Category Archives: Energy

Remember Peak Oil?

It’s difficult to overstate just how panicked the world was over oil prices a decade ago — stratospherically high oil prices. We were, most policy makers and economists believed, in an energy crisis — the result of a desperate shortage of petroleum that could only be solved with cellulosic ethanol and windmills. During this “energy crisis” of 2006, we wrote the following Wall Street Journal commentary, hoping to calm fears of peak oil and other such nonsense that often accompanies big price swings. We said oil prices likely would recede. We said vast stores of oil, especially in shale, were about to be found and extracted. We said alternative energy schemes in part justified by high oil prices were a bad idea. We also said a big financial disruption was likely. The macro environment is very different today — prices are low instead of high; the dollar strong instead of weak. In fact, we’ve been telling clients for the last year that today’s environment looks much like the late 1990s: a strong dollar, plummeting energy and commodity prices, soaring prices for abstract technology firms like Internets and bio-techs, and trouble in emerging markets. We reprint this column as a reminder of the economic fundamentals…and energy’s abundance.

The Elephant in the Barrel

The Wall Street Journal — August 12, 2006

by Bret Swanson

Nigerian pipeline explosions, Chinese demand, Arab angst, Venezuelan volatility, peak oil and a Putin premium: These are the usual explanations for high petroleum prices. But our discussion of the “energy crisis” has ignored the elephant in the barrel — monetary policy. Today, high oil prices are the backdrop for Middle Eastern chaos and calls for bad energy policy. It was much the same in the 1970s, when high prices yielded similar violence against our fellow man and against economics. This is no coincidence. A weak dollar is the culprit, now as then.

When the Yom Kippur war was launched in October 1973, the price of oil had been rising for two years. For decades, oil’s price had been remarkably stable, like the prices of most other goods. But in 1971 Richard Nixon broke the dollar’s links both to gold and to key foreign currencies. Bretton Woods — and the dollar — collapsed, and a decade-long inflation began.

By July 1973, gold had deviated from its long-time price of $35 per ounce and soared to $120. Oil also responded quickly to dollar weakness and doubled in price by the early autumn. The Mideast nations complained that the Western oil companies were accumulating massive “windfall profits.” Having negotiated agreements in the previous environment of price stability, the Arabs and Persians were stuck with much lower prices and royalty payments. You know the rest of the decade’s news: embargoes, gas lines, inflation, wage and price controls, hostages.

Today, commodity prices across the board, from coffee to carbon fiber, remain near 25-year highs. High oil prices are not a unique phenomenon, but just another commodity whose price is determined primarily by the value of the dollar. Expensive oil isn’t exclusively a monetary event, of course: Risk and demand matter, too. But in comparing oil to other commodities, especially gold, we find that elevated risk and demand explains only $10-$15 of the higher oil price; $30 of the price is explained by a weak, inflationary dollar. The entity most responsible for expensive oil is thus the Fed.


Quote of the Day

“In the end, perhaps the most misleading claim of the peak-oil advocates is that the earth was endowed with only 2 trillion barrels of ‘recoverable’ oil. Actually, the consensus among geologists is that there are some 10 trillion barrels out there. A century ago, only 10 percent of it was considered recoverable, but improvements in technology should allow us to recover some 35 percent — another 2.5 trillion barrels — in an economically viable way. And this doesn’t even include such potential sources as tar sands, which in time we may be able to efficiently tap.

“Oil remains abundant, and the price will likely come down closer to the historical level of $30 a barrel as new supplies come forward in the deep waters off West Africa and Latin America, in East Africa, and perhaps in the Bakken oil shale fields of Montana and North Dakota. But that may not keep the Chicken Littles from convincing policymakers in Washington and elsewhere that oil, being finite, must increase in price.”

— Michael Lynch, New York Times, August 24, 2009

Quote of the Day

“The largest scientific and economic questions are being addressed by others, so I will confine myself to reporting about how all this looks from the receiving end of the taxes, restrictions and mandates Congress is now proposing.

“Quite simply, it looks like imperialism. This bill would impose enormous taxes and restrictions on free commerce by wealthy but faltering powers — California, Massachusetts and New York — seeking to exploit politically weaker colonies in order to prop up their own decaying economies. Because proceeds from their new taxes, levied mostly on us, will be spent on their social programs while negatively impacting our economy, we Hoosiers decline to submit meekly.”

— Gov. Mitch Daniels of Indiana, on the cap-and-trade tax, May 15, 2009

The world’s greatest energy analyst…

…with yet another incomparable, iconoclastic article. Peter Huber gives us the facts of life on carbon, oil, coal, nuclear, wind, and solar, with a grasp of economics no other energy commentator can match.

Shoveling wind and sun is much, much harder. Windmills are now 50-story skyscrapers. Yet one windmill generates a piddling 2 to 3 megawatts. A jumbo jet needs 100 megawatts to get off the ground; Google is building 100-megawatt server farms. Meeting New York City’s total energy demand would require 13,000 of those skyscrapers spinning at top speed, which would require scattering about 50,000 of them across the state, to make sure that you always hit enough windy spots.

But even though the world will continue to use massive amounts of carbon, we also will be able to mitigate its effects or sequester it far more rapidly than most believe.

If we’re truly worried about carbon, we must instead approach it as if the emissions originated in an annual eruption of Mount Krakatoa. Don’t try to persuade the volcano to sign a treaty promising to stop. Focus instead on what might be done to protect and promote the planet’s carbon sinks—the systems that suck carbon back out of the air and bury it. Green plants currently pump 15 to 20 times as much carbon out of the atmosphere as humanity releases into it—that’s the pump that put all that carbon underground in the first place, millions of years ago. At present, almost all of that plant-captured carbon is released back into the atmosphere within a year or so by animal consumers. North America, however, is currently sinking almost two-thirds of its carbon emissions back into prairies and forests that were originally leveled in the 1800s but are now recovering. For the next 50 years or so, we should focus on promoting better land use and reforestation worldwide. Beyond that, weather and the oceans naturally sink about one-fifth of total fossil-fuel emissions. We should also investigate large-scale options for accelerating the process of ocean sequestration.

Carbon zealots despise carbon-sinking schemes because, they insist, nobody can be sure that the sunk carbon will stay sunk. Yet everything they propose hinges on the assumption that carbon already sunk by nature in what are now hugely valuable deposits of oil and coal can be kept sunk by treaty and imaginary cheaper-than-carbon alternatives. This, yet again, gets things backward. We certainly know how to improve agriculture to protect soil, and how to grow new trees, and how to maintain existing forests, and we can almost certainly learn how to mummify carbon and bury it back in the earth or the depths of the oceans, in ways that neither man nor nature will disturb. It’s keeping nature’s black gold sequestered from humanity that’s impossible.

Free Thinker Dyson

This profile of Freeman Dyson is must reading for all those who admire creative — and courageous — thinking. It’s even more important reading for those who tend to toward group-think.

Beyond Dyson’s scientific genius, John Tierney admires his “humanism and optimism.”

Squanderable abundance

Energy conservation? Forget it. The goal, says Bob Metcalfe, should be to produce “squanderably abundant, cheap and clean energy.”

That’s exactly right. No one can understand the energy debate — or any technology or policy debate, really — without understanding this fundamental Metcalfe insight, which is also the big theme of the best book on energy, Peter Huber’s and Mark Mills’ The Bottomless Well.

Squanderable abundance. Supply creates its own demand. That is the motto of this blog.

Quote of the Day

“Cap and trade, in other words, is a scheme to redistribute income and wealth — but in a very curious way. It takes from the working class and gives to the affluent; takes from Miami, Ohio, and gives to Miami, Florida; and takes from an industrial America that is already struggling and gives to rich Silicon Valley and Wall Street “green tech” investors who know how to leverage the political class.”

The Wall Street Journal, March 9, 2009

Quote of the Day

Environmentalists love the idea of milking Mother Nature for power, but they hate the hardware needed to make it work: huge windmills, acres of solar panels, high-voltage transmission lines to connect them to the places where people live. Of course, they still totally, absolutely, wholeheartedly support green energy — as long as it gets built where someone else goes yachting.

— editorial, The Wall Street Journal, January 24, 2009

Getting real about oil

Mark Mills reminds us of the fundamental physics of energy and why the difference between atoms, electrons, and photons is so important. 

But in the world of atoms and aircraft, not bits and YouTube, things tend to expand, not shrink. The energy needed to move a ton of people, or heat a ton of steel (or silicon), is fixed by properties of Mother Nature. Moving 1,000 pounds 1,000 miles at 50 or 500 mph has a specific, knowable, and immutable minimum energy requirement, dictated by laws of gravity, inertia, friction, mass, heat transfer, and the like. An aircraft’s or car’s engine is not about to shrink in size a thousand-fold and be etched onto a sliver of silicon, or increase in power similarly.

Pearls of Unwisdom

Steve Pearlstein of the Washington Post is on Charlie Rose right now saying the U.S. trade deficit was a chief cause of the present financial crisis. He’s got it just backwards. It was our overreaction to the innocuous trade deficit — namely, inflationary weak-dollar easy credit, designed in part to close the trade gap — that brought us here. The weak-dollar Fed juiced oil and home prices. High oil prices boosted the trade deficit — just the opposite of the weak-dollar advocates‘ intent. Skyrocketing home prices required, and were fueled by, hyper-aggressive and unsustainable mortgage lending.

Pearlstein then said we needed an international regulator to stop this from happening. This entity should have stopped the U.S. from buying so much from China. Wrong again. We needed the Fed and Treasury to maintain a stable dollar. A stable currency is the ultimate financial regulator and disciplinarian. If we had ignored the trade deficit and focused on stable money, there would be no financial crisis.

Nobel Al to the Rescue

What should be first on a new President Obama’s agenda? Merely an 

emergency rescue of human civilization

That’s all.

You can already see what’s going to happen. They’re going to put up some solar panels in the Arizona desert and some windmills in North Dakota. Then, after the Sun changes cycles and we get global cooling in about 10 years — as many scientists predict — Al’s going to crow like the rooster, thinking he saved the world.