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Todd Ganos Contributor

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I lead a multi-family office and trust administration firm, having earned a doctoral degree in finance, a law degree and an advanced degree in taxation. I have over 20 years of experience in all aspects of managing and administering the business and investment interests of families--including domestic and international tax and estate planning, as well as business transition planning.

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The World Will Never Run Out Of Oil -- Might Its Price Tank?

Hubbert peak oil plot-es

Image via Wikipedia

While global demand for oil has moved to an all-time high, one long-established theory suggests that oil production (and consumption) might be peaking out.  If this is the case, might its price tank?

If one thinks about it, the world will never run out of oil.  As oil becomes scarce, consumers will necessarily turn to an alternative before the supply runs out.  Whether it is due to a realization that oil is scarce – if only in an economic sense – or due to a concern for global warming, we can see the signs of a shift in consumption.  Most automobile manufacturers have some pure electric or electric hybrid car project in development or in production.  There are even hybrid Formula One racecars.  (What would Enzo think?)  It is only a matter of time that the automobile is electric.  It seems not too far-fetched that oil consumption might drop.

Back in the 1950s, M. King Hubbert developed logistical models to predict points in time called “peak oil,” which is when the maximum rate of petroleum extraction would be reached.  For the US, peak oil was the point in time when the maximum rate of US petroleum extraction was reached.  Hubbert correctly predicted the US would reach peak oil in the 1965 to 1970 timeframe.  His logistical models are now called Hubbert Peak Theory.  Today, Hubbert Peak Theory is used predict peak oil points for oil wells, oil fields, regions, and countries with reasonable accuracy.

When Hubbert applied his models to global production, they pointed to a peak petroleum extraction being somewhere in the 2010 to 2015 timeframe.  Separately, there have been a number of studies published by the Association for the Study of Peak Oil and Gas that reach a similar conclusion.  Given the automobile industry’s current embracing of electricity, Hubbert’s prediction of global peak oil might well come to pass.

Some might point to the emerging middle class in China, India, Brazil, and elsewhere and suggest that the demand for automobiles is just ramping up.  While there is no denying this increasing demand for automobiles, but how will those vehicles be powered?  Jerry Matecun, portfolio manager at Integrated Wealth Counsel (www.integratedwealth.com), notes that there is intense interest in renewable energy by emerging market governments.  During the past two years, he attended conferences in Singapore and Beijing whose focus was just that.  So, it might well be that global consumption of oil will peak out this decade and, in the face of price-competitive energy alternatives, its price begins to fall.


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  • edwindrake edwindrake 3 years ago

    A word about ERoEI.

    One of the hardest things for economics-type people to wrap their heads around is the idea that oil is NOT like any other commodity or resource on Earth. It stands wholly apart from everything else because it is simultaneously a) a feed stock, b) a tool, and c) a source of energy. Feed stocks and tools don’t generally baffle financial-type people. But energy –and their typical LACK of understanding of energy– is often their undoing. They have blindly convinced themselves that money is money, stuff is stuff, and anything –including oil– can be swapped back and forth, in and out of money at will. They think:

    – wheat can be swapped for money, and then swapped back for more wheat

    – pork bellies can be swapped for money, and then swapped back for more pork bellies

    – copper can be swapped for money, and then swapped back for more copper

    – oil can be swapped for money, and then swapped back for more oil

    All of the above is only true when you isolate yourself into the artificial world of business and papers and ticker streams. But if you can just get your head out of Wall Street for a few minutes, and then think back to your 10th grade science class, then all of the above gets proven futile.

    Financially trained people SOMETIMES are scientifically trained, and so what I am about to say will be completely lost upon those who have no grasp of science. (Think hard on that 10th grade science class!)


    ENERGY can be used to generate MONEY,
    but it’s impossible for
    MONEY to ever get used to generate ENERGY.
    (utterly impossible)

    That above statement is an undeniable FACT of the universe. It’s not a fact of commerce or of business or of finance. It’s “merely” a physical fact of the physical universe. And the above would have no impact upon you for as long as you were not a physical being living in the physical universe with physical needs and physical limitations. But there are just far far far too many financially trained people who truly do not understand any of this. Likewise, there are far far far too many governmental leaders who also do not understand this. All of this can be explained via the concept of ERoEI.

    You can spend all kinds of money on an energy project, but if there’s just no energy to be had there, then the whole project will turn out to be a bust. Surely you can see the logic of that. Maybe there’s oil in the project, but that does NOT mean there is any energy in the project — or at least, not a NET GAIN of energy … just a net loss of energy. And this has nothing at all to do with money gains and losses, just energy gains and losses. (So stop thinking about Rockefeller and capitalization, and instead start thinking about Isaac Newton and thermodynamics.)

    We have found all the super-powerful deposits of energy in the world. Only the crappy, skimpy, lousy, sub-standard deposits of energy remain now. Tar sands are an energy loser. Oil shales are an energy loser. And anything that is trapped beneath 5 miles of ocean, and then an additional 6 miles of solid ocean floor, is also an energy loser by virtue of the sheer distance we have to lift the oil to bring it to the surface (the further we have to lift the stuff, the more energy we expend in getting at it, thus it turns into a net energy loser). And it doesn’t matter how much money you try to throw at the project, all that money can’t magically make more energy get conjured into existence.

    When it comes to getting a grasp of the science behind energy AND the underlying principles of launching a successful energy harvesting project, there is ONE scientific concept which is THE all time, hands down, most important concept for a novice energy speculator to immerse themselves into. And that is the concept of ERoEI. Anyone who dares to invest in energy (whether he chooses to invest in oil, natural gas, coil, nuclear, solar, wind, geothermal, or any other energy) and yet ignores this one concept of ERoEI is a fool on a capital order.

    DO NOT allow yourself to even think about investing in ANY energy project without taking the time to study the concept of ERoEI. If you fail to acquaint yourself with ERoEI, you will lose your shirt (and you’ll also probably add to the ongoing travesty of bringing our civilization one step closer to the brink of complete collapse).

    Too many financially trained people concentrate only upon MRoMI, or even MRoEI. But I want to tear my hair out when they draw a blank face over the concept of ERoEI. “Huh?” They say. “What’s that? What dies ERoEI even mean?”

    Ignorance of ERoEI is what will destroy our whole civilization. And the laws governing the universe don’t bend the rules for anyone’s Wall Street aspirations. We WILL destroy ourselves for as long as financially-trained people and governmental leaders continue to remain willfully ignorant of the unrelenting and unmerciful reality of ERoEI.

  • edwindrake edwindrake 3 years ago

    ERoEI is ” energy returned on energy invested.” That’s the ratio between how much energy you spend on an energy harvesting project vs. how much energy you get from it.

    Back in the “wild cat” era in the early days of the oil business, hitting a “ gusher” meant you tapped into an underground oil deposit that contained the following 5 characteristics. The deposit was: 1) found under dry land, 2) close to the surface, 3) liquid in form, 4) mega-sized (contained millions of barrels), and 5) supercharged with a pocket of natural gas. We call such oil deposits “traditional” deposits. (SIDE NOTE: A gas pocket is quite desirable but also very dangerous since it could explode, as was the case with last year’s BP rig in the Gulf of Mexico. The gas in that deposit is also why that well kept gushing for months.)

    When an old-time wild catter hit a gusher, it instantly gushed to the surface for him due to the natural gas, thus doing all the work for him, presenting no initial need for a mechanical pump. With no need for a pump, he didn’t (at first) need to INVEST ANY ENERGY in his well. He could easily harvest 100 barrels per day while only investing little more than 1 barrel per day in running a small generator to keep some lights on and operate a company vehicle. So his ERoEI on that well was 100:1 (“one-hundred to one”). Even people not good in math can see the beauty in that. A gusher at 100:1 was how you became a millionaire overnight.

    As a well ages, it eventually starts losing its own pumping ability. Then you at last have to bring in that mechanical pump (with a motor that runs on either gasoline or diesel). But even then, the ratio stays profitable for years. The ratio slips slowly, down from 100:1 to 50:1 (fifty to one). You can keep coasting downhill for years, watching the well get older and more sluggish. It’ll stay profitable all the way down at 20:1 (twenty to one) which is when the “yellow light” starts flashing on your oil operation and you need to admit that it’s almost time to close everything down. But you won’t have to give up completely until somewhere down at 7:1 (seven to one). At that point the amount of energy you’re feeding the project is no longer worth the energy you’re getting out of it. There’s still oil down there but no one wants to bother now. So you pack up your equipment and try to find ANOTHER gusher somewhere out that which can again give you that beautiful ratio of 100:1.

    Well, those ratios of 100:1 no longer exist. The classic, traditional “gusher” oil deposits from the wild cat days that were 1) on dry land, 2) close to the surface, 3) liquid, 4) mega-sized, and 5) accompanied by a gas pocket, are a thing of the past. Most remaining deposits in the world possess one or two of those five characteristics. A scant few possess three or four. But there’s no such thing anymore as finding a new oil deposit which possesses all five. Those glory days are gone forever. The easy oil is gone forever. So we’re now stuck with the sub-par deposits which we’ve known about for decades, and yet which we also snubbed our noses at for decades because they were unattractive to oil experts. (We’ve known about the Bakken Shale Formation since the late-1940’s but it was always deemed a fool’s errand to go after it.) Only now are those same oil experts forcing themselves to settle for the poorer quality deposits. They have no choice now. This is what desperation looks like.

    Drilling far out in the ocean or deep under the tundra requires huge, expensive, energy-sucking equipment at the front end. Separating individual molecules of oil bound up inside the composition of shale rocks or else saturated in swampy tar pits also requires huge, expensive, energy-sucking equipment at the front end. So these “unconventional” oil projects all suffer from low ERoEI’s at their outsets. That’s why ERoEI is the very heart of the problem. And please understand it’s NOT a question of money. It’s a problem centered upon energy, and the pathetic lack of there being an EXCESS of energy. (And as any well-trained economist can tell you, civilizations need more than just energy to survive, they actually need an EXCESS of energy or they can’t progress beyond the static trap of hand-in-mouth existence.)

    The thing to understand about ERoEI is that you need to start out at the very outset of your well’s lifecycle with the highest possible ERoEI before you go down to your termination point of 7:1. This is why it’s all a question of numbers –numbers which don’t lie, cannot be negotiated, and don’t care about us. And these modern “unconventional” oil projects involving tar sands and oil shales start off with ERoEI’s of around 3:1 (three to one). And it always only goes down from there –never up. Therefore, these new fangled energy projects of shale and tar are in fact “energy suicide.” We’re borrowing from Peter to pay Paul, and cutting off the bottom six inches of the blanket in order to sew those same six inches back onto the top. WE’RE USING ENERGY TO GET ENERGY. It’s a loser’s game. This is the direness we face.

    This is not merely a “problem.” It is a full blown crisis –one capable of being a civilization-destroyer. When billionaire Richard Rainwater was shown these numbers six years ago, he said: “This is the first scenario I’ve seen where I question the survivability of mankind.” And then when Virgin Airlines CEO Sir Richard Branson was shown these same numbers, he said: “This an emergency far worse than World War I and World War II put together.”

  • edwindrake edwindrake 3 years ago

    Sorry, I meant to add citations:

    The quote from Richard Rainwater where he said “This is the first scenario I’ve seen where I question the survivability of mankind,” came from a 2005 Forbes article called “The Raiwater Prophecy” where Rainwater explains how he found out about Peak Oil (he was researching a new potential investment deal) and how it really shook him up.

    And the quote from Sir Richard Branson where he said “This an emergency far worse than World War I and World War II put together,” came from a one-hour 2008 CNN special about oil called “Out of Gas” where Branson was interviewed about his accidental discovery of the reality of Peak Oil. He explained that he blundered onto the concept when he tried to find out why it was getting so hard to secure aviation fuel for his fleet of Virgin Airlines jets.

  • edwindrake edwindrake 3 years ago



    The news article called “The Rainwater Prophecy” wasn’t a Forbes magazine news article, it was a Fortune magazine news article. It was published December 26, 2005. (My bad!)

  • texasexplorer texasexplorer 3 years ago

    As good an explanation of EROEI as I’ve ever seen. And the rest of your commentary is spot-on as well.

    I’d like to hear more from you, edwindrake. Please check my profile and contact me.