Receding Horizons

The bear went over the mountain

The bear went over the mountain

The bear went over the mountain

And what do you think he saw?

He saw another mountain . . .

Last week, energy blogger Robert Rapier published a thorough analysis of what went wrong with thermal depolymerization (TDP), a much-hyped technology that promised to turn anything (starting with turkey guts) into usable oil and other clean, usable byproducts, while being net energy positive and economical.

I blogged it myself back in 2004 when it was supposed to be the Next Big Thing, able to harvest landfills and deliver liquid fuels in a post-peak oil world.

Rapier’s account of the TDP story is an interesting study in how the “next big thing” in energy often turns out to be overpromised and underdelivered.

He observes that this has also been the case with tar sands, gas-to-liquids, oil shale and other unconventional means of producing liquid fuels.

“They believe that oil prices will rise, and yet their costs will magically remain where they were. In fact, what happens is that as oil prices rise, all the costs associated with these various projects rise,” he explains.

He refers to this phenomenon as the “Law of Receding Horizons.”

I am grateful to whoever gets the credit for that little coinage, because I’ve been barking up that tree without a good name for the concept for a while now, and it’s an apt description of what I’ve been seeing in the energy press lately: receding horizons.

A Horrible Irony

So far, April is living up to T.S. Eliot’s aspersion that she is the cruelest month.

Energy projects in oil, natural gas and tar sands have been getting cancelled or delayed left and right for the last two weeks or so.

Why?

Because of a horrible irony we have observed before: the rising cost of oil causes the project’s costs to balloon until it is no longer economical.

The horizon recedes. Like an oil-slick mirage–always just out of reach, just another mile or a billion dollars away.

Thanks to the record oil revenues being raked in by oil producing countries of the Middle East, they’re building and expanding infrastructure like gangbusters, which has led to a global shortage of contractors, raw materials, equipment and qualified labor . . . and in turn to higher prices for all the world’s big construction projects, including their own.

Talk about the snake eating its own tail.

We’re not just talking refineries, either. Did you hear about the planned 68-story combination hotel, apartment and office tower complex in Dubai where each floor rotates 360 degrees independently to create a constantly changing architectural form?

Well, whatever it takes to entertain the likes of Michael Jackson, I guess.

But I digress . . .

The Unconventional Oil Mirage

The point is, any time we hear that oil has to be over $30 . . . or $40 . . . or $XX per barrel in order for some marginal energy project to make sense economically, we should instantly be skeptical.

Because when oil does get to that cost per barrel, the project’s costs often turn out to be based on the cost of oil back when they made the estimate . . . but now, because of that very rise in oil costs, the project is still too expensive to make sense.

I don’t know how they get away with such predictions, actually. We’ve all seen this movie before, haven’t we?

And yet the cost overruns are always called “unexpected.”

One clear example of this is the production of the oil shale in the American West. Once you factor in the future cost of all the energy that it will take to harvest those low-quality hydrocarbons, it never pencils out. Indeed, it seems to be a calculation that few even attempt.

The standard joke is: “Shale oil–fuel of the future, and always will be.”

Back in 1946, you’d have seen a billboard along the route of today’s I-70 suggesting that you “Get In On the Ground Floor” of real estate there to capitalize on the impending shale oil rush. And it’s still not too late, because to this day there is not a single production-scale oil shale facility.

Another good example of receding horizons was given in the recent report by the Energy Watch Group on the impending peak of global coal production. The report’s authors concluded, “The present and past experience does not support the common argument that reserves are increasing over time as new areas are explored and prices rise.”

I’ll say it yet again: When it comes to non-renewable resources, neo-classical economics just doesn’t work. The Invisible Hand stays in its Invisible Lap, and God doesn’t put more oil in the ground just because we’re willing to pay more for it.

Unfortunately, the cancellation of these projects comes at a time when we’re just barely able to balance global supply and demand, no matter what OPEC may say to the contrary.

Claude Mandil, executive director of the IEA, said last week, “Demand growth has exceeded the capacities put on the market, which currently are barely balanced. . . . Even if we are happy with increasing investments in Middle East countries of OPEC, we think the rate of investment and capacity growth is not enough to meet future oil demand.”

Not enough to meet future oil demand.

Next week, we’ll review the rogues’ gallery of cavalrymen who have decided to stay home.

Until next time,

–Chris