Kicking The Gasoline & Petro-Diesel Habit

High Costs Could Prompt A Premature End To Oil Production

August 29, 2008

Consider what’s now happening at the major mining companies as a harbinger of what we can expect to see with oil production companies. According to a recent article appearing in The Wall Street Journal*, a number of mining companies are curtailing certain of their operations, in some cases shutting them down completely. The explanation, which at first blush seems strange, especially given the run up in commodity prices over the last few years, has to do with operating and investment costs. The cost of energy to run mining trucks and other equipment has skyrocketed. In addition, certain materials needed to make mining buildings and related infrastructure, materials like steel, have also become considerably more expensive.


Mining nickel, lead, copper, and other metals from the ground actually has many similarities to pumping oil out of the ground. While the processes are technologically different, in both cases we are talking about discovering and extracting a commodity that is in limited supply. In both cases, the supply of these commodities is in the process of being exhausted, and as a result, these commodities are increasingly more difficult to find, and increasingly more expensive to extract from the earth. For example, no new giant oil fields are being discovered these days. Producers must now go into very inhospitable environments, such as the bottom of the sea, in order to find significant new deposits of oil. 


In the future, firms that are mining minerals, and firms that are producing oil, will both be hit with the double whammy of higher energy prices combined with higher commodity prices. Higher energy prices mean that the cost per ton of ore produced, or the cost per barrel of oil produced, will be higher than it was in the past. Higher commodity prices will discourage investment in new and more efficient infrastructure, just as it will discourage efforts to develop additional deposits.


As was the case for carrier pigeons, bison, and many other animals, the extraction of these “resources” continues until it is no longer economical. Personally, I think it’s deplorable that organizations make these decisions primarily based on economics, but that’s the way the system is set up right now. So the production of minerals and petroleum from the ground will continue until it is no longer economical for the producers to engage in this activity. This point comes when the variable operating costs, and the fixed investment costs, both mentioned above, no longer look attractive relative to the revenues that can be obtained from further production activities.


Exactly when this point in time will come for oil or other commodities is hard to estimate. Many factors will affect this timing, including remaining supplies, prevailing demand levels, available technology, government subsidies and taxes, as well as the cost of capital. The important take-away point is that there will come a point when the producers stop producing, NOT because supplies have run out, and NOT because demand has dried up. At that point in time it won’t matter who you are, or how important your organization’s mission is, nobody is going to produce the commodity your organization may be dependent upon.


So the traditional bell-shaped depletion curve that is generally drawn by those who speak about peak oil is therefore a bit misleading. The smooth symmetrical bell shaped curve was relevant for the United States because the gap between United States’ production and United States’ consumption could be made up by imports from other countries. But when worldwide oil production peaks, if it has not done so already, and there is ample evidence to indicate that it has, then there will be no other country that can supply the missing oil. So the curve doesn’t neatly move down asymptotically approaching the horizontal axis of the diagram – at some point it just stops. That is the point when it is no longer economical to extract petroleum from the earth.


Confirming this reality, firms that produce oil are now dealing with heavy oil, oil produced from tar sands, oil high in sulfur, and otherwise undesirable grades of crude oil. It is much more expensive to extract and refine these types of oil than was the case with the light sweet crude that has been traditionally produced. So this day or reckoning, when oil will no longer be produced, is not all that far away.


From a managerial perspective, what does all this mean? First, it underscores the importance of reengineering your organization so that it is no longer dependent on a rapidly-depleting limited-supply commodity such as oil. It would be far better to transition to renewables, such as ethanol and butanol, fuels that can be distilled from biomass and other forms of renewable waste. Better yet would be sources of energy that do not depend on any potentially unreliable external input whatsoever. For example, electric cars can be powered by solar, wind, geothermal, wave, tidal, and other forms of energy that are predictable and do not deplete over time.


Secondly, this reality points to the need to get more specific about the economics of producing oil, so that we might get a better sense for the date when production will cease because it is no longer economical to engage in this activity. Just having a conversation about this date, and attempting to calculate when it could be, will also be important, because it underscores the increasing fragility of any operation that remains dependent on petroleum.


Thirdly, this reality points to the need for much greater diversity in our energy supply. Because petroleum now makes up about 60% of the world’s energy supply, if oil producers were to stop producing, there would be widespread and unprecedented adverse impacts. But if petroleum made up a much smaller part of the world’s energy supply, and if specific organizations used multiple sources of energy, the impact would be substantially reduced. Even if this day when oil is no longer produced is far away, it is in everyone’s best interest to more toward greater energy supply diversification.


Fourthly, knowledge of this day when petroleum will no longer be produced underscores how organizations are dependent on suppliers on the other side of the world, suppliers that they have no relationship with whatsoever, suppliers about whom they really know very little. Knowledge of this day of reckoning pushes management to consider making their own transportation fuels, and otherwise setting up in-house (or at least local) energy-generating systems. For example, it is now possible for organizations to manufacture their own bio-methane (also called renewable natural gas), to refine this gas, to store this gas for long periods, and to use this gas in their own transportation vehicles. The technology to do this is now sufficiently advanced that organizations can go out and buy a turnkey manufacturing system to capture and refine this gas. 



Charles Cresson Wood, MBA, MSE, is an alternative fuels management consultant with Post-Petroleum Transportation in Sausalito, California. His most recent book is Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action. You can learn more about the book, read his alternative fuels blog, and reach him at


* See Barta, Patrick, “High Costs Dig Into Mine Profits,” The Wall Street Journal, 25 August 2008, pp. A1 & A9. 


Note: A different version of this same article appeared at on 15 September 2008.


Quantitatively Estimating The Cost Of Converting Now Or Later

August 14, 2008

By Charles Cresson Wood


Once management at business firms, government agencies and non-profit organizations acknowledges that there is a substantial body of evidence to support the “peak oil theory,” as some people refer to it, they will soon thereafter be asking: “When should our organization transition away from petroleum?” In other words, given the assumption that an organization will at some future point in time be forced to transition to alternative sources of energy, at what future point in time would it be most prudent to make this conversion? This question can be answered quantitatively, with a formal decision making model using decision trees and/or influence diagrams.


Generally the most difficult part of this process is convincing management that such a model should in fact be developed. But if you look for it, the quantitative evidence supporting the “peak oil theory” is readily available. For example, the Energy Information Administration web site shows that worldwide production of oil has been effectively flat at about 74 million barrels per day since 2005. Making reference to the actual historical total world petroleum production data by year, actual number of discoveries of large oil fields by year, and similar indisputable quantitative data is the recommended strategy. Discussion of how it is likely that the total world oil production curve is expected to show up something like the historical United States total oil production curve is also helpful. Stick with the facts, and avoid estimates and projections. This means avoidance of estimated remaining petroleum reserves, number of years of estimated supplies remaining, etc.


The development of a model to provide guidance about the timing of a transition away from petroleum can be approached as a capital budgeting decision. Since such a project involves a considerable amount of time and money, it deserves a detailed analysis. To simplify the model development process, we can focus on the date when substantially all of an organization’s critical business processes are converted away from petroleum. This approach assumes the organization already knows which critical business processes are dependent on petroleum-based fuels such as gasoline and petro-diesel (if it does not, an inventory of these dependent business processes is advisable).


For example, five specific conversion projects could be proposed to top management. They could involve a completed transition within (1) one year, (2) two years, (3) five years, (4) ten years, and (5) twenty-five years. The net present value, internal rate of return, payback or some other financial measure of expected value can be calculated for each of these five projects. The project with the greatest expected value would then indicate the timeframe when it would be best to have transitioned away from petroleum. To get to this single numerical ranking of the alternative projects, the analyst developing a model will need to gather additional information. While a listing of the additional information needed in order to construct such a model is clearly beyond the scope of this brief article, a number of data points that will be important to the model are provided below.


Such a model’s structure could involve two major segments. The first segment could be a traditional managerial accounting delineation of the costs of a conversion project. The second could involve a decision making model, including the expected dollar value outcomes and expected probabilities.


In this first major segment, the analyst could note that the costs to convert will be rapidly rising over the years ahead. This could reflect an expectation that commodities such as steel and lead will become considerably more expensive in the years ahead, and also that the energy required to manufacture new alternative energy equipment will most likely be more expensive in the years ahead. Likewise, these higher costs to convert in the years ahead could reflect the expectation that competition for resources and expertise in the alternative energy field will be considerably more intense in the years ahead.


Alternatively, in the first of these major segments, the analyst may specify that the costs to convert would go down in the years ahead. He or she may have great faith in the new technology currently being developed, for instance that which converts algae into bio-diesel fuel. Undertaking a transition away from petroleum further in the future would then allow these new lower-cost technologies to be utilized, while converting now does not allow that option. In such a model, the analyst may reason that the organization could switch directly to the prime successor(s) to petroleum, rather than going through one or more transitional technologies. For example, perhaps five years from now, an organization may be able to buy fully electric vehicles that have sufficient driving range to meet business needs. But if a transition was to be made right now, then the organization may at best be able to convert to plug-in hybrids, which would then later need to be traded in for fully-electric vehicles. A series of conversions could be incorporated into such a model, although this author recommends against it — a transition directly to a sustainable and renewable energy technology is a lot more predictable and manageable.


The second major segment of the model could include the anticipated scenarios that materially affect the organization in question. A decision tree or influence diagram can include a series of probabilities associated with a particular scenario or outcome. For example, the probability that the world has now reached peak oil production can be combined with the probability that the organization in question will suffer volatile oil supply relationships, oil shortages, oil rationing, and rapidly escalating oil-based fuel costs. The dollar value of the impacts can then be assessed, and when combined with the net result of these probabilities, the expected value of a particular segment of the decision tree or influence diagram can then be calculated. The future availability of and price of oil is a very serious matter because, in some instances, the impacts mentioned above will threaten the very survival of organizations. Some small trucking firms and some large airlines are now coming to appreciate this fact.


We now have a significant amount of quantitative data about the petroleum situation, so that we can build credible versions of mathematical decision-making models about the best timing of a transition away from this energy source. Thus management does not need to make an intuitive decision, throwing up its hands in frustration because there are too many unknowns and too many unquantifiable variables.


For example, we can now make estimates of the future price of oil. These estimates can include a variety of assumptions, such as a reversion to historical prices, or the extrapolation of the rising prices experienced during the last few years. We can factor in the future prices for oil found in the futures market, as well as the opinions of technical experts who have studied these matters at great length. For instance, Dr. Robert Hirsch, author of a very influential report* prepared for the US Department of Energy, which is informally known as the Hirsch Report, has been talking about $500/barrel oil in the next few years.


Probabilities can then be attached to each of these possible future price points for oil. The clarification of, and explicit documentation of these and related estimates, and the assumptions that going into making these estimates, is absolutely critical in the development of a useful decision-making model. This is not only because it will increase the likelihood of making the best decision, but also because it will illuminate the perspectives held by experts who have studied the facts. It is likely that top management in many organizations hasn’t yet been exposed to the latest information, and their familiarity with these reports, such as that one by Dr. Hirsch, will most likely change the way they are looking at the conversion process. This changed perspective will then most likely markedly alter the probabilities that management assigns to different possible future oil price points, as well as other numbers used in these models.


Another important quantitative assumption in such a decision-making model is the time when the availability of oil will rapidly decline. A variety of expert oil geologists are now suggesting that the total world oil supply will go down 5-10% per year for the next decade or so. Factoring in different scenarios about the availability of oil, and the adverse impacts of shortages on the organization in question, this too will be a critical part of a successful decision-making model. For example, the oil available to consumers in oil-importing countries may fall off quite rapidly if oil-producing countries choose to use increasing percentages of their oil production for their own internal populations. According to data from the Energy Information Administration, this increased domestic consumption is already happening in a number of oil-producing countries such as Saudi Arabia.


One of the great parts about preparing a model such as this is the ability to perform sensitivity analysis. Thus the model’s inputs can be altered and the results calculated again to see if a materially different result is obtained. A sensitivity analysis could thus be performed on a completed model to see at what points the result would be different. For example, if management believed that such a conversion three years from now would be most prudent, a sensitivity analysis could be conducted to determine which of the input factors must change, and by how much, before it would be clear that the most prudent course of action would be a conversion one year from now. The results of such a sensitivity analysis may surprise management, and cause them to rethink their assumptions. For example, if oil prices escalate a lot faster than expected, the target completion date for a conversion project may need to be moved forward considerably.


In summary, it is now possible for organizations of all types and sizes to calculate the best date for a conversion of all major business processes away from petroleum. When top management actually goes through this important exercise it will, most likely, become considerably more aware of the urgency of this transition.




Charles Cresson Wood, MBA, MSE, is an alternative fuels management consultant with Post-Petroleum Transportation, in Sausalito, California. His most recent book is Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action. To learn more about the book, to read his alternative fuels blog, or to contact him, go to


* This highly recommended report, which is written in non-technical language, can be found at:


The True Costs Of Using Petroleum-Based Fuels

August 13, 2008

By Charles Cresson Wood

In business circles, the discussion about adopting alternative transportation fuels these days revolves largely around finances. While it is important to fully understand the finances of this new and rapidly evolving area, it is also important to understand the business interruption implications of continuing to rely on petroleum-based fuels. Yes, some alternative fuels do now provide lower per mile operational costs than petroleum-based fuels, but this benefit may very soon be completely overshadowed by the business interruption related losses suffered because deliveries cannot be made to customers, raw materials cannot be shipped from suppliers, salespeople cannot visit customers, etc. If you have not yet researched the geological data related to the peak oil discussion, I highly recommend two books: Richard Heinberg’s The Party’s Over and Matt Simmons’ Twilight In The Desert. click here to read more

Practical Tools To Speed Up the Transition Away from Petroleum

August 13, 2008

By Charles Cresson Wood

It is human nature to resist change when such a change involves anything else but known and desired results. We see evidence of this all around us, even in the U.S. Congress. When it comes to getting off of petroleum-based fuels, Congress has dragged its feet for decades. While special interest money no doubt also encouraged this foot dragging, we have now reached a point where the world is in an undeniable oil crisis. click here to read more

Thirty Serious Reasons Why Organizations Must Get Off Petroleum Now

August 13, 2008

By Charles Cresson Wood

Don’t get me wrong — I am very concerned about global warming and climate change. In the long run, that’s one of the most serious challenges that humans face as a species. But in the short run, the world is no longer able to produce petroleum in sufficient volume to satisfy its demand. Soon it will not be able to produce petroleum in sufficient volume to satisfy its needs. click here to read more

How Peaking World Oil Production Will Force Us To Evolve

August 13, 2008

By Charles Cresson Wood

At this point it is no longer a question whether world oil production will peak, although the exact date of this peak is certainly still in question. Recent books such as Twilight In The Desert by Matt Simmons authoritatively document that even the most reliable long-tern sources of petroleum, such as Saudi Arabia, will soon provide much diminished quantities of oil. From the standpoint of a futurist and strategic planner, one can of course see a wide variety of resulting implications, many of which should now be the serious concerns of governments, businesses, and non-profits. For example, if world supplies of petroleum will soon be significantly reduced, and if prices of this same petroleum will soon be much higher, organizations will need to rapidly transition to alternative transportation fuels. click here to read more

Five Ways The Public Gets Spun About The Oil Situation

August 13, 2008

By Charles Cresson Wood

The American public is being fed significant quantities of disinformation and spin about the current world oil situation. Unfortunately many among us are so pressed for time that they can’t spare a few minutes to seek out alternative points of view. But don’t take this author’s word for it — do your own research on the Internet, searching for terms such as “peak oil” and “Hubbert’s peak.” click here to read more

Five Myths About Alternative Transportation Fuels

August 13, 2008

By Charles Cresson Wood

Myths about the current world oil situation and rapid fuel price increases are causing confusion for consumers, businesses, and government policy makers. Unfortunately, many people don’t have ready access to alternative points of view. This author strongly recommends that the reader do some research on the Internet to verify the truth of the following claims.

click here to read more

Don’t Expect The Market To Resolve The Petroleum Crisis

August 13, 2008

By Charles Cresson Wood

In one of America’s most famous business newspapers, a recent article explored the causes of the run-up in food prices (1). One economist was alarmed because some countries — such as Vietnam and India — are now restricting exports of food, and/or increasing tariffs on exported food, in an effort to ensure that their populations are adequately fed. This economist is quoted as saying “Countries should, in general, rely on trade for food security.” In the eyes of this and many other economists, the free market should instead be used to most efficiently allocate food among the world’s population. click here to read more