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Peak Oil Theory and the Energy Crisis: Not Just for SUVs Anymore
Posted by Jessica Collins.
Consumers grumble about rising gas prices. The price of goods – inputs, outputs, intermediates – escalates; businesses struggle. As the price of oil steadily climbs to an all-time high and U.S. currency, markets, and overall economy are left to suffer in its wake. You think it’s bad now? The situation may be getting worse.
In addition to being the backbone of the global economy, oil is a non-renewable commodity whose demand curve has increased steadily over the past two decades.
Lead by population supergiants China and India, the world has embarked on an unmatched boom in global industrialization (read: oil consumption) that has forced the price of oil up 56 percent to-date in 2008 and over 365 percent over the last decade. [1]
In addition, analysts estimate combined global demand will exceed 120 million barrels per day (bpd) in 2030, an astonishing 41 percent increase from current production levels. [2]
The problem? The world may not have enough oil to go around. Will we completely run out of oil? Not likely. Many have dismissed the idea that the global community could ever completely deplete the world’s oil supply. However, it’s not extracting that last drop of oil that will send the world into its biggest energy crisis in history. Not even close. The true turning point occurs when the gap between the demand for oil and its accessible supply becomes so great that the resulting price brings the world economy to a grinding halt. Unlike previous energy shocks of past decades, this unprecedented energy crisis is based on accelerating global demand, rather than sudden, short-term interruptions of supply. The result? “A long period of significant hardship worldwide.” [3].
Don’t think it could happen? Assuming a daily consumption of 21 million barrels per day, at $135 per barrel, the U.S. alone spends approximately 15 percent of its $6.8 trillion net income on oil. Increase the price to $200 per barrel and the percentage of take-home income spent on oil increases to 22 percent. “In other words, the U.S. [could be] broke long before oil prices hit $200 per barrel, and the rest of the world is sure to follow.” [4]
This is not just a problem for our children’s children. Several key figures in the oil and gas industry, including the CEO of France’s Total Petroleum and the CEO of Royal Dutch Shell, have recently expressed concern about the situation. [5],[6]. Even ExxonMobil, which continues to post strong financial performance, recently reported a 6 percent decline in production and have readjusted long-term reserve projections. [7]
Think this is only a problem for SUV owners and Big Oil executives? Think again. Every aspect of modern life depends on oil. Never mind that virtually every type of good is brought to market using oil-based transportation – food, water, modern medicine, and all technological devices rely on oil and oil byproducts. As explained by commentator Robert Wise:
Nearly all the work done in the world economy, all the manufacturing, construction, and transportation, is done with energy derived from fuel. … And, the lion’s share of that fuel comes from oil and natural gas, the primary sources of the world’s wealth. [8]
While higher oil prices will stimulate the development of additional oilfields, the remaining oil is difficult to produce, expensive to extract and refine, and is owned by a small majority of the world that seems to hate everyone else – or, at least, the U.S. Moreover, while new production may slow the decline in production, it cannot completely prevent it.
What about ‘alternative energy’? Some alternatives, like natural gas, have showed promise, but it too is a limited-supply fossil fuel. [9] Further, all of the current ‘viable’ sources of alternative energy (e.g., wind, solar, biofuels, biomass, hydrogen, and even nuclear) are extracted, collected, generated, or otherwise based, in whole or in part, on oil and oil-based fuels. [10] In addition, not one alternative energy technology is currently suitable for wide-spread commercial implementation. Even if the technologies themselves were ready to be implemented, the necessary infrastructures are primitive, if present. Implementing alternative energy sources is, at best, daunting: it requires massive short- and intermediate-term investment and represents a massive drain on the dwindling pool of global capital.
The global shift to alternative energy sources is inevitable. The challenge, then, is to execute the transition seamlessly and efficiently by appropriately allocating capital to winning sustainable alternative technologies thereby permitting the global economy to maintain reasonable growth levels. On the other hand, inefficient execution of this crucial transition will almost certainly result in a severe depletion of global capital, leaving little or no financial resources for investment in other areas of the world economy.
Financial Market Commentary 
The Economics of Alternative Energy
Posted by J.D. Kaad.
The need to implement alternate sources of electricity will continue to increase as the price of fossil fuels continues to rise and the availability these resources decreases. This article compares the most feasible alternatives that are commonly considered when considering the transition away from carbon-based power. The various costs associated with hydro-electric, geothermal, wind, nuclear, tidal, and solar power are described below. Based on these data we conclude that a heavy reliance on nuclear fission power is likely as the technology necessary to implement other sources continues to develop. [1][2][3][4][5][6][7][8][9]
Hydro-Electric dams offer a reasonable cost in terms of initial startup capital ($1.58 million / Mw) and operating costs (.85 cents / KwH). These low costs can be attributed to the lack of fuel needed to operate Hydro-Electric plants and the high power output of these plants, which are capable of generating up to 9,800 Megawatts of power. The use of hydro-electric plants can also be controlled and scheduled to meet the power requirements of any grid. The only negative aspect to hydro-electric power is its reliance on rivers and reservoirs, which makes mass implementation difficult. [2][7]
Geothermic sources of electricity are more expensive in terms of initial startup capital ($2.5 million / Mw) when compared to wind, nuclear or hydro-electric, but have lower operating costs ($.01 / KwH) than all other options except for Hydro-Electric. If it was not for two major issues with geothermal energy it would be an ideal option. The first issue is that this method of generating energy is only feasible in locations that have pockets of geothermal heat that can be tapped. Second, geothermal power plants currently do not have enough generating capacity to support the United States’ infrastructure. The average geothermal power plant puts out anywhere from 85-90 Mw, which is miniscule compared with the 976 Mw that an average coal plant produces. [4][10][11]
Wind Turbine generators offer the lowest capital cost per generating capacity ($1.5 million / Mw), equaled only by nuclear power. Wind power’s operating costs ($.015 / KwH) are the third lowest of the options explored in this article. Wind Farms can be used in almost any location as long as the average wind speed is between 10 to 50 mph. Wind farms also offer an efficient use of land; for example, a wind farm that occupies 12,000 acres of land would directly utilize only 6 acres. This allows for electricity to be generated by the turbines and leave the land available for other uses. The only problem with wind power is that wind is unpredictable and cannot be scheduled on a power grid. [3][12]
Nuclear Fission Reactors are currently the most feasible replacement for fossil fuel power plants. Nuclear Power has reasonable initial capital costs ($1.5 million / Mw) because the total generating capacity for these plants is large — over 2,000 Mw. Nuclear power’s operating costs ($.0172 /KwH) have become less expensive due to improvements in fuel production and refining. Waste disposal has also been improved in nuclear plants; the overall cost of disposal accounts for $.001/KwH of its total operating costs. Furthermore, the volume of waste from nuclear plants has significantly decreased with improvements in waste reprocessing. [1][13][14]
Tidal power is not reasonable in terms capital cost ($5.45 Million / Mw) — it is the highest of the options explored. Tidal power’s operational costs ($.03 / KwH) are also less attractive due to the difficulties in transmitting power to nearby power grids. New tidal power generators feature ducted impellers, an improvement that has caused power outputs to triple. These new units are unfortunately controversial due to their environmental impact. The main benefit tidal power has over wind power is that tides are extremely predicable and thereby easy to schedule on a power grid. [5][8][15]
Currently, solar power is the least attractive of alternate power sources. This energy source features the second highest capital costs ($4.16 million / Mw) and the highest operating costs ($.13 / KwH). To make matters even worse, these estimates of solar power’s operating costs include government subsidies ($.23 / KwH without subsidization). Solar is unpredictable, and therefore difficult to schedule on a power grid. Moreover, solar uses land inefficiently — it takes 400 acres of collectors to generate 75 Mw of capacity. [6][9]
In conclusion, to phase out fossil fuels as our primary source of electricity in the most economical fashion we would need to rely heavily upon nuclear power. This power source is the only one that does not have reliability issues or location requirements. Hydro-electric, wind and geothermal energy should also be implemented as circumstances allow. Tidal and solar power’s time has yet to come; they currently fail to beat the cost of coal ($.0221 / KwH), but with technological improvements, the future looks bright for these options. [1]