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strategy and business
 / Summer 2006 / Issue 43(originally published by Booz & Company)


Engines of Change

Anticipating Global Shortages
Beyond Oil, by energy consultant and emeritus Princeton professor Kenneth S. Deffeyes, builds on the author’s previous book, Hubbert’s Peak. In 1956, the statistician M. King Hubbert predicted that American oil supplies would reach a peak of production between 1965 and 1970 — in other words, a point after which the supply of oil from the U.S. would be increasingly expensive and scarce. Mr. Hubbert was only one year off (the peak occurred in 1971), which suggested his methodology was indeed robust. Then, in 1979, he predicted a global oil production peak in 2000. Few took notice. Was the reality too hard to contemplate?

The tone of Mr. Deffeyes’s book is warm, with interesting and amusing anecdotes from his long career in the oil industry, which he loves. Yet his prediction is somber enough. He takes the view that the world is indeed close to a peak of production for conventionally recoverable fossil fuel oil. The clash with rising oil demand, notably from China and India, will push market prices up rapidly — to which add the discomfiting politics of a world where an increasing proportion of reserves lies in politically sensitive regions. Industrial societies have already made a significant shift toward natural gas for fuel. But the amount of natural gas extracted from each new well is growing steadily smaller, and much of the remaining supply is in places remote from the main centers of consumption, requiring substantial liquefaction and transportation costs.

Mr. Deffeyes makes the reasonable case that other fossil fuels, or, for that matter, renewables like hydro, solar, and wind power, will probably not cushion the descent, as we can’t bring them online fast enough. Rising petroleum prices will enable the tapping of alternative sources, such as nonconventional oil (shale oil, the Athabasca tar sands in Western Canada, heavy oil in Venezuela’s Orinoco basin) and coal, of which there is still plenty. But their direct and environmental costs will be considerable, so the switchover can occur only at much higher energy prices than we have become used to. Coal is a concentrated energy form, but the investment and environmental costs of synthesizing hydrocarbons from it are high. Hydrogen, touted as the wholly nonpolluting fuel, is not in fact a primary fuel but only an energy carrier. It is only as clean or as cheap as the process by which it is generated. Widespread use of it will require a complete new distribution infrastructure. Through failure to recognize the oil problem early enough, we may face an awkward and expensive transition.

If Mr. Deffeyes disappoints at all, it is because, having led us to the edge of the precipice, he stops short of describing the economic thrills and spills of the impending fall. This is perhaps wise, as he makes his own argument skillfully and has chosen not to stray into speculation about its implications, noting that he is not an economist.

Virtues of Development
Peter W. Huber and Mark P. Mills, the authors of The Bottomless Well, do not share Mr. Deffeyes’s view of imminent disaster. Rather, they are what he would call “cornucopians,” advocates of the idea that there will always be enough energy to go around, at least for those who matter. Mr. Huber and Mr. Mills begin plausibly enough by characterizing all life and economic development as a fight against entropy — the measure of disorder, which inescapably increases as energy degrades. All ordering, all upgrading of energy, requires the input of high-grade heat and the throwing off of degraded heat, as stated in the Second Law of Thermodynamics, enunciated 182 years ago by Sadi Carnot.

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Resources for Understanding
Energy and Automobiles
Works mentioned in this review.

  1. Alfred W. Crosby, Children of the Sun: A History of Humanity’s Unappeasable Appetite for Energy (W.W. Norton, 2006)
  2. Kenneth S. Deffeyes, Beyond Oil: The View from Hubbert’s Peak (Hill & Wang, 2005)
  3. Kenneth S. Deffeyes, Hubbert’s Peak: The Impending World Oil Shortage (Princeton University Press, 2001)
  4. European Commission, Cars 21: Competitive Automotive Regulatory System for the 21st Century. Final Report (E.U. Directorate General for Enterprise and Industry, 2005)
  5. Kelly Sims Gallagher, China Shifts Gears: Automakers, Oil, Pollution, and Development (forthcoming from MIT Press, July 2006)
  6. Peter W. Huber and Mark P. Mills, The Bottomless Well: The Twilight of Fuel, the Virtue of Waste, and Why We Will Never Run Out of Energy (Basic Books, 2005)
  7. Mark Jaccard, Sustainable Fossil Fuels: The Unusual Suspect in the Quest for Clean and Enduring Energy (Cambridge University Press, 2005)
  8. Amory B. Lovins, E. Kyle Datta, Odd-Even Bustnes, and Jonathan G. Koomey, Winning the Oil Endgame: Innovation for Profits, Jobs, and Security (Rocky Mountain Institute, 2005), Click here.
  9. Matthew R. Simmons, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (Wiley, 2005)
  10. World Business Council for Sustainable Development, Mobility 2030: Meeting the Challenges to Sustainability — The Sustainable Mobility Project, Full Report 2004. Click here.
  11. World Health Organization, World Report on Road Traffic Injury Prevention, Geneva, 2004. Click here.
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