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(Interviewed by Louis James, Editor, International Speculator)
L: Doug, in
our conversation last week about Syria, we talked about
implications for the oil business, and you mentioned Peak Oil. That's a
controversial subject to some, and we've had questions about it. Care to
comment?
Doug: There
shouldn't be any controversy, as the facts are clear – and there
wouldn't be any, if so many people weren't so obstinate about
misunderstanding plain English. For instance, I was just reading an article
the other day, entitled Whatever Happened to Peak Oil?, in which the
writer comes across as if not an idiot, then at least intellectually dishonest.
He does so first by his reference to an apocalyptic religious prediction,
where he implies that those who credit M. King Hubbert's Peak Oil theory
are like foolish religious fanatics, as opposed to analysts of a possible
geological reality, and second – and more important – by showing
a complete failure to grasp the very simple essence of the Peak Oil argument.
L: Which is?
Doug: In essence,
that there is a finite amount of conventional light, sweet crude in the
earth's crust. That statement may not seem like a cosmic breakthrough, on its
face. After all, if you have a 42-gallon barrel of oil and you consume 21
barrels, it's simple arithmetic that 21 barrels remain.
On the other hand, wealth is something men create, not something that they
simply find. That philosophical fact, however, doesn't really have much to do
with Peak Oil theory.
This theory is widely misunderstood, even by
economically literate people, oddly enough. Such people rightly point out
that the world will basically never run out of anything, as long as the
market is free to set prices. Decreased supply increases prices, which
simultaneously causes people to economize, and incentivizes new producers and
new alternatives to enter the field. That's absolutely true, but irrelevant
to Hubbert's point, which was strictly a geological
one: The number of conventional deposits of light, sweet crude in the US are
finite, and the search for them has been more thorough than anywhere else in
the world, and a documented decline in discoveries had to lead to a
documented decline in production – of this particular kind of oil.
Peak Oil is a major reason why, in spite of a rapidly
cooling global economy, oil prices are still near historic highs, at over $95
a barrel. In part, this is due to so-called "quantitative easing"
– i.e., money-printing – but it's also clearly evidence of
the essential correctness of Hubbert's theory,
which accurately predicted the peaking of light, sweet crude-oil production
in the US circa 1970. It was not only technically daring, but occupationally
and politically dangerous in the '50s for Hubbert
to forecast that the US, and then world production, would go into decline.
And he was right.
L: Oil sands
were not part of his consideration.
Doug: Right. To
my knowledge, he never said anything about oil sands, shale oil, oil from
coal, heavy oil from Venezuela, or deep ocean drilling off the coast of
Brazil or other places. He did not say, and Peak Oil does not mean, that the
world is going to run out of oil. All he said was that the lowest-hanging
fruit was picked – the production of that particular kind would go into
permanent decline. Technology is constantly pushing both production costs lower
and expanding economic supply. But the simple fact that the low-hanging fruit
is being depleted at an accelerating rate worldwide is simultaneously pushing
costs up. In fact, for many years – especially the '0s and '60s –
people discovered a lot more oil than the world produced. But since 1980, the
world has produced more oil than people discovered. Petroleum geos believe
there are about two trillion barrels of recoverable conventional oil, and we
now appear to have produced a bit over half of it.
Unconventional oil supplies of all types could easily
be ten times as great as the light, sweet crude supplies we're depleting
– but that's simply not relevant to Hubbert's
theory, which was a geological statement, not an economic one.
L: There's no
real argument on this point, right? US light, sweet crude production did
peak, just as he foresaw.
Doug: That's
correct. And he also predicted that in about 2005-2010, light, sweet crude
production would peak globally – and it has.
A lot of people pooh-pooh Peak Oil saying, quite
correctly, that we'll never run out of oil. That's true partly because of the
huge amounts of unconventional oil available, partly because of constant
improvements in technology, and because of the basic economic arguments I
mentioned earlier. But again, these things are irrelevant to Hubbert's point and its documented correctness.
The take-away point from all this is that the cost of
oil production has likely found a new floor. Peak Oil doesn't mean we run out
of oil – only that the cost of production, which now often runs about
$40 per conventional barrel and up to $80 per unconventional barrel, all-in,
is never going back down to where it was. Prices can never go back to where
they were either, because if they drop – or are forced by law – below
the cost of production, there won't be any production.
Even considering the current economic downturn, which
is in fact the Greater Depression beginning, the developing world, especially
the Chinese and Indians, is going to be using a lot more oil. It's just going
to have to come more and more from higher-cost, unconventional sources. It's
worth noting that oil consumption in the developed world – North
America, Europe, and Japan – is flat and has been for years. The growth
in consumption – and there will be growth – is coming from China,
India, and the rest of the world, where 80% of the people are.
L: Is there
really no chance of ever running out? Even the unconventional stuff must be finite…
Doug: No –
or rather, it's an academic point. As a matter of basic science, oil is
really a simple chemical. It's just carbon, hydrogen, and oxygen, all of
which are common and abundant on our planet. We can make oil in the lab now;
and at high-enough prices, it would be economic to make oil products in
chemical plants, out of these three basic elements. If
we're right about nanotechnology, the cost of synthesizing gasoline and
almost any molecules you can think of will drop to trivial levels –
with no waste or byproducts.
L: If we ever
get cheap, programmable assemblers…
Doug: Even
without that, they – in particular Craig Venter, who is also
responsible for huge breakthroughs in sequencing the human genome – are
already working on algae that make oil. There are lots of technological fixes
for this. It simply makes no sense to worry about running out of oil in
particular or fuel in general. It's not going to happen.
L: That
doesn't stop the Mad Max wannabes from citing Peak Oil as scientific
proof that The End is nigh.
Doug: [Chuckles]
Yes, there seem to be two schools of thought relating to Hubbert's
theory. Both are basically reflections of the psychology of the people in
question and have nothing to do with Peak Oil. One group says the world is
running out of oil completely – the "Mad Max" group you
referenced. The other says Hubbert was wrong, and
we'll never run out of oil. Of course, they are right that we'll never run
out, but Hubbert was right about conventional
light, sweet oil – which is basically what the world has run on for the
last century.
L: Investment
implications? People wonder if these
more-expensive-to-produce, alternative oil supplies are viable, and the
answer is…
Doug: Yes. The
answer is yes. But even that's no big deal, over the long haul. Oil is the
most compact, dense store of easily transportable energy we have, making it
ideal for vehicles today. Fifty years from now, however, there will be a
dozen cheaper and better technologies.
The chattering classes have an innate and most regrettable
tendency to become hysterical over any possible problem – most of them
temporary, illusory, artificial, or imaginary. Global warming, overpopulation, immigration, food
shortages, nuclear power, drugs, genetically
modified organisms – they're all blown up out of all proportion, just
like the so-called energy crisis. That's because hysteria leads to calls for
political action, and political action feeds power to the state and its
minions.
The fact of the matter is that most things are nonproblems... or absolutely would be if the market was
allowed to solve them.
L: Sure
– just look at how far electric cars have come. Nobody wanted them
before, because something like a golf cart is simply not practical for
driving the kids to school, bringing home a cord of wood, or driving across
the country. Enter the Tesla Roadster – the thing can accelerate faster
than my Corvette. If it could go both as far and fast as my 'Vette, I might just buy one. But that design is already
several years old, and batteries and electric motors keep getting lighter and
more powerful. As they get better, there won't be any point in governments
forcing people to buy electric cars – they'll want them because they
are better cars. I've already seen free electric-charging stations at rest
areas between my house and Vancouver – this could work for me.
Doug: Exactly. Moore's Law applies here too, though maybe at a different
rate. As I like to point out, there are more scientists and engineers alive
today than during all the rest of history combined – and they are busy
doing things.
L: So would
you buy stock in Tesla Motors (Nasdaq:TSLA)?
Doug: I might,
but I don't know the company well enough. And the stock market doesn't
impress me as a bargain, either. Anyway, a great idea doesn't always make for
a great company. It's a pioneer, and pioneers often wind up full of arrows. I
leave that sort of thing to Alex Daley and the Casey Extraordinary Technology team.
L: Other
investment implications?
Doug: Well, as I was
just saying, oil prices have probably reached a new plateau, based on the
cost of production, which is driven by the Peak Oil factor. Prices of raw
materials cannot fall below the cost of production, even with government
price controls – not for longer than stockpiles last, anyway.
I think the same argument applies for gold and silver
– and many other elements and minerals, by the way.
L: So are you
buying oil stocks now, or are you looking for lower prices, given your
bearish view of the global economy in the near term?
Doug: As with
Alex and the technology stocks and you with mining stocks, when it comes to
particular oil companies, I follow whatever Marin Katusa
says in our energy letters very carefully.
But I have to say that the oil business is different
from mining. Mining is a tough and, in today's world, basically a crappy
business. It's unwanted, expensive, high risk, and has a myriad other
problems. They can be addressed, but they never go away. At least on
technical grounds, oil is a much easier business; you can see what you're
usually looking for with 3D seismic surveys and one drill hole can both make
your discovery and put it into production. Some of those holes can deliver
thousands of barrels of oil per day for years. So, as far as the economics,
science, and engineering goes, it's a much better business than mining
– but for the same reasons, it's become much more politicized. That
makes government risk even greater than mining.
At any rate, my gut sense is that just like the junior
mining stocks, junior oil stacks are bouncing around near a bottom. And oil
juniors are almost as volatile as junior mining stocks.
L: Well,
whether it's in oil, technology, or metals exploration, when you go from
having nothing but an idea to having a discovery with measurable value, the
results for shareholders can be spectacular. The change in value from nothing
to something – whatever that "something" is – can make
for three- and four-digit percentage gains in days. That's why we like these
"most volatile stocks on earth," as you call them.
Doug: That's
right. Speculating on a discovery in any of these fields takes nerves of
steel and a true contrarian mindset, but for those who have the discipline,
the results can be life-changing.
There are literally thousands of these little venture
companies you could bet on. You have to be diligent – ruthless,
actually – about narrowing the field, which is what makes our "8 Ps" approach to separating the wheat from
the chaff so important.
L: The 8 Ps
– my mantra and my marching orders. Okay then, thanks for the
clarification on Peak Oil.
Doug: My
pleasure. See you next week at our upcoming Carlsbad Summit. I look forward to spending time
with many of our readers there.
L: Me too
– always fun. And for those who can't make it, we'll both be at this
year's New Orleans conference.
Doug: Well,
speaking of other gatherings, there are efforts to start new Casey phyles in Thailand and Tennessee. If any of our readers
live in those areas and are looking for like minds – or if they live somewhere
else and would like to find or start a Casey group, they can find out more by
emailing phyle@caseyresearch.com.
L: Very good.
See you soon!
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