Editor’s note: Today, we turn once again to our founder Doug Casey, who’s sharing his insights this week on everything from technology and commodities to politics and history.
Yesterday, Doug revealed why he views technology as a “liberating influence for the average man.” And in today’s Conversations with Casey, he tackles how technology has changed the energy sector over the past few decades – especially the oil industry.
Read on to find out what Doug sees ahead for the oil markets… and why he’s confident the world will never run out of oil…
Daily Dispatch: Doug, in the previous part of this interview, you spoke about the melding of science and technology with commodities. One of the biggest technology changes in the energy sector over the past 15 years or so was hydraulic fracturing, or fracking, in the energy sector.
That has led to the US becoming a net energy exporter. Is that sustainable, or will there be new technologies that will improve on that even further? Additionally, do you think it’s actually possible for us to exhaust all oil and natural gas in our lifetimes?
Doug Casey: First – and I know it will shock most people to hear this – but it’s relatively unimportant whether the US is an energy importer or exporter – pretty much in the same way it doesn’t matter if, say, Florida is an energy importer or exporter. But that takes us into another subject for another time.
Getting back to your questions, they’re important, and demand detailed answers.
There’s a huge controversy about fracking. That’s the process of drilling first vertically, often three, four or five thousand feet. Then when the bit hits an oil bed, it takes a horizontal turn and it might go for another mile or so. That area is flooded, mostly with water and sand, and small amounts of other chemicals to liberate the oil which is clinging to those rocks. It’s then pumped to the surface.
The good news for this technology is that it’s opened up lots of hydrocarbon deposits that weren’t feasible to recover previously. The bad news is that it’s fairly expensive to do all that drilling. Furthermore, these are not concentrated oil deposits. It’s a far cry from drilling into a lake of oil, and having it gush to the surface under its own pressure. Fracked deposits are high cost.
Daily Dispatch: Is it just about high costs?
Doug Casey: No, there are other problems with it. Not only are they high cost – generally speaking, we’re talking minimum $35 to $40 a barrel even for the best deposits – but they tend to have a fairly short life. In the oil business there’s a very important factor known as the decline curve. Wells typically produce most during their first year, then less the year after, and less the year after. Different types of deposits have different curves. Deposits in the Middle East tend to have very shallow decline curves, and can go on for decades.
However, shale deposits have very steep decline curves. If you get a barrel of oil the first year, you’ll probably get only half a barrel the second year, and a quarter barrel the third year, and then it drops off even further. This really affects the economics.
Daily Dispatch: Doesn’t that support the idea that one day the world will run out of oil?
Doug Casey: There are lots of hydrocarbons yet to be discovered, and fracking is just the latest technique to recover them. But it takes high oil prices to make it viable. And this is the important point, and the reason why we’ll never run out of oil or gas. It’s all a question of price.
If the price of oil goes to $200 a barrel, oil consumption would collapse. That would drive the price down. But then all kinds of deposits would have been brought into production while oil was at $200. We’d then be flooded with oil. The boom would go to a bust, with lots of bankruptcies. This is the way all commodity markets work. The cure for high prices is high prices. The cure for low prices is low prices.
All commodity production, and demand, rotates around the marginal cost of production. That’s why, in a free market, gluts and shortages are always temporary.
But people don’t understand that. People who are afraid we’ll run out of oil simply don’t understand either economics or technology.
We’re never going to use up all of the oil in the world, it’s simply not possible. The price will adjust both supply and demand. Apart from the fact that oil is basically carbon and hydrogen. Hydrogen is the most common element in the universe: 75% of all the mass in the universe is hydrogen. And almost all the rest is helium. It just doesn’t seem that way when you look at our little ball of dirt, Earth.
As for carbon, there’s a reasonable amount of it in the universe. It’s a tiny fraction of a percent, but it’s concentrated in planets. Furthermore, chemists know how to combine the different elements in order to fabricate oil and gas.
Daily Dispatch: Fabricate it? You mean “make” oil and gas from its constituent elements?
Doug Casey: Petroleum is a hydrocarbon with two simple elements. The only thing that precludes making your own oil and gas is energy. It takes a lot of it. It costs more energy to fabricate it from elemental carbon and hydrogen than you get out of it later – although it may be worth it. Perhaps it can be done economically with bio processes, using the sun for energy and plankton for raw material. Look, only 150 years ago we could only recover oil by skimming it with towels from places where it seeped close to the surface. It’s all about technology.
Daily Dispatch: So we shouldn’t worry about ever running out of oil?
Doug Casey: People who worry about the Earth running out of resources are intellectually ignorant and psychologically subject to hysteria. These things are non-problems and are hardly worth worrying about. People who worry about it the most tend to have the least knowledge – but the most interest in politics.
That said, oil is by far the most convenient and concentrated form of energy that we have right now. Wood, and then coal, used to be equally important, and they’re not important anymore. The same is going to happen to oil and gas. My guess is that battery power will fill their space in the future. Oil and batteries are just media for storing energy that comes, directly or indirectly, from the sun.
The production cost of electricity from solar is down about 85% in the last decade, and wind is down 50%. They’re actually becoming economic. But the real answer for mass energy remains nuclear. If it wasn’t for massive regulations, we’d already be a couple of generations ahead of where we now are.
It’s been said that the Stone Age didn’t end because we ran out of stones. And the same is going to be true about the oil age. These things are what you call non-problems. The real danger is the types who use these things to create hysteria, which they transform into political power.
Daily Dispatch: Be sure to check your inbox for tomorrow’s Dispatch. Doug shares more of his thoughts on the future of oil… and breaks down why politics and politicians are holding back the next revolution in energy…