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John Gardner speaks to Kiwanis about oil and gold at November 30 meeting

John Gardner introduced his November 30 Kiwanis presentation with a sobering description of “Peak Oil”, the point at which oil production plateaus and then declines. The world is running out of oil. 
John Gardner (L) and Dick Plambeck (R)
Conventional oil comes from a drilled well; it is extracted by its own pressure and a pump. Unconventional oil is in place but cannot flow on its own without intervention. Fracturing, enhancement and chemicals are used to extract oil from where it is trapped. There is heavy oil (like tar). Oil sands (in Canada) and shale are formations that have to be fractured at great cost so that the oil will move. For example, in the Bakkon field in and around Montana, it costs about $3,000,000 to drill the well and about $4,000,000 to fracture and get the oil to flow.

Peak Oil is happening now. For the past five years, world production of conventional oil has plateaued at about 72-74 million barrels per day. Consumption is about 85 and the difference comes from unconventional oil and natural gas liquids.

News reports highlight new production but skip over depletion of old oil fields. Most oil comes from mature, declining fields. Large oil fields like Bergen and Kuwait were discovered before WWII. Saudi’s Ghawar field, the world’s largest, came on in the 50’s and 60’s. All fields are declining. Decline exceeds discoveries of new sources. We are consuming 3 barrels of oil from inventory for every barrel we discover. We are facing a decline in conventional oil production.

How can we reverse this? Reduce consumption through conservation. Higher prices and rationing could reduce consumption. Available alternatives for corrective measures will decline as the oil availability declines. There is only so much you can do when the scarcity problem hits. The price of oil and gasoline is going to go up significantly.

There are new discoveries like the Tupi field approximately 200 miles off the shore of Brazil in 7000 feet of saltwater. The oil lies 25,000 feet below the ocean bottom. The field has a potential for up to 40 Billion Barrels. It will take $50 Billion and 10 years to develop the field. At its peak, it will produce only about 1 million barrels per day, a small percent of the need. Market oil prices will have to be above $80 per barrel to make the field economically viable.

Kuwait plans to spend 60 Billion dollars to increase production by .9 million barrels per day, a “drop in the bucket” compared to what is needed.

The major changes in American life style caused by “Peak Oil” are going to be awful. We live in suburban sprawl, have oversized mansions, are hyper-consumers and use our autos wastefully. All this will have to go. There will be downsizing and reduced travel. Anyone who lives in a McMansion more than 15 miles from good public transportation is going to be hurting. SUV’s will be replaced with electric vehicles. However, the battery technology is still not efficient and economical. The lithium battery for the new Chevy Volt cost $12,000 to $14,000 and lasts about 100,000 miles.

Another source of supply is “coal to liquids”, “gas to liquids” and natural gas driven cars. There aren’t enough stations supplying natural gas for cars. There are economic and government policy problems in producing fuel from coal and gas.

75 to 80 percent of oil goes into transportation. Over 20 percent of that figure goes into agriculture and food processing, which cannot be changed. We need to have rules restricting oil to use for transportation. Other fuels must be used for heating and industrial purposes.

Clean (green) energy is increasing in use. Solar-electric generation has problems, for example, keeping the panels clean. Windmills generate noise and people don’t want them near their residences. The wind doesn’t blow all the time and sun doesn’t shine all the time so energy must be stored somehow. A better electrical grid is needed to deliver this energy to users. Right now, renewable energy accounts for less than 2 percent of energy production and will not make a significant difference in the near future.

Technology will help, but it will not solve the problem. For example, fracturing makes a well produce but it does not last as long as conventional oil wells.

Peak Oil is an ongoing question being debated at the highest levels of industry and government. Military in the US and Germany are trying to figure out how to maintain a supply of fuel for weapons during the period of Peak Oil.

We need to understand how Peak Oil will affect the economy going forward. A good book is the “The Impending World Energy Mess” by Robert L. Hirsch an others. In this book he shows that a 1 percent growth in energy supply equals a 2 percent growth in GDP. For example, the 2008 oil price of over $140 per barrel reduced available oil and had a crushing effect on the economy. Cheap and abundant oil in the past has contributed to our prosperity.

The 2008 recession stopped about $100 billion in exploration and development projects that eliminated about 2.5 million barrels per day of future supply, which will not be forthcoming. The US leads the world in consumption at 19 million barrels per day. The US only produces about 6.7 barrels per day. We import the difference, but the US must compete with China and other developing nations for this supply. Chinese policy is to make long range plans and deals with suppliers to ensure an adequate supply. The US does not have an effective policy to ensure adequate supply. John believes that the US competition with China for scarce oil will become nasty in the future.

Click on this link to visit The Oil Drum website and learn more about oil.

Right now we have a fragile economy with problems in housing and unemployment. Housing probably won’t be corrected for 3-5 years. Unemployment will not be solved until the housing problem is solved. Oil prices will rise and the US economy will be in bad shape in the future. The problems are serious.

The government doesn’t seem to know or care to know about the bad economic situation. QE2 serves only to bail out the banks and Wall Street. No effective steps have been taken to stimulate jobs. US citizens have no idea what the government will do about taxes and health care. We will just muddle through but in the meantime, the government is running out of money.

How do you protect your own money? “Things” are where you want to go. Energy and agriculture (including water) are going to have scarcity – also resources like copper, zinc, lead, gold, silver, etc will be scarce. Gold and silver are like a financial insurance policy. We are probably not going to have a nice ten years and should have a plan to deal with this.

In Q&A at the end of the talk, John mentioned a recent New York Times Sunday Supplement on energy. A headline was “You Will Have Fuel”. The article gives false hope. He also said that energy initiatives started during the recent oil price peak will return to favor when oil prices rise again. Also, drilling in the Pennsylvania Marcellus Shale is going to be slowed down because of potential ground water contamination. Relative to precious metals, he believes that silver is a better investment than gold at this time.

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