Oil Limits and the Economy: One Story, Not Two

The two big stories of our day are

(1) Our economic problems: The inability of economies to grow as rapidly as they would like, add as many jobs as they would like, and raise the standards of living of citizens as much as they would like. Associated with this slow economic growth is a continued need for ultra-low interest rates to keep economies of the developed world from slipping back into recession.

(2) Our oil related-problems: One part of the story relates to too little, so-called “peak oil,” and the need for substitutes for oil. Another part of the story relates to too much carbon released by burning fossil fuels, including oil, leading to climate change.

While the press treats these issues as separate stories, they are in fact very closely connected, related to the fact that we are reaching limits in many different directions simultaneously. The economy is the coordinating system that ties together all available resources, as well as the users of these resources. It does this almost magically, by figuring out what prices are needed to keep the system in balance—how much materials of which types are needed, given what consumers can afford to pay.

The catch is that the economic system is not infinitely flexible. It needs to grow, to have enough funds to (sort of) pay back debt with interest and to make good on all the promises that have been made, such as Social Security.

Energy use is very closely tied to economic growth. When energy consumption becomes slow-growing (or high-priced—which  is closely tied to slow-growing), it pulls back on economic growth. Job growth becomes more difficult, and governments find it difficult to get enough funding through tax revenue. This is the situation we have been experiencing for the last several years. Continue reading

Reasons for our Energy Predicament – An Overview

Quiz: What will cause world oil supply to fall?

  1. Too little oil in the ground
  2. Oil prices are too low for oil producers
  3. Oil prices are too high for oil consumers leading to recession, debt defaults, and ultimately a cut back in credit availability and very low oil prices
  4. Oil exporters are subject to civil unrest and overthrow of governments, due to low prices and/or depleting reserves
  5. Lack of money (and physical resources that might be purchased with this money) to pull oil out of the ground.
  6. Pollution related issues–too much smog in China; too many problems with fracking; too many problems with CO2.
  7. The financial current system fails, and can only be replaced by one that allows much less debt. Oil prices remain too low under such a system. 

In my view, any answer other that the first one is likely to be at least partially right. Ultimately, the issue is that to extract oil or any fossil fuel, we have to keep the financial and political systems together. These systems can be expected to fail, far before we run out of oil in the ground. Most oil in the ground (as well as most other fossil fuels in the ground) will be left in the ground, in my view.

Basing estimates of future oil production on oil reserves is likely to give far too high an indication with respect to actual future production. Even more absurd numbers come from using “resource” numbers (which are higher than reserve numbers) to make estimates of future oil production. Coal and natural gas production is likely to fall at exactly the same time as oil, because the problems are likely to be financial and political ones, not “resources in the ground” problems.

Direct Application of M. King Hubbert Theory is Incorrect

M. King Hubbert is known for his estimates of future oil production  (195619621976) based on reserve amounts. There are two things of importance to notice about his estimates:

(a) The oil reserve estimates used are of free flowing oil reserves of the type that geologists currently were looking at. Thus, they were restricted to “cheap to extract” reserves, and

(b) When Hubbert showed graphs of world oil production following a generally symmetric curve (so downslope looks like a mirror image of upslope), Hubbert showed some other source of energy supply (nuclear in his early papers, solar in later ones) rising to high levels, before world oil production ever dropped. He even talked about making liquid fuels using a huge amount of energy plus carbon dioxide and water–in other words, reversing combustion (1962). In order to ramp nuclear or solar up to these very high levels, they would need to be  extremely cheap.

The assumptions that M. King Hubbert makes are effectively ones that would allow the economy to continue to grow and the financial system to “hang together.” If a person looks at today’s situation, it is quite different. We do not have an alternate fuel supply that will  allow the economy to continue to grow, regardless of fossil fuel consumption. The published reserves include large amounts of oil in the ground that are not of the very cheap to extract type. Extracting such oil will be impossible if oil prices are very low, or if credit availability is lacking. It is tempting for observers to look at oil reserves and assume that all is well, but this is definitely not the case.

Continue reading

Energy and the Economy–Basic Principles and Feedback Loops

Does a fish know that its nose is wet? Probably not. It swims in water, and assumes that is the only way any animal lives.

We live in an economic world. Economic models that were developed years ago were created based on observations of how the economy seemed to work at the time. As time goes on, it is becoming clear that early economists missed important connections. The most important of these is the role of energy and its connection to the economy. It takes energy to make anything, from a piece of steel to a loaf of bread. It takes energy to transport anything. Humans need energy in the form of food to continue to live. Clearly, energy should have a place in economic models.

In this post, I explain some of the basic principles as I see them:

1. Humans have evolved to be dependent on external energy.

2. Humans now supplement their own limited energy supply with external energy of various types. In general, the more external energy used, the more humans are able to control their environment.

3. Over the 1 million+ years during which humans have been able to control fire, humans have generally been in situations with favorable feedback loops, due to increasing efficiency in producing goods and services required to meet basic needs. Such loops allowed continued population growth and economic growth.

4. We are now reaching limits on these feedback loops. The result is feedback loops that are changing from favorable feedbacks to contraction.

5. Part of the change in feedback loops relates to the cost of energy sources, such as oil. A rise in the price of oil tends to reduce salaries of workers (because of layoffs) as well as reduce discretionary income (because of higher price of food and commuting), contributing to the trend toward contraction.

All of this is very concerning, because in the past, adverse feedback loops of this type  seem to have led to collapse.

Continue reading

Reaching Limits in a Finite World

We don’t usually think about it, but we live in a finite world. In other words, in theory we can count precisely how many atoms make up the earth. We can also theoretically count how many humans live on earth and how many of any other species live on earth at a particular point in time.

At some point, in a finite world, we start reaching limits. There are now about seven billion people in the world. We could probably add some more, but how many? What is it that limits our ability to add more people to the world we live in today?

Too Much Population “Morphs” to an Energy and Financial Limit

One obvious guess as to what might limit world population is the amount of fresh water that is available. If we don’t have enough fresh water available, we can’t continue to expand population.

The amount of fresh water that is available can be changed, though, by adding desalination plants. There are many other ways of getting fresh water. To give an extreme example, the amount of fresh water available could be increased by melting ice in Antarctica and importing it by ship. Either of these solutions would require energy in an appropriate form—either to run the desalination plant, or to melt the ice and transport it by ship. Thus the fresh water shortage, at least for the foreseeable future, can be worked around if there is sufficient energy available of the right type.

The other not-so-minor detail is that the cost of desalination or of importing melted ice from Antarctica needs to be inexpensive enough that users of fresh water can afford it. In order for this to be the case, the cost of the appropriate type of energy must be extremely inexpensive. Continue reading

Renewables – Good for some things; not so good for others

Based on the sound of the name renewable, a person might think that using only “renewable” energy is ideal–something we should all strive to use exclusively. But there are lots of energy sources that might be called “renewable,” and lots applications for renewable energy. Clearly not all are equally good. Perhaps we should examine the “Renewables are our savior,” belief a little more closely.

Figure 1. World fuel consumption based on BP's 2012 Statistical Review of World Energy data.

Figure 1. World fuel consumption based on BP’s 2012 Statistical Review of World Energy data.

1. Renewables that we have today won’t replace the quantity of  today’s fossil fuels, in any reasonable timeframe.

Figure 1, above shows the distribution of fuels used since 1965. 

Other renewables, which includes wind, solar, geothermal and other categories of new renewables, in total amounts to 1.6% of world energy supply in 2011, according to BP. The light blue line is not very visible on Figure 1. (The blue line that is visible at the top is “Nuclear.”)

Biofuels, which would include ethanol and other types of biofuels, such as palm oil, amounts to 0.5% of world energy supply. Its orange line is not very visible on the chart either.

Hydroelectric, shown in purple, has been around a long time–since 1880 in the United States. It amounts to 6.4% of world energy supply. Its quantity is not growing very much, because most of the good locations have already been dammed.

In total, the three categories amount to 8.5% of world energy supply. If growth continues at today’s rate, it will be a very long time before renewable energy supply can be expected to amount to more than 10% or 15% of world energy supply. We very clearly cannot operate all the equipment we have today on this quantity of energy. In fact, it is doubtful that we can even cover the basics (food, water, and heat to keep from freezing) for 7 billion people, with this quantity of energy. Continue reading