It's all about Peak Oil

Keep Your Eyes On The Prize: It's Always And Ever About Energy

Chris Martenson

Zero Hedge,

4 January, 2015

Submitted by Chris Martenson via Peak Prosperity,

At the essential center of the framework of the Crash Course is the almost insultingly simple idea that endless growth on a finite planet is an impossibility.

It is so simple it could be worked out by a clever 4 year-old. And yet it must not be so simple because the main narrative of every economy in every corner of the globe rests on the idea of endless, infinite growth.

Various rationalizations and mental dodges are made in people’s minds to accommodate the principle of endless growth.  Some avoid thinking of it all together.  Some think that perhaps we will escape into space, and continue our growthful ways on some other yet-to-be named planet(s).  Most simply assume that some new wondrous technology will arise that can allow us to avoid pesky limits.

Whatever the rationalization, none stand up well to simple math and cold logic.

At the very heart of endless growth lies the matter of energy.  To grow forever requires infinite amounts of energy.  Growth and energy are linked in a causal way.

If you want mountains to grow higher you need tectonic forces to push them there.  If you want a child to grow taller, food energy is absolutely required.  If you want more people building more houses, driving more cars, and wearing more clothes, you need energy, energy and more energy.

Perhaps because long-term thinking is not one of humanity’s greatest gifts, very few can appreciate just how we’ve fashioned an entire economy and related set of belief systems around fossil fuel energy that has only been with us for a scant few hundred years.

Even more importantly, because we are consuming a few percent more of it with every passing year, 75% of all fossil fuel energy has been consumed in just the past 50 years.  And we’ve been burning coal and drilling for oil for well over 150 years…boy, those stadiums fill up quick towards the end, don’t they?

The mistake is to think that those past 50 years are just the new normal and the even bigger mistake is to overlook the central and essential role of fossil fuel energy in creating the world we see around us.

The Dчissipating Organism

Forget everything we know about technology and oil and gas and coal and all the rest.  Set that aside and step over into the role of being a dispassionate observer from another planet.

As you look upon all the life forms on earth and classify each according to it’s main role – predator, prey, scavenger, parasite, and so on – what role would you assign to humans?

To perform this classification you would observe, very carefully, the main activities of each species to see what they spent that majority of their time doing.

As you watch from a great height you’d notice humans moving about, 24 hours a day, 365 days a year, in a great flurry of activity.  From a strictly biological and scientific perspective they seem to be doing one thing with the most focused and determined energy; they are taking concentrated forms of energy and naturally occurring elements and dispersing them at vastly less concentrated levels.

Humans may have other features and functions, but their primary one is 'dispersal agent.'

Oils and coal and natural gas are dispersed as waste heat.  Silver is mined, refined further, and then lost atom by atom in various innumerable processes.  Rich soils with thousands of years of carefully accumulated major and minor minerals are mined one crop at a time and then irrecoverably diluted into the seas.

Taken together, the main purpose of humans seems to be as dispersal agents as if Gaia and decided enough was enough and it needed a species to come along and widely scatter all these concentrated pockets of energy and minerals so that the process of concentration could begin new.

As I view any of the hundreds of beautiful videos on Vimeo showing time-lapse traffic patterns from cities around the world,  I cannot avoid seeing them as elegant expressions of a species seemingly intent on turning fossil fuels into waste heat an carbon dioxide as fast as they possibly can.

24 hours a day, 365 days a year, in every major city around the world, there are cars and trucks jamming the roads.  There is no 'night-time' in this story when the world completely rests.  One side takes a few hours off while the other side takes over.

Whether we call this progress or folly is merely an indication of which internal belief system we happen to have installed.  Let’s pretend the value judgment is an irrelevant distraction to the main point.  It doesn’t matter at all how we judge the situation. 

The main point is that 80% of all human economic, political and cultural organization, specialization, and even collective biomass are simply expressions of energy consumption.  Whether that’s folly or progress does not alter the fact that currently 7.2 billion humans exist in the arrangements they do because of fossil fuels.

Fossil fuels provide 80% of all our current energy.  That's a whopping high percentage and the hundreds of quadrillions of BTUs represented by that number will not be easily or cheaply replaced by any combination of alternative energies that we currently could deploy.   In fact, there are exactly zero credible plans for completely replacing fossil fuels to be found anywhere in the world.  Everybody has the same plan; continue obtaining the majority of their energy needs from fossil fuels while growing their economies.

That’s the plan and if it does not make you uncomfortable on some level, then I would gently suggest that some more time ought to be spent studying energy’s role in supporting life, and especially complex arrangements of life.

The Race

If there’s a dominant belief system installed across the developed world it is a faith in technology.

Some of that is very well placed faith.  Technology has delivered incredible advances, efficiencies and understandings that just a few short decades ago would have been indistinguishable from magic. 

We are making advances all the time, and for as long as we have a complex society that can support advanced technology we will continue making advances.

There are, however, a few keys to understanding how and when we have misplaced faith in technology. 

One key point lost on many people is that technology cannot createenergy.  It can only transform it.  Perhaps we’ll someday be surprised by a breakthrough in low energy nuclear reactions (LENR) or zero-point energy or some other fantastical breakthrough, but until then we have to go with what we know to be true.

Technology has not yet, ever, in the long history of humans, createdenergy.  The laws of thermodynamics rule over us like gravity itself, always there exerting and imposing their all-encompassing embrace on every energy transaction.

Energy can neither be created nor destroyed, only transformed.  Oil (concentrated) becomes waste heat (diffuse) + work (if harnessed).

So that’s the first limitation of technology….it cannot create the hundreds of quadrillions of BTUs of energy we currently extract and need from fossil fuels.  It can help us use it more efficiently, find more of it, get it out more cheaply, and other fun things, but it does notcreate the energy.

The second key point is that technology is really only as useful as the culture is advanced.  There are obvious signs that our cleverness with inventing technology exceeds our cultural maturity to use it wisely.

GPS is one of the greatest inventions ever, and I love it and use it constantly.   I doubt I would visit twisty, uninuitively laid out Boston nearly as confidently or as often without GPS.

But it also allowed fishing trawlers to steam out 100 miles and drop their massive and destructive drag nets precisely 6 inches to the side of where they left off last week leaving no accidental hiding spots and fisheries were ruined.

That is, the technology allowed us to do things that we lacked the ability to self-regulate properly.  It also has routinely had many more unanticipated consequences than we seemed to appreciate.

The first humans with concentrated radioactive substances were about as safe as monkeys with guns.  We learned, but that came after the accidental deaths.

As I see it, nearly all of the difficulties we have with technology are due to the fact that we push technology into service before we really appreciate all of its pros and cons. 

It has been said that most technology was designed to address the problems caused by prior technology, and there’s some truth to that.

I am often asked if I would be thrilled if humans did get their hands on unlimited clean energy, and I have to give an unequivocal ‘no’ at this point because it seems to me that we’d merely use it to continue on our present path of growth at any cost.

Maybe in the future once we have the cultural ability to self-regulate our seemingly insatiable desire for ‘more’ endless clean energy would be a fantastic thing.  But right now we don’t even know how to slow down a fishery before it completely collapses, which is a trivial thing compared to managing to live in balance with entire ecosystems.

The race, then is between technological development, cultural advancement, and declining resources.  Can we bring appropriate technologies on line fast enough to prevent the loss of the societal complexity required to support that same technology?

That is the question, and I’m not clear on the answer yet. 

I do note that we have the capability to build light, high-mileage vehicles but we cling to the large, heavy and fuel inefficient vehicles in many parts of the world.

We have the capability to heat nearly all of our water using the sun but instead we typically use fossil fuels.  Not because they are cheaper over any reasonable frame of time, but simply  we don’t yet do it differently.

That is, we lack the cultural awareness and urgency that would mandate solar hot water heaters.  We do this because we still have a narrative of technological prowess and the recent (and temporary) shale oil victory to comfort our core beliefs.

There are literally thousands of better technologies out there that make economic, energy and ecological sense but we don’t really use them except at the margins.

Faced with this observation the usual response is to say that ‘the market will take care of that’ implying both that the market is a rational place and that the market has enough time to work things out.

To my mind, neither assumption is correct.

The Looming Oil Crunch

The good news is that shale oil has bought us some time in the peak oil story, but the less good news is that it bought us no time in the PeakCheap Oil story.

The best news for the Peak Oil story was an unprecedented decline in oil demand brought about by the twin conditions of too much debt and high oil prices.  The loss of demand in Europe and the US handily outpaced the gains in US shale production and therefore was the larger contributor to balancing the supply/demand equation.

Again, we do not beat the allegedly dead horse of Peak Oil because we cannot let go of an idea, but because it remains just as vital today as when it was first described back in the 1990’s.  Even more so because we have more data to work with and we are that many years closer to its eventual arrival.  Adding to the urgency is the fact that no major government besides Sweden’s has even uttered the phrase ‘peak oil’ let alone begun to publicly plan for its eventual arrival.

There are a number of combining forces that will cause future oil price spikes. 

The current price of oil at under $80 per barrel for Brent crude is insufficient to support any of the newest unconventional projects out there. 

Ultra deepwater, tar sands and all but the very best sweet spots in the very best shale plays are uneconomic at current oil prices.  The way we can detect that this is true is by the slashing of capital budgets in all the oil majors that are committed to these projects, something that began last February even when oil was some $30 per barrel higher.

With shale oil helping to contribute to today’s lower oil prices it has caused the cessation of development within countless other large and expensive oil projects. 

While not immediate, the loss of these projects will certain constrain future oil supplies 2-3 years down the line.

For every single oil exporting country with the sole exception of Russia,  what is also true is that their domestic demand is rising even as their production (in many cases) is falling. 

Rising demand and falling production provide a double squeeze on exports which are, after all, the only thing that oil importing nations really care about.  Who cares how much the world is producing?  All that matters to an importer is how much is for sale, and at what price?

On the demand side, oil demand growth continues in the developing world and Asian countries.  So much so that it’s possible to project a time in the future when China and India alone will import 100% of all available exported oil.

Obviously that won’t happen without some form of price war or shooting war, but it tells us something about the trajectory we are on.  If it looks, feels and smells like there’s no serious planning for the future, then that’s probably the case.

Recently the International Energy Agency put these same sorts of dots together an issued a warning:

U.S. Shale Boom Masks Threats to World Oil Supply, IEA Says

Nov 1, 2014

 

The U.S. shale boom masks threats to global oil supplyincluding Middle East turmoil, conflict in Ukraine and the difficulty of unconventional oil production beyond North America, the International Energy Agency said.

 

“The global energy system is in danger of falling short of the hopes and expectations placed upon it,” the IEA said today in its annual World Energy Outlook. “The short-term picture of a well-supplied oil market should not disguise the challenges that lie ahead as reliance grows on a relatively small number of producers.”

 

Global oil consumption will rise to 104 million barrels a day in 2040 from 90 million barrels a day in 2013,driven by demand for transport fuel and petrochemicals in developing countries, the report said.

 

To meet that growth and replace exhausted fields will require about $900 billion a year in investment by the 2030s as oil companies develop fields from Canada’s oil sands to the deep waters off Brazil, the IEA said.

(Source)

There’s a lot to unpack in those statements from the IEA, so let’s begin with the punchline...the IEA has only projected world demand for oil to grow from 90 million barrels per day (mbd) to 104 over the next 27 years.

That’s a rate of growth of just 0.5% per year!

Never in modern economic world history has there been a period of low oil growth of such length.  Never.  My prediction is that if we did only achieve that 0.5% rate of oil growth the world economy would be in a shambles long before 2040.

Economic growth requires energy, oil specifically and high net energy oil even more specifically.

This brings us to point number two.  The IEA has projected that some $900 billion a year will be required to bring on enough incremental (expensive) oil to even achieve that paltry rate of 0.5% growth.

Let’s really look at that for a moment, shall we?  If it’s going to take $900 billion to deliver what pencils out to an additional 483,000 barrels per day of oil growth, that means the yearly incremental new flow to the world will be 176 million barrels (= 365 * 483,000). 

Hmmmm…but at $900 billion that means the world will effectively be investing $900 billion more but getting 176 million new barrels so those incremental barrels are costing some $5,100 each. 

I know this is an odd way to look at it because in reality the $900 billion will be bringing vastly more oil to the table than the 176 M barrels, but existing oil is declining at the same time so the net oil to the world is going to cost a huge amount compared to historical efforts.

The bottom line here is that when the IEA casts about and looks at the reality of oil projects across the world they see that only a very heavy and sustained program of investment approaching one trillion dollars a year has any chance of (barely) offsetting existing declines.

And that new oil, excepting only whatever Iraq and Iran have left to bring to the party, is vastly more expensive than in times past.

Which brings us to the IEA's  conclusion which is that shale oil is actually doing two things;  driving the price of oil down below the price required for this massive investment program, and masking the supply issues by temporarily providing extra oil.

Emphasis on ‘temporary’ because the average shale field in the US peaks about ten years after the drilling begins in earnest and all US shale fields are currently projected to peak somewhere around 2020.

The risk the IEA sees is that shale oil, coupled to a generally weak global economy, could conspire to keep oil prices down below the new project threshold long enough to cause real trouble in the future.

My personal bottom line, though, is that the $900 billion yearly oil spent to achieve an underwhelming 0.5% yearly supply increase is not going to provide the necessary economic growth required to justify the mountains of debt already on the books, let alone expanding that pile robustly as the financial sector seems to need.

More subtly, but even more importantly, the new oil that $900 billion will bring is lower net energy oil, the sort that has far less surplus contained within it that the world can use to maintain its current complexity and order.

Think of current oil as having 100 arbitrary units of net energy stored within it that society can use however it wishes.  Then imagine that the new oil only has 50 units of net energy in it.  As we blend ever-increasing amounts of ‘50’ oil with ever-shrinking quantities of ‘100’ oil, the amount of net energy steadily sinks towards the ‘50’ mark. 

One day people wake up and notice that they seem to be able to support less, accomplish less, and that fewer types of jobs that pay less are available.  This is what we’d expect to see in a world of declining net energy. 

Conclusion

If technology requires a complex society to build and maintain it, and our dreams and hopes are pinned on even more complex and useful technology in the future, but net energy from new oil plays is shrinking, then it might not be wise to pin all our hopes on technology.  Perhaps there should be some other plans in the works too.

Given sufficient energy sources I am convinced that technology would simply continue to advance, and eventually our ability to live with and manage it would catch up to the technology.

But I imagine that process taking decades, centuries even, because cultures change slowly. 

However, according to the best oil data available, we don’t have decades and centuries to fiddle about and hope. 

The US shale plays are going to peak in 2020, give or take a year or two, and that’s practically tomorrow in the grand scheme of things.  Other relentless declines in existing fields are continuing even as you read this.

24 hours a day, 365 days a year.  And that process is speeding up, not slowing down, as the developed world joins the fray with stunning quickness.

A lot of things could go wrong with the IEA forecasts, and they’ll certainly get some things wrong.  It’s the nature of the business. 

Demand could be higher than 0.5% per year and so supplies will either fall short of investments or prices will need to go higher to support even higher spending on oil exploration and development.  Future finds may be less robust than they imagine and therefore more expensive. Existing fields may decline faster or slower than they have modeled which will throw things off quite a bit.

But through all that uncertainty we can note the obvious trend; oil is getting harder to find and more expensive to produce.

And humans, being the dissipating agents we are, will continue to gobble up this magical substance with relentless focus every minute of every day until it is gone.

All of this is why I continue to regret the degree to which the western media has gone out of its way to portray the energy predicament as nothing more than a problem which can be easily addressed through a program of investment and being ever-more clever.

Instead I wish we could simply note that oil has no scalable substitutes, we support billions of people by growing food with it, and that every political, financial, portfolio, and institutional entity has the same underlying assumption; the next twenty years are going to be exactly like the past twenty years.

Somehow, magically, more oil will be there, it will be affordable, and nobody will have to make any adjustments to their main habits of spending more than they have, and consuming more next year than this year.  We can just keep borrowing more than we earn forever, and therefore current stock and bond markets are reasonably priced.

To a scientist like myself, the energy story is everything.  If you get that, you are armed with the information you need to understand the general direction of things.

The only thing we don’t know is what our respective cultures will choose to preserve as we are forced to jettison various unproductive habits and livelihoods. 

As I wrote in a recent comment on the thread on millennials being broke:

As we slip down the energy cliff, we cannot know exactly what each culture will decide to jettison as 'unnecessary' activities.  Some decided to cut down trees and erect giant stones right to the end.  A different culture would have chosen some other activity.

The question to ask is, what are our equivalents of giant stones?  What will *not* disappear as the green area shrinks?

 

 

My best guess is that we'll cling to technology as the last things to erect before we succumb to reality.  Maybe that's just talking my own book, as they say on Wall Street, because that would imply the internet will be salvaged/preserved at any and every cost.

So that’s the question before us, what are our ‘giant stones?’  Answer that and you’ll know which jobs, investments, and products will be relatively secure and which won’t.