
This more expensive fuel oil will be directed to aircraft and to motor vehicles where it delivers the most benefits. Electricity generators will switch to nuclear fuel, coal and useful renewables such as solar power, geothermal energy and biomass.
Finally, we will be able to afford even higher prices for our cars if we need to.
The average household income for the Auckland Region is about $66,000 dollars a year. After a hundred years GDP growth at say 3% a year their income will be over a million dollars a year. They could afford to pay $30 a litre to fill their tank.
So don’t panic. Oil will be around for a long time. And so will cars and planes.
However, the oil-age will certainly end before we run out of oil.
Just as the stone-age ended long before we ran out of rocks.
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is Director of the Centre for Resource Management Studies (www.RMAStudies.org.nz), a privately sponsored New Zealand-based “think tank” specialising in resource management matters. The Centre’s activities are funded by the Centre for Resource Management Studies Trust, which is registered as a charitable trust for educational purposes. He has New Zealand degrees in Architecture and Town Planning and also studied Urban Economics at UC Berkeley towards a Masters Degree in City and Regional Planning. He writes a fortnightly column for New Zealand's National Business Review, titled “Straight Thinking” and has been published in many magazines and newspapers including the Wall Street Journal and the Far Eastern Economic Review