A Forecast of Our Energy Future; Why Common Solutions Don’t Work

In order to understand what solutions to our energy predicament will or won’t work, it is necessary to understand the true nature of our energy predicament. Most solutions fail because analysts assume that the nature of our energy problem is quite different from what it really is. Analysts assume that our problem is a slowly developing long-term problem, when in fact, it is a problem that is at our door step right now.

The point that most analysts miss is that our energy problem behaves very much like a near-term financial problem. We will discuss why this happens. This near-term financial problem is bound to work itself out in a way that leads to huge job losses and governmental changes in the near term. Our mitigation strategies need to be considered in this context. Strategies aimed simply at relieving energy shortages with high priced fuels and high-tech equipment are bound to be short lived solutions, if they are solutions at all.


1. Our number one energy problem is a rapidly rising need for investment capital, just to maintain a fixed level of resource extraction. This investment capital is physical “stuff” like oil, coal, and metals.

We pulled out the “easy to extract” oil, gas, and coal first. As we move on to the difficult to extract resources, we find that the need for investment capital escalates rapidly. According to Mark Lewis writing in the Financial Times, “upstream capital expenditures” for oil and gas amounted to  nearly $700 billion in 2012, compared to $350 billion in 2005, both in 2012 dollars. This corresponds to an inflation-adjusted annual increase of 10% per year for the seven year period. (If you have problems viewing the images, attached is a PDF of the article, including images: A Forecast of Our Energy Future; Why Common Solutions Don’t Work | Our Finite World)

Figure 1. The way would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.

Figure 1. The way would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.

In theory, we would expect extraction costs to rise as we approach limits of the amount to be extracted. In fact, the steep rise in oil prices in recent years is of the type we would expect, if this is happening. We were able to get around the problem in the 1970s, by adding more oil extraction, substituting other energy products for oil, and increasing efficiency. This time, our options for fixing the situation are much fewer, since the low hanging fruit have already been picked, and we are reaching financial limits now.

Figure 2. Historical oil prices in 2012 dollars, based on BP Statistical Review of World Energy 2013 data. (2013 included as well, from EIA data.)

Figure 2. Historical oil prices in 2012 dollars, based on BP Statistical Review of World Energy 2013 data. (2013 included as well, from EIA data.)

To make matters worse, the rapidly rising need for investment capital arises is other industries as well as fossil fuels. Metals extraction follows somewhat the same pattern. We extracted the highest grade ores, in the most accessible locations first. We can still extract more metals, but we need to move to lower grade ores. This means we need to remove more of the unwanted waste products, using more resources, including energy resources.

Figure 3. Waste product to produce 100 units of metal

Figure 3. Waste product to produce 100 units of metal

There is a huge increase in the amount of waste products that must be extracted and disposed of, as we move to lower grade ores (Figure 3). The increase in waste products is only 3% when we move from ore with a concentration of .200, to ore with a concentration .195. When we move from a concentration of .010 to a concentration of .005, the amount of waste product more than doubles.

When we look at the inflation adjusted cost of base metals (Figure 4 below), we see that the index was generally falling for a long period between the 1960s and the 1990s, as productivity improvements were greater than falling ore quality.

Figure 4. World Bank inflation adjusted base metal index (excluding iron).

Figure 4. World Bank inflation adjusted base metal index (excluding iron).

Since 2002, the index is higher, as we might expect if we are starting to reach limits with respect to some of the metals in the index.

There are many other situations where we are fighting a losing battle with nature, and as a result need to make larger resource investments. We have badly over-fished the ocean, so  fishermen now need to use more resources too catch the remaining much smaller fish.  Pollution (including CO2 pollution) is becoming more of a problem, so we invest resources in  devices to capture mercury emissions and in wind turbines in the hope they will help our pollution problems. We also need to invest increasing amounts in roads,  bridges, electricity transmission lines, and pipelines, to compensate for deferred maintenance and aging infrastructure.

Some people say that the issue is one of falling Energy Return on Energy Invested (EROI), and indeed, falling EROI is part of the problem. The steepness of the curve comes from the rapid increase in energy products used for extraction and many other purposes, as we approach limits.  The investment capital limit was discovered by the original modelers of Limits to Growth in 1972. I discuss this in my post Why EIA, IEA, and Randers’ 2052 Energy Forecasts are Wrong.

2. When the amount of oil extracted each year flattens out (as it has since 2004), a conflict arises: How can there be enough oil both (a) for the growing investment needed to maintain the status quo, plus (b) for new investment to promote growth?

In the previous section, we talked about the rising need for investment capital, just to maintain the status quo. At least some of this investment capital needs to be in the form of oil.  Another use for oil would be to grow the economy–adding new factories, or planting more crops, or transporting more goods. While in theory there is a possibility of substituting away from oil, at any given point in time, the ability to substitute away is quite limited. Most transport options require oil, and most farming requires oil. Construction and road equipment require oil, as do diesel powered irrigation pumps.

Because of the lack of short term substitutability, the need for oil for reinvestment tends to crowd out the possibility of growth. This is at least part of the reason for slower world-wide economic growth in recent years.

3. In the crowding out of growth, the countries that are most handicapped are the ones with the highest average cost of their energy supplies.

For oil importers, oil is a very high cost product, raising the average cost of energy products. This average cost of energy is highest in countries that use the highest percentage of oil in their energy mix.

If we look at a number of oil importing countries, we see that economic growth tends to be much slower in countries that use very much oil in their energy mix. This tends to happen  because high energy costs make products less affordable. For example, high oil costs make vacations to Greece unaffordable, and thus lead to cut backs in their tourist industry.

It is striking when looking at countries arrayed by the proportion of oil in their energy mix, the extent to which high oil use, and thus high cost energy use, is associated with slow economic growth (Figure 5, 6, and 7). There seems to almost be a dose response–the more oil use, the lower the economic growth. While the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) are shown as a group, each of the countries in the group shows the same pattern on high oil consumption as a percentage of its total energy production in 2004.

Globalization no doubt acted to accelerate this shift toward countries that used little oil. These countries tended to use much more coal in their energy mix–a much cheaper fuel.

Figure 5. Percent energy consumption from oil in 2004, for selected countries and country groups, based on BP 2013 Statistical Review of World Energy. (EU - PIIGS means "EU-27 minus PIIGS')

Figure 5. Percent energy consumption from oil in 2004, for selected countries and country groups, based on BP 2013 Statistical Review of World Energy. (EU – PIIGS means “EU-27 minus PIIGS’)

Figure 6. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

Figure 6. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

Figure 7. Average percentage consumption growth between 2004 and 2011, based on BP's 2013 Statistical Review of World Energy.

Figure 7. Average percentage consumption growth between 2004 and 2011, based on BP’s 2013 Statistical Review of World Energy.

4. The financial systems of countries with slowing growth are especially affected, as are the governments. Debt becomes harder to repay with interest, as economic growth slows.

With slow growth, debt becomes harder to repay with interest. Governments are tempted to add programs to aid their citizens, because employment tends to be low. Governments find that tax revenue lags because of the lagging wages of most citizens, leading to government deficits. (This is precisely the problem that Turchin and Nefedov noted, prior to collapse, when they analyzed eight historical collapses in their book Secular Cycles.)

Governments have recently attempt to fix both their own financial problems and the problems of their citizens by lowering interest rates to very low levels and by using Quantitative Easing. The latter allows governments to keep even long term interest rates low.  With Quantitative Easing, governments are able to keep borrowing without having a market of ready buyers. Use of Quantitative Easing also tends to blow bubbles in prices of stocks and real estate, helping citizens to feel richer.

5. Wages of citizens of  countries oil importing countries tend to remain flat, as oil prices remain high.

At least part of the wage problem relates to the slow economic growth noted above. Furthermore, citizens of the country will cut back on discretionary goods, as the price of oil rises, because their cost of commuting and of food rises (because oil is used in growing food). The cutback in discretionary spending leads to layoffs in discretionary sectors. If exported goods are high priced as well, buyers from other countries will tend to cut back as well, further leading to layoffs and low wage growth.

6. Oil producers find that oil prices don’t rise high enough, cutting back on their funds for reinvestment. 

As oil extraction costs increase, it becomes difficult for the demand for oil to remain high, because wages are not increasing. This is the issue I describe in my post What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs.

We are seeing this issue today. Bloomberg reports, Oil Profits Slump as Higher Spending Fails to Raise Output. Business Week reports Shell Surprise Shows Profit Squeeze Even at $100 Oil. Statoil, the Norwegian company, is considering walking away from Greenland, to try to keep a lid on production costs.

7. We find ourselves with a long-term growth imperative relating to fossil fuel use, arising from the effects of globalization and from growing world population.

Globalization added approximately 4 billion consumers to the world market place in the 1997 to 2001 time period. These people previously had lived traditional life styles. Once they became aware of all of the goods that people in the rich countries have, they wanted to join in, buying motor bikes, cars, televisions, phones, and other goods. They would also like to eat meat more often. Population in these countries continues to grow adding to demand for goods of all kinds. These goods can only be made using fossil fuels, or by technologies that are enabled by fossil fuels (such as today’s hydroelectric, nuclear, wind, and solar PV).

8. The combination of these forces leads to a situation in which economies, one by one, will turn downward in the very near future–in a few months to a year or two. Some are already on this path (Egypt, Syria, Greece, etc.)

We have two problems that tend to converge: financial problems that countries are now hiding, and ever rising need for resources in a wide range of areas that are reaching limits (oil, metals, over-fishing, deferred maintenance on pipelines).

On the financial side, we have countries trying to hang together despite a serious mismatch between revenue and expenses, using Quantitative Easing and ultra-low interest rates. If countries unwind the Quantitative Easing, interest rates are likely to rise. Because debt is widely used, the cost of everything from oil extraction to buying a new home to buying a new car is likely to rise. The cost of repaying the government’s own debt will rise as well, putting governments in worse financial condition than they are today.

A big concern is that these problems will carry over into debt markets. Rising interest rates will lead to widespread defaults. The availability of debt, including for oil drilling, will dry up.

Even if debt does not dry up, oil companies are already being squeezed for investment funds, and are considering cutting back on drilling. A freeze on credit would make certain this happens.

Meanwhile, we know that investment costs keep rising, in many different industries simultaneously, because we are reaching the limits of a finite world. There are more resources available; they are just more expensive. A mismatch occurs, because our wages aren’t going up.

The physical amount of oil needed for all of this investment keeps rising, but oil production continues on its relatively flat plateau, or may even begins to drop. This leads to less oil available to invest in the rest of the economy. Given the squeeze, even more countries are likely to encounter slowing growth or contraction.

9. My expectation is that the situation will end with a fairly rapid drop in the production of all kinds of energy products and the governments of quite a few countries failing. The governments that remain will dramatically cut services.

With falling oil production, promised government programs will be far in excess of what governments can afford, because governments are basically funded out of the surpluses of a fossil fuel economy–the difference between the cost of extraction and the value of these fossil fuels to society. As the cost of extraction rises, the surpluses tend to dry up.

Figure 8. Cost of extraction of barrel oil, compared to value to society. Economic growth is enabled by the difference.

Figure 8. Cost of extraction of barrel oil, compared to value to society. Economic growth is enabled by the difference.

As these surpluses shrink, governments will need to shrink back dramatically. Government failure will be easier than contracting back to a much smaller size.

International finance and trade will be particularly challenging in this context. Trying to start over will be difficult, because many of the new countries will be much smaller than their predecessors, and will have no “track record.” Those that do have track records will have track records of debt defaults and failed promises, things that will not give lenders confidence in their ability to repay new loans.

While it is clear that oil production will drop, with all of the disruption and a lack of operating financial markets, I expect natural gas and coal production will drop as well. Spare parts for almost anything will be difficult to get, because of the need for the system of international trade to support making these parts. High tech goods such as computers and phones will be especially difficult to purchase. All of these changes will result in a loss of most of the fossil fuel economy and the high tech renewables that these fossil fuels support.

A Forecast of Future Energy Supplies and their Impact

A rough estimate of the amounts by which energy supply will drop is given in Figure 9, below.

Figure 9. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Figure 9. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

The issue we will be encountering could be much better described as “Limits to Growth” than “Peak Oil.” Massive job layoffs will occur, as fuel use declines. Governments will find that their finances are even more pressured than today, with calls for new programs at the time revenue is dropping dramatically. Debt defaults will be a huge problem. International trade will drop, especially to countries with the worst financial problems.

One big issue will be the need to reorganize governments in a new, much less expensive  way. In some cases, countries will break up into smaller units, as the Former Soviet Union did in 1991. In some cases, the situation will go back to local tribes with tribal leaders. The next challenge will be to try to get the governments to act in a somewhat co-ordinated way.  There may need to be more than one set of governmental changes, as the global energy supplies decline.

We will also need to begin manufacturing goods locally, at a time when debt financing no longer works very well, and governments are no longer maintaining roads. We will have to figure out new approaches, without the benefit of high tech goods like computers. With all of the disruption, the electric grid will not last very long either. The question will become: what can we do with local materials, to get some sort of economy going again?


There are a lot of proposed solutions to our problem. Most will not work well because the nature of the problem is different from what most people have expected.

1. Substitution. We don’t have time. Furthermore, whatever substitutions we make need to be with cheap local materials, if we expect them to be long-lasting. They also must not over-use resources such as wood, which is in limited supply.

Electricity is likely to decline in availability almost as quickly as oil because of inability to keep up the electrical grid and other disruptions (such as failing governments, lack of oil to lubricate machinery, lack of replacement parts, bankruptcy of companies involved with the production of electricity) so is not really a long-term solution to oil limits.

2. Efficiency. Again, we don’t have time to do much. Higher mileage cars tend to be more expensive, replacing one problem with another. A big problem in the future will be lack of road maintenance. Theoretical gains in efficiency may not hold in the real world. Also, as governments reduce services and often fail, lenders will be unwilling to lend funds for new projects which would in theory improve efficiency.

In some cases, simple devices may provide efficiency. For example, solar thermal can often be a good choice for heating hot water. These devices should be long-lasting.

3. Wind turbines. Current industrial type wind turbines will be hard to maintain, so are  unlikely to be long-lasting. The need for investment capital for wind turbines will compete with other needs for investment capital. CO2 emissions from fossil fuels will drop dramatically, with or without wind turbines.

On the other hand, simple wind mills made with local materials may work for the long term. They are likely to be most useful for mechanical energy, such as pumping water or powering looms for cloth.

4. Solar Panels. Promised incentive plans to help homeowners pay for solar panels can be expected to mostly fall through. Inverters and batteries will need replacement, but probably will not be available. Handy homeowners who can rewire the solar panels for use apart from the grid may find them useful for devices that can run on direct current. As part of the electric grid, solar panels will not add to its lifetime. It probably will not be possible to make solar panels for very many years, as the fossil fuel economy reaches limits.

5. Shale Oil. Shale oil is an example of a product with very high investment costs, and returns which are doubtful at best. Big companies who have tried to extract shale oil have decided the rewards really aren’t there. Smaller companies have somehow been able to put together financial statements claiming profits, based on hoped for future production and very low interest rates.

Costs for extracting shale oil outside the US for shale oil are likely to be even higher than in the US. This happens because the US has laws that enable production (landowner gets a share of profits) and other beneficial situations such as pipelines in place, plentiful water supplies, and low population in areas where fracking is done. If countries decide to ramp up shale oil production, they are likely to run into similarly hugely negative cash flow situations. It is hard to see that these operations will save the world from its financial (and energy) problems.

6. Taxes. Taxes need to be very carefully structured, to have any carbon deterrent benefit. If part of taxes consumers would normally pay to the government are levied on fuel for vehicles, the practice can encourage more the use of more efficient vehicles.

On the other hand, if carbon taxes are levied on businesses, the taxes tend to encourage businesses to move their production to other, lower-cost countries. The shift in production leads to the use of more coal for electricity, rather than less. In theory, carbon taxes could be paired with a very high tax on imported goods made with coal, but this has not been done. Without such a pairing, carbon taxes seem likely to raise world CO2 emissions.

7.  Steady State Economy. Herman Daly was the editor of a book in 1973 called Toward a Steady State Economy, proposing that the world work toward a Steady State economy, instead of growth. Back in 1973, when resources were still fairly plentiful, such an approach would have acted to hold off  Limits to Growth for quite a few years, especially if zero population growth were included in the approach.  

Today, it is far too late for such an approach to work. We are already in a situation with very depleted resources. We can’t keep up current production levels if we want to–to do so would require greatly ramping up energy production because of the rising need for energy investment to maintain current production, discussed in Item (1) of Our Energy Predicament. Collapse will probably be impossible to avoid. We can’t even hope for an outcome as good as a Steady State Economy.

7. Basing Choice of Additional Energy Generation on EROI Calculations. In my view, basing new energy investment on EROI calculations is an iffy prospect at best. EROI calculations measure a theoretical piece of the whole system–“energy at the well-head.” Thus, they miss important parts of the system, which affect both EROI and cost. They also overlook timing, so can indicate that an investment is good, even if it digs a huge financial hole for organizations making the investment. EROI calculations also don’t consider repairability issues which may shorten real-world lifetimes.

Regardless of EROI indications, it is important to consider the likely financial outcome as well. If products are to be competitive in the world marketplace, electricity needs to be inexpensive, regardless of what the EROI calculations seem to say. Our real problem is lack of investment capital–something that is gobbled up at prodigious rates by energy generation devices whose costs occur primarily at the beginning of their lives. We need to be careful to use our investment capital wisely, not for fads that are expensive and won’t hold up for the long run.

8. Demand Reduction. This really needs to be the major way we move away from fossil fuels. Even if we don’t have other options, fossil fuels will move away from us. Encouraging couples to have smaller families would seem to be a good choice. 

This entry was posted in Financial Implications and tagged , , , , , by Gail Tverberg. Bookmark the permalink.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.

630 thoughts on “A Forecast of Our Energy Future; Why Common Solutions Don’t Work

  1. This article demonstrates the debilitating effect of high priced oil on growth — governments can try to offset with subsidies but like Medusa you just sprout another demon.

    There is NO free lunch.

    Governments in emerging markets face fuel subsidy dilemma

    Although Brent crude oil remains well below its 2008 peak in dollar terms, it is at record levels in South African rand and Turkish lira. In the currencies of India, Indonesia and Brazil – the other so-called “fragile five” economies exposed to large import bills – Brent hit record levels late last year.

    The result is a dilemma for emerging market governments. Either they allow fuel costs to rise, stoking inflation and discouraging consumption, or they absorb higher prices through subsidies, heaping further pressure on already-strained budgets.

    “Falling currencies and higher oil import costs are testing energy-intensive patterns of growth across emerging markets,” said Amrita Sen, head of the Energy Aspects consultancy.

    Many developing economies have become major importers of crude oil over the past decade as their economies have industrialised. That has helped keep oil prices above $100 a barrel even as greater fuel efficiency has helped erode demand in the US and Europe.

    More http://www.ft.com/intl/cms/s/0/20bb132a-8aa4-11e3-9465-00144feab7de.html#axzz2sD4BemhG

    • Former BP geologist: peak oil is here and it will ‘break economies’

      US Army colonel: world is sleepwalking to a global energy crisis

      Mark C. Lewis, former head of energy research at Deutsche Bank’s commodities unit highlighted three problems facing the global energy system: “very high decline rates” in global production; “soaring” investment requirements “to find new oil”; and since 2005, “falling exports of crude oil globally.”

      Lewis told participants that the International Energy Agency’s (IEA) own “comprehensive” analysis in its World Energy Outlook of the 1,600 fields providing 70% of today’s global oil supply, show “an observed decline rate of 6.2%” – double the IEA’s stated estimate of future decline rate out to 2035 of about 3%.


    • Toil for oil means industry sums do not add up (FT.com)

      Rising costs are being met only by ever smaller increases in supply

      The most interesting message in this year’s World Energy Outlook from the International Energy Agency is also its most disturbing.

      Over the past decade, the oil and gas industry’s upstream investments have registered an astronomical increase, but these ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply. Even these have only been made possible by record high oil prices. This should be a reality check for those now hyping a new age of global oil abundance.

      According to the 2013 WEO, the total world oil supply in 2012 was 87.1m barrels a day, an increase of 11.9mbd over the 75.2mbd produced in 2000.

      However, less than one-third of this increase was in the form of conventional crude oil, and more than two-thirds was therefore either what the IEA calls unconventional crude (light-tight oil, oil sands, and deep/ultra-deepwater oil) or natural-gas liquids (NGLs).

      This distinction matters because unconventional crude has a higher cost than conventional crude, while NGLs have a lower energy density

      The IEA’s long-run cost curve has conventional crude in a range of $10-$70 a barrel, whereas for unconventional crude the ranges are higher: $50-$90 a barrel for oil sands, $50-$100 for light-tight oil, and $70-$90 for ultra-deep water. Meanwhile, in terms of energy content, a barrel of crude oil is worth 1.4 barrels of NGLs.

      Threefold rise

      The much higher cost of developing unconventional crude resources and the lower energy density of NGLs explain why, as these sources have increased their share of supply, the industry’s upstream capex has increased. But the sheer scale of the increase is staggering: upstream outlays have risen more than threefold in real terms over the past 12 years, reaching nearly $700bn in 2012 compared with only $250bn in 2000 (both figures in constant 2012 dollars).

      Coinciding with the rise in US tight-oil production, most of this increase in upstream capex has occurred since 2005, as investments have effectively doubled from $350bn in that year to nearly $700bn in 2012 (again in 2012 dollars).

      All of which means the 2013 WEO has the oil industry’s upstream capex rising by nearly 180 per cent since 2000, but the global oil supply (adjusted for energy content) by only 14 per cent. The most straightforward interpretation of this data is that the economics of oil have become completely dislocated from historic norms since 2000 (and especially since 2005), with the industry investing at exponentially higher rates for increasingly small incremental yields of energy.

      The industry has been able and willing to finance such a dramatic increase in its capital investment since 2000 owing to the similarly dramatic increase in prices. BP data show that the average price of Brent crude in real terms increased from $38 a barrel in 2000 to $112 in 2012 (in constant 2011 dollars), which represents a 195 per cent increase, slightly greater in fact than the increase in industry capex over the same period.

      However, looking only at the period since 2005, capital outlays have risen faster than prices (90 per cent and 75 per cent respectively), while in the past two years capex has risen by a further 20 per cent (the IEA estimates 2013 upstream capex at $710bn versus $590bn in 2011), while Brent prices have actually averaged about $5 a barrel less this year than in 2011.

      Iran not a game changer
      That prices have fallen slightly since 2011 while capex has risen by a further 20 per cent is a flashing light on the industry’s dashboard indicating that its upstream growth engine may finally be overheating.

      Without a significant technological breakthrough reversing the geological forces that have driven the unprecedented increase in upstream investment over the past decade, prices will have to rise further in real terms from here or else capex – and with it future oil production – will fall.

      It should also be emphasised that this vast increase in capex has occurred during a prolonged period of record-low interest rates. Once interest rates start rising again, this will put further pressure on the industry’s ability to make the massive capital outlays required to keep supply growing.

      Of course, the diplomatic breakthrough achieved with Iran over the weekend could provide some much needed short-term relief to the market, as Iran’s exports could ultimately increase by up to 1.5m barrels a day if and when western sanctions were to be fully lifted. But this would not change the dynamics of the industry’s capex treadmill in any fundamental sense.

      Even if global oil demand only grows at 1 per cent a cent a year, those extra barrels would be would be fully absorbed by the market within about 18 months. And that is probably how long it would take for Iran’s production and exports to return to pre-sanctions levels in any case.

      Alternatively, if we take the IEA’s estimate that global production of conventional crude oil from all currently producing fields will decline by 41m barrels a day by 2035 (that is, by an average of 1.9m barrels a day per year), then Iran’s potential increase of 1.5m barrels a day would compensate for just 10 months of natural decline in global conventional-crude output.

      In short, behind the hubbub of market hype about a new age of oil abundance, the toil for oil is in fact now more arduous and back-breaking than ever.

      This should worry everybody, because with the evidence suggesting that consumers are reluctant to pay much above $110 a barrel, it is an open question what happens next to the industry’s investment plans and hence, over time, to the supply of oil.
      Mark Lewis is an independent energy analyst and former head of energy research in commodities at Deutsche Bank; Daniel L Davis, a lieutenant colonel in the US Army, is co-author

  2. Hello once again Gail,
    Thank you for replying to my previous requests for facts regarding the likelihood of success of schemes proposed by Dick Smith and Andrew Forrest here in Australia. Sorry I didn’t thank you before now, but I thought I would pop off from all the heat and smoke, we have experienced recently. Never mind, I have another question regarding current happenings in Australia. http://www.abc.net.au/news/2014-01-31/shell-looking-to-sell-service-stations/5231278 I am not sure why Shell has decided to sell these assets,but your article gives some insight into the types of problems they are experiencing with global profitability. Is this proposed sale likely to be a windfall for the new Asian investors that buy these assets as suggested in the article? Is this all about freeing up funds for reinvestment for Shell or do you think that there are other factors as well? Do you think that this is a red flag that Australia is experiencing the same sorts of problems as other countries. I suppose if there is another collapse here, everybody thinks it won’t happen to them.

    King regards H.

  3. Great article, Gail. I would like to follow up on EclipseNow, OscarThreeKilo and others, who envision a future where serious and imminent collapse does not happen, and why. I do fear EclipseNow is being very generous with his/her optimism, but i like his/her comments, anything that makes us think. I keep coming back to the issue about government, and the government’s potential for extraordinary measures. Writing from Norway (Bergen, I even know a few Tverbergs! Any relations in Bergen, Gail?) – my feeling is that the Norwegian state apparatus at least, is very resilient, one thing is that it is a creditor, not a debtor, another that in a fairly small and homogenous country, people wil accept rationing, state confiscation of land and assets etc, if they feel a crisis is real. WWII a case in point, of course. They also, as main share holder, already run Statoil, the most important oil company in the Norwegian sector of the North sea. Not that Statoil hasn’t had its problems lately…

    Now a massive build-up of nuclear does seem far fetched, even for a state with a (pre-crisis) solid economy. If global trade breaks down, and the value of foreign assets with it, things will have to be kept simple and fairly local. But I really do think that many governments will, perhaps after a reorganization like the war cabinets of yesteryear, persist. It all depends of course, and no one can really tell in advance. But let’s say many governments do: How to keep the most important things working; electricity, some basic transport (food, ambulances, basic goods), and machines for essential mining and infrastructure repair. Oil rationing, obviously. And then, maybe coal. Coal is accessible with fairly simple means, ships and trains can be rebuilt to run on coal, heck, some are already there in museums, they pull them out every other year here in Bergen on Steam boat day, and the city centre overflows with dense, dirty smoke from their engines. But they do the job, and they can, in the future, do the job, even exporting coal from one country to another. Coal is accessible and low tech, or maybe I should say: Not impossibly high tech. Related to this are things like the oil shale they simply crush and burn in Estonia(not bothering to extract the oil first), in a fairly self powered process to generate electricity. Simple – and dirty.

    The upshot of all this, of course, is that when collapse threatens and war and starvation become real possibilities, we will perhaps cluster around governments with extended powers (legally that is, not financially, of course) and limited accountabilities, and mitigate many of our troubles by burning the easy stuff. To turn off a coal powered generator if that should mean that people in hospitals will die, or essential food production cease, is fairly unthinkable. Such is the industrial corner we have painted ourselves into. And thus we reach – who knows – 700 ppm, 800ppm CO2 by the end of the century. And then, of course, we are well and truly done for, holding emergency workshops in “Geo-engineering for the future”, as the record storm pounds our poorly constructed flood barriers to pieces and swipes us out to sea.

    • Yes, my father’s parents emigrated from that area of Norway. My grandfather was born on a farm near Voss, now used (I understand) for some kind of extreme sports–gliding or some such thing.

      While we theoretically could go backward, there are timing and investment problems here as well. With 7 billion people in the world, it is hard to suddenly make enough old style anything to work for today’s population. If we weren’t running short of investment capital, it wouldn’t be such a problem.

    • Good points.

      However, look at the history of the Soviet Union in WW2 and the treatment of the sick and wounded – letting them die was not unthinkable. When conditions are tough enough…..

      • True. What I meant was that purely environmental concerns will not be enough to motivate people to turn off life preserving power, and in a sense it shouldn’t be. That is, of course, part of the terrible dilemma we are in, and even more so will be in, if it turns out that we manage to maintain extensive fossil fuel use in one form or another, past a certain (6-700 ppm?) threshold. But of course I see Gail’s points, and have really no way of telling which scenario will play out. Gail: Voss is a beautiful small town, at least the scenery.. And the Tverbergs I know are very decent, intelligent people, which as far as I can tell speaks for a possible relation across the Atlantic 🙂

        • Tarjei

          Quite agree with you. Everything will be maintained, even if it is, in the end, just a facade – for instance the whittling away of welfare systems in the poorer countries of Europe, and Britain – until it can’t be. The state hospital that can’t provide much, the pension that only buys a bag of potatoes, the run-down state school, etc. The process is well underway as far as I can observe, without wishing to exaggerate. And the background the totalitarian propaganda that ‘Recovery is Real’: I find Europe surreal these days!

  4. Pingback: Another Week in the Ecological Crisis – February 2, 2014 – A Few Things Ill Considered

  5. Dear All
    David Holmgren has made waves in the small world of people who give a s—. Here, he discusses with Alex Smith his thoughts on his recent essay on the triumph of Brown Tech and the only chance he sees to reverse our slide toward catastrophe.

    [audio src="http://www.ecoshock.net/downloads/ES_140205_Show.mp3" /]

    Alex says at the end that David has said many profound things, and he needs to replay the interview several times to make sure he understand it all.

    You will find that one of his primary foci is ‘where is the capital going’? Gail has recently emphasized that collapse comes when capital is no longer available. David’s talk is followed by the reaction of Nicole Foss. You will find that Nicole thinks that collapse is about to happen, and it doesn’t make sense to get yourself any more in the line of fire for the blame than necessary.

    My editorial is that David explains how his circle expected that financial pressure in the 1980s would force a redirection of capital as investors recognized the inevitability of resource depletion. and climate change 30 years later we can see that the redirection of capital did not happen. You can see Shell and Chevron and Exxon talking about the poor returns they have gotten from massive capital expenditures, but there is not a hint that their stock might not be a superb investment because ‘everything will get better next year, and our efforts will pay off’. In other words, double down on Brown Tech. I believe that both Gail and Nicole are quite confident that their predictions of collapse in the short term are right on the money, and perhaps they secretly wonder how Holmgren and his friends back in the 70s and 80s could have been so wrong.

    Zero Hedge today has an interesting article by a DeutscheBank analyst. He says that the most interesting thing that has happened recently is the decision by China to bail out a 500 million dollar financial firm. China has been talking tough about bailouts…and yet they wilted under the pressure. His conclusion is that this is good for ‘us’. By ‘us’ he means the bankers. It is evidence that the governments are going to do everything possible to keep the current financial system on life support. So the bankers can keep on doing what they like to do.

    My conclusion is that ordinary middle class citizens, such as David is appealing to, would be foolish to think they can fight the governments. You just end up getting killed by drones. Tending one’s garden is the best advice I could offer.

    Don Stewart

  6. Gail – I wonder if you might consider a column specifically addressing the issue of substitution with regards to oil.

    Whenever I raise the issue of expensive oil with MBA-types the common rejoinder is that if oil becomes too expensive it will be replaced by something else.

    I suppose a few things:

    – it’s been too expensive for years now
    – we need the replacement miracle now
    – it needs to be cheaper than oil
    – even if one of the many miracle cures that we read about being ‘around the corner’ actually arrived – I do not believe any of those being discussed could replace oil — it would seem that oil is a rather unique substance.

    • I can think about writing such a column. The other issues, besides the ones you mention, are (1) the changeover itself requires resources, (2) it is very costly to replace anything that is not fully depreciated, meaning that the length of the changeover will be 25+ years, and (3) a substitute needs to be adequate in quantity to replace oil.

      • I think a problem is that cheap energy led to inefficient ways of living- all water, even the stuff to flush the loo is processed drinking water, – water is a good example- we use a gallon to flush a pint of pee away, which then has a huge amount of energy used on it to pump it to the processing plant, where more energy is used to clean it and energy is used to get rainwater, cleaned and delivered back to your loo. Pee in a bucket and put it on the vegetables is very low in energy use and beneficial, with a little marketing and a nice bathroom fitting this low tech process is just one alternative method.

        Cheap energy is seen as a right by most westerners – more so in the US, here in the UK politicians are all promising cheap energy in the future as it is a political winner. However my business in home construction is seeing more interest and more investment in reducing consumption- energy bills are around £1400 [$2000] which for professionals is not a huge amount but enough for them to invest now to save later. The poorer in rental will be spending anything up to 1/10th of income now on energy but don’t have the resources and blindly hope for cheap fuel to return.

        We have now switched the small holding from CFL to LED, it wasn’t particularly expensive but the savings are massive. this US site gives comparisons costs for 30 lights at 60watt equivalence as $328 for traditional bulbs a year, $76 for compact energy efficient lights and just $32 for LED http://www.designrecycleinc.com/led%20comp%20chart.html

        the problem for those on low income is the upfront cost a 1200 hour 60 watt trad bulb is £1 and the LED version is £8 to 16 but last 50 times longer saving around £40 in a lifetime. But this is an example of cheap energy working against people- cheap imported shoes cost a few £$ but last months a quality pair costing £120 [my last investment in boots] last years. We are in the crazy situation where cheap credit could buy quality but instead is spent on lots of junk.

        However fossil fuels only appear to be cheap because there are many hidden costs such as health care, lost production days from pollution- and not just China but cities like London, as well as the bigger cost of changing the climate. I saw a study that demonstrated new pv is cheaper over its entire life now than coal powered electric- whether solar could ever make solar is another matter.

        • Jules

          The cynical promise of ‘cheap energy’ from fracking by UK politicians is shocking in its brazenness. One can see from comments in the UK press that many people believe in it. Well, they fall for the property bubble, too. One despairs.

  7. Dear Gail
    Some speculation triggered by email exchange between Dmitry Orlov and Ugo Bardi.

    The Orlov/Bardi exchange suggests some reasons why the former Soviet Union collapsed so promptly after oil use declined, while Italy has not suffered a similar collapse.

    The exchange started me to thinking about the question ‘Why hasn’t the boom in oil production in Russia resulted in strong economic growth in Russia?’ I speculate as follows:
    1. In order for an oil boom to spur significant, lasting economic growth, two conditions must be satisfied:
    a. There must be significant net energy made available by the extraction
    b. The net energy must be used to fuel activity in the broader economy

    The simplest possibility that I see is that there really isn’t significant net energy in Russian oil. Consequently, there isn’t any potential for fueling much activity in the broader economy. It’s also possible that the structure of the Russian system does not funnel the net energy into the broader economy.

    A country may have significant net energy potential, but if it simply turns that over to a multinational oil company, then the money from the net energy simply disappears into the global headquarters of the oil company.

    The best that a country could experience would be two conditions:
    A. There is significant net energy in their oil
    B. The net energy is used to build capital resources which are useful in the broader economy.

    Italy was, for a few decades, able to acquire oil which had a significant amount of net energy which had not already been harvested by the oil producing countries. It used some of this net energy to build infrastructure which was useful in the broader economy. Italy is now living off that infrastructure, but cannot use oil with significant net energy to replace it as it ages. And so far, no innovations have appeared which will permit Italy to build a new infrastructure with a similar energy requirement. Thus, we might say that the current trajectory is one wherein Italy will decline to a considerably lower energy intense infrastructure. And so we see the PV panels on Ugo’s roof.

    Don Stewart

    • Russia several strikes against it:
      1. Huge geographical area.
      2. Very cold climate,
      3. Large population relative to the oil and gas it exports, and
      4. Lack of good ports near population centers, so that it can export products it makes.

      As a result, Russia needs huge energy use itself, just to stay even. It would need very much ramped up energy use from its current level to do things we would consider reasonable–have a nice interstate system, give the people of Russia potable drinking water, give people nicer living conditions. Without good roads and good export capacity, it is an exercise in frustration trying to make thinks for export. Also, with the cold climate, there is no way that Russia can compete with China and India in making things–the salaries of workers have to be too high, to pay for the heat for homes and heavy clothing.

      Russia taxes oil exports heavily, to try to get enough funds to meet its budget needs, but with all of the people and the many needs, it is difficult to get enough. When lists are put together of countries where oil prices are not high enough for exporters, Russia is one of the countries with a problem. It needs higher prices to make ends meet. From the fact that the government can tax oil exports heavily, I would deduce it has some positive net energy, but not enough to satisfy the needs of the huge country.

      Natural gas is more of a problem, because long pipelines need to be built for exporting the gas, causing major capital expenditures (some of them for oil). Russia would like oil prices tied to those for natural gas, but in recent years, prices in Europe have been lower, causing a problem. The tight balance is part of the problems in the Ukraine I expect.

      • I believe Russia is not doing so bad in terms of debt/GDP. The big bear ranks the better upon this among BRICS I guess, this being due to HC availability

  8. We have to put the problems of private oil companies like Shell etc. into perspective. Most oil and natural gas is produced by national oil companies, and they make huge profits at current prices. There are almost 100 sovereign wealth funds globally, and they are desperately looking for investment opportunities to put all the billions into. Norway has one of the finest.

    • Despite having huge funds, Norway can see that current investment “opportunities” for oil really aren’t worth exploring–the payback won’t be sufficient.

      The investments the sovereign wealth funds invest in are not going to be worth much in the long run. To a significant extent, it is necessary to spend the funds on goods and services now, or not at all.

      • I agree that investing big money in a collapsing economy is very difficult. The Arab SWF’s try to convert their oil money into a “technological future” – I guess most readers here will agree that this approach will hardly work.
        The point I wanted to make was that for most producers, oil is very profitable at current prices, and that the struggling of some private companies doesn’t mean there will be a complete and sudden collapse in oil production if prices drop to 70 or 60$. That’s one reason I am not so sure about your very soon and sudden collapse scenario.

        • the wackiest Arab idea of all, is that Saudi will become an oil importer by 2030.
          So analyse just what that means, in only 15 years, the prime source of world oil will have run out. And despite all the promises, there is no other source to replace it
          15 years!
          Come Jan 1st 2030, the Saudis won’t just close the oil ledger and look around for new supplies. Long before then, their own supplies will have got tighter and tighter, but in the meantime, their millions of unemployable young men will have become aware that their subsidised lifestyle (essentially free gas) is ending, so will look around for someone to blame for that.
          They will not accept it as their own profligacy, any more than we do in the west. (we brits dug up and burned all our coal)
          When those young Saudi men find there’s nothing left, they are going to resort to violence, that will physically close off access to what little oil is left. That will happen long before 2030. The middle east flashpoints now are just precursors to that.
          When the Saudi oil tap starts to run dry, then the global oil market becomes unstable. When that happens the entire world economy wobbles with it. It won’t be to actual volume of available oil that will be the immediate problem, but the confidence that there will always be more, and ongoing access to it.
          But oil producers recognise the critical nature of their asset. Stable producers will hold onto what they have, unstable producers will spawn warlords who will use oil wealth to further their ambitions, selling it to those willing to pay any price for it. Just guessing now, but I’d say that Saudi will descend into the ‘warlord’ camp, to try to extract the maximum value from a diminishing asset.

          • End

            It’s interesting that the Saudis are now expelling millions of (despised and poorly treated) foreign workers, in order to compel their own to work. Of course it doesn’t address over-population one bit.

            The thread that hold the sword swaying over the heads of Europeans grows tangibly thinner as time passes……

            Oh, but we can always trust Putin for oil and gas: no worries……!

  9. r Interesting as always Gail.

    the interesting sub story at the moment that you touched on is oil companies either hitting financial problems or suffering profits: BP is still dealing with Deepwater Horizon hiding it true profit downturn, Shell you mentioned, the German energy giant EDF is selling off profitable offshore wind and north sea gas because it is ‘restructuring’, UK energy suppliers have increased prices 9% this year. The sub-story is a crisis in the energy industry despite record prices and a few points of growth and recovery in the wider economy.

    Added to this is oil companies in Brazil despite being the ‘big’ new fields going bankrupt or seriously suffering a cash crisis.

    Oil [and other fossil fuel] companies are putting on a brave face- and are linked to ‘thinktank’ lobby groups who downplay AGW and renewables- The impression given is one’s investment in ff is the future and AGW is not a big worry- however I get the impression that renewables [and smart energy use] are seen to threaten their 200 year power reign and certainly be a threat to investment.

    Are traditional power companies and oil producers in serious cash trouble? And will the surprise limit be corporate collapse as seen with the banks with governments taking failing firms into public ownership?

    Two other points- energy here in the UK is getting to a price point that my client base is increasing for energy efficiency- we have hit a tipping point where energy has moved from being too cheap to worry about to people being prepared to invest now to save later.

    The other relates to your last post- renewables are pretty reliable with the benefit that being small generator units either in an array for wind or bank for PV the system is quick to repair, improvements can be made without switching the whole thing off and modifications can be made quickly- a big thermal power station with a 40 year life will only get the new improved version 40 years later.

    As for the need for fossil fuels- we are only half way through our carbon budget [although a 2c rise hardly seems safe given 0.8c is playing havoc with the world’s weather]- the transition then, to a fully sustainable energy system/economy is a 100 year process but requires the opposite exponential contraction of consumption.
    so for this period to 2020 we can only consume the same amount as we did in the 00s [which through low growth is something we appear to be doing] in the 2020s we can only consume the same amount as we consumed in the 1990s, and for the 2030s the same as we consumed in the 1980s- all the way to 2100 when we can consume 1 billion tonnes of coal equivalent – most likely for plastics.

    The way supply is going this may be the contraction we will get anyway- better this transition than sudden collapse- I would like to think my son’s generation had something to look forward to.

    best Jules

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