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Energy price & supply projections - how good are your assumptions?

The energy crises in the 1970s were a major shock to the US. Unfortunately, 20 years of plentiful supplies and low prices lulled us back into a state of complacency. Recent gasoline and natural gas price spikes have provided another wake up call and everyone wants to know what is going on and what does the future hold.

As with many other issues that divide the country, we have small groups of vocal optimists and pessimists at the extremes with the majority in the middle in a state of confusion or apathy. The optimists are confident that higher prices will stimulate enough new supply and demand reductions to satisfy all reasonable needs without major problems. The pessimists believe we are headed for shortages, huge price spikes and massive turmoil. Which opinion is correct?

The optimists are correct in their assumption that high prices will stimulate additional exploration, recovery of resources that are uneconomic at lower prices, and widespread conservation efforts. However, I believe they are wrong in assuming that normal market response will be able to resolve the price and supply problems without major disruptions. Their blind faith in the power of market forces ignores hard constraints that limit what the market can deliver. This unrealistic optimism is dangerous because it gives people hope that our energy problems are only temporary, which helps rationalize procrastination.

We must address 2 major threats now. The first is the U.S.’s vulnerability to disruption of oil imports. Large cuts in oil supply would devastate our economy and create serious health and safety problems. The second threat is the imminent collision between growing demand and flat or declining oil supply. The data show that global oil production is peaking soon and natural gas probably is not far behind. Our current lifestyle is unsustainable and we soon will be forced to make radical adjustments. Wishful thinking will not change reality and further delaying action will make the coming crises worse.

This paper is another attempt to shake this irrational optimism. I believe the best way to do so is to evaluate the assumptions on which this optimism is based. I think it is time to focus the debate on that issue – i.e., what are reasonable assumptions? The optimists and pessimists are basing their positions on significantly different sets of assumptions. All participants in these debates would benefit from taking a step back and revaluating their assumptions concerning the primary drivers of energy supply, demand, and pricing.

...The main focus of this new paper is oil, the Achilles heel of the US and much of the world. Natural gas, coal, renewables, and energy carriers (i.e., electricity & hydrogen) will be addressed in future installments. The following is a series of what I believe are reasonable assumptions to use in planning the future. ...

Assumptions Related to Supply

1. The downward trend in net supply additions will not reverse
2. Production trends indicate we will hit peak oil production very soon
3. Equipment and labor constraints will preclude expanding exploration, production, transportation, and refining oil and NG fast enough to avoid major supply shortages
4. Net yield of useful fuels from new discoveries and unconventional oil sources will be far lower than expected
5. Renewable resources cannot produce enough energy to replace current oil consumption
6. Oil reserves probably are better and worse than one would believe from published statistics
7. OPEC will not increase output sufficiently to support projected global demand growth
8. Total output of non-OPEC producers will continue to decline
9. Political instability and other “temporary” problems will cause periodic supply disruptions
10. Competition from other countries will limit how much energy the US can import

Assumptions Related to Demand or, More Accurately, Consumption

11. No country can grow or maintain a strong economy without large amounts of oil
12. Liquid fuels for transportation are absolutely essential for health and welfare in the US
13. Dramatically increasing the energy efficiency will require massive quantities of capital
14. The biggest barriers to increased efficiency are behavioral, not technological

Assumptions Related to Balancing Supply and Demand

15. Peaking of oil and/or natural gas production isn’t the problem. The gap between production and demand is the problem
16. Small supply shortages will yield major problems
17. Normal supply/demand balancing mechanisms will break down when large shortage appear
18. Raising prices is the most effective way to reduce demand, but our leaders will not take this path until all other options fail
19. Competition for oil and natural gas will intensify and could get very ugly
20. The earth cannot sustain its current population in reasonably acceptable living standards without large quantities of fossil fuels

Conclusions – What Should We Do Now

The debate over when oil production will – or did – peak is a distraction that needs to end immediately. There is no doubt that production will peak well before demand stops growing and major lifestyle changes will be needed to bring supply and demand into balance. We will face major upheavals as we adapt to post-peak production world. While we need optimists to build the future, we need them to focus on changing unsustainable practices, not keeping people on a path that can only end in even more pain and suffering. We need to start dealing with how to achieve sustainability rather than arguing over how serious the problem is.

The optimists argue that we don’t need to worry or do anything radical to prepare for shortages and price spikes as market forces will eliminate the problems quickly. If we do nothing and they are wrong, the impact will be devastating to the world. However, following the pessimists’ recommendations – i.e., immediately implement a massive efficiency improvement and alternative fuels program – does not have any significant downside. In fact there are several major benefits to following these recommendations including job creation, energy cost savings, reduction in harmful emissions, improved balance of trade, improved industrial productivity, and improved comfort. Why is this debate still going on?
Sustainability is mandatory, not optional. Our current lifestyle is unsustainable and by definition, no one can live an unsustainable lifestyle indefinitely. The smart move is to start trying to change ASAP. The transition will not be easy or pleasant, but it will be made one way or another. Delaying action will limit options and make the task harder – you seldom have the luxury of being picky when you are in the middle of a crisis. Failure to deal with our energy problems now increases the likelihood that we will see more of these extreme crises. Procrastination that makes the problems worse – i.e., makes war or famine more likely – is not admirable, desirable, or smart.

Editorial Notes: The original articles are longer and go into much more depth: Part 1 / Part 2 More on author Moran. -BA

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