This week, we’re talking to Casey Research founder Doug Casey about his interest in science, technology, politics, and history.
Yesterday, Doug told us about the impossibility of an oil shortage – despite panic in the mainstream media. And in today’s Conversations With Casey, Doug offers his thoughts on the alternative energy sector…
Read on below for Doug’s take on the political hacks who are destroying green energy with “incessant propaganda”…
So Doug, you’ve spoken to us about the theory and background for oil exploration and production. The practical question is whether oil is cheap or expensive right now at around $55?
The price has been dropping of late, because of the coronavirus, and fears it will greatly reduce consumption. Around 70% of oil is fuel for travel – cars, planes, boats and trains. I suspect it’s something that will burn out and blow over, like SARS and the others. Mass hysteria does a lot more damage than the virus itself. But who knows? The next war will undoubtedly feature bioweapons.
But it’s important to note that all commodities tend to rotate around their production cost. Today, the average production cost of oil varies greatly. It’s not just the cost of actually pumping the marginal extra barrel of oil, either. There are infrastructure, transportation, financing, tax, regulatory, administrative, and numerous other costs. But at this point, oil, in most places in the world, is a marginal business at best. It’s profitable for good operators, but far from a bonanza. In fact, most small producers are on the edge of bankruptcy. Gas producers are all running at a loss with gas under $2.
Technology always works to both drive down costs and increase production. Most people aren’t aware of the fact that even when an oil well is capped, and is no longer produced, there is still lots of oil left in the well. There’s just not enough pressure to get the oil up. Of course, there are secondary – mostly water flooding – and tertiary ways to recover more oil. But even under the best circumstances you can’t, today, get more than about 40% of the oil in the deposit up above ground.
When technology improves further with better tertiary recovery methods, producers will be able to go back to exploit many of these old capped oil wells. It’s a huge resource, already discovered, laying and waiting for the technology to liberate it.
Who can say exactly when that will happen? But if the oil price increases, innovators and capitalists will develop new ways to recover the oil in those wells. The bottom line is: Don’t worry about running out of oil.
In that case, what’s your take on alternative energy? Sounds like it may be a waste of time if we’re never going to run out of oil.
Although the world’s supply of oil will never run out, that doesn’t mean I’m against the idea of alternative energy sources. In fact, I completely support their development and the technology behind them.
The oil price and the cost of producing oil are key to how quickly alternative energy sources are developed. Right now, at around $50, oil is a very marginal business – and so are alternative sources. But if oil goes to $100 or $150, then oil companies are going to be absolutely coining money – and lots of resources will go into alternatives.
If for some reason it goes back down to $25, which is unlikely, then a lot of oil companies will go bankrupt. What observations can we make from that?
How about this: Oil is perhaps the most political of all commodities. Of course, all commodities – very unfortunately – are political in one way or another. But oil is probably the most political, even more than gold, wheat, or uranium. That’s because it’s the major source of income for a number of countries – especially in the Middle East and Africa. In Venezuela and Russia, the main source of government income is oil.
And as we know, something like 25% of the world’s oil passes through the Straits of Hormuz. So it can be cut off. And if it is cut off, the price of oil is going to explode. The price fluctuates very much with political events. It’s controlled by governments directly and indirectly. That makes me tend to be a bull.
That all makes sense. But what’s your take on the relationship between capital investment in fossil fuels and in alternative energy sources? How will governments, politics, and lobbyists affect this?
We’ll try to give you an example here… As you know, there’s a lot of political and social pressure for capital to divert from fossil fuels to so-called “green energy,” even if the “green energy” is less efficient than fossil fuels.
If it was only about energy efficiency, then that capital would probably go into oil or maybe even coal or natural gas. But because of the political pressure, it goes towards investments in “green energy.” That means it takes capital away from something that is efficient and more cost-effective, and directs it into something else which may not be as efficient or cost-effective. This may, in turn, be another reason why the oil price is so high. It limits or reduces the investment in new technologies in the oil or fossil fuel sector. What’s your take on that?
Yes. Well, you’re absolutely right. This is another reason, among many, why politics is the enemy of the average man. Politics, by its very nature, directs capital away from its most efficient use – where it could create more capital and make the world wealthier – and it directs it into inefficient uses, where you’re actually getting poorer.
Governments might take a dollar of capital, and pay some company to create a widget. They typically do that because the “investment” is politically productive – not because it’s economically productive. Government isn’t interested in making money, as business is; it’s interested in controlling people. But making money – which is becoming a rather despised concept – is actually about creating new wealth.
I’m all for wind and solar, as I’ve explained previously. But technologies that are subsidized don’t create wealth. They misallocate it, or even destroy it. This is how things have been with solar and wind power for decades. They’ve been stupid political boondoggles, destroying wealth. That’s only now beginning to change.
Yes, perhaps you can explain what you mean. Solar and wind power are the alternative energy sources that seem to have the most backing from the green lobby groups.
Remember, all power – except nuclear – comes from the sun, directly or indirectly. Everything – coal, wood, oil, wind, solar, tidal, geothermal, whatever. By trying to get power directly from wind and solar, it’s like we’re cutting out the middleman, which very nicely over hundreds of millions of years has concentrated that power for us. It’s foolish not to take advantage of that.
That said, solar and wind efficiency have been getting better and better for decades. Which is both wonderful and inevitable. And they’ve actually been practical for remote special applications for years. But as a form of mass power, base load power, they still don’t make good economic sense.
They’d make even less economic sense if it wasn’t for subsidies, which waste capital, and are always destructive. They’re destructive, because they direct capital to things that make political sense, but rarely economic sense. When government tries to act as a venture capitalist, things almost always go badly.
Probably the most famous example was Solyndra, which came to light in the 2012 elections. There was apparently lots of fraud – which is not unexpected when the government has $535 million on offer. Cronies are always first in line at the trough. But it was also just a bad bet in a rapidly evolving area of technology.
A more recent example is the Crescent Dunes solar project near Tonopah, Nevada. The U.S. guaranteed a $750 million loan for the plant, which is now bankrupt, shut down as uneconomic, and being sold as scrap. I thought it was an interesting large-scale science project – but only the government would waste that kind of capital because it seemed like a good idea at the time.
What about solar’s claimed environmental credentials?
Contrary to the incessant propaganda, solar isn’t an environmental issue; it’s not about saving the planet from carbon, the newly christened enemy element. These people forget that in order to create solar collectors and windmills, it takes an immense amount of metals, plastics, petrochemicals, energy, and other non-green ingredients to build them.
The only way you can know if solar and wind make sense is if they make money. I’m confident they will in the near future. But they should be funded by venture capitalists, not bureaucrats and political hacks.
Doug Casey (send him mail) is a best-selling author and chairman of Casey Research, LLC., publishers of Casey’s International Speculator.
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