On Oil

Oil

JTRoberts recently made an important and insightful observation which I paraphrase and elaborate here.

Oil is a non-renewable resource that we extract from the earth. Oil companies are motivated by profit so they start with low-cost reservoirs and as those deplete they move to increasingly higher cost sources like water injection, offshore, tar sands, and fracking.

All economic activity depends on energy, as the laws of thermodynamics explain, and as the near perfect correlation between wealth and energy consumption confirms.

Oil is the keystone energy because oil is required to extract or capture all other forms of energy including food, coal, natural gas, wood, solar, wind, nuclear, and hydroelectric energy.

The cost of oil can be viewed as a tax on economic activity. Our economy is configured to operate profitably on about $20 per barrel oil. We have already captured most feasible energy efficiency gains making it difficult for our economy to operate profitably on oil over $20.

Thus, as the cost of extraction due to depletion of low-cost reserves pushes the price of oil above $20, the difference must be made up with debt.

At today’s $70 oil, which we burn about 96 million barrels per day, that works out to 96 * 365 * ($70-$20) = $1.8 trillion, which as predicted, is about the rate that global debt is increasing.

If you believe we have many years of oil left, then you must also believe that debt can continue to increase much faster than our income for many years without consequence on the value of money.

Money has value because we have confidence that the debt which creates our money will be repaid with interest, which can only occur when the economy grows, which can only occur when the quantity of energy we burn grows, which due to continually increasing extraction costs, can only occur when debt grows faster than the economy, which at some point will erode our confidence, which will reduce the value of money, which will reduce the amount of energy we can afford to burn, which will reduce economic activity, which will further erode our confidence in the value of money.

Do you see our energy and climate predicament?

Do you see why our leaders deny we have a problem?

Do you see why the longer we deny the problem the worse the outcome will be?

Additional Thoughts (30-Jul-2018)

Most people do not think we have an imminent oil problem because they’ve read in the news that there is 50 years or more of unconventional oil left to extract. While probably true, this fact is misleading.

What does it mean to say oil is depleted?

Depleted does not mean that all the oil is gone. Depleted means that all the oil we can afford to extract and purchase is gone. Big difference.

To be a little more precise, depleted is the point at which the cost to extract oil exceeds the price that our economy can pay and still grow.

Today we are paying the price and achieving a little growth, but it is taking a lot of debt at a very low interest rate to do so, and each year it takes more debt.

The ability of our global debt-backed fractional reserve monetary system to function (i.e. not collapse), and the high standard of living we enjoy, and the high capital things we invest in like modern infrastructure and technology, all fundamentally depend on economic growth. If growth stops our system will collapse, and our monetary system will have to be replaced with a different design, such as an asset-backed full reserve system, which will mean much lower standards of living, and much less availability of many things we currently take for granted.

I wrote an essay on economic growth which I recommend you read because many people think they know why we want economic growth but in fact don’t know the main and much more important reason.

So what evidence exists that oil is getting close to being depleted?

  1. Our economy in aggregate is losing money. Debt is growing much faster than the economy. It now takes over $3 of debt to generate $1 of growth. This is not sustainable. A sustainable economy invests $1 of debt to create more than $1 of growth, as we did prior to 1970.  It’s important to note that this state of affairs exists despite the interest rate (i.e. the cost of money) being historically low (in some cases zero). It’s also important to note that this is a global phenomenon. So we can’t blame bad leaders, or the political system, or the culture. Every country in the world is growing their debt in an unsustainable manner, or wants to. The common denominator is energy which is the most important thing that drives every economy in the world. And the price of energy has been trending up for 5 decades simultaneous with our debt.
  2. The US central bank is starting to increase interest rates for their money that the world uses to buy oil. There are many different ways to interpret this action. My own speculation is they are worried about confidence in their money and want to maintain or strengthen its purchasing power for oil. Looking through the other side of the lens, this is the same as saying the Fed wants to lower the price of oil because they are worried about inflation since oil is required to make almost everything. If the price of oil drops, the supply of oil will drop.
  3. Most companies that extract high-cost oil are struggling. For example, the majority of US fracking companies are losing money.
  4. Countries that are highly dependent on profits from their high-cost oil reserves are struggling. For example, Venezuela with the largest unconventional oil reserves in the word seems to be collapsing.
  5. Countries with large low-cost reserves are behaving oddly for countries that used to be fantastically wealthy. For example, Saudi Arabia has implemented aggressive austerity and wanted to sell a portion of their state oil company to raise money. They’ve recently backed off from this sale, possibly because it would have required them to submit to an independent audit of their remaining reserves, which some smart people speculate are much lower than stated.
  6. War-like behavior is increasing towards countries that have large low-cost oil reserves and that are not viewed as close friends. For example, Russia and Iran.
  7. Weak countries that lack the ability to borrow US$ needed to buy oil are struggling.
  8. Our central banks, economists, and politicians appear to have no clue about what is causing our persistent global economic problems. I speculate this is a combination of the fact that they’ve never needed to understand thermodynamics until now, and the fact that they deny unpleasant realities as explained by Varki’s MORT theory. I do find it very telling that not one senior leader anywhere in the world has spoken publicly about this issue. A few must understand our predicament and they must be terrified.

 

24 thoughts on “On Oil”

  1. If YOU means the people inclined to follow these blogs, seeing the problem is a given. But how can the message reach the herd animals who run society? Without some major info-shock, the most well-reasoned post is just “documenting the decline.” Many people get numb to environmental messages when they’re repeated often, so you’re left searching for a sort of sales pitch.

    I’m wondering how many people who get this stuff have some brain anomaly, like left-handedness or an unknown gene factor that gives them clear perception? In person I can quickly tell if someone is receptive to evidence, as long as they’re removed from a group setting. The rest have a certain demeanor that tells you nobody’s home except the ego.

    “How can everyone see it and yet be so blind?” (prophetic 1991 song with little airplay)

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  2. Concise summary.
    I am still puzzled a bit about how such a volume of debt can still be created if oil is becoming more difficult/more costly to extract. Debt cannot override the laws of thermodynamics. Therefore there must still be enough surplus (net) energy in total system to drive economic activity including oil extraction and production. Offshore, tar sands, and fracking must be energetically profitable, or if not, then the energy is coming from elsewhere in the system to support that extraction. A few folks have suggested it comes out of the major and super major oil fields, particularly in the middle east and Russia. Add to that the surplus energy “embedded” in existing oil and gas infrastructure. So perhaps the downturn for economic growth (and the inability to drive further growth with debt) begins with the downturn of these fields. A couple of things I have seen recently suggest we might have a few more years of production in these fields before the big declines begin. A trend line on diminishing global economic growth rates suggest something like 5-8 years before we hit zero growth. Trend lines can be broken.

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    1. Interesting comments. Isn’t the small remaining energy surplus shifting from the middle class to the money and energy companies? And even still the energy companies are losing money.

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    2. “A few folks have suggested it comes out of the major and super major oil fields, particularly in the middle east and Russia”
      This is the way I see it. The USD and debt is used to pull these resources from other parts of the world, and drive it into the ground over here. Creates GDP, jobs, etc. These resources: fracked oil, tar sands may be somewhat energy positive but I am skeptical that they really support the system on their own, high EROI energy souces from elsewhere are needed.

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  3. Yes, you are right, another source for maintaining energy production would be to pull the energy from the non-energy production portion of the economy. Maybe that is the primary source. If I understand his work correctly, this is what Dr. Tim Morgan is documenting with his SEEDS system at his Surplus Energy Economics blog. That said, it still seems like there must be enough surplus energy in the total system to continue drive the ~2% economic growth. The GDP/GWP figures used to say we are growing at ~2% are problematic in judging growth. It would be interesting to know if natural resource extraction and throughput are increasing, have plateaued, or are declining. I don’t know if anyone really tracks that other than indirectly with global trade figures.

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    1. Yes it would be interesting to know if other commodity extraction has peaked. My guess is they will mostly track energy consumption. I don’t trust GDP numbers. There are too many incentives to adjust on the up side. I think the best economic indicator is the CO2 measurement at Mauna Loa.

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  4. Mazamascience.com recently overhauled their web site – and their energy import/export databrowser is no longer online (at least, I couldn’t find it). This was one of the most useful and illustrative series of charts on the web related to oil/gas consumption, production and net exports or imports by country and region. Many, many web sites used it for reference. I’m sorry to see it go —

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      1. Excellent digging into that comment and follow up. JTRoberts really does add value to the blogs he comments on esp Tim M’s, Gail T’S and SRSRocco’s. As you said before like to have an overview of his thoughts by him.

        Megacancer still not up – I think I remember (possibly) James on that site saying he had contracted Lymes disease. Hope he’s well.

        Quite a startling article on Damn the Matrix about a Jem Bendell publication.

        Recently read your piece about women in doomerland-I’ve used several of these women’s names in the past as a defence to the accusation that it’s only old men
        who worry about such silliness when the experts have got it all in hand because well they’re experts. I like to quote this story about Barry Marshall
        http://discovermagazine.com/2010/mar/07-dr-drank-broth-gave-ulcer-solved-medical-mystery
        “The medical elite thought they knew what caused ulcers and stomach cancer. But they were wrong—and didn’t want to hear otherwise”

        Have now given up as its so boring trying to say the same thing in different ways to people who are not going to believe you anyway. Even my wife of 40 years thinks I’m slighly losing it (and she may be right of course-musn’t deny that).

        I don’t suppose an old hard-bitten engineer like you has any time at all for a bit of
        foolishness like Game of Thrones?

        Keep up the good work
        MickN

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        1. Thanks.

          I hope James @ Megacancer is ok. He had some fresh ideas and I like the intelligent discussions on his site.

          The story on Tim Garrett is more startling than what happened to Bendell. Garrett has a theory that explains both the foundation of the economy and climate change using the laws of thermodynamics, which most agree are the most important and least likely to change laws of the universe, and he is ignored by almost everyone. Another reason for my fascination with denial.

          Another story similar to that of Marshall is the theory of Plate Tectonics. An entire generation of scientists had to die before something in your face obvious was accepted as fact. I expect all the stupid fucks in our health industry will also have to die before sugar is acknowledged to be the main cause of our obesity and diabetes epidemics. Again, denial is amazing.

          I understand how you feel about speaking to an audience that will not believe you regardless of evidence or fact. I’m not discouraged yet as I don’t care if anyone agrees with me. There’s so much insanity in this world that I get enough satisfaction from speaking the truth to myself.

          I’m not a fan of fantasy or science fiction. There’s too much reality in my engineer’s personality. But I do enjoy eacaping in a good drama or thriller.

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    1. From that article: “Watch over the next 1-2 years as U.S. shale oil production peaks and declines. This will mark the end of the notion of U.S. Energy Independence forever.”

      The sooner that happens, the sooner we can bust the illusion that the 2008 recession was mostly about home financing and Wall Street. Bogus shale hype temporarily killed high-MPG concepts like Elio Motors (damned shame). Economists like Jeff Rubin, who “failed” by calling prices too soon, should be vindicated in the long run.

      Of course the environment will keep losing as desperation mounts for extreme drilling or kerogen retorting, with “America’s Vast, Ugly Sculpture Garden” greenwashing the decline.

      http://bit.do/oilwaste (WordPress)

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  9. Gail Tverberg’s take on our no-growth zero sum game.

    What we are facing going forward is a debt bubble made possible by a long period of very low interest rates. The Federal Reserve now seems to be intent on popping this bubble by raising short-term interest rates and selling Quantitative Easing securities at the same time. If the Federal Reserve does succeed in popping the debt bubble, oil prices (as well as other energy prices) could fall very low again. If I am right, we can expect another major recession. It will be characterized by low demand, low commodity prices and layoffs in many industries.

    …what we need to be concerned about is the possibility of rising conflict. The energy situation may become increasingly like a game of musical chairs, if the amount available from sellers at an affordable price falls too low. The winners will attempt to obtain an adequate supply for themselves. It is not clear that this strategy can have winners, but perhaps I have not considered all of the possible outcomes.

    https://ourfiniteworld.com/2018/08/27/how-energy-shortages-really-affect-the-economy/

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  11. Energy flow and storage is always associated with materials. The flow can be doing positive work but the associated friction does the negative work that produces waste material. The usage of fossil fuels has produced the greenhouse gas emissions that are causing climate change and ocean acidification and warming.

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