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Letters to the Editor

Fortnightly Magazine - January 2008

Will it be now, or will it take place in the 2030-2040 era? A recent crude oil study undertaken by the G.A.O., and released in Feb. 2007, reviewed forecasts of 21 independent energy experts. Seven of those experts believe we have already reached the peak oil limit, and 10 believe we will achieve peak oil before 2012. The range of forecasts extends out to 2040. So, let us choose 2010 as our date.

Why should utilities care about peak oil? Although petroleum is no longer a player, if you will, having been separated from other energy markets when it became too expensive for burning in large stationary power plants in the ’80s, over time all energy prices tend to move in the same direction ( see Figure ). If oil production declines, and prices rise, what will be the impact on utilities?

Shortages of oil in 1973 and 1979 led to much higher oil prices as shown in the figure below. In spite of utilities’ spread of energy use, and petroleum “independence,” peak oil matters to utilities.

In 1982, demand for electricity dropped 2.1 percent, the only time this had happened since 1945. The United States was in a recession, in part attributed to policies at the Federal Reserve, initiated by Paul Volcker in 1979 to raise interest rates deliberately in order to control inflation that had grown to double digits: 11.2 percent, compared to 7.5 percent the previous year. Why had inflation increased so dramatically in 1979? In part, the Iranian revolution that had removed the Shah led to a disruption in oil supply. The price of crude oil jumped from approximately $19/barrel in 1979 to $45/barrel in 1982, and stayed high until 1985.

Not coincidentally, coal prices also rose during the 1973 and 1979 oil shortages, as the figure illustrates. Coal prices rose from $8.71/ton of bituminous coal in 1973 to $20.11/ton in 1976, a 131 percent increase. Coal prices also rose from $22.64 per ton in 1978 to $32.15 per ton in 1982, according to DOE statistics. Prices since 2000 show a similar trend.

Another argument to utilities is that a decline in oil supply coupled with dramatically rising demand for energy worldwide will lead to spikes in crude oil prices that can drive a recession and lower demand for electricity. The decline in oil supply attributed to peak oil will produce this same result. Recently prices for crude oil have reached new records exceeding $100/barrel, while OPEC is simultaneously announcing a cut in fourth quarter non-OPEC production outlook by 110,000 barrels/day. Some in the oil industry, like Matt Simmons in Houston, are forecasting that the world has already reached its peak oil production capacity, and that production will decline inexorably in the next decades.

Future Wargames could link the price of coal to oil prices, and also include the portion of coal prices that are attributable to transportation costs by rail, driven by diesel. If oil prices go up, then coal prices will increase.

So, let the games continue, but factor in peak oil, and oil security pricing