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Brian Westenhaus

Brian Westenhaus

Brian is the editor of the popular energy technology site New Energy and Fuel. The site’s mission is to inform, stimulate, amuse and abuse the…

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Oil Will Run Out Before Replacements are Ready

So says UC Davis Professor of Civil and Environmental Engineering Debbie Niemeier in a forecast that published on Nov. 8 in the journal Environmental Science & Technology. Sound nuts?  Wait a moment . . .

Niemeier is working from the theory that long-term investors are good predictors of whether and when new energy technologies will become commonplace. That’s to say stock market expectations are a guide to the future.

The case can be made from applying two key elements of the theory, market capitalizations (based on stock share prices) and dividends of publicly owned oil companies and alternative-energy companies. Other analysts have previously used similar equations to predict events in finance, politics and sports.

Nataliya Malyshkina, a UC Davis Postdoctoral Researcher and co-author said, “Sophisticated investors tend to put considerable effort into collecting, processing and understanding information relevant to the future cash flows paid by securities. As a result, market forecasts of future events, representing consensus predictions of a large number of investors, tend to be relatively accurate.”

Niemeier said the new study’s findings are a warning that current renewable-fuel targets are not ambitious enough to prevent harm to society, economic development and natural ecosystems.

This writer can buy this is a general sense.

Niemeier explains, “Our results suggest it will take a long time before renewable replacement fuels can be self-sustaining, at least from a market perspective.”   Just how the ladies are getting to 90 years isn’t explained.  A “long time” isn’t real precise, but 90 years?

Some license must have been granted for the press release.  The abstract of the ladies paper is more scientific saying, “This research establishes a probabilistic theoretical approach based on market expectations reflected in prices of publicly traded securities to estimate the time horizon until the appearance of new technologies related to replacement of nonrenewable resources, for example, crude oil and oil products. To assess time T when technological innovations are likely to appear, we apply advanced pricing equations, based on a stochastic discount factor to those traded securities whose future cash flows critically depend on appearance of such innovations. In a simple approximation of the proposed approach applied to replacement of crude oil and oil products, we obtain T ? (P0oil/C0)•ln (?•P0oil/P0alt), where P0oil and P0alt are the current aggregate market capitalizations of oil and alternative-energy companies, C0 is the annual aggregate dividends that oil companies pay to their shareholders at the present, and ? is the fraction of the oil (oil products) replaced at time T. This formula gives T ? 131 years for replacement of gasoline and diesel. The proposed market-expectations approach may allow policymakers to effectively develop policies and plan for long-term changes.”

Everyone with some modeling experience or math or statistics will realize that the inputs for the formula are rapidly moving assumptions.  The curious thing is the formula, updated every day, week or month might be very useful for establishing a trend or more adroitly as measure of the effectiveness of national polices.

Which today suggests – at 90 years – that policy is a dismal failure.

But policy isn’t a dismal failure, rather the foundational work is proceeding both with amazing progress and aggravating frustration – it depends on where you look.

Resources for the stock researchers rely on hard data of performance already done.  The alternative fuels are still building foundations and simply are not threatening entrenched fuel producers in a serious way.  The mindset of the stockholder isn’t ready to move, and justifiably so.

But a certainty exists that’s not in the view just yet – alternative fuels are coming and cheaper and will cross the market price line someday.  At that moment much of the high cost petroleum production will be threatened – if demand is high enough that the marginal last barrels are rare enough to command a good price.  If the marginal barrel is cheap – its all the harder for alternative fuels to get market share.

But if anything has been learned over the passed four years it’s that demand and supply are elastic, more than the analysts thought.  And that doesn’t seem to be in the formulae.
As a practical matter the UC Davis ladies have given us a valuable service.  A tool exists to project the effectiveness of national policy. One hopes they are very busy with Congressional inquiries.


Niemeier said in the news story’s closing, “We need stronger policy impetus to push the development of these alternative replacement technologies along.”

She’s right, whether 90 years, 45 or 5; policy is too weak and too slow.

By. Brian Westenhaus

Source: Warning – Oil will run out before replacements are ready

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Leave a comment
  • Anonymous on November 20 2010 said:
    Oil is not going to "run out". It may run down or peak, and the ladies are probably correct when they say that replacements will not be ready. As for predicting the future of oil on the basis of what is happening with traded securities, I say 'nuts' or 'nuthouse' to that.
  • Anonymous on October 25 2011 said:
    To poster #1, according to worldometers.info's analysis of proven oil and natural gas reserves, we have about 42 years of oil left at current rates of consumption. Of course, given we are adding 1 billion people a decade, and developing nations like India and China are rising, consumption is probably going to rise even as production peaks and declines. I am 26, so within my own lifetime, and certainly my children's, we could be facing a complete and utter industrial collapse as the base commodity which drives our very life-systems (agriculture, medicine, industry) is completely dependent upon non-renewables. All of us, every single man, woman, and child on Earth, are screwed if we do not create a renewable alternative within 30 years.

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