$500 Oil? Why Not $1,000? Does It Matter?

Everybody in the world should read a new Fortune article about Matt Simmons, the oil analyst turned peak-oil prophet. As a lifelong Republican, Bush campaign and energy policy contributor, and Houston-based oil guy, he's an unusual leader of the peak oil theorists. Simmons has become convinced that Saudi Arabia and others don't have as much in reserve as they say.

Simmons is not alone. T. Boone Pickens, oil billionaire, has been making a lot of noise about how we can't drill our way out of this...and he's building the world's largest wind farm to demonstrate his commitment. Not a commitment to the environment, but to making money and enhancing national security.

Just to clarify: peak oil doesn't mean we've run out. It means we've hit the peak of production. There's still a lot in the ground, but it's harder and harder to get out. It's not just analysts warning about this. We're at 85 million barrels per day now globally, but clearly the world is growing. So can we supply the 100 million barrels and more we'll need in short order? Well, let's listen to James Mulva, CEO of Conoco Phillips earlier this year: "I don't think we are going to see supply going over 100MM barrels a day...Where is all that going to come from?"

So supply is a problem, but it's not actually the biggest one. My college days, when not spent on other pursuits, included a degree in economics. I can't claim to remember that much, but I do know one Econ 101 basic fact. If demand grows, and supply is "inelastic" (meaning it's really hard to change the amount), the price will rise, and sometimes very, very fast.

As much as supply is certainly inelastic - you know how hard it is to get oil from Canadian oil sands or from 5 miles under water? - the real story is demand. It's almost trite to say, but the growth of India and China is impossible to grasp and will drive prices of everything up and up. The highly respected business strategist, CK Prahalad, recently talked about some trends in India. Every minute 30 people move to the city, meaning India will need hundreds of new cities over the next 20-30 years. As these people desire more middle class lifestyles, consumption will rise. Just one example: If they all add a bit of chicken protein to their diet, Prahalad says, we'll need to double current global agricultural output to feed them. A lot of oil goes into agriculture, and that's just to satisfy India. China statistics are just as crazy (another Fortune article recently described a nice little Cleveland-sized community going up outside of Shanghai - and it's one of ten suburbs being built).

But in the end, the debate is almost moot. The problem is not just that it's harder to get oil - it's that we're all in deep trouble if we do actually get it and burn it all. Climate change and environmental damage are going to push us away from fossil fuels long before we get through it all. This is a hard reality for an industry to take, but we're going to have to leave a trillion barrels in the ground - or at least only take it out to make stuff from it (those molecules are really useful for chemicals, plastics, etc). Burning it is the problem.

Peter Schwartz, the futurist (a job that I absolutely love -- but how do you really know if you're good at it?), says some very wise things along these lines. He says the peak oil guys are wrong and couldn't possibly know how much is left, but he says it doesn't really matter:

"We are not going to run out of oil before the issue of climate change drives change. It'll be costly oil. But it'll be climate change catastrophes [such as sudden, unexpected displacement of large numbers of people, and massive property damage], and more expensive oil, not the fact that we're running out of oil, that will drive change."

I agree. But take your pick - constrained supply, rising demand, and climate change. All are pretty good indications of one fundamental reality: Energy will never be cheap again. There will be some incredible pain coming for people, companies, and countries that don't use energy wisely. Getting lean will not be only one element of a good, sustainable business - it may be the only thing that matters.

Andrew Winston helps companies use environmental thinking to grow and prosper. He is co-author of the best-seller Green to Gold, writes a monthly e-letter Eco-Advantage Strategies, and regularly blogs on green business.

Comments

[maxpayne]

You know. You could rid of the ban on INDUSTRIAL HEMP and let it replace petroleum all the way. That way, farmers and locals can have their fuel market and we need not "free" trade fuel all the time. Also, cut down on "free" trade, Big Corn and let grass-fed meat and diary in, give algae for oil a chance, etc ...

[EinChicago]

"Everybody in the world should read a new Fortune article about Matt Simmons, the oil analyst turned peak-oil prophet. As a lifelong Republican, Bush campaign and energy policy contributor, and Houston-based oil guy, he's an unusual leader of the peak oil theorists. "

Hogwash. He's the perfect example of a peak oil comnnspiracy theorist. The single greatest effect of peak oil paranoia is to drive oil proices higher, which is a major benefit for the oil companies so of course republicans are the best candidates to subscrbe to the peak oil conspiracy.

The thing I love most about peak oil conspirasists is their ability to selectively ignore facts. e.g., stating Hubbard was right that US oil production pwould peak in teh US in teh 70s while ignoring the fact that the start of the decline matches exacrtly with the removal of many of our largets oil fields from exploration by statutes.

[WorkingClass]

A massive global die off is already underway that will include humans. There will be plenty of oil for the remnant.

http://www.well.com/user/davidu/extinction.html

[BlackbirdHighway]

"Energy will never be cheap again"

That statement shows exactly what our problem is. Most Americans think that oil is the one and only form of energy available.

My solar panels produced 28 KWH of power yesterday. The price of sunshine is not going up! The sun doesn't care what the oil traders are doing. It doesn't matter what the dollar is worth.

But electricity can't replace oil, right? Wrong: my electric car likes that sun-provided energy just fine, thanks. There are a great many electric cars coming out starting in 2010. This time, they are here to stay. They can't replace every gasoline vehicle, but they don't have to. They just have to replace enough to create a significant drop in oil demand. It may take a decade or so, but we will see the combination of greater efficiency and alternative fuels produce a 30% drop in oil consumption in the US. That will make a huge difference.

We are witnessing something extraordinary in history: the beginning of the end of the age of oil.

[TxAggie]

What is the economic payout of your solar panels? 50 years?

[FrictionSoul]

Energy: you meant non-renewable energy will never be cheap again.

[DuganS1]

Peak oil will be proven wrong once we start getting oil out of the US oil shale -- it will be expensive though. Another important issue is that we need to get the radical left wing out of the process of determining energy policy. There will be serious consequences if we don't cut loose from the global warming conspiracy theory cult.

[KillTheMessenger]

I am waiting... tap... tap... tap... what still no oil from shale?

Too bad, I guess it is the technology of tomorrow and it will always stay that way.

:-)

[TxAggie]

The Marcellous Shale is primarily oil, we get a bunch from shale right now.

[EinChicago]

Perfect example of my point. Ignore any reality and deal only in fantasy.

No oil from shale? Must be because all those scientifc peer reviewed journals, oil studies, etc are lying and have nothing to do with oh, that little statutory ban on shale oil extraction....right?

Noooooo. Can't be anything to do with that....

[BlackbirdHighway]

But that's exactly what peak oil is all about. It does NOT mean that we are running out of oil! What peak oil means is that we are running out of the cheap, easy to find, easy to pump out, oil.

The Peak Oil theory predicts that there continue will be oil available, but it will become exceedingly expensive. This is proving to be a very accurate prediction.

[johnnyjust]

What is your opinion of the Abiotic theory that oil is produced naturally and not the result of decayed organic matter?

[KillTheMessenger]

Bwaaahhhhaaaahhahaaahhhaaaaahhh...

rolling on the floor

...bawaaahhhaaaahhiihhoooooooohhhhooohhooohuuuhhhhaaaahahh

You are killing me, man, you are killing me!

Oil that results from organic matter IS "produced" naturally. Or did you think there were some supernatural forces at work when organic compounds get cooked into hydrocarbons at high temperature and pressure? You can put organic garbage in a suitable chemical reactor, put the pressure and heat on and get something eerily similar to crude oil out after only hours. The timescales are really just a matter of choosing the right thermodynamic conditions.

http://en.wikipedia.org/wiki/Thermal_depolymerization

[petemrtno]

I agree with futurist Schwartz that we wont run out of "easy" oil before the climate changes. When its supply tightened a bit last spring, its price shot to over $140/bbl. The world economic slowdown has pushed the price down to nowhere the levels of say a year ago and back. Its price will again skyrocket and keep bobbling upward to unthinkable heights in the next few years as the world economy improves again and as the poor nations of the EU plus China and India prosper, requiring much more easy oil. The new oil prices will cause massive, unstoppable downward changes in the world economy, driving it back to the early oil days of around 1900. During the change, there will be massive poverty and hunger in the developed, developing and undeveloped worlds, and aworld population crash (but an amelioration of climate change from vastly fewer automotive vehicles of all kinds, and minimized livestock and electricity production).

Perhaps the biggest problem to peace is how will the declining oil be shared? Will the big three, China, the EU and the US try to grab off their own supplies? Can the US continue to burn hugely more fossil fuels per person, due to our car culture and very low fossil fuel taxation, while the others conserve it and tax it much higher? Many fossil fuel scientists, both oil company geologists and academics, say peak oil has already occurred, around 2005. What should US policy be?

[KillTheMessenger]

Oil plays no leading role in climate change. It is actually rather clean in comparison to coal if we look at total CO2 contribution to the problem. But there is a heck of a lot more coal in the ground than there are liquid and gaseous carbon compounds. And if we extract it, burn it and dispose of it in out atmosphere, we are going to get a lot more heat in the future than we were dreaming of.

The whole economic doom story is based on poor understanding of what role and dimension the different primary energy sources play in our world economy. Oil is a fuel of convenience, not one of necessity. We can replace all the oil we NEED (not the oil we WASTE) with other sources of energy and synthesize the rest from coal, if necessary.

Climate change is a choice. So far people have made the wrong choices because they were told that the other choice would cost them dearly. Well, we need more education and we need to remove the dinosaurs from our political systems. If we do that, we can exercise our real choices and avoid the worst.

[Teamster]

Really ? Very much more of this conversation is needed . its our planet.

[KillTheMessenger]

It's not "our" planet. We did not legally buy it. We just happen to live on it.

One could however say that it happens to be the only planet that we have access to that can support us. And if you have only one thing of a kind and you depend on it this much, you better take good care of it.