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Larry Kudlow is fond of saying "Drill, baby,drill," and he seems to think of this slogan as a major domestic energy policy solution to $100-plus oil. The Arctic National Wildlife Refuge in our very own Alaska is off-limits to drillers, as are many other areas.

We dare not harm the environment of the yellow speckled squirrel. We humans may all be swallowed up in an economic collapse, but as for biting the dust, better us than the squirrel. This seems to be our energy policy in America, so it's understandable when you hear the chorus "Drill, baby,drill." But this does not address the energy crisis we are flying into.

I usually agree with Kudlow and Steve Forbes as well, but when they assume that the free capital markets will solve the oil problem, as Forbes predicted in 2006 with a call for a longterm return to $35 pricing, they are just flat wrong. The energy crisis we are flying into has little to do with higher technology or more drilling; it has everything to do with net energy and the laws of diminishing returns.

Drilling now is not the same thing as drilling five or 10 years ago, as I illustrated here. Pretty much all drilling -- shale gas, conventional crude, conventional gas, etc. -- is subject to the same math, so let's look at what it says for conventional gas in North America:

[Click all to enlarge]

This is a complicated chart, but it basically shows various production profiles as time advances in terms of gas per foot of drill effort. All of the plotted data shows the same thing -- as EROEI (energy return on energy invested) goes lower over time, it takes more drilling to get the same BTU out of the earth. This is just Mother Nature's way and it cannot be changed.

Note the light green line for Canadian conventional gas. It goes from an EROEI of 40 many years ago with high per drill foot production down to intersect zero net production with EROEI at 1 (zero net energy produced) by the year 2014. As the EROEI ratio approaches 1, the amount of drilling just to keep production flat must go hyperbolic, as the two curves in the chart show. We are fast arriving at a historic drilling boom that may be a surprising corollary to Hubbert's math of peak oil. We may be seeing the beginning of it here in Q1 2011, with energy turning from last year's dog to the best performing sector of this past quarter.

Could such a monster boom really happen? Well, it already has as a case study on a sizable land mass, as if to present the global situation to us 50 years in advance, so maybe we could implement a solution (we have not). I'm referring to the Hubbert model's prediction of peak oil production in the U.S. made in 1956. The math said by 1970 it would happen; everyone said Hubbert was a lunatic.

But the math was right. Let's look at a microcosm of what could happen as we go through the global oil production peak by examining the U.S. peaking experience:

Here we see something that Kudlow and Forbes would abhor. We enjoyed a fabulous rise in production all the way up Hubbert's logistic curve with a declining rate of drilling. And as we passed Hubbert's peak in 1971, a frantic drilling boom took place. Did we get a commensurate rise in production? No -- it kept declining, in fact. Instead of drill-more-get-more, there is a near perfect inverse correlation. Note the R-squared for the two of 0.005! How can this be?

It is because of Hubbert's basic premise. Oil fields have a natural speed limit at which their contents can be optimally extracted. Overproduction permanently damages fields and runs the reservoir pressure way down; underproduction is called for only if fields are mothballed due to poor demand. Geologists are very wary of these facts and strive to keep production in between these two speeds, hopefully near the optimum rate. The fields tend to produce at this rate no matter how many straws are poked into it. That's why Hubbert was able to so accurately predict when peaks occur without knowing what kind of drilling activity would be applied in the future.

When a play is well past peak, punching a zillion wells into it just overproduces it for a brief time with field damage (stranded oil). The drilling boom in the chart above mostly followed the price of oil up at the end of the commodity bull market, and then back down again as foreign oil quickly took up the slack. But it is most noteworthy that if we do not have a flood of foreign oil from Mars at the global peaking experience, we will likely go through the mother of all drilling booms with very little production increase to show for it.

It is also noteworthy that the U.S. peaking experience proceeded without the greatest technological revolution in mankind's history, from 1971 to now, coming to the rescue -- another grim fact foreign to the Kudlow/Forbes mindset.

"Let's just find more," a lot of people say. "That will push the global peak well into the future." But all told, a flood of newly-discovered Alaskan oil coming down through the Alaskan pipeline (not even in Hubbert's 1956 math), a monstrous "drill, baby, drill" program, and the greatest tech revolution ever could not supersede the "lunatic's" U.S. model.

That's not to say improving technology won't help. It has saved our bacon from the conventional natural gas doomsday illustrated above. We figured out a way to do horizontal fracking of shale efficiently enough to open up a vast new supply of clean natural gas, putting the gas doomsday off for quite awhile.

But even this supply is subject to the EROEI laws as I discussed here. Shale probably won't last us 100 years, as you commonly hear. With the knowledge we have gained from the U.S. peak and the reprieve shale has given us, you'd think we would be taking our second and third chances and doing something intelligent for a national energy policy.

What are we doing instead? We are letting the yellow speckled squirrel have Alaska, politically shunning our new-found natural gas bonanza to the point where we're going to export it so we can be at the mercy of importing the global oil production peak as it is managed by the basket-case governments around the world. I have often called the U.S. the global village idiot of energy policy, and I think it bears repeating here.

An excellent article from back in 2008, "Why "Drill, Baby, Drill" Does Not Translate Into Effective National Energy Policy" by Timothy Kailing, discusses the drilling/production paradox in greater mathematical detail. If you still think more drilling is the answer, you should read it.

In this chart from the article, we see another case of improving technology helping, but not solving, the basic problem. The black data points are plotting U.S. oil production per pre-1990 rigs versus the total number of rigs drilling, and you can see the hyperbolic relationship as the EROEI limits and field speed limits set in. The red line plots the same but with a few decades of improvement to the rigs, post-1990 rig technology. This shifts the whole curve to the left, meaning much more production from each newer model rig. But it does not solve the basic EROEI and peaking problems. It just buys us some more time to hopefully wake up to our folly.

We seem to be entering the post peak drilling boom on the global scale similar to the U.S. case above:

If you discount the brief 2009 crash anomaly, the total global rig count began steepening its climb right after the Hubbert conventional oil peak date of 2005. We have shot up to about the same number of working rigs as we had at the high of $147/barrel. This could be just the beginning of a larger scale version of the U.S. peaking phenomenon.

Source: The Math of the New Drilling Boom