Peak Oil: The Sun Also Rises

The Net Exports Debate

I concede the point on Net Exports.  In particular, after a discussion in the comments with Jeffrey Brown (the geologist who created the concept), I believe Net Exports help to clearly explain the combined dangers of peak oil and oil subsidies.

Why did I persist in my resistance to the net exports concept so long?  Because, from an economics perspective, net exports are an unnecessary complication to my oil supply/demand elasticity model.  If the world were filled with economists, there would probably be no need for the concept of net exports.  Economist Mike Giberson certainly thinks so.

But the world is filled with people with limited understanding of the “dismal science,” and the economic realities of peak oil affect everyone.   It falls to us to explain those economic realities to everyone in the clearest terms possible.  And net experts are a lot clearer than elasticity models.

Oil for Electricity

While the net exports concept is a great pedagogical tool, I worry that it may distract us from the ways that even subsidized demand for oil in oil exporting countries responds to changes in the oil price.  For instance, Saudi Arabian consumers may not feel the impact of changes in the world price of oil, but their government does.

Soaring oil prices allow Saudi export revenue to increase even as exports decline (see chart below),

Chart by Jim Hansen of Ravenna Capital Management

but the Saudi government still feels the pain of potential revenue lost when their economy gobbles oil for low-value uses like electricity generation.  Most of Saudi electricity is generated from oil, a practice most of the rest of the world abandoned when it became prohibitively expensive during the oil shocks of the 1970′s and 80s.  Now, it’s only countries like Saudi Arabia, which use subsidized oil, and islands like Hawaii where the use of oil for power is prevalent.

I’ve had difficulty finding information on how much oil it takes to generate a kilowatt hour (kwh) of electricity, but this chart relating oil and electricity prices in Hawaii allows me to estimate it:

Image source: Hawaii Energy

From the chart, my estimate is that a $20 increase in the price of oil leads to a 4 cent increase in the price of a kwh of Hawaiian electricity.  Hence, the export revenue Saudi Arabia loses by using oil to create electricity is about 20 cents per kilowatt hour, and the total cost is higher because this ignores operations and maintenance (O&M) costs and capital costs.

The Saudi Arabia of Solar Power

In contrast, falling photovoltaic prices mean that industrial solar farms can now be built for well under $4 per watt, leading to a levelized cost of electricity well below 20 cents per kwh, even when all O&M and capital costs are accounted for.

Since the Saudi government owns their electric grid, this gives them a compelling investment opportunity, while the high oil price means that they do not lack for money to invest.  Which probably has a lot to do with why they are planning to plow $109 billion into solar generation.  As world oil prices rise, don’t be surprised to see such announcement of new solar generation rise from the hundreds of billions into the trillions.  Why not, when such investments are not only profitable, but will also serve to finally diversify their economy away from oil?

It may be politically difficult for oil producers to cut oil subsidies, but that is not the only lever they have to reduce oil consumption.  Net exports are a great way for conveying the scale and gravity caused by peak oil.  Let’s hope they don’t distract us from the economic forces that remain at play, even in the most state-controlled markets.

In ten years, I expect Saudi Arabia to be the “Saudi Arabia” of solar power.

For lot more about the factors affecting the oil market, including Net Exports, I suggest attending the 2012 Symposium on Oil Supply and Demand on June 19 in New York.

Forbes

6 Comments on "Peak Oil: The Sun Also Rises"

Sparky on Sun, 13th May 2012 11:30 pm 



.
The peak exports argument is the very crux of peak oil ,
While there is some good attempts at modelling and numerous reference to historical data ,I note that very little is mentionned on the politics of exporting countries .
simply put restricting local consumtion to export more to foreigners is the stuff revolution and riots are made off
a governement would impose its fiat
rather than squeezing it’s own population ,
free market is fine but keeping power or one head on one’s shoulders is better

one has to integrate the real difficulty of suppressing local demand

Same with the subsidies in an importing country , every attempt to remove them has met with strong resistance , the most “successful “was China introducing quota per user at the pump , any thing above was borderline grey market

BillT on Mon, 14th May 2012 12:08 am 



-Eventually, the oil situation will be solved…by the absence of any oil, anywhere. Meanwhile, the juggling will go on and the prices will go up.

As for a solar Arabia, nope. Won’t happen. There will be some power from solar, but not enough to replace oil. Not even close. As one Saudi said: “My father rode a camel, I drive a Mercedes, my son will ride a camel.” This is going to be true all over the world, even in the Empire. Except we won’t even have camels.

Renewables ALL rely on oil somewhere in their life cycle to exist. Mostly at the beginning to get the minerals and form them into the components necessary. Mining the millions of tons of ores we use is NOT going to happen with ‘renewables’. Not even close. The manganese steel cage for an ore crusher is beyond the scope of renewables and that is one tiny part of a refinery. They wear out and need to be replaced regularly. Then there are those 100 ton mining machines that have to be made and powered. Renewables are a joke on the uneducated.

Bernz223 on Mon, 14th May 2012 6:23 am 



I just want to punch you in the face BillT.

BillT on Mon, 14th May 2012 10:31 am 



Bernz…careful, your blood pressure is rising…lol. You cannot handle reality, obviously.

I have first hand experience in a manganese steel foundry and saw those cages being formed and poured. The furnace that melted the metals to make them used the electricity of a town of 25,000 people for about 2 hours to pour one cage. That does not account for the energy needed to get the ores and metals to the foundry, the sand used to make the molds, the wood to make the pattern for the molds, the energy to make the wooden pattern, the the energy to cut and dry the lumber and haul it to the foundry, the energy to make the machines that cut and moved the logs, to the saw mill, the energy to move the 10+ ton mold and it’s steel container into place for the pour, the shakeout of that cage and the recycling of the sand, the machining of the cage, the crating and shipping of the cage to the refinery, the installation and eventual use of that cage, then the removal and recycling of the metal back at the foundry, roughly half the weight of the new cage. This is just one small part of a refinery. And you expect to do this with solar/wind/ethanol?

Kenz300 on Mon, 14th May 2012 9:47 pm 



Wind, solar, wave energy, geothermal and second generation biofuels made from algae, cellulose and waste are the future.

Clouseau2 on Tue, 15th May 2012 12:20 am 



The expression was “My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel,” and I often see if quoted as “My father rode a camel. I drive a car. My son flies a jet airplane. His son will ride a camel.”