Charlie Hall on ERoEI

3 03 2017





A retraction……….

28 02 2017

Catastrophism is popular, but not necessarily right. Debunking the “Hill’s Group” analysis of the future of the oil industry

I have lifted this post by Ugo Bardi straight from his site because, as he did himself, I posted all the info from Louis Arnoux and the Hill’s Group treating it as gospel. As Ugo says, and just like him, I have no time to check all the facts that pass by my ‘desk’, especially when they are as complex as this issue. Another proof we live in a post truth world…. it’s disappointing that I have to retract this issue from my blog, because I still feel it’s ‘correct’ in its assessment, just not correct in its methodology, apparently…. at the very least, enjoy the Trump ‘cartoon’.
“The Hill’s Group” has been arguing for the rapid demise of the world’s oil industry on the basis of a calculation of the entropy of the oil extraction process. While it is true that the oil industry is in trouble, the calculations by the Hill’s group are, at best, irrelevant and probably simply plain wrong. Entropy is an important concept, but it must be correctly understood to be useful. It is no good to use it as an excuse to pander unbridled catastrophism. 

Catastrophism is popular. I can see that with the “Cassandra’s Legacy” blog. Every time I publish something that says that we are all going to die soon, it gets many more hits than when I publish posts arguing that we can do something to avoid the incoming disaster. [I can vouch for this….. the exact same thing happens here at DTM!] The latest confirmation of this trend came from three posts by Louis Arnoux that I published last summer (link to the first one). All three are in the list of the ten most successful posts ever published here.

Arnoux argues that the problems we have today are caused by the diminishing energy yield (or net energy, or EROI) of fossil fuels. This is a correct observation, but Arnoux bases his case on a report released by a rather obscure organization called “The Hill’s Group.” They use calculations based on the evaluation of the entropy of the extraction process in order to predict a dire future for the world’s oil production. And they sell their report for $28 (shipping included).

Neither Arnoux nor the “Hill’s Group” are the first to argue that diminishing EROEI is at the basis of most of our troubles. But the Hill’s report gained a certain popularity and it has been favorably commented on many blogs and websites. It is understandable: the report has an aura of scientific correctness that comes from its use of basic thermodynamic principles and of the concept of entropy, correctly understood as the force behind the depletion problem. There is just a small problem: the report is badly flawed.

When I published Arnoux’s posts on this blog, I thought they were qualitatively correct, and I still think they are. But I didn’t have the time to look at the report of Hill’s group in detail. Now, some people did that and their analysis clearly shows the many fundamental flaws of the treatment. You can read the results in English by Seppo Korpela, and in Spanish by Carlos De Castro and Antonio Turiel.

Entropy is a complex subject and delving into the Hill’s report and into the criticism to it requires a certain effort. I won’t go into details, here. Let me just say that it simply makes no sense to start from the textbook definition of entropy to calculate the net energy of crude oil. The approximations made in the report are so large to make the whole treatment useless (to say nothing of the errors it contains). Using the definition of entropy to analyze oil production is like using quantum mechanics to design a plane. It is true that all the electrons in a plane have to obey Schroedinger’s equation, but that’s not the way engineers design planes.

Of course, the problem of diminishing EROEI exists. The way to study it is based on the “life cycle analysis” (LCA) of the process. This method takes into account entropy indirectly, in terms of heat losses, without attempting the impossible task of calculating it from first principles. By means of this method, we can see that, at present, oil production still provides a reasonable energy return on investment (EROEI) as you can read, for instance, in a recent paper by Brandt et al.

But if producing oil still provides an energy return, why is the oil industry in such dire troubles? (see this post on the SRSrocco report, for instance). Well, let me cite a post by Nate Hagens:

In the last 10 years the global credit market has grown at 12% per year allowing GDP growth of only 3.5% and increasing global crude oil production less than 1% annually. We’re so used to running on various treadmills that the landscape doesn’t look all too scary. But since 2008, despite energies fundamental role in economic growth, it is access to credit that is supporting our economies, in a surreal, permanent, Faustian bargain sort of way. As long as interest rates (govt borrowing costs) are low and market participants accept it, this can go on for quite a long time, all the while burning through the next higher cost tranche of extractable carbon fuel in turn getting reduced benefits from the “Trade” creating other societal pressures.

Society runs on energy, but thinks it runs on money. In such a scenario, there will be some paradoxical results from the end of cheap (to extract) oil. Instead of higher prices, the global economy will first lose the ability to continue to service both the principal and the interest on the large amounts of newly created money/debt, and we will then probably first face deflation. Under this scenario, the casualty will not be higher and higher prices to consumers that most in peak oil community expect, but rather the high and medium cost producers gradually going out of business due to market prices significantly below extraction costs. Peak oil will come about from the high cost tranches of production gradually disappearing.

I don’t expect the government takeover of the credit mechanism to stop, but if it does, both oil production and oil prices will be quite a bit lower. In the long run it’s all about the energy. For the foreseeable future, it’s mostly about the credit

In the end, it is simply dumb to think that the system will automatically collapse when and because the net energy of the oil production process becomes negative (or the EROEI smaller than one). No, it will crash much earlier because of factors correlated to the control system that we call “the economy”. It is a behavior typical of complex adaptative systems that are never understandable in terms of mere energy return considerations. Complex systems always kick back.

The final consideration of this post would simply be to avoid losing time with the Hill’s report (to say nothing about paying $28 for it). But there remains a problem: a report that claims to be based on thermodynamics and uses resounding words such as “entropy” plays into the human tendency of believing what one wants to believe. Catastrophism is popular for various reasons, some perfectly good. Actually, we should all be cautious catastrophists in the sense of being worried about the catastrophes we risk to see as the result of climate change and mineral depletion. But we should also be careful about crying wolf too early. Unfortunately, that’s exactly what Hill&Arnoux did and now they are being debunked, as they should be. That puts in a bad light all the people who are seriously trying to alert the public of the risks ahead.

Catastrophism is the other face of cornucopianism; both are human reactions to a difficult situation. Cornucopianism denies the existence of the problem, catastrophism (in its “hard” form) denies that it can be solved or even just mitigated. Both attitudes lead to inaction. But there exists a middle way in which we don’t exaggerate the problem but we don’t deny it, either, and we do something about it!





March 15th 2017

27 02 2017

Published on 25 Feb 2017

Former White House Budget Director David Stockman drops a bomb in his latest interview by saying, “I think what people are missing is this date, March 15th 2017. That’s the day that this debt ceiling holiday that Obama and Boehner put together right before the last election in October of 2015. That holiday expires. The debt ceiling will freeze in at $20 trillion. It will then be law. It will be a hard stop. The Treasury will have roughly $200 billion in cash. We are burning cash at a $75 billion a month rate. By summer, they will be out of cash. Then we will be in the mother of all debt ceiling crises. Everything will grind to a halt. I think we will have a government shutdown. There will not be Obama Care repeal and replace. There will be no tax cut. There will be no infrastructure stimulus. There will be just one giant fiscal bloodbath over a debt ceiling that has to be increased and no one wants to vote for.”

Stockman also predicts very positive price moves for gold and silver as a result of the coming budget calamity…… but zero mention of the oil problems. Typical economist, almost certainly has no understanding of thermodynamics.





And the oil rout continues unabated..

26 02 2017

Paul Gilding, whose work I generally admire, has published a new item on his blog after quite some time off. “It’s time to make the call – fossil fuels are finished. The rest is detail.” Sounds good, until you read the ‘detail’. Paul is still convinced that it’s renewable energy that will sink the fossil fuel industry. He writes…..:

The detail is interesting and important, as I expand on below. But unless we recognise the central proposition: that the fossil fuel age is coming to an end, and within 15 to 30 years – not 50 to 100 – we risk making serious and damaging mistakes in climate and economic policy, in investment strategy and in geopolitics and defence.

Except the fossil fuel age may be coming to an end within five years.. not 15 to 30.

The new emerging energy system of renewables and storage is a “technology” business, more akin to information and communications technology, where prices keep falling, quality keeps rising, change is rapid and market disruption is normal and constant. There is a familiar process that unfolds in markets with technology driven disruptions. I expand on that here in a 2012 piece I wrote in a contribution to Jorgen Randers book “2052 – A Global Forecast” (arguing the inevitability of the point we have now arrived at).

This shift to a “technology” has many implications for energy but the most profound one is very simple. As a technology, more demand for renewables means lower prices and higher quality constantly evolving for a long time to come. The resources they compete with – coal, oil and gas – follow a different pattern. If demand kept increasing, prices would go up because the newer reserves cost more to develop, such as deep sea oil. They may get cheaper through market shifts, as they have recently, but they can’t keep getting cheaper and they can never get any better.

In that context, consider this. Renewables are today on the verge of being price competitive with fossil fuels – and already are in many situations. So in 10 years, maybe just 5, it is a no-brainer that renewables will be significantly cheaper than fossil fuels in most places and will then just keep getting cheaper. And better.

With which economy Paul….? Come the next oil crisis, the economy will simply grind to a halt. Paul is also keen on electric cars….

Within a decade, electric cars will be more reliable, cheaper to own and more fun to drive than oil driven cars. Then it will just be a matter of turning over the fleet. Oil companies will then have their Kodak moment. Coal will already be largely gone, replaced by renewables.

When the economy crashes, no one will have any money to buy electric cars. It’s that simple….. Peak Debt is only just starting to make its presence felt…:

The carnage continues in the U.S. major oil industry as they sink further and further in the RED.  The top three U.S. oil companies, whose profits were once the envy of the energy sector, are now forced to borrow money to pay dividends or capital expenditures.  The financial situation at ExxonMobil, Chevron and ConocoPhillips has become so dreadful, their total long-term debt surged 25% in just the past year.

Unfortunately, the majority of financial analysts at CNBC, Bloomberg or Fox Business have no clue just how bad the situation will become for the United States as its energy sector continues to disintegrate.  While the Federal Government could step in and bail out BIG OIL with printed money, they cannot print barrels of oil.

Watch closely as the Thermodynamic Oil Collapse will start to pick up speed over the next five years.

According to the most recently released financial reports, the top three U.S. oil companies combined net income was the worst ever.  The results can be seen in the chart below:

Can the news on the collapse of the oil industry worsen…..? You bet……

According to James Burgess,

A total of 351,410 jobs have been slashed by oil and gas production companies worldwide, with the oilfield services sector bearing much of this burden, according to a new report released this week.

The report, based on statistical analysis by Houston-based Graves & Co., puts the number of jobs lost in the oilfield services sector at 152,015 now—or 43.2 percent of the global total since oil prices began to slump in mid-2014.

And then there are the bankruptcies……

A report published earlier this month by Haynes and Boone found that ninety gas and oil producers in the United States (US) and Canada have filed for bankruptcy from 3 January, 2015 to 1 August, 2016.

Approximately US$66.5 billion in aggregate debt has been declared in dozens of bankruptcy cases including Chapter 7, Chapter 11 and Chapter 15, based on the analysis from the international corporate law firm.

Texas leads the number of bankruptcy filings with 44 during the time period measured by Haynes and Boone, and also has the largest number of debt declared in courts with around US$29.5 billion.

Forty-two energy companies filed bankruptcy in 2015 and declared approximately US$17.85 billion in defaulted debt. The costliest bankruptcy filing last year occurred in September when Samson Resources filed for Chapter 11 protection with an accumulated debt of roughly US$4.2 billion.

Then we have Saudi Arabia’s decision to cut production to manipulate the price of oil upwards. So far, it appears to have reached a ceiling of $58 a barrel, a 16 to 36 percent increase over the plateau it had been on for months last year. But this has also come at a cost.

The world hasn’t really caught on yet, but OPEC is in serious trouble.  Last year, OPEC’s net oil export revenues collapsed.  How bad?  Well, how about 65% since the oil price peaked in 2012.  To offset falling oil prices and revenues, OPEC nations have resorted to liquidating some of their foreign exchange reserves.

The largest OPEC oil producer and exporter, Saudi Arabia, has seen its Foreign Currency reserves plummet over the past two years… and the liquidation continues.  For example, Saudi Arabia’s foreign exchange reserves declined another $2 billion in December 2016 (source: Trading Economics).

Now, why would Saudi Arabia need to liquidate another $2 billion of its foreign exchange reserves after the price of a barrel of Brent crude jumped to $53.3 in December, up from $44.7 in November??  That was a 13% surge in the price of Brent crude in one month.  Which means, even at $53 a barrel, Saudi Arabia is still hemorrhaging.

Before I get into how bad things are becoming in Saudi Arabia, let’s take a look at the collapse of OPEC net oil export revenues:

The mighty OPEC oil producers enjoyed a healthy $951 billion in net oil export revenues in 2012.  However, this continued to decline along with the rapidly falling oil price and reached a low of $334 billion in 2016.  As I mentioned before, this was a 65% collapse in OPEC oil revenues in just four years.

Last time OPEC’s net oil export revenues were this low was in 2004.  Then, OPEC oil revenues were $370 billion at an average Brent crude price of $38.3.  Compare that to $334 billion in oil revenues in 2016 at an average Brent crude price of $43.5 a barrel…….

This huge decline in OPEC oil revenues gutted these countries foreign exchange reserves.  Which means, the falling EROI- Energy Returned On Investment is taking a toll on the OPEC oil exporting countries bottom line.  A perfect example of this is taking place in Saudi Arabia.

Saudi Arabia was building its foreign exchange reserves for years until the price of oil collapsed, starting in 2014.  At its peak, Saudi Arabia held $797 billion in foreign currency reserves:

(note: figures shown in SAR- Saudi Arabia Riyal currency)

In just two and a half years, Saudi Arabia’s currency reserves have declined a staggering 27%, or roughly $258 billion (U.S. Dollars) to $538 billion currently.  Even more surprising, Saudi Arabia’s foreign currency reserves continue to collapse as the oil price rose towards the end of 2016:

The BLUE BARS represent Saudi Arabia’s foreign exchange reserves and the prices on the top show the average monthly Brent crude price.  In January 2016, Brent crude oil was $30.7 a barrel.  However, as the oil price continued to increase (yes, some months it declined a bit), Saudi’s currency reserves continued to fall.

This problem is getting bad enough that for the first time ever, the Saudi government has, shock horror,  started taxing its people….

Tax-free living will soon be a thing of the past for Saudis after its cabinet on Monday approved an IMF-backed value-added tax to be imposed across the Gulf following an oil slump.

A 5% levy will apply to certain goods following an agreement with the six-member Gulf Cooperation Council in June last year.

Residents of the energy-rich region had long enjoyed a tax-free and heavily subsidised existence but the collapse in crude prices since 2014 sparked cutbacks and a search for new revenue.

How long before Saudi Arabia becomes the next Syria is anyone’s guess, but I do not see any economic scenario conducive to Paul Gilding’s “Great Disruption”. The great disruption will not be the energy take over by renewables, it will be the end of freely available energy slaves supplied by fossil fuels. I believe Paul has moved to Tasmania, in fact not very far from here….. I hope he’s started digging his garden.





Chris Hedges on the collapse of the USA

23 02 2017





Tom Murphy: Growth has an Expiration Date

20 02 2017

While searching for Tom Murphy’s latest post over at do the math (and he hasn’t posted anything new in months now, after promising to write an article on Nickel Iron batteries which I assume he must be testing…) I found the following video on youtube. probably not much new for most people here, but he has a talent for explaining things very clearly, and it’s definitely worth sharing.





Nafeez Ahmed: Our Systems Are Failing

20 02 2017

IF you are not familiar with Chris Martenson’s immensely valuable work, then start here….

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nafeezThe most fascinating thing for me is how so much of what we take for granted becomes questionable as a result of the breakdown we’re seeing. When we begin questioning the exponential growth model then we begin questioning the value system driving our material production/consumption. It’s not that it hasn’t produced amazing knowledge of our environment and our place in the universe. It’s not that there haven’t been a huge amount of amazing technological developments, like the internet which has enabled people to be interconnected in ways that they never were able to before. In a way has paved the way for us to be able to think globally in a way that centuries ago would have never happened.

It’s not that everything about this paradigm is bad. It’s just that it has very clearly outlasted its usefulness and is now fundamentally responsible for escalating the biophysical rupture that we see happening and manifesting in so many different ways. What that tells me is that we have to grow up as a species. It’s an evolutionary moment.

When we apply systems theory to this, when we apply our knowledge of complex adaptive systems and the history of evolution, it does seem to me that it is absolutely clear really that we’re at an unprecedented moment. For the first time in human history, we are standing at a point where we need to basically undergo fundamental systemic adaptation. Exactly what that looks like we’re still trying to work out. But what is very clear is what it doesn’t look like. It doesn’t look like seeing each other as separate material entities that just fend for themselves and produce and consume to an endless degree. It looks quite different.

The ideas and the values and the ethos of that different approach has been percolating in different civilizations in different ways. There’s evidence from indigenous civilizations, from tribal societies, and even from projects that are now being seeded here and now in our current context where people are trying different things. I think we are at a moment where we’re rewriting that story and making a new story of what it means to be human.

It’s particularly important because when people look at this with fresh eyes, it’s very easy to be overwhelmed by a sense of powerlessness. That’s being reflected now with the rise of Trump and everything else. There is this sense of things getting worse. And I think in many ways it is going to get worse before it gets better. All of this is symptomatic of the crisis that is at play.

A question we all need to be able to ask ourselves is To what extent can I make myself useful going forward, building and planting seeds for what comes after this moment?

https://www.peakprosperity.com/podcast/107221/nafeez-ahmed-our-systems-failing?utm_source=dlvr.it&utm