Energy policy or disaster
By Eric Sprott and Sasha Solunac
In the past month, Peter Foster has written two editorials criticizing "peak oil theorists." Rather than questioning the geology (although he clearly believes that even geologically peak oil is nothing to worry about), Mr. Foster apparently relies on blind faith in "free markets" and "human ingenuity" to avert an energy crisis. Furthermore, according to Mr. Foster, any attempt by governments, through energy policy or otherwise, to do anything about the looming crisis is wrong. He likens such actions to those of "old Soviet planners" and attempts to turn the peak-oil problem into a left-versus-right ideological debate. Unfortunately, we believe that laissez faire in this instance is tantamount to a head-in-the-sand approach that accelerates the problem rather than alleviating it.
Don't get us wrong. We are proponents of free markets a la Adam Smith. However, and unfortunately, oil is not a widget that can be produced freely depending on supply/demand signals. Crude oil has three important and distinct differences from your everyday widget. First of all, it is a limited non-renewable resource, the production of which will someday peak in spite of our desire to not have it do so. This is indisputable; the only question is when. Second, unlike the common widget, there are currently no viable substitutes for crude oil. Oil is the pre-eminent transportation fuel. We rely on oil for over 90% of our transportation energy and are expected to do so for at least the next two decades. Try as we might over the past century to find viable alternatives, there are simply none that are as plentiful or as cheap. To believe that we could all continue to drive around in our SUVs and produce ethanol or hydrogen or nuclear batteries to replace the scale at which we currently consume oil is a pipe dream. Third and finally, crude oil has an importance to civilization that few, if any, widgets have. Wars have been won and lost because of it. We've gone to the moon thanks to it. We live our lives enslaved to it. It is something we take for granted and can't imagine going without. We can survive without MP3 players but to do without oil is a terrifying proposition to most. Indeed, it is difficult to imagine a commercial product that we are more dependent on. Perhaps food -- but even then, the food industry is heavily reliant on oil far more than most people are aware.
Therefore, to ignore the fact of peak oil and "let the markets decide" is naive at best and disastrous at worst. Human history is replete with examples of mismanagement of resources when left in the hands of the free markets. One example that immediately comes to mind is the Newfoundland cod fishery. Sorry Adam Smith, but individuals acting for their own benefit do not always produce an outcome that is best for the whole. In this case, laissez faire failed and we are now without the cod that was once considered boundlessly abundant. What's worse, fish is a renewable resource and yet we still managed collectively to bungle it up. Oil is not renewable. We also have close substitutes for fish (chicken, beef, etc.). For oil we do not. Let's not kid ourselves. Peak Oil, when it happens (not if), will be a world-changing event.
We will one day find a substitute for oil (we won't have a choice), but alternatives are still decades away from fruition. If peak oil happens today, or next year, or the year after that, no amount of human ingenuity nor technology will save us. To believe otherwise is naive. This is why we believe the debate on peak oil needs to happen here and now, even if the outcome is unpleasant and alarming. Marion King Hubbert, the geophysicist who predicted in 1956 that U.S. oil production would peak in 1970, was also considered an alarmist in his day. But, in hindsight, he was proven to be correct even though right up until the peak few believed that U.S. oil production was on the verge of going down.
Oil prices soared in the early 1970s. Yet, the free markets failed to avert the decline in U.S. oil production even though there was every economic incentive to do so. We see a similar phenomenon occurring today with non-OPEC oil production. In spite of an escalating oil price, estimates for non-OPEC oil production have been coming down throughout the year. According to the International Energy Agency, back in December, 2004, non-OPEC production was expected to be 1.2 million barrels a day higher this year over last. By July of this year, the estimate was revised down to 900,000 barrels per day. Today the estimate stands at merely 175,000 bpd. In that time the price of oil is up 50%. Why aren't the markets working? Clearly, a blind faith in free markets isn't the solution to the peak-oil problem. It is for this reason that we believe we should be worried about Middle East oil production going forward, especially that of Saudi Arabia. Without a substantial increase in Saudi production in the next few years (every year) we are literally up the creek without a paddle ... let alone a motor.
Therefore, to not have an energy policy, to not have a debate, to keep our heads buried in the sand and to just keep doing as we've been doing, can only lead to disaster. We need a strategy before the crisis hits, not after. It's not a question of left versus right. It's not a question of free markets versus managed economy. It's not a question of Adam Smith versus Lou Dobbs.
It's a question of survival.
Eric Sprott is CEO, and Sasha Solunac an analyst, at Toronto-based Sprott Asset Management Inc.