PowerSwitch

By Jack Lifton - 16/08/07

DETROIT (ResourceInvestor.com) -- I have been reading more and more lately about the topic referred to as ?Peak Oil.? I think that what most writers are saying when they use the term ?peak oil? is that they are placing their bet on whether or not global petroleum production is:

1. At
2. Has already passed
3. Is approaching or
4. Will never reach a maximum.

There is evidence for any and all of these positions, but, from what I have reviewed myself so far, I am inclined to accept item No. 3 above as the correct description of what is happening today. I think that if we in the West continue to use and increase our use of oil for motor fuel and for fuel in the production of electricity at present rates and trends - and if new demand grows due to the rapidly increasing industrialization of the East in the same consumer oriented way as the West has developed but in a much shorter time - then the global demand for petroleum will exceed the global supply within a generation of this writing.

At that point in time, prices of oil will index up sharply and usage will immediately decline, for reasons of cost alone. Then, as usage plummets, pundits of the free market capitalism school will say incorrectly that a crisis - peak oil production - has been narrowly averted, but they will at first ignore that, from that point on, the unravelling of the oil drinking civilization we have built around the gasoline- and kerosene-fuelled internal combustion engine and the oil fired steam powered turbine (for the production of electricity).

We see the above scenario in miniature played out more and more frequently lately as we hear about labour strife in Nigeria, pipeline leaks in Tuscaloosa, and threatened or carried out terrorist attacks in Saudi Arabia interrupting the flow of oil or refined products. Lately these rehearsals have sometimes become performances through which the price of fuel permanently ratchets up. I call this the escalator method of price increases; they are always going up, but you can move sideways a little whenever you like.

We have all become used to the price at the neighbourhood service station fluctuating with the daily market price of crude oil - even though this is clearly a game to cheat us. People actually think that they are somehow participating in the world oil market as service station owners play the game of pricing gasoline and kerosene (diesel fuel) at the margin base (ridiculously) on the posted price for crude in the Persian Gulf of the day before. Imagine if your electric bill or your car payment were re-priced daily based on oil prices or the prime interest rate. Supermarkets are actually doing the same thing for perishables such as meat, eggs, fruit and vegetables, but we have all become so used to that, that we don?t notice that as farmers are paid more to grow less feed grain or paid a subsidy to divert feed grain to ethanol use, we pay more for beef.

Science fiction writers often take us to just after, or - more dramatically - years after, the collapse of our oil intensive society so they can show us the consequences of our energy profligacy. But these writers rarely, if ever, tell us of any practical way of preventing the crisis other than just for everyone else - but the writer and likeminded people - to use less energy while the morally pure nations of the third world show us how we should live just as they do, loving and respecting each other - but without safe roads, universal electric power availability, clean water, specialty metals and the myriads of other things that only the pure of heart and ego should be entitled to enjoy. Oops, excuse me; I?m not talking about science fiction writers. I seem to be talking about modern political liberals and activist environmentalists. These are the people who fly around the world to conferences and concerts in private jets wasting tonnes of metal, rubber, plastics and fuel - just a tiny amount of which could be used to broadcast their message by radio and television to those who could, in their wisdom, choose to turn off the receiver to purify their local air of noise pollution.

Even though I believe that the political and economic consequences of the arrival of the permanent excess of global demand for oil over supply have clearly not happened yet, I see clear signs of the free market already moving to avert them, so I know that they cannot be far off.

This brings me to my topic today: not peak oil, but, peak local natural resources. I want to point out to investors that, notwithstanding any other uses of certain key metals, their uses today for the purpose of locating and producing petroleum oil in Mexico, the U.S. and Canada and under the territorial waters of the three nations; processing tar sands in western Canada; and producing shale oil in the western U.S. are the key to pushing off the peak petroleum oil crisis described above into the indefinite future, at least as far as North America is concerned.

North America, at least the United States, has clearly already reached and passed a relative peak of its domestic oil production. The U.S. today imports 60% of the oil it uses daily. This, the reaching of a relative peak in oil production, is interestingly enough a political event as much as anything else since it is narrow-minded, elitist, and frankly, luddite politics that mostly prevents American oil companies from further drilling in our Arctic or under the territorial waters of our coastlines. We have and continue to hold on to the best, safest and cleanest drilling, pumping and distributing technology on the planet. Just one example is the fact that the modern oil drill was invented in the early 1920s by Howard Hughes, Sr., the father of the famously neurotic playboy, and has therefore been in use by American companies longer than those of any other nation. Stainless steel and molybdenum steel for oil field tubular goods were also invented in the U.S. in the early twentieth century. It was mainly for reasons like these, not just because there was oil in Texas, that oil production in the U.S. led the world early on.

Everyone should note that the China National Offshore Oil Corporation (CNOOC) [NYSE:CEO] was prevented by a Republican majority Congress from buying the American oil company Union Oil Company of California (UNOCAL) - a subsidiary of Chevron Corp. [NYSE:CVX] - entirely for political reasons, ostensibly of sovereignty.

Yet the same Congress, even in its current Democrat majority version, will not admit that this was a political decision based on the potential loss of technology, not sovereignty. UNOCAL has developed some of the most sophisticated deep sea drilling technology in the world, and even the most hypocritical member of Congress does not want to lose that technology - because he or she knows that in the next oil supply crisis he or she may have to vote (reluctantly if he or she needs environmentalist votes) for opening up the Arctic wildlife preserve and/or the continental shelf and/or the North Pole region to exploration, and even Ted Kennedy and Dick Durbin could lose their hereditary seats if the public became angered by the idea that we had allowed the best technology for doing the job to be acquired by the Chinese so they could open up the China Sea?s oil reserves for themselves.

Imagine how annoyed the voters would be if they found out that UNOCAL also owns Molycorp, a mining company with substantial reserves of molybdenum and rare earths in California. Of course, the U.S. is now self-sufficient in molybdenum, but a substantial amount of this supply is produced as a byproduct of copper mining. If copper mining should slow down due to a global recession, as it looks to be doing now, or if there is increased pressure to stop the operation of sulfur dioxide producing copper (roaster) smelters because the politicians are completely under the sway of the clueless anti-mining interests, then even though the U.S. has large reserves of molybdenum and produces a lot of molybdenum from primary mines, we could go to a position where our domestically produced supply would not equal our domestic demand, and we would have to import a critical amount of molybdenum. Oh, by the way, you must have molybdenum in steel and molybdenum chemicals in the lubricants used to make oil field tubular goods - the piping through which crude oil and finished oil products are transported most economically because of the properties of the molybdenum alloys and chemicals.

This is why UNOCAL bought Molycorp in the first place. It is sad to think that if CNOOC had bought UNOCAL it simply would have had the Mountain Pass mine concentrates loaded and sent to China where dirty smelters would have recovered the molybdenum and rare earths and sent them back to the U.S. in manufactured items packaged with recycled materials and cute green environmental symbols printed on the packaging. The thorium in the concentrates, which shut down the mine here, would be simply discarded in China or processed for sale to Indian or Russian research reactor sites.

One more thing - as I alluded to above, Molycorp owns America?s best proven resources of rare earth metals, contained in the ores from its closed Mountain Pass mine in Inyo County, California. So what, you say? Well it turns out that we now get 100% of our rare earth metals from China, and since the nickel metal hydride battery pack is used now, and for the indefinite future, by every hybrid vehicle sold in the U.S., it is necessary for us to buy the rare earth metals in China - which we could mine in California - and the nickel, of which we also import 100%, from Russia, or, to be honest, Canada - that we could mine in Michigan - in order to make the batteries for the hybrid cars. Oh, and by the way, to make those super high speed rock eating drill heads - the profits from which allowed Howard Hughes, Jr., to play at life - you need tungsten and cobalt. China is the world?s largest, and America?s overwhelming, source of the one (western Africa has the other), even though America has enough proven tungsten ores and even a considerable amount of cobalt - certainly enough to make drill heads for rock cutting.

The United States also has enough uranium and thorium to build all of the reactors, the thorium fuelled ones of which cannot produce weapons material, and in fact could burn the weapons-grade plutonium excess that we have into non-usability. These safe reactors could produce enough steam to provide all of the electricity the U.S. needs for its power grid and to recover oil from American shale and Canadian tar so that we would not have to burn any imported oil in our power plants and perhaps no coal eventually.

I could go on, and I will in the future, both here in ResourceInvestor.com and at the Hard Assets Conference in Las Vegas on what the U.S. must do to remedy its relative peak oil problem by eliminating our current, self-induced, relative peak metals-critical-to-self-sufficiency-in-energy-production problem.

Perspective is the key to objectivity, dear readers. We must address problems holistically. Peak oil in the U.S. is not a separate issue from the anti-mining fallout of poorly thought-out, knee-jerk environmentalism.

There is no evidence at all that the majority of the citizens of any nation other than the U.S. consider the maintenance of America?s standard of living to be more important to themselves than maintaining or improving their own domestic standard of living. There is, however, some historical evidence of shared goals for security, health and economic well being among the principal three nation states of North America: the United States of America, Canada and Mexico.

The world does not owe us a living. The BRIC nations - Brazil, Russia, India and China - are rapidly moving towards sequestering their natural resources, metals as well as energy, for their own use domestically. If China, for example, has to choose between maintaining domestic employment and allowing America to have tungsten for oil drills, military or naval armour, cutting tools or ammunition, what decision do you think they?ll make?