Much to-do is being made over the announcement yesterday by three oil companies who say they've figured out how to extract deep-water oil in the Gulf of Mexico. It's a "bonanza," declared CNN. Oil prices promptly dropped, although, if anything, the blanket coverage the news is getting succeeds mostly in illustrating an uncomfortable point: big strikes are few and far between these days. As the Wall Street Journal noted: "While the new discoveries are sizable, they won't usher in an era of plentiful, low-priced oil. The Gulf's lower-tertiary reservoirs don't come close in size to the enormous oil fields of the Middle East or even Mexico's huge, but tired, Cantarell oil field in the waters off the Yucatan Peninsula."
Personally, I'm far more excited about the news that a New Zealand company has successfully converted sewage algae into biodiesel. The intersection of waste effluent and algae-to-oil production is always going to be treated fondly at How the World Works, and this operation seems pretty legit. The company, Aquaflow Bionomics (how's that for a 21st century name?) is run by New Zealanders with well established records in renewable energy development, and it recently signed a deal with Silicon Valley's Girvan Institute of Technology, a venture capital "incubator" that specializes in helping high tech companies commercialize their products.
Why's a New Zealand company cutting deals with a Silicon Valley incubator? The quick and easy answer: the price of oil. The last two years of high prices have made a constellation of new technologies commercially viable, and everyone with venture cash to burn is looking for the quick score. In the big scheme of things, Aquaflow's technology, by itself, won't make more than a small dent in the world's fuel consumption. But if there is profit to be found in selling the technology to waste treatment facilities around the world, then it's a go.
New Zealand's own trajectory of renewable energy development offers a classic demonstration of the relationship between the price of oil and the viability of alternative energy development. Like all oil importing nations, the oil shocks of the 1970s forced New Zealand to look into alternative sources of power. New Zealand was particularly vulnerable, given its vast distance from the world's major oil exporters. For several years in the '70s and '80s, New Zealand made dramatic strides in ramping up other sources of energy -- according to one researcher, for a brief period, it was a world leader in biofuels research.
But at the same time, New Zealand also developed its own indigenous oil production, including the huge Maui field, just as oil prices plunged across the world. Further development of alternative sources of energy was nipped in the bud. When oil is ten dollars a barrel, solar, wind, and, naturally, sewage-to-biodiesel, don't make much sense.
That's all changed again. The Maui field has peaked and is in decline. Oil prices are sky high. Today, New Zealand is making a major push in wind power and entrepreneurs are demonstrating renewed interest in biofuel development, not just from sewage, but also from other sources that New Zealand boasts in abundance, such as tallow (animal fat) from its beef industry, and whey from its dairy production.
New Zealand is far from unique in fitting to this pattern. The price mechanism works its magic everywhere, at all times. And that's why we shouldn't get too jubilant over the news of big oil strikes in the Gulf of Mexico, or anywhere else. Suppose that the current price of oil is inflated as a result of hedge fund speculators betting on continued price rises -- and thus ensuring a self-fulfilling prophecy by pumping up demand. All it would take would be for the conventional wisdom to switch, and for investors to start betting on a decline, for that decline to become real. Suddenly business plans by the score would become moribund, again, which, in turn, would inevitably exacerbate global warming trends and prolong the world's true reckoning with the day of energy judgment.