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Uncovering the Real Price of Peak Oil

Commodities / Crude Oil Aug 29, 2012 - 11:37 AM GMT

By: Casey_Research

Commodities

Best Financial Markets Analysis ArticleDoug Casey, chairman of Casey Research and expert on crisis investing, is on the search for real wealth – not investments in companies that push around paper. In this exclusive interview with The Energy Report, Casey shares his pragmatic take on what's next for oil, gas, and nuclear power.


The Energy Report: There will be a Casey Research Summit on Navigating the Politicized Economy in Carlsbad, California, in September. At the last conference, Porter Stansberry caused some excitement with his argument that oil could go to $40/barrel (bbl). What's your view?

Doug Casey: We like to have a range of defensible views represented at our conferences. But personally, I don't think it's realistic to suggest oil prices will drop as low as $40/bbl.

I am of the opinion that the Hubbert peak-oil theory is correct. In the 1950s, M. King Hubbert projected that US oil production would start declining in the 1970s, and he was accurate. Then he projected that in the mid-2000s, the world's production of light, sweet crude would start declining. He was quite correct about that, too.

There will always be plenty of oil at some given price, but to produce oil – even conventional, shallow, light sweet crude – now costs close to $40/bbl in many places.

It's extremely expensive to produce oil through unconventional techniques like horizontal drilling and fracking. Producing oil from tar sands is very expensive and problematical.

Drilling 15,000 feet under the ocean is very expensive and has a lot of risk.

Drilling in politically unstable jurisdictions with sparse infrastructure is neither cheap nor fun. We're talking about production costs of at least $80/bbl in many cases.

I don't think oil is going down much from here.

Let's not, in addition, forget that it's the most political commodity in the world, and that most of it still comes from the Middle East, where tensions will remain high.

I'm neutral to bullish on oil. I'm not bearish at all.

TER: How will US natural gas impact oil prices?

DC: The thing with natural gas is that it's almost an entirely local market. Oil is very transportable, very fungible – it's a world market. Oil prices are relatively consistent – say within 20-30% worldwide. But the price of gas differs by hundreds of percent around the globe because it's not very transportable. It doesn't seem that's going to change in the near future.

The price of gas is going to stay low in the US for some time because of new technologies, namely horizontal drilling and fracking, which allow the exploitation of vast new deposits. These deposits can produce large amounts of hydrocarbons, albeit at relatively high cost. As soon as prices start to rise, however, wells that have been shut because of low prices will start producing again – and that will keep a lid on gas prices for some time to come.

TER: Do you see potential for the US to become a natural-gas exporter at some point in the future?

DC: The problem with gas is that, unlike oil, it's hard to move and inconvenient to export. There are basically two ways that you can move gas. One is via pipelines. That doesn't work very well across oceans. The second is by liquefying it and putting it in liquefied natural gas (LNG) tankers and then transporting it to some place where it is re-gasified again, but that is expensive and it's actually quite dangerous because the LNG tankers are almost like floating bombs.

I'm not convinced that gas is ever going to become a truly international commodity – at least not until it's much more expensive.

The idea of the US becoming a huge gas exporter is a politically driven fantasy. The government throws ideas out if it makes them look good. We bat them back when we weigh up the realities, then it's up to the reader to decide. It's why I think our summits and the world-shaping topics we discuss are so important.

TER: Can we assume that you're not as bullish on gas as you are on oil?

DC: Yes. I'm much more bullish on oil. Oil is a much more concentrated energy than gas. Oil is needed for cars. It's needed for airplanes. It's needed for everything. Gas is mostly used for utilities and heating. Oil is both a much denser energy and a much more important form of energy.

TER: Speaking of concentrated types of energies, you have called nuclear "the safest, cheapest, and cleanest form of mass power generation," yet we still haven't seen the uranium price return. What's your view on the future of uranium?

DC: I have to be bullish simply because of reality. It really is the safest, cheapest, and cleanest form of mass power, but unfortunately it's also the object of mass political hysteria. Many misinformed but well-funded nongovernmental organizations simply hate uranium, for purely ideological reasons.

Actually, thorium would be an even better form of nuclear power than uranium. We've been using uranium primarily because you can't make nuclear bombs out of thorium, and the US was building up its nuclear arsenal from World War II on. This is how uranium came to be used for nuclear power plants instead of thorium, but that's a whole different discussion.

Of course, now the disaster at Fukushima is held up as proof that nuclear isn't viable; the Japanese and German governments are panicking and shutting down their nuclear plants as quickly as they can. But doing so is extremely foolish.

To start, Fukushima used 50-year-old technology. That plant was – like most plants in the world today – an antique, two generations behind current designs. It was also poorly located. It should never have been put right on the ocean. Other design mistakes were made. Still, even over the next decade, only a few people will die from radiation released, whereas at least 20,000 died from the earthquake and tsunami.

But the real question is: if nuclear is not going to be used for mass power generation, where is the power going to come from?

Most of the world's power is generated by coal, but coal is extremely dirty and dangerous in every way possible – in the production process, and in the residues that it leaves both on the land and in the air.

In an industrial world with seven billion people, the only energy source that makes sense is nuclear power. Sure, you can use wind and solar from time to time and in certain places. But those technologies are extremely expensive, and they absolutely can't solve the world's energy problems. Certainly not when electrical grids start going down, as they did in India last month. That's why India and China will be building scores of nuclear plants in the years to come.

TER: Doug, thanks for sharing your insights. I greatly appreciate it.

DC: Thanks for having me. I encourage your readers to attend the Navigating the Politicized Economy Summit. If you can't make it, the audio collection is a great way to benefit from the information the conference's 28 expert presenters will be sharing – and if you preorder, you can save $100. It's a great deal.

© 2012 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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