This is an excerpt from David Korn’s August 16-17, 2008 weekly newsletter (Click for a FREE SAMPLE ) that comments on Bob Brinker’s Money Talk.
On Saturday (August 16, 2008), Bob (Brinker) had on one of his favorite guests, Charlie Maxwell, Senior Energy Analyst for Weedon & Co.
Charlie was educated at Princeton and then Oxford. He has been working in the oil industry since the 1950s. In the 1960s he became an analyst on Wall Street and has been rated the #1 energy and oil analyst on many occasions. Bob heaped heavy praise on Charlie as the best of the best in terms of energy analysts and mandatory listening for Moneytalk trekkies. Bob also congratulated Charlie on receiving the M. King Hubbert E3 Ward for Excellence in Energy Education at the 2007 ASPO World Oil Conference. I summarized the interview below.
Maxwell/Brinker: Bob opened the interview asking Charlie his view on what is going on in the energy market. Charlie said what happens next with oil is on everyone's mind. Charlie said he doesn't think we are deeply solving the problem of less oil being produced in the world in the coming years, while demand from foreign countries surges ahead. Many foreign countries subsidize the demand, keeping demand higher than it normally would be. Charlie said he thinks the price of oil will stabilize in the next 1-2 years, and in fact Charlie said he thinks we may see a significant decline in the price of oil down to the $80-90 a barrel range. Charlie said he was looking for oil to come down to those prices and then stay for quite a while around $100 a barrel.
DAVID KORN COMMENT: That would be huge. It also be closer to Charlie's prediction on Moneytalk last year when he forecast that oil would trade in the $50s to the $70s. His forecast that by 2010-2011 oil would trade over a $100 a barrel was obviously way off when oil broke easily through $100 some months back.
Maxwell/Brinker: Bob asked Charlie to comment on people suggesting we convert to wind and solar energy. Charlie said we want to use more solar, but people have to understand that today's solar energy is only about 0.1% of all the energy we use in this country. Even if we could get ten times as much solar, we would only be at 1.0%. Moreover, even if we did a nationwide push for solar energy, the best we might get in the next few years is 3%, and during that time we would have lost more than that in oil alone.
DAVID KORN COMMENT: Charlie's reference to losing more oil during that time is based on his agreement with Dr. Marion King Hubbert, who predicted that the world oil production would reach a peak and then rapidly decline.
Kirk Lindstrom's Comment: For more on what is called "Hubbert's Peak" I recommend the book "Hubbert's Peak: The Impending World Oil Shortage."
In Hubbert's Peak, Deffeyes writes with good humor in easy to understand language about the oil business and a sobering message: the 100-year petroleum era is nearly over. Global oil production will peak and the world's production of crude oil "will fall, never to rise again." If correct and "if nothing is done to reduce the increasing global thirst for oil--energy prices will soar and economies will be plunged into recession as they desperately search for alternatives."
Maxwell/Brinker: Bob asked Charlie to comment on using wind energy to combat the energy crises. Charlie said the first problem is the wind doesn't always blow. Sometimes when you have heavy hot spots, there isn't wind for a long period of time and you have to replace that energy with coal or some other fuel. You would have to build that extra capacity because you never know when you would need it. Plus, it takes a lot of energy to make the infrastructure for wind energy, and there are other problems with it, such as birds that get killed in the propellers. People also don't like the noise they make. And there aren't many places to build them. Even when they do produce electricity, the wind farms are often in areas that they would need to transport the energy produced to where it is needed. Charlie said we are working on superconductor transmission lines, but that is probably 20-30 years away. Charlie pointed out that not everyone agrees with him, and noted that T. Boone Pickins is one of the people pushing wind energy:
DAVID KORN COMMENT: On T. Boone's web site promoting his energy plan, he states that the Department of Energy reports that 20% of America's electricity can come from wind with North Dakota alone having the potential to provide power for more than 25 years. Read about it here:
Maxwell/Brinker: Bob noted that with the price at the pump so high, at some point it is reasonable to assume that price elasticity of demand would take effect. Charlie agreed and noted that when prices initially move higher, people will try to keep their old habits in place. They want to keep their SUVs because they are used to them and they are convenient vehicles. But they weigh about 6,000 pounds and so your gas mileage is not so good. Charlie said he thinks we are moving toward cars that will weight around 2,500 pounds which might produce 60-80 miles per gallon which means the effective cost of transportation would not be going up nearly as much as the price of gas.
DAVID KORN COMMENT: In economics and business studies, the price elasticity of demand (PED) is a measure of the sensitivity of quantity demanded to changes in price. It is measured as elasticity, that is it measures the relationship as the ratio of percentage changes between quantity demanded of a good and changes in its price. Water is a good example of a good that has inelastic characteristics in that people will pay anything for it so it is not elastic. On the other hand, sugar is very elastic because as the price of sugar increases, there are many substitutions for it.
Maxwell/Brinker: Bob asked Charlie to comment on the political movements both pro and con on drilling for oil. Charlie said this has become such a political issue, that some of the facts are lost. Charlie said if we could get more oil through drilling, that would be helpful provided it wasn't too costly in its environmental and economic impact. Charlie said drilling for oil in recent years has proved to be successful with environmental concerns taken care of. Its not a bad idea, particularly in the ANWR area where we have a reasonable chance of finding large supplies. That said, even if we do drill it might not solve the problem. There aren't that many good new areas to drill to make that big a difference. Some additional drilling would be useful, and every bit would help, but it isn't a panacea.
Charlie said there are other ways to spend our money that might bear more fruit, such as developments in clean burning coal since we do have a lot of coal available. Scientists believe we may be able to harness the CO2 and prevent it from going into the atmosphere. Another option is a return to nuclear fuel which does not produce any harmful gasses into the atmosphere.
Nuclear power has been accomplished in Japan and France successfully and China and Russia are moving in that direction. We know from history that the rise of a country's standard of living is proportionate to the availability of fuel and so if we can't continue to meet demand in a cost-efficient manner, we are in trouble. Charlie thinks as a country we are going to have to come back to nuclear power to compete.
DAVID KORN COMMENT: Just this week, France reaffirmed its faith in the future of nuclear power as they are building its first nuclear reactor in 10 years on the Normandy coast. Meanwhile, energy major Tata Power is planning to invest billions into nuclear power in India.
Maxwell/Brinker: How does a coals-to-liquid program play into all of this? Charlie said there was a consortium of governments and big companies to build the first coal-to-liquid plan. The concept is you turn coal to gas, and the gas to liquid. That consortium broke up a few months ago when they found out that the new estimates were triple what they originally projected. So, there isn't any political or economic action toward that move until we can get a trial going to build the first plant. The problem is the first one is going to be costly and might not work well since it is the first one. That said, Charlie thinks that one day this will get done.
DAVID KORN COMMENT: I read an article this weekend that the government gave a $1.4 million grant to the University of Kentucky to step up research on refining coal into liquid fuels and that the University will begin building a $12 million mini-refinery. Read about it here:
Caller: This caller believes that part of the motivation for the invasion of Iraq was for oil. What percentage of Iraq's oil production is online right now? Charlie said the Iraqis were at their maximum production about 7 years before the invasion and at that time were producing about 3.6 million barrels a day. Right now, they are back up to about 2.5 million barrels. They are overcoming terrible odds because their equipment is old and breaks easily. It is amazing that they can get 2.5 million barrels a day, and the potential is that they can easily get up to 6 million barrels a day.
DAVID KORN COMMENT: Time Magazine has an article out this weekend entitled, "Why Iraq is Still Oil Poor" at this url:
Maxwell/Brinker: Many emerging companies are going through economic growth like the U.S. went through from 1920-1980 which will require a lot of oil. Right now, our planet is producing about as much as it can yield. We are replacing older refineries with newer ones, but after 2015 we will be unable to produce enough to meet demand. Every year, the national oil companies must find 5 million barrels a day to equal the losses in depletion of reserves the prior year. The world uses about 86 million barrels a day, and then on top of that there is growth in demand so we need to produce more and more.
DAVID KORN COMMENT: Oil has broken well below its accelerated upward trend of the first half of 2008 and is now currently testing support of an upward trend that began in early 2007. That's what the folks at chartoftheday have to say. See for yourself at the following url:
Caller: Too many people talk about one solution to solve the energy problems. This caller suggested we need an integrated approach with a timetable. Charlie said the problem is so big, we probably need 50-60 smaller solutions. Even nuclear power, which could account for a larger and larger portion of the pie, won't run your cars right now and there is no hope in the near future for nuclear powered cars. The same thing goes for coal unless we convert it into a fuel. It is good for electricity, but not good for cars except for the growing number of electric cars that may come off of coal based plants.
We could get different solutions by higher prices where smart humans start to concentrate on this problem to find solutions. Charlie thinks that is a likely scenario and will work in the late 2020s and 2030s. Right now oil accounts for about 39% of total energy use. But as it moves down to the low 30s, what will we have to replace it? Charlie said that is what worries him about our country in the next 10 years.
DAVID KORN COMMENT: David Strahan has written a book called, "The Last Oil Shock." In that book, he writes, "There are currently 98 oil producing countries in the world, of which 64 are thought to have passed their geologically imposed production peak, and of those 60 are in terminal production decline." Learn more about that book at the hubbert peak web site at this url:
Maxwell/Brinker: Bob asked Charlie to comment on the use of natural gas and how it fits into the equation. Charlie said we are finding out new ways of opening source rocks that we have known about for a long time but could never open. Using new cracking techniques with sand, we are getting lots more gas than we ever suspected we would. This is being led by about 6-8 midsize companies, not the big boys. They are producing a lot of natural gas and all of a sudden the price of natural gas is down from $13 a few months ago to $8 today. Charlie thinks it will settle around $6-$7 and America will have a wonderful run of using it. Charlie said he is sad to see some of natural gas going toward electricity when there are more efficient uses for it. In the end, Charlie thinks it will become a very important fuel as use more compressed natural gas and we modify our cars to use natural gas.
DAVID KORN COMMENT: Last time Charlie was on the show, Bob had asked him to comment on whether hydrogen would ever play an important role in our energy supply. Charlie said he thinks it will in 40- 50 years because hydrogen is the most plentiful element on the planet. Charlie also pointed out that he problem is that Hydrogen bonds so easily and powerfully on a molecular level with other elements that it requires a lot of energy to unbind it and, therefore, getting pure hydrogen is therefore expensive, and it costs money to transport and store. Here is a link to an interesting article addressing hydrogen and peak oil:
Maxwell/Brinker: Bob asked Charlie to comment on the viability of getting fuel through oil shale. Charlie said we have huge reserves of oil shale in places like Colorado but they are extremely expensive to access. Charlie said in the technical sense we have to blow apart the rock, flood it with solvents, then take out the solvents, and then turn it into products. This is very energy intensive. Charlie said we would probably put 70 barrels into a process that might yield us 100 barrels. Thus, there is some modest gains to be seen, but it is not a salvation. On top of the technical problems, Charlie didn't think the environmentalists would allow large areas to be blown up for this purpose.
DAVID KORN COMMENT: Oil shale refers generally to a group of rocks rich enough in organic material to yield petroleum upon distillation. The U.S. Energy Information Administration estimates the world supply of oil shale at 2.6 trillion barrels of recoverable oil. Of that, about 1.2 trillion barrels exist in the United States. If we could just harness that energy in an efficient manner, we would be on to something big.
Maxwell/Brinker: Some say that even if we open drilling for oil off the continental shelf we won't see for another decade. Others say we could have the oil in 2 years. What is your opinion? Charlie said along the Atlantic coast if we started drilling it would probably be 8-10 years before we could get oil from it. In the gulf coast, it would probably be 4-5 years because of the infrastructure and Charlie said he thinks we stand a very high chance of finding additional oil there. Off the coast of Santa Barbara, we could have oil in 3-4 years because we know the oil is there and there are facilities there. How do we know there is oil there? Because we see oil seeping out from under the channel. The total oil you would get, however, does not do too much for the global oil problem, but it would help the situation in the U.S.
DAVID KORN COMMENT: The Wall Street Journal published an article last week that was an eye opener to me. The article cites a study by University of California estimating that natural seepage in the Santa Barbara Channel amounts to about 10,000 gallons of oil and 3.5 million cubic feet of natural gas per day! That means about every three years there is the equivalent of a natural Exxon Valdez spill. The article is entitled, "Most Oil in Santa Barbara Channel is Natural Seepage" and can be read at this url:
Maxwell/Brinker: What about drilling in ANWR? Charlie said right now we are getting 1 million barrels a day pumped through a 2 million/day capacity pipeline that once was full. The beauty of ANWR is we already have the existing facilities that are not full. It would help strengthen the dollar, help reduce our imports, and help reduce our reliance on foreign countries.
DAVID KORN COMMENT: I always enjoy it when Charlie Maxwell is on the show. He is a real class act. Charles Maxwell's bio is at this link:
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