Book review of Failing states, collapsing systems biophysical triggers of political violence by Nafeez Ahmed

6 06 2017

I have written at length about the collapse of Egypt over the years, and Syria too. I’ve also discussed Nafeez Ahmed’s views on the unraveling now happening in the Middle East, and my most recent item here from the Doomstead Diner has attracted a lot of attention….. including from Alice Friedemann who pointed out to me that she has published an extensive review of Ahmed’s new book “Failing states, collapsing systems biophysical triggers of political violence”. It’s a long read (the references alone are almost as long as the article and would keep you busy for weeks!), but I was totally riveted by it and felt the compulsion to republish it here as it needs to be read as widely as possible. In fact, this review is so good, you may not need to buy the book……. as I’ve been saying for a very long time now, 2020 is when things start to get really ugly, all the way to 2030, by which time it’s likely the state of the world will be unrecognisable.

The overview of biophysical factors table below is alone really telling……

If after reading this latest piece you are not convinced collapse is indeed underway, then there’s no hope for you….!

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alice_friedemann[ In this post I summarize the sections of Nafeez’s book about the biophysical factors that bring nations down (i.e. climate change drought & water scarcity, declining revenues after peak oil, etc.) The Media tend to focus exclusively on economic and political factors.

My book review is divided into 3 parts: 

  • Why states collapse for reasons other than economic and political
  • How BioPhysical factors contribute to systemic collapse in Syria, Yemen, Iraq, Saudi Arabia Egypt, Nigeria
  • Predictions of when collapse will begin in Middle East, India, China, Europe, Russia, North America

In my opinion, war is inevitable in the Middle East where over half of oil reserves exist.  Oil is life itself.  If war happens,  collapse of the Middle East, India, and China could happen well before 2030.  If nuclear weapons are used, most nations collapse from the nuclear winter and ozone depletion that would follow.   Indonesia blew up their oil refineries to keep Japan from getting oil in WWII. If Middle Eastern governments or terrorists do the same after they’re attacked, that brings on the energy crisis sooner.  Although this would leave some high EROI oil in the ground, the energy to rebuild refineries, pipelines, oil rigs, roads, and other infrastructure would lower the EROI considerably.

Alice 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 ]

Ahmed, Nafeez. 2017. Failing States, Collapsing Systems BioPhysical Triggers of Political Violence. Springer.

1) Why states collapse for reasons other than economic and political

Since the 2008 financial crash, there’s been an unprecedented outbreak of social protest: Occupy in the US and Western Europe, the Arab Spring, and civil unrest from Greece to Ukraine, China to Thailand, Brazil to Turkey, and elsewhere. Sometimes civil unrest has resulted in government collapse or even wars, as in Iraq-Syria and Ukraine- Crimea. The media and experts blame it on poor government, usually ignoring the real reasons because all they know is politics and economics.

In the Middle East, experts should also talk about geology.  Oil-producing nations like Syria, Yemen, Egypt, Nigeria, and Iraq have all reached peak oil and declining government revenues after that force rulers to raise the prices of food and oil.  This region was already short on water, and now climate change (from fossil fuels) is making matters much worse with drought and heat waves causing even greater water scarcity, which in turn lowers agricultural production.  Many of these nations have some of the highest rates of population growth on earth at a time when resources essential to life itself are declining.

The few nations still producing much of the oil – Russia, Saudi Arabia, and the U.S. are about to join the club and stop exporting oil so they can provide for their domestic population.

Ahmed points out that “because these and other factors are so nested and interconnected, even small perturbations and random occurrences in one can amplify effects on other parts of the system, sometimes in a feedback process that continues.  If thresholds are reached, these tipping points can re-order the whole system”.  These ecological and geological factors result in social disorder, which makes it even harder for government to do anything, such as putting more money into water and food production infrastructure, which accelerates climate change and energy decline impacts, which leads to even more violence at an accelerating rate until state failure.

2) How BioPhysical factors contribute to systemic collapse in Syria, Yemen, Iraq, Saudi Arabia Egypt, Nigeria

 

Table 1. Overview of biophysical factors (water scarcity, peak oil, population) for nations Ahmed discusses in this book

The UN defines a region as not having water scarcity above 1700 cubic meters per capita (green).  Water stressed nations have 1000 to 1700 cubic meters per capita (yellow).  Water scarcity is 500-1000 per capita (orange) and absolute water scarcity 0-500 (red).  Countries already experiencing water stress or far worse include Egypt, Jordan, Turkey, Iraq, Israel, Syria, Yemen, India, China, and parts of the United States. Many, though not all, of these countries are experiencing protracted conflicts or civil unrest (Patrick 2015).

SYRIA

The media portray warfare in Syria as due to the extreme repression of President Bashar al-Assad and the support he receives from Russia.  Although there has been awareness that climate change drought played a role in causing conflict, there is no recognition that peak oil was one of the main factors.

Here’s a quick summary of how peak oil and consequent declining revenues from oil production, rising energy and food prices, drought, water scarcity, and population growth led to social unrest, violence, terrorism and war.

It shouldn’t be surprising that peak oil in 1996 triggered the tragic events we see today.  After all, the main source of Syrian revenue came from their production of 610,000 barrels per day (bpd).  By 2010 oil production had declined by half. Falling revenues caused Syria to seek help from the IMF by 2001, and the onerous market reform policies required resulted in higher unemployment and poverty, especially in rural Sunni regions, while at the same time enriching and corrupting ruling minority Alawite private and military elites.

In 2008 the government had to triple oil prices resulting in higher food prices. Food prices rose even more due to the global price of wheat doubling in 2010-2011. On top of that, the 2007-2010 drought was the worst on record, causing widespread crop failures. This forced mass migrations of farming families to cities (Agrimoney 2012; Kelley et al. 2015). The drought wouldn’t have been so bad if half the water hadn’t been wasted and overused previously from 2002 to 2008 (Worth 2010). All of these violence-creating events were worsened by one of the highest birth rates growth on earth, 2.4%.  Most of the additional 80,000 people added in 2011 were born in the hardest-hit drought areas (Sands 2011).

Rinse and repeat.  Social unrest and violence led to war, oil production dropped further, so there is even less money to end unrest with subsidized food and energy or more employment, aid farmers, and build desalination plants.

Syria, once able to feed its people, now depends on 4 million tonnes of grain imports at a time when revenues continue to drop.  Syrian oil production didn’t really take off until 1968 when there were 6.4 million people.  Since oil revenues allowed their population to explode, another 13.6 million have been born.

IRAQ

Like Syria, Iraq’s agricultural production has been reduced by heat, drought, heavy rain, water scarcity, rapid population growth, and the inability of government to import food and provide goods and services as oil revenues decline.  ISIS has worsened matters and filled in the gaps of state-level failure.  Peak oil is likely by 2025.  Or sooner given the ongoing war, lack of investment to keep existing production flowing, and low oil prices (Dipaola 2016).

YEMEN 

Like Syria, Iraq, and Iran, Yemen has long faced serious water scarcity issues. The country is consuming water far faster than it is being replenished, an issue that has been identified by numerous experts as playing a key background role in driving local inter-tribal and sectarian conflicts (Patrick 2015).

Yemen is one of the most water-scarce countries in the world. In 2012, the average Yemeni had access to just 140 cubic meters of water a year for all uses and just three years later a catastrophic 86 m3, far below the 1000 m3 level minimum requirement standards.    Cities often only have sporadic access to running water— every other week or so.  Sanaa could become the first capital in the world to run out of water (IRIN 2012).

Yemen reached peak oil production in 2001, declining from 450,000 barrels per day (bpd) to 100,000 bpd in 2014, and will be zero by 2017 (Boucek 2009).   This has led to a drastic decline in Yemen’s oil exports, which has eaten into government revenues, 75% of which had depended on oil exports. Oil revenues also account for 90% of the government’s foreign exchange reserves. The decline in post-peak Yemen state revenues has reduced the government’s capacity to sustain even basic social investments. When the oil runs out … the capacity to sustain a viable state-structure will completely collapse.

Yemen has 25 million people and an exorbitantly high growth rate and predicted to double by 2050. In 2014 experts warned that within the next decade, these demographic trends would demolish the government’s ability to meet the population’s basic needs in education, health and other essential public services. This is already happening to over 15 million people (Qaed 2014).  Over half the Yemeni population lives below the poverty line, and unemployment is at 40% (60% of young people).

To cope, too many people have turned to growing qat (a mild narcotic) on 40% of Yemen’s irrigated land, increasing water use to 3.9 billion cubic meters (bcm), but the renewable water supply is just 2.5 bcm. The 1.4 bcm shortfall is made up by pumping water from underground water reserves that are starting to run dry.

Energy, overpopulation, drought, water scarcity, poverty, and a government unable to do much of anything without oil revenue is in a downward loop of social tensions, local conflicts and even mass displacements.  This in turn adds to the dynamics of the wider sectarian and political conflicts between the government, the Houthis, southern separatists and al-Qaeda affiliated militants.

Violence undermines food security, feeding back into the downward spiraling loop.  Making matters worse is that rain-fed agriculture has dropped by about 30% since 1970, making Yemen ever more food import dependent at a time when revenues are shrinking. The country now imports over 85% of its food, including 90% of its wheat and all of its rice (World Bank 2014). Most Yemenis are hungry because they can’t afford to buy food, which also rises in price when global prices rise.  The rate of chronic malnutrition as high as 58%, second only to Afghanistan (Arashi 2013).

Epidemic levels of government corruption, mismanagement and incompetence, have meant that what little revenue the government receives ends up in Swiss bank accounts.  With revenues plummeting in the wake of the collapse of its oil industry, the government has been forced to slash subsidies while cranking up fuel and diesel prices. This has, in turn, cranked up prices of water, meat, fruits, vegetables and spices, leading to fuel and food riots (Mawry 2015).

Is Saudi Arabia Next?

Summary: Within the next decade, Saudi Arabia will become especially vulnerable to the downward feedback loop of peak oil.  The most likely date for peak oil is 2028 (Ebrahimi 2015). But because the Saudi exports have been going down since 2005 at 1.4% a year as their own population rises and consumes more and more, world exports could end as soon as 2031 (Brown and Foucher 2008).

Saudi revenues will decline to zero, so the Saudis will be less able to buy their way out of food shortages.  Their own food production will drop as well from drought and water scarcity — the kingdom is one of the most water scarce in the world, at 98 m³ per inhabitant per year.

Most water comes from groundwater, 57% of which is non-renewable, and 88% of it goes to agriculture. Desalination plants produce 70% of the kingdom’s domestic water supplies. But desalination is very energy intensive, accounting for more than half of domestic oil consumption. As oil exports run down, along with state revenues, while domestic consumption increases, the kingdom’s ability to use desalination to meet its water needs will decrease (Patrick 2015; Odhiambo 2016).

According to the Export Land Model (ELM) created by Texas petroleum geologist Jeffrey J Brown and Dr. Sam Foucher, the key issue is the timing of when there will be no more exports because the domestic population of oil producing nations is using it all for domestic consumption.   Brown and Foucher showed that the tipping point to watch out for is when an oil producer can no longer increase the quantity of oil sales abroad because of the need to meet rising domestic energy demand.

Saudi Arabia is the region’s largest energy consumer. Domestic demand has increased 7.5% over the last 5 years, mainly due to population growth. Saudi population may grow from 29 million people now to 37 million by 2030, using ever more oil and therefore less available for export.

Declining Saudi peak oil exports will affect every nation on earth that imports Saudi oil, especially top customers China, Japan, the United States, South Korea, and India.  As Saudi oil declines, there will be few other places oil for importing nations to turn to, since other exporting nations will also be using their oil domestically.

A report by Citigroup predicted net exports would plummet to zero in the next 15 years. This means that 80% of money from oil sales the Saudi state depends on are trending downward, eventually terminally (Daya 2016). In this case, the peak oil production date could happen well before 2028, as well as violent social unrest, since so far, Saudi Arabia’s oil wealth, and its unique ability to maintain generous subsidies for oil, housing, food and other consumer items, has kept civil unrest at bay. Energy subsidies alone make up about a fifth of Saudi’s gross domestic product. But as revenues are increasingly strained by decreasing exports after peak oil, the kingdom will need to slash subsidies (Peel 2013).  Even now a quarter of the Saudi’s live in poverty, and unemployment is 12%, especially young people who have a 30% unemployment level. [Saudi Arabia recently started taxing fuel at the bowsers]

Saudi Arabia is experiencing climate change as temperatures rise in the interior and far less rainfall occurs in the north.  By 2040, local average temperatures are expected to increase by as much as 4 °C at the same time rain levels are falling, resulting in more extreme weather events like the 2010 Jeddah flooding when a year of rain fell in 4 hours.  The combination could dramatically impact agricultural productivity, which is already facing challenges from overgrazing and unsustainable industrial agricultural practices leading to accelerated desertification (Chowdhury 2013).

80% of Saudi Arabia’s food requirements are purchased through heavily subsidized imports.  Without the protection of oil revenue subsidies, and potential rises in the global prices of food (Taha 2014), the Saudi population would be heavily impacted. But with net oil revenues declining to zero—potentially within just 15 years—Saudi Arabia’s capacity to finance continued food imports will be in question.

EGYPT

Like Syria, Egypt has had increasing problems paying for food, goods, and services after peak oil in 1993 while at the same time population keeps growing.   Worse yet, there are no oil revenues at all, because since 2010 the population has been using more oil than what is produced and has had to import oil, with no oil revenues to pay for food, goods, and services.  Two-thirds of Egypt’s oil reserves have likely been depleted and oil produced now is declining at 3.4% a year.

Nor are there revenues coming from natural gas sales made up for the loss of oil revenues.  Over the past decade domestic use nearly doubled to consumption of nearly all the production (Kirkpatrick 2013a).

The Egyptian population since 2000 has grown 21% to 88 million people and isn’t slowing down, with 20 million more expected over the next 10 years.  A quarter are children half of them living in poverty and unemployed  (EI 2012) at the same time the elites have grown wealthier from IMF and World Bank policies.

In the 1960s there were 2800 cubic meters of water per capita, now just 660 – well below the international standard of water poverty of 1000 per person (Sarant 2013).   Water scarcity and population growth lave led to tens of thousands of hectares of farmland to be abandoned.  There is some water that can be obtained, but most farmers can’t afford the price of diesel fuel to power pumps  (Kirkpatrick 2013b)

Egypt was self-sufficient in food production in the 1960s but now imports 70% of its food (Saleh 2013). One of the many reasons Mubarak fell was the doubling of wheat prices in 2011 since half of Egypt’s people depend on food rations.  But the democratically-elected Muslim Brotherhood party and their leader Morsi couldn’t alleviate declining government revenues due to the biophysical realities of food, water, and energy shortages either.  Morsi desperately tried to get a $4.8 billion IMF loan by slashing energy subsidies and raising sales taxes, but the economic crisis made it hard to make the payments and wheat imports dropped to a third of what was imported a year ago.

This led to Morsi being ousted by army chief Abdul Fateh el-Sisi in a coup.  Like his predecessors, El-Sisi has also been unable to meet IMF demands for increased hydrocarbon production and has resorted to unprecedented levels of brutal force to crush protests. He has also rationed electricity, which led to key industries cutting production, leading to further economic losses, declining exports and foreign reserves.  Without more money, energy companies can’t be paid, so energy production continues to drop, and debt goes up, reducing the value of Egyptian currency and higher costs for imports and shortages of energy for industrial production. Egypt’s energy and economy find themselves caught in an amplifying feedback loop (Barron 2016).

How Boko Haram arose in Nigeria

Nigeria’s climate change has led to water and land shortages from desertification, which in turn has led to illness, hunger, and unemployment followed by conflict (Sayne 2011).

Perhaps the Boko Haram wouldn’t have arisen, if the Maitatsine sect in northern Nigeria hadn’t been hit so hard by ecological disasters.  To survive they fanned out to search for food, water, shelter, and work (Sanders 2013).  Niger and Chad refugees from drought and floods also became Boko Haram foot soldiers, some 200,000 displaced farmers and herdsmen.

In northern Nigeria, where Boko Haram is from, about 70% of the population subsists on less than a dollar a day. As noted by David Francis, one of the first western reporters to cover Boko Haram: “Most of the foot soldiers of Boko Haram aren’t Muslim fanatics; they’re poor kids who were turned against their corrupt country by a charismatic leader” (Francis 2014)

The Nigerian military sees a correlation between regional climatic events, and an upsurge in extremist violence: “It has become a pattern; we saw it happen in 2006; it happened again in 2008 and in 2010. President Obasanjo had to deploy the military in 2006 to Yobe State, Borno State and Katsina State. These are some of the states bordering Niger Republic and today they are the hotbeds of the Boko Haram” (Mayah 201).

Drought caused desertification is decreasing food production, in turn leading to “economic decline; population displacement and disruption of legitimized authoritative institutions and social relations.” The net effect was an acceleration of the attractiveness of groups like “Boko Haram and other forms of Jihadi ideology,” resulting in escalating “herder-farmer clashes emanating from the north since 1980s” (Onyia 2015).

The rapid spread of Boko Haram also coincided with Lake Chad’s shrinking from 25,000 square km in 1963 to less than 2500 square km today, mainly due to climate change. At this rate, Lake Chad is will dry up in 20 years, and has already caused millions of people to lose their livelihoods.

The government has exacerbated problems by cutting fuel subsidies, which led to fuel shortages, angering the public who engaged in civil unrest  (Omisore 2014).

A senior Shell official said that crude oil production decline rates are as high as 15–20%.  But Nigeria doesn’t have the money to explore to find more oil to offset this high decline rate. Nigeria’s petroleum resources department said that Nigeria had reached a plateau of production in the Niger Delta and were already going down (Ahmed 2014).

About $15 billion of investment is required just to maintain current production levels and compensate for a natural decline in production of about 250,000 b/d each year. A 2011 study by two Nigerian scholars concluded that “there is an imminent decline in Nigeria’s oil reserve since peaking could have occurred or just about to occur (Akuru and Okoro 2011). A 2013 report backs this up, finding that Nigeria’s crude oil production has decreased since its peak in 2005, largely due to the impact of internal conflicts, leading to the withdrawal of oil companies and lack of investments. Since then production has fluctuated along a plateau. The UK Department for International Development report noted that new offshore fields might bring additional oil on-stream, surpassing the 2005 peak—but also noted that rising domestic demand “at some point in the future may cut into the amount of oil available for export” (Hall et al. 2014).

POPULATION. With Nigeria’s population expected to rise from 160 to 250 million by 2025 and oil accounting for some 96% of export revenue as well as 75% of government revenue, the state has resorted to harsh austerity measures. Sharp reductions in public spending, power cuts, fuel shortages and conditional new loans will probably widen economic inequalities and further stoke the grievances that feed groups like Boko Haram in the North. With domestic oil production decline undermining Nigeria’s oil export revenues and consequent fuel subsidy cuts, the public grows poorer and increases the number of young men more likely to join Islamist terrorist groups.

3) Predictions of when collapse will begin in Middle East, India, China, Europe, Russia, North America

When will  Middle-East oil producing nations fail?

Ahmed says that so far after peak oil production, Middle-Eastern economies have declined as revenues declined, leading to systemic state-failure in roughly 15 years, more or less, depending on how hard hit a nation was by additional (climate-change) factors such as drought, water scarcity, food prices, and overpopulation.

Saudi Arabia, and much of the rest of Arabian Gulf peninsula, may experience state-failure well within 10 to 20 years. If forecasts of Saudi oil depletion are remotely accurate, then by 2030 the country will simply not exist as we know it. Coupled with the accelerating impacts of climate-induced water scarcity, the Kingdom is bound to begin experiencing systemic state-failure at most within 20 years, and probably much earlier.

Marin Katusa, chief energy strategist at Casey Research, reports that “many Middle Eastern countries may stop exporting oil and gas altogether within the next few years, while some already have” (Katusa 2016). Oil analysts at Lux Research estimate that OPEC oil reserves may have been overstated by as much as 70%. True OPEC reserves could be as low as 429 billion barrels, which could mean a global net export crunch as early as 2020 (Lazenby 2016).

The period from 2020 to 2030 will see Middle East oil exporters experiencing a systemic convergence of energy and food crises.

When will India & China collapse?

India and China are widely assumed to be the next superpowers, but at this stage of energy and resource depletion, can’t possibly mimic the exponential growth of the Western world.

India, South Asia, and China face enormous ecological challenges Irregularities in the pattern of monsoon rains and drought are likely to lower food production and increase water scarcity, while higher temperatures will increase the range of vector-borne diseases such as malaria and become prevalent year-round (DCDC 2013). As sea levels rise, millions of people will be displaced permanently.

These impacts will unravel regional political and economic order well within 20 years and manifest at first as civil unrest.  Depending on how the Indian and Chinese states respond, it is likely that these outbreaks of domestic disorder will become more organized, and will eventually undermine state territorial integrity before 2030.  Near-term growth will further undermine environmental health and deplete resources, making these nations even more vulnerable to climate and food crises.

European and Russian collapse timeframe

Within Europe, resource depletion has meant that the European Union as a whole has become increasingly dependent on energy imports from Russia, the Middle East, Central Asia and Africa. Yet exports from these regions will become tighter as major oil producers approach production limits.

The geopolitical turmoil that has unfolded in Ukraine provides a compelling indication that such processes are rapidly moving from the periphery of the global system into the core. For the most part, the Euro-Atlantic core—traditionally representing the most powerful sections of the world system—has insulated itself from global crisis convergence impacts by diversifying energy supply sources. However, there is only so much that diversification can achieve when the total energetic and economic quality of global hydrocarbon resource production is declining.

Post-2030–2045

Faced with these converging crises, the Euro-Atlantic core will continue to see the creation of cheap debt-money through quantitative easing as an immediate solution to generate emergency funds to stabilize the financial system and shore-up ailing industries. This will likely play out in one of these business-as-usual scenarios:

  1. The lower resource quality (EROI) of the global energy system may act as a fundamental geophysical ceiling on the capacity of the economy to grow. It may act as an invisible brake on growth in demand, so fossil fuel prices would remain at chronically low levels, endangering the profitability of the fossil fuel industries. This would lead to an acceleration of the demise of the fossil fuel industries, which could lead to debt-defaults across industries in the financial system. Declining hydrocarbon energy production would cause a self-reinforcing recessionary economic process. This would escalate vulnerability to water, food and energy crises and hugely strain the capacity of European and American states to deliver goods and services to even their own populations, and other nations dependent as much on importing food as they are oil.
  2. Scarcity of net exports on the world market may raise oil prices and provide some sectors of ailing fossil fuel industries to be profitable again. But previous slashing of investments and cutbacks in exploration will mean that only the most powerful sections of the industry would be able to capitalize on this, which means production is unlikely to return to former high levels. Price spikes would trigger economic recession, causing a drop in demand, while lower production levels would exacerbate the economy’s inability to grow substantially, if at all. In effect, the global economy would likely still experience a self-reinforcing recessionary economic process.

In both scenarios, escalating economic crises are likely to invite the Euro-Atlantic core to respond by using debt-money to shore-up as much of the existing core financial and energy industries as possible. Prices spikes and shortages in water, food and energy would be experienced by general populations as a dramatic lowering of purchasing power, leading to an overall decrease in quality of life, an increase in poverty, and a heightening of inequality. This would undermine their internal cohesion, giving rise to new divisive, nationalist and xenophobic movements, and lead states into a tightening spiral of militarization to police domestic order. As instability in the Middle East and elsewhere intensifies, manifesting in further unrest, political violence and terrorist activity, states will also be drawn increasingly into short- sighted military solutions. In particular, scarcity of net oil exports on the world market will heighten geopolitical and military competition to control and/or access the world’s remaining hydrocarbon energy resources. With the Middle East still holding the vast bulk of the world’s reserves, the region will remain a central flashpoint for such competition, even as major producers such as Saudi Arabia approach systemic state-failure due to reaching inevitable production declines.

It is difficult to avoid the conclusion that as we near 2045, the European and American projects will face escalating internal challenges to their internal territorial integrity, increasing the risk of systemic state-failure. Likewise, after 2030, Europe, India, China (and other Asian nations) will begin to experience symptoms of systemic state-failure.

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Collapse is underway……

5 06 2017

(By the Doomstead Diner)

Due to my High & Mighty position as a Global Collapse Pundit, I am often asked the question of when precisely will Collapse arrive?  The people who ask me this question all come from 1st World countries.  They are also all reasonably well off with a computer, an internet connection, running water and enough food to eat.  While a few of us are relatively poor retirees, even none of us wants for the basics as of yet.  The Diner doesn’t get many readers from the underclass even here in Amerika, much less from the Global Underclass in places like Nigeria, Somalia, Sudan and Yemen.

The fact is, that for more than half the world population, Collapse is in full swing and well underway.  Two key bellweathers of where collapse is now are the areas of Electricity and Food.

This chart was around 16 years ago when I first became a peaknik….

In his seminal 1996 Paper The Olduvai Theory: Sliding Towards a Post-Industrial Stone Age, Richard Duncan mapped out the trajectory of where we would be as the years passed and fossil fuels became more difficult and expensive to mine up.  Besides powering all our cars and trucks for Happy Motoring and Just-in-Time delivery, the main thing our 1st World lifestyle requires is Electricity, and lots of it on demand, 24/7.  Although electricity can be produced in some “renewable” ways that don’t depend on a lot of fossil fuel energy at least directly, most of the global supply of electric power comes from Coal and Natural Gas.  Of the two, NG (NatGas) is slightly cleaner, but either way when you burn them, CO2 goes up in the atmosphere.  This of course is a problem climatically, but you have an even bigger problem socially and politically if you aren’t burning them.  Everything in the society as it has been constructed since Edison invented the Light Bulb in 1879 has depended on electricity to function.

Now, if all the toys like lights, refrigerators big screen TVs etc had been kept to just a few small countries and the rest of the world lived a simple subsistence farming lifestyle, the lucky few with the toys probably could have kept the juice flowing a lot longer.  Unfortunately however, once exposed to all the great toys, EVERYBODY wanted them.  The industrialists also salivated over all the profit to be made selling the toys to everyone.  So, everybody everywhere needed a grid, which the industrialists and their associated banksters extended Credit for “backward” Nation-States all over the globe to build their own power plants and string their own wires.  Now everybody in the country could have a lightbulb to see by and a fridge to keep the food cold.  More than that, the electricity also went to power water pumping stations and sewage treatment plants, so you could pack the Big Shities with even more people who use still more electricity.

This went on all over the globe, today there isn’t a major city or even a medium size town anywhere on the globe that isn’t wired for electricity, although many places that are now no longer have enough money to keep the juice flowing.

Where is the electricity going off first?  Obviously, in the poorest and most war torn countries across the Middle East and Africa.  These days, from Egypt to Tunisia, if they get 2 hours of electricity a day they are doing good.

The Lights Are Going Out in the Middle East

Public fury over rampant outages has sparked protests. In January, in one of the largest demonstrations since Hamas took control in Gaza a decade ago, ten thousand Palestinians, angered by the lack of power during a frigid winter, hurled stones and set tires ablaze outside the electricity company. Iraq has the world’s fifth-largest oil reserves, but, during the past two years, repeated anti-government demonstrations have erupted over blackouts that are rarely announced in advance and are of indefinite duration. It’s one issue that unites fractious Sunnis in the west, Shiites in the arid south, and Kurds in the mountainous north. In the midst of Yemen’s complex war, hundreds dared to take to the streets of Aden in February to protest prolonged outages. In Syria, supporters of President Bashar al-Assad in Latakia, the dynasty’s main stronghold, who had remained loyal for six years of civil war, drew the line over electricity. They staged a protest in January over a cutback to only one hour of power a day.

Over the past eight months, I’ve been struck by people talking less about the prospects of peace, the dangers of ISIS, or President Trump’s intentions in the Middle East than their own exhaustion from the trials of daily life. Families recounted groggily getting up in the middle of the night when power abruptly comes on in order to do laundry, carry out business transactions on computers, charge phones, or just bathe and flush toilets, until electricity, just as unpredictably, goes off again. Some families have stopped taking elevators; their terrified children have been stuck too often between floors. Students complained of freezing classrooms in winter, trying to study or write papers without computers, and reading at night by candlelight. The challenges will soon increase with the demands for power—and air-conditioning—surge, as summer temperatures reach a hundred and twenty-five degrees.

The reasons for these outages vary. With the exception of the Gulf states, infrastructure is old or inadequate in many of the twenty-three Arab countries. The region’s disparate wars, past and present, have damaged or destroyed electrical grids. Some governments, even in Iraq, can’t afford the cost of fueling plants around the clock. Epic corruption has compounded physical challenges. Politicians have delayed or prevented solutions if their cronies don’t get contracts to fuel, maintain, or build power plants.

Now you’ll note that at the end of the third paragraph there, the journalist implies that a big part of the problem is “political corruption”, but it’s really not.  It’s simply a lack of money.  These countries at one time were all Oil Exporters, although not on the scale of Saudi Arabia or Kuwait.  As their own supplies of oil have depleted they have become oil importers, except they neither have a sufficient mercantilist model running to bring in enough FOREX to buy oil, and they can’t get credit from the international banking cartel to keep buying.  Third World countries are being cut off from the Credit Lifeline, unlike the core countries at the center of credit creation like Britain, Germany and the FSoA.  All these 1st World countries are in just as bad fiscal deficit as the MENA countries, the only difference is they still can get credit and run the deficits even higher.  This works until it doesn’t anymore.

Beyond the credit issue is the War problem.  As the countries run out of money, more people become unemployed, businesses go bankrupt, tax collection drops off the map and government employees are laid off too.  It’s the classic deflationary spiral which printing more money doesn’t solve, since the notes become increasingly worthless.  For them to be worth anything in FOREX, somebody has to buy their Government Bonds, and that is precisely what is not happening.  So as society becomes increasingly impoverished, it descends into internecine warfare between factions trying to hold on to or increase their share of the ever shrinking pie.

The warfare ongoing in these nations has knock on effects for the 1st World Nations still trying to extract energy from some of these places.  To keep the oil flowing outward, they have to run very expensive military operations to at least maintain enough order that oil pipelines aren’t sabotaged on a daily basis.  The cost of the operations keeps going up, but the amount of money they can charge the customers for the oil inside their own countries does not keep going up.  Right now they have hit a ceiling around $50/bbl for what they can charge for the oil, and for the most part this is not a profit making price.  So all the corporations involved in Extraction & Production these days are surviving on further extensions of credit from the TBTF banks.  This also is a paradigm that can’t last. The other major problem now surfacing is the Food Distribution problem, and again this is hitting the African countries first and hardest.  It’s a combination problem of climate change, population overshoot and the warfare which results from those issues.

Currently, the UN lists 4 countries in extreme danger of famine in the coming year, Nigeria, Sudan, Somalia and Yemen.  They estimate currently there are 20M people at extreme risk, and I would bet the numbers are a good deal higher than that.

World faces four famines as Trump administration [and Australia] plans to slash foreign aid budget

‘Biggest humanitarian crisis since World War II’ about to engulf 20 million people, UN says, as governments only donate 10 per cent of funds needed for essential aid.

The world is facing a humanitarian crisis bigger than any in living memory, the UN has said, as four countries teeter on the brink of famine.

Twenty million people are at risk of starvation and facing water shortages in Somalia, Nigeria and Yemen, while parts of South Sudan are already officially suffering from famine.

While the UN said in February that at least $4.4 billion (£3.5 bn) was needed by the end of March to avert a hunger catastrophe across the four nations, the end of the month is fast approaching, and only 10 per cent of the necessary funds have been received from donor governments so far.

It doesn’t look too promising that the UN will be able to raise the $4B they say is necessary to feed all those hungry mouths, and none of the 1st World countries is too predisposed to handing out food aid when they all currently have problems with their own social welfare programs for food distribution.  Here in the FSoA, there are currently around 45M people on SNAP Cards at a current cost around $71B.  The Repugnants will no doubt try to cut this number in order to better fund the Pentagon, but they are not likely to send more money to Somalia.

Far as compassion for all the starving people globally goes in the general population, this also appears to be decreasing, although I don’t have statistics to back that up. It is just a general sense I get as I read the collapse blogosphere, in the commentariats generally.  The general attitude is, “It’s their own fault for being so stupid and not using Birth Control.  If they were never born, they wouldn’t have to die of starvation.”  Since they are mostly Black Africans currently starving, this is another reason a large swath of the white population here doesn’t care much about the problem.

There are all sorts of social and economic reasons why this problem spiraled out of control, having mainly to do with the production of cheap food through Industrial Agriculture and Endless Greed centered on the idea of Endless Growth, which is not possible on a Finite Planet.

More places on Earth were wired up with each passing year, and more people were bred up with each passing year.  The dependency on fossil fuels to keep this supposedly endless cycle of growth going became ever greater each year, all while this resource was being depleted more each year.  Eventually, an inflection point had to be hit, and we have hit it.

The thing is, for the relatively comfortable readers of the Doomstead Diner in the 1st World BAU seems to be continuing onward, even if you are a bit poorer than you were last year. 24/7 electricity is still available from the grid with only occasional interruptions.  Gas is still available at the pump, and if you are employed you probably can afford to buy it, although you need to be more careful about how much you drive around unless you are a 1%er.  The Rich are still lining up to buy EVs from Elon Musk, even though having a grid to support all electric transportation is out of the question.  The current grid can’t be maintained, and upgrading to handle that much throughput would take much thicker cables all across the network.  People carry on though as though this will all go on forever and Scientists & Engineers will solve all the problems with some magical new device.  IOW, they believe in Skittle Shitting Unicorns.

That’s not going to happen, however, so you’re back to the question of how long will it take your neighborhood in the UK or Germany or the FSoA to look like say Egypt today?  Well, if you go back in time a decade to Egypt in 2007, things were still looking pretty Peachy over there, especially in Tourist Traps like Cairo.  Terrorism wasn’t too huge a problem and the government of Hosni Mubarak appeared stable.  A decade later today, Egypt is basically a failed state only doing marginally better than places like Somalia and Sudan.  The only reason they’re doing as well as they are is because they are in an important strategic location on the Suez Canal and as such get support from the FSoA military.

So a good WAG here for how long it will take for the Collapse Level in 1st World countries to reach the level Egypt is at today is about a decade.  It could be a little shorter, it could be longer.  By then of course, Egypt will be in even WORSE shape, and who might still be left alive in Somalia is an open question.  Highly unlikely to be very many people though.  Over the next decade, the famines will spread and people will die, in numbers far exceeding the 20M to occur over the next year.  After a while, it’s unlikely we will get much news about this, and people here won’t care much about what they do hear.  They will have their own problems.

The original article can be found at the Doomstead Diner here: Dimming Bulb 3: Collapse Has ARRIVED!


A very interesting article by the folks at Doomstead Diner.  While their forecast of collapse could be off a few years, it seems as if they are looking at the same time-frame the Hills Group and Louis Arnoux are projecting for the Thermodynamic oil collapse.

Lastly, people need to realize COLLAPSE does not take place in a day, week, month or year.  It takes place over a period of time.  The folks at Doomstead Diner are making the case that it has ARRIVED.  It is just taking time to reach the more affluent countries will good printing presses.

So… it is going to be interesting to see how things unfold over the next 5-10 years.





The end of the Middle East

14 03 2017

I have to say, I am seriously chuffed that Nafeez Ahmed is calling it, as I have been for years now…. In a lengthy but well worth reading article in the Middle East Eye, Nafeez explains the convoluted reasons why we have the current turmoil in Iraq, Yemen, and Syria. He doesn’t mention Egypt – yet – but to be fair, the article’s focus in on Mosul and the implications of the disaster unfolding there……

It never ceases to amaze me how Egypt has managed to stay off the news radar. Maybe the populace is too starved to revolt again….

After oil, rice and medicines, sugar has run out in Egypt, as the country has announced a devaluation of 48% of its currency. In Egypt, about 68 million of the total 92 million people receive food subsidized by the State through small consumer stores run by the Ministry of supply and internal trade. After shortages of oil, rice and milk, and even medicines, now sugar scarcity has hit the country. Nearly three quarters of the population completely rely on the government stores for their basic needs.

Egypt produces 2 million tons of sugar a year but has to import 3 million to face domestic demand. However imports have become too expensive.  The country is expected to receive a loan of 12 billion dollars (11 billion euros) from the International monetary Fund (IMF) to tackle its food scarcity. The price for sugar in supermarkets and black markets are skyrocketing as well, with a kilogram costing around 15 pounds. If available, one could get sugar from subsidized government stores for 0.50 euros per kilo.

Nafeez goes into great and interesting detail re the dismaying shenanigans going on in nafeezIraq and Syria at the moment. I’ll leave it to you to go through what he wrote on the Middle East Eye site on those issues, but what struck me as relevant to what this blog is about is how well they correlate with my own thoughts here…..:

Among my findings is that IS was born in the crucible of a long-term process of ecological crisis. Iraq and Syria are both experiencing worsening water scarcity. A string of scientific studies has shown that a decade-long drought cycle in Syria, dramatically intensified by climate change, caused hundreds and thousands of mostly Sunni farmers in the south to lose their livelihoods as crops failed. They moved into the coastal cities, and the capital, dominated by Assad’s Alawite clan. 

Meanwhile, Syrian state revenues were in terminal decline because the country’s conventional oil production peaked in 1996. Net oil exports gradually declined, and with them so did the clout of the Syrian treasury. In the years before the 2011 uprising, Assad slashed domestic subsidies for food and fuel.

While Iraqi oil production has much better prospects, since 2001 production levels have consistently remained well below even the lower-range projections of the industry, mostly because of geopolitical and economic complications. This weakened economic growth, and consequently, weakened the state’s capacity to meet the needs of ordinary Iraqis.

Drought conditions in both Iraq and Syria became entrenched, exacerbating agricultural failures and eroding the living standards of farmers. Sectarian tensions simmered. Globally, a series of climate disasters in major food basket regions drove global price spikes. The combination made life economically intolerable for large swathes of the Iraqi and Syrian populations.

Outside powers – the US, Russia, the Gulf states, Turkey and Iran – all saw the escalating Syrian crisis as a potential opportunity for themselves. As the ensuing Syrian uprising erupted into a full-blown clash between the Assad regime and the people, the interference of these powers radicalised the conflict, hijacked Sunni and Shia groups on the ground, and accelerated the de-facto collapse of Syria as we once knew it.  

AND…..

Meanwhile, across the porous border in Iraq, drought conditions were also worsening. As I write in Failing States, Collapsing Systems, there has been a surprising correlation between the rapid territorial expansion of IS, and the exacerbation of local drought conditions. And these conditions of deepening water scarcity are projected to intensify in coming years and decades.

An Iraqi man walks past a canoe siting on dry, cracked earth in the Chibayish marshes near the southern Iraqi city of Nasiriyah in 2015 (AFP)

The discernable pattern here forms the basis of my model: biophysical processes generate interconnected environmental, energy, economic and food crises – what I call earth system disruption (ESD). ESD, in turn, undermines the capacity of regional states like Iraq and Syria to deliver basic goods and services to their populations. I call this human system destabilisation (HSD).

As states like Iraq and Syria begin to fail as HSD accelerates, those responding – whether they be the Iraqi and Syrian governments, outside powers, militant groups or civil society actors – don’t understand that the breakdowns happening at the levels of state and infrastructure are being driven by deeper systemic ESD processes. Instead, the focus is always on the symptom: and therefore the reaction almost always fails entirely to even begin to address earth system sisruption.

So Bashar al-Assad, rather than recognising the uprising against his regime as a signifier of a deeper systemic shift – symptomatic of a point-of-no-return driven by bigger environmental and energy crises – chose to crackdown on his narrow conception of the problem: angry people.

Even more importantly, Nafeez also agrees with my predictions regarding Saudi Arabia…

The Gulf states are next in line. Collectively, the major oil producers might have far less oil than they claim on their books. Oil analysts at Lux Research estimate that OPEC oil reserves may have been overstated by as much as 70 percent. The upshot is that major producers like Saudi Arabia could begin facing serious challenges in sustaining the high levels of production they are used to within the next decade.

Another clear example of exaggeration is in natural gas reserves. Griffiths argues that “resource abundance is not equivalent to an abundance of exploitable energy”.

While the region holds substantial amounts of natural gas, underinvestment due to subsidies, unattractive investment terms, and “challenging extraction conditions” have meant that Middle East producers are “not only unable to monetise their reserves for export, but more fundamentally unable to utilise their reserves to meet domestic energy demands”. 

Starting to sound familiar..? We are doing the exact same thing here in Australia…. It’s becoming ever more clear that Limits to Growth equates to scraping the bottom of the barrel, and the scraping sounds are getting louder by the day.

And oil depletion is only one dimension of the ESD processes at stake. The other is the environmental consequence of exploiting oil.

Over the next three decades, even if climate change is stabilised at an average rise of 2 degrees Celsius, the Max Planck Institute forecasts that the Middle East and North Africa will still face prolonged heatwaves and dust storms that could render much of the region “uninhabitable”. These processes could destroy much of the region’s agricultural potential.

Nafeez finishes with a somewhat hopeful few paragraphs.

Broken models

While some of these climate processes are locked in, their impacts on human systems are not. The old order in the Middle East is, unmistakably, breaking down. It will never return.

But it is not – yet – too late for East and West to see what is actually happening and act now to transition into the inevitable future after fossil fuels.

The battle for Mosul cannot defeat the insurgency, because it is part of a process of human system destabilisation. That process offers no fundamental way of addressing the processes of earth system disruption chipping away at the ground beneath our feet.

The only way to respond meaningfully is to begin to see the crisis for what it is, to look beyond the dynamics of the symptoms of the crisis – the sectarianism, the insurgency, the fighting – and to address the deeper issues. That requires thinking about the world differently, reorienting our mental models of security and prosperity in a way that captures the way human societies are embedded in environmental systems – and responding accordingly.

At that point, perhaps, we might realise that we’re fighting the wrong war, and that as a result, no one is capable of winning.

The way the current crop of morons in charge is behaving, I feel far less hopeful that someone will see the light. There aren’t even worthwhile alternatives to vote for at the moment…  If anything, they are all getting worse at ‘leading the world’ (I of course use the term loosely..), not better. Nor is the media helping, focusing on politics rather than the biophysical issues discussed here.

 





The unraveling is going global….

18 01 2016

You never hear about markets outside of New York, London, and Australia…….. but, as seen here from a Zerohedge article by Tyler, the rout is global.  And because these countries are at the core of our hydrocarbon energy sources, if they don’t recover……?

Broad Middle-East and African stock markets crashed over 5%, erasing any gains back to November 2008 as the carnage from last week continues. From Kuwait (-4.3%) to Qatar (-8%) it was a bloodbath as Saudi Arabia Tadawul Index plunged 5.4% – the most since Black Monday (now down over 50% from their 2014 highs). These losses are far in excess of US ‘catch-up’ moves and suggest a dark cloud over Asia this evening.

 

It’s been a bloodbath in the Middle-East since the year began…

 

Africa/Middle-East Stocks crashed 5%…

 

Saudi Arabia’s Tadawul Index is down 5.4% on the day – the worst since August’s collapse and has lost over 50% since its exuberant peak in 2014…

 

Kuwait down over 4% to 2009 lows…

 

But Qatar was carnaged… (down over 8%)

 

Makes you wonder where all that hot-money from The Fed flowed eh?

 





The Real Reason behind the Oil Price Collapse

14 03 2015

This article originally appeared at TomDispatch.com. To stay on top of important articles like these, sign up to receive the latest updates from TomDispatch.com.

Michael T. Klare on Energy Policy and Sustainability

Michael T Klare

By Michael T Klare

Many reasons have been provided for the dramatic plunge in the price of oil to about $60 per barrel (nearly half of what it was a year ago): slowing demand due to global economic stagnation; overproduction at shale fields in the United States; the decision of the Saudis and other Middle Eastern OPEC producers to maintain output at current levels (presumably to punish higher-cost producers in the US and elsewhere); and the increased value of the dollar relative to other currencies. There is, however, one reason that’s not being discussed, and yet it could be the most important of all: the complete collapse of Big Oil’s production-maximizing business model.

Until last fall, when the price decline gathered momentum, the oil giants were operating at full throttle, pumping out more petroleum every day. They did so, of course, in part to profit from the high prices. For most of the previous six years, Brent crude, the international benchmark for crude oil, had been selling at $100 or higher. But Big Oil was also operating according to a business model that assumed an ever-increasing demand for its products, however costly they might be to produce and refine. This meant that no fossil fuel reserves, no potential source of supply—no matter how remote or hard to reach, how far offshore or deeply buried, how encased in rock—was deemed untouchable in the mad scramble to increase output and profits.

In recent years, this output-maximizing strategy had, in turn, generated historic wealth for the giant oil companies. Exxon, the largest US-based oil firm, earned an eye-popping $32.6 billion in 2013 alone, more than any other American company except for Apple. Chevron, the second biggest oil firm, posted earnings of $21.4 billion that same year. State-owned companies like Saudi Aramco and Russia’s Rosneft also reaped mammoth profits.

How things have changed in a matter of mere months. With demand stagnant and excess production the story of the moment, the very strategy that had generated record-breaking profits has suddenly become hopelessly dysfunctional.

To fully appreciate the nature of the energy industry’s predicament, it’s necessary to go back a decade to 2005, when the production-maximizing strategy was first adopted. At that time, Big Oil faced a critical juncture. On the one hand, many existing oil fields were being depleted at a torrid pace, leading experts to predict an imminent “peak” in global oil production, followed by an irreversible decline; on the other, rapid economic growth in China, India and other developing nations was pushing demand for fossil fuels into the stratosphere. In those same years, concern over climate change was also beginning to gather momentum, threatening the future of Big Oil and generating pressures to invest in alternative forms of energy.

A “Brave New World” of Tough Oil

No one better captured that moment than David O’Reilly, the chairman and CEO of Chevron. “Our industry is at a strategic inflection point, a unique place in our history,” he told a gathering of oil executives that February. “The most visible element of this new equation,” he explained in what some observers dubbed his “Brave New World” address, “is that relative to demand, oil is no longer in plentiful supply.” Even though China was sucking up oil, coal and natural gas supplies at a staggering rate, he had a message for that country and the world: “The era of easy access to energy is over.”

To prosper in such an environment, O’Reilly explained, the oil industry would have to adopt a new strategy. It would have to look beyond the easy-to-reach sources that had powered it in the past and make massive investments in the extraction of what the industry calls “unconventional oil” and what I labeled at the time “tough oil“: resources located far offshore, in the threatening environments of the far north, in politically dangerous places like Iraq, or in unyielding rock formations like shale. “Increasingly,” O’Reilly insisted, “future supplies will have to be found in ultradeep water and other remote areas, development projects that will ultimately require new technology and trillions of dollars of investment in new infrastructure.”

For top industry officials like O’Reilly, it seemed evident that Big Oil had no choice in the matter. It would have to invest those needed trillions in tough-oil projects or lose ground to other sources of energy, drying up its stream of profits. True, the cost of extracting unconventional oil would be much greater than from easier-to-reach conventional reserves (not to mention more environmentally hazardous), but that would be the world’s problem, not theirs. “Collectively, we are stepping up to this challenge,” O’Reilly declared. “The industry is making significant investments to build additional capacity for future production.”

On this basis, Chevron, Exxon, Royal Dutch Shell and other major firms indeed invested enormous amounts of money and resources in a growing unconventional oil and gas race, an extraordinary saga I described in my book The Race for What’s Left. Some, including Chevron and Shell, started drilling in the deep waters of the Gulf of Mexico; others, including Exxon, commenced operations in the Arctic and eastern Siberia. Virtually every one of them began exploiting US shale reserves via hydro-fracking.

Only one top executive questioned this drill-baby-drill approach: John Browne, then the chief executive of BP. Claiming that the science of climate change had become too convincing to deny, Browne argued that Big Energy would have to look “beyond petroleum” and put major resources into alternative sources of supply. “Climate change is an issue which raises fundamental questions about the relationship between companies and society as a whole, and between one generation and the next,” he had declared as early as 2002. For BP, he indicated, that meant developing wind power, solar power and biofuels.

Browne, however, was eased out of BP in 2007 just as Big Oil’s output-maximizing business model was taking off, and his successor, Tony Hayward, quickly abandoned the “beyond petroleum” approach. “Some may question whether so much of the [world’s energy] growth needs to come from fossil fuels,” he said in 2009. “But here it is vital that we face up to the harsh reality [of energy availability].” Despite the growing emphasis on renewables, “we still foresee 80% of energy coming from fossil fuels in 2030.”

Under Hayward’s leadership, BP largely discontinued its research into alternative forms of energy and reaffirmed its commitment to the production of oil and gas, the tougher the better. Following in the footsteps of other giant firms, BP hustled into the Arctic, the deep water of the Gulf of Mexico, and Canadian tar sands, a particularly carbon-dirty and messy-to-produce form of energy. In its drive to become the leading producer in the Gulf, BP rushed the exploration of a deep offshore field it called Macondo, triggeringthe Deepwater Horizon blow-out of April 2010 and the devastating oil spill of monumental proportions that followed.

Over the Cliff

By the end of the first decade of this century, Big Oil was united in its embrace of its new production-maximizing, drill-baby-drill approach. It made the necessary investments, perfected new technology for extracting tough oil, and did indeed triumph over the decline of existing, “easy oil” deposits. In those years, it managed to ramp up production in remarkable ways, bringing ever more hard-to-reach oil reservoirs online.

According to the Energy Information Administration (EIA) of the US Department of Energy, world oil production rose from 85.1 million barrels per day in 2005 to 92.9 million in 2014, despite the continuing decline of many legacy fields in North America and the Middle East. Claiming that industry investments in new drilling technologies had vanquished the specter of oil scarcity, BP’s latest CEO, Bob Dudley, assured the world only a year ago that Big Oil was going places and the only thing that had “peaked” was “the theory of peak oil.”

That, of course, was just before oil prices took their leap off the cliff, bringing instantly into question the wisdom of continuing to pump out record levels of petroleum. The production-maximizing strategy crafted by O’Reilly and his fellow CEOs rested on three fundamental assumptions: that, year after year, demand would keep climbing; that such rising demand would ensure prices high enough to justify costly investments in unconventional oil; and that concern over climate change would in no significant way alter the equation. Today, none of these assumptions holds true.

Demand will continue to rise—that’s undeniable, given expected growth in world income and population—but not at the pace to which Big Oil has become accustomed. Consider this: in 2005, when many of the major investments in unconventional oil were getting under way, the EIA projected that global oil demand would reach 103.2 million barrels per day in 2015; now, it’s lowered that figure for this year to only 93.1 million barrels. Those 10 million “lost” barrels per day in expected consumption may not seem like a lot, given the total figure, but keep in mind that Big Oil’s multibillion-dollar investments in tough energy were predicated on all that added demand materializing, thereby generating the kind of high prices needed to offset the increasing costs of extraction. With so much anticipated demand vanishing, however, prices were bound to collapse.

Current indications suggest that consumption will continue to fall short of expectations in the years to come. In an assessment of future trends released last month, the EIA reported that, thanks to deteriorating global economic conditions, many countries will experience either a slower rate of growth or an actual reduction in consumption. While still inching up, Chinese consumption, for instance, is expected to grow by only 0.3 million barrels per day this year and next—a far cry from the 0.5 million barrel increase it posted in 2011 and 2012 and its one million barrel increase in 2010. In Europe and Japan, meanwhile, consumption is actually expected to fall over the next two years.

And this slowdown in demand is likely to persist well beyond 2016, suggests the International Energy Agency (IEA), an arm of the Organization for Economic Cooperation and Development (the club of rich industrialized nations). While lower gasoline prices may spur increased consumption in the United States and a few other nations, it predicted, most countries will experience no such lift and so “the recent price decline is expected to have only a marginal impact on global demand growth for the remainder of the decade.”

This being the case, the IEA believes that oil prices will only average about $55 per barrel in 2015 and not reach $73 again until 2020. Such figures fall far below what would be needed to justify continued investment in and exploitation of tough-oil options like Canadian tar sands, Arctic oil and many shale projects. Indeed, the financial press is now full of reports on stalled or cancelled mega-energy projects. Shell, for example, announced in January that it had abandoned plans for a $6.5 billion petrochemical plant in Qatar, citing “the current economic climate prevailing in the energy industry.” At the same time, Chevron shelved its plan to drill in the Arctic waters of the Beaufort Sea, while Norway’s Statoil turned its back on drilling in Greenland.

There is, as well, another factor that threatens the wellbeing of Big Oil: climate change can no longer be discounted in any future energy business model. The pressures to deal with a phenomenon that could quite literally destroy human civilization are growing. Although Big Oil has spent massive amounts of money over the years in a campaign to raise doubts about the science of climate change, more and more people globally are starting toworry about its effects—extreme weather patterns, extreme storms, extreme drought, rising sea levels and the like—and demanding that governments take action to reduce the magnitude of the threat.

Europe has already adopted plans to lower carbon emissions by 20% from 1990 levels by 2020 and to achieve even greater reductions in the following decades. China, while still increasing its reliance on fossil fuels, has at least finally pledged to cap the growth of its carbon emissions by 2030 and to increase renewable energy sources to 20% of total energy use by then. In the United States, increasingly stringent automobile fuel-efficiency standards will require that cars sold in 2025 achieve an average of 54.5 miles per gallon, reducing US oil demand by 2.2 million barrels per day. (Of course, the Republican-controlled Congress—heavily subsidized by Big Oil—will do everything it can to eradicate curbs on fossil fuel consumption.)

Still, however inadequate the response to the dangers of climate change thus far, the issue is on the energy map and its influence on policy globally can only increase. Whether Big Oil is ready to admit it or not, alternative energy is now on the planetary agenda and there’s no turning back from that. “It is a different world than it was the last time we saw an oil-price plunge,” said IEA executive director Maria van der Hoeven in February, referring to the 2008 economic meltdown. “Emerging economies, notably China, have entered less oil-intensive stages of development.… On top of this, concerns about climate change are influencing energy policies [and so] renewables are increasingly pervasive.”

The oil industry is, of course, hoping that the current price plunge will soon reverse itself and that its now-crumbling maximizing-output model will make a comeback along with $100-per-barrel price levels. But these hopes for the return of “normality” are likely energy pipe dreams. As van der Hoeven suggests, the world has changed in significant ways, in the process obliterating the very foundations on which Big Oil’s production-maximizing strategy rested. The oil giants will either have to adapt to new circumstances, while scaling back their operations, or face takeover challenges from more nimble and aggressive firms.





America: You’ve got three more years to drive normally! – Part 2

5 10 2014

Part 1 of this series stirred up a lot of interest with Rag Blog readers, and it was reposted by Resilience.org where it was also popular. I imagine the article’s somewhat alarming title struck a nerve, calling attention to the repressed fears that challenge our suburban, car-centric American culture. Fears that stem from our culture of denial in response to business as usual.

In Part 2 we will further explore the constraints on our energy resources and will look at the role of finance capital in perpetuating our denial; denial that inhibits energy reform until there is a full blown crisis.

                                                                                                                                                                                                                                                                                                Below are clickable section heads for those of you who like to jump around.
The context of our driving problem
As a nation we know that something is deeply wrong, starting with a politically gridlocked congress. The recent march against climate change underlined this high level of public concern.
Arguably the top issue of our times has become how long our physically expansive system of global finance capital can maintain profitable growth without wrecking the global environment. In this respect, public attention to global warming has become the leading example.
Business as usual justifies its legitimacy by maintaining that at least some plausibly improved version of our system can pay off its immense deficit of public and private debt by growing profitably forever. And can do so in a finite world that is clearly already struggling to deal with a human population of 7 billion. There is now a wealth of solid scientific research and useful information that shows that this goal is impossible; information easily available from a growing assortment of environmental awareness sites like the Post Carbon Institute.
Expansionist economic control and free market fundamentalism have become like a state religion.
Expansionist economic control and free market fundamentalism have become like a state religion uniting politics and economics in support of corporate domination. In accord with this point of view, it comes as no surprise to see Paul Krugman, a liberal Keynesian advocate of a gentler greener kind of capitalist economics, blame the Post Carbon Institute for teaching about natural limits to economic growth.
This recent exchange features Krugman as an economic expansionist, and Richard Heinberg, in response, laying out conflicting positions on the growth issue.  Nobel economics prize winner Krugman seems to have blundered into an uphill debate against top scientists and their intellectual allies.
Now, with the help of recent geological data, we can see that peak oil will probably soon limit and affect an important aspect of American life, namely our driving. The global oil supply situation will probably only permit about three more years of easily affordable driving. So far we have been able mostly to ignore this problem, which has been nipping at our heels for most of the past decade by more than tripling oil prices.
Follow the oil
Oil, when burned, has the unique ability to supply the motive muscle power needed throughout our global civilization. The power to move stuff around; to physically expand global trade by powering nearly all the world’s ships, planes, trucks, and trains. The Hirsch report laid out the difficulty of an economic transition away from oil about a decade ago, by predicting the need for about 20 years to properly prepare for peak oil. Everyone has become fond of solar panels these days, but there has not been nearly enough progress towards alternatives since conventional oil peaked in 2005, given the true scale of the problem.
Peak oil is here, or close enough for us to be able to sketch out important details.
Peak oil is here, or close enough for us to be able to sketch out important details. The current world oil glut is genuine, and we need to try to see why this situation is actually quite compatible with a globally peaking oil supply. We can closely examine the considerable body of evidence that suggests about three more years of easy driving. Anyone can study the same evidence and attempt a more optimistic interpretation.
Thanks to what could be seen as the increasingly disruptive side effects of maintaining our globally oil-dependent economy, we face unpredictable problems that could interfere with normal driving even sooner than three years.
Having made a horrible mess of Iraq, we now see rising conflict throughout the Middle East, largely as a result of an old agreement with the Saudis after the 1970s energy crisis. An agreement to maintain through military force the stable production and export of OPEC oil on the world marketplace. A second looming threat stems from the fact that the global economy was thoroughly disrupted by a severe oil price spike in 2008 and has not recovered. The world of finance capital has been kept solvent since then through transfusions of publicly funded credit, such as quantitative easing and low interest rates.
It is no accident that we sometimes call our dollars petrodollars. The British pound may have been backed by gold, but now our dollar is backed by its singular ability to buy oil and its combustion-derived mobile power on the global market. Oil is only globally traded in dollars, which are also the world’s standard reserve currency.
Our dollar-based global economy, led by finance capital centered in Wall Street and London, has managed to function successfully since WWII, but, distressingly, it is beginning to  resemble an oil-addictive dollar-based global Ponzi scheme, sure to fail without an exponential growth in profit.”
Fracking looks like a fossil fuel retirement party
The technical advance that is keeping the USA driving affordably, for now at least, is hydrofracturing or fracking, used to produce tight gas and oil from shale deposits. This U.S. fracking boom is now adding more than 3 million barrels of tight oil and closely associated liquid condensate fuel each day. This is enough new product that, when it is added to the world’s slowly declining conventional oil production, the resulting in obscuring and delaying the onset of the peak oil problem, if only for a few years.
For the moment, there is a global oil glut and a falling price due to an unusually weak global customer demand for the relatively constant stream of oil being produced and consumed globally, but that does not mean that this product is being produced at a profit. Over the short run, shifting consumer demand due to the economy or freezing weather conditions can have a much bigger faster effect on price than investment in new production, which is slow, and risky at best.
As a whole, domestic oil and gas from fracking is beginning to look like an investment bubble.
As a whole, domestic oil and gas from fracking is beginning to look like an investment bubble. U.S. production of tight oil by fracking can probably only increase and postpone another global oil price spike for a few years. Even if the current fracking boom should somehow give us five more years, it doesn’t change the picture much. Driving will get less affordable because of fuel, and there will be a painfully short amount of time to prepare. Gasoline-powered cars are expensive and last for more than a decade, and the USA doesn’t have any good mobility alternative to serve its suburbs.
An oil glut for now
As we saw in Part 1, trying to convince the U.S. public that they might have a problem driving about three years from now is going to be a hard sell. Who is the driving public to believe, those who warn them about a problem a years from now, or their own eyes? This is especially true since anyone who fills up at the gas pump can see for themselves that gasoline has been getting a bit cheaper lately.
For now, oil and its products remain a buyer’s market. Here we see the Wall Street Journal telling us that the reason that gas prices are going down is because of a glut of gasoline.
A global glut of crude oil is the main driver behind the decline in gasoline prices. Relatively cheap oil has made it more profitable for refiners to produce gasoline and other fuels, and they have ramped up production to record levels. This boom in supplies has sent gasoline prices tumbling. Traders and other market observers expect the flow of both crude oil and gasoline to keep rising, likely exerting more downward pressure on prices.
We are now at the doorstep of globally peaking oil
When I say that Americans will probably have trouble driving in only three years, this means that I think another oil price shock causing widespread public driving anxiety is quite likely by then. It could be less than three years; James Howard Kunstler gives us two years for reasons similar to mine.
Wait until they discover that the shale oil producers have never made a buck producing shale oil, only on the sale of leases and real estate to “greater fools” and creaming off the froth of the complex junk financing deals behind their exertions. Expect that mirage to dissipate in the next 24 months, perhaps sooner if the price of oil keeps sinking toward the sub $90-a-barrel level, where there’s no economically rational reason to bother drilling and fracking.
Gasoline is cheap for now only because oil production is relatively constant and the oil must be sold at whatever price the global market can bear, even during a time of global deflation due to the lingering effect of the 2008 oil price shock.
The estimate of three more years of easily affordable driving is an educated guess, based on looking at the work of a number of expert forecasters and analysts who predict that the global oil market will run out of profitable U.S. fracking plays in about this time. After another oil price spike we’re back to a bad recession like 2009, but this time with even less of the oil needed to recover.
The price of oil has a complex and partly hidden effect on the economy.
The price of oil has a complex and partly hidden effect on the economy. Since cheap conventional oil globally peaked in 2005, the higher price of fuel has acted like a slowly increasing but hidden tax on almost everything sold, since almost everything sold has some rising oil price costs embedded in its sales price. People cut back on discretionary spending in order to pay more for gas, which sent those sectors into recession. A hidden oil tax tends in this way to cause the pervasive economic stagnation we now see.
A rapid oil price spike is a much more politically visible target than the general stagnation effect of high energy prices, since an oil price spike leads to higher fuel and food costs fairly quickly. These two impacts of high oil prices, one faster and one slower, generate different types of political and economic responses.
Without an economic recovery, which is itself unlikely without cheap oil, another gasoline price spike to even $4 dollars a gallon might now cause a broad and angry public demand for Congress to do something fast, a sort of a political tipping point. A return to gasoline rationing, like that used after the 1973 oil crisis, is one plausible way for politicians to try to ease the public’s driving pain.
Expert evidence for three more years of easily affordable driving
The estimate of three years of easily affordable driving depends primarily on estimating how long the current fracking boom, which is now holding down the global oil price, can be sustained. There seems to be almost a consensus, outside of government officialdom like the EIA, of maybe two or three more years.

roger graphic 1

Post Carbon Institute fellow and author Richard Heinberg has written an exceptionally well-researched book, published in July 2013, titledSnake Oil: How Fracking’s False Promise of Plenty Imperils our Future.
In this interview, Heinberg reviews our energy situation; you can get a good idea where things stand just by listening to about the first 10 minutes.  Following is a quote from Heinberg’s recent writing: “Why Peak Oil Refuses to Die. ”
Let’s start with the common assertion that oil supplies are sufficiently abundant so that a peak in production is many years or decades away. Everyone agrees that planet Earth still holds plenty of petroleum or petroleum-like resources: that’s the kernel of truth at the heart of most attempted peak-oil debunkery. However, extracting and delivering those resources at an affordable price is becoming a bigger challenge year by year. For the oil industry, costs of production have rocketed; they’re currently soaring at a rate of about 10 percent annually. Producers need very high oil prices to justify going after the resources that remain—tight oil from source rocks, Arctic oil, ultra-deepwater oil, and bitumen. But oil prices have already risen to the point where many users of petroleum just can’t afford to pay more. The US economy has a habit of responding to oil price hikes by swooning into recession, and during the shift from $20 per barrel oil to $100 per barrel oil (which occurred between 2002 and 2011), the economies of most industrialized countries began to shudder and stall. What would be their response to a sustained oil price of $150 or $200? We may never know: it remains to be seen whether the world can afford to pay what will be required for oil producers to continue wresting liquid hydrocarbons from the ground at current rates.
Heinberg’s shale oil book is partly based on the work of a top Canadian resource geologist, David Hughes, who did a study of tight oil and gas economics for the Post Carbon Institute, titled “Drill Baby Drill.” The report can be downloaded here. Basically what Hughes says is that there are only a few geographically large shale plays which contain within themselves much smaller sweet spots, those areas which are profitable when used to produce fairly high priced oil or gas. But these fracking wells tend to deplete rapidly, and the truly profitable sweet spots are being used up fast, implying that U.S. shale oil production will peak about 2017.
Hughes explained that more than 80 percent of the nation’s shale oil comes from just two plays, the Bakken field in North Dakota and Montana and the Eagle Ford in Texas. He estimates that production in those regions will recede back to 2012 levels in 2019. Overall production across the nation’s shale oil fields will peak in 2017.
Readers who want to review and keep abreast of the evidence should become familiar with the peak oil blogs.
Readers who want to review and keep abreast of the evidence should become familiar with the peak oil blogs. Ron Patterson posts on Peak oil barrel.  Crude Oil Peak  is another excellent source  Yet another is Peak Oil News.
In this article — “US shale oil growth covers up production drop in rest-of-world” — we see charts that tell us that that an increase in U.S. shale oil production is now the one factor that has kept otherwise declining global oil production increasing.  Tight oil has been effectively obscuring the pricing signals that peaking oil in the rest of the world would give, as global oil need, if not ability to buy, continues to rise.
Here is what a top Saudi geologist, now in private practice as a consultant, had to offer in an interview with ASPO-USA earlier this year (“Ex-Saudi Aramco geologist Dr Husseini predicts oil price spikes of USD 140 by 2016-17: graphs”)
Husseini: My base oil price forecast in 2012 dollars still ranges between $105 and $120/barrel Brent with a volatility floor of $ 95/barrel and more probable upward spiking to $140/barrel within 2016/2017.
Dr. Husseini didn’t say how he predicted the oil price spike, but Crude oil Peak analyst Matt Mushalik comments on the Husseini interview. The last graphic predicts that rising demand will meet the falling production predicted by Dr. Husseini about 2016, and concludes as follows:
We see that the intersection point is somewhere in 2016. What is more important than the precise year in which the next oil crunch may happen is the widening gap in the 2nd half of this decade.
Conclusion: Whether the world wants to follow the New Policies Scenario of the IEA WEO 2013 is another question altogether. It seems governments are rather on a current policies track which increases oil demand and therefore pressure on oil prices.
Here is a graphic that illustrates what might happen when fracking declines. See Figure 1.  The red region representing tight oil is the only thing that has kept total world oil production from having already peaked. This is evidence that only a continuation or increase in the current level of U.S. tight oil production from shale can prevent another oil price spike followed by an economic bust.
The Medium Term Oil Market Report of the International Energy Agency (IEA, Paris), published in June 2014, contains a graph which implies that US crude production will start to peak in 2016. Few took notice although the world is continuously occupied with oil and energy related conflicts and wars in Ukraine, Libya and Iraq. So far, oil prices increased only shortly when fights flared up. Apparently oil markets are at ease while the US tight oil “revolution” is underway. But for how long?
The graph [Fig 1: US tight oil and crude oil in rest of world vs oil prices] shows that US tight (shale) oil sits on top of a bumpy crude production plateau in the rest of the world which clearly started in 2005 (average of 73.4 mb/d since Jan 2005). Despite increasing tight oil production oil prices did not go down but stayed at a level of around US$ 100 a barrel. We can safely say that without US tight oil – in May 2014 around 2.9 mb/d – the world would be in a deep oil crisis. People got accustomed to a higher oil consumption level which will be hard to come down from. Between 2005 and 2007, oil production declined by around 2 mb/d (supply shock) and oil prices doubled. That gives us an idea what will happen when tight oil starts to decline. So it is important to know when tight oil reaches its tipping point.
Another prediction that tight oil from fracking will top out in its domestic production in only about three years comes from the U.S. federal government, via the Energy Information Agency (EIA) and its periodic Outlook report.

roger graphic 2

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See how much difference a year can make in the “reference case” or business as usual expectations, about doubling the expected future output. However if fracking expectations can double in a single year, how accurate is the EIA tight oil production model? How sensitive is the model to oil price? Why not show the model and also show the expected tight oil output for a high, medium, and low oil price? If our future driving affordability is tied to this oil output, we deserve good data transparency.
Here is how top oil analyst Tom Whipple of ASPO-USA reviewing the tight oil production situation recently put it.
The two major forecasting agencies, Washington’s EIA and Paris’ IEA, are both more pessimistic than is generally known for they both foresee US shale oil production levelling off as soon as 2016. The reason for this is that drillers will simply run out of new places to drill and frack new wells. While new techniques of extracting more oil from a well are possible, there is need to look closely at the costs of these techniques vs. the potential payoff.
The shale oil situation in Texas is somewhat different than in North Dakota, for there you have much better weather and two separate shale oil deposits. The recent growth in Texas’s shale oil production has been much smoother than in storm-prone North Dakota and has been increasing at about 44,000 b/d each month. So far as can be seen from the outside of the industry, production in both states will continue to grow for at least another year or two — but then we will be at 2016.
The government has never gotten around to publishing the assumptions that go into the forecast that U.S. shale oil production will stop growing circa 2016. The biggest difference between EIA/IEA and independent analysts is the government forecasters do not see a precipitous drop in shale oil production following the peak. Instead they see a period of flat production followed by a gentle decline stretching well into the next decade. Such a gentle end to the shale oil “bubble” can only assuage fears of a calamity. This projection on a gentle end to U.S. shale oil is at variance with outside forecasters who note that shale oil wells are pretty well gone in three years and simply do not see where the oil to maintain production levels will be coming from for another 10 or 15 years after the peak…
Independent analyses of U.S. shale oil generally come to the same conclusion that production will peak in the 2016-2017 time frame, but as noted above see a much faster decline than does the government.
Hydrofracturing for tight oil and gas is now about all that is left to maintain global oil production
Hydrofracturing for tight oil and gas is now about all that is left to maintain global oil production, as Art Berman points out in this interview: “Shale, the Last Oil and Gas Train”
Oil companies have to make a big deal about shale plays because that is all that is left in the world. Let’s face it: these are truly awful reservoir rocks and that is why we waited until all more attractive opportunities were exhausted before developing them. It is completely unreasonable to expect better performance from bad reservoirs than from better reservoirs. The majors have shown that they cannot replace reserves. They talk about return on capital employed (ROCE) these days instead of reserve replacement and production growth because there is nothing to talk about there. Shale plays are part of the ROCE story–shale wells can be drilled and brought on production fairly quickly and this masks or smooths out the non-productive capital languishing in big projects around the world like Kashagan and Gorgon, which are going sideways whilst eating up billions of dollars. None of this is meant to be negative. I’m all for shale plays but let’s be honest about things, after all! Production from shale is not a revolution; it’s a retirement party. [emphasis mine]
Finally, lets conclude this section with a peak shale oil prediction for 2016 made by one of the most skillful resource data analysts, Jean Laherrere, who along with Colin Campbell coauthored “The End of Cheap Oil” in Scientific American in 1998, when oil cost less than $20 a barrel.  Scroll toward the end of the link and see a big green hump in a chart that represents the official EIA Outlook prediction of a peak in shale oil in 2017. Laherrere’s peak for shale oil is followed by a much steeper decline rate as can be seen in the subsequent chart.

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As Laherrere says:
It seems that most oil companies are spending more than their revenues by increasing their debts. Countries can live for a long time with huge debt increase, not companies. They count on the stock market by delivering optimistic reports and keep drilling to avoid the production to decline. With shale oil or shale play, in contrary with conventional where wells are dry or producing, oil can be produced even for a while if not economical.
Such behaviour explains why most peak forecasts are wrong. But the main question is about the slope of the decline after the peak. EIA forecast a LTO (light tight oil = shale oil) peak in 2017 it is not too far after my forecast, the big difference is the slow EIA LTO decline.
Why fuel prices probably won’t fall much more
Why won’t the price of driving, as affected by fuel cost, go down very much or for very long? The Saudis alone can produce about 10 million barrels of oil a day mostly for export. This gives the Saudis the ability, acting as one country with a centralized oil production policy, to put a floor under the global oil price simply by cutting back on their oil offered for export. Abundant Saudi oil exports remain vital to a world of commerce built with and quite dependent on affordable oil.
The Saudis lack the excess oil production capacity that they once had, so they cannot flood the market to lower the oil price.
The Saudis lack the excess oil production capacity that they once had, so they cannot flood the market to lower the oil price. However the Saudis still have the critical market power, through cutting production, to keep global crude oil prices from sinking.
“We are swimming in crude, and they [the Saudis] know that better than anyone because they are the biggest exporter,” Mike Wittner, the head of oil market research at Societe Generale in New York, said by phone Sept. 9. “History shows that the Saudis will just do what’s necessary.” … Saudi Arabia made the biggest contribution to OPEC’s production cuts in 2008 and 2009 as demand contracted amid the financial crisis. The group took almost 5 million barrels of daily output off the market, reviving prices from about $30 at the end of 2008 to almost $80 a year later.
At its current price, “Brent has traded since early July within the range of $95 to $110 described as ‘fair’ by Saudi Oil Minister Ali Al-Naimi at a meeting of the Organization of Petroleum Exporting Countries in June.”
The Saudis have an incentive to pump at or near their maximum capacity, but to cut back when the global price sinks below their favored price range, neither so high as to hurt the global economy, nor so low that it puts other higher cost oil producers, which together supply most of the world’s other oil, out of business.
Both Saudi and Iran recently warned that declines in crude prices will be short lived. It is an ominous sign for motorists in the UK who were hoping that recent declines in the cost of a gallon of petrol would be sustained.
The Saudi’s favorable price band is shrinking and may not even exist any more because global oil customers are getting poorer, even while oil producers, especially private oil investors outside the Middle East, are losing money by producing oil under increasingly costly and difficult circumstances.
A timeless pattern of periodic energy investment overshoot
The human effort required to obtain and channel the energy needed to build and maintain an economy is a key feature of all civilizations, which ultimately limits their complexity and type of economic organization, as Tainter has pointed out.  For this reason, changes in the supply and cost of motive power, whether this is derived from oxen and slaves consuming grain or from diesel engines burning oil, can cause civilizations to rise and fall and to win or lose wars.
The oil industry has always been characterized by boom and bust investment cycles.
As a primary and vital source of such power, the oil industry has always been characterized by boom and bust investment cycles, a pattern of exuberant investment in production followed by ruinous periodic production gluts. Frenzied oil production in the giant East Texas field during the early depression years caused the oil price to fall as low as 13 cents a barrel. The Texas governor called out the Texas Rangers to halt and regulate excessive production, which was permanently damaging oil fields.
Later regulation from the Texas Railroad Commission established allowable oil production limits that effectively set world oil prices from the 1930s until the 1960s. This Texas regulation of private producers later served as the regulation model for OPEC, created to prevent ruinous price volatility in the unregulated global oil market.
In Part 1, we saw the federal data compiled by the EIA, which indicates that not only are the top 127 energy companies losing money on oil and gas, but that meanwhile most OPEC oil producing countries are also having trouble meeting their costs by selling oil to a depressed global market.
Deep water oil production in the Gulf of Mexico was expanding fairly rapidly until recently. Since deep water oil is very expensive and risky — and not very profitable — production by the private majors like Exxon, those who can afford $180 million for a deep water well, have been shifting back onshore with the advent of fracking, which is more predictable in outcome and might only cost $8 million per well. Nobody would be doing deep water drilling in the Gulf of Mexico if there were profitable places left to drill on dry land, but now even the deep water drilling has tapered off.
“Deepwater is providing lower returns and has shown no production growth while U.S. unconventionals have much higher returns (at least on paper), [and] enough scale of reserves to be of interest to the majors … so according to them, they will shift spending,” Wicklund noted.
With current economic uncertainty, investors don’t know what the price of oil will be a few years into the life of the well. Until about 2012, the global price of oil was rising nicely, comfortably over $100 a barrel, but over the last two years it has been almost flat and is now decreasing due to a stagnant or deflating global economy.
But oil producers are tied to the existing market price, for better or worse. The market demand for oil-based fuel can rise or fall much faster than the supply tends to change. A low rate of drilling sets the stage for a future price rise when the return of a tight market causes global oil prices to rise again.
Since fracking is what is has been holding U.S. driving costs down, it stands to reason that when this rapidly depleting oil source goes into decline, fuel prices will rise and we will be obliged to drive less.
Military events which could seriously interfere with driving in less than three years
There are looming but plausible threats to widely affordable American driving that are widely understood to exist but are nearly impossible to accurately predict in their severity and timing. Two major “black swan” events are first, an interruption in steady oil exports from the Middle East, and second, a swiftly developing global economic crisis which could affect the U.S. and global economies.
Our current effort to militarily contain the Sunni-based Islamic State in Iraq and deescalate regional conflict is plagued with uncertainties, if not impossibilities. Nobody can easily anticipate how military turmoil in the Sunni regions to the north might affect oil production from the Shiite dominated oil-producing regions of Iraq to the south, which are currently producing and exporting about 3 million barrels of oil a day.
Trying to use U.S. military power to keep the Middle East reliably producing its oil for export has become a daunting military juggling act.
There is much to go wrong in a conflict that could spill over into nearby Saudi Arabia, which is itself increasingly unstable. Trying to use U.S. military power to keep the Middle East reliably producing its oil for export has become a daunting military juggling act.  The new Prime minister of Iraq tells us that all foreign troops will be unwelcome at the same time our generals tell us that the conflict cannot be won from the air.
In light of this situation, we might be better off using diplomacy rather than relying on military power to achieve our goals.
Economic events which could seriously interfere with driving in less than three years
Gasoline has gotten a little cheaper at the pump lately, headed toward $3 a gallon, which has the welcome effect of stimulating the U.S. economy by putting some extra dollars in the pockets of most drivers. But it doesn’t change the big picture much.
The USA remains in an economic crisis because of low growth, a dependence on easy money from the Fed, and an inability to revive the U.S. economy despite a massive level of quantitative easing.

roger graphic 3

roger graphic 6

It is hard not to see that the easy credit and low interest rates are tied to the new public debt shown in Figure 5, and that this cash is seeking out stocks. It looks like the Fed’s quantitative easing is inflating stock prices, which are soaring, but that this cash is avoiding investment in the stagnating economy of high unemployment and minimum wage jobs familiar to those who don’t own stocks. The Nasdaq composite index looks even more peaky. Looking like an asset bubble in search of profitable investment in the self-promoting world of finance, rather than in the struggling hard times economy unable to keep growing without cheap oil. How high will the latest shark tooth get before it falls again?
It is is not widely understood that the great recession of 2008 was initiated when oil surged to $147 a barrel in mid-year, followed by a banking liquidity paralysis and a steep oil price collapse. This same event also tells us roughly what to expect when the current oil glut is succeeded by another oil price spike. Dr James Hamilton has done a lot of economic analysis that strongly links oil price rises to subsequent recessions.
The USA is slowly moving in the right direction, burning less oil and we are driving less than ever, but the easy progress has already been made. We still have to import roughly the same amount of oil that we produce domestically just to keep driving normally. There is essentially one big global oil market which has Americans bidding against the Chinese and everyone else for fuel, in the context of a shrinking supply of globally traded oil.
The Chinese economy now seems to be headed into its own growth slump.
The Chinese economy now seems to be headed into its own growth slump.  For a decade or more, investments in many sorts of raw materials, including oil, have depended on strong Chinese demand that acted as an economic engine to maintain global trade and support rising commodity prices.
…In other words, we are now in a world in which the biggest economy, Europe, is about to enter a triple-dip recession, and the third largest standalone economy, China, is undergoing an economic standstill, and all hopes and prayers are that China will join the ECB in activating monetary easing once again. But yes, the Fed will not only conclude QE but will supposedly begin rising rates in just over two quarters. Good luck with that.
With a global economy depressed for years by the stress of about $100 a barrel oil prices, and with attempts to revive the US. economic growth ineffective, aside from what looks like a stock bubble, we could easily slip into a global deflationary spiral. It is not apparent that the global economy can grow at all without cheap oil. As a result, we have a world flush with dollars that have a very low velocity of circulation and a cautious deflationary spending psychology prevails.
Richard Heinberg’s book The End of Growth pointed out that, with the end of cheap oil, the global economy is likely to be incapable of real material growth, as opposed to financial sector growth.  Good economists are starting to realize that the future doesn’t work very well without cheap oil.
Peak oil could be the catalyst for global collapse. Some see new fossil fuel sources like shale oil, tar sands and coal seam gas as saviours, but the issue is how fast these resources can be extracted, for how long, and at what cost. If they soak up too much capital to extract the fallout would be widespread.
Gail Tverberg in her excellent blog Our Finite World, thinks global deflation is happening now. (“Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply?”)
I would argue that falling commodity prices are bad news. It likely means that the debt bubble which has been holding up the world economy for a very long time — since World War II, at least — is failing to expand sufficiently. If the debt bubble collapses, we will be in huge difficulty…
Tom Whipple, who we saw comment earlier, points out that social and economic problems related to peak oil are already global, and are around us everywhere whether or not we are able to understand the connections.
If we step back and acknowledge that the shale oil phenomenon will be over in a couple of years and that oil production is dropping in the rest of the world, then we have to expect that the remainder of the peak oil story will play out shortly. The impact of shrinking global oil production, which has been on hold for nearly a decade, will appear. Prices will go much higher, this time with lowered expectations that more oil will be produced as prices go higher. The great recession, which has never really gone away for most, will return with renewed vigour and all that it implies…
All this is telling us that the peak oil crisis we have been watching for the last ten years has not gone away, but is turning out to be a more prolonged event than previous believed. Many do not believe that peak oil is really happening as they read daily of surging oil production and falling oil prices. Rarely do they hear that another shoe has yet to drop and that much worse in terms of oil shortages, higher prices and interrupted economic growth is just ahead. We are sitting in the eye of the peak oil crisis and few recognize it. Five years from now, it should be apparent to all.




America: You’ve got three more years to drive normally!

5 10 2014

Part 1

Three more years? That’s pretty scary! Surely there must be a mistake in that headline.

Is it possible that average Americans could have a hard time driving only three years from now? Preposterous, to say the very least! Three more years to drive would be awful scary if it were true. Fortunately, it can’t be true because the USA has been racing ahead, drilling like crazy, with the result that we are now the world’s third biggest oil producer, just behind Russia and Saudi Arabia.

As everyone who follows the news has heard by now, an innovative drilling technology called “fracking” has added about three million barrels a day of new “tight oil” production, from areas of the U.S. like the Bakken in North Dakota, and the Eagle Ford shale in Texas. Obama used to tell us how we need to break our petroleum addiction, but now he can’t bless new drilling enough. As a result, Americans are feeling better and driving more.

Case closed, right? Actually no.

The problem in a nutshell

This article will review the major problem the USA faces and the basic reasons why average American middle class folks can’t keep driving the way they have been accustomed to thinking is their birthright for almost the past century.

This first part begins a series that is partly concerned with geology, partly with the economics of energy, and partly with how the powers of self-interest and denial have blinded Americans to the precarious future of our national fossil fuel addiction.

The economic and geological evidence strongly suggests that the widely acclaimed new “fracking” technology may have bought us a few more years of grace in being able to keep on driving, but that this is about to end. With the end of cheap energy, and cheap oil in particular, the whole world is now facing an end to several centuries of rapid growth based on burning fossil fuels, as we progressed from burning wood to coal, and finally to oil and natural gas. The end of cheap oil means that the USA must now learn to accept a painful new transportation reality.

It all has to do with a peak in world oil production, about which I have written in the past. Shell geologist M. King Hubbert famously predicted in 1956 that U.S. oil production would peak about 1970, which it did, and then globally about 2000. As it happened, he was only off by about five years. Production of conventional oil — meaning cheap traditional oil — peaked globally in 2005.

Now the world is only able to expand global liquid fuel production by producing various costlier unconventional fuels.

Now the world is only able to expand global liquid fuel production by producing various costlier unconventional fuels. We are still mostly able to drive largely because of a big increase in unconventional oil production from sources such as the Canadian tar sands, heavy oil production, and deep water drilling. Especially in the last five years, the widespread use of “fracking,” or the hydrofracturing of petroleum source rock, has been used to yield “tight oil,” as well as natural gas.

Fracking has already added U.S. production of about 3 million barrels per day of expensive, low quality tight “oil,” and this addition is still increasing. This has been enough to allow most people to keep driving for now, although at a much higher fuel cost than people were used to paying a decade ago. In the last decade oil prices have roughly tripled. Only the recent tight oil from U.S. fracking has kept total world liquid fuel production rising.

New oil production already costs more than consumers can pay

The important new information to report is that we can now see the timing of a peak in global oil production much more clearly than even five years ago. Fracking has brought us a little slack in driving, but not much. As we can see, total U.S. driving has been in decline since about 2007, largely due to a rising fuel cost. A decline is total miles driven implies an even sharper decline in per capita driving, as indicated by the red line.

Roger - driving in fast decline

Chart from State Smart Transportation Initiative.
CLICK ON IMAGE TO ENLARGE.

Fracking production has temporarily held down driving costs, and has thus bought us a few more years of energy crisis denial; for now, driving is expensive but commonly affordable (our global warming denial can still go on for a little longer).

However, driving as usual will probably have to end with the end of the current fracking boom, as soon as its mounting profit losses kill new investment in production. The reason we can’t frack our way out of our oil addiction is that fracking really doesn’t pay off very well. The drilling costs are high compared to conventional oil production, since fracking involves a lot of lateral drilling, plus the great additional energy expense of breaking up a lot of underground rock using high pressure water.

You can produce oil at about $100 a barrel this way, but this tight oil commonly contains a lot of volatile but less valuable condensates like butane. Fracking wells also tend to mostly deplete in just a few years, much faster than old-fashioned conventional oil wells. Although the best fracking wells can still be profitable, the most profitable parts of the major U.S. fracking fields have already been drilled and produced since the low hanging fruit always gets picked first.

Today most energy companies are actually losing money on their oil and gas production.

Today most energy companies are actually losing money on their oil and gas production. This lack of profit, even at the current high price of $100 per barrel, is the way that the world of energy investment tells us that we are reaching peak oil. Peak oil is not exactly geological, although geology has a whole lot to do with it. Peak oil is actually reached when people can no longer afford what it costs to to produce it.

The official U.S. Energy Information Administration recently released a chart which shows that the top 127 oil and gas companies are currently losing money.

roger - energy profit

Chart from U.S. Dept. of Energy.
CLICK ON IMAGE TO ENLARGE.

The gap between the cost of producing oil and what our depressed global economy can bear is currently estimated to be about $10 a barrel in losses. This in itself is unsustainable but Gail Tverberg, a very perceptive non-governmental energy analyst, predicts that that this loss on new oil production will widen very rapidly to about $50 per barrel in only a few years, see Fig. 13 at this link.

When the profit on new oil production disappears, the slow depletion of the giant existing fields takes over. The world’s reserves of cheap conventional oil, largely still in the Middle East, are still profitable, but these massive reserves are in slow decline. Russia recently announced that its production has peaked and even the Saudis are suspected to have run out of spare production capacity.

Most people probably think that OPEC must be getting rich on its oil, but the reality is that “Oil prices are now too low for most OPEC countries to cover their spending needs.” Peak oil is sneaky because it has the hidden effect of slowly impoverishing oil customers by inhibiting economic growth in addition to directly raising fuel costs.

The bottom line

We have already reached the point that the average cost to drill for oil is more than our world of oil-starved and economically struggling customers can afford to pay. This is particularly the case when this increasingly costly fuel is used to power gas guzzlers that many people in the USA use to drive to work while earning minimum wage.

We have already seen the price of oil spike to $147 dollars a barrel in 2008, followed by a price collapse that brought the price back down to the low forties a barrel, at least briefly in 2009. This extreme price volatility is by itself enough to scare away a lot of new drilling investment. Once you drill and frack a tight oil well, you must find a market for this expensive oil, even though the price might go down because of a weak economy. Now that most oil companies are losing money, even at $100 a barrel (at this time, global benchmark Brent is trading below $100), we can’t expect this production to increase.

No matter how the relative value of the dollar fluctuates, the amount of oil-based fuel that it can buy will almost certainly have to decrease as a trend.

No matter how the relative value of the dollar fluctuates, the amount of oil-based fuel that it can buy will almost certainly have to decrease as a trend, or perhaps more abruptly due to economic pressure that can be attributed to costly fuel. We are in a real bind when the global economy can’t recover without cheap oil, when at the same time the oil that global trade relies on for its recovery is no longer profitable to produce.

Looking ahead, oil is much more valuable as a feedstock for making petrochemicals than it is for powering inefficient cars. This means that the petrochemical industry will still be bidding a high price for the world’s last oil, long after our gasoline-powered cars go the way of the horse and buggy.