June 25, 2008

Medium-term, is this another 80's oil bubble?

No, not if you define medium-term as less than 10 years.

The oil crisis of 1973-79 was caused by OPEC - the US had lost it's ability to increase oil production (as "swing-producer"), and OPEC tried to corner the market. Unfortunately for them, they tried too early - when consumption fell, and non-OPEC production increased, OPEC couldn't reduce production sufficiently to support prices (it's interesting to note that OPEC tried before, in 1967, to choke off supplies, and was completely unsuccessful - it was much too early).

With the benefit of hindsight we know that the 70's oil crises were "geo-political", but at the time that wasn't so clear - even where this was recognized, it was assumed that very high prices would continue (which they would have, had OPEC been able to manage it). Paradoxically, the 70's "energy crisis" caused an influx of new supply, and a great deal of efficiency and conservation, precisely because people thought this was a long-term problem. If everyone had thought prices would crash in the 80's, no one would have acted as decisively as they did.
As a result, many people got burned. Oil companies invested in projects that didn't pay off. Individuals "relocalized" and forewent children, in anticipation of resource poverty that never arrived.

It's simply not realistic to dismiss the question "what about another 80's style bubble and crash?" by saying that people should have known back then that things weren't that bad, and arguments that "this time is different" need decent proof.

On the other hand, I think it's clear that the current problem was caused by demand exceeding supply, starting very roughly in 2005, rather than primarily by 70's style top-down decisions by OPEC. Whether this is a classic commodity boom-bust cycle caused by lagging capital expenditures, or is caused by Peak Oil, it isn't going to be over quickly: large oil ventures take 5-10 years to take from the inception of exploration to discovery to production, and the oil services industry has been decimated by historically low oil prices in the last 20 years, and will have a hard time catching up to demand.

Now, we don't know if OPEC is contributing somewhat to this shortage, or if they're simply covering up their inability to meet demand, but there's very little question that they're pretty happy with prices above $70 (at minimum), and would defend them. These days it looks like they're happy with $100 oil, and would very likely defend that higher price level. The gradual loss of a surplus supply cushion means that OPEC would be successful in such a defense.

There is a real risk that it won't be over for 20 years: Peak Oil theory (which is explained here in a PDF), and the Export Land Model (as explained by Jeffrey Brown and "Khebab" in their blog) suggest that quantities of oil available to importers such as the US may fall quickly, accompanied by dramatic price increases. See figure 17 in the second website for a range of projected exports for the top 5 oil exporters - these 5 currently account for about 50% of all oil exports (this doesn't include smaller exporters, some of which, like Canada, are likely to increase exports, but these big exporters are important). The chart suggests that there is a real risk that oil exports by the biggest oil producers could drop in half by about 2019.

Here is a recent mainstream perspective.

We could also face a sudden loss off all oil exports from the Persian Gulf due to, say, someone bombing enrichment facilities in Iran, or civil insurrection in the region (monarchies aren't the most stable of governments).

What could be done?

Well, if US imports were to drop by 50% in 11 years that might reduce overall US oil consumption by 30% (we import 57% of consumption - about 11.6M bpd vs consumption of 20.2M). In 1978-1982 the US reduced it's oil consumption by 19% while growing slightly, for a reduction of about 4% per year. At that rate a 30% reduction would require 8 years. So, we could handle it, though possibly with stagnating GDP for some years.

If oil imports were to fall more quickly, people would at some point be ready for real emergency measures. Well, emergency measures could easily reduce consumption by 25% in 6 months by conservation (just make all highway lanes HOV, strictly enforced), and drilling (in ANWR and off the coasts) and large-scale CTL could both be done in 3 years under truly emergency conditions.
Many analysts project conditions that reflect a true emergency, and assume Business As Usual responses. That makes no sense.

On the other hand, none of these are fun scenarios. It's urgent that we, at a national and personal level, start planning ahead, and start reducing consumption ASAP, as well as trying to increase production.

What if China's buying power continues to rise versus that of the US?

That's likely to continue, but how large will the effect be? Keep in mind that Chinese consumers have a lot of alternatives for their buying power, and expensive oil is more expensive than substitutes everywhere, not just in the US. higher prices stop consumption, even in China. We see that China had to cave in and raise price controls, even before the olympics, which is something that they surely didn't want to do. Because of those price controls the effect on Chinese consumption was delayed, but I expect to happen just like anywhere else. Don't forget, much Chinese oil consumption is for diesel electrical generation - we have to think that's unlikely to continue for long in these volumes at these prices.

What about domestic production, which depends on when ANWR and OCS get opened up?

I suspect that ANWR, OCS, as well as CTL, could be done quickly (in very roughly 3 years) in a true emergency, in which environmental precautions are thrown to the wind, various processes are done in parallel, and cost is no object. Perhaps we'll continue to do our frog-boiling thing, but one way or another I think we'll reach a breaking point on domestic production, including CTL, which will both start these projects, and accelerate their development.

Here's an interesting take on OCS. It refers to an EIA study that says that there is quite a bit of oil (41B barrels) in the OCS that is already available to oil companies. That suggests that low oil prices prevented production in these areas in the past, and that scarce resources (rigs, manpower, etc) are now preventing oil production that is likely to be arrive eventually as the oil-services industry expands. The EIA indicates that there are another 18B that would are now legally unavailable, and that require high prices to be viable.

Aren't existing Alaska, onshore and existing offshore going to go down?

That's not at all guaranteed - I'm including new wells in old fields in "existing". Tertiary methods, especially CO2 injection, have a lot of promise. There's an enormous amount of oil to be extracted in the US. The Bakken alone has upwards of 200B bbls. Only about 4B are economic now, but that's a $30T incentive - there's a likelihood of more to be extracted there, with a significant chance of a great deal more.

Hasn't Hubbert's projection for the lower 48 been very accurate?

That's been exaggerated a bit. Keep in mind the domestic price controls before and during the price peaks, and the crash in prices immediately thereafter. Sure, drilling went up, but how much earlier, higher and longer-lived would that drilling increase have been if the domestic oil industry had received a strong and persistent price signal? Also, Hubbert was far from prescient: he made a similar projection for natural gas that was completely wrong (he projected a crash roughly in the 1980's, while NG production is still fairly stable).

how much do you think US production will decline in the 2010s?

I'm not sure. It will increase when Thunderhorse goes into production, and the EIA projects an substantial increase in the medium (though we don't trust EIA projections much). What I do know is that as discussed above there is a lot of oil to be extracted in the US (a lot of decent prospects are known and just waiting to be exploited), and that the drilling services industry will ramp up with time. I would be very surprised if production fell, and I expect at least a small increase.

Didn't the 1978-1982 period included declining oil prices in the last couple of years?

If prices had been higher there would have been an effect on both oil consumption and GDP - how much we don't know, but we have pretty good evidence that a 4% annual decline can be done without declining GDP.

Didn't we also have a much better trade balance?

Actually, if we exclude oil we have a pretty good balance right now - oil is the problem. I agree it's a big problem - right now we're selling the family silver and hocking our furniture to pay for it. OTOH, if oil exporters are sensible, and recycle petrodollars, we'll have some mix of stagnating domestic consumption (transferred to exports) and go into debt, but not suffer declining incomes.

Won't oil prices go far higher, in inflation-adjusted terms, in the 2010s?

I think current prices are the ceiling for several years, and that $200 oil is a maximum. Roughly 50% of world GDP has their currencies tied to the dollar (including the yen and yuan), and price signals will indeed work.

Don't efficiency increases get harder as you go along?

Not really. Telecommuting will have benefits for all, once we get past the cultural barriers (it's kind've like the Norsemen in Greenland who starved rather than eat fish). Carpooling is an inconvenience, but very, very cheap.

Don't hybrids cost thousands of dollars more per car?

The Honda Insight was cheap, and got 60-70MPG. The Prius (at $24k) is cheaper than the average US light vehicle (at $28k). The Volt will be below $30k easily, with volume production. NEV's can be $15K.

Didn't it take over 20 years for the US to improve by 34% in the 80's and 90'?

Keep in mind that this was in an era of low prices, with efficiency an afterthought. Now it's a high priority .

Won't the oil availability drop be too steep for orderly and timely adjustments?

Probably. The real question is how disruptive this will be. We know that there will be premature obsolescence for a lot of capital (like SUV's, and hopefully coal plants). I just think that a depression is not likely. It's a risk that our policymakers should be paying much, much more attention to, but not likely.

Isn't one of the reasons that the energy intensity of OECD economies has gone down is that energy intensive activities have migrated to less developed countries?

Keep in mind that the energy intensity of the whole world, and especially the "oil intensity" of the whole world, have increased at roughly the same rate. World GDP has been growing at 5% per year for the last several years while oil production has been flat. This is much more a problem of recycling petrodollars than it is of a lack of energy or oil.

What about Saudi Arabia - aren't their exports going to fall dramatically, due to increasing consumption and falling output?

Probably not, though it is a real risk. If we take a look at the best known analysis of this type we see: "Our middle case shows Saudi Arabia approaching zero net exports in 2031, within a range from 2024 to 2037." That's only 23 years away, and is entirely unrealistic: it doesn't take into account the differences between KSA and other producers (KSA is much, much more carefully managed from the top-down); it projects out current consumption growth without change; and it suggests that KSA wouldn't do anything to maintain exports even as it lost all export income.

Hubbert linearization is useful, but only as a preliminary guide - it can't be elevated to the status of supernatural authority. As a very good example, Hubbert's 1970's prediction for Natural Gas in the 80's was completely wrong: he projected that NG would fall off a cliff, while it has stayed very stable for another 30 years. The same criticism applies to the ELM model - it's just a preliminary, rough guide, and needs a great deal of finetuning.Look at his use of historical US production numbers without an acknowledgement of the problems with extending this analogy to the world: US price controls, and import competition. Look at how badly Hubbert's prediction for Natural Gas missed the mark.

KSA's per capita oil consumption is just behind the US's, so it's growth is likely to slow soon. A great expansion of consumption would mostly require industrial energy disintermediation by KSA, with continued net energy exports. In other words, they'd start refining oil, manufacturing fertilizer and smelting aluminum. Those things would be largely exported (or displace imports), so that oil & gas exports would fall, but that would reduce energy needed for those products elsewhere, so the net effect would not be to starve the rest of the world of energy.

June 21, 2008

Is solar power a real solution?

In short, yes.

This can be broken down into several questions:

Is solar too expensive?

See this article for analysts who foresee solar becoming as cheap as grid power in 3-5 years.

Also, take a look at First Solar's last quarterly report, which shows PV costs at $1.12 per peak watt (which is very cheap), and that it fell 12% from 1 year ago. I believe their thin-film has efficiency which is a bit below the average for conventional silicon, so Balance of System costs will be a little higher. Their wholesale panels are being sold for about $2.50/Wp, which suggests complete systems, installed, at about $4/Wp. That, in turn, suggests about $.20/kwhr for large, industrial/commercial installations.

Solar costs are now around $.30/kwhr (for retail, rooftop PV) in ideal locations like Southern California, and it looks like large, industrial/commercial installations are indeed achieving about $.20. Given that solar competes with retail electric rates, this is competitive (meaning a total cost that is lower than paying for utility electricity) without subsidies for many customers in S. California. I should think that with continued growth and competition we could expect to see wholesale panels at $1.50/Wp in perhaps the next 3 years, and complete systems, installed, at $3/Wp ( This story suggests costs of less than $2/Wp in several years), which would give us $.15 and grid parity generally in Southern California and many other places. Of course, as long as we have high subsidies we will see very high growth rates, elevated prices and incredible profits - already we're seeing Chinese solar billionaires. It could take a while. OTOH, silicon is also coming down in cost very fast - big producers like Sharp are being very aggressive about this, in order to maintain profits and market share. Ultimately, of course, it depends on the subsidies. As long as Germany is paying around 40 euro cents per KWH, that's how it will be priced in Germany!

At some point, as volumes grow, Germany will have to drop the subsidy levels, and then the rest of the world will begin to reap the benefit of the economies of scale the Germans have paid for.

Solar costs are dropping about 10% or more per year, which puts it at $.12/kwrh in 5 years, and $.06 in 12 (this is a cost-reduction rate which is reasonably well accepted among experts in the area - actually, it may be much faster, with the rate of change in thin-film PV). Solar installation volumes won’t catch up with wind anytime soon. Instead, in around 7-10 years solar is likely to catch up with where wind is now, which is to say that it will be a clearly up and coming large scale power source.

Please note that prices have not fallen quickly, even as costs have fallen. Why? Demand has really gotten ahead of supply. PV supplies are expanding at about 40% per year, but they are only just now beginnging to catch up with demand, especially in Germany. CA has increased subsidies, and France has raised the price they'll pay for PV power, but Germany is gradually reducing theirs. Lately supply seems to be catching up with demand, and prices started to fall in mid 2006.

PV suppliers can still charge a heckuva markup to ration their product, until supplies catch up in the next year or so. For instance, First Solar has a 55% gross profit margin.

Will solar soon be as cheap as coal even when you don't include external costs, like CO2 and mercury?

Yes, when compared to new coal plants - the cost of new coal plants is surprisingly high. Sadly, old, dirty, coal plants are probably unbeatable.

Could solar supply all of our power?

Probably, but it's marginal costs will rise above those of other sources at a much lower % of market penetration, due to intermittency (daily, seasonal and weather-related). The optimal level is around 35% of the overall market as a rough guess.

What solar's advantages?

1st, solar PV is mostly a retail, consumer side technology, and competes with retail pricing. In the US that means that it's competitive at $.10 per KWH, not $.04-.05.

2nd, it provides peak power, which is more expensive for Industrial/Commercial (I/C) consumers, and hopefully will become so for residential consumers.

3rd, most power demand is daytime, especially when you include the I/C demand which DSM has shifted to the night, and which people generally, and erroneously, include as part of "baseload".

4th, PV costs are plummeting - see the last section.

5th, consumers can buy and install PV with very little cooperation from utilities. If they don't care about selling back to the utility then they can cover roughly 75% of their consumption and rarely have unneeded production.

Our energy economy is awfully large, and we currently invest hundreds of billions of dollars in it. That investment just needs to be redirected. Currently PV is labor intensive, and therefore somewhat more expensive than fossil fuels in most places, but that's changing fast - check out Nanosolar.com.

Can solar supply all we need (is it scalable)?

Yes. The earth receives 100,000 terawatts continously from the sun, and humans use the equivalent of 4.5 terawatts on average (15 TW of BTU’s is the standard measurement. That’s equivalent to 1/3x as many electrical BTU's. For instance, in the US 39 quadrillion BTU's are used to produce 13 "quads" of electricity).

Can solar grow fast enough to matter?

Yes, it's doubling more quickly than every 2 years, and manufacturing capital costs are falling, so that growth rate appears sustainable.

Solar PV grew at a 25% annual rate from 1994 to 2000 (doubling twice), and a 40% annual rate from 2000 to 2006 (doubling three times), and the rate of growth is still accelerating (it’s constrained only by the speed manufacturers can ramp up). In 2007 about 3.5 gigawatts worldwide was installed. Solar is definitely here.

Can solar help with Peak Oil?

Yes. First, liquid fuel can be replaced with utility powered plugins and EVs.

It's interesting to note that at current prices PV is cost-effective on any form of transportation that's in use all day - RV's, trucking, bus, rail, water shipping, even aviation. They're all going to hybrid-electric drive trains (or went long ago, in the case of rail), and PV can provide a surprisingly high % of their power (100%, in the case of container boats).

Water shipping is the easiest form of transportation to power renewably. In fact, container vessels could easily run mostly on solar and wind, due to the very low power to surface ratios of these huge boats.

Is it cost effective?

Sure - it's just straightforward calculations: PV can generate power for the equivalent of diesel at $3/gallon (40KWH per gallon @40% efficiency = 16 KWH/gallon; $3/16KWH = bout $.20/KWH.

Could the big container ships that cross the oceans get a substantial fraction of their power this way?

Let's take the Emma Mærsk. With length: 397 metres, and beam: 56 metres, it has a surface area of 22,400 sq m. At 20% efficiency we get about 4.5MW on the ship's deck at peak power. Now, as best I can tell it probably uses about 10MW at 12 knots (very roughly a minimum speed), 20MW at 15 knots, and 65MW (80% of engine rated power) at 25.5 knots (roughly a maximum). So, at minimum speed it could get about 45% of it's power for something close to 20% of the time, for a net of 9%. Now, if we want to increase that we'll need either higher efficiency PV, or more surface area from outriggers or something towed, either of which will increase costs. I suspect that the outriggers would be very cost-effective, but that would involve some design analysis by naval architects.

On using wind propulsion to cut long-distance shipping costs by 10- 50%:
It's astonishing what can be done with modern materials, computer-aided design, and electronic control systems, to turn the old new again..

Large batteries could be carried for the remainder, to be recharged at frequent port stops, as used to be done with coal. Or, the ships could just slow down - a speed reduction of 25% reduces power consumption by 50%. If this is so easy, why don't we do it already? Because bunker fuel has been so cheap. Now, even at PV's currently relatively high price points it would be cheaper than bunker fuel for propelling ships.

As PV gets cheaper, and oil more expensive, more efficient forms of PV become economic - 10% efficient PV is the cheapest right now, but 40% efficient will get there, and that means a high % of industrial transportation energy from PV. The only exception here is aviation, which is probably limited to getting something around 25% of it's energy consumption from high-efficiency PV.

Is solar being slowed down by the current credit crunch?

Only slightly. One of the largest suppliers has cut it's 2009 forecasted growh from 75% to 58%. One of the largest suppliers has cut it's 2009 forecasted growh from 75% to 58%.

June 20, 2008

Will peak oil force the economy to decline disastrously?

Robert Hirsch is perhaps the most visible advocate of this idea.

He has published several studies. The last one suggests that oil consumption is related to GDP in a 1:1 ratio - in other words, if oil consumption drops by 10%, GDP will as well. Here is what he said recently: "So then if one calculates a range of 2 to 5 percent, some people think the number may be larger, 2 to 5 percent per year increase in oil shortage, one comes up with a rather disastrous indication world GDP will decline by 2 to 5 percent a year in tandem with increasing oil shortages."

Is this realistic?

No. We can see this from economic history: in the US, oil consumption fell by 19% from 1978 to 1983, and yet GDP grew slightly. Similarly, world oil consumption was flat 2004-2008, but GDP growth was quite strong, stronger than for the US (which itself grew 8% 2005-2008, with flat oil consumption). Oil consumption in the US fell much faster in 2008 and 2009 than GDP. Lately, in the 4th quarter of 2009, US oil consumption continued to fall by 1.1% over the previous quarter, while GDP grew by 5.8%.

Hirsch seems to have looked at the relationship between oil and GDP over the last 20 years, noticed that the ratio of oil increase to GDP increase has dropped from the previous 1:1 to roughly 1:2.5 (an analysis which he attributes to the DeutcheBank, but which can be derived straightforwardly from IEA statistics). In other words, in previous decades as the economy grew, oil consumption grew as quickly, while lately less oil has been needed. Hirsch drew the very strange inference that GDP has become more dependent on oil, rather than less.

An important and relevant researcher here is Robert Ayers . We see that he showed that GDP is related to applied energy (exergy), and only very loosely linked to energy, let alone to oil consumption. The research indicates that BTU's only explain 14% of GDP,and that the source of those BTU's can change (coal to oil to wind, for instance). Both energy efficiency and energy intensity can change. Further, oil is only one source of BTU's. Oddly enough, many energy commentators seem to misunderstand Ayre's research, and think that it supports the idea of a strong causal connection between oil consumption and GDP.

US (and world) GDP could grow much more quickly than it's energy consumption (even including electricity). The best example of this is California, which has kept per capita electricity consumption flat over the last 25 years, while growing it's GDP relatively quickly.

Ayres used "exergy services", which are not "very close to BTU parity". Exergy services are work performed. So, for instance, a Prius performs the same work as a similar vehicle with half the MPG, but uses half the BTU's. Strictly speaking, a Prius can perform the same work as a Hummer (transporting people), and use 20% of the BTU's. An EV also does the same work as a Hummer, and uses about 1/3 of the BTU's as the Prius, and 1/15 of the Hummer's...and so on.

Another source for this argument is here: http://www.postpeakliving.com/downloads/Sill-MacroeconomicsOfOilShocks.pdf from the Philadelphia Fed. It concludes that a 10% decline in oil availability would reduce GDP, on a temporary basis, by about a cumulative 2%. This means that GDP growth would be 2% lower than otherwise in very roughly the 2 years following the oil shock, then go back to it's historical growth rate. Interestingly, it finds no impact on inflation.

I would argue that the paper exaggerates the short-term effect, due to an over-emphasis on the 1980 oil shock (which was made much worse by a simultaneous change in Federal Reserve policy under Volcker), and underestimates the long-term effect of a permanent price/supply change due to the cost of imports, but the overall magnitude of the effect would be roughly the same.


A reader asked - does this blog post add helpful information on this subject?

This strongly advocates for the idea that peak oil will "crash" the economy. However, it provides very little support. The discussion simply accepts Hirsch's arguments. It discusses both Hirsch's findings as well 4 other reports. Oddly, three of those other reports actually disagree with Hirsch's thesis of a strong causal connection between oil and GDP - like others, the post seems to misunderstand Ayres in the manner that is discussed above.

Here is an example of an unrealistically pessimistic perspective: "oil is peaking or will soon peak. I don't quibble over 2012 or 2020 — either date is a disaster for humanity because we can't get ready in time." source: http://thefraserdomain.typepad.com/energy/2008/02/yergin-climate.html .

On the contrary, a difference in timing of 8 years makes an enormous difference - an additional 8 years would dramatically reduce the cost and disruptions of the transition away from oil, allowing many car owners, for instance, to smoothly replace their old vehicles with ErEV's. This may explain the blog author's perspective - there seems to a confusion about short-term vs. longterm effects: he assumes a large short-term effect predicts an even larger long-term effect, whereas, as shown in the Philadelphia Fed paper, the reverse is the case: a large short-term effect will generally be followed by adaptation which will eliminate continuing impacts on the economy.

In one place he asks a correspondent to show proof that the US economy can survive a 20% reduction in oil supply. Here are two: the Fed paper above, which shows that a 10% reduction would only reduce GDP by 2%, and the 5 year reduction of 19% discussed above, where GDP managed to grow slightly.

One might ask about imports - hasn't the US out-sourced it's high-energy-consumption manufacturing to China?

Germany is a good counter-example to the argument that OECD countries are showing a higher ratio of GDP to energy because of out-sourcing, given that's it generally understood that Germany hasn't out-sourced it's manufacturing.

We can see it easily in energy use vs. GDP graphs. Till around 1970 it was linked very closely, after 1970 not so closely anymore and after 1990 not at all.

A chart of oil vs GDP would be even more dramatic, given Germany's fast declining oil consumption.
I'm willing to believe that a dramatic decline in energy availability would over-stress our economy, but that would require decline rates much, much higher than we're seeing. For better or worse, we have plenty of coal for the next 30 years; and ASPO projections are for only a 11% decline in all-liquids by 2030.

That's not nearly dramatic enough to cause anything to collapse outside of the very poorest countries.

How do you forsee this transition actually playing out? The DOE has said we need a 20 year head start to mitigate serious consequences of PO. I see almost no evidence of widespread planning for PO and a 20% decline over the next 20 years?

First, that wasn't the DOE, it was a study by Hirsch, paid for by the DOE. The DOE doesn't endorse it's conclusions.

2nd, the study was badly flawed by it's assumption that liquid fuels had to be replaced. It didn't consider EVs at all.

3rd, a transition has indeed begun. It started roughly in 1994, when the Clinton administration started the PNGV program, which led fairly directly to the Prius. Now, a new generation of EVs has been developed, and are coming out in 2010. We could ramp up the Volt and the Leaf to very large numbers in 10 years.

Are we running out of coal?

One could ask several questions related to coal.

First, why ask the question? Don't we want to reduce or eliminate coal because of climate change?
Yes, we do. For better or worse, however, it's important to be realistic about the availability of coal. If we're not running out of it, we have to make a conscious decision to eliminate it, not rely on geological limits. Also, it's good to know whether or not we'll face energy shortages due to coal scarcity. If not, we have more options - if we face an emergency, we will have the option of using coal. Of course, that may be expensive and difficult to do without excessive CO2, but options are usually good to have. In that vein, we should note that if we have coal to spare it's actually easier to sequester CO2 - sequestration consumes a fair amount of energy, and if things are tight it will be much harder to pay for something whose necessity isn't obvious to all .

So, do we face limits on our coal production, as a practical matter?
No. Coal is unlike oil - we have enormous reserves, we know where they are, and in many cases there is no significant increasing marginal cost to their extraction, except for temporary costs of expansion.

Do higher energy prices raise the costs of extracting fossil fuels?

It depends on the individual case. Coal has a high E-ROI. For instance from a recent survey by Heinberg ( from http://www.theoildrum.com/node/4061 ): "Consider the case of Massey Energy Company, the nation’s fourth-largest coal company, which annually produces 40 million tons of coal using about 40 million gallons of diesel fuel—about a gallon per ton" .

That's a very high E-ROI: a gallon of diesel is about 140K BTU's, and a ton of coal is very roughly 20M (see http://www.uwsp.edu/CNR/wcee/keep/Mod1/Whatis/energyresourcetables.htm ), so that's an E-ROI about 140:1! Now, diesel costs very roughly 10x as much per BTU (reflecting it's scarcity premium), so the cost ratio isn't quite as favorable, but it's still well above 10:1. So, the price of diesel rises by $1 (roughly 25%), and the cost of coal rises by $1, or very, very roughly 2% - not a big deal. Also, we should note that coal mining (and transportation) is often electric even now (especially underground), and that it's pretty amenable to further electrification - in other words, coal mining can power itself using a small fraction of it's production.

Will higher coal prices make a substantially larger fraction of the coal available for extraction?

Yes, but only slightly higher prices are needed. Here's what Heinberg has to say: "if Montana and Illinois can resolve their production blockages, or the nation becomes so desperate for energy supplies that environmental concerns are simply swept away, then the peak will come somewhat later, while the decline will be longer, slower, and probably far dirtier.". The Montana "production blockages" he talks about are relatively trivial, and Illinois doesn't really have them. The pollution he refers to is CO2 and sulfur - the sulfur costs about 2 cents/KWH to scrub, and the CO2 might cost out at $80/ton of CO2, which IIRC would add about $30/ton of coal, should we choose to internalize this cost.

Illinois coal simply couldn't compete with Powder River coal with a 2 cent premium for sulfur scrubbing - it's as simple as that. UK and German coal became a bit more expensive, and they couldn't compete with cheap oil.

The same general rule applies to US, UK and European coal: only under Business As Usual is coal declining - people who say otherwise are misinterpreting the data. I discussed this at length with one the often-quoted authors on this subject, David Rutledge, and we came reasonably close to some kind of agreement on this. If there are serious energy shortages, the old reserve numbers will apply, for better or worse.

So, would a doubling in coal prices substantially increase recoverable coal reserves?

Yes. Now, "recoverable" is tricky: the normal distinction used by the USGS is "economically recoverable" - that includes economic assumptions, and Illinois coal (and much other coal in the world), at a slightly higher cost as discussed above, is currently uneconomic. But, that's under Business As Usual - if we have a true energy scarcity, Illinois coal will very, very quickly become economic.

What about the "Law of Receding Horizons"?
That applies only to low E-ROI sources of energy. Coal is high E-ROI, unlike Canadian bitumen (tar sands) or Colorado kerogen (oil shale). I would note that the importance of this "law" has been enormously exaggerated, as it's confused with temporary capex issues and scarcity premia, which are allocating temporarily scarce capital resources.

More coal gets extracted from the ground each year as measured in tons, but hasn't the quality declined so much that net energy content is lower now than 10 years ago?

Powder River coal is lower energy density (sub-bituminous), but it's sufficiently cheaper to mine that the difference doesn't matter. Again, this is a purely economic shift from Illinois coal, which is higher energy density (bituminous). This shift has caused endless confusion to analysts unfamiliar with the coal industry (OTOH, people inside the industry understand this).

Aren't coal prices rising?

In many cases, this is due to the temporary costs of expansion. Oil & gas are much more expensive per BTU due to a scarcity premium, and so demand has increased for coal. Most coal is on long-term contract, not on the higher spot market (unlike oil). But it's important to be clear that in many places, like the US, the long-term marginal cost of extraction isn't really increasing, as it is for oil.

Should we build new coal electrical generation plants?

Yes. I used to think that we should only build new plants if they included sequestration. Lately, I've started to think that that's unrealistic, given the glacial pace of development for sequestration. At the moment, much of our marginal generation comes from the very dirtiest, least efficient coal plants. It's unlikely that we'll be able to build enough wind and solar generation to replace all coal and natural gas plants for at least 25 years. New wind production will largely eliminate natural gas consumption before it affects coal. The marginal cost of NG KWH's is much greater than for coal, plus it's much easier to finetune NG production around wind's variations. Even at night, long-distance transmission will allow heavy NG users to preferentially buy wind-power (whose marginal cost will always be lower). In other words, an area with excess wind production which has zeroed out it's NG will sell the excess before turning down coal production.

Consideration should probably be given to building new, efficient coal plants to replace the least efficient coal plants - that would substantially reduce emissions, because coal will be around for a while. Now, that wouldn't make sense if we can get behind Al Gore's challenge to eliminate all CO2 emitting generation in 10 years. Gore's proposal gets it just right, but will require a lot of education and selling to the public.

Consideration should probably be given to building new, efficient coal plants to replace the least efficient coal plants - that would substantially reduce emissions. These might include underground coal gasification , which would also expand usable coal resources. Now, that wouldn't make sense if we can get behind Al Gore's latest challenge to eliminate all CO2 emitting generation in 10 years. Gore's proposal gets it just right, but will require a lot of education and selling to the public.

Is Coal-to-Liquids (CTL) feasible?

Yes, but projects tend to be large and expensive, and would be CO2 intensive. That means that investors would like federal loan guarantees, but that such guarantees are unlikely. Nevertheless, CTL is cost-effective even with fairly high carbon taxes, with oil prices at anything like the current level , and projects are slowly moving ahead . The best path would be CTL with CO2 sequestration - this would deserve guarantees.

Is oil-shale feasible?

With oil over $100/barrel, the answer is almost certainly yes. There's something like a $50T incentive there for exploitation, and somebody could make something work. In that way its similar to the Bakken basin, which may have 400B barrels of true oil, though much, much less is economically recoverable right now.

Kerogen has the advantage of not needing hydrogenation (which is needed for both tar-sands and CTL), which requires expensive natural gas or a combination of added energy and water (also a significant cost).

On the other hand Green River kerogen (mis-named oil shale) is low density, and a pain to dispose of after burning (it expands). That's why even low-value coal is more attractive for burning (which is what the Estonians do with it). That's also why retort conversion to oil (the conventional method) is unattractive, and why Shell is considering in-situ conversion instead.

Further, kerogen requires a lot of energy to upgrade - the Shell process looks very much like a very slow, inconvenient method of converting electricity to oil (kind've like ethanol, except ethanol mostly uses natural gas). All in all, it's not going to happen cheaply or at large volumes any time soon.

I wouldn't reject it, as it is extremely valuable to have diversity in energy supply, but it would be much better to concentrate on electrifying our vehicles ASAP. In other words, we can't let it distract us from the main and best solutions available to us, which are, unfortunately, inconvenient for oil & gas and car companies.

Do we have enough energy in the long run?


This raises a lot of issues, including scalability, E-ROI, cost, capital expense, infrastructure, convenience, reliability, storage and portability. I believe it’s established that wind and solar are scalable, and have good E-ROI, and that the other issues can be handled in various ways.

The other measures are a long discussion. Here’s a quote from a source with credibility in this area: Kenneth Deffeyes, author of both "Hubbert's Peak: The Impending World Oil Shortage" and "Beyond Oil: The View From Hubbert's Peak," writes that "there are plenty of energy sources other than fossil fuels. Running out of energy in the long run is not the problem. The bind comes during the next 10 years: getting over our dependence on crude oil."

Mathew Simmons says: "I happen to think the world can make the transition into what we might call the post-Saudi oil era in some very rational way that will limit economic disruption. As a perpetual optimist, I believe the world still works beyond Peak Oil. While oil prices in this new world will obviously rise, this rise can be a blessing, not a curse. Far higher oil prices make all other forms of energy more competitive and spur on energy research programs that might discover some real long-term fixes."

I envision a grid powered by a complementary mix of sources in roughly the following proportions: 25% wind, 25% solar, 20% nuclear, 20% smaller renewables (hydro, geothermal, wave, etc) 10% various storeable fuels such as gasified biomass, synthetic hydrocarbons, hydrogen, ammonia, etc. Nuclear could be eliminated if desired, though at a significant price in transitional excess CO2 emissions, cost and reliability.

Introduction, and overview


I've been interested in energy issues ever since I read the first report from the Club of Rome. I've been a management consultant for 30 years, and our group, among many other things, assists with energy conservation and purchasing. Along the way, I've learned some answers to some of my energy questions, and I'd like to share them. I'll start with some basics, and as I have time I'll add more detail to them, as well as answer additional questions. The following provides an outline - please see other posts for more detail on individual points. And always, keep in mind that "Predictions are hard, especially when they're about the future." (Yogi Berra). That means, don't rely on anyone (including me) as an Authority: use this information to inform and sharpen your own judgement, and come to your own conclusions (especially when it comes to life decisions and investment decisions!).

The first question is: what are the most important upcoming energy issues?

Answer: I think Peak Oil (generally speaking, the idea that oil production is now, or soon will be inadequate for our needs in a way that is irreversible, and will only get worse) is real - see "What can we do about disappearing oil imports? for further discussion. I also think anthropogenic climate change is real, and rather more important than Peak Oil.

What will Peak Oil look like?

I think current oil prices (they're about $140 right now, but I have in mind anything that stays consistently above $100) will shave off the peak in oil production and consumption, and put world oil consumption in a mild decline, which is all to the good. I suspect that we'll be in that mode for at least 10 years, which will give us time to begin to replace oil with renewable electricity.

I think people badly underestimate the effect of prices over $100, and the importance of the crash in oil services industries in the 90's. For instance, the US is likely to grow in production, or at least maintain level production. Other countries which are peaking, such as Mexico, are probably doing so due to underinvestment. Estimates that maximum world production will peak in 2-4 years make sense to me. On the other hand, on the whole I estimate that the decline after the peak will be slow, due to enormous growth in drilling over time, for at least 10 years.

Could we repeat the experience of the 70'? In other words, could this just be another cycle of commodity boom and bust?

Yes, it could, but if it is, the cycle will take at least as long as it did then. In other words, very high prices are likely to last at least 10 years. After that, prices could crash if governments, private firms and individuals react strongly to the combination of Peak Oil and climate concerns, and aggressively replace oil with electricity.

How will Peak Oil affect the economy?

The gradual reduction in oil consumption won't hurt the economy much, but the transfer of wealth to oil-exporters will hurt a great deal. I think the transfer of wealth problem is much more important than the reduction in oil consumption, per se. A reduction in oil consumption would be relatively trivial over a sufficiently long period for substitutes (say, from ICE to PHEV/EV) - the shorter the period, the greater the disruption of change.

But, the transfer of wealth is big. At the very least it creates enormous debt, and transfer of ownership of assets, such as corporate stock. If the recycling of petrodollars isn't handled well (and so far it's been mediocre - Collateral Debt Obligations, the derivatives at the heart of the Mortgage Crisis, were one such instrument of recycling), then there is real potential for financial disruption.

The likeliest outcome is some combination of somewhat higher inflation and somewhat lower GDP growth than would have been the case. There is a real risk (perhaps 10%) of a dollar crash due to a sustained current account deficit, and a roughly similar risk of a short term event like that of 1979, only worse, due to a crisis in the Persian Gulf.