Major Oil Companies Debt Explode Since The GFC

15 10 2017

WORLD’S LARGEST OIL COMPANIES: Deep Trouble As Profits Vaporize While Debts Skyrocket

The world’s largest oil companies are in serious trouble as their balance sheets deteriorate from higher costs, falling profits and skyrocketing debt.  The glory days of the highly profitable global oil companies have come to an end.  All that remains now is a mere shadow of the once mighty oil industry that will be forced to continue cannibalizing itself to produce the last bit of valuable oil.

I realize my extremely unfavorable opinion of the world’s oil industry runs counter to many mainstream energy analysts, however, their belief that business as usual, will continue for decades, is entirely unfounded.  Why?  Because, they do not understand the ramifications of the Falling EROI – Energy Returned On Invested, and its impact on the global economy.

For example, Chevron was able to make considerable profits in 1997 when the oil price was $19 a barrel.  However, the company suffered a loss in 2016 when the price was more than double at $44 last year.  And, it’s even worse than that if we compare the company’s profit to total revenues.  Chevron enjoyed a $3.2 billion net income profit on revenues of $42 billion in 1997 versus a $497 million loss on total sales of $114 billion in 2016.  Even though Chevron’s revenues nearly tripled in twenty years, its profit was decimated by the falling EROI.

Unfortunately, energy analysts, who are clueless to the amount of destruction taking place in the U.S. and global oil industry by the falling EROI, continue to mislead a public that is totally unprepared for what is coming.  To provide a more realistic view of the disintegrating energy industry, I will provide data from seven of the largest oil companies in the world.

The World’s Major Oil Companies Debt Explode Since The 2008 Financial Crisis

To save the world from falling into total collapse during the 2008 financial crisis, the Fed and Central Banks embarked on the most massive money printing scheme in history.  One side-effect of the massive money printing (and the purchasing of assets) by the central banks pushed the price of oil to a record $100+ a barrel for more than three years.  While the large oil companies reported handsome profits due to the high oil price, many of them spent a great deal of capital to produce this oil.

For instance, the seven top global oil companies that I focused on made a combined $213 billion in cash from operations in 2013. However, they also forked out $230 billion in capital expenditures.  Thus, the net free cash flow from these major oil companies was a negative $17 billion… and that doesn’t include the $44 billion they paid in dividends to their shareholders in 2013.  Even though the price of oil was $109 in 2013; these seven oil companies added $45 billion to their long-term debt:

As we can see, the total amount of long-term debt in the group (Petrobras, Shell, BP, Total, Chevron, Exxon & Statoil) increased from $227 billion in 2012 to $272 billion in 2013.  Isn’t that ironic that the debt ($45 billion) rose nearly the same amount as the group’s dividend payouts ($44 billion)?  Of course, we can’t forget about the negative $17 billion in free cash flow in 2013, but here we see evidence that the top seven global oil companies were borrowing money even in 2013, at $109 a barrel oil, to pay their dividends.

Since the 2008 global economic and financial crisis, the top seven oil companies have seen their total combined debt explode four times, from $96 billion to $379 billion currently.  You would think with these energy companies enjoying a $100+ oil price for more than three years; they would be lowering their debt, not increasing it.  Regrettably, the cost for companies to replace reserves, produce oil and share profits with shareholders was more than the $110 oil price.

There lies the rub….

One of the disadvantages of skyrocketing debt is the rising amount of interest the company has to pay to service that debt.  If we look at the chart above, Brazil’s Petrobras is the clear winner in the group by adding the most debt.  Petrobras’s debt surged from $21 billion in 2008 to $109 billion last year.  As Petrobras added debt, it also had to pay out more to service that debt.  In just eight years, the annual interest amount Petrobras paid to service its debt increased from $793 million in 2008 to $6 billion last year.  Sadly, Petrobras’s rising interest payment has caused another nasty side-effect which cut dividend payouts to its shareholders to ZERO for the past two years.

Petrobras Annual Dividend Payments:

2008 = $4.7 billion

2009 = $7.7 billion

2010 = $5.4 billion

2011 = $6.4 billion

2012 = $3.3 billion

2013 = $2.6 billion

2014 = $3.9 billion

2015 = ZERO

2016 = ZERO

You see, this is a perfect example of how the Falling EROI guts an oil company from the inside out.  The sad irony of the situation at Petrobras is this:

If you are a shareholder, you’re screwed, and if you invested funds (in company bonds, etc.) to receive a higher interest payment, you’re also screwed because you will never get back your initial investment.  So, investors are screwed either way.  This is what happens during the final stage of collapsing oil industry.

Another negative consequence of the Falling EROI on these major oil companies’ financial statements is the decline in profits as the cost to produce oil rises more than the economic price the market can afford.

Major Oil Companies’ Profits Vaporize… Even At Higher Oil Prices

To be able to understand just how bad the financial situation has become at the world’s largest oil companies, we need to go back in time and compare the industry’s profitability versus the oil price.  To find a year when the oil price was about the same as it was in 2016, we have to return to 2004, when the average oil price was $38.26 versus $43.67 last year.  Yes, the oil price was lower in 2004 than in 2016, but I can assure you, these oil companies weren’t complaining.

In 2004, the combined net income of these seven oil companies was almost $100 billion….. $99.2 billion to be exact.  Every oil company in the group made a nice profit in 2004 on a $38 oil price.  However, last year, the net profits in the group plunged to only $10.5 billion, even at a higher $43 oil price:

Even with a $5 increase in the price of oil last year compared to 2004, these oil companies combined net income profit fell nearly 90%.  How about them apples.  Of the seven companies listed in the chart above, only four made profits last year, while three lost money.  Exxon and Total enjoyed the highest profits in the group, while Petrobras and Statoil suffered the largest losses:

Again, the financial situation is in much worse shape because “net income” accounting does not factor in the companies’ capital expenditures or dividend payouts.  Regardless, the world’s top oil companies’ profitability has vaporized even at a higher oil price.

Now, another metric that provides us with more disturbing evidence of the Falling EROI in the oil industry is the collapse of  the “Return On Capital Employed.”  Basically, the Return On Capital Employed is just dividing the company’s earnings (before taxes and interest) by its total assets minus current liabilities.  In 2004, the seven companies listed above posted between 20-40% Return On Capital Employed.  However, this fell precipitously over the next decade and are now registering in the low single digits:

In 2004, we can see that BP had the lowest Return On Capital Employed of 19.68% in the group, while Statoil had the highest at 46.20%.  If we throw out the highest and lowest figures, the average for the group was 29%.  Now, compare that to the average of 2.4% for the group in 2016, and that does not including BP and Chevron’s negative returns (shown in Dark Blue & Orange).

NOTE:  I failed to include the Statoil graph line (Magenta)  when I made the chart, but I added the figures afterward.  For Statoil to experience a Return On Capital Employed decline from 46.2% in 2004 to less than 1% in 2016, suggests something is seriously wrong.

We must remember, the high Return On Capital Employed by the group in 2004, was based on a $38 price of oil, while the low single-digit returns by the oil companies in 2016 were derived from a higher price of $43.  Unfortunately, the world’s largest oil companies are no longer able to enjoy high returns on a low oil price.  This is bad news because the market can’t afford a high oil price unless the Fed and Central Banks come back in with an even larger amount of QE (Quantitative Easing) money printing.

I have one more chart that shows just how bad the Falling EROI is destroying the world’s top oil companies.  In 2004, these seven oil companies enjoyed a net Free Cash Flow minus dividends of a positive $34 billion versus a negative $39.1 billion in 2016:

Let me explain these figures.  So, after these oil companies paid their capital expenditures and dividends to shareholders, they had a net $34 billion left over.  However, last year these companies were in the HOLE for $39.1 billion after paying capital expenditures and dividends.  Thus, many of them had to borrow money just to pay dividends.

To understand how big of a change has taken place at the oil companies since 2004, here are the figures below:

Top 7 Major Oil Companies Free Cash Flow Figures

2004 Cash From Operations = …………$139.6 billion

2004 Capital Expenditures = ……………..$67.7 billion

2004 Free Cash Flow = ………………………$71.9 billion

2004 Shareholder Dividends = …………..$37.9 billion

2004 Free Cash Flow – Dividends = $34 billion

2016 Cash From Operations = ……………..$118.5 billion

2016 Capital Expenditures = ………………..$117.5 billion

2016 Free Cash Flow = …………………………..$1.0 billion

2016 Shareholder Dividends = ……………….$40.1 billion

2016 Free Cash Flow – Dividends = -$39.1 billion

Here we can see that the top seven global oil companies made more in cash from operations in 2004 ($139.6 billion) compared to 2016 ($118.5 billion).   That extra $21 billion in operating cash in 2004 versus 2016 was realized even at a lower oil price.  However, what has really hurt the group’s Free Cash Flow, is the much higher capital expenditures of $117.5 billion in 2016 compared to the $67.7 billion in 2004.  You will notice that the net combined dividends didn’t increase that much in the two periods… only by $3 billion.

So, the lower cash from operations and the higher capital expenditures have taken a BIG HIT on the balance sheets of these oil companies.  This is precisely why the long-term debt is skyrocketing, especially over the past three years as the oil price fell below $100 in 2014.  To continue making their shareholders happy, many of these companies are borrowing money to pay dividends.  Unfortunately, going further into debt to pay shareholders is not a prudent long-term business model.

The world’s major oil companies will continue to struggle with the oil price in the $50 range.  While some analysts forecast that higher oil prices are on the horizon, I disagree.  Yes, it’s true that oil prices may spike higher for a while, but the trend will be lower as the U.S. and global economies start to contract.  As oil prices fall to the $40 and below, oil companies will begin to cut capital expenditures even further.  Thus, the cycle of lower prices and the continued gutting of the global oil industry will move into high gear.

There is one option that might provide these oil companies with a buffer… and that is massive Fed and Central Bank money printing resulting in severe inflation and possibly hyperinflation.  But, that won’t be a long-term solution, instead just another lousy band-aid in a series of band-aids that have only postponed the inevitable.

The coming bankruptcy of the once mighty global oil industry will be the death-knell of the world economy.  Without oil, the global economy grinds to a halt.  Of course, this will not occur overnight.  It will take time.  However, the evidence shows that a considerable wound has already taken place in an industry that has provided the world with much-needed oil for more than a century.

Lastly, without trying to be a broken record, the peak and decline of global oil production will destroy the value of most STOCKS, BONDS and REAL ESTATE.  If you have placed most of your bests in one of these assets, you have my sympathies.

IMPORTANT UPDATE: TO MY FOLLOWERS:

I want to thank the new and existing supporters of the SRSrocco Report site.  In just the past week, I have received 11 new Patrons and several new members on the SRSrocco Report site.  Your support allows me to continue posting articles for the entire public.  I have noticed over the past few years, more analysts have decided to put their articles and content behind a subscriber paywall.  Unfortunately, that shuts off the information to many followers who do not have the funds to support that paid content.

I believe the economic and financial situation in the U.S. and world will continue to deteriorate over the next two years and will only get increasing worse going forward.  Those who understand the root cause of it all, ENERGY, will be better prepared or less shocked (or both) when the collapse picks up speed.

I want to thank everyone who participates in the comment section of the site… even those I disagree with… LOL.  We like to keep the debate open for everyone.  So, if you have been a follower of the SRSroccoReport site for a while, but haven’t participated in the comment section, please let us know what you are thinking.

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From oilslick to tyranny

10 10 2017

A prosperous society is an orderly society.

Just found this……  says it all really.  I expect that one day Australia will also be ‘disunited’, I can see how easily Tasmania would cease to trade with the rest of Australia for starters…. republished from ExtraNewsfeed.

People with full bellies, stable homes and secure employment do not allow themselves to be involved in civil disorder. Unfortunately we are living on borrowed money in a bankrupt society. When our debts catch up with us, society will collapse, violent disorder will ensue and martial law will be inevitable. Pre-oil, despotic rule was the norm and democracies did not exist; we are going to return to that era.

The hallmark of the tyrant is already being stamped on the nation for anyone willing to recognise it. Suppression of truth is already in hand, information on climate change has been removed from government websites. It is the preparation for your future governance. No names are given here, because no-one will recognise the opportunist until he makes his grab for ultimate power. It will not be who you expect it to be.

forget Wall St., this is what world bankruptcy looks like:

Oil is our prime source of energy, ‘alternatives’ cannot power our industrial infrastructure.

Any business that continually burns through its assets at ten times the rate of replacement can be said to be bankrupt; that describes the global economy. Fossil fuels are the only asset we have, because everything else is a derivative of coal oil and gas inputs. Without heat, nothing can be manufactured. We elect politicians to lie on our behalf, because we want to be told that our resources and growth are infinite. In return for our votes, they are happy to do this. Everyone is complicit in the grand deceit, to accept the truth would destroy the existence of all of us.

So to perpetuate that lie there is a collective insistence that the global economy must continue to function to a very simple (but ultimately nonsensical) formula:

the more fuel we burn, the greater our gross domestic product. The faster we burn it, the higher our percentage growth.

Our machines and the (finite) fuels that move them now form the sinews that hold all nations together. They feed us, provide heat, light and transport, and with equal importance, stabilise international democracies and political systems.

No matter how complex or mundane your current job, whether garbage collector or brain surgeon, someone, somewhere is producing sufficient surplus energy to support it.

Prosperity is not an infinite right

Collective prosperity at the global level depends on cheap surplus fossil fuel energy. For 2 centuries we have been able to use those fossil fuels as collateral for future debt, to build ever bigger machines to extract elemental resources from the earth. This has been our great burning, because extracted materials of themselves are of no use to us unless we use heat to process them into desirable commodities.

That excess heat is altering our climate beyond human tolerance.

But heat provides our industrial growth economy: fuels must be consumed to sustain it and provide continued employment to make things that are ultimately thrown away in order to consume more to enable our debts to be continually carried forward. Our system of rolling debt depends on increasing energy input ad infinitum. So the one who asserts that climate change is a hoax gets voted into office, granting permission to burn our planet forever.

Without economic stability, democracy cannot survive.

Fuel resources have been a once-only gift of nature, and there are no viable substitutes. When they are no longer freely available, the effects will be catastrophic and force the events outlined here because the availability of surplus energy directly underpins our economic system. Without surplus energy you cannot have a modern democratic society. Be under no illusions, on current trends the events outlined here are certain. Only timing is in question by a few years either way.

Our global bank balance in oil has been falling for 70 years.

We are living on legacy oil. Oilwells cannot be refilled by votes, prayers or money.

We have created an industrial economy that is entirely predicated on a single factor: converting explosive force into rotary motion. Those six words separate us from the economics of the horsedrawn cart, windmill and sailing ship. They also separate us from the disease and deprivation that was the lot of our forebears only a century or two ago. Only fossil fuels can supply that explosive force at the rate we need.

The global industrial economy is now an interlocked progressive whole. It will not allow isolationism to function, neither will it allow a return to a previous era and downsized economic environment. We demand more, you have heard the aspiring tyrant’s words that promise more.

Political promises evaporate when there is insufficient energy to support them.

The notion of “Saudi America” is reassuring, but the facts are not.

Despite the rhetoric and posturing, reality cannot be ignored: the USA produces around 9 Million barrels of oil a day, but uses 0ver 19MBd. (2016). This imbalance is not going to change, despite collective belief to the contrary.

Price fluctuations and the ebb and flow of gluts should be ignored. If the cost of oil rises to a level that sustains the producers, users can’t afford to buy it; if it falls, oil producers can’t afford to extract it. This is the economic vice that is inexorably crushing the global industrial system as oil supplies decline.

Real wages fall in lockstep with oil depletion.

As surplus energy falls away, so does real income. We have substituted debt for income and allowed that debt to grow to mask the reality of our situation. We are stealing from our own future and from generations unborn to stay solvent. It might be called intergenerational larceny. When our great grandchildren arrive they will find nothing left for them to burn.

We are already in the phase of expending too much energy to get energy, which is why real income has been static for 30 years. We live in an energy economy, not a money economy. Wages are paid from energy surpluses, not printing presses, and that surplus has been gradually reducing.

The mirage of infinity.

The killer factor is Energy Return on Energy Invested, EROEI. Over the last 150 years civilisation has been built based on coal that returned an EROEI of 50:1, and oil that returned 100:1. Those ratios of return provided the cheap surplus energy that created our industrial infrastructure, and led to the expectation of infinite affluence.

We cannot maintain our current lifestyle using expensive fuels which give a return ratio of only 20:1 (and falling), which is what the best oilwells deliver.

Around 14:1 our society might hold together in a rudimentary sense if consumption could be balanced at that level, but 80 million new people arrive on the planet each year. They demand to be housed clothed and fed, spreading available resources even thinner. The mothers of the next 2 billion people are alive now. They will reproduce as a matter of personal survival, taking global population beyond 9 billion by mid century, guaranteeing our fall off the ‘energy cliff’.

The Energy Cliff:

There are numerous interpretations of the ‘energy cliff’, offering different return ratios that will supposedly allow our industrial society to function. 14:1, 12:1 even 8:1. The exact figure is irrelevant, right now we are entering the ‘elbow curve’ of the cliff, pinning our energy hopes on PV, wind, nuclear and tarsands; the ultimate downturn is inescapable. Wind and solar farms cannot supply sufficient concentrated energy to replace oil.

oil-gas-war-graffitiWe are 7.5 billion people on a planet that, pre-oil, supported between 1 and 2 billion. By any reckoning, 5 billion people do not have a future, let alone 2 billion more due over the next 30 years.

We must burn fuel to maintain what we have, but the act of burning destroys what we have. This is contrary to human instinct, so the only recourse will be armed conflict to take what others have. All wars are about survival and acquisition of resources. Conflict will drain what little energy we have left and finally exhaust any survivors.

When we reach the point of having only shale or tar sand oil or wind turbines returning 5:1, there will not be enough surplus energy in our industrial systems to provide the economic momentum we need, and maintain the necessary machinery to power the system.

When our wheels stop turning, we stop eating. Our situation is as brutally simple as that. Electric vehicles cannot function outside a hydrocarbon based infrastructure, and no transportation can exist beyond the extent of its purpose. A collapsed economy removes any such purpose. Battery power will not deliver fresh water and remove your wastes, and there isn’t going to be a bucolic utopia where we all become rural gardeners. We don’t know how, there isn’t enough room and probably not enough time. Hungry people will not allow a second harvest.

But the demand for answers will persist, a search for those responsible for our misfortunes, and insistence that our lives are restored to the ‘normality’ of previous times. Already the finger pointing rhetoric of the despot is being cheered on a wave of ignorance and bigotry: lock up opponents and dissenters, suppress the media, remove the unwanted, ignore the laws.

When that (and more) is done, all will be well. They are words from recent history, overlaid on our own time. We thought fascism was impossible in civilised nations; as long as prosperity held for all, that was true. As prosperity fails, it is stirring again, with an appetite easily fed but never sated.

Secession

As energy supplies deplete, the industrial economy will enter its terminal phase, still under collective denial. But no nation can hold together without the fuel sources that created it. Secession will become inevitable, into five, six, seven or more regions in the USA, along racial, religious, political and geographic lines. The faultlines are already there, with no energy base there will be nothing to stop ultimate breakup. Other conglomerations of states and provinces will also disintegrate. The EU, Russia, China, Africa will react and deny, but the end result will be the same: Energy depletion = social collapse.

As civil unrest takes hold, governments will act in the only way they know how: violent suppression to restore order. This will mean military intervention and imposition of martial law as civil breakdown becomes widespread.

At that point your elected leader will assume the role of dictator and suspend the constitution. Once established, godly certainties among those around him will cloak this in righteousness and subvert it into a theocracy of the worst kind. That will make it easier to identify the heathen and justify any form of retribution. It will be fascism cloaked in holy orders. It will not be the first time: Hitler’s army had “Gott Mitt Uns” stamped on their belt buckles.

Those who support him will become part of the new order. Those who do not will be dismissed from office, either voluntarily or by force. Police and military will fall in behind whoever pays their wages, and enforce the new regime. Totalitarian states have shown that there is never a shortage of willing hands to perform unpleasant tasks. They are always ready and waiting to be recruited.

The inevitability of regional secession will inflame regional differences, and spark civil war(s). It will be the time of petty states and tyrannies, each regime desperate to resist the decline into a different lifestyle, certain that the mess can be ‘fixed’, and only ‘they’ can fix it by enforcement of ideology. Yet without the power of fossil fuels there will be an inexorable regression to the brutalities of medievalism, with power resting only in the command of muscle.

Eventually they will be forced to accept each other’s existence, for no better reason than there will be insufficient means to do anything about it.

Welcome to the (dis) United States of America.

So what of the years to come? The dictator’s power will grow for a time, and make life unpleasant for millions, but ultimately his Reich will extend only to the door of his bunker. No doubt he will remain in his seat of imagined power for as long as possible, issuing incoherent commands that cannot be fulfilled because there will be insufficient energy to do so, just as his predecessor discovered 75 years ago.

You can follow me on twitter

or my book “The End of More” https://www.amazon.co.uk/dp/B00D0ADPFY

might give a clearer insight into how we got into the mess in the first place.





Peak ERoEI…?

22 08 2017

Inside the new economic science of capitalism’s slow-burn energy collapse

nafeezAnd why the struggle for a new economic paradigm is about to get real

Another MUST READ article by Nafeez Ahmed……….

 

Originally published by INSURGE INTELLIGENCE, a crowdfunded investigative journalism project for people and planet. Support us to keep digging where others fear to tread.

New scientific research is quietly rewriting the fundamentals of economics. The new economic science shows decisively that the age of endlessly growing industrial capitalism, premised on abundant fossil fuel supplies, is over.

The long-decline of capitalism-as-we-know-it, the new science shows, began some decades ago, and is on track to accelerate well before the end of the 21st century.

With capitalism-as-we-know it in inexorable decline, the urgent task ahead is to rewrite economics to fit the real-world: and, accordingly, to redesign our concepts of value and prosperity, precisely to rebuild our societies with a view of adapting to this extraordinary age of transition.


A groundbreaking study in Elsevier’s Ecological Economics journal by two French economists, for the first time proves the world has passed a point-of-no-return in its capacity to extract fossil fuel energy: with massive implications for the long-term future of global economic growth.

The study, ‘Long-Term Estimates of the Energy-Return-on-Investment (EROI) of Coal, Oil, and Gas Global Productions’, homes in on the concept of EROI, which measures the amount of energy supplied by an energy resource, compared to the quantity of energy consumed to gather that resource. In simple terms, if a single barrel of oil is used up to extract energy equivalent to 50 barrels of oil, that’s pretty good. But the less energy we’re able to extract using that single barrel, then the less efficient, and more expensive (in terms of energy and money), the whole process.

Recent studies suggest that the EROI of fossil fuels has steadily declined since the early 20th century, meaning that as we’re depleting our higher quality resources, we’re using more and more energy just to get new energy out. This means that the costs of energy production are increasing while the quality of the energy we’re producing is declining.

But unlike previous studies, the authors of the new paper — Victor Court, a macroeconomist at Paris Nanterre University, and Florian Fizaine of the University of Burgundy’s Dijon Laboratory of Economics (LEDi)—have removed any uncertainty that might have remained about the matter.

Point of no return

Court and Fizaine find that the EROI values of global oil and gas production reached their maximum peaks in the 1930s and 40s. Global oil production hit peak EROI at 50:1; while global gas production hit peak EROI at 150:1. Since then, the EROI values of oil and gas — the overall energy we’re able to extract from these resources for every unit of energy we put in — is inexorably declining.

Source: Court and Fizaine (2017)

Even coal, the only fossil fuel resource whose EROI has not yet maxed out, is forecast to undergo an EROI peak sometime between 2020 and 2045. This means that while coal might still have signficant production potential in some parts of the world, rising costs of production are making it increasingly uneconomical.

Axiom: Aggregating this data together reveals that the world’s fossil fuels overall experienced their maximum cumulative EROI of approximately 44:1 in the early 1960s.

Since then, the total value of energy we’re able to extract from the world’s fossil fuel resource base has undergone a protracted, continuous and irreversible decline.

Insight: At this rate of decline, by 2100, we are projected to extract the same value of EROI from fossil fuels as we were in the 1800s.

Several other studies suggest that this ongoing decline in the overall value of the energy extracted from global fossil fuels has played a fundamental role in the slowdown of global economic growth in recent years.

In this sense, the 2008 financial crash did not represent a singular event, but rather one key event in an unfolding process.

The economy-energy nexus

This is because economic growth remains ultimately dependent on “growth in material and energy use,” as a study in the journal PLOS One found last October. That study, lead authored by James D. Ward of the School of Natural and Built Environments, University of South Australia, challenged the idea that GDP growth can be “decoupled” from environmental impacts.

The “illusion of decoupling”, Ward and his colleagues argued, has been maintained through the following misleading techniques:

  1. substituting one resource for another;
  2. financialization of GDP, such as through increasing “monetary flows” through creation of new debt, without however increasing material or energy throughput (think quantitative easing);
  3. exporting environmental impacts to other nations or regions, so that the realities of increasing material throughput can be suppressed from data calculations.
  4. growing inequality of income and wealth, which allows GDP to grow for the benefit of a few, while the majority of workers see decreases in real income —in other words, a wealthy minority monopolises the largest fraction of GDP growth, but does not increase their level of consumption with as much demand for energy and materials.

Ward and his co-authors sought to test these factors by creating a new economic model to see how well it stacks up against the data.

Insight: They found that continued economic growth in GDP “cannot plausibly be decoupled from growth in material and energy use, demonstrating categorically that GDP growth cannot be sustained indefinitely.”

Other recent scientific research has further fine-tuned this relationship between energy and prosperity.

The prosperity-resource nexus

Adam Brandt, a leading EROI expert at Stanford University’s Department of Energy Resources Engineering, in the March edition of BioPhysical Economics and Resource Quality proves that the decline of EROI directly impacts on economic prosperity.

Earlier studies on this issue, Brandt points out, have highlighted the risk of a “net energy cliff”, which refers to how “declining EROI results in rapid increases in the fraction of energy dedicated to simply supporting the energy system.”

Axiom: So the more EROI declines, a greater proportion of the energy being produced must be used simply to extract more energy. This means that EROI decline leads to less real-world economic growth.

It also creates a complicated situation for oil prices. While at first, declining EROI can be expected to lead to higher prices reflecting higher production costs, the relationship between EROI and prices begins to breakdown as EROI becomes smaller.

This could be because, under a significantly reduced EROI, consumers in a less prosperous economy can no longer afford, energetically or economically, the cost of producing more energy — thus triggering a dramatic drop in market prices, despite higher costs of production. At this point, in the new era of shrinking EROI, swinging oil prices become less and less indicative of ‘scarcity’ in supply and demand.

Brandt’s new economic model looks at how EROI impacts four key sectors — food, energy, materials and labor. Exploring what a decline in net energy would therefore mean for these sectors, he concludes:

“The reduction in the fraction of a resource free and the energy system productivity extends from the energy system to all aspects of the economy, which gives an indication of the mechanisms by which energy productivity declines would affect general prosperity.

A clear implication of this work is that decreases in energy resource productivity, modeled here as the requirement for more materials, labor, and energy, can have a significant effect on the flows required to support all sectors of the economy. Such declines can reduce the effective discretionary output from the economy by consuming a larger and larger fraction of gross output for the meeting of inter-industry requirements.”

Brandt’s model is theoretical, but it has direct implications for the real world.

Insight: Given that the EROI of global fossil fuels has declined steadily since the 1960s, Brandt’s work suggests that a major underlying driver of the long-term process of economic stagnation we’re experiencing is resource depletion.

The new age of economic stagnation

Exactly how big the impact of resource depletion on the economy might be, can be gauged from a separate study by Professor Mauro Bonauiti of the Department of Economics and Statistics at the University of Turn.

His new paper published in February in the Journal of Cleaner Production assesses data on technological innovations and productivity growth. He concludes that:

“… advanced capitalist societies have entered a phase of declining marginal returns — or involuntary degrowth — with possible major effects on the system’s capacity to maintain its present institutional framework.”

Bonauiti draws on anthropologist Joseph Tainter’s work on the growth and collapse of civilizations. Tainter’s seminal work, The Collapse of Complex Societies, showed that the very growth in complexity driving a civilization’s expansion, generates complex new problems requiring further complexity to solve them.

 

Axiom: Complex civilizations tend to accelerate the use of resources, while diminishing the quantity of resources available for the civilization’s continued expansion — because they are continually being invested in solving the new problems generated by increasing complexity.

The result is that complex societies tend to reach a threshold of growth, after which returns diminish to such an extent that the complexification of the society can no longer be sustained, leading to its collapse or regression.

Bonauiti builds on Tainter’s framework and applies it to new data on ‘Total Factor Productivity’ to assess correlations between the growth and weakening in productivity, industrial revolutions, and the implications for continued economic growth.

The benefits that a certain society obtains from its own investments in complexity “do not increase indefinitely”, he writes. “Once a certain threshold has been reached (T0), the social organisation as a whole will enter a phase of declining marginal returns, that is to say, a critical phase, which, if ignored, may lead to the collapse of the whole system.”

This threshold appears to have been reached by Europe, Japan and the US before the early 1970s, he argues.

Insight: The US economy, he shows, appears to have reached “the peak in productivity in the 1930s, the same period in which the EROI of fossil fuels reached an extraordinary value of about 100.”

Of course, Court and Fizaine quantify the exact value of this peak EROI differently using a new methodology, but they agree that the peak occurred roughly around this period.

The US and other advanced economies are currently tapering off the end of what Bonauiti calls the ‘third industrial revolution’ (IR3), in information communications technologies (ICT). This was, however, the shortest and weakest industrial revolution from a productivity standpoint, with its productivity “evaporating” after just eight years.

In the US, the first industrial revolution utilized coal to power steam engine and telegraph technology, stimulating a rapid increase in productivity that peaked between between 1869 and 1892, at almost 2%.

The second industrial revolution was powered by the electric engine and internal combustion engine, which transformed manufacturing and domestic consumption. This led productivity to peak at 2.78%, remaining at around 2% for at least another 25 years.

After the 1930s, however, productivity continually declined, reaching 0.34% in the period 1973–95. Since then, the third industrial revolution driven by computing technology led to a revival of productivity which, however, has already tapered out in a way that is quite tepid compared to the previous industrial revolutions.

Axiom: The highest level of productivity was reached around the 1930s, and since then with each industrial revolution has declined.

The decline period also roughly corresponds to the post-peak EROI era for total fossil fuels identified by Court and Fizaine.

Thus, Bonauiti concludes, “the empirical evidence and theoretical reasons lead one to conclude that the innovations introduced by IR3 are not powerful enough to compensate for the declining returns of IR2.”

Insight: The implication is that the 21st century represents the tail-end of the era of industrial economic expansion, originally ushered in by technological innovations enabled by abundant fossil fuel energy sources.

The latest stage is illustrated with the following graph which demonstrates the rapid rise and decline in productivity of the last major revolution in technological innovation (IR3):

The productivity of the third industrial revolution thus peaked around 2004 and since then has declined back to near 1980s levels.

Bonauiti thus concludes that “advanced capitalist societies (the US, Europe and Japan) have entered a phase of declining marginal returns or involuntary degrowth in many key sectors, with possible major detrimental effects on the system’s capacity to maintain its present institutional framework.”

In other words, the global economic system has entered a fundamentally new era, representing a biophysical phase-shift into an energetically constrained landscape.

Going back to the new EROI analysis by French economists, Victor Court and Florian Fizaine, the EROI of oil is forecast to reduce to 15:1 by 2018. It will continue to decline to around 10:1 by 2035.

They broadly forecast the same pattern for gas and coal: Overall, their data suggests that the EROI of all fossil fuels will hit 15:1 by 2060, and decline further to 10:1 by 2080.

If these projections come to pass, this means that over the next few decades, the overall costs of fossil fuel energy production will increase, even while the market value of fossil fuel energy remains low. The total net energy yield available to fuel continued economic growth will inexorably decline. This will, in turn, squeeze the extent to which the economy can afford to buy fossil fuel energy that is increasingly expensive to produce.

We cannot be sure what this unprecedented state of affairs will herald for the market prices of oil, gas and coal, which are unlikely to follow the conventional supply and demand dynamics we were used to in the 20th century.

But what we can know for sure from the new science is that the era of unlimited economic growth — the defining feature of neoliberal finance capitalism as we know it — is well and truly over.

UK ‘end of growth’ test-case

The real-world workings of this insight have been set out by a team of economists at the University of Leeds’ Centre for Climate Change Economics and Policy, whose research was partly funded by giant engineering firm Arup, along with the main UK government-funded research councils — the UK Energy Research Centre, the Economics and Social Research Council and the Engineering and Physical Sciences Research Council.

In their paper published by the university’s Sustainability Research Institute this January, Lina Brand-Correa, Paul Brockway, Claire Carter, Tim Foxon, Anne Owen, and Peter Taylor develop a national-level EROI measure for the UK.

Studying data for the period 1997-2012, they find that “the country’s EROI has been declining since the beginning of the 21st Century”.

Energy Returned (Eout) and Energy Invested (Ein) in the UK (1997–2012) Source: Brand-Correa (2017)

The UK’s net EROI peaked in 2000 at a maximum value of 9.6, “before gradually falling back to a value of 6.2 in 2012.” What this means is that on average, “12% of the UK’s extracted/captured energy does not go into the economy or into society for productive or well-being purposes, but rather needs to be reinvested by the energy sectors to produce more energy.”

The paper draws on previous work by economists Court and Fizaine suggesting that continuous economic growth requires a minimal societal EROI of 11, based on the current energy intensity of the UK economy. By implication, the UK is dropping increasingly below this benchmark since the start of the 21st century:

“These initial results show that more and more energy is having to be used in the extraction of energy itself rather than by the UK’s economy or society.”

This also implies that the UK has had to sustain continued economic growth through other mechanisms outside of its own domestic energy context: in particular, as we know, the expansion of debt.

It is no coincidence, then, that debt-to-GDP ratios have continued to grow worldwide. As EROI is in decline, an unsustainable debt-bubble premised on exploitation of working and middle classes is the primary method to keep growth growing — an endeavour that at some point will inevitably come undone under its own weight.

We need a new economics

According to MIT and Harvard trained economist Dr. June Sekera — who leads the Public Economy Project at Tufts University’s Global Development And Environment Institute (GDAE) — net energy decline proves that neoclassical economic theory is simply not fit for purpose.

In Working Paper №17–02 published by the GDAE, Sekera argues that: “One of the most important contributions of biophysical economics is its critique that mainstream economics disregards the biophysical basis of production, and energy in particular.”

Policymakers, she says, “need to understand the biophysical imperative: that societal net energy yield is falling. Hence the need for a biophysical economics, and for policymakers to comprehend its central messages.”

Yet a key problem is that mainstream economics is held back from being able to even comprehend the existence of net energy decline due to an ideological obsession with the market. The result is that production that occurs outside the market is seen as an aberration, a form of government, state or ‘political’ interference in the ‘natural’ dynamics of the market.

And this is why the market alone is incapable of generating solutions to the net energy crisis driving global economic stagnation. The modern market paradigm is fatally self-limited by the following dynamics: “short time horizons, growth as a requisite, gratuitous waste baked-in, profits as life-blood.” This renders it “incapable of producing solutions that demand long-view investment without profits.”

Thus, Sekera calls for a new “public economics” commensurate with what is needed for a successful energy transition. The new public economics will spur on breakthrough scientific and technological innovations that solve “common-need problems” based on “distributed decision-making and collective action.”

The resulting solutions will require “long time-horizon investment: investments with no immediate payoff in terms of saleable products, no visible ROI (return on investment), no profit-making in the near-term. Such investment can be generated only in a non-market environment, in which payment is collective and financial profit is not the point.”

The only problem is that, as Sekera herself recognizes, the main incubator and agent of the non-market public economy is government — but government itself is playing a key role in dismantling, hollowing-out and privatizing the non-market public economy.

There is only one solution to this conundrum, however difficult it might seem:

Citizens themselves at all scales have an opportunity to work together to salvage and regenerate new public economies based on pooling their human, financial and physical assets and resources, to facilitate the emergence of more viable and sustainable economic structures. Part of this will include adapting to post-carbon energy sources.

Far from representing the end of prosperity, this transition represents an opportunity to redefine prosperity beyond the idea of endlessly increasing material accumulation; and realigning society with the goal of meeting real-world human physical, psychological and spiritual needs.

What will emerge from efforts to do so has not yet been written. But those efforts will define the contours of the new post-carbon economy, as the unsustainable juggernaut of the old grinds slowly and painfully to a protracted, chaotic halt.

In coming years and decades, the reality of the need for a new economic science that reflects the dynamics of the economy’s fundamental embeddedness in the biophysical environment will become evermore obvious.

So say goodbye to endless growth neoliberalism.


This INSURGE story was enabled by crowdfunding: Please support independent journalism for the global commons for as little as a $1/month via www.patreon.com/nafeez


Dr. Nafeez Ahmed is an award-winning 16-year investigative journalist and creator of INSURGE intelligence, a crowdfunded public interest investigative journalism project. He is ‘System Shift’ columnist at VICE’s Motherboard.

His work has been published in The Guardian, VICE, Independent on Sunday, The Independent, The Scotsman, Sydney Morning Herald, The Age, Foreign Policy, The Atlantic, Quartz, New York Observer, The New Statesman, Prospect, Le Monde diplomatique, Raw Story, New Internationalist, Huffington Post UK, Al-Arabiya English, AlterNet, The Ecologist, and Asia Times, among other places.

Nafeez has twice been featured in the Evening Standard’s ‘Top 1,000’ list of most influential people in London.

His latest book, Failing States, Collapsing Systems: BioPhysical Triggers of Political Violence (Springer, 2017) is a scientific study of how climate, energy, food and economic crises are driving state failures around the world.





The Dynamics of Depletion

27 06 2017

Originally published on the Automatic Earth, this further article on ERoEI and resource depletion ties all the things you need to understand about Limits to Growth in one neat package. 

Over the years, I have written many articles on the topic of EROEI (Energy Return on Energy Invested); there’s a whole chapter on it in the Automatic Earth Primer Guide 2017 that Nicole Foss assembled recently, which contains 17 well worth reading articles.

Since EROEI is still the most important energy issue there is, and not the price of oil or some new gas find or a set of windmills or solar panels or thorium as the media will lead you to believe, it can’t hurt to repeat it once again. Brian Davey wrote this item on his site CredoEconomics, it is part of his book “Credo”.

The reason I believe it can’t hurt to repeat this is because not nearly enough people understand that in the end, everything, the survival of our world, our way of life, is all about the ‘quality’ of energy, and about what we get in return when we drill and pump and build infrastructure; what remains when we subtract all the energy used to ‘generate’ energy, from (or at) the bottom line is all that’s left…….

nicolefoss

Nicole Foss

Nicole Foss: Energy is the master resource – the capacity to do work. Our modern society is the result of the enormous energy subsidy we have enjoyed in the form of fossil fuels, specifically fossil fuels with a very high energy profit ratio (EROEI). Energy surplus drove expansion, intensification, and the development of socioeconomic complexity, but now we stand on the edge of the net energy cliff. The surplus energy, beyond that which has to be reinvested in future energy production, is rapidly diminishing.

We would have to greatly increase gross production to make up for reduced energy profit ratio, but production is flat to falling so this is no longer an option. As both gross production and the energy profit ratio fall, the net energy available for all society’s other purposes will fall even more quickly than gross production declines would suggest. Every society rests on a minimum energy profit ratio. The implication of falling below that minimum for industrial society, as we are now poised to do, is that society will be forced to simplify.

A plethora of energy fantasies is making the rounds at the moment. Whether based on unconventional oil and gas or renewables (that are not actually renewable), these are stories we tell ourselves in order to deny that we are facing any kind of future energy scarcity, or that supply could be in any way a concern. They are an attempt to maintain the fiction that our society can continue in its current form, or even increase in complexity. This is a vain attempt to deny the existence of non-negotiable limits to growth. The touted alternatives are not energy sources for our current society, because low EROEI energy sources cannot sustain a society complex enough to produce them.

 

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 

Using Energy to Extract Energy – The Dynamics of Depletion

 

brian-selfie

Brian Davey

Brian Davey: The “Limits to Growth Study” of 1972 was deeply controversial and criticised by many economists. Over 40 years later, it seems remarkably prophetic and on track in its predictions. The crucial concept of Energy Return on Energy Invested is explained and the flaws in neoclassical reasoning which EROI highlights.

The continued functioning of the energy system is a “hub interdependency” that has become essential to the management of the increasing complexity of our society. The energy input into the UK economy is about 50 to 70 times as great as what the labour force could generate if working full time only with the power of their muscles, fuelled up with food. It is fossil fuels, refined to be used in vehicles and motors or converted into electricity that have created power inputs that makes possible the multiple round- about arrangements in a high complex economy. The other “hub interdependency” is a money and transaction system for exchange which has to continue to function to make vast production and trade networks viable. Without payment systems nothing functions.

Yet, as I will show, both types of hub interdependencies could conceivably fail. The smooth running of the energy system is dependent on ample supplies of cheaply available fossil fuels. However, there has been a rising cost of extracting and refining oil, gas and coal. Quite soon there is likely to be an absolute decline in their availability. To this should be added the climatic consequences of burning more carbon based fuels. To make the situation even worse, if the economy gets into difficulty because of rising energy costs then so too will the financial system – which can then have a knock-on consequence for the money system. The two hub interdependencies could break down together.

“Solutions” put forward by the techno optimists almost always assume growing complexity and new uses for energy with an increased energy cost. But this begs the question- because the problem is the growing cost of energy and its polluting and climate changing consequences.

 

The “Limits to Growth” study of 1972 – and its 40 year after evaluation

It was a view similar to this that underpinned the methodology of a famous study from the early 1970s. A group called the Club of Rome decided to commission a group of system scientists at the Massachusetts Institute of Technology to explore how far economic growth would continue to be possible. Their research used a series of computer model runs based on various scenarios of the future. It was published in 1972 and produced an instant storm. Most economists were up in arms that their shibboleth, economic growth, had been challenged. (Meadows, Meadows, Randers, & BehrensIII, 1972)

This was because its message was that growth could continue for some time by running down “natural capital” (depletion) and degrading “ecological system services” (pollution) but that it could not go on forever. An analogy would be spending more than one earns. This is possible as long as one has savings to run down, or by running up debts payable in the future. However, a day of reckoning inevitably occurs. The MIT scientists ran a number of computer generated scenarios of the future including a “business as usual” projection, called the “standard run” which hit a global crisis in 2030.

It is now over 40 years since the original Limits to Growth study was published so it is legitimate to compare what was predicted in 1972 against what actually happened. This has now been done twice by Graham Turner who works at the Australian Commonwealth Scientific and Industrial Research Organisation (CSIRO). Turner did this with data for the rst 30 years and then for 40 years of data. His conclusion is as follows:

The Limits to Growth standard run scenario produced 40 years ago continues to align well with historical data that has been updated in this paper following a 30-year comparison by the author. The scenario results in collapse of the global economy and environment and subsequently, the population. Although the modelled fall in population occurs after about 2030 – with death rates reversing contemporary trends and rising from 2020 onward – the general onset of collapse first appears at about 2015 when per capita industrial output begins a sharp decline. (Turner, 2012)

So what brings about the collapse? In the Limits to Growth model there are essentially two kinds of limiting restraints. On the one hand, limitations on resource inputs (materials and energy). On the other hand, waste/pollution restraints which degrade the ecological system and human society (particularly climate change).

Turner finds that, so far it, is the former rather than the latter that is the more important. What happens is that, as resources like fossil fuels deplete, they become more expensive to extract. More industrial output has to be set aside for the extraction process and less industrial output is available for other purposes.

With signficant capital subsequently going into resource extraction, there is insufficient available to fully replace degrading capital within the industrial sector itself. Consequently, despite heightened industrial activity attempting to satisfy multiple demands from all sectors and the population, actual industrial output per capita begins to fall precipitously, from about 2015, while pollution from the industrial activity continues to grow. The reduction of inputs produced per capita. Similarly, services (e.g., health and education) are not maintained due to insufficient capital and inputs.

Diminishing per capita supply of services and food cause a rise in the death rate from about 2020 (and somewhat lower rise in the birth rate, due to reduced birth control options). The global population therefore falls, at about half a billion per decade, starting at about 2030. Following the collapse, the output of the World3 model for the standard run (figure 1 to figure 3) shows that average living standards for the aggregate population (material wealth, food and services per capita) resemble those of the early 20th century. (Turner, 2012, p. 121)

 

Energy Return on Energy Invested

A similar analysis has been made by Hall and Klitgaard. They argue that to run a modern society it is necessary that the energy return on energy invested must be at least 15 to 1. To understand why this should be so consider the following diagram from a lecture by Hall. (Hall, 2012)

eroei

The diagram illustrates the idea of the energy return on energy invested. For every 100 Mega Joules of energy tapped in an oil flow from a well, 10 MJ are needed to tap the well, leaving 90 MJ. A narrow measure of energy returned on energy invested at the wellhead in this example would therefore be 100 to 10 or 10 to 1.

However, to get a fuller picture we have to extend this kind of analysis. Of the net energy at the wellhead, 90 MJ, some energy has to be used to refine the oil and produce the by-products, leaving only 63 MJ.

Then, to transport the refined product to its point of use takes another 5 MJ leaving 58MJ. But of course, the infrastructure of roads and transport also requires energy for construction and maintenance before any of the refined oil can be used to power a vehicle to go from A to B. By this final stage there is only 20.5 MJ of the original 100MJ left.

We now have to take into account that depletion means that, at well heads around the world, the energy to produce energy is increasing. It takes energy to prospect for oil and gas and if the wells are smaller and more difficult to tap because, for example, they are out at sea under a huge amount of rock. Then it will take more energy to get the oil out in the first place.

So, instead of requiring 10MJ to produce the 100 MJ, let us imagine that it now takes 20 MJ. At the other end of the chain there would thus, only be 10.5MJ – a dramatic reduction in petroleum available to society.

The concept of Energy Return on Energy Invested is a ratio in physical quantities and it helps us to understand the flaw in neoclassical economic reasoning that draws on the idea of “the invisible hand” and the price mechanism. In simplistic economic thinking, markets should have no problems coping with depletion because a depleting resource will become more expensive. As its price rises, so the argument goes, the search for new sources of energy and substitutes will be incentivised while people and companies will adapt their purchases to rising prices. For example, if it is the price of energy that is rising then this will incentivise greater energy efficiency. Basta! Problem solved…

Except the problem is not solved… there are two flaws in the reasoning. Firstly, if the price of energy rises then so too does the cost of extracting energy – because energy is needed to extract energy. There will be gas and oil wells in favourable locations which are relatively cheap to tap, and the rising energy price will mean that the companies that own these wells will make a lot of money. This is what economists call “rent”. However, there will be some wells that are “marginal” because the underlying geology and location are not so favourable. If energy prices rise at these locations then rising energy prices will also put up the energy costs of production. Indeed, when the energy returned on energy invested falls as low as 1 to 1, the increase in the costs of energy inputs will cancel out any gains in revenues from higher priced energy outputs. As is clear when the EROI is less than one, energy extraction will not be profitable at any price.

Secondly, energy prices cannot in any case rise beyond a certain point without crashing the economy. The market for energy is not like the market for cans of baked beans. Energy is necessary for virtually every activity in the economy, for all production and all services. The price of energy is a big deal – energy prices going up and down have a similar significance to interest rates going up or down. There are “macro-economic” consequences for the level of activity in the economy. Thus, in the words of one analyst, Chris Skrebowski, there is a rise in the price of oil, gas and coal at which:

the cost of incremental supply exceeds the price economies can pay without destroying growth at a given point in time.(Skrebowski, 2011)

This kind of analysis has been further developed by Steven Kopits of the Douglas-Westwood consultancy. In a lecture to the Columbia University Center on Global Energy Policy in February of 2014, he explained how conventional “legacy” oil production peaked in 2005 and has not increased since. All the increase in oil production since that date has been from unconventional sources like the Alberta Tar sands, from shale oil or natural gas liquids that are a by-product of shale gas production. This is despite a massive increase in investment by the oil industry that has not yielded any increase in “conventional oil” production but has merely served to slow what would otherwise have been a faster decline.

More specifically, the total spend on upstream oil and gas exploration and production from 2005 to 2013 was $4 trillion. Of that amount, $3.5 trillion was spent on the “legacy” oil and gas system. This is a sum of money equal to the GDP of Germany. Despite all that investment in conventional oil production, it fell by 1 million barrels a day. By way of comparison, investment of $1.5 trillion between 1998 and 2005 yielded an increase in oil production of 8.6 million barrels a day.

Further to this, unfortunately for the oil industry, it has not been possible for oil prices to rise high enough to cover the increasing capital expenditure and operating costs. This is because high oil prices lead to recessionary conditions and slow or no growth in the economy. Because prices are not rising fast enough and costs are increasing, the costs of the independent oil majors are rising at 2 to 3% a year more than their revenues. Overall profitability is falling and some oil majors have had to borrow and sell assets to pay dividends. The next stage in this crisis has then been that investment projects are being cancelled – which suggests that oil production will soon begin to fall more rapidly.

The situation can be understood by reference to the nursery story of Goldilocks and the Three Bears. Goldilocks tries three kinds of porridge – some that is too hot, some that is too cold and some where the temperature is somewhere in the middle and therefore just right. The working assumption of mainstream economists is that there is an oil price that is not too high to undermine economic growth but also not too low so that the oil companies cannot cover their extraction costs – a price that is just right. The problem is that the Goldilocks situation no longer describes what is happening. Another story provides a better metaphor – that story is “Catch 22”. According to Kopits, the vast majority of the publically quoted oil majors require oil prices of over $100 a barrel to achieve positive cash flow and nearly a half need more than $120 a barrel.

But it is these oil prices that drag down the economies of the OECD economies. For several years, however, there have been some countries that have been able to afford the higher prices. The countries that have coped with the high energy prices best are the so called “emerging non OECD countries” and above all China. China has been bidding away an increasing part of the oil production and continuing to grow while higher energy prices have led to stagnation in the OECD economies. (Kopits, 2014)

Since the oil price is never “just right” it follows that it must oscillate between a price that is too high for macro-economic stability or too low to make it a paying proposition for high cost producers of oil (or gas) to invest in expanding production. In late 2014 we can see this drama at work. The faltering global economy has a lower demand for oil but OPEC, under the leadership of Saudi Arabia, have decided not to reduce oil production in order to keep oil prices from falling. On the contrary they want prices to fall. This is because they want to drive US shale oil and gas producers out of business.

The shale industry is described elsewhere in this book – suffice it here to refer to the claim of many commentators that the shale oil and gas boom in the United States is a bubble. A lot of money borrowed from Wall Street has been invested in the industry in anticipation of high profits but given the speed at which wells deplete it is doubtful whether many of the companies will be able to cover their debts. What has been possible so far has been largely because quantitative easing means capital for this industry has been made available with very low interest rates. There is a range of extraction production costs for different oil and gas wells and fields depending on the differing geology in different places. In some “sweet spots” the yield compared to cost is high but in a large number of cases the costs of production have been high and it is being said that it will be impossible to make money at the price to which oil has fallen ($65 in late 2014). This in turn could mean that companies funding their operations with junk bonds could find it difficult to service their debt. If interest rates rise the difficulty would become greater. Because the shale oil and gas sector has been so crucial to expansion in the USA then a large number of bankruptcies could have wider repercussions throughout the wider US and world economy.

 

Renewable Energy systems to the rescue?

Although it seems obvious that the depletion of fossil fuels can and should lead to the expansion of renewable energy systems like wind and solar power, we should beware of believing that renewable energy systems are a panacea that can rescue consumer society and its continued growth path. A very similar net energy analysis can, and ought to be done for the potential of renewable energy to match that already done for fossil fuels.

eroei-renewables

Before we get over-enthusiastic about the potential for renewable energy, we have to be aware of the need to subtract the energy costs particular to renewable energy systems from the gross energy that renewable energy systems generate. Not only must energy be used to manufacture and install the wind turbines, the solar panels and so on, but for a renewable based economy to be able to function, it must also devote energy to the creation of energy storage. This would allow for the fact that, when the wind and the sun are generating energy, is not necessarily the time when it is wanted.

Furthermore, the places where, for example, solar and wind potential are at this best – offshore for wind or in deserts without dust storms near the equator for solar – are usually a long distance from centres of use. Once again, a great deal of energy, materials and money must be spent getting the energy from where it is generated to where it will be used. For example, the “Energie Wende” (Energy Transformation) in Germany is involving huge effort, financial and energy costs, creating a transmission corridor to carry electricity from North Sea wind turbines down to Bavaria where the demand is greatest. Similarly, plans to develop concentrated solar power in North Africa for use in northern Europe which, if they ever come to anything, will require major investments in energy transmission. A further issue, connected to the requirement for energy storage, is the need for energy carriers which are not based on electricity. As before, conversions to put a current energy flux into a stored form, involve an energy cost.

Just as with fossil fuels, sources of renewable energy are of variable yield depending on local conditions: offshore wind is better than onshore for wind speed and wind reliability; there is more solar energy nearer the equator; some areas have less cloud cover; wave energy on the Atlantic coasts of the UK are much better than on other coastlines like those of the Irish Sea or North Sea. If we make a Ricardian assumption that best net yielding resources are developed first, then subsequent yields will be progressively inferior. In more conventional jargon – just as there are diminishing returns for fossil energy as fossil energy resources deplete, so there will eventually be diminishing returns for renewable energy systems. No doubt new technologies will partly buck this trend but the trend is there nonetheless. It is for reasons such as these that some energy experts are sceptical about the global potential of renewable energy to meet the energy demand of a growing economy. For example, two Australian academics at Monash University argue that world energy demand would grow to 1,000 EJ (EJ = 10 18 J) or more by 2050 if growth continued on the course of recent decades. Their analysis then looks at each renewable energy resource in turn, bearing in mind the energy costs of developing wind, solar, hydropower, biomass etc., taking into account diminishing returns, and bearing in mind too that climate change may limit the potential of renewable energy. (For example, river flow rates may change affecting hydropower). Their conclusion: “We nd that when the energy costs of energy are considered, it is unlikely that renewable energy can provide anywhere near a 1000 EJ by 2050.” (Moriarty & Honnery, 2012)

Now let’s put these insights back into a bigger picture of the future of the economy. In a presentation to the All Party Parliamentary Group on Peak Oil and Gas, Charles Hall showed a number of diagrams to express the consequences of depletion and rising energy costs of energy. I have taken just two of these diagrams here – comparing 1970 with what might be the case in 2030. (Hall C. , 2012) What they show is how the economy produces different sorts of stuff. Some of the production is consumer goods, either staples (essentials) or discretionary (luxury) goods. The rest of production is devoted to goods that are used in production i.e. investment goods in the form of machinery, equipment, buildings, roads, infrastracture and their maintenance. Some of these investment goods must take the form of energy acquisition equipment. As a society runs up against energy depletion and other problems, more and more production must go into energy acquisition, infrastructure and maintenance. Less and less is available for consumption, and particularly for discretionary consumption.

hall

Whether the economy would evolve in this way can be questioned. As we have seen, the increasing needs of the oil and gas sector implies a transfer of resources from elsewhere through rising prices. However, the rest of the economy cannot actually pay this extra without crashing. That is what the above diagrams show – a transfer of resources from discretionary consumption to investment in energy infrastructure. But such a transfer would be crushing for the other sectors and their decline would likely drag down the whole economy.

Over the last few years, central banks have had a policy of quantitative easing to try to keep interest rates low. The economy cannot pay high energy prices AND high interest rates so, in effect, the policy has been to try to bring down interest rates as low as possible to counter the stagnation. However, this has not really created production growth, it has instead created a succession of asset price bubbles. The underlying trend continues to be one of stagnation, decline and crisis and it will get a lot worse when oil production starts to fall more rapidly as a result of investment cut backs. The severity of the recessions may be variable in different countries because competitive strength in this model goes to those countries where energy is used most efficiently and which can afford to pay somewhat higher prices for energy. Such countries are likely to do better but will not escape the general decline if they stay wedded to the conventional growth model. Whatever the variability, this is still a dead end and, at some point, people will see that entirely different ways of thinking about economy and ecology are needed – unless they get drawn into conflicts and wars over energy by psychopathic policy idiots. There is no way out of the Catch 22 within the growth economy model. That’s why degrowth is needed.

Further ideas can be extrapolated from Hall’s way of presenting the end of the road for the growth economy. The only real option as a source for extra resources to be ploughed into changing the energy sector is from what Hall calls “discretionary consumption” aka luxury consumption. It would not be possible to take from “staples” without undermining the ability of ordinary people to survive day to day. Implicit here is a social justice agenda for the post growth – post carbon economy. Transferring resources out of the luxury consumption of the rich is a necessary part of the process of finding the wherewithal for energy conservation work and for developing renewable energy resources. These will be expensive and the resources cannot come from anywhere else than out of the consumption of the rich. It should be remembered too that the problems of depletion do not just apply to fossil energy extraction coal, oil and gas) but apply across all forms of mineral extraction. All minerals are depleted by use and that means the grade or ore declines over time. Projecting the consequences into the future ought to frighten the growth enthusiasts. To take in how industrial production can hit a brick wall of steeply rising costs, consider the following graph which shows the declining quality of ore grades mined in Australia.

mining-australia

As ores deplete there is a deterioration of ore grades. That means that more rock has to be shifted and processed to refine and extract the desired raw material, requiring more energy and leaving more wastes. This is occurring in parallel to the depletion in energy sources which means that more energy has to be used to extract a given quantity of energy and therefore, in turn, to extract from a given quantity of ore. Thus, the energy requirements to extract energy are rising at the very same time as the amount of energy required to extract given quantities of minerals are rising. More energy is needed just at the time that energy is itself becoming more expensive.

Now, on top of that, add to the picture the growing demand for minerals and materials if the economy is to grow.

At least there has been a recognition and acknowledgement in recent years that environmental problems exist. The problem is now somewhat different – the problem is the incredibly naive faith that markets and technology can solve all problems and keep on going. The main criticism of the limits to growth study was the claim that problems would be anticipated in forward markets and would then be made the subject of high tech innovation. In the next chapter, the destructive effects of these innovations are examined in more depth.





EROI explained and defended by Charles Hall, Pedro Prieto, and others

29 05 2017

Yes, another post on ERoEI……  why do I bang on about this all the time…?  Because it is the defining issue of our time, the issue that will precipitate Limits to Growth to the forefront, and eventually collapse civilisation as we know it.

There are two ways to collapse civilisation:
1) don’t end the burning of oil
2) end burning oil

And if that wasn’t enough, read this from srsroccoreport.com 

While the U.S. oil and gas industry struggles to stay alive as it produces energy at low prices, there’s another huge problem just waiting around the corner.  Yes, it’s true… the worst is yet to come for an industry that was supposed to make the United States, energy independent.  So, grab your popcorn and watch as the U.S. oil and gas industry gets ready to hit the GREAT ENERGY DEBT WALL.

So, what is this “Debt Wall?”  It’s the ever-increasing amount of debt that the U.S. oil and gas industry will need to pay each year.  Unfortunately, many misguided Americans thought these energy companies were making money hand over fist when the price of oil was above $100 from 2011 to the middle of 2014.  They weren’t.  Instead, they racked up a great deal of debt as they spent more money drilling for oil than the cash they received from operations.

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alice_friedemannAlice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report ]

Questions about EROI at researchgate.net 2015-2017

Khalid Abdulla, University of Melbourne asks:  Why is quality of life limited by EROI with renewable Energy? There are many articles explaining that the Energy Return on (Energy) Invested (EROI, or EROEI) of the sources of energy which a society uses sets an upper limit on the quality of life (or complexity of a society) which can be enjoyed (for example this one).  I understand the arguments made, however I fail to understand why any energy extraction process which has an external EROI greater than 1.0 cannot be “stacked” to enable greater effective EROI.  For example if EROI for solar PV is 3.0, surely one can get an effective EROI of 9.0 by feeding all output energy produced from one solar project as the input energy of a second? There is obviously an initial energy investment required, but provided the EROI figure includes all installation and decommissioning energy requirements I don’t understand why this wouldn’t work. Also I realise there are various material constraints which would come into play; but why does this not work from an energy point of view?

Charles A. S. Hall replies:  As the person who came up with the term  EROI in the 1970scharles-hall (but not the concept: that belongs to Leslie White, Fred Cotrell, Nicolas Georgescu Roegan and Howard Odum) let me add my two cents to the existing mostly good posts.  The problem with the “stacked” idea is that if you do that you do not deliver energy to society with the first (or second or third) investment — it all has to go to the “food chain” with only the final delivering energy to society.  So stack two EROI 2:1 technologies and you get 4:2, or the same ratio when you are done.

The second problem is that you do not need just 1.1:1 EROI to operate society.  We (Hall, Balogh and Murphy 2009) studied how much oil would need to be extracted to drive a truck including the energy to USE the energy.  So we added in the energy to get, refine and deliver the oil (about 10% at each step) and then the energy to build and maintain the roads, bridges, vehicles and so on.  We found you needed to extract 3 liters at the well head to use 1 liter in the gas tank to drive the truck, i.e. an EROI of 3:1 was needed.

But even this did not include the energy to put something in the truck (say grow some grain)  and also, although we had accounted for the energy for the depreciation of the truck and roads,  but not the depreciation of the truck driver, mechanic, street mender, farmer etc.: i.e. to pay for domestic needs, schooling, health care etc. of their replacement.    Pretty soon it looked like we needed an EROI of at least 10:1 to take care of the minimum requirements of society, and maybe 15:1 (numbers are very approximate) for a modern civilization. You can see that plus implications in Lambert 2014.

I think this and incipient “peak oil” (Hallock et al.)  is behind what is causing most Western economies to slow or stop  their energy and economic growth.   Low EROI means more expensive oil (etc) and lower net energy means growth is harder as there is less left over after necessary “maintenance metabolism”. This is explored in more depth in Hall and Klitgaard book  “Energy and the wealth of Nations” (Springer).

Khalid Abdulla asks: I’m still struggling a little bit with gaining an intuition of why it is not possible to stack/compound EROI. If I understand your response correctly part of the problem is that while society is waiting around for energy from one project to be fed into a second project (etc.) society needs to continue to operate (otherwise it’d all be a bit pointless!) and this has a high energy overhead.  I understand that with oil it is possible to achieve higher external EROI by using some of the oil as the main source of energy for extraction/processing. Obviously this means less oil is delivered to the outside world, but it is delivered at a higher EROI which is more useful. I don’t understand why a similar gearing is not possible with renewables.  Is it something to do with the timing of the input energy required VS the timing of the energy which the project will deliver over its life?

Charles A. S. Hall replies: Indeed if you update the QUALITY of the energy you can come out “ahead”.  My PhD adviser Howard Odum wrote a lot about that, and I am deeply engaged in a discussion about the general meaning of Maximum Power (a related concept) with several others.  So you can willingly turn more coal into less electricity because the product is more valuable.   Probably pretty soon (if we are not already) we will be using coal to make electricity to pump out ever more difficult oil wells….

I have also been thinking about EROI a lot lately and about what should the boundaries of analysis be.  One of my analyses is available in the book “Spain’s PV revolution: EROI and.. available from Springer or Amazon.

To me the issue of boundaries remains critical. I think it is proper to have very wide boundaries. Let’s say we run an economy just on a big PV plant. If the EROI is 8:1 (which you might get, or higher, from examining just the modules) then it seems like you could make your society work. But let’s look closer. If you add in security systems, roads, and financial services and the EROI drops to 3:1 then it seems more problematic. But if you add in labor (i.e. the energy it takes to make the food, housing etc that labor buys with its salaries, calculated from national mean energy intensities times salaries for all necessary workers) it might drop to 1:1. Now what this means is that the energy from the PV system will support all the purchases of the workers that are building/maintaining the PV system, let’s say 10% will be taken care of, BUT THERE WILL BE NO PRODUCTION OF GOODS AND SERVICES for the rest of the population. To me this is why we should include salaries of the entire energy delivery system (although I do not because it remains so controversial). I think this concept, and the flat oil production in most of the world, is why we need to think about ALL the resources necessary to deliver energy from a project/ technology/nation.”

Khalid Abdulla: My main interest is whether the relatively low EROI of renewable energy sources fundamentally limits the complexity of a society that can be fueled by them.

Charles A. S. Hall replies: Perhaps the easiest way to think about this is historical: certainly we had lots of sunshine and clever minds in the past.  But we did not have a society with many affluent people until the industrial revolution, based on millions of years of accumulated net energy from sunshine. An affluent king, living a life of affluence less than most people in industrial societies now, was supported by the labor of thousands or millions of serfs harvesting solar energy.  The way to get rich was to exploit the stored solar energy of other societies through war (see Plutarch or Tainter’s the collapse of complex societies).

But most renewable energy (good hydropower is an exception) are low EROI or else seriously constrained by intermittency. Look at all the stuff required to support “free” solar energy. We (and Palmer and Weisbach independently) found EROIs of about 3:1 at best when all costs are accounted for.

The lower the EROI the larger the investment needed for the next generation: that is why fossil fuels with EROIs of 30 or 50 to one have led to such wealth: the other 29 or 49 have been deliverable to society to do economic work or that can be invested in getting more fossil fuels.  If the EROI is 2:1 obviously half has to go into the next generation for the growth and much less is delivered to society.   One can speculate or fantasize about what one can do with some future technology but having been in the energy business for 50 years I have seen many come and go.  Meanwhile we still get about 75-80% of our energy from fossil fuels (with their attendant high EROI).

Obviously we could have some kind of culture with labor intensive, low energy input systems if people were willing to take a large drop in their life style.  I fear the problem might be that people would rather go to war than accept a decline in life style.

Lee’s assessment of the traditional  Kung hunter gatherer life style implies an EROI of 10:1 and lots of leisure (except during droughts–which is the bottleneck).  Past agricultural societies obviously had a positive EROI based on human labor input — otherwise they would have gone extinct.  But it required something like a hectare per person.  According to Jared Diamond cultures became more complex with agriculture vs hunter gatherer.

The best assessment I have about EROI and quality of life possible is in:  Lambert, Jessica, Charles A.S. Hall, Stephen Balogh, Ajay Gupta, Michelle Arnold 2014 Energy, EROI and quality of life. Energy Policy Volume 64:153-167 http://authors.elsevier.com/sd/article/S0301421513006447 — It is open access.  Also our book:  Hall and Klitgaard, Energy and the wealth of nations.   Springer

At the moment the EROI of contemporary agriculture is 2:1 at the farm gate but much less, perhaps one returned for 5 invested  by the time the food is processed, distributed and prepared (Hamilton 2013).

As you can see from these studies to get numbers with any kind of reliability requires a great deal of work.

Sourabh Jain asks: Would it be possible to meet the EROI goal of, say for example 10:1, in order to maintain our current life style by mixing wind, solar and hydro? Can we have an energy system various renewable energy sources of different EROI to give a net EROI of 10:1?

Charles A. S. Hall replies:  Good question.  First of all I am not sure that we can maintain our current life style on an EROI of 10:1, but let’s assume we can (Hall 2014, Lambert 2014).  We would need liquid fuels of course for tractors , airplanes and ships — I cannot quite envision running those machines on electricity.

The problem with wind is that it tends to blow only 30% of the time, so we would need massive storage.  To the degree that we can meet intermittency with hydro that is good, although it is tough on the fish and insects below the dam.  The energy cost of that would be huge, prohibitive with respect to batteries, huge with respect to pumped storage, and what happens when the wind does not blow for two weeks, as is often the case?

Solar PV may or may not have an EROI of 10:1 (I assume you know of the three studies that came up with about 3:1: Prieto and Hall, Graham Palmer, Weisbach — but there are others higher and certainly the price and hence presumed energy cost is coming down –but you should also know that many structures are lasting only 12, not 25 years) — — this needs to be sorted out ).  But again the storage issue will be important.   (Palmer’s rooftop study included storage).

These are all important issues.  So I would say the answer seems to be no, although it might work well for let’s say half of our energy use.   As time goes on that percentage might increase (or decrease).

Jethro Betcke writes: Charles Hall: You make some statements that are somewhat inaccurate and could easily mislead the less well informed: Wind turbines produce electricity during 70 to 90% of the time. You seems to have confused capacity factor with relative time of operation.  Using a single number for the capacity factor is also not so accurate. Depending on the location and design choices the capacity factor can vary from 20% to over 50%.  With the lifetime of PV systems you seem to have confused the inverter with the system as a whole. The practice has shown that PV modules last much longer than the 25 years guaranteed by the manufacturer. In Oldenburg we have a system from 1976 that is still producing electricity and shows little degradation loss [1]. Inverters are the weak point of the system and sometimes need to be replaced. Of course, this would need to be considered in an EROEI calculation. But this is something different than what you state. [1] http://www.presse.uni-oldenburg.de/download/einblicke/54/parisi-heinemann-juergens-knecht.pdf

Charles A. S. Hall replies: I resent your statement that I am misleading anyone.   I write as clearly, accurately and honestly as I can, almost entirely in peer reviewed publications, and always have. I include sensitivity analysis while acknowledging legitimate uncertainty (for example p. 115 in Prieto and Hall).  Some people do not like my conclusions. But no one has shown with explicit analysis that Prieto and Hall is in any important way incorrect.  At least three other peer reviewed papers) (Palmer 2013, 2014; Weisbach et al. 2012 and Ferroni and Hopkirk (2016) have come up with similar conclusions on solar PV.  I am working on the legitimate differences in technique with legitimate and credible solar analysts with whom I have some differences , e.g. Marco Raugei.  All of this will be detailed in a new book from Springer in January on EROI.

First I would like to say that the bountiful energy blog post is embarrassingly poor science and totally unacceptable. As one point the author does not back his (often erroneous) statements with references. The importance of peer review is obvious from this non peer-reviewed post.

Second I do not understand your statement about wind energy producing electricity 70-90 percent of the time.  In England, for example, it is less than 30 percent (Jefferson 2015).

Third your statement on the operational lifetime of actual operational PV systems is incorrect. Of course one can find PV systems still generating electricity after 30 years.  But actual operational systems requiring serious maintenance (and for which we do not yet have enough data) often do not last more than 18-20 years, For example Spain’s “Flagship ” PV plant (which was especially well maintained) is having all modules replaced and treated as “electronic trash” after 20 years : http://renewables.seenews.com/news/spains-ingeteam-replaces-modules-at-europes-oldest-pv-plant-538875    Ferroni and Hopkirk found an 18 year lifespan in Switzerland.

Pedro Prieto replies: The production of electricity of wind turbines the 70-90% of time is a very inaccurate quote. Every wind turbine has a nominal capacity in MW. The important factor is not how many hours they move the blades at any working regime, but how many EQUIVALENT peak hours they work at the end of the year. That is, to know how much real energy they generate within one year. This is what the industry uses as a general and accurate measurement and it is the load factor or capacity factor.

Of course, this factor may change from the location or the design choices, but there is an incontrovertible figure: when we take the total world installed wind power in MW (435 Gw as of 2015) from January 2004 up to December 2015 and the total energy generated in Twh (841 Twh as of 2015) in the same period and calculate the averaged capacity factor, the resulting figure slightly varies around 15% AT WORLD LEVEL. This is REAL LIFE, much more than your unsupported theoretical figures of 20 to over 50% capacity factor in privileged wind fields for privileged wind turbines.

Interesting enough, some countries like the US, United Kingdom or Spain have capacity factors reaching 20% in the last years, but the world total installed capacity has not really improved so much in the last ten years, despite of theoretically much more efficient wind turbines (i.e. multipole with permanent magnets), very likely for the reasons that good wind fields in some countries were already used up. Other countries like China, India or France show, on the contrary very poor capacity factors even in 2015.

 

With respect to the lifetime of the PV systems, nor Charles Hall neither myself have confused the inverter lifetime with the solar PV system as a whole. The practice has not shown that modules have lasted more than 25 years in general over the world installed base. The fact that one single system is still working after more than 30 years of operation, if it was carefully manufactured with high quality materials, and was well cared, cleaned and free from environmental pollutants, like several modules we have also in Spain, does not mean AT ALL that the massive deployments (about 250 GW as of 2015) are going to last over 25 years.

I have to clarify also a common mistake: almost all main world manufacturers guarantee a maximum of 25 years (NOT 30) to the modules, but this is the “power” guarantee. This means that they “guarantee” (assuming they will be still alive as companies in 25 years from the sales period, something which is rather difficult for many of the manufacturers that went out of business in shorter periods of time than the guarantee of their modules. Of course, this guarantee is given with the subsequent module degradation specs over time, which in many cases has been proved be higher than specified.

But not only that. Most of the module manufacturers have a second guarantee: the “material’s guarantee”. And this is offered for between 5 and 10 years. This is the one by which the manufacturer guarantees the module replacement if it fails. Beyond that date, if the module fails, the buyer has to buy a new one (if still being manufactured, with the same specs power and size), because the second guarantee SUPERSEDES the first one.

Last but not least, there is already quite a large experience in Europe (Germany, France, Switzerland, Spain, Italy, etc.) of the number of faulty modules that have been decommissioned in the last years (i.e. period 2010-2015) as for instance, accounted by PV-Cycle, a company specialized in decommission and recycling modules in Europe. As the installed base is well known in volumes per year, it is relatively easy to calculate, in a very conservative (optimistic) mode the percentage over the total that failed and the number of years that lasted in this period and the average years for that sample that died before the theoretical 25-30 years lifetime and make the proportion on the total installed base.

The study conducted by Ferroni and Hopkirk gives an approximate lifetime for the installed base of lower than 20 years. And this is Europe, where the maintenance is supposed to be much better made than in the rest of the developing world. And the figures of failed modules given by PV-Cycle did not include the many potential plants that did not deliver their failed modules to this company for recycling

What it seems impossible for some academic people is to recognize that perhaps the “standards” they adhered to (namely IEA PVPS Task 12 in this case) and through which they published a big number of papers, should be revisited, because they lacked some essential measurements that could help to understand why renewables are not replacing fossils at the required speed, despite having claimed for years that they reached grid parity or that their Levelized Cost of Electricity (LCOE) is cheaper than coal, nuclear or gas. 

I am afraid that peer reviewed authors are not immune to having preconceived ideas even more difficult to eradicate. Excessive pride, lack of humility, considerable distance between the academy (i.e. imagined solar production levels versus real data from actual solar PV plants and lack of a systemic vision due to an excess of specialization are the main hurdles. Of course in my humble opinion.

References

  • Hall, C.A.S., Balogh, S., Murphy, D.J.R. 2009. What is the Minimum EROI that a Sustainable Society Must Have? Energies, 2: 25-47.
  • Hall, Charles  A.S., Jessica G.Lambert, Stephen B. Balogh. 2014.  EROI of different fuels  and the implications for society Energy Policy Energy Policy. Energy Policy, Vol 64 141-52
  • Hallock Jr., John L., Wei Wu, Charles A.S. Hall, Michael Jefferson. 2014. Forecasting the limits to the availability and diversity of global conventional oil supply: Validation. Energy 64: 130-153. (here)
  • Hamilton A , Balogh SB, Maxwell A, Hall CAS. 2013. Efficiency of edible agriculture in Canada and the U.S. over the past 3 and 4 decades. Energies 6:1764-1793.
  • Lambert, Jessica, Charles A.S. Hall, et al.  Energy, EROI and quality of life.  Energy Policy




Charlie Hall on ERoEI

21 04 2017





Your Oil wake up call.

8 04 2017

tedtrainer

Ted Trainer

My old mate Ted Trainer has for decades been a limits to growth advocate. Ted lectured in limits to growth and other subjects during a long teaching career at the University of New South Wales. He is author of a number of books on living in a simpler way, including the book that changed my life, Abandon Affluence…… here is his latest offering.

ALMOST NO ONE has the slightest grasp of the oil crunch that will hit them, probably within a decade. When it does it will literally mean the end of the world as we know it. Here is an outline of what recent publications are telling us. Nobody will, of course, take any notice.

It is gradually being understood that the amount of oil reserves and increases in them due to, for instance, fracking, is of little significance and that what matters is their EROI (Energy Return on Energy Invested). If you found a vast amount of oil, but to deliver a barrel of it you would need to use as much energy as there is in a barrel of oil, then there would be no point drilling the field.

When oil was first discovered the EROI in producing it was over 100/1. But Murphy (2013) estimates that by 2000 the global figure was about 30, and a decade later it was around 17. These approximate figures are widely quoted and accepted although not precise or settled.

Scarcer and difficult to produce

In other words, oil is rapidly getting scarcer and more difficult to find and produce. Thus, they are having to go to deep water sources (ER of 10 according to Murphy), and to develop unconventional sources such as tar sands (ER of 4 according to Ahmed), and shale (Murphy estimates an ER of 1.5, and Ahmed reports 2.8 for the oil and gas average.)

As a result, the capital expenditure on oil discovery, development and production is skyrocketing but achieving little or no increase in production. Heinberg and Fridley (2016) show that capital expenditure trebled in a decade, while production fell dramatically. This rapid acceleration in costs is widely noted, including by Johnson (2010) and Clarke (2017).

Why can’t we keep getting the quantities we want just by paying more for each barrel? Because the price of the oil in a barrel cannot be greater than the economic value the use of the barrel of oil creates.

Ahmed (2016) refers to a British government report that:

“…the decline in EROI has meant that an increasing amount of the energy we extract is having to be diverted back into getting new energy out, leaving less for other social investments … This means that the global economic slowdown is directly related to the declining resource quality of fossil fuels.”

Everything depends on how rapidly EROI is deteriorating. Various people, such as Hall, Ballogh and Murphy (2009), and Weisbach et al. (2013) do not think a modern society can tolerate an ER under 6 – 10. If this is so, how long have we got if the global figure has fallen from 30 to 18 in about a decade?

Several analysts claim that because of the deteriorating resource quality and rising production costs the companies must be paid $100 a barrel to survive. But oil is currently selling for c$50/barrel. Clarke details how the companies are carrying very large debt and many are going bankrupt: “The global oil industry is in deep trouble.”

Ignorance, debt bubble and catastrophic implosion

Why haven’t we noticed? Very likely for the same reason we haven’t noticed the other signs of terminal decay… because we don’t want to.

We have taken on astronomical levels of debt to keep the economy going. In 1994 the ratio of global debt to GDP was just over 2; it is now about 6, much higher than before the GFC (Global Financial Crisis), and it is continuing to climb.

Everybody knows this cannot go on for much longer. Debt is lending on the expectation that the loan will be repaid plus interest, but that can only be done if there is growth in the real economy, in the value of goods and services produced and sold …but the real economy (as distinct from the financial sector) has been stagnant or deteriorating for years.

The only way huge debt bubbles are resolved is via catastrophic implosion. A point comes where the financial sector realizes that its (recklessly speculative) loans are not going to be repaid, so they stop lending and call in bad debts … and the credit the real economy needs is cut, so the economy collapses, further reducing capacity to pay debts in a spiral of positive feedback that next time will deliver the mother of all GFCs.

There is now considerable effort going into working out the relationships between these factors, ie. deteriorating energy EROI, economic stagnation, and debt. The situation is not at all clear. Some see EROI as already being the direct and major cause of a terminal economic breakdown, others think at present more important causal factors are increasing inequality, ecological costs, aging populations and slowing productivity.

Whatever the actual causal mix is, it is difficult to avoid the conclusion that within at best a decade deteriorating EROI is going to be a major cause of enormous disruption.

Peaking oil production, national income and resource detorioration

But there is a far more worrying aspect of your oil situation than that to do with EROI. Nafeez Ahmed has just published an extremely important analysis of the desperate and alarming situation that the Middle East oil producing countries are in, entitled Failing States, Collapsing Systems, (2016). He confronts us with the following basic points:

  • in several countries oil production has peaked, and energy return on oil production is falling; thus their oil export income is being reduced
  • in recent decades populations have exploded, due primarily to decades of abundant income from oil exports; the 1960 – 2014 multiples for Yemen, Saudi Arabia, Iraq, Nigeria, Egypt, India and China have been 5.5, 4.6, 5.3, 4.2, 3.4, 3.0 and 2.1 respectively
  • there has been accelerating deterioration in land, water and food resources. If water use per capita is under 1700 m3 pa, there is water stress; the amounts for the above countries, (and the percentage fall since 1960), are Yemen 86 m3 (71% fall), Saudi Arabia 98 m3 (82% fall), Iraq 998 m3 (88% fall), Nigeria 1245 m3 (73% fall), Egypt 20 m3 (70% fall).

Climate change will make these numbers worse.

The consequences of these trends are:

  • more of the falling oil income now has to go into importing food
  • increasing amounts of oil are having to go into other domestic uses, reducing the amounts available for export to the big oil consuming countries.
  • in many of the big exporting countries these trends are likely to more or less eliminate oil exports in a decade or so, including Saudi Arabia.
  • these mostly desert countries have nothing else to earn export income from, except sand
  • falling oil income means that governments can provide less for their people, so they have to cut subsidies and raise food and energy prices
  • these conditions are producing increasing discontent with government as well as civil unrest and conflict between tribes over scarce water and land; religious and sectarian conflicts are fuelled; unemployed, desperate and hungry farmers and youth have little option but to join extremist groups such as ISIS, where at least they are fed; our media ignore the biophysical conditions generating conflicts, refugee and oppression by regimes, giving the impression that the troubles are only due to religious fanatics
  • the IMF makes the situation worse; failing states appeal for economic assistance and are confronted with the standard recipe — increased loans on top of already impossible debt, given on condition that they gear their economies to paying the loans back plus interest, imposing austerity, privatizing and selling off assets
  • local elite authoritarianism and corruption make things worse; rulers need to crack down on disruption and to force the belt tightening; the rich will not allow their privileges to be reduced in order to support reallocation of resources to mass need; the dominant capitalist ideology weighs against interfering with market forces, ie. with the freedom for the rich to develop what is most profitable to themselves.
  • thus there is a vicious positive feedback downward spiral from which it would seem there can be no escape because it is basically due to the oil running out in a context of too many people and too few land and water resources
  • there will at least be major knock-on effects on the global economy and the rich (oil consuming) countries, probably within a decade; it is quite likely that the global economy will collapse as the capacity to import oil will be greatly reduced; when the fragility of the global financial system is added (remember, debt now six times GDP), instantaneous chaotic breakdown is very likely
  • nothing can be done about this situation; it is the result of ignoring fifty years of warnings about the limits to growth.

A tightening noose

So, the noose tightens around the brainless, taken for granted ideology that drives consumer-capitalist society and that cannot be even thought about, let alone dealt with.

We are far beyond the levels of production and consumption that can be sustained or that all people could ever rise to. We haven’t noticed because the grossly unjust global economy delivers most of the world’s dwindling resource wealth to the few who live in rich countries. Well, the party is now getting close to being over.

You don’t much like this message? Have a go at proving that it’s mistaken. Nar, better to just ignore it as before.

A way out?

If the foregoing account is more or less right, then there is only one conceivable way out. That is to face up to transition to lifestyles and systems that enable a good quality of life for all on extremely low per capita resource use rates, with no interest in getting richer or pursuing economic growth.

There is no other way to defuse the problems now threatening to eliminate us, the resource depletion, the ecological destruction, the deprivation of several billion in the Third World, the resource wars and the deterioration in our quality of life.

Such a Simpler Way is easily designed, and built…if that’s what you want to do (see: thesimplerway.info/). Many in voluntary simplicity, ecovillage and Transition Towns movements have moved a long way towards it. Your chances of getting through to it are very poor, but the only sensible option is to join these movements.

Is the mainstream working on the problem? Is the mainstream worried about the problem? Does the mainstream even recognize the problem? I checked the Sydney Daily Telegraph yesterday and 20 percent of the space was given to sport.

References:

Ahmed, N. M., (2016); We Could Be Witnessing the Death of the Fossil Fuel Industry — Will It Take the Rest of the Economy Down With It?, Resilience, April, 26.

Ahmed, N. M., (2017); Failing States, Collapsing Systems, Dordrecht, Springer. Alice Friedmann’s summary is at: http://energyskeptic.com/2017/book-review-of-failing-states-collapsing-systems-biophysical-triggers-of-political-violence-by-nafeez-ahmed/

Clarke, T., (2017); The end of the Oilocene; The demise of the global oil industry and the end of the global economy as we know it, Resilience, 17th Jan.

Friedmann, A., (2017); Book review of Failing states, collapsing systems biophysical triggers of political violence by Nafeez Ahme, energyskeptic January 31: http://energyskeptic.com/2017/book-review-of-failing-states-collapsing-systems-biophysical-triggers-of-political-violence-by-nafeez-ahmed/

Hall, C. A. S., Balogh, S. Murphy, D. J. R., (2009); What is the minimum EROI that a sustainable society must have? Energies, 2, 25–47.

Heinberg, R., and D. Fridley, (2016); Our Renewable Future, Santa Rosa, California, Post Carbon Institute.

Johnson, C., (2010); Oil exploration costs rocket as risks rise, Industries, London, February 11.

Murphy, D. J., (2013), The implications of the declining energy return on investment of oil production; Philosophical Transactions of the Royal Society, December 2013.DOI: 10.1098/rsta.2013.0126

The Simpler Way website: http://thesimplerway.info/

Weisback, D., G. Ruprecht, A. Huke, K. Cserski, S. Gottlleib and A. Hussein, (2013);Energy intensities, EROIs and energy payback times of electricity generating power plants, Energy, 52, 210- 221.