PROFIT FROM THE PEAK The End of Oil and the Greatest Investment Event of the Century BRIAN HICKS CHRIS NELDER John Wiley & Sons, Inc. ffirs.indd iii 3/20/08 1:51:34 PM ffirs.indd ii 3/20/08 1:51:34 PM PROFIT FROM THE PEAK ffirs.indd i 3/20/08 1:51:33 PM ffirs.indd ii 3/20/08 1:51:34 PM PROFIT FROM THE PEAK The End of Oil and the Greatest Investment Event of the Century BRIAN HICKS CHRIS NELDER John Wiley & Sons, Inc. ffirs.indd iii 3/20/08 1:51:34 PM Copyright © 2008 by Angel Publishing, LLC. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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HD9560.5.H47 2008 333.8'23—dc22 2007047638 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 ffirs.indd iv 3/20/08 1:51:34 PM CONTENTS List of Figures ix List of Tables xii Acknowledgments xiii Introduction xv PART I. THE CRISIS IN A BARREL CHAPTER 1: DECEMBER 2005: THE MONTH THE DEVIL WEPT HIS TRILLIONTH TEAR 3 CHAPTER 2: WHAT IS PEAK OIL? 7 What Is Oil? 7 Hubbert’s Peak 10 Types of Oil 12 Refi ning 15 Oil Prices 16 Reserves Revisions 16 Importance of Giant Oil Fields 22 When Is the Peak? 25 Exports 31 Reserve Replacement and Deepwater Drilling 35 Differing Projections 36 Drilling Like Never Before 42 Infrastructure Issues 44 The Bottom Line on Peak Oil 46 The Hard Truth 51 v ftoc.indd v 3/20/08 2:55:16 PM vi Contents CHAPTER 3: WANTED: FIVE NEW SAUDI ARABIAS 53 Global Demand and Population 54 China and India 58 Making up for Depletion 62 U.S. Dependence 63 Investment Opportunities 67 CHAPTER 4: $480 A BARREL: THE TRUE VALUE OF OIL 71 Cheaper than Water 71 Draining the National Coffers 72 The True Cost of Oil 73 Government Subsidies 74 Environmental Costs 75 Climate Change Cost 76 Natural Capital Costs 76 CHAPTER 5: THE PENTAGON PREPARES FOR PEAK OIL 79 Reduce Dependence on Oil 80 Reduce CO2 Emissions 85 Staunch the Bleeding 88 Invest Heavily in Renewables 89 Policy Recommendations 90 Solar for China? 91 PART II. MAKING MONEY FROM THE FOSSIL FUELS THAT ARE LEFT CHAPTER 6: TWILIGHT FOR FOSSIL FUELS 95 Natural Gas 96 Coal 111 Diminishing Returns and Receding Horizons 119 Energy Return on Investment 122 Global Warming 123 ftoc.indd vi 3/20/08 2:55:16 PM Contents vii CHAPTER 7: TAR SANDS: THE OIL JUNKIE’S LAST FIX 125 Tar Sands 125 Oil Shale 131 PART III. ENERGY AFTER OIL CHAPTER 8: THE RENEWABLE REVOLUTION 137 Oil and Gas Executives Want Renewables 139 World Bank Financing 140 Biofuels 141 CHAPTER 9: ENDLESS ENERGY: HERE COMES THE SUN 153 A Short History of Solar Technologies 154 The Sky’s the Limit 155 Photovoltaics Takes Center Stage 156 Grassroots Momentum 160 Investment Opportunities 161 CHAPTER 10: PRESSURE COOKER: TAPPING THE EARTH’S HEAT 165 What Is Geothermal Power? 166 Benefi ts of Geothermal Power 169 Explosive Growth 169 Investment Opportunities 171 CHAPTER 11: NUCLEAR’S SECOND ACT 175 Nuclear Potential 176 China and Nuclear Power 177 Limits to Nuclear Power 178 Investment Opportunities 183 CHAPTER 12: WHAT’S NEEDED: A MANHATTAN PROJECT FOR ENERGY 187 The Importance of Timely Response 188 Apollo Alliance 192 ftoc.indd vii 3/20/08 2:55:17 PM viii Contents Carbon Taxes and Cap-and-Trade Systems 193 Gasoline Taxes 197 Negawatts 198 Oil Depletion Protocol 201 Replacing the Fleet 202 Combined Heat and Power 203 Smart Grids 203 Wind Energy 209 Wave and Tidal Energy 213 Relocalization 217 The Hydrogen Economy 218 CHAPTER 13: A FUTURE ELECTRIC 225 The Rail Revolution, Part II 226 Electrifi ed Cars 231 All-Electric 232 EPILOGUE: WHY WE’RE ENERGY OPTIMISTS 235 A Harsh Reality 235 Foresight Is 2020 237 Never Sell Short Humanity 238 Appendix A Energy Units and Equivalences Tables 241 Appendix B Top Oil Producers and Peak Production 245 Appendix C Energy Mix Charts 251 Glossary 255 Notes 257 Index 279 ftoc.indd viii 3/20/08 2:55:17 PM LIST OF FIGURES Figure 2.1 Oil Formation Process 8 Figure 2.2 U.S. Oil Production Profi le 11 Figure 2.3 US-48 Hubbert Curves 12 Figure 2.4 World Hubbert Curves 13 Figure 2.5 Time-Shifted Hubbert Curves 13 Figure 2.6 Non-OPEC Crude Quality 14 Figure 2.7 Oil Refi ning 15 Figure 2.8 Political Reserve Additions 19 Figure 2.9 Kuwait Oil Reserves History 19 Figure 2.10 Distribution of Proven Reserves in 1986, 1996, and 2006 22 Figure 2.11 Simmons’ Oil Pyramid 25 Figure 2.12 Giant Field Discoveries, Pre-1950s to 1990s 27 Figure 2.13 World Oil Production (Crude Oil Plus Natural Gas Liquids) and Various Forecasts (1940–2050) 28 Figure 2.14 World Oil Production (All Liquids)— ASPO 2006 Base Case 29 Figure 2.15 World Crude Oil Plus Lease Condensate Production 30 Figure 2.16 World Oil Production (Crude Oil Plus Natural Gas Liquids) Consolidated Forecasts 31 Figure 2.17 World Liquids Exports, January 2002–February 2007 32 Figure 2.18 OPEC Liquids Exports, January 2002–February 2007 34 Figure 2.19 International Energy Agency Medium-Term Supply/Demand Growth 39 Figure 2.20 Euan Mearns’ Ghawar Production Model 43 Figure 2.21 Baker Hughes Oil Rig Count in Saudi Arabia vs. Saudi Arabian Oil Production 45 ix ftoc.indd ix 3/20/08 2:55:17 PM x List of Figures Figure 2.22 Energy Information Administration World Liquids Production, 2004–2030 47 Figure 3.1 World Oil Production and Population, 1900–2005 54 Figure 3.2 Sum-of-Energies Model of World Population 55 Figure 3.3 World Marketed Energy Consumption by Region, 2004–2030 59 Figure 5.1 Carbon Dioxide Emissions from Fossil Fuels for the United States and China, 1985–2003 88 Figure 6.1 North American Gas Production, 1985–2005 99 Figure 6.2 U.S. Gas Production Rate, 1993–2006 100 Figure 6.3 U.S. L48 Gas Production versus Successful Drilling 100 Figure 6.4 Canada’s Gas Production versus Wells and Reserves 101 Figure 6.5 North American Natural Gas Supply Outlook 102 Figure 6.6 Gas Recovery per Well versus Gas Wells Completed, Western Canada Sedimentary Basin 103 Figure 6.7 Production, Consumption, and Net Imports of Natural Gas in the United States, 2004–2007 105 Figure 6.8 U.S. Cost of Gas Imports, 1970–2005 106 Figure 6.9 U.S. Net Imports as Share of Consumption, 1958–2005 106 Figure 6.10 U.S. Natural Gas Supply Forecast by Source, 2005–2030 107 Figure 6.11 U.S. Natural Gas Supply with Canadian Imports and Shortfalls, 2005–2025 108 Figure 6.12 Worldwide Possible Coal Production 114 Figure 6.13 Coal Production Scenario with Energy Input Costs for Carbon Dioxide Capture and Storage (CCS) 116 Figure 6.14 Change in Carbon Emissions from Substituting for Petroleum 118 Figure 8.1 United States Energy Sources, 2004 138 Figure 8.2 World Total Primary Energy Supply, Fuel Share, 2004, Percent 139 Figure 10.1 Geothermal Flash Plant 168 Figure 10.2 Geothermal Binary Cycle Plant 168 Figure 11.1 World Electricity Generation by Fuel, 2004 and 2030 178 ftoc.indd x 3/20/08 2:55:18 PM List of Figures xi Figure 11.2 Uranium Ore Grade, 2006–2076 181 Figure 11.3 Future Production Profi le of Uranium—All “Possible Reserves” 182 Figure 11.4 Ux U3O8 vs.