Sunday, August 27, 2006

The Energy Crisis - The Truth in Summary

I will not pretend to be an expert on the energy situation. However, over the last couple of years I have read countless articles, books, and blog postings on the subject, not to mention attending the two day Global Warming conference. The following summary must be read with the understanding that I am a an optimist by nature.

Energy is cheap and plentiful by historic standards. It has been cheaper during the past 25 years, and it has been more expensive. However, on balance energy is currently very plentiful, and pretty cheap. Compare the cost to heat or air condition a home in 1985 compared to now in constant dollars and you'll get some idea.

The earth has abundant resources of locked up energy. Different experts reach vastly different conclusions about known reserves of oil, natural, gas, coal, and shale. The truth is that no one really knows the potential for known fields as technology continuously increases extraction methods. And, no one knows how many fields are left to find. What we do know is that the experts can't even agree on how long existing reserves will last. 50-250 years seems to be the range.

New ways to create, store, and conserve energy are even more abundant. It is almost a lead pipe certainty that there will be one or more major breakthroughs in the energy equation in the next decade. The evolutionary improvements in batteries, engines, motors, solar power, wind power, fuel cells, hydrogen power, biomass, synfuels, and nuclear are already adding powerful potential to both boosting known reserves and lowering cost. It will not take much to create a revolutionary breakthrough.

The economics of energy create the greatest roadblock to revolutionary change. How quickly we forget that only 6 years ago, oil was $12 a barrel and the oil industry in Texas and Oklahoma was devastated. Four years ago OPEC was trying to stabilize the cost of a barrel at $25. Natural gas is back to $6-$7 MMBtu after being at $12 late last year and early this.
When oil is at $25 and Natural gas is at $6 or less, other forms of energy can't currently compete. Therefore, smart money is not willing to invest in projects that can't make a profit.

When the price of oil is $70 a barrel, and natural gas is at $12, speculative money dances into the market hoping to underwrite the next big breakthrough. However, this speculative money generally only provides another layer of cash to fund evolutionary changes in other potential sources of energy. The good news is that each evolutionary improvement in solar, wind, biomass, brings these methods closer to competing with $25 oil.

In a future post, I will give a brief summary of the current status of various ways we are likely to keep energy cheap and plentiful into the very distant future.

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