How Researchers Could Miss the Real Energy Story

I have been telling a fairly different energy story from most energy researchers. How could I possibly be correct? What have other researchers been missing?

The “standard” approach is to start from the amount of resources that we have of a particular type, for example, oil in the ground, and see how far these resources will go. Growing development of technology seems to allow increasing amounts of these resources to be extracted. Thus, limits seem to be farther and farther in the distance, especially if a person starts out with an optimistic bias. It is easy to get this optimistic bias, with all research funds going in the direction of, “What can we do to solve our energy problems?”

Approaches for forecasting future supply problems that start from the amount of resources in the ground suffer from the problem that it is hard to draw a sharp line regarding when we will run into difficulties. It is clear that at some point, there will be a problem–EROEI (Energy Return on Energy Investment) will be too low–but exactly when is hard to pinpoint. If a person starts from an optimistic viewpoint, it is easy to assume that as long as Energy Output is greater than Energy Input for a given process, that process must be helpful for solving our energy problem.

In fact, in my opinion, the story is very different. The very thing that should be saving us–technology–has side effects that bring the whole system down. 

The only way we can keep adding technology is by adding more capital goods, more specialization, and more advanced education for selected members of society. The problem, as we should know from research regarding historical economies that have collapsed, is that more complexity ultimately leads to collapse because it leads to huge wage disparity. (See TainterTurchin and Nefedov.) Ultimately, the people at the bottom of the hierarchy cannot afford the output of the economy. Added debt at lower interest rates can only partially offset this problem. Governments cannot collect enough taxes from the large number of people at the bottom of the hierarchy, even though the top 1% may flourish. The economy tends to collapse because of the side effects of greater complexity.

Our economy is a networked system, so it should not be surprising that there is more than one way for the system to reach its end.

Slide 5

Figure 1

I have described the problem that really brings down the economy as “too low return on human labor,” at least for those at the bottom of the hierarchy. The wages of the non-elite are too low to provide an adequate standard of living. In a sense, this is a situation of too low EROEI: too low return on human energy. Most energy researchers have been looking at a very different kind of EROEI: a calculation based on the investment of fossil fuel energy. The two kinds of EROEI are related, but not very closely. Many economies have collapsed, without ever using fossil fuel energy,

While what I call “fossil fuel EROEI” was a reasonable starting place for an analysis of our energy problems back in the 1970s, the calculation now gets more emphasis than it truly deserves. The limit we are reaching is a different one: falling return on human labor EROEI, at least for those who are not among the elite. Increasing wage disparity is becoming a severe problem now; it is the reason we have very divisive candidates running for political office, and many people in favor of reduced globalization.

Overly Simple Models Give Misleading Answers

People who don’t work with models very much can easily assume that a model is telling them more than it really is. I discussed this issue in my recent article Overly Simple Energy-Economy Models Give Misleading Answers. It is quite possible to make a model that works some of the time, but not always. A researcher who is unaware of this problem is likely to overuse the model. As the saying goes, “If a person’s only tool is a hammer, every problem is a nail.”

If a system has multiple parts to it, as is the case with the system that controls energy extraction and energy prices, it is likely that a fairly complex model is needed to make a model that really represents the situation. The earliest models were in a sense one dimensional, when they needed to be multi-dimensional. With these additional dimensions, the model would include such characteristics as the fact that demand is controlled by a financial system, and the fact that the level of demand (and thus prices) depends on the ability of even the lowest-paid workers to afford the output of the system.

The model could also include what is essentially a physics problem–if there is not enough energy to go around, the usual solution is “more technology” or “more complexity.” What more technology and more complexity add is more concentrations of energy in various ways: in capital goods such as machinery and vehicles, in larger businesses to own these devices, in high-paid management officials, and in workers with specialized training.

These concentrations of energy are what lead to wealth disparity–some people “own” businesses and capital goods, and some people (but not others) receive advanced education or other specialized training. All of these things allow a relatively small number of privileged people to receive a greater share of the output of the economy. This leaves less for the rest.

As the result of this wage disparity, the economy ends up with too many people either dropping out of the work force, or earning low wages. It is lack of the ability of these people to afford the output of the economy that brings the economy down. Demand is closely related to affordability of goods made using fossil fuels, such as homes and cars. Many people miss the connection between demand and affordability.

Of course, if we didn’t have this falling demand problem (or low price problem) caused by increased concentrations of wealth leaving too large a share of the population too poor, we would eventually get to something similar to the problem that many have been concerned about: fossil fuel EROEI would eventually fall too low.

Hubbert Tells Part of the Story

When talking about resource limits, the thing that tends to confuse most people is the large quantity of energy resources that seems to be available. We can get some of these resources out with today’s technology. Logic would seem to suggest that with improved technology, we should be able to keep moving on to increasingly difficult-to-extract fossil fuel resources. We should also be able to create increasing quantities of substitutes.

M. King Hubbert gave an answer that only went partway in telling the extent of our problems. Basically, he said that once we had extracted 50% of a particular resource, the quantity we could extract would tend to decline in a more or less symmetric curve.

Figure 2. M. King Hubbert symmetric curve from Nuclear Energy and the Fossil Fuels.

Figure 2. M. King Hubbert’s indicated symmetric curve of resource extraction from Nuclear Energy and the Fossil Fuels, published in 1956.

Hubbert described the situation of a single well or field, when there were other wells or fields taking the place of the wells and fields depleting. In this situation, demand (and thus price) stays pretty much the same. If investment in the well remains the same, production will tend to follow a symmetric curve.

We are clearly reaching a different limit at this time. We have a two-way tug:

  1. Low demand. We have wages that show increasing disparity. Wealthy people tend to spend their incomes on goods that are not very energy-intensive, such as education and financial services, while less wealthy people tend to spend a larger share of their incomes on energy-intensive products such as food, basic transportation, and basic housing. Thus, this shift in wage patterns tends to reduce energy demand, and thus energy prices.
  2. Government attempts to fix low demand. Low demand leads to low economic growth, so governments and central banks are doing everything that they can to raise demand. Their approaches include ultra-low interest rates and deficit spending. The hope is that even if citizens don’t have sufficient wages to buy expensive goods such as cars and homes, the additional debt at low interest rates will make these goods, more affordable and thus spur demand.

We can keep increasing oil and other fossil fuel extraction, as long as our current system continues to “work.” In particular, prices need to be high enough for those extracting oil to make a reasonable profit, to cover reinvestment needs. The profit has to be high enough, too, so that the companies can pay taxes to their governments, so that governments can continue programs that mostly benefit the 99% of the citizens who don’t have high incomes. This is a major way that the net energy that is generated by fossil fuels gets back to benefit the government and the many poorer citizens who benefit from government programs.

Misinterpretation of Hubbert by Peak Oilers and The Powers That Be

Neither Peak Oilers nor The Powers That Be (TPTB) figured out the real story. The Peak Oilers were “tripped up” by the overly simple model problem I described above. They assumed that 50% of remaining fossil fuels could be extracted after peak, regardless of whatever other circumstances might hold. Economists provided one part of this overly simple model: they postulated that if there were a shortage of some product, prices would rise. This view is true when there is not too much wage disparity, but it is not true in general.

The combination of these overly simple assumptions leads to the belief that we can continue to pump quite a lot of fossil fuels, even after the decline begins. These remaining fossil fuels together with renewables can lead to some sort of civilization at a lower level after collapse. High prices will point the way to economizing.

TPTB were even more confused. They listened only to economists, with their overly simple model about future prices, and paid no attention to Hubbert and his message that extraction would become more difficult after 50% of a given resource was extracted. Instead, they assumed that the recent pattern of adding new extraction at ever-higher cost would continue indefinitely, as a result of improved technology. Prices would probably rise moderately, as well.

Figure 3. Figure from Jeremy Grantham article published on The Oil Drum in 2011.

Figure 3. Figure from Jeremy Grantham article published on The Oil Drum in 2011.

Figure 4. US crude oil production, separated into tight oil (from shale formations), oil from Alaska, and other oil, based on EIA data.

Figure 4. US crude oil production, separated into tight oil (from shale formations), oil from Alaska, and other oil, based on EIA data.

If there is an increasing wage disparity problem, the whole idea of ever-rising prices because of more technology doesn’t really work. At some point, there is an affordability problem, leading to low prices rather than high prices. Ever more debt at lower interest rates cannot cover up a problem of stagnating wages for the masses.

What Does Falling Fossil Fuel EROEI Tell Us?

Quite a few commenters on like to use “falling EROEI” as a synonym for “reaching diminishing returns.” EROEI (really “fossil fuel EROEI”) as developed by Energy Researcher Charles Hall, is calculated by dividing “Energy Produced” by “Fossil Fuel Energy Used to Deliver that Energy.” The easiest-to-extract oil or coal or natural gas tends to be extracted first, and the later-to-be-produced fuel tends to have lower EROEI. Thus, lower EROEI is a handy numerical way of quantifying diminishing returns with respect to the production of energy using fossil fuel inputs.

The Paradox of Falling Energy Consumption Relative to GDP, Despite Falling EROEIs

We quickly get to a paradox: if falling EROEI is raising the cost of extraction for all fossil fuels, are we using an increasing share of the output of the economy for energy production? The answer for historical periods has been, “No.” Energy Researcher Carey King has reported on this in an academic paper.

Figure 5. Figure by Carey King from "Comparing World Economic and Net Energy Metrics Part 3: Macroeconomic Historical and Future Perspectives," published in Energies in Nov. 2015.

Figure 5. Figure by Carey King from “Comparing World Economic and Net Energy Metrics Part 3: Macroeconomic Historical and Future Perspectives,” published in Energies in Nov. 2015.

In fact, recent United Nations’ research seems to indicate that this pattern of falling energy consumption as a percentage of GDP continues to hold through 2013 for the world as a whole:

Figure 6 shows that the bottom two sectors, namely “Agriculture, hunting, forestry, fishing,” and “Mining and utilities” continue to fall to lower levels as a percentage of the world economy, through the last year shown, 2013.

The way that these falling percentages seem to take place is through rebalancing of energy supply toward countries with a lower-cost energy mix. See the Appendix for more information on how this seems to occur.

Aude Illig and Ian Schindler, who are specialists in mathematics and economics working at the Toulouse School of Economics, have been examining how oil prices can be expected to behave, both before and after the share of the world’s resources  devoted to energy extraction hits the low point (nadir) and begins rising again, if Figures 5 and 6 were extended forward. They explain their findings in a working paper called Oil Extraction and Price Dynamics. It shows that prior to the nadir, oil prices can be expected to generally rise, with some temporary spikes. Once we are past the nadir, the dynamics are the opposite. Prices tend to fall, exacerbating the decline.

Does US Drilling for Oil Add to US Industrial Energy Consumption? 

One of the commenters on recently asked what impact the rise and fall of US oil production would have on US energy consumption. In his view, if extraction of oil from shale has low EROEI, surely US industrial consumption of oil or of total energy must rise and fall in response to the greater production. When we looked, any impact seemed to be too small to measure (Figure 7).

Figure 3. Comparison of US oil extraction with industrial consumption of total energy and of oil by itself, based on EIA data (monthly amounts).

Figure 7. Comparison of US oil extraction with industrial consumption of total energy and of oil by itself, based on EIA data (monthly amounts, converted to average daily amounts).

Transportation energy is not included in industrial energy, so we looked at diesel energy consumption, to see whether it had changed materially in response to all of the drilling activity. Again, it was hard to discern any impact (Figure 8).

Comparison of US oil produced with diesel plus residual fuel oil consumed, based on EIA data. Monthly data, converted to daily averages. (Residual fuel oil combined with diesel, because of law changes on types of fuel ships can use.)

Figure 8. Comparison of US oil produced with diesel plus residual fuel oil consumed, based on EIA data. Monthly data, converted to daily averages. (Residual fuel oil combined with diesel, because of law change on types of fuel ships can use.)

Thinking about the situation, the energy consumed is quite possibly not consumed in the US. For example, a great deal of steel pipeline will be used. This pipeline could be made with coal and imported from China. The timing could vary as well, if the pipeline and the machines drilling the wells were made some time in advance. Some natural gas or oil is no doubt burned when wells are drilled, but, in the whole scheme of things, the amount isn’t large enough to cause even a tiny hump in the data.

If we think about the situation, it is not really the “energy consumed” (and thus EROEI) that affects “demand.” Instead, it is the selling price of the oil that affects demand for energy products. This selling price of oil is shared many ways. This selling price includes not only the direct cost of energy used in extraction, but many other costs, as well: wages, leases, dividends, royalties and taxes of various sorts. In many cases, the royalties and taxes go to provide benefits for the non-elite–in other words, the 99%. The selling price acts as stimulus for the entire world economy, not just the part related to EROEI.

If the price of oil drops, what tends to be cut first is taxes–the money that goes to help the non-elite 99% of the economy. Besides taxes, wages and pension benefits tend to be cut very early, in an attempt to keep the company operating. These comprise a large share of costs, so are easy to cut. Strange as it may seem, oil extraction may not be cut back, even in bankruptcy. Creditors want as much value to be retained as possible after bankruptcy.

So What Does EROEI Tell Us?

EROEI as a way of allocating limited fossil fuel energy supplies. One way of thinking about EROEI is that it can be used to show the optimal way of stretching a given supply of fossil fuels; all a person needs to do is select new approaches for producing energy products with the highest EROEI values, to be able to leverage available fossil fuels as much as possible.

The EROEI calculation seems to be oriented in the direction of allocating scarce resources. Energy is counted using its Btu value. Thus, oil is viewed as having the same “value” as coal (based on its Btu content), and intermittent electricity is viewed as having the same value as electricity that is suitable for distribution to customers. Since the focus is on fossil fuels “running out,” some researchers leave out hydroelectric power from EROEI calculations; it does not represent the use of fossil fuel energy. Human labor is generally left out, as are taxes, interest payments, lease payments, and many other components of costs.

“Boundaries” on what energy inputs are to be included vary considerably from researcher to researcher, making comparisons among analyses difficult. For example, is energy used in the irrigation of biofuel crops included in calculations? Reports prepared by researchers from certain universities tend to give higher EROEIs than those from other universities. There is sometimes a suspicion that the funding source for a particular university biases the results of its EROEI calculations. This situation is not too different from the independence problems experienced in other types of academic studies.

Back door to estimating costs. EROEI can also be considered as a backdoor approach for estimating the approximate cost of extraction. Researchers working in a university are unlikely to be able to obtain information on the true total cost of extraction. On the other hand, if they can develop a new metric, they have the possibility of building a tool that they can keep updating with company information. There seems to have been early hope that the new metric would be more objective than other available cost information.

Doesn’t behave like the cost metric we are used to. There often is an economic reason to make a highly valued liquid fuel from less valuable coal or natural gas, but the calculation does not take this into account. This is one reason that the EROEIs for ethanol tend to be very low; ethanol production tends to use quite a bit of electricity from coal or natural gas to produce somewhat higher-valued ethanol.

Another catch in trying to use EROEI for comparison purposes is that EROEIs for capital goods (such as wind and solar) behave differently from EROEIs of fuels that are burned. With capital goods, society first “digs an EROEI hole,” and over time, must dig itself out. (I expect that this is one of the reasons for our debt problem.) Energy Researcher Graham Palmer has developed “Dynamic EROEI” to deal with this problem.

Figure 7. Graham Palmer's chart of Dynamic Energy Returned on Energy Invested from "Energy in Australia."

Figure 9. My explanation of Graham Palmer’s chart of Dynamic Energy Returned on Energy Invested from “Energy in Australia.”

Wind and solar have a second problem, besides the use of capital goods problem, and that is an intermittency problem that is difficult for the grid to correct, especially when more than a small amount is added to the grid. In Figure 9, Graham Palmer has added batteries, and replaced them three times during the 30-year lifetime of the solar panels, to correct the intermittency problem. I would argue that other costs should also be included–the cost of building and operating an inverter and replacement inverter(s), for example, plus any type of installation costs.

Interest costs are not typically included in EROEI calculations, but it would seem like they should be, whenever the delivery of energy is substantially delayed, as it is when some type of capital good is used to capture energy from the sun.

Alternatively, instead of adding battery costs, it would theoretically be possible to revise the calculation to include the energy cost of adjusting the electric grid to handle the intermittency. All of these issues have to do with selecting proper “boundaries” for the calculation.

Intermittent Renewables Seem to Give Funding to the 1% and Raise Costs for the 99%, Unlike Fossil Fuels

Something that we don’t often think about is that individual types of energy production can be evaluated from the point of view of the extent to which they provide funding for the 99%, versus funding for the elite 1%. EROEI, of course, cannot consider this at all.

Fossil fuels would seem to favor the 99% because the fossil fuel industry has traditionally has been heavy payers of taxes. These taxes go to help the vast majority. It is rare to find reports showing taxes paid by fossil fuel producers, however. Instead, reports tend to show subsidies, which are offsets to the high tax payments. These offsets are frequently payments for such purposes as helping low income people pay their winter heating bills. While these payments are called “subsidies,” in a true sense they are often ways of helping the 99%.

Wind and solar tend to be financed in the US with tax credits. These tax credits help concentrate wealth among the already wealthy. In Europe, the high cost of intermittent renewables tends to be paid by individual households. This leads to a situation where businesses, and the owners and operators of these businesses, benefit at the expense of those who are financially less well off.

The debt level with wind and solar (and all of their related paraphernalia that often gets left out of EROEI calculations) also tends to be high. Interest on this debt transfers money from the 99% to the 1%. The grid likely will need upgrading to handle intermittent renewables. This cost, too, will be borne by the 99% through higher electricity rates or higher taxes.

What Should the Role of EROEI Be?

EROEI is now well established as a tool to try to see how much energy is being consumed in making an energy product. I think that many people have expectations for EROEI beyond what it really can do. For example, I don’t think that EROEI calculations can predict when the economy will collapse, because the mechanics for reaching collapse come from a different direction–namely, increasing wage disparity and low commodity prices.

EROEI doesn’t consider whether a high-valued product is being used to produce a low-valued product, or vice versa. The solution here is to look at the actual cost involved in producing the energy product, as a supplement to EROEI calculations. This is important if our real energy problem is high cost and lack of affordability, rather than “running out” of fossil fuels.

EROEI calculations also are not designed to look at the required growth in debt, and the required transfer of wealth from the 99% to the 1%. Clearly, it would be helpful to add some new tools to the tool set, to look at these problems.

As a check on whether EROEI calculations are really producing reasonable results, any energy product that is producing net energy should be able to support the government with taxes, rather than being dependent on subsidies. If an energy product is dependent upon continued subsidies, this should be considered as likely evidence that it is, in fact, a net energy sink.

EROEI studies do have a continued role, but they need to be used with care.

How Did I Get Involved in this Whole Discussion?

I have been what a person might call a “financial detective” for a long time. I started working for CNA Insurance Group as an actuarial trainee in 1970. This was about the time that inflation started to affect insurance companies. After I had been at CNA only a short time, I was the one who figured out how inflation would affect reserves set by claims adjustors. When my predictions proved to be correct, my supervisors were very surprised; they had never considered the possibility that there would be an impact.

I soon moved on to a smaller insurance company, where I reported directly to the president of the company. The position was supposed to report to a lower level in the organization, but the president was shocked at what I had been able to figure out about the company from its financial statements, and decided he wanted me to report to him instead. As a result, I had an opportunity to see the impact of the 1973-1974 oil price spike on an insurance company, from a front-row seat. I also got a chance to see what impact rapidly changing interest rates had on an insurance company. I later went back to CNA, and observed the problems they were also having.

I later moved into consulting. I was always the “go-to” person for trying to figure out answers to questions that had never come up before. If someone needed a model for something really weird, they would come to me. I would often develop material for expert witness assignments. When new companies were set up, I would set up models of how they might be expected to behave under various scenarios. I worked a lot with “long tail” business, where claims were reported and paid long after the time an injury occurred.

I didn’t get involved with oil limits until 2005, and began writing articles about it in 2006. I was near the age where I could take early retirement, so I left in 2007, with the plan to look into the subject further. Editors at The Oil Drum saw some of my articles, and invited me to write articles for them, under the pen name Gail the Actuary. Not too much later, they asked me to be an editor. I soon found myself corresponding with authors, fixing mistakes in articles, and becoming acquainted with many people in the energy field.

One of the articles I wrote fairly early was Peak Oil and the Financial Markets: A Forecast for 2008. In it, I forecast the 2008 financial crash. Prof. Charles Hall (of EROEI fame) saw the post, and invited me to come to Syracuse, New York, and give a presentation at the next Biophysical Economics Conference. I soon met many other researchers, either through the Biophysical Economics community, or through my work at The Oil Drum. I was invited to give many talks, including one in Barcelona, Spain, in 2010, which ultimately led to the publishing of my article Oil Supply Limits and the Continuing Financial Crisis in the journal Energy. All of this further led to my becoming more involved with the research and journal end of the oil limits story. I now get quite a few invitations related to the research end of my work.

One of the things that led to conflict between the Peak Oil community and me was that I wasn’t really telling the “Peak Oil” story. I was telling something different. By late 2010, the conflict was sufficiently great that I started writing my articles on, and let re-publish the ones they chose to. I continued to be an editor at, however, until its close in 2013.

My general approach has been to learn as much as I can, in as many ways as possible. When various groups would want to sponsor conference phone calls, I would always participate, regardless of whether the group was a renewable group or one from the oil industry. I tend to interact with the commenters on my site, and get quite a few ideas from them. I don’t accept donations on my site, but I do accept invitations to give talks when people offer to at least pay my expenses. I also have had quite a few opportunities to visit installations of various types–geothermal as well as oil and gas. My only official affiliation is that I am Director of Energy Economics for the Space Solar Power Institute–an unpaid position.

All of this puts me in an odd position. The research community seems to accept me as one of their own. But Richard Heinberg of the Post Carbon Institute can’t understand why my view differs so much from the view that the Post Carbon Institute is trying to sponsor. He refers to me as an “energy writer” and says, “Her critiques of renewables appear to be based almost entirely on literature from fossil fuel and utility companies; she doesn’t seem to cite much data from solar and wind engineers.” I do talk to everyone. But I certainly don’t get my views from literature from fossil fuel and utility companies. I expect that having someone give a different view than PCI’s preferred view is threatening, especially if it is having an adverse impact on donations.

Appendix: How Rebalancing of Energy Supply Occurs

How does rebalancing of energy supplies occur? The answer seems to be, “Expansion of economies that use a fuel mix that is disproportionately weighted toward cheaper fuels, and contraction of economies that use more expensive fuels.”

This following slide shows a simple grouping of fuels I made based on my perception of which fuels are more or less expensive.

Appendix, Figure 1. Slide showing groupings of low, medium, and high priced fuels.

Appendix, Figure 1. Slide showing groupings of low, medium, and high priced fuels.

Growth in energy consumption seems to take place almost entirely in parts of the world that use a disproportionate amount of low-priced fuel. These countries also tend to have low wages, to go with the low fuel costs.

Figure 8. Note that the scales of the last three slides are all the same. Also note that the last of the four groupings is World Minus US Minus EU. It its thus the remainder of the world grouping.

Appendix, Figure 2. Note that the scales of the last three slides are all the same. Also note that the last of the four groupings is World Minus US Minus EU. It its thus the remainder of the world grouping.

What happens is that the world’s energy mix rebalances away from the countries that use a large share of high-cost fuels in their energy mix.

Figure 9.

Appendix, Figure 3.

In the end, the low-cost fuels (coal and hydroelectric) hold their own, as a share of total production; countries using a disproportionate share of high-cost fuels tend to lose out in the world marketplace.

Figure 10

Appendix, Figure 4

Once the world “runs out” of cheap fuels to keep adding to the energy mix (or finds the cheap fuels too polluting), the situation changes. The world economy cannot maintain its shift in mix toward products that have a better return relative to their cost simply by rebalancing toward countries with a lower-cost fuel mix.

Instead, the price of energy products must fall below the cost of production, to maintain this pattern. We seem to be seeing such a drop in prices below the cost of production, starting in 2014. Proving that this is the reason for the price drop might be difficult, but it certainly is a strong suspicion.

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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.

1,836 thoughts on “How Researchers Could Miss the Real Energy Story

  1. Thanks Weirdo !

    Amazing that you can dive into the complexity and balance the books.

    The return on cost of producing different fuel types using the energy mix and the value the different fuel types add to goods and services in the production chain ?

    • Things “turn out” differently than a person might expect, just looking at one part of the system. This is part of what makes the analysis confusing.

  2. Nice article….

    Here’s some ammo re big oil and taxes…

    ‘TPTB were even more confused. They listened only to economists, with their overly simple model about future prices, and paid no attention to Hubbert and his message that extraction would become more difficult after 50% of a given resource was extracted.’

    Don’t agree. The minions of TPTB may be confused …. but the TBTB… the ones who are actually the masterminds directing this gargantuan effort to keep us alive…. they most definitely are not confused…

    They recognize the implications of high oil prices…

    Of course we do not get to hear what they think or know — because they do not tell us … they hide behind the curtain and let spokespeople feed us soothing fables….

    But if we look deep into the bowels of the system…. we can find evidence that at the very highest levels… they know …. there are releases like the one below…. there is also evidence in their actions (vs what they say)….. as in massive amounts of stimulus to attempt to offset higher oil prices….

    According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.

    How can we get Dicky Heinberg to venture forth from DelusiSTAN to debate his assertions here on FW?

    Yoo hoo Dicky… come out to play…. yoo hoo where are you…

    I love Global Warming because it = growth which equals me getting to live longer — I have been called a shill for big oil based on my position … I am a shill for keeping BAU on track no doubt about that…. if throwing babies on fires would keep BAU on a roll I’d shill for that too…. if clubbing old people to death and making coats of their wrinkled skin would add a decade to BAU I’d take out my Louisville Slugger right now and crack some skulls…

    What do you think of that Dicky?

    Be a man — come here and defend your positions. Don’t hide away and live large off donations from your Koombaya Korporations….

    • I actually think that Richard Heinberg believes what he writes about. He is an “educator,” not a researcher himself. I have never seen him at an academic conference. He is truly confused about what I am writing about, and thinks I must be getting help somewhere.

  3. Dear Gail,
    Excellent article, as always, thank you! Also thanks for your impressive bio.

    I’m hoping we could expand the issue re how debt affects the 1% and 99%. You wrote “The debt level with wind and solar (and all of their related paraphernalia that often gets left out of EROEI calculations) also tends to be high. Interest on this debt transfers money from the 99% to the 1%.”

    It seems to me that nearly all debt transfers money from the 99% to the 1%.
    I love this simple story – scroll down about one page to see “The Eleventh Marble”:
    This analogy is amusing until you visualize the social effects.

    There has been a struggle for centuries, including in the USA, between public and private banking systems. In most media, government is described as not sufficiently responsible to be in charge – but note the profits (interest) would then return to the public purse, instead of to the 1% (who also own the major media).

    Also note the track record of private banking as it deals with “moral hazard.”
    How superior does that seem?

    These two books helped me to understand this issue:

    It appears to me that pulling in the 11th marble results in defaults, mostly among the 99%, unless it is papered over with more debt – which seems to explain the steepening curve of debt.

    Thank you, and commenters, for any insights.
    With best regards, George

    • As an observation, I don’t think the 11th marble analogy really works. Because paying back the whole debt isn’t ever the point (or the aim) – ability to service the interest over a time period is the important bit.

    • Many years ago, it was the government who owned the system that gave out debt. With this arrangement, debt jubilees could be made a regular intervals, to try to cut back on the problem of wealth tending to migrate upward to the 1%.

      Moving the debt to privately owned banks changed the possibility of doing this. There are also bonds sold directly to the public. If these default, they affect the organization who owns them. Very often, these are pension plans and insurance companies. Shares of stock of companies have a similar function, and also affect pension plans and insurance companies. Once ownership is spread around, heavily to the 1%, defaults become a bit problem.

      One time I had the occasion to visit the people in Washington DC who administered the FDIC insurance plan for banks. They explained that it led to a “heads I win, tails the FDIC loses” mentality among those operating banks. The people who made investments could choose as risky investments as they liked, because they “knew” that the FDIC would protect the depositors. The FDIC wanted to know whether we (as actuaries) could fix this problem, but I don’t think there was.

  4. The present economic system began about 250 years ago – based on fossil fuels. That system is now geriatric & dying, & industrial capitalism with it. Sad, but there is no halting entropy.
    Only a new form of cheap, clean energy can save the Western economy & culture. This can only come from radical, new science: no, not technology & widgetry, but from new fundamental science.
    Modern physics has been in a virtual state of suspended animation since the ‘particle revolution’. That was about 100 years ago now. So why isn’t the deep research a matter of urgency? The answer is the negative influence of powerful, vested political interests. The oil/gas oligarchs don’t want cheaper alternatives, & they control energy research globally.

    • “The present economic system began about 250 years ago” – invented by smarty people in England. Then incompetent foreigners tried to join in and predictably made a hash of it.
      Here in UK we have just approved a third runway for Heathrow, a gigantic extension of our railways, and many are proposing to double the size of second city Birmingham’s airport too. We’re nowhere near peak optimism here.

      • Using costly energy for building someting that is visible and lasting is an ideal way how to keep the illusion that the civilization is o.k.

        • I think part of what is involved is that the logical end of underregulated capitalism is that one person ends up owning everything and everyone else is his debt slave. We are well on the way to that situation. As a result there is a group of several thousand multi-miilion/billonaire people who are getting even richer and would just like the queues at the airports to be speeded up so they can commute to the Bahamas more conveniently.

      • How many hundreds of billions – if not trillions – have been wasted on things like solar and wind power? Isn’t China desperately trying to make fusion work — and spending hundreds of millions on research?

        It is total bullshit that entrenched interests are inhibiting attempts to replace fossil fuels.

        In case you have not noticed – big oil is not replacing reserves… nowhere near …

        They have families — they want to live — they can see the writing on the wall.

        Let’s apply some common sense here

      • The options are:

        Grow the economy — and collapse later

        Stop growing the economy – and collapse now

        I eagerly await the 4th and a 5th runways

        • the irony of not enough arable land… with the only viable solution being to lay more concrete.

        • The options are:

          Grow the economy — and collapse later

          Stop growing the economy – and collapse now

          Unfortunately, you are exactly correct.

          • Now shall we vote on which we prefer …

            All those for Door Number One tick this box ___

            All fhose for Door Number Two tick this box ___

            It’s door Number One – in a landslide….

            Now let’s get shopping people!

        • I agree that these are our 2 options however I think we could choose to reduce the pain and danger of collapse by climbing part way down from the cliff and reducing the inequality that will exist when we hit the bottom. For example, confiscating some (not all) of the wealth of the 1% to pay down public debt and implementing austerity measures to avoid more public debt that cannot be repaid unless the value of money is destroyed with money printing. It seems to me the 99% could force this policy if more people understood what is going on. It probably won’t happen but it is something concrete we could do to improve the situation. Along with a global one child policy.

          • Not really. The cheap to extract fossil fuels are gone. So called renewables tend to be expensive. Cutting down trees is cheap, I agree, but it dos’t provide a very reasonable long-term future.

            • ‘Less people => cheaper energy’

              Less people does not make the cost of finding, extracting and refining of oil any cheaper than it is now.

              Also — reducing population would result in a deflationary death spiral — fewer people to buy stuff — leading to layoffs — bankruptcies — fewer people with jobs and buying stuff … and so on.

              People seem to have trouble with the concept of grow or die.

              The economy must grow — or it will collapse.

              It’s actually one of the more simplistic concepts that have been discussed on FW.

              Smite – try reading this — I am sure Norman would be happy to explain the parts that you are unable to understand

    • “So why isn’t the deep research a matter of urgency? The answer is the negative influence of powerful, vested political interests.”

      I don’t think so. Much of physics has become a pseudoscience in recent decades, as evidenced by the paucity of useful things emerging and the need for vastly expensive equipment to supposedly prove hypotheses. Contrast with the age of x-rays and so on.

    • See my previous response — had an internet hiccup and I think I replied to the wrong person

    • ‘Only a new form of cheap, clean energy can save it…’

      Well, it seems like we don’t care about clean. If we found a dirty but cheap new energy source I’m 100% sure we would use it.

      James Hansen recently penned an article to Mrs. Solberg. ( Hansen also has an interesting view of the world. In his world the most important thing is that we price carbon fuels out of existence. Instead there will be nuclear. The fact that roads are not made of electricity doesn’t seem to be a concern. And amazingly the 99% will come out ahead through the dividend. It’s pretty amazing.

      But his view probably comes from the fact that he has a very deep understanding of how rapidly humanity is destroying the planet, and he is probably correct in that focusing on a single issue he might have some impact.

      But if I understand you correctly Gail – there is no fix. Perhaps reduced usage could make the system a little longer, but is your opinion that even reduced usage brings on collapse sooner than we would have it otherwise?

      Thanks again for the article!

    • In 25 words or less, the problem is that it is too late. Even if something new came about now, it would be too late to implement it on the scale needed. It takes 30 to 50 years to make an energy transition.

  5. There is another angle on the debt subject which should be added to the discussion, namely that nearly all “money” (bank deposits) are created as debt, on computers, from thin air, with a few keystrokes. This is seen dramatically in the case of trillion dollar bailouts of the private banking system.

    Government banks can also create funds from thin air. Abe Lincoln did it with “Greenbacks.”

    So in a sense, money is a fiction. And who should profit from creating this currency?
    Cheers, George

    • Money is to a significant extent relying on the benefit that capital goods financed with debt can provide. We can’t fund capital goods without debt.

  6. I see this as a political rebalancing of energy. Energy use is changing worldwide. The west is using less while poorer nations use more. Unfortunately at this time falling use is exceeding rising use in other nations. It will take time for this rebalancing to complete. Unfortunately those in power do not want to wait and war will be used to tighten supplies and raise prices.

  7. Great article.

    George Box said, “All models are wrong. Some are useful.”

    You mention the problem of drawing boundaries in the calculations of EROEI. I have always felt that this step is critically important, and doing it in an incomplete manner (particularly for the denominator, the inputs) accounts for the misleading values and misguided conclusions that people draw from such numbers. For example there are the direct inputs, the people, equipment, vehicles, fuel, that go into planning, exploration, drilling, production, refining, distribution, environmental cleanup, etc. But for each one of these direct inputs, there are multiple support systems that need to be present and in working order: schools, universities, health care, utilities, government, law enforcement, security, sea lane management, steel making, shipbuilding, food production, etc. And for each one of the indirect inputs there is another level of inputs, each level more distant from the oil producer, but each indispensable and necessary. It is like an infinite rabbit hole of regression to enumerate all of the energy inputs that had to be expended to allow the barrel of oil to emerge at the end of the process. Of course only a diminishing fraction of each distant input can be allocated to energy production, but the fraction is not zero. I would like to see a model that at least attempted to incorporate all of the above. On the other hand, with the apparent urgency of the situation, maybe people who could construct such a model have better things to do with their time.

    It seems we have come a long way from Colonel Drake who walked out into the woods with some simple equipment and came away with thousands of barrels of oil.

    • You are exactly right about the infinite rabbit hole. Our system of adding together all costs is the only system I know of that “fixes” this problem.

      I was perhaps too charitable in talking about EROEI. It is a flawed system. It was developed by well-meaning people, some of whom are my friends. I feel very bad for them. I talk about “costs,” because these are things that we understand, and that have truly have meaning. The developers of EROEI thought that they could build a better system, but in practice, it doesn’t work. There are too many boundary issues. These get worse, when many different people from different institutions make calculations, with their own assumptions.

      To make things worse, an awfully lot of people assume that if Energy Out is greater than Energy In (as counted in EROEI calculations), that is good enough. That is not nearly enough, especially if the inputs and outputs are of equal value. It the inputs and outputs are of different value, that adds to the confusion.

  8. Reblogged this on Stephen Hinton Consulting and commented:
    Repost from the excellent blog of actuary Gail Tverberg. Gail has an uncanny ability to spot what is happening in the interface between energy and economy. She has an amazing intellectual capability to model it combined with clear and insightful communication.

  9. “The Paradox of Falling Energy Consumption Relative to GDP, Despite Falling EROEIs…
    EROEI as a way of allocating limited fossil fuel energy supplies…
    What Should the Role of EROEI Be?”

    EROEI is a perfect framework for evaluating ALL energies, from human, human & animal, wood, coal, gas, hydro, solar, petroleum through nuclear and thorium. All that is required is the rigorous calculation of any and all energy used in the production, delivery and implementation of the energy to be used and a precise calculation of the energy output especially including any inefficiencies. This will give you the EROEI of almost everything.

    What is the energy cost of a man digging for gold with a shovel? What is the proportionate cost of the energy to make the shovel for however long the man uses it and what is the energy cost of the man digging? What is the per load or per hour energy cost of the donkey the man uses to carry the ore? What is the energy cost per unit for the geological degree of the man to determine where to dig? And so on and so forth. Understanding that not all energy invested yields anything, like burning a candle in full sunlight and not using it to heat anything. Energy is easily and usually wasted.

    The calculation of the energy costs of all things is a herculean task perhaps, but once accomplished the calculation of the EROEI will answer most energy evaluation questions and resolve the apparent paradox. When you have determined the energy cost of each additional dollar of debt, the paradox disappears.

    • Sorry, I don’t agree with you. We don’t really have a shortage of energy (we have a shortage of cheap energy), and “cost” comes out better as a way of evaluating relative values.

  10. Pingback: How Researchers Could Miss the Real Energy Story –

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