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The FT's Martin Wolf does not believe in peak oil

In his new column on energy, The best hope for energy security, Martin Wolf, the senior economics editor of the Financial Times, after his earlier column  that noted the expected growth in world energy demand, takes a look at how supply can provide for such demand. He makes the explicit hypothesis in this article that he will not worry about global warming (promising to come back to the issue specifically in a future column), and looks at the availability of energy sources.

The conclusion is pretty explicit:

Remember that this argument ignores the question of climate change. It asks whether the Malthusians who argue that the world will soon run out of fossil fuels allow the Malthusians who worry about the damage to the atmosphere to cheer up. The answer is an unambiguous no. It will be perfectly possible to run a fossil fuel economy for many decades at prices that are likely to be substantially lower than those of recent times.

...most analysts argue that reserves tell one little about available supplies, that higher prices and innovation generate greater extraction from existing fields, that discovery of new (if smaller) fields is continuing and, most important, that unconventional oil resources are still to be exploited (see chart). So even if production of conventional oil were to peak, the oil era would not be over. The question is rather one of price. The potential at a price of $70 a barrel seems huge. Many argue that the price needed to bring forward additional supply is much lower.

Nor does the end of oil mean the end of fossil fuels. Gas and, above all, coal are even more plentiful. Some would counter that petroleum is a unique source of high quality energy for transportation (which itself accounts for one-fifth of commercial energy use). But it is possible to convert coal and natural gas into "syngas" (synthesis gas) and then into liquid fuels. The question is one of cost. The answer is that this would be more expensive than conventional oil, but not prohibitively so.

He provides the following graph:


According to this, long term $40 oil will be enough to provide us with plentiful new sources of oil, like oil sands, ultra deep offshore, and improved recovery from existing fields. There are a number of reasons why this argument is suspect:

  • as has been pointed out before, this relies exclusively on the numbers from BP or the IEA, numbers which are highly suspect in many ways. (see this diary - Official US energy statistics are full of shit) -  about the latest EIA outlook - note that it's not the same organisation, but their publications - and biases -  are similar in many ways. Similarly, BP's numbers rely exclusively on official government data from countries with zero transparency);

  • somehow, the cost threshhold for these new technologies always seems to be a few dollars off current prices. Back in 2001, when I first studied Canadian oil sands, their cost was evaluated to be in the $15-25 range - i.e. barely profitable at then prevailing prices. The same applies today: they would be barely profitable at the suggested medium term prices ($40/bl). This leads to think that these prices are consistently underestimated or, more likely, that they include a large chunk of energy- and commodity-linked inputs whose prices are themselves increasing... thus their actual net cost increases as energy prices increase.

    In a diary back last September, I noted that estimates of oil production costs were going up significantly, both for the average cost and the marginal cost (the most expensive barrel needed to fulfill demand, and the one ultimately driving minimum oil prices):


  • as noted yesterday, and as noted in reaction to his  earlier article on energy demand, the implicit link between progress, GDP growth and energy demand is taken - wrongly - for granted, and little thought seems to ever be given to how to slow demand growth, and then reduce demand without damaging our standards of living. Instead, only the question of how to find the supply is asked. The conclusion that we can go on for "many decades", even if true, seems to suggest that the problem that need to be resolved is only what happens during our lifetime, and not what happens to our children and grandchildren.

The article contains the usual casual dismissal of renewable energy, which, as it cannot provide the whole solution, is immediately discounted as useless. Nuclear is put in the same sorry bag.

What role then might be played by nuclear and renewables in such a "business as usual" scenario? "Marginal" seems to be the answer. The big points are that renewable energy is expensive, nuclear energy is controversial and overall demand is set to grow substantially.

There are a number of depressing things to read here:

  • the stupid argument that renewable energy makes a small part of today's supply and therefore cannot become a big part

  • the even sillier argument that because it cannot solve everything, it can be ignored
  • the use of totally unrealistic price hypotheses to demonstrate that coal and gas are cheaper. $4/mbtu for gas is a price that has not been seen for a while (see below, from freecharts.com) and is absolutely unlikely to be for a long time, so it's pretty dishonest to base comparisons on such a price

  • more subtly, even if we accept not to take into account the costs of pollution and global warming into consideration, the choice of a high - market driven - discount rate for all technologies structurally favors those technology with lower investment costs and higher running costs, i.e. hydrocarbon burning plants. Imposing such financing "neutrality" on market rates rather than the lower rates a State-backed utility company could obtain is really an ideological choice that favors carbon burning on a massive scale. I can only refer again to this diary: The real cost of electricity - some numbers

So this story perpetuates all the feelgood stories that maintain the pretense that there is enough oil for the foreseable future, not to mention even more gas and coal, and that alternatives energies are unrealistic and unneeded - and thus that we do not need to do anything - and in particular we don't need to think about conservation and about demand.

I'll wait for his article on global warming to make too rash a conclusion, but this article is not reassuring, to say the least, that we're ever goping to get our elites to take energy issues seriously.

Editorial Notes: The article in the FT is behind a paywall. However it is posted by The Australian today as Old king coal to reign as fossil fuel continues to fire the future. UPDATE: Original on the FT site now seems to be available. Jerome's piece is also posted on Daily Kos as All is well. Oil is plentiful!. UPDATE #2: Inserted the correct graph of gas prices in the last part of the article. -BA

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