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Monday
Sep032012

The Real Price of Peak Oil

Contributed by Casey Research. Doug 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 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.

TER: You have called nuclear energy "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.

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Reader Comments (5)

Technically the oil low ranges around USD80. Given that oil prices are set in a tightly controlled and managed market, DCs view is right.

The question at most trading and investment desks is how high could oil range over the next three years, and whether gas and other energy substitutes can be worked into industrial end use within this decade.

It could be that political forces need oil price induced inflation to set off the sprial that will minimise the sovereign debt burden.
September 3, 2012 | Unregistered CommenterPermafrost
Agree with Mr. Casey entirely on Thorium.

The transition from Uranium will not get past the anti-atom lobby and those who still tremble and sweat when Chernobyl or Fukushima are mentioned.

India, China and South Korea, the new big energy users, are far from any viable nuclear power generation and strangely blocked when it comes to solar powered energy which can free the power now made available to households to top up industrial usage.
September 4, 2012 | Unregistered Commentergan ainm
Go poke around in the slag pile produced by running a utility scale coal plant for 30 years. The energy content of the thorium in the remains will approach the total life cycle energy output of the burned coal. Now that's energy density! Thorium is a problematic waste product produced by mining rare earth metals-- you know, the ones we are worried that China will fail to export to us at a price cheaper than mining our own.

Safety systems on a conventional solid fuel water cooled nuclear reactor must be actively operational and have multistage redundancy because the system must operate at extremely high pressures to prevent the water from flashing off to steam and initiating a hydrogen explosion event.

In a liquid fluoride thorium reactor the primary safety system is passive and automatic. In the event of malfunction the liquid fuel (suspended in molten salt) merely flows downhill into a shielded containment vessel, regardless of whether there is a human within miles of the reactor at the time.

But, the remaining waste product is only 5% as much as with a conventional reactor, and isn't suitable for building bombs. What good is a device like that to the military industrial complex? Forget it!
September 6, 2012 | Unregistered CommenterThor's Hammer
Thor's Hammer - great info. Thanks!
September 8, 2012 | Registered CommenterWolf Richter
"Producing oil from tar sands is very expensive and problematical."

Casey doesn't know what he's talking about. The production cost of a barrel of oil sands oil is around $27. The oil companies make twice the profit on it over conventional oil. The increase in cost--from $10 bbl in 1990 to now--is because of labor costs and the stringent, almost draconian, reclamation laws put in place in 1970--although they were enacted in 1949 province-wide for anything coming out of the ground--and tightened ever since. Every plant and piece of original dirt have to be saved, sometimes for decades, to be put back when the mine is exhausted..

Also, a barrel of syncrude (the output) is three times as concentrated as conventional oil, which translates into greater output, and therefore profits, when refined, something Alberta doesn't do.

BTW, anyone who calls it Tar Sands is usually winging it, or over 70. Dead giveaway.
November 7, 2012 | Unregistered CommenterFactChecker

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