I hosted a web chat on Monday at the Washington Post, along with my co-author Brian Hicks, to answer questions about energy. For those who are interested, here is the transcript.
–C

Transcript: Washington Post web chat with Chris Nelder and Brian Hicks, authors of Profit from the Peak

Books: ‘Profit From the Peak’
Authors Discuss Peak Oil, Energy Markets, Alternative Fuels and Recent Offshore Drilling Proposals

Brian Hicks and Chris Nelder
Authors, “Profit From the Peak: The End of Oil and the Greatest Investment Event of the Century”
Monday, June 23, 2008; 1:00 PM

 

Brian Hicks and Chris Nelder, authors of ” Profit From the Peak: The End of Oil and the Greatest Investment Event of the Century” were online Monday, June 23 at 1 p.m. ET to discuss energy markets, alternative fuels, the future of gas prices and proposals for oil and gas exploration off U.S. coasts.

The transcript follows.

Hicks worked for Agora Publishing, one of the largest financial newsletter publishers in the world, for ten years before helping to found Angel Publishing. In addition to being the managing editor of Energy and Capital and The $20 Trillion Report, Hicks writes a weekly column for Wealth Daily.

Nelder is a self-taught energy expert who has intensively studied peak oil for five years, and written hundreds of articles on peak oil and energy in general for Energy and Capital and other publications.

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Munich, Germany: When I’d first heard of the concept of “peak oil” I’d read that the Saudis were being cautious about trying to increase their capacity from 12.5 million barrels per day to 15 million, because they didn’t want to damage the supporting bedrock around the oil fields by over-pressurizing. As the oil fields in the Middle East get older, isn’t it going to get more challenging to retrieve the remaining oil?

Chris Nelder: Yes, it will. I am very skeptical that the Saudis will ever produce more than 12 mbpd, but they keep their data and field production details very close to the chest, so it’s hard to know.

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Washington: I’ve noticed a recent drop in demand; how far down could it go? Also, is Obama right — can we drill our way out of this? Thanks.

Chris Nelder: No, we cannot drill our way out of this. The U.S. imports about 14 million barrels per day (mbpd) of oil and products and produces about 7 mbpd. There is no way that the U.S. could add another 14 mbpd of domestic production. As to how far demand could go, that’s really a question of how far our economy could fall…and your guess is as good as mine.

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Harrisburg, Pa.: What is blocking there being a major corporation in alternative energy? Many of these technologies have been around for decades, and the economics always has been the same — high startup costs but long-term savings. What has no large investor gone fot the long-term returns, like Henry Ford did a century ago?

Chris Nelder: Long term investors are going for the long term! Legendary oil investor T. Boone Pickens is a good example…he’s investing billions in wind and water.

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Washington: Do you see any significance to a legal advisor to Condi Rice endorsing the Law of the Sea treaty in today’s New York Times? Could it be that even they want a shot at Arctic oil?

washingtonpost.com: Treaty on Ice (New York Times, June 23)

Chris Nelder: I have no doubt that they want a shot at Arctic oil. However, from what research I have read, it’s not a terribly promising area, and tends to be gas-prone. When you drill a dry well that cost over $2 billion to drill, it really stifles further investment.

“Some believe that the oil industry didn’t have the capabilities to explore for oil in the Arctic Ocean until recently, but back in the early 1980s a huge structure about 65 miles northwest of the Prudhoe Bay field, in the Arctic Ocean, was drilled. In December 1983 the structure was breached only to discover it was filled with salt water, the infamous $2 billion Mukluk dry hole.”

See http://www.aspo-usa.com/index.php?option=com_content&task=view&id=378&Itemid=91

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Knoxville, Tenn.: Is oil produced in the United States from public land and offshore to remain in the United States, or is it destined for the highest-priced market, forign or domestic? Is oil from public lands in Alaska sold to the Asian markets, where profits are higher? Will the cost of oil exploration and drilling that produces no oil be passed on to the consumers with higher prices?

Chris Nelder: Oil is a globally traded commodity, and generally sells to the highest bidder, although transportation costs favor the most local markets. So oil produced in the U.S. could be sold to any foreign buyer as easily as it could be sold to a domestic buyer. And yes, oil company costs including drilling all get priced in to the cost of a barrel, eventually.

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Linthicum, Md.: Thanks for taking my question. From what I understand, once the shale oil industry kicks in it can provide an almost unlimited source of oil at less than $50 per barrel. Why haven’t we heard more about this? Thanks.

Chris Nelder: At this point, there are no commercial oil shale operations. There are many technical issues yet to be resolved. If any such operations suceed, they may be able to deliver oil for a very long time, but it will probably be just a trickle in terms of flow rate.

Brian Hicks: The oil industry has known about oil shale for decades. But the technology… and more importantly the price of oil hasn’t been there to support developing it.

But even with oil trading for $135+ a barrel, going after shale oil will be time-consuming because it doesn’t gush out of the ground like a conventional oil well we’re used to.

So if we’re looking for a cure to our current oil crisis, shale isn’t it. It’s a band-aid.

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Washington: Any comments on John McCain’s proposal to give a $300 million prize for a new improved car battery? Are we going to hear more credible ideas from our presidential candiates, such as investing in rail and public transporation? By the way, a new 2008 Toyota Corolla gets 35 miles per gallon, while a 1997 Toyota Corolla used to get 42 miles per gallon.

Chris Nelder: I support all investment into R&D on batteries. It’s a crucial part of the picture. As for investing in rail and transportation, that is #2 on my list of recommendations, after efficiency gains. I can only hope that our leadership will take up both objectives with full support.

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Bethesda, Md.: Will offshore drilling solve the current crisis?

Chris Nelder: There is no way it can. My guess (we won’t know until we drill it) is that the continental offshore would never produce more than 2 mbpd, maybe a little more. Compare that to the 14 mbpd we import…

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Mt. Lebanon, Pa.: Your book was published by Wiley, is that right? Why them? Is it more like a typical Wiley handbook (science, engineering)? I’m a registered electrical engineer (electric power and controls) and many of my solid (not popular puff stuff) texts were published by them. Thus, will we see hard numbers, data and charts in your work, or the usual hand-waving, emotion-laden treatment of the typical general-purpose author? You can see my bias. Thanks much.

Brian Hicks: Wiley also has a financial/investment publishing division. In fact, if I’m not mistaken, they’re the largest financial book publisher in the world.

In the summer of 2006, Wiley approached us about doing a book on Peak Oil and its ramifications to the individual investor.

I haven’t counted the number of charts and graphs in our book… but I would venture to guess it’s over 50. I consider our book to be academic… but not so academic that it’s intimidating to the average investor. It’s an easy read.

Chris Nelder: I absolutely loaded the book with hard data, lots of references, and about 57 charts if memory serves. Those who love hard data will be satisfied with the book. It has received excellent reviews from geologists who really know the data, such as Colin Campbell and Jean Laherrere.

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San Diego: On stocks: I believe energy stock prices (oil and solar) are at their near-highs. Why might this not be true?

Brian Hicks: I think we could be close to a correction in oil and gas. In fact, I’m hoping for it because I think both commodities (and the underlying stocks) have come too far too fast. I would be looking to buy any dips… because this energy crisis isn’t going to end anytime soon. If the IEA is correct (and I think they are)… that we have to invest at least $20 trillion to advert a crisis, the wealth that’ll be created will be life-altering.

This is the investment event of the century… and I’m looking to hold my oil and gas positions for several more years.

Chris Nelder: I am not as optimistic as Brian about significant corrections any time soon in the energy markets. There will be some short ones but I expect the long term trends of rising prices to hold. I base my expectations simply on the supply and demand outlook. However, if we should experience a sudden or sharp loss of demand, we could get those corrections.

My advice is to pick good stocks in energy, buy them on the dips, and hold ’em hold ’em hold ’em!

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Winchester, Va.: I enjoyed reading your book. In it there are investment discussions regarding individual stocks in the various energy sectors (i.e., oil, biofuels, solar, etc.). Are there funds that provide broad exposure to alternative energy investments (that include several sectors and a combination of large-cap, mid-cap and perhaps small-cap companies) that you recommend? Thank you.

Brian Hicks: Yes, there are several… especially in the form of ETFs. There’s a Market Vectors Global Alternative Energy ETF (GEX) that will give you broad exposure to the global alternative energy infrastructure including wind, geothermal, solar, etc.

There are also renewable energy specific ETFs that focus exclusively on solar and most recently wind, which you can find under the symbol FAN.

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Washington: What is more important in the peak oil world, inner-city land that is less reliant on cars and more reliant on group transport and walking, or agricultural land, with its easy access to growing food for yourself and others?

Chris Nelder: That’s an excellent question! But I think the question isn’t really which is best, but which options you actually have.

Personally, I would choose a rural agricultural option over an inner city one, at least until the necessary public transportation infrastructure is a little more in place.

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Mt. Lebanon, Pa.: Please comment on “energy density” and why it, coupled with unregulated prices for energy equivalents, will determine in the future which energy sources (by type) actively will be developed and which will wither on the vine. There’s only one planet, an exploding human population, and a finite resource base. The unverse works on numbers, not handwaving. Something has to give. Thanks much.

Chris Nelder: I agree that something has to give, but I’m not sure that energy density is really the operative factor. The world is beholden to a liquid fuels regime, so any energy source that can be converted into a liquid fuel is going to be developed asap, particularly natural gas. But if/when we succeed in developing a larger infrastructure that runs on electricity, then we will see a real explosion of renewables. I hope that answers your question!

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Oak Hill, Va.: The lack of decisions to support domestic exploration or decisions to veto proposals to open domestic sources such as ANWR ten years ago are reasons we are more dependent on foreign sources. Members of Congress wrap themselves in votes to stop filling the stratecic petroleum reserve (less than 100,000 barrels per day) because it would impact the market but bring on one million barrels of oil from ANWR would not. I’m sure that makes perfect sense in Congress, but not on the world petroleum markets.

Foreign oil dependence (not all from the Middle East) has increased in the past 30 years because of shortsighted, “re-elect me” decison. Now people are saying we can’t reduce imports. Baloney. We can become more secure, but “independence” from foreign oil is neither needed nor prudent. Every barrel found domesticly sends a message, albeit somewhat psychological, that we are getting serious.

Is petroleum a finite resource? Yes, but as prices rise, if restrictions are lifted, petroleum will be found! You can take that to the bank. Finally, the doubling of alternative fuel production in the next decade barely will keep up with increasing world demand. Alternatives are part of the energy mix, but so is more petroleum.

Chris Nelder: What you say is basically true, but there is a huge gap between the 14 mbpd we import and the perhaps 2-3 mbpd we could still produce from domestic sources.

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Leesburg, Va.: Given the Hirsch Report, “Twilight in the Desert,” Sadad al-Huseini, etc., what scenarios do you forecast (deep recession, depression, collapse) and for how long? What human settlement patterns, agricultural methods and technological shifts do you expect will bring us out of the morass?

Chris Nelder: Unfortunately it would take about another whole book to answer that question! My guess is that we will experience about a 30- or 40-year global recession, as we try to fill the gap of declining fossil fuels. Over that time, I expect a renaissance in subsistence farming and self-sufficiency. But I don’t think anybody could say, certainly not me, whether the 22nd Century will look more like an advanced eco-topia, or more like the 17th Century…

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Washington: I’m reading some of your earlier responses and trying to figure out why you keep saying an additional 14 million barrels per day is necessary to end the current energy crisis. Why is it necessary to replace all imported oil with domestic resources? Are you confusing the goal of ending the energy crisis with the concept of eliminating the use of foreign oil? It would seem to me to be significant if domestic production increased by a million or two barrels per day, and that prices would fall dramatically as a result. Perhaps you have market data to the contrary, or maybe you are defining the “crisis” in a way that I am not understanding. Please explain.

Chris Nelder: If additional domestic production succeeded in bringing prices down, that would only stimulate further usage. This is a classic problem known as the Jevons Paradox.

The only way we can succeed in meeting our domestic demand is by severely curtailing it until it fits within our domestic supply budget. There is no way we can fill a 14 mbpd gap with additional domestic supply! The U.S. has been on a 40-YEAR decline in domestic oil production and we aren’t going to significantly change that.

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Arlington, Va.: Thanks for your informative insights. Can you explain the issue of leases? I have heard that oil companies have purchased leases to explore/drill oil in the U.S., but have not drilled on all of them. Could the companies be required to explore and drill in areas where they already own leases before they are permitted to purchases additional leases? I would not like to see drilling in ANWR, but if it was permitted, would leases have to be sold? Thanks in advance for your answer!

Brian Hicks: When a “patch” becomes hot, one of the first things you’ll see is a land grab by energy companies via leases. This recently occurred in the Bakken formation in MT and ND… and most recently in the Marcellus formation in Western PA, NY, etc.

Companies will acquire leases to land in effort to 1) stake their claim to a potential production bonanza; and/or 2) sell the lease to a higher bidder in the future.

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Westcliffe, Colo.: T. Boone Pickens can afford to invest billions — he’s not getting any younger, and life is to the swift and the forsightful, not to the retired and complacent.

Brian Hicks: I think Boone believes he’ll live to 125. I’ve met Boone… he’s a machine!

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Phoenix: How much is the current high price of crude oil affected by the relative abundance of heavy, sulphurous oil vs. the less readily available, lighter, “sweeter” oil, such as WTI? Also, to what extent are gasoline prices in the U.S. exacerbated by the shortage of refineries to process the heavier types of oil?

Chris Nelder: Different grades of crude are sold in various places for various prices. Heavy sour trades at a discount to light sweet, but the tightness of the light sweet market and its high price tends drags the price of heavy sour up along with it. At this point, the independent heavy sour crude refiners in the U.S., like Valero (VLO) and Tesoro (TSO), have seen their margins collapse in the face of much higher imports of finished gasoline, so they have been unable to pass on the higher cost of their crude feedstock to the consumer. As a result, they are running well below capacity right now. So it’s not just about the availability and price of the crude; it’s also about the ability to keep selling products like gasoline when high prices are killing demand.

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Long Beach, Calif.: Where is the collusion between big auto and big oil? It’s ridiculous when India is rolling out compressed-air cars (they hit the U.S. in 2010, see this Web site) and the White House is talking about hydrogen cars. Hydrogen guarantees another decade of gas guzzlers at least! The laws of supply and demand are broken here. Why are we still driving gas guzzlers, and why isn’t the government pushing comopressed air if India of all places can get it done now?!

Chris Nelder: I think you answered your own question!

Hydrogen cars are a bad joke and have only delayed crucially important changes in our existing energy regime. I am glad that we don’t hear much about them anymore…maybe now we can get down to the serious business of addressing the peak oil challenge instead of just waving it away with pie-in-the-sky talk about hydrogen cars.

I wrote an article about this topic one year ago: http://www.energyandcapital.com/articles/hydrogen-economy-fuel+cell/480

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Washington: Last week I was given an flex-fuel vehicle rental car. There was not a single E85 pump en route or near the return location. It seems that even when there may be alternative fuel, the exising means of delivery are controlled by the competition. I’d bet there are tens of thousands of FFVs in the D.C. area that could reduce demand for oil.

Chris Nelder: That’s true, if we had the ethanol to run them on! Unfortunately, the chicken of E85 cars arrived well before the egg of domestic ethanol. In my opinion, we will have a very difficult time just meeting the existing ethanol mandate in this country, and it will continue to drive up food prices. E85 isn’t the answer; electric vehicles running on renewably produced electricity are.

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Ashburn, Va.: Why is the mainstream media ignoring the role of the Phil Gramm legislation in 2001 — at the request of his wife while sitting on the Enron board — to allow trading of Oil from NYMEX to ICE, when the number of contracts being traded went from 150,000 a day to 1.5 million?

Chris Nelder: I don’t think they’ve been completely ignoring it…I’ve seen several pieces addressing the ICE exchange. But it looks like that trade may be put under more restrictive rules now.

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Washington: Could you comment on the role of speculation in the price of a barrel of oil? How significant is speculation in driving up oil prices?

Brian Hicks: I think it’s important to understand the role of speculation in free markets. Speculation is to markets what air is to fire. They cannot exist without each other.

If speculators are driving up the price of oil, they’re doing it for a reason, ie, they believe that a supply crunch is coming. As a result, they believe that the current $135/barrel price of oil will be considered cheap years from now. I agree with them!

And listen, we’ve been hearing this “speculation… and oil is in a bubble” argument/excuse for years now. Remember the infamous Steve Forbes prediction back in 2005 when he said oil was in a bubble… and that it would fall back to $30 a barrel?

Well, we’re still waiting…

Chris Nelder: I don’t believe that speculation plays much of a role. I addressed this in a recent column: http://www.energyandcapital.com/articles/oil+futures-contango-backwardation/707

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Silicon Valley, Calif.: Much of this discussion has ignored the adverse tradeoff of more oil meaning more greenhouse gases (GHGs). I anticipate cap-and-trade mechanisms for near-real-time trading of GHGs. While these will be marginal cost compared to $140-per-barrel oil, these will provide other incentives to shift away from carbon. Can you forsee an awakening that an alternative to oil is a national security and human survival issue great enough to result in a $100-billion-scale Manhattan Project?

Chris Nelder: Yes! And I hope and pray for it, ASAP! Only $100 billion isn’t nearly enough. Maybe $100 per year, for many years…

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Collegeville, Pa.: Okay, so tell me, if I’m your average homeowner who makes enough money to get by but is feeling the pinch like everyone else … how can I protect myself from rising gasoline prices, soon-to-be higher natural gas prices, etc.? What is the most practical advice you can give?

Brian Hicks: Well you’re probably reacting — correctly — to higher energy prices. You just don’t know it or have acknowledge it.

What I mean is this… for far too long, oil and gas were essentially free to Americans. There are 336 pints in every barrel of oil. So when oil was trading for $20 a barrel…if was essentially selling for 6 cents per pint. That’s basically a free commodity.

So, because it was so cheap, Americans consumed as much oil and gas as they possibly could without ever thinking about the future consequences. Well, the consequence is that we’ve consumed over 1 trillion barrels in 150 years… and this was the cheapest of the cheap oil.

Today, we’re now consuming the more expensive oil. And as a result, Americans are having to look into the mirror… and they have to make consumption decisions based on this new high price.

Americans — even myself — are driving more efficiently… more locally.

Chris Nelder: Your best defense is to review every corner of your life and try to reduce your energy consumption: your car, the insulation of your house, your appliances, your commute, everything. If you can, put some solar panels on your roof.

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Virginia Beach, Va.: I read recently that the U.S. produces around 5 million barrels of oil a day, and that of that amount almost 2 million barrels is exported. Do you know why we are exporting oil when we clearly need every drop for our own use? Also, do you know to where it is exported?

Chris Nelder: Exports and imports are a very complex subject. The EIA regularly reports the data on where imports and exports come from and where they go. Check out the Petroleum Navigator on their web site for the data. Exports from the U.S. are a fine example of why oil is a globally traded commodity, and why oil prices aren’t all about us.

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Brian Hicks: I want to thank the Washington Post for this session … and for all the great questions.

I’ll see you on the other side of the Peak!

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Chris Nelder: Thank you all for your questions. It’s been a pleasure to have an opportunity to answer them directly, and I hope you found the information we provided useful. For those who want to take a closer look at the data, the possibilities, and the limits of energy in the future, check out our book — it’s all in there!

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