Nicole Foss debates with George Monbiot

Peak Oil: A Dialogue with George Monbiot

Nicole Foss

Automatic Earth,

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:

We were wrong on peak oil. There's enough to fry us all

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.

From Nicole Foss' visit to Australia

This article from a Tasmanian newspaper appeared after Nicole Foss's visit to Tasmania

Predictions bring focus home

EVERYONE, I'm sure, agrees that some big changes lie ahead. Climate and energy are in the mix, as are governments and economies. All very important, but I reckon that your central concern is much closer to home.

.

the Mercury,

27 March, 2012

I'm guessing that when you think about your future, uppermost in your mind (as in mine) is your physical and financial wellbeing, and that of those close to you.

The neighbourhood we call home and the people we share it with remain our principal focus. It's part of being human.

In tough times, our home focus is stronger than ever. This was brought home to me in Hobart earlier this month when a softly spoken Canadian named Nicole Foss held listeners spellbound as she mapped out her vision of where our current global financial difficulties are taking us.

Foss, who writes under the name Stoneleigh on the blogsite The Automatic Earth, has a background in biology, pollution control, finance and international law a pretty clear pointer to a mind that ranges far and wide. In that respect at least, she didn't disappoint her two Tasmanian audiences.

Foss provided a pretty full run-down of what it takes to develop resilience to future shock. She might have added one more item: sitting through one of her lectures without collapsing in utter despair.

Even if you take on board only a small part of her message, this is pretty tough medicine.

Here's a sampler of what she had to say:

The world is now experiencing the biggest financial bubble in history. In keeping with the size of the bubble, its inevitable bursting will bring on a major depression and an energy crisis.

Markets are neither rational nor efficient, and are driven by perception, not reality. Prices are determined not by any economic fundamentals but simply by what people are prepared to pay.

Emotions are contagious. When markets are steeply rising, we tend to be euphoric; when they're collapsing, we're driven by fear. Fear being a very sharp emotion, in the wake of a bubble bursting we get an extremely rapid decline. That means we're headed for the worst crash in history.

It has already begun. With those at the top of the financial food chain grabbing for their share of collateral, we're seeing a spread of fear, which will increase sharply in the next few years. In these circumstances, public policy gets completely overtaken by events.

Credit (currently 95 per cent of the total money supply) is the main driver of today's bubble. Where it once boosted GDP by supporting productive business, credit has been used for personal luxuries or for gambling on market futures, while at the same time creating the illusion that this is real wealth.

The credit bubble is something like a giant game of musical chairs where there's one chair to every 100 people. So long as the music keeps playing we don't notice the acute chair deficit. When the music stops, only those best positioned to understand the rules of the game will remain viable.

While Australia has a low public debt to GDP ratio, its household and financial institution debt burden is among the highest in the world as a proportion of GDP, which makes us more vulnerable to a credit crunch than we might think we are.

The global energy market did not trigger this crisis, but it will play a big part in its aftermath. Financial disruption will see spikes in oil prices, adding to general volatility. In the longer term, as oil extraction becomes more expensive, oil shortages will make economic recovery more difficult.

The scale of the present financial crisis is beyond the capacity of governments and financial institutions to resolve. While they will seek to retain central control, inevitably it will devolve to regional and smaller units as global trade slows and local resources take on greater value.

We need to resist the urge to blame someone else, and to think constructively about how we can best manage this situation for both our personal benefit and just as important the benefit of our communities.

This brings opportunities to foster a more decentralised economy, drawing more on local skills and resources and less dependent on large-scale trade or government programs.

In doing so, we must work with others, because we cannot get through the coming hard times alone, and that will bring numerous benefits. We don't have to live like kings or queens; in living a simpler life, one that is more focused on community, we can rediscover what it means to be human.

There are some caveats to all this. Though a long-time student of global finance, Foss is neither an economist nor a psychologist.

Professionals in either of these fields, and no doubt many others, may thus conclude that she doesn't know what she's talking about.

We should be careful about such conclusions. Any wise economist or psychologist will tell you that our future economic and social wellbeing involve understanding well beyond the scope of any set of professional tools of trade. If I had to choose, I'd happily line up with Foss. On the subject of building community, I went to an event close to home last week that launched a nifty little map, partly funded by Hobart City Council, to help and encourage West Hobart locals to walk their neighbourhood and find local services.

Created by a small group of stalwarts from the West Hobart Environment Network (great acronym), this map is a template for any Tasmanian community wanting to draw attention to its assets. Find it at http://westhobartenvnet. blogspot.com.au.

pb@climatetasmania.com.au

Here is an interview with Nicole Foss from the Extraenvironmentalist

Debt is placing a stranglehold on the global economy, restricting the ability for growth to occur at a rate fast enough to prevent the monetary system from unraveling. To delay a massive deleveraging, governments are turning on the central bank taps to fill the system with liquidity. With severe structural issues that continue to avoid inclusion in the political discourse, can ordinary people prepare to maintain control over their assets to ensure success of future decentralization initiatives? How is preparing for this world different for our generation than for our parents?

In Extraenvironmentalist #38 we talk about living in hard times with Nicole Foss of The Automatic Earth. Nicole tells us about the Canadian housing bubble and why the initial collapse might just be faster than the one America experienced in 2005. Seth and I ask about what life was like in the Great Depression and how the process of labor exploitation may continue into the near future. We ask Nicole if misunderstandings about economic collapse could have us preparing for the wrong thing.

Also, we get to meet our blog editor Louisa Clarence-Smith who tells us about WWOOFing and her experiences working on farms in Scotland and Italy.

For interview GO HERE

Nicole Foss interviewed

Nicole Foss: Global Finance and Peak Oil

Radio New Zealand,
24 March, 2012

Peak oil and the economy Senior editor of TheAutomaticEarth.org, which chronicles and interprets the ongoing credit crunch, and former editor of The Oil Drum Canada, where she wrote on peak oil and finance. 

She is an international speaker on energy and global finance and is touring New Zealand until 22 April.