Peak
Oil: A Dialogue with George Monbiot
Nicole
Foss
8
July, 2012
George
Monbiot recently made a major about-face on his peak oil stance, on
the grounds that unconventional oil represents a new reality. The
basis of his u-turn is a
recent report on unconventional oil by
Leonardo Maugeri, (former) oil executive at Italy's Eni, published at
Harvard University, where Maugeri's a Senior Fellow at the John
Kennedy School, Belfer Center, which we discussed here at TAE
in Unconventional
Oil is NOT a Game Changer.
George
Monbiot:
Peak
oil hasn't happened, and it's unlikely to happen for a very long
time.
A
report by the oil executive Leonardo Maugeri, published by Harvard
University, provides compelling evidence that a new oil boom has
begun. The constraints on oil supply over the past 10 years appear to
have had more to do with money than geology. The low prices before
2003 had discouraged investors from developing difficult fields. The
high prices of the past few years have changed that.
Maugeri's
analysis of projects in 23 countries suggests that global oil
supplies are likely to rise by a net 17m barrels per day (to 110m) by
2020. This, he says, is "the largest potential addition to the
world's oil supply capacity since the 1980s". The investments
required to make this boom happen depend on a long-term price of $70
a barrel – the current cost of Brent crude is $95. Money is now
flooding into new oil: a trillion dollars has been spent in the past
two years; a record $600bn is lined up for 2012.
I
sent George a short response to his article, by way of opening a
dialogue:
What
we are facing is a demand and price collapse that will render
unconventional supplies uneconomic. Natural gas is leading the way
over the next few years. The high cost and low EROEI are fatal flaws.
And
received this reply:
If
there's a collapse in demand, peak oil is not an issue, right? If
there's a resurgence of demand, unconventionals become economic
again. As for EROEI being a constraint, try telling that to the tar
sands producers in Alberta.
With
best wishes,
George
The
debate continues. Here is my next installment:
A
demand collapse will certainly put peak oil on the backburner for a
number of years. The next few years will be remembered for financial
crisis as we move into what will be at least as bad as the Great
Depression (and very likely worse, since the bubble was much larger
this time). Peak oil will not have gone away, however.
We
have used the cheap and accessible oil (and other fossil fuels) and
what remains will be exceptionally, and increasingly, expensive in
both financial and energy terms. Predictable consequences will follow
from this, but in a complex interaction with many other factors,
notably the context of the huge credit bubble bursting. This amounts
to crashing the operating system. For a while, resource constraints
will be relieved due to economic seizure (i.e. the collapse of both
the money supply and the velocity of money).
During
the period of financial crisis, deflation and deleveraging, weak
demand will buy us some time, but at the cost of setting us up for a
supply crunch later. The period of sharply falling prices will kill
investment in the energy sector, because the cost of production will
fall less quickly than prices, meaning margins will be squeezed. Both
physical and financial risks will be much higher. A lack of economic
visibility will be anathema to what are inherently long term
projects.
In
addition, trade collapses during periods of economic depression, as
for instance letters of credit become impossible to obtain, and the
lack of funds for maintenance compromises the integrity of
distribution infrastructure. Infrastructure may also be deliberately
targeted during the inevitable upheaval. All of these factors act to
reduce supply, and would be difficult, or impossible, to reverse
quickly if demand were to rise.
When
supply and demand become tight, what transpires is not a simple price
spike, but an exaggerated boom and bust dynamic. This has been
underway since 2005/06. The first full cycle unfolded from 2005/06 to
2008. The second began in 2008/09 and will probably end with a price
bottom relatively early in this depression with a resurgence of
military demand, given that oil is liquid hegemonic power.
That
should feed into the third cycle, which should send prices sharply
higher in real terms, if not to a new high in nominal terms. This
price volatility, against a backdrop of severe economic contraction,
upheaval and fear is leading towards a profound societal change, most
likely a significant period of involuntary loss of socioeconomic
complexity.
You
mention the tar sands, and they are indeed an interesting case - an
arbitrage between cheap natural gas and expensive syncrude that can
continue while the price disparity is maintained. They are able to
make money, even though they are not producing much net energy.
Unfortunately for the tar sands producers, the price disparity is set
to reverse.
The
hype surrounding shale gas has crashed the price to the point where
it is on the verge of putting producers out of business. Natural gas
in North America appears to have bottomed, while the perception of
glut in unconventional oil, combined with weak demand and a lack of
appropriate infrastructure for internal North American sources, is
set to undermine oil prices considerably.
Tar
sands projects will be under acute threat under those circumstances -
not imminently, but over the next five years or so. Once one cannot
make money from some combination of artificial input/output price
disparity, public subsidy and the ability to socialize externalities,
then EROEI becomes the defining factor, and the EROEI for tar sands
is pathetic.
While
I agree that oil men do not base decisions on EROEI, ultimately EROEI
will determine their ability to make money, and that is their driving
motivation. Finance can only temporarily allow people to ignore
thermodynamics.
EROEI
effectively determines what is and is not an energy source for a
given society (ie to maintain a given level of socioeconomic
complexity). Unconventional fossil fuels are caught in a
paradox - that their EROEI is too low for them to sustain a society
complex enough to produced them.
They
can only be produced for the relatively short period of time that the
complex society built on conventional sources continues to maintain
its current capacities, but as the conventional sources disappear,
and that society can no longer support itself, the ability to
undertake all the activities required for unconventional production
will be lost. The hype has no foundation.
We
have been living in a major departure from reality in many ways, as
always occurs during bubble times, but those times are coming to an
end. Instead of overshoot, we are headed for undershoot, and we are
not going to like it.
Note
the critical paradox of unconventional supplies. That is where the
cornucopian view of energy, where Monbiot now seems to have landed,
breaks down.
The
same argument applies to renewable power as it is currently
practiced. Without affordable conventional fossil fuels, the
increasingly complex alternatives cannot be developed and exploited.
We
find ourselves in a world of receding horizons.
Unconventional
supplies are always priced at conventional energy plus a premium,
thanks to their crucial dependency on conventional supplies.
What
high Energy Return On Energy Investment makes possible, low EROEI
will eventually take away, following a brief boom that constitutes
the last gasp of our modern energy bubble era.
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