The reason I think oil is doomed (in response to FourthAxis)
June 06, 2008
– Comments (12)
Yes, count me in as a big grizzly permabear. I fully believe that the oil industry as we know it today has 15 years of life ahead of it, and even that is optimistic. Why? Because the numbers tell the story. Look at this graph:
World AnnualPhotovoltaic Production, 1975-2007
Looks pretty impressive? Note, however, that all this growth took place while oil was below $80. Essentially, it represented the early adopters who overpayed several hundred percent for the solar technology to show off their technological sophistication, to make use of government incentives, or to power homes in remote locations where the grid was not available. This is all beginning to change now. First of all, companies llike STP that use the conventional silicon technology are about to achieve grid parity in a year or two. Meanwhile, as they expand production, polysilicon prices are coming down. Turns out that polysilicon is another commodity after all. On the other hand, energy prices are going up together with oil, so the price gap between conventional and solar energy is about to close very soon. What that means is, the demand for PV cells will literally explode, and the production will be going up as fast as manufacturing capacity allows.
Peter Lynch has the following to say about solar prospects in this article: http://www.renewableenergystocks.com/PL/News/080306a.asp
"The Photovoltaics industry also happens to be the fastest growing industry in the world, with a promising chance to remain the fastest growing industry for the next 25 to 50 years. The PV industry worldwide grew at a compound annual rate of 37.5% during 2000-2003, with the growth rate, exceeding 60% for 2003-2004."
Notice that 2000-2003 is the time of $25 oil, and PV production is still growing like wildfire...
And that growth shows no signs of abating. The Earth Policy Institute says: "Growing by an impressive average of 48 percent each year since 2002, PV production has been doubling every two years, making it the world’s fastest-growing energy source."
And this is only the beginning. Lynch continues:
"By now, I may have truly confused you. How could there be an industry with a product that is TOO EXPENSIVE be the fastest growing industry in the world? This contradiction is a result of the fact that the market is so vast, and that despite the current tremendous industry growth, it is only the beginning of the industries long-term growth curve. Incredible as it may sound the industry actually has the potential to grow at 30% per annum rates for decades."
The total worldide energy need is 4 TW, growing 2.5% a year.
Now, assuming the current 48% growth rate, we find that PV production could increase 30 times from today's level in just 10 years. Plugging in Lynch's more conservative 30% growth, we arrive at the same result in just 15 years.This increase will amount to about 120GW of new capacity installed annually, which will cover the entire increase of the total worldwide production. Consider that hydro, wind, coal, nuclear energy production are on the rise as well, and what do you get as the result? The conclusion is inescapable: In 10-15 years, the use of oil for energy production will have become an anachronism. Meanwhile, solar power production will still be growing at Lynch's 30% rate, meaning that by 2038, the Sun will replace all fossil fuels, and the lion's share of uranium and wind power.
Now, does that involve some bold assumptions about the progress of future technologies? No. These are the technologies that exist today. The Earth Policy Institute estimates: "The average price for a PV module, excluding installation and other system costs, has dropped from almost $100 per watt in 1975 to less than $4 per watt at the end of 2006. With expanding polysilicon supplies, average PV prices are projected to drop to $2 per watt in 2010. For thin-film PV alone, production costs are expected to reach $1 per watt in 2010, at which point solar PV will become competitive with coal-fired electricity."
And Nanosolar claimes to have reached that milestone already:
"Our product is defining in more ways I can enumerate here but includes:
-the world’s first commercial solar panel based on a printed solar cell;
- the world’s first thin-film solar cell with a back-contact;
-the world’s lowest-cost solar panel –which we believe will make us the first company capable of profitably selling solar panels for as little as $.99/Watt".
In other words, today's technology already makes fossil fuels obsolete. When production picks off, we'll realize some extra economy of scale, and then technology will likely develop still further.
The conclusion is that in 10-15 years, we're going to discover a new plentiful source of oil: oil that is being produced currently, only be burnt in power plants.
But what about gasoline? After all, we also need oil to drive cars, and the number of cars is growing, right?
There are several answers to that. First, cars will also become more energy-efficient. The number of cars in the world may quantiple 30 years from now, but the need for gas will increase by a lesser amount. Secondly, telecommunications should reduce the need for driving. Third, not everybody is going to drive 100 miles a day like the stupid Americans who painted themselves into this corner while attempting to inflate house values in the cities. But all of this is not important. The main answer is that when the solar power emerges as the solution to the energy problem, the hybrid cars will become prevalent, and will be driven by the energy of the sun stored in accumulators. To make a long story short, the demand for oil will still grow for the next several years, but after that the extrapolation will fail as miserably as the extrapolation for oats, hay and horse manure failed in the early 20th century.
And in case you think we still don't have enough oil, we can always make $40 oil out of coal using the Fischer-Tropsch process.Given that the supply of coal is essentially unlimited, it is clear that even $80 oil is unsustainable in the long run.
Having said that, I don't think prices will fall to $40 this year. Short-term, oil's prospects look OK (by the way, it's just OK, not even good, because the upside from $130 is not that great). But fast-forward 10 years, and the first cracks in the edifice will appear, and 15 years from now the whole building will collapse. Oil will become a $40 commodity and will continue a steady slow decline from that level...turns out you didn't need to stockpile a 100-year supply of hay in 1910...Of course it won't really be $40 because of inflation, but it will be $40 in real terms.
Actually, I expect oil prices to collapse even sooner that that become many companies and even whole countries have reserves that they're not developing now because they view it as a strategic resource. But by 2018 or so, oil companies will see that the end is near, and even the pigheaded governments like Russia and Saudi Arabia will finally realize that the game is over for them. This is when the dumping will begin. Everybody who has a few barrels left underground will want to sell them while they still can. Exisitng reserves will be exploited at full capacity like there's no tomorrow because people will know there is no tomorrow. Meanwhile, companies that had sunk trillions of dollars into difficult oil fields will be forced to keep pumping to recover some of their losses, like it happens in every cycle to those stupid companies who'd been smimming naked...The same thing that was happening to housing until recently...By the way, there'll be plenty of those stupid companies, and I don't mean Exxon or BP. I mean Gazprom, Rosneft, and other such dinosaurs...think Nigeria, Venezuela, the Saudis, and all those countries with "newly found oil wealth". Easy come, easy go. They will bury it all underground to find themselves sitting on an oil well that produces $100 oil that they can sell on the market for $40, but they can't shut down the well because the creditor is unrelenting. So that is the future of that commodity called oil that's quickly becoming outdated - a short spike lasting a few years and then a slow painful march to the cemetery. I don't see myself investing in oil companies even at todays low PE of 10, because I think this multiple will shrink to zero ten years from now...By the way, the market is going to anticipate trouble well in advance. The current bubble one is already in its seventh or eighth year, and it looks to me like we're in dangerous territory. Oil companies still have only 10-15% margins at the peak of the cycle, so I'm wondering what will happen to those margins when the party ends. Also, the endgame will be more gruesome this time. Last time it was new oil fields coming online that pricked the bubble. This time it will be cheap solar energy - more fatal and more irreversible.
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