Gail in China Report #3

Greetings Finite Worlders!  Gail is on her 1 month lecture tour of China. She’s unable to access WordPress from China, but does have access to email, so she’s sending me updates to publish here on OFW.  My Byline/About appears at the bottom here, but the China Travelogue articles are authored by her. -RE

From Gail below:

Greetings from China again!

As I mentioned previously, it was Prof. Feng at China University of Petroleum in Beijing who invited me to come to China for the first two weeks. In the second two weeks I would be doing a variety of other things. I am now in the “other things” part of the visit.
One thing we did during the first two weeks is make video recordings of the talks I gave during the first two weeks. I also I have the PDF slides. After I get back I will work on putting those things up on OurFiniteWorld.com.
One thing that Prof. Feng has talked to me about is that he would like to host a “Finite World” conference in Beijing in 2016, if he can get the details worked out (and if the financial system stays together well enough, and if I would help with the endeavor). Because of the cost of transport and other details involved, he expects that the vast majority of the attendees would be from China–perhaps 80 Chinese attendees and 20 attendees from elsewhere in the world. Given the way Prof. Feng does things, I expect the plan would be to make videos of those talks available on line, to the many people who would not be able to travel to China.
I have been working on a number of other things. Together with Prof. Feng and a graduate student, I wrote an article called, “The Myth of Everlasting Oil from Shale Formations,” which we are hoping will run in the “People’s Daily.” The graduate student translated it into Chinese.
One morning, I gave a talk to a group of about 20 people doing research related to energy and the economy at an institute in Beijing. This is a photo of Prof. Feng, the director of the research group (Prof. Fan), and myself, standing in front of their buildings. They seemed to be interested in what I had to say. This talk was videotaped as well.
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One evening, I met with the vice president in charge of international operations for BGP, which is the subsidiary of China National Petroleum Corporation (CNPC) that does the initial geological assessment of proposed new locations. He told us that the work of his staff is down by 50%, but that the company has held off in laying off workers, because they are hopeful that prices will rise in the next few months. He is also hopeful that technological innovation will solve our other problems. He said that he is hesitant to lay off staff, because if he loses his staff, he loses the heart of his operations. It is very hard to build the expertise back up again.
I visited Ordos, Inner Mongolia for a short time. I received a very warm welcome there, from the extended family of the graduate student who invited me to visit the area. This is a photo of me shaking hands (in a symbolic handshake of friendship) with the graduate student’s father, while the graduate student looks on.
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Ordos is the gateway to many of China’s coal operations. One of the things we noticed was how few cars were on the road. The road was a new four lane highway, but we drove for miles without seeing another car or other vehicle. The Ordos airport had few patrons, and many spaces available for stores were not rented. The airport had been built at the time the growth in coal operations was at its highest, but growth has not continued as hoped. Another thing we noticed is that while apartments seem still to be being built in Ordos, many of the apartments seem to be unoccupied.
I am now in Daqing (pronounced Daching), China, the home of China’s largest oil field, Daqing Oil Field. The city is a very modern city that grew up after Daqing oil field began production in 1960. It now has about 2.5 million inhabitants. The economy is very much tied to oil–I have been told that there are something like 300,000 CNPC employees living in Daqing, and many more indirectly tied to the oil field. The production of Daqing Oil Field is now in decline. We (I am here with others from Petroleum University of China, Beijing) visited some of the oil field operations today. The question a person might ask is whether low oil prices will adversely affect Daqing operations. When we attempted to ask CNPC employees questions along this line, we were told that the oil field is profitable at $40 barrel. We were also told that the company is testing the use of fracking and long horizontal wells, in the hope of increasing production (or slowing the decline).
When I asked how long oil prices would have to stay low before Daqing employment would be affected, the CNBC employee I asked (who may not be knowledgeable about this) said “one to two years.” When I talk to people at Petroleum University of China in Beijing, the point is made that the Chinese government realizes that there is a need for employment for a huge number of people–laying off a large number of employees would simply turn one problem into a different one. That is probably the reason why employment at CNPC is as high as it is–300,000 employees is a huge number for a field producing less than 1 million barrels a day. A large number of people are involved with monitoring well production. This part of the operation could probably be significantly mechanized, reducing the needed number of workers–but then what would all of the laid-off workers do? We will be meeting with some of the folks at the Daqing branch of Petroleum University of China tomorrow–perhaps they will have some additional insights. If the numbers I quoted above are right, the employees are not earning very much a piece–or the story about being profitable at $40 barrel is not true.

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.

OUR ENERGY PREDICAMENT

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.

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Energy limits: Is there anything we can do?

The energy limit we are running into is a cost limit. I would argue that neither the Republican or Democrat approach to solving the problem will really work.

The Republicans favor “Drill Baby Drill”. If the issue is that the price of oil extraction is too high, additional drilling doesn’t really fix the problem. At best, it gives us a little more expensive oil to add to the world’s supply. The Wall Street research firm Sanford Bernstein recently estimated that the non-Opec marginal cost of production rose to $104.50 a barrel in 2012, up more than 13 per cent from $92.30 a barrel in 2011.

US consumers still cannot afford to buy high-priced oil, even if we extract the oil ourselves. The countries that see rising oil consumption tend to be ones that can leverage its use better with cheaper fuels, particularly coal (Figure 1). See Why coal consumption keeps rising; what economists missed. The recent reduction in US oil usage is more related to young people not being able to afford to drive than it is to improved automobile efficiency. See my post, Why is gasoline mileage lower? Better gasoline mileage?

Figure 1. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world "all liquids" production amounts.

Figure 1. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.

The Democrats favor subsidizing high-priced energy approaches that wouldn’t be competitive without such subsidies. Government debt is at 103% of GDP. It is hard to see that the government can afford such subsidies. Also, it is doubtful that the supposed carbon-saving benefit is really there, when all of the follow-on effects are included. Buying wind turbine parts, solar panels, and goods that use rare earth minerals (used in many high-tech goods, including electric cars and  wind turbines) helps to stimulate the Chinese economy, adding to their coal use. Furthermore, the higher taxes needed to pay for these subsidies reduces the spendable income of the common worker, pushing the country in the direction of recession.

So what do we do as an alternative, if neither the Republican or Democrat approach works? I would argue that we are dealing with a situation that is essentially unfixable. It can be expected to morph into a financial crash, for reasons I explained in How Resource Limits Lead to Financial Collapse. Thus, the issue we will need to mitigate will be debt defaults, loss of jobs, and possibly major changes to governments. If we are dealing with a financial crash, oil prices may in fact be lower, but people will still be unable to afford the oil because of other issues, such as lack of jobs or lack of access to money in their bank accounts. Continue reading

Our Energy Predicament in Charts

A friend asked me to put together a presentation on our energy predicament. I am not certain all of the charts in this post will go into it, but I thought others might be interested in a not-so-difficult version of the story of the energy predicament we are reaching.

My friend also asked what characteristics a new fuel would need to have to solve our energy predicament. Because of this, I have included a section at the end on this subject, rather than the traditional, “How do we respond?” section. Given the timing involved, and the combination of limits we are reaching, it is not clear that a fuel suitable for mitigation is really feasible, however.

ENERGY BASICS

Energy makes the world go around

Figure 1.  Source: Jewish World Review

Figure 1. Source: Jewish World Review

Energy literally makes the world turn on its axis and rotate around the sun.

Energy is what allows us to transform a set of raw materials into a finished product.

Figure 2. Energy is what allows us to transform raw materials into finished products. (Figure by author.)

Figure 2. Energy is what allows us to transform raw materials into finished products. (Figure by author.)

Energy is also what allows an us to transport goods (or ourselves) from one location to another. Services of any type require energy–for example, energy to light an office building, energy to create a computer, and human energy to make the computer operate. Without energy of many types, we wouldn’t have an economy. Continue reading

Why Malthus Got His Forecast Wrong

Most of us have heard that Thomas Malthus made a forecast in 1798 that the world would run short of food. He expected that this would happen because in a world with limited agricultural land, food supply would fail to rise as rapidly as population. In fact, at the time of his writing, he believed that population was already in danger of outstripping food supply. As a result, he expected that a great famine would ensue.

Most of us don’t understand why he was wrong. A common misbelief is that the reason he was wrong is that he failed to anticipate improved technology. My analysis suggests that there were really two underlying factors which enabled the development and widespread use of technology. These were (1) the beginning of fossil fuel use, which ramped up immediately after his writing, and (2) a ramp up in non-governmental debt after World War II, which enabled the rapid uptake of new technology such as the sale of cars and trucks. Without fossil fuels, availability of  materials such as metal and glass (needed for most types of technology) would have been severely restricted. Without increased debt, common people would not have been able to afford the new types of high-tech products that businesses were able to produce.

This issue of why Malthus’s forecast was wrong is relevant today, as we grapple with the issues of world hunger and of oil consumption that is not growing as rapidly as consumers would like–certainly it is not keeping oil prices down at historic levels.

What Malthus Didn’t Anticipate

Malthus was writing immediately before fossil fuel use started to ramp up.

Figure 1. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects and together with BP Statistical Data on 1965 and subsequent

Figure 1. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects and together with BP Statistical Data on 1965 and subsequent

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