The Real Energy Crisis
- November 11, 2012
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Five years ago we got the energy crisis wrong. Predictions of peak oil and declining sources of petroleum supply convinced many of an impending geologic and strategic crisis: the world was physically running out of recoverable oil and the remaining sources of significant supply were declining in number and located in politically unstable areas. This crisis drove major investment into advanced batteries and electric vehicles, which were seen as the best and most flexible way to substitute other fuels for petroleum.
What many did not anticipate at the time were the great advances being made in petroleum production technology. For as much as was invested in new battery technology over the past five years, the amount invested in new oil production technology exceeded the investment in batteries many times over. That investment produced a return. Today new petroleum production technology, such as fracking and ultra-deep water drilling, appears to have taken the urgency out of the energy crisis, at least as that crisis was originally perceived. Unconventional crude oil seems plentiful. It does not appear to be concentrated in a limited number of geographic areas. Sources of possible supply seem diverse.
Today the crisis of five years ago has given way to complacence and even to energy optimism. Both presidential campaigns recently assured us that energy independence is virtually around the corner. All we need to do is drill.
But while our understanding of the energy crisis five years ago may have been flawed (or more correctly, less than prescient), our appreciation that there was a crisis was not. We just misunderstood its details.
The real energy crisis is neither a geologic crisis nor a strategic crisis. The real energy crisis is a slow growth crisis. Although the oil industry has figured out a way technologically to recover large quantities of unconventional oil, the cost of doing so will be staggering. Conventional oil, which may cost $4-6 per barrel to lift out of a Saudi Arabian well, may cost more than $100 per barrel to lift out deep water deposits off the coast of Brazil. And the lift costs will only go up, as each barrel of oil becomes progressively more difficult and expensive to recover.
The result is a hyper-inflation of energy costs, as the fixed, structural cost of petroleum spirals ever higher. As more and more resources must be invested in petroleum production, fewer and fewer resources will be available for other productive parts of the economy.
In ordinary markets, the market self-corrects by incenting substitution for a high priced commodity. But the petroleum market is no ordinary market. The energy needs of the transportation sector are almost entirely dependent upon petroleum; no easy substitutes are available. As a consequence, as petroleum costs hyper inflate, the economy will slow as consumers compensate by using less energy. This lowers demand for oil, which depresses its price, which in turn slows investment in alternate fuel technologies.
The solution is the same one we settled on five years ago: find a way to substitute different fuels for petroleum in the transportation sector. Advanced battery technology was then, and it remains today, the best, most flexible and most technologically feasible way to let different fuels substitute for petroleum. But we must recognize that the nature of the real energy crisis is such that the market alone will not drive transportation sector consumers to substitution. The real energy crisis will instead impose a vicious cycle of higher structural petroleum costs, slower economic growth and the lack of investment capital for alternate fuel technologies.
Governments around the world must not let that to happen. They must re-double investments in advanced battery technology, the world’s best chance to reduce its dependence on petroleum for transportation fuel. They must break the vicious cycle that condemns the world economy to ever slower growth until that dependence is broken.