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Trading Lessons

Panic Time for Peak Oil Pundits

Commodities / Crude Oil Nov 13, 2010 - 09:29 AM GMT

By: Dian_L_Chu

Commodities

It seems the panic time for both green enthusiasts and peak oil pundits.

According to a new paper by two researchers at the University of California – Davis, it would take 131 years for replacement of gasoline and diesel given the current pace of research and development; however, world's oil could run dry almost a century before that.


The research was published on Nov. 8 at Environmental Science & Technology, which is based on the theory that market expectations are good predictors reflected in prices of publicly traded securities.

By incorporating market expectations into the model, the authors, Nataliya Malyshkina and Deb Niemeier, indicated that based on their calculation, the peak of oil production could occur between 2010 and 2030, before renewable replacement technologies become viable at around 2140.

The estimates not only delayed the alternative energy timeline, but also pushed up the peak oil deadline. The researchers suggest some previous estimates that pegged year 2040 as the time frame when alternatives would start to replace oil, could be “overly optimistic".

As I pointed out before, despite the excitement and hype surrounding a future of clean energy, a majority of the current technology simply does not make economic sense for regular consumers and lack the infrastructure for a mass deployment….even with government subsidies, tax breaks, and outright mandates.

In addition, the supply chain of renewable technologies is not as green as people might think. Most alternative technologies rely on rare earths for efficiency. However, the radioactive waste produced by rare earths mining process makes oil sands look like a green energy. This overlooked (or ignored) fact just now received some attention due to the sudden shortage caused by China’s embargo and export quotas on rare earths.

Another case in point – In China, the city of Jiuquan in Gansu province needs to build 9.2 gigawatts of new coal-fired generating capacity as backup power of the 12.7 gigawatts wind turbines due to be installed by 2015.  More wind farms would need more coal-fired power plants, with little or possiblyly no carbon reduction.

Capitalism means investment naturally flows to the more profitable proposition....and vice versa. With more data and information becoming available, not much could go unnoticed by the markets, particularly in a relatively new sector such as renewable energy. And this harsh reality is clearly reflected in this new study.

Now, in its latest long term outlook, the International Energy Agency (IEA) predicts that oil demand, prices and dependence on OPEC all set to continue rising through 2035, and that global oil supplies would be near their peak in 2035 as China, India and other emerging economies keep on trucking.

So the world needs to come to a common understanding that
  1. The alternative energy is not mature enough to completely repalce fossil sources any time soon. 
  2. Energy security means a diversified and balanced portfolio inclusive of every bit of resource, fossil as well as renewables, just to meet the projected demand.
  3. Real "green" energy is easier said than done. 

Furthermore, the increased rare earths dependency, and the latest food vs. fuel debate when the food industry slapped a law suit against the EPA over E15 ehtanol, underline some of the unintended (we hope), yet nasty consequences that often come with ill-informed and poorly-planned policies.  (In the case of E15, the EAP is an easy mark considering one in eight Americans is on food stamps.)

All this requires a balanced and unbiased government policy to guide exploration and development of technologies to unlock the new fossil fuel reserves, expanding the R&Ds of emerging technologies, while effectively practicing and promoting energy efficiency and conservation.

Otherwise, we may literally witness $300 a barrel oil before the electric vehicle could even make one percent market penetration.  Unfortunately, there's no easy fix, and the clock is seriously ticking.

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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