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Special Report
The Paradigm Shift of Sky-High Oil
Peak Oil, Utilities and Nuclear
By George Bell
Peak oil means utilities will face higher prices and be forced to move into alternatives like nuclear power.
Here’s why: Basically peak oil is the theory that once less expensive sources of pure oil (high natural grades like light, sweet, crude) are exhausted, refining measures will become more expensive and trigger an environment of rising oil prices. Oil alternatives like "heavy sour" and oil shale are both significantly more expensive for refineries to process and will only help drive up prices even more.
The theory was initially derived by Marion King Hubbert, who made his initial predictions in 1956. His thoughts were met with substantial resistance, but have since gained immense support. At this point, even the U.S. government’s predictions regarding global oil production are somewhat validating the peak oil theory, as shown in the attached file labeled "Peak Oil."
In a 2004 report titled "Strategic Significance of America’s Oil Shale Resource" prepared by the Office of Deputy Assistant Secretary for Petroleum Reserves: Office of Naval Petroleum and Oil Shale Reserves U.S. Department of Energy Washington, D.C., the authors state: "It is generally agreed that worldwide petroleum supply will eventually reach its productive limit, peak, and begin a long-term decline. What should the United States do to prepare for this event? An objective look at the alternatives points to the Nation’s untapped oil shale as a strategically located, long-term source of reliable, affordable, and secure oil."
In addition, on page 12 of the report, the authors' state, "Rising world oil demand will add upward price pressure on petroleum prices. Higher world oil prices could cost the U.S. economy $1.1 trillion in gross domestic product (GDP) between now and 2020, as American consumers pay more for gasoline, diesel, jet fuel, heating oil, and other petroleum products (see Analysis in Section 5.2)."
If the peak oil theory holds true, the U.S. economy could be at great risk. Even major oil companies are concerned about waning oil resources, as seen in Exxon Mobil’s 2007 announcement that it is stepping up the company’s oil exploration budget to $21 billion. Keep in mind U.S. GDP has been falling dramatically over the past few years, and according to the International Monetary Fund (IMF) 2008 outlook, could clock in at a mere 1.5% this year, though current predictions are more in the 0.7% area.
It is important to note that there are two sides to every argument…the report addresses this issue on page 15 where the authors state, "The two sides of the debate are being referred to as the depletionists and the nondepletionists. Depletionists argue that world production will peak, perhaps in the near term, and that the advent of the peak portends a long, painful decline with serious worldwide economic consequences. Non-deflationists argue that advances in technology and favorable investment climates will continue to stave off the peak in production long enough to promote a smooth transition to other energy forms with higher use-efficiency."
What’s important to note is that regardless of which side of the fence one might fall on, the simple fact of the matter is that oil is a finite resource, which will eventually run out. Moreover, even the non-deflationists indicate, "...a smooth transition to other energy forms with higher use-efficiency."
The National Petroleum Council (NPC) probably falls in the "non-deflationist category," as witnessed in the recent NPC Global Oil and Gas Study, released in July of 2007. The NPC does not buy into peak oil.
However on page 3 of the executive summary, the NPC states: "To mitigate these risks, expansion of all economic energy sources will be required, including coal, nuclear, renewables, and unconventional oil and natural gas. Each of these sources faces significant challenges—including safety, environmental, political, or economic hurdles—and imposes infrastructure requirements for development and delivery."
Peak oil and/or NPC -- or not -- the argument for utilities moving towards nuclear power is bold. Case in point, the Christian Science Monitor recently reported, "In the next 15 months, US regulators expect applications for up to 28 new plants." Clearly, the game is changing.
It’s important to remember that though the peak oil theory holds true in terms of declining global oil production, the one important aspect it leaves out is the fact that even with lower global production the emergence of alternative energy sources, including nuclear power, may indeed keep oil prices lower than where the "severely high" prices peak oil theorists have been touting over the years. (Note: should oil settle at non-inflation adjusted prices, oil could still be "high, but not severely high." Fact is, $50 a barrel is okay for shale, but not amazing by mega-profit standards. Some predict that shale can be extracted for as low as $13 a barrel, though it might be an optimistic figure.)
And should the price of oil not fire through the roof, oil shale is expensive and difficult to process. What’s more, at present, the world produces roughly 1 to 2 million barrels of oil a day from shale. Using VERY liberal estimates, the world may be able to produce 37 million barrels of oil a day from shale by 2030...
Considering the EIA predicts by 2030 the world will consume 118 barrels of oil a day… The limited capacity of shale extraction still supports a global move to nuclear power as an alternative.
It’s true that on an inflation adjusted basis that oil should be trading somewhere near $100 a barrel… however, even this argument for higher prices only solidifies the argument for utilities to embrace nuclear power.
Higher oil prices will only encourage utilities to move towards alternative fuels, in an effort to keep costs low.
Really then, both the inflation adjusted oil argument for higher prices and/or the peak oil theory all mean that we are on the dawn of an age where utilities are already investigating lower-cost long-term viable solutions to high energy prices. All of which reinforces the need for nuclear power.
One argument readers may present in their mind is, "If the price of oil goes up, wouldn’t the recovery costs for uranium as well?" And the answer is yes; however, even if uranium oxide (U308) prices double from where they are now ($73 per pound), nuclear power is still a long-term cost viable alternative to waning crude resources, coal and natural gas.
Clearly then, at the end of the day, peak oil is a major concern for all, but uranium could be the answer to the United States energy woes, while also abating "peak oil risk" all at the same time.
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