Peak Resources

By now I expect that most people have heard of the concept of peak oil. This is the observation that we have reached, or may soon reach, the historical maximum oil production. Like any prediction based on limited data, the timing is uncertain. What we do know is that the quantity of petroleum, in all of its naturally-occurring forms, is finite. Therefore there has to be a peak sometime.

Of course, peak oil can come about for reasons other than resource depletion. Examples include reduced demand (rampant environmentalism?) and an unexpected replacement energy source (fusion, high-efficiency solar). For the present discussion let's assume that the present demand trends continue so that we can focus on production. We know that oil -- or any natural resource, including gold -- cannot last forever. But how much is there, and how can we know?

These may be the wrong questions. Though studied extensively, the composition of the Earth's crust remains unknowable. It is simply too vast and sampling can only give us an imperfect statistical picture of its contents. It is in fact very likely that there is far more oil, natural gas, gold, and other valuable ores than is forecast in the most optimistic resource reserve calculations. That isn't the problem. The correct problem is one of economics: what it costs to access and extract the resources.

The marginal cost of extracting the resource is inexorably climbing. This is no surprise since profit-seeking companies seek the lowest-cost resources; this is the so-called low-hanging fruit. Resource deposits may be long ignored until the market price rises above the deposit's extraction cost, since this is the only way to achieve profitable production. There are abandoned gold mines in northern Ontario that are now getting a second look since their residual deposits may now be profitably mined because of current high gold price. A key measure to estimate the cost of mining mineral resources is the desired resource's concentration in the ore. As the concentration gets lower, more rock must be processed to produce a given output, and that increases the cost. As technology improves or the market price increases, lower concentrations become profitable. Get the price high enough and it is conceivable that even the gold in ocean water and river effluent could be profitably extracted.

Oil and natural gas have similar economics. With better and more-expensive technology, more impure and less accessible deposits become profitable. The northern Alberta oil sands (bitumen) is so impure that it is mined rather than pumped out of the ground. In addition to this expense, the heavy oil has to be upgraded before becoming suitable for refining into sellable products. This has a high price. The oil sands are only profitable with the market price of a barrel of crude oil that is somewhere north of $60.

Another deposit that is a common object of attention in the idiotic chain emails that pour into my inbox is the Bakken Formation, which straddles the US-Canada border. The theme here is the vast forecast reserves of oil and gas in this deposit, and how it can sustain the US economy on its own for a hundred years or more. While this may be true, it is irrelevant since the bulk of the deposits, perhaps 99% of it, is currently inaccessible, and even it were accessible the extraction costs would be far above current prices. Get the price high enough and it might as well not exist. The more-easily accessed parts of the deposit are now being extracted and, while significant, it is not going to solve the any country's supply needs.

As finite natural resources are depleted, their prices will rise. Not because of peak oil, peak gold or other trendy buzz words, but simply because extraction costs will continue to climb as we deplete the most accessible deposits. There is lots of any resource, if you are prepared to pay the price.

Even if we do not voluntarily reduce our consumption of these resources, the higher prices give innovators and entrepreneurs the incentive to develop alternatives. This is what is driving the solar industry today. It is still only marginally viable, but as oil and gas prices trend higher over the long term, investment into these alternatives will drive down costs through production volume and a steady stream of scientific discovery and technological innovation.

Better than any regulations, publicity stunts (like turning out the lights for an hour on Earth Day), or pleas for ethical business practices, it is basic economics that will ultimately halt exploitation of non-renewable resources. If you're an investor like me, there are lots of ways to profit from this since the prices of many commodities will continue to trend higher and emerging technologies (though not necessarily any particular company) will see their own prospects rise alongside resource prices.