Thursday, May 23, 2013

The Core Peak Oil Debate: Speed and Scale

I just got finished reading Ramez Naam's new book "The Infinite Resource." The first part of the book is a great overview of peak oil and climate change. He accurately describes the gigantic nature of a both problems and the potentially massive negative consequences we face as a society from them. He's clearly done his homework and gives a lot of examples of how these issues are affecting us all right now.

He also does a good job framing the climate change debate and walking through the real issues that are currently being debated (like whether peak oil will stop climate change and what level of atmospheric carbon dioxide we should consider "safe") while knocking down the "red herring" debating points (like whether humans are causing climate change).

On page 96 he finally gives us his main thesis: that we can solve the issues of peak oil and climate change with technology, innovation and substitution. He goes on to back up this assertion by showing many different ways in which technology is improving renewable energy, food production and sea water desalination.

On page 175 he finally addresses the main issue of the peak oil debate: Speed and Scale. His whole thesis (that the issues of peak oil and climate change will be solved by technology, innovation and substitution) is dependent on innovation improving renewable energy technology at a fast enough rate to allow us to offset the energy lost through fossil fuel depletion at a speed and scale necessary to avoid collapse. That is the core issue of the peak oil debate: will we be able to substitute renewable energy fast enough to make up for declining rates of fossil fuel production?

Naam is supremely confident that technological innovation in renewable energy will occur at a fast enough pace to allow us to both overcome the pace of fossil fuel depletion once we pass peak oil, peak gas and peak coal, but also that the rate of technological innovation will occur fast enough to allow renewable energy technologies to continue to ramp up to tremendous scale in the face of other limits like the limits of available "high potential" locations for wind and solar, the limits to speed and scale of the required electrical transportation infrastructure, the limits of available skilled manpower to build out that infrastructure at a fast enough pace, the depletion of required resources (peak rare earth metals, peak copper, peak silver) required to build out that infrastructure, the backlash of Jevon's Paradox to increases in efficiency, the potential decline in available capital should peak oil push us into another recession through another oil price spike and the potential social backlash (NIMBYism) to the massively ramped up scale of renewable energy infrastructure.

My argument is because of all of these limits, it is unlikely that we will be able to ramp up renewable energy generation and the electrification of transportation fast enough to offset the decline in available energy once we pass peak oil. The consequences of this shortfall are what worry me most. Naam's optimism that "technology" will solve the problems of peak oil and climate change by allowing us to seamlessly switch from from fossil fuels to renewables is, in my opinion, dangerous. Optimism breeds complacency. By telling readers that "innovation" will solve all of our problems, people can put down the book and go back to their normal lives without making the dramatic changes required to make themselves more resilient and to move us all towards a more sustainable future. This kind of optimism causes people to say "well this guy says there are some smart scientists out there working to fix the problem, so I guess I don't have to worry about peak oil and climate change."

Perhaps our difference in opinions comes from the fact that my professional experience is in the energy industry -- where projects take billions of dollars and years to ramp up to scale -- and Naam's professional experience is in the technology industry (specifically at Microsoft) -- where new software can be developed overnight on a shoestring budget and ramp up to infinite scale with little cost and few "real world" obstacles. Unfortunately, our global energy infrastructure isn't made out of bits and bytes, it's made out of iron and steel (and copper and rare earth metals). Energy projects can't be ramped up overnight. Engineering lead times for renewable energy projects can take a decade. We have trillions of dollars of capital stock (cars, airplanes, trains, farming machinery) locked up in technologies that are dependent on oil. Every car, every airplane, every train and every farm tractor has a usable life. In the case of a farm tractor, that usable life may be in the decades. Rolling over this multi-trillion-dollar capital stock is going to be an extremely slow process. It will take decades and trillions of dollars to switch our transportation infrastructure away from oil and on to renewable electricity and biofuels. Unfortunately, with peak oil staring us in the face, we do not have decades to solve the problem. With atmospheric carbon dioxide levels passing 400 ppm this month and with China now burning more coal than the rest of the world combined (making any carbon reduction the developed world does a moot point), we certainly don't have decades to fix our climate change problem. You can't simply wish away these problems with optimism about "innovation."

The consequences of this kind of unhinged optimism are perhaps more serious in the investing world. When deciding how to invest in the future of energy, we need to balance our optimism for technological innovation with our pessimism that the limits to innovation won't allow us to substitute away from fossil fuels fast enough to avoid collapse as we begin seeing a post peak oil decline. The key here is deciding how much optimism we should have. With most activities in life, it pays to be an optimist: sports, love, friendships, philanthropy, work, etc. But with investing, it arguably pays to be a pessimist, or at least to walk the line between pessimism and optimism. Optimists ignore investment risks and get burned. Pessimists see those investment risks, weigh them and decide to invest in ways that expose their portfolios to the upside while hedging the downside risk. In the world of peak oil, all of these risks will increase dramatically.