The Price of Oil and the Financial Collapse

In the early 00's, I was supremely interested in the problem of peak oil, as a large part of my own journey to understand exactly how the physical economy works, despite being apparently unsustainable. In the process of learning, I performed a simple calculation of what I thought the price of oil should be, based solely on the price per equivalent energy content of its nearest (sustainable) competitors. I came up with a price of $150 per barrel. At the time, oil was less than $40 per barrel. This result alarmed me, especially since I made no attempt to account for other uses for oil other than simple fixed energy production, such as its value as chemical feedstock for plastics, or its relatively high energy density and ease of use in transport applications. I couldn't see how there could be such a disconnect in what should be the absolute root of the global physical economy, and in what is routinely touted as the ultimate free market.

The truth is, of course, that the global oil market is not free at all. But I had to learn that in a roundabout way.

I mentioned this result to a friend of mine. He trusted my opinion on the matter, and anything else relating to energy economics for that matter, implicitly. He merely asked "why not $200 per barrel?" I said "no, $200 is too high. $150 is the right number." And that was all it took.

Oil began its meteoric, multi-year rise, in early 2004. In March of 2005, with the price already pushing well past recent highs, a young yet globally-recognized oil industry expert at Goldman Sachs released his latest prediction: $50 to $105 per barrel. People thought he was crazy.

When this prediction was not only met, but exceeded, Goldman executives took a break from swimming in all their newfound money, and made the Cornell graduate a partner.

Near the peak, in mid-2008, the same analyst updated his forecasts for the last time. The latest number: $200 per barrel. Typical, huh? As I recall, the price peaked at $145 per barrel late that summer, shortly before the entire US economy collapsed.

There are other stories here, as well, occurring concurrently. Don't think Goldman is the only culprit. They involve other billionaires in the oil/energy industry, each equally-well-connected to this entire conspiracy, in their own way. These stories will be added at a later date.

T. Boone Pickens is a grandfatherly hedge-fund manager in the oil/gas industry, based in Dallas, who graduated from Oklahoma State University. A well-known corporate raider in the 80s, these days he makes the news periodically because of his gifts to the OSU football program -- to a school that both of my parents attended. In 2007, he gained national attention by releasing the Pickens Plan -- his proposal for a renewable energy future in America. I, for one, saw this as a realistic proposal worthy of consideration and garnering Pickens some respect. Ranchers in Northwest Texas, however, tend to view him as more of a snake-in-grandfather-clothing. The reason for that seems to be that his plan, which focused on easements and investment in distribution infrastructure, was more of a plan to unify the markets for water and energy than an immediate investment in renewable power production. And once you understand that Mr. Pickens' particular area of expertise involves fracking and natural gas production in arid regions of Texas and the American West, you can see how his proposal, if implemented, might have worked to his short-term advantage and to the disadvantage of certain landowners, while not necessarily resulting in any increased investment in politically-popular forms of renewable energy.

Like most Americans, I didn't understand this right away. In 2005, I didn't know anything about fracking because, like I've said, I am a software consultant and not a rancher or oilman. But, at the time, like many Americans, I was interested in becoming more self-sufficient, primarily more energy-independent. And I was dabbling in various renewable energy technologies, towards that end.

In December of that year, after several months of dedicated research, I began releasing a few proposals for what I viewed as a practical and cost-effective path to small-scale energy-independence. This was the path that I intended to take on a few acres outside of Tulsa. It was a path that, I calculated, any other American could reasonably expect to take, with a little work, given average resources per capita.

Upon posting this proposal to a renewable energy forum, I garnered immediate backlash. Much more backlash than I expected. I had been posting controversial political opinions to the internet for years. But this seemed different. This time, I was facing overt censorship from a group of people who, I believed, were as interested as I was in promoting sustainability and renewable energy, any way possible. Apparently that shared interest didn't extend to the types of renewable energy that I was proposing.

I was not, and never have been, a techno-utopian who believes in battery-powered flying cars. I didn't even think that solar photovoltaics would become cost-effective. (Though I've since been proven wrong on that point.) The long-term choice, as I saw it, was between wind power and biomass, or some combination of the two. And the ideal combination would be dependent upon location, population density and intended use. Maybe, in a high population-density area, you would use wind power to charge a small electric car. In less-populated areas, you would run your truck off of biogas. The biggest problems, it seemed, were energy storage and cost. So I simply drew up a small roadmap along these lines, and created a simple spreadsheet application capable of comparing the costs of different renewable energy technologies.

Batteries were not a solution, in my view. They don't store enough energy. They aren't going to heat your house in the winter, or run your air conditioner all night, in the summer. They don't scale. They don't work with existing infrastructure. And they aren't cheap. But from what I could tell, if you had cheap water, a source of carbon and excess renewable energy almost anywhere, you could economically turn it into synthetic fuels, even at a very low efficiency. You can store those basically forever. And the nature of renewable energy, especially wind power, is that at certain times you indeed end up with a glut of energy that is otherwise wasted. So all I pointed out was that, hey, on a small scale, in America, efficiency doesn't matter. Ample energy storage matters. Transportation fuel matters. Capital cost matters. And, because of that, biomass and biofuels are the only economical forms of energy storage.

And that's where Pickens comes in. Because oil and gas investment is, on a large scale, just a giant machine of balancing long-term energy storage and cost. The Pickens Plan was a large-scale solution to the problem of economizing renewable energy production and investment, storing renewable energy, and ensuring stability in the market for transportation fuels. It aimed to do the same thing my proposal would accomplish, just in a completely different way -- to unify the markets for water, renewable energy and transportation fuels on a large scale.

I was thinking on the small-scale. And I lived in an area with lots of rainfall. So my proposal just assumed cheap water. Pickens assumed the opposite -- cheap energy, and no water. So he proposed easements, pipelines and power lines in order to move that water and energy around.

Once you understand it, it's not a terrible idea. The American Southwest, despite its hospitable climate, is almost completely uninhabitable due to lack of water. The only exceptions to this are areas along the Colorado and Rio Grande Rivers, where water usage is heavily controlled. Housing construction in these areas had been booming for decades and, by 2007, was reaching ridiculous levels, and prices. Pickens perhaps looked at all of that uninhabited land in West Texas, with a warm climate and ample potential for wind energy, as the potential next Phoenix. If only a pipeline could be built to transfer water from Southeast Oklahoma, for instance. Or, if only high-voltage power lines could be built to send that renewable energy the other direction.

Or, maybe not. Maybe it was just a cynical play for fracking and water rights. In the short-term, that's undoubtedly true. Pipelines are expensive, and take a long time to build. Billions of dollars don't just appear out of nowhere in order to build cities in the middle of nowhere, regardless of how much energy there is.

But, in the long-term, we are kind of screwed with regards to energy usage and peak oil, if we don't do something on the scale of the Pickens Plan. It's either that, or a lot of inefficient small-scale solutions like the one I proposed. And, even though I have absolutely no evidence that Pickens or any of his staff ever saw my proposal, this is here because it is just another coincidence that I can't manage to shake. And because, for at least a couple of years afterwards, I couldn't help but think that this small text may have had something to do with my brother attacking me, three months after I released it. It was an idea that I never thought made much sense, at the time. So I wrote it off as paranoia, totally expected in such a situation. But, like many other such ideas on this site, it is one that I now realize has some potential for ties to the Dees Ranch.

Last Updated on 02/06/17