Sunday, March 19, 2006

Can Peak Oil Make You Rich? Does it Matter?

There is no shortage of financial newsletters, blogs, and websites that will tell you quite confidently that we are closing in on world peak oil production and that you can make a lot of money with the right investments. (For a sampling, try this promo for a newsletter called Outstanding Investments, blogs such as The Real Deal and New Era Investor, and websites such as Resource Investor and 321energy.) What this tells me is that these investment-oriented commentators don't quite grasp the issue. The question isn't whether you can make money on peak oil. Somebody will. The question is whether doing so will matter.

No doubt a few market participants will make great fortunes in the ongoing energy bull market. That this particular bull market may or may not be the result of an imminent peak in world oil production doesn't really matter to an investor. Other factors may be sufficient to spawn new speculative fortunes in energy including previous low investment resulting in infrastructure and personnel limitations; war and the threat of war in the Middle East; skyrocketing demand, especially in Asia; and regional natural gas shortages.

Investment advice on peak oil, however, is lost on most of the people in the world because they simply do not have the savings to invest or lack the skills to do so even if they do have the money. For the remaining few, the answer to whether such investing actually matters depends on the time frame. In the short term the answer is probably yes. In the long term, the answer is more than likely to be, "Not as much as many people think."

In the short term climbing energy prices will undermine the standard of living for all the world's energy consumers. A small group who work for energy producing companies and countries will prosper, and shareholders in energy companies are likely to prosper as well. So, from this perspective it may make sense to hedge one's bets by investing some money in the energy markets.

But, peak oil is probably not going to be a one-way street to financial heaven. One of the effects of high energy prices is to depress economic activity. If high prices bring on a recession or even worse, an economic depression, energy prices will fall along with all other prices--maybe not as far, but far enough to put a big dent in any investing profits. The other thing to remember is that investing is a social phenomenon. If everybody who invests "knows" that energy is the place to be, the market is probably topping. The point is that by definition not everyone will reap big profits in the emerging energy bull market. It takes latecomers to make such investing pan out for those who got in early.

Oddly, sites promoting peak oil money-making ideas seem to be assuming that we will somehow return to a business-as-usual world in which lucky investors can spend their new fortunes. But, in the long term, peak oil means we will never go back to business as usual.

Perhaps the world will move on to a miraculous new energy source making any investments in the fossil fuel industry ultimately a big loser. Perhaps the world will be faced with ever decreasing supplies of energy which will result in a chaotic and highly destructive descent into a low-energy society that gives new meaning to the word "post-industrial." Perhaps money and credit as we know it will cease to exist, and life will become intensely local. In such a world the financial riches of a networked, global economy won't have any meaning. Beyond this is the question of timing. Either the optimistic or the pessimistic scenario might unfold quickly or take decades to reach a conclusion.

Given the uncertainties, perhaps the most important investments that any of us can make are in helping to prepare our families, friends and communities for the energy challenges ahead. This might mean spending some of our own treasure for the public good. In this way, at least in the short-term, peak oil investing can provide a benefit, not just to the individuals who do it, but also to the communities in which they live.

If those who profit from rising energy prices come truly to understand our energy predicament, they can help communicate it to others and assist in preparing our communities. But the peak oil investor who succeeds at making money, while failing to grasp the gravity of our situation, may find that his or her new fortune means nothing to a community that has been forced by circumstances to move quickly beyond a world governed by Wall Street wizards and international finance. In such a world, even if you manage to hold on to your investment winnings, from that point onward what you can do will be far more important than what you are worth.

Friday, March 10, 2006

What if Daniel Yergin is wrong?

Daniel Yergin is the oil optimist that peak oil believers love to hate. He is president of Cambridge Energy Research Associates (CERA), perhaps the most well-respected energy consulting firm in the world. He is the Pulitzer Prize-winning author of the best-selling history of oil, The Prize, which was also made into a PBS series. And, he is friendly, upbeat, calmly reassuring, and above all, quotable. Yergin's smiling face stands in stark contrast to the dour visages of the peak oil crowd as they warn of an imminent peak and subsequent collapse in oil production, an event that will shake our civilization to its very foundations.

Not so fast, Yergin says. We have plenty of oil--enough to meet the needs of growing Asian giants such as China and India and the rest of us as well for the next 30 to 40 years. After that oil supplies will reach an "undulating plateau." (The word "peak" seems so downbeat and distasteful that he refuses to utter it.) But, Daniel Yergin knows no more than anyone else about the future, especially the future 30 to 40 years hence. (In the past, much shorter time periods have proven problematic for Yergin and his firm. CERA predicted in 2001 that natural gas supplies in North America would be plentiful for the foreseeable future. That turned out to be woefully off the mark. In itself, it doesn't mean he's wrong about oil--only that he and his firm can make mistakes like the rest of us.)

To repeat: Neither Yergin nor anyone else knows anything for certain about oil supplies 30 to 40 years hence. Yergin is merely assigning a high probability to a peak then. But, implicit in his forecast is this: Since oil is a finite resource which is being continuously depleted and since no one--not even Daniel Yergin--knows exactly how much new oil will be found over the next three to four decades, it follows that the probability of an oil peak grows with each passing year. It is this reality and not the cheerful certainty which Yergin exudes that ought to command our attention.

The obvious question then is this: What if Daniel Yergin is wrong? What if the very low probability he assigns to a nearby peak doesn't stay neatly tucked beneath the tail of the bell curve of probabilities? What if peak oil--however disrespectful and unmannerly it may be--is about to arrive (or has already snuck in the back door and is waiting in the broom closet to surprise us)?

In Daniel Yergin's world, the marketplace will take care of all necessary adjustments. But, no reporter to date has bothered to press him on how this would work if a peak were to occur, say, next year. If he were pressed on this point, I am certain he would say that a peak will not occur next year or the year after that or the one after that. Naturally, he could produce evidence for this belief; but, ultimately he could not by definition prove it--just as none of us can prove anything about the future.

But, implicit in Yergin's insistence on a distant peak is that the marketplace would deal very badly with a nearby one. And, here we should note that Yergin is the author of another famous book called Commanding Heights, a paean to free market ideology. To admit the possibility of a nearby peak would be to admit that the free market has already failed to detect and fix a critically important problem, one that could challenge the very continuity of modern civilization. It would be like saying one's god had failed, the god in this case being the "marketplace." There would be "demand destruction" on a major scale, the kind that destroys a lot of people. There would be no ready oil substitutes and no ready infrastructure if we had them. There would be parlous consequences economically, socially, politically, and probably militarily. There would be serious questions about whether we could produce enough food and whether we could distribute it even if we did.

Let us stop and think for a moment about what would happen if, on the other hand, we began to implement on an emergency basis the recommendations of the dour peak oil crowd. If such a speeded up program succeeded, people everywhere would end up with the following: 1) Splendid public transport including excellent intercity rail; 2) a great increase in the amount of energy produced by nonpolluting, renewable energy sources; 3) increasing amounts of locally grown, organic food--some of it grown in one's own garden; 4) the quick and widespread dissemination of green technology everywhere; and 5) greater participation in the governance of our local communities as they become more sustainable and self-sufficient. Such a response would coincidentally help us make great strides in addressing global warming since global warming results from our use of carbon-based fuels.

But, what if, after all of this, it turned out that the dour peak oil crowd was wrong? The worst that would happen is that we would have prepared ourselves for a peak that would then pass almost unnoticed in the distant future. We would have transformed society from one that is unsustainable into one that is sustainable. The only real criticism that Yergin could make is that this transformation took place earlier than it absolutely had to. Or he might be one of those who would think that such a world--one no longer run by giant multinational corporations and huge centralized bureaucracies--isn't worth living in.

Peak oil pessimists are not very much worried about being wrong on the exact date of a peak. They are trying to provide guidance for policymakers and the public. To that end they regularly update their projections, seemingly without embarrassment, when new information arrives. What worries the pessimists much more than being wrong is that the world will arrive at peak oil unprepared. Can Daniel Yergin say the same?