More Peak Oil bad news…..

15 06 2017

There have been no end of new articles on the demise of the oil industry lately. I’ve been so busy building that it’s only now I can catch up with some blogging, so here’s your lot for the time being.

From the website comes this unbelievable analysis…:

While the Mainstream media continues to put out hype that technology will bring on abundant energy supplies for the foreseeable future, the global oil and gas industry is actually cannibalizing itself just to stay alive.   Increased finance costs, falling capital expenditures and the downgrade of oil reserves are the factors, like flesh-eating bacteria, that are decimating the once great oil and gas industry.

This is all due to the falling EROI – Energy Returned On Investment in oil and gas industry.  Unfortunately, most of the public and energy analysts still don’t understand how the Falling EROI is gutting the entire system.  They don’t see it because the world has become so complex, they are unable to connect-the-dots.  However, if we look past all the over-specialized data and analysis, we can see how bad things are getting in the global oil and gas industry.

Let me start by republishing this chart from my article, Future World Economic Growth In Big Trouble As Oil Discoveries Fall To Historic Lows:

The global oil industry only found 2.4 billion barrels of conventional oil in 2016, less than 10% of what it consumed (25.1 billion barrels).  Conventional oil is the highly profitable, high EROI oil that should not be confused with low quality “unconventional” oil sources such as OIL SANDS or SHALE OIL.  There is a good reason why we have just recently tapped in to oil sands and shale oil…. it wasn’t profitable for the past 100 years to extract it.  Basically, it’s all we have left…. the bottom of the barrel, so to speak.

Now, to put the above chart into perspective, here are the annual global conventional oil discoveries since 1947:

You will notice the amount of new oil discoveries (2.4 billion barrels) for 2016 is just a mere smudge when we compare it to the precious years.  Furthermore, the world has been consuming about an average of 70 million barrels per day of conventional oil production since 2000 (the total liquid production is higher, but includes oil sands, deep water, shale oil, natural gas liquids, biofuels and etc).  Conventional oil production has averaged about 25 billion barrels per year.

As we can see in the chart above… we haven’t been replacing what we have been consuming for quite a long time.  Except for the large orange bar in 2000 of approximately 35 billion barrels, all the years after were lower than 25 billion barrels.  Thus, the global oil industry has been surviving on its past discoveries.

That being said, if we include ALL liquid oil reserves, the situation is even more alarming.

Global Oil Liquid Reserves Fall In 2015 & 2016

According to the newest data put out by the U.S. EIA, Energy Information Agency, total global oil liquid reserves fell for the past two years.  The majority of negative oil reserve revisions came from the Canadian oil sands sector:

Of the 68 public traded energy companies used in this graph, total liquid oil reserves fell from 116 billion barrels in 2014 to 100 billion barrels in 2016.  That’s a 14% decline in liquid oil reserves in just two years.  So, not only are conventional oil discoveries falling the lowest since 1947, companies are now forced to downgrade their total liquid oil reserves due to lower oil prices.

This can be seen more clearly in the EIA chart below:

The “net proved reserves change” is shown as the black line in the chart.  It takes the difference between the additions-revisions, (BLUE) and the production (BROWN).  These 68 public companies have been producing between 8-9 billion barrels of oil per year.

Because of the downward revisions in 2015 and 2016, net oil reserves have fallen approximately 16 billion barrels, or nearly two years worth of these 68 companies total liquid oil production.  If these oil companies don’t suffer anymore reserve downgrades, they have approximately 12 years worth of oil reserves remaining.

But… what happens if the oil price continues to decline as the global economy starts to really contract from the massive amount of debt over-hanging the system?  Thus, the oil industry could likely cut more reserves, which means… the 12 years worth of reserves will fall below 10, or even lower.  My intuition tells me that global liquid oil reserves will fall even lower due to the next two charts in the following section.

The Coming Energy Debt Wall & Surging Finance Cost In The Energy Industry

Over the next several years, the amount of debt that comes due in the U.S. oil industry literally skyrockets higher.  In my article, THE GREAT U.S. ENERGY DEBT WALL: It’s Going To Get Very Ugly…., I posted the following chart:

The amount of debt (as outstanding bonds) that comes due in the U.S. energy industry jumps from $27 billion in 2016 to $110 billion in 2018.  Furthermore, this continues higher to $260 billion in 2022.  The reason the amount of debt has increased so much in the U.S. oil and gas industry is due to the HIGH COST of producing Shale oil and gas.  While many companies are bragging that they can produce oil in the new Permian Region for $30-$40 a barrel, they forget to include the massive amount of debt they now have on their balance sheets.

This is quite hilarious because a lot of this debt was added when the price of oil was over $100 from 2011 to mid 2014.  So, these companies actually believe they can be sustainable at $30 or $40 a barrel?  This is pure nonsense.  Again… most energy analysts are just looking at how a company could producing a barrel of oil that year, without regard of all other external costs and debts.

Moreover, to give the ILLUSION that shale oil and gas production is a commercially viable enterprise, these energy companies have to pay its bond (debt) holders dearly.  How much?  I will show you all that in a minute, however, this is called their DEBT FINANCING.  Some of us may be familiar with this concept when we have maxed out our credit cards and are paying a minimum interest payment just to keep the bankers happy.  And happy they are as they are making a monthly income on money that we created out of thin air… LOL.

According to the EIA, these 68 public energy companies are now spending 75% of their operating cash flow to service their debt compared to 25% just a few years ago:

We must remember, debt financing does not mean PAYING DOWN DEBT, it just means the companies are now spending 75% of their operating cash flow (as of Q3 2016) just to pay the interest on the debt.  I would imagine as the oil price increased in the fourth quarter of 2016 and first quarter of 2017, this 75% debt servicing ratio has declined a bit.  However, people who believe the Fed will raise interest rates, do not realize that this would totally destroy the economic and financial system that NEEDS SUPER-LOW INTEREST RATES just to service the massive amount of debt they have on the balance sheets.

As an example of rising debt service, here is a table showing Continental Resources Interest expense:

Continental Resources is one of the larger energy players in the Bakken oil shale field in North Dakota.  Before tapping into that supposed “high-quality” Bakken shale oil, Continental Resources was only paying $13 million a year to finance its debt, which was only $165 million.  However, we can plainly see that producing this shale oil came at a big cost.  As of December 2016, Continental Resources paid $321 million that year to finance its debt…. which ballooned to $6.5 billion.  In relative terms, that is one hell of a huge credit card interest payment.

The folks that are receiving a nice 4.8% interest payment (again… just a simple average) for providing Continental Resources with funds to produce this oil at a very small profit or loss… would like to receive their initial investment back at some point.  However….. THERE LIES THE RUB.

With that ENERGY DEBT WALL to reach $260 billion by 2022, I highly doubt many of these energy companies will be able to repay that majority of that debt.  Thus, interest rates CANNOT RISE, and will likely continue to fall or the entire financial system would collapse.

Lastly…. the global oil and gas industry is now cannibalizing itself just to stay alive.  It has added a massive amount of debt to produce very low-quality Shale Oil-Gas and Oil Sands just to keep the world economies from collapsing.  The falling oil price, due to a consumer unable to afford higher energy costs, is gutting the liquid oil reserves of many of the publicly trading energy companies.

At some point… the massive amount of debt will take down this system, and with it, the global oil industry.  This will have an extremely negative impact on the values of most STOCKS, BONDS & REAL ESTATE.  If you have well balanced portfolio in these three asset classes, then you are in serious financial trouble in the future.

Then…….  on ABC TV’s lateline (I’m rarely up late enough to watch it, so this was an omen…) this interview came up. I have to say, I found the whole Qatar thing rather bizarre, but this commentator thinks that Saudi Arabia is already in trouble

And now Zero Hedge has this to say as well….

Oil Prices Suffer First ‘Death Cross’ Since 2014 Collapse

For the first time since September 2014, after which oil prices collapsed almost 75%, Brent and WTI Crude futures both just flashed a ‘death cross’ signal as the 50-day moving-average crossed below the 200-day moving-average.

The crossover is typically seen a loss of short-term momentum and last occurred in the second half of 2014, when prices collapsed due to oversupply amid surging U.S. shale oil production.


As Bloomberg notes, OPEC and its partners will be hoping their efforts to curb output will be enough to support prices and counteract any fears of growing downside risk.


However, this morning’s news of “real” OPEC production may raise more doubts about the cartel’s commitment (and going forward, the Qatar debacle won’t help).

The End of the Oilocene

19 02 2017

The Oilocene, if that term ever catches on, will have only lasted 150 years. Which must be the quickest blink in terms of geological eras…… This article was lifted from but unfortunately I can’t give writing credits as I could not find the author’s name anywhere. The data showing we’ll be quickly out of viable oil is stacking up at an increasing rate.

Steven Kopits from Douglas-Westwood (whose work I published here three years ago almost to the day) said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programs. Nearly half of the industry needs more than $120,” he said”.

And if you don’t finish reading this admittedly long article, do not exit this blog without first taking THIS on board…….:

What people do not realise is that it takes oil to extract, refine, produce and deliver oil to the end user. The Hills Group calculates that in 2012, the average energy required by the oil production chain had risen so much that it was then equal to the energy contained in the oil delivered to the economy. In other words “In 2012 the oil industry production chain in total used 50% of all the energy contained in the oil delivered to the consumer”. This is trending rapidly to reach 100% early in the next decade.

So there you go…… as I posted earlier this year, do we have five years left…….?


End of the “Oilocene”: The Demise of the Global Oil Industry and of the Global Economic System as we know it.

(A pdf version of this paper is here. Please refer to my presentation for supporting images and comments. )

In 1981 I was sitting on an eroded barren hillside in India, where less than 100 years previously there had been dense forest with tigers. It was now effectively a desert and I was watching villagers scavenging for twigs for fuelwood and pondering their future, thinking about rapidly increasing human population and equally rapid degradation of the global environment. I had recently devoured a copy of The Limits to Growth (LTG) published in 1972, and here it was playing out in front of me. Their Business as Usual (BAU) scenario showed that global economic growth would be over between 2010 -2020; and today 45 years later, that prediction is inexorably becoming true. Since 2008 any semblance of growth has been fuelled by astronomically greater quantities of debt; and all other indicators of overshoot are flashing red.


One of the main factors limiting growth was regarded by the authors of LTG as energy; specifically oil. By mid 1970’s surprisingly, enough was known about accessible oil reserves that not a huge amount has since been added to what is known as reserves of conventional oil. Conventional oil is (or was) the high quality, high net energy, low water content, easy to get stuff. Its multi-decade increasing rate in production came to an end around 2005 (as predicted many years earlier by Campbell and Laherre in 1998). The rate of production peaked in 2011 and has since been in decline (IEA 2016).


The International Energy Agency (IEA) is the pre-eminent global forecaster of oil production and demand. Recently it admitted that its oil production forecasts were based on economic projections rather than geology or cost; ie on the assumption that supply will always meet projected demand.
In its latest annual forecast however (New Policies Scenario 2016) the IEA has also admitted for the first time a future in which total global “all liquids” oil production could start to fall within the next few years.


As Kjell Aklett of Upsala University Global Energy Research Group comments (06-12-16), “In figure 3.16 the IEA shows for the first time what will happen if its unrealistic wishful thinking does not become reality during the next 10 years. Peak Oil will occur even if oil from fracked tight sources, oil sands, and other (unconventional) sources are included”.

In fact – this IEA image clearly shows that the total global rate of production of “all hydrocarbon liquids” could start falling anytime from now on; and this should in itself raise a huge red flag for the Irish Government.

Furthermore, it raises a number of vital questions which are the core subject of this post.
Reserves of conventional “easy” oil have mostly been used up. How likely is it that remaining reserves will be produced at the rate projected? Rapidly diminishing reserves of conventional oil are now increasingly being supplemented by the difficult stuff that Kjell Aklett mentions; including conventional from deep water, polar and other inaccessible regions, very heavy bituminous and high sulphur oil; natural gas liquids and other xtl’s, plus other “unconventional oil” including tar sands and shale oil.

How much will it cost to produce all these various types? How much energy will be required, and crucially how much energy will be left over for use by the economy?

The global industrial economy runs on oil.

Oil is the vital and crucial link in virtually every production chain in the global industrial world economy partly because it supplies over 96% of global transport energy – with no significant non-oil dependent alternative in sight.


Our industrial food production system uses over 10 calories of oil energy to plough, plant, fertilise, harvest, transport, refine, package, store/refrigerate, and deliver 1 calorie of food to the consumer; and imagine trying to build infrastructure; roads, schools, hospitals, industrial facilities, cities, railways, airports without oil, let alone maintain them.

Surprisingly perhaps, oil is also crucial to production of all other forms of energy including renewables. We cannot mine and distribute coal or even drill for gas and install pipelines and gas distribution networks without lots of oil; and you certainly cannot make a nuclear power station or build a hydroelectric dam without oil. But even solar panels, wind and biomass energy are also totally dependent on oil to extract and produce the raw materials; oil is directly or indirectly used in their manufacture (steel, glass, copper, fibreglass/GRP, concrete) and finally to distribute the product to the end user, and install and maintain it.

So it’s not surprising that excluding hydro and nuclear (which mostly require phenomenal amounts of oil to implement), renewables still only constitute about 3% of world energy (BP Energy Outlook 2016). This figure speaks entirely for itself. I am a renewable energy consultant and promoter, but I am also a realist; in practice the world runs on oil.


The economy, Global GDP and oil are therefore mutually dependent and have enjoyed a tightly linked dance over the decades as shown in the following images. Note the connection between oil, total energy, oil price and GDP (clues for later).

Click on image to enlarge

Rising cost of oil production

Since 2005 when the rate of production of conventional oil slowed and peaked, production costs have been rising more rapidly. By 2013, oil industry costs were approaching the level of the global oil price which was more than $100/barrel at that time; and industry insiders were saying that the oil industry was finding it difficult to break even.

Click on image to enlarge

A good example of the time was the following article which is worth quoting in full in the light of the price of oil at the time (~$100/bbl), and the average 2016 sustained low oil price of ~$50/bbl.

Oil and gas company debt soars to danger levels to cover shortfall in cash By Ambrose Evans-Pritchard. Telegraph. 11 Aug 2014

“The world’s leading oil and gas companies are taking on debt and selling assets on an unprecedented scale to cover a shortfall in cash, calling into question the long-term viability of large parts of the industry. The US Energy Information Administration (EIA) said a review of 127 companies across the globe found that they had increased net debt by $106bn in the year to March, in order to cover the surging costs of machinery and exploration, while still paying generous dividends at the same time. They also sold off a net $73bn of assets.

The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568bn over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly. Companies have exhausted the low-hanging fruit and are being forced to explore fields in ever more difficult regions.

The EIA said the shortfall between cash earnings from operations and expenditure — mostly CAPEX and dividends — has widened from $18bn in 2010 to $110bn during the past three years. Companies appear to have been borrowing heavily both to keep dividends steady and to buy back their own shares, spending an average of $39bn on repurchases since 2011”.

In another article (my highlights) he wrote

“The major companies are struggling to find viable reserves, forcing them to take on ever more leverage to explore in marginal basins, often gambling that much higher prices in the future will come to the rescue. Global output of conventional oil peaked in 2005 despite huge investment. The cumulative blitz on exploration and production over the past six years has been $5.4 trillion, yet little has come of it. Not a single large project has come on stream at a break-even cost below $80 a barrel for almost three years.

Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said”.

The following images give a good idea of the trend and breakdown in costs of oil production. Getting it out of the ground is just for starters. The images show just how expensive it is becoming to produce – and how far from breakeven the current oil price is.

Click on image to enlarge

It is important to note that the “breakeven cost” is much less than the oil price required to sustain the industry into the future (business as usual).

The following images show that the many different types of oil have (obviously) vastly different production costs. Note the relatively small proportion of conventional reserves (much of it already used), and the substantially higher production cost of all other types of oil. Note also the apt title and date of the Deutsche Bank analysis – production costs have risen substantially since then.



The global oil industry is in deep trouble

You do not need to be an economist to see that the average 2016 price of oil ~ $50/bbl was substantially lower than just the breakeven price of all but a small proportion of global oil reserves. Even before the oil price collapse of 2014-5, the global oil industry was in deep trouble. Debts are rising quickly, and balance sheets are increasingly RED. Earlier this year 2016, Deloitte warned that 35% of oil majors were in danger of bankruptcy, with another 30% to follow in 2017.


Click on image to enlarge

In addition to the oil majors, shrinking oil revenues in oil-producing countries are playing havoc with national economies. Virtually every oil producing country in the world requires a much higher oil price to balance its budget – some of them vastly so (eg Venezuela). Their economies have been designed around oil, which for many of them is their largest source of income. Even Saudi Arabia, the biggest global oil producer with the biggest conventional oil reserves is quickly using up its sovereign wealth fund.


It appears that not a single significant oil-producing country is balancing its budget. Their debts and deficits grow bigger by the day. Everyone is praying for higher oil prices. Who are they kidding? The average BAU oil price going forward for business as usual for the whole global oil industry probably needs to be well over $100/bbl; and the world economy is on its knees even at the present low oil price. Why is this? The indicators all spell huge trouble ahead. Could there be another fundamental oil/energy/financial mechanism operating here?

The Root Cause

The cause is not surprising. All the various new types of oil and a good deal of the conventional stuff that remains require far more energy to produce.

In 2015, The Hills Group (US Oil Engineers) published “Depletion – A Determination of the Worlds Petroleum Reserve”. It is meticulously researched and re-worked with trends double checked against published data. It follows on from the Hills Group 2013 work that accurately predicted the approaching oil price collapse after 2014 (which no-one else did) and calculated that the average oil price of 2016 would be ~$50/bbl. They claim theirs is the most accurate oil price indicator ever produced, with >96% accuracy with published past data. The Hills Group work has somewhat clarified my understanding of the core issues and I will try to summarise two crucial points as follows.

Oil can only be useful as an energy source if the energy contained in the product (ie transport fuel) is greater than the energy required to extract, refine and deliver the fuel to the end user.

If you electrolyse water, the hydrogen gas produced (when mixed with air and ignited), will explode with a bang (be careful doing this at home!). The hydrogen contained in the world’s water is an enormous potential energy source and contains infinitely more energy (as hydrogen) than humans could ever need. The problem is that it takes far more energy to produce a given amount of hydrogen from water than is available by combusting it. Oil is rapidly going the same way. Only a small proportion of what remains of conventional oil resources can provide an energy surplus for use as a fuel. All the other types of oil require more energy to produce and deliver as fuel to the end user (taking into account the whole oil production chain), than is contained in the fuel itself.

What people do not realise is that it takes oil to extract, refine, produce and deliver oil to the end user. The Hills Group calculates that in 2012, the average energy required by the oil production chain had risen so much that it was then equal to the energy contained in the oil delivered to the economy. In other words “In 2012 the oil industry production chain in total used 50% of all the energy contained in the oil delivered to the consumer”. This is trending rapidly to reach 100% early in the next decade.

At this point – no matter how much oil is left (a lot) and in whatever form (many), oil will be of no use as an energy source for transport fuels, since it will on average require more energy to extract, refine and deliver to the end-user, than the oil itself contains.

Because oil reserves are of decreasing quality and oil is getting more difficult and expensive to produce and transform into transport fuels; the amount of energy required by the whole oil production chain (the global oil industry) is rapidly increasing; leaving less and less left over for the rest of the economy.

In this context and relative to the IEA graph shown earlier, there is a big difference between annual gross oil production, and the amount of energy left in the product available for work as fuel. Whilst total global oil (all liquids) production currently appears to be still growing slowly, the energy required by the global oil industry is growing faster, and the net energy available for work by the end user is decreasing rapidly. This is illustrated by the following figure (Louis Arnoux 2016).


The price of oil cannot exceed the value of the economic activity generated from the amount of energy available to end-users per barrel.

The rapid decline in oil-energy available to the economy is one of the key reasons for the equally rapid rise in global debt.

The global industrial world economy depends on oil as its prime energy source. Increasing growth of the world economy during the oil age has been exactly matched by oil production and use, but as Louis’ image shows, over the last forty years the amount of net energy delivered by the oil industry to the economy has been decreasing.

As a result, the economic value of a barrel of oil is falling fast. “In 1975 one dollar could have bought, on average, 42,348 BTU; by 2010 a dollar would only have bought 6,946 BTU” (The Hills Group 2015).


This has caused a parallel reduction in real economic activity. I say “real” because today the financial world accounts for about 40% of global GDP, and I would like to remind economists and bankers that you cannot eat 0000’s on a computer screen, or use them to put food on the table, heat your house, or make something useful. GDP as an indicator of the global economy is an illusion. If you deduct financial services and account for debt, the real world economy is contracting fast.

To compensate, and continue the fallacy of endless economic growth, we have simply borrowed and borrowed, and borrowed. Huge amounts of additional debt are now required to sustain the “Growth Illusion”.


In 2012 the decreasing ability of oil to power the economy intersected with the increasing cost of oil production at a point The Hills Group refers to as the maximum affordable consumer price (just over $100/bbl) and they calculated that the price of oil must fall soon afterwards. In 2014 much to everyone’s surprise (IEA, EIA, World Bank, Wall St Oil futures etc) the price of oil fell to where it is now. This is clearly illustrated by The Hills Group’s petroleum price curve of 2013 which correctly calculated that the 2016 average price of oil would be ~$50/bbl (Depletion – The Fate of the Oil Age 2013).


In their detailed 2015 study The Hills Group writes (Depletion – A determination of the world’s petroleum reserve 2015);

“To determine the affordability range it is first observed that the price of a unit of petroleum cannot exceed the value of the economic activity (generated by the net energy) it supplies to the end consumer. (Since 2012) more of the energy from petroleum was being committed to the production of petroleum than was delivered to the consumer. This precipitated the 2014 price decline that reduced prices by 50%. The energy delivered to the end consumer will continue to decline and the end consumer maximum affordability will decline with it.

Dr Louis Arnoux explains this as follows: “In 1900 the Global Industrial World received 61% of the gross energy in a barrel of oil. In 2016 this is down to 7%. The global industrial world is being forced to contract because it is being starved of net energy from oil” (Louis Arnoux 2016).

This is reflected in the slowing down of global economic growth and the huge increase in total global debt.

Without noticing it, in 2012 the world entered “Emergency Red Alert”

In the following image, Dr Arnoux has reworked Hills Group petroleum price curve showing the impending collapse of thermodynamically driven oil prices – and the end of the oil age as we know it. This analysis is more than amply reinforced by the dire financial straits of the global oil industry, and the parlous state of the global economy and financial system.


Oil is a finite resource which is subject to the same physical laws as many other commodities. The debate about peak oil has been clouded by the fact that oil consists of many different kinds of hydrocarbons; each of which has its own extraction profile. But conventional oil is the only category of oil that can be extracted with a whole production chain energy surplus. Production of this commodity (conventional oil) has undoubtedly peaked and is now declining. The amount of energy (and cost) required by the global oil industry to produce and deliver much of the remainder of conventional reserves and the many alternative categories of oil to the consumer, is rapidly increasing; and we are equally rapidly heading toward the day when we have used up those reserves of oil which will deliver an energy surplus (taking into account the whole production chain from extraction to delivery of the end product as fuel to the consumer).

The Global Oil Industry is one of the most advanced and efficient in the world and further efficiency gains will be minor compared to the scale of the problem, which is essentially one of oil depletion thermodynamics.

Humans are very good at propping up the unsustainable and this often results in a fast and unexpected collapse (eg Joseph Tainter: The collapse of complex societies). An example of this is the Seneca Curve/Cliff which appears to me to be an often-repeated defining trait of humanity. Our oil/financial system is a perfect illustration.

Debt is being used to extend the unsustainable and it looks as though we are headed for the “Mother of all Seneca Curves” which I have illustrated below:



Because oil is the primary energy resource upon which all other energy sources depend, it is almost certain that a contraction in oil production would be reflected in a parallel reduction in other energy systems; as illustrated rather dramatically in this image by Gail Tverberg (the timing is slightly premature – but probably not by much).


Energy and Money

Fundamental to all energy and economic systems is money. Debt is being used to prop up a contracting oil energy system, and the scale of money created as debt over the last few decades to compensate is truly phenomenal; amounting to hundreds of trillions (excluding “extra-terrestrial” amounts of “financials”), rising exponentially faster. This amount of debt, can never ever be repaid. The on-going contraction of the oil/energy system will exacerbate this trend until the financial system collapses. There is nothing anyone can do about it no matter how much money is printed, NIRP, ZIRP you name it – all the indicators are flashing red. The panacea of indefinite money printing will soon hit the thermodynamic energy wall of reality.


The effects we currently observe such as exponential growth in debt (US Debt alone almost doubled from $10 trillion to nearly $20 trillion during Obama’s tenure), and the financial problems of oil majors and oil producing countries, are clear indicators of the imminent contraction in existing global energy and financial systems.

The coming failure of the global economic system will be a systemic failure. I say “systemic” because for the last 150 years up till now there has always been cheap and abundant oil to power recovery from previous busts. This era is over. Cheap and abundant oil will not be available for recovery from the next crunch, and the world will need to adopt a completely different economic and financial model.

The Economics “profession”

Economists would have us believe it’s just another turn of the credit cycle. This dismal non-science is in the main the lapdog of the establishment, the global financial and corporate interests. They have engineered the “science” to support the myth of perpetual growth to suit the needs of their pay-masters, the financial institutions, corporations and governments (who pay their salaries, fund the universities and research, etc). They have steadfastly ignored all ecological and resource issues and trends and warnings such as LTG, and portrayed themselves as the pre-eminent arbiters of human enterprise. By vehemently supporting the status quo, they of all groups, I hold primarily responsible for the appalling situation the planet faces; the destruction of the natural world, and many other threats to the global environment and its ability to sustain civilisation as we know it.

I have news for the “Economics Profession”. The perpetual growth fantasy financial system based on unlimited cheap energy is now coming to an end. From the planet’s point of view – it simply couldn’t be soon enough. This will mark the end of what I call the “Oilocene”. Human activities are having such an effect on the planet that the present age has been classified by geologists as a new geological era “The Anthropocene”. But although humans had already made a significant impact on natural systems, the Anthropocene has largely been defined by the relatively recent discovery and use of liquid fossil energy reserves amounting to millions of years of stored solar energy. Unlimited cheap oil has fuelled exponential growth in human systems to the point that many of these are now greater than natural planetary ones.
This cannot be sustained without huge amounts of cheap net oil energy, so we are inescapably headed for “the great deceleration”. The situation is very like the fate of the Titanic which I have outlined in my presentation. Of the few who had the courage to face the economic wind of perpetual growth, I salute the authors of LTG and the memory of Richard Douthwaite (The Growth Illusion 1992), and all at FEASTA who are working hard to warn a deaf Ireland of what is to come and why – and have very sensibly been preparing for it! We will all need a lot of courage and resilience to face what is coming down the line.

Ireland has a very short time available to prepare for hard times.

There are many things we could do here to soften the impact if the problem was understood for what it is. FEASTA publications such as the Before The Wells Run Dry and Fleeing Vesuvius; and David Korowicz’s works such as The Tipping Point and of course, The Hills Group 2015 publicationDepletion – a determination of the worlds petroleum reserve , and very many other references, provide background material and should be required urgent reading for all policy makers.

The pre-eminent challenge is energy for transport and agriculture. We could switch to use of compressed natural gas (CNG) as the urgent default transport/motive fuel in the short term since petrol and diesel engines can be converted to dual-fuel use with CNG; supplemented rapidly by biogas (since we are lucky enough to have plenty of agricultural land and water compared to many countries).

We could urgently switch to an organic high labour input agriculture concentrating on local self-sufficiency eliminating chemical inputs such as fertilisers pesticides and herbicides (as Cuba did after the fall of the Soviet Union). We could outlaw the use of oil for heating and switch to biomass.

We could penalise high electricity use and aim to massively cut consumption so that electricity can be supplied by completely renewable means – preserving our natural gas for transport fuel and the rapid transition from oil. The Grid could be urgently reconfigured to enable 100% use of renewable electricity within a few years. We could concentrate on local production of food, goods and services to reduce transport needs.

These measures would create a lot of jobs and improve the balance of payments. They have already been proposed in one form or another by FEASTA over the last 15 years.

Ireland has made a start, but it is insignificant compared to the scale and timescale of the challenge ahead as illustrated by the next image (SEAI: Energy in Ireland – Key Statistics 2015). We urgently need to shrink the oil portion to a small fraction of current use.


Current fossil energy use is very wasteful. By reducing waste and increasing efficiency we can use less. For instance, a large amount of the energy used as transport fuels and for electricity generation is lost to atmosphere as waste heat. New technological solutions include a global initiative to mount an affordable emergency response called nGeni that is solely based on well-known and proven technology components, integrated in a novel way, with a business and financial model enabling it to tap into over €5 trillion/year of funds currently wasted globally as waste heat. This has potential for Ireland, and will be outlined in a subsequent post.

To finance all the changes we need to implement, quickly (and hopefully before the full impact of the oil/financial catastrophe really kicks in), we could for instance create something like a massive multibillion “National Sustainability and Renewable Energy Bond”. Virtually all renewables provide a better (often substantially better) return on investment compared to bank savings, government bonds, etc; especially in the age of zero and negative interest rate policies ZIRP, NIRP etc.

We may need to think about managing this during a contraction in the economy and financial system which could occur at any time. We certainly could do with a new clever breed of “Ecological Economists” to plan for the end of the old system and its replacement by a sustainable new one. There is no shortage of ideas. The disappearance of trillions of fake money and the shrinking of national and local tax income which currently funds the existing system and its social programmes will be a huge challenge to social stability in Ireland and all over the world.

It’s now “Emergency Red Alert”. If we delay, we won’t have the energy or the money to implement even a portion of what is required. We need to drag our politicians and policy makers kicking and screaming to the table, to make them understand the dire nature of the predicament and challenge them to open their eyes to the increasingly obvious, and to take action. We can thank The Hills Group for elucidating so clearly the root causes of the problem, but the indicators of systemic collapse have for many years been frantically jumping up and down, waving at us and shouting LOOK AT ME! Meanwhile the majority of blinkered clueless economists that advise business and government and who plan our future, look the other way.

In 1972 “The Limits to Growth” warned of the consequences of growing reliance on the finite resource called “oil” and of the suicidal economics mantra of endless growth. The challenge Ireland will soon face is managing a fast economic and energy contraction and implementing sustainability on a massive scale whilst maintaining social cohesion. Whatever the outcome (managed or chaotic contraction), we will soon all have to live with a lot less energy and physical resources. That in itself might not necessarily be such a bad thing provided the burden is shared. “Modern citizens today use more energy and physical resources in a month than our great-grandparents used during their whole lifetime” (John Thackera; “From Oil Age to Soil Age”, Doors to Perception; Dec 2016). Were they less happy than us?

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Powerpoint presentation

Featured image: used motor oil. Source:

Forget 1984…. 2020 is the apocalypse year

26 01 2017

The crescendo of news pointing to 2020 as the date to watch is growing apace…. it won’t be the year collapse happens, because collapse is a process, not an event; but it will definitely be the year this process starts to become obvious. To people other than followers of this blog at least…!

RIYADH, Saudi ArabiaAccording to the International Monetary Fund, Saudi Arabia’s economy is in danger of collapse as oil prices grow increasingly unstable.

The warning appeared in the “Regional Economic Outlook” for the Middle East and Central Asia published on Oct. 15, an annual report published by IMF economists. Adam Leyland, writing on Oct. 23 for The Independent, explained the grim prognosis for Saudi’s economy, which is almost completely dependent on fossil fuels:

“[T]he IMF said that the kingdom will suffer a negative 21.6 per cent ‘General Government Overall Fiscal Balance’ in 2015 and a 19.4 per cent negative balance in 2016, a massive increase from only -3.4 per cent in 2014.

Saudi Arabia currently has $654.5 billion in foreign reserves, but the cash is disappearing quickly.

The Saudi Arabian Monetary Agency has withdrawn $70 billion in funds managed by overseas financial institutions, and has lost almost $73 billion since oil prices slumped, according to Al-Jazeera. Saudi Arabia generates 90 per cent of its income from oil.”


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

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

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

Author Dr Nafeez Ahmed, a Visiting Fellow at Anglia Ruskin University’s Global Sustainability Institute, is making even more waves today, saying………:

“Syria and Yemen demonstrate how climate and energy crises work together to undermine state power and fuel terrorism. 

“Climate-induced droughts ravage agriculture, swell the ranks of the unemployed and destroy livelihoods.  Domestic oil depletion undercuts state revenues, weakening the capacity to sustain domestic subsidies for fuel and food.  As the state is unable to cope with the needs of an increasingly impoverished population, this leads to civil unrest and possibly radicalisation and terrorism. 

“These underlying processes are not isolated to Syria and Yemen.  Without a change of course, the danger is that eventually they will occur inside the US and Europe.”

Failing States, Collapsing Systems: BioPhysical Triggers of Political Violence, authored by Dr Nafeez Ahmed, published by Springer Briefs in Energy includes the following key points…:
  • Global net energy decline is the underlying cause of the decline in the rate of global economic growth.  In the short term, slow or absent growth in Europe and the US is complicit in voter discontent and the success of anti-establishment politicians. 
  • Europe is now a post-peak oil society, with its domestic oil production declining every year since 1999 by 6%.  Shale oil and gas is unlikely to offset this decline. 
  • Europe’s main sources of oil imports are in decline. Former Soviet Union producers, their production already in the negative, are likely to terminate exports by 2030.  Russia’s oil production is plateauing and likely to decline after 2030 at the latest. 
  • In the US, conventional oil has already peaked and is in sharp decline.  The shortfall is being made up by unconventional sources such as tight oil and shale gas, which are likely to peak by 2025. California will continue to experience extensive drought over the coming decades, permanently damaging US agriculture.
  • Between 2020 and 2035, the US and Mexico could experience unprecedented military tensions as the latter rapidly runs down its conventional oil reserves, which peaked in 2006. By 2020, its exports will revert to zero, decimating Mexican state revenues and potentially provoking state failure shortly thereafter.
  • After 2025, Iraq is unlikely to survive as a single state.  The country is experiencing worsening water scarcity, fueling an ongoing agricultural crisis, while its oil production is plateauing due to a combination of mounting costs of production and geopolitical factors.
  • Saudi Arabia will face a ‘perfect storm’ of energy, food and economic shocks most likely before 2030, and certainly within the next 20 years.
  • Egypt will begin to experience further outbreaks of civil unrest leading to escalating state failure after 2021.  Egypt will likely become a fully failed state after 2037.
  • India’s hopes to become a major economic player will falter due to looming food, water and energy crises.  India’s maximum potential domestic renewable energy capacity is insufficient to meet projected demand growth.
  • China’s total oil production is likely to peak in 2020.  Its rate of economic growth is expected to fall continuously in coming decades, while climate change will damage its domestic agriculture, forcing it to rely increasingly on expensive imports by 2022.

I wish Julian Simon could read this….. it seems all our limits to growth chickens are coming home to roost, and very soon now.

The price of fuel…. yep, Australia still bang on target to run out of oil by 2020

18 01 2017

Following on from the article I recently published regarding the sudden rise in the cost of fuel in Australia by a whopping 14% in one day, and the absence of any logical reason despite the mainstream media falsely rabbitting on about the soaring cost of oil, I started thinking about the series of articles I wrote years ago about Australia running out of oil by 2020……. the last time I investigated this was almost three years ago. How time flies when you move interstate and start again…!

Finding current data turned out difficult, as usual. My traditional source from the government has still not updated its spreadsheets beyond September last year, so 2016 totals were not yet available.

This chart is from and means I don’t need to produce my own..!


Predictably, we are still bang on target to totally run out of oil by 2020, now just three years away.

I still believe that the oil companies are in serious financial trouble, but the fact that we are continually importing more and more liquid fuel from overseas instead of producing our own cannot be helping the situation. How much you will have to pay for the fuel for your favorite vehicle three hears hence is anyone’s guess…. except it’s unlikely to be less!

You may also remember I commented about the huge shale oil deposit found in South Australia over four years ago. Why has nothing yet happened about this scenario changing event, as we were promised by the ranting media of the time…?

A year ago, the Advertiser, Adelaide’s main newspaper wrote..:

THE company sitting on potentially significant shale oil reserves in the state’s far north has dismissed its previous claims to deliver a US-style economic boom for Australia.


“We just don’t have the resources on the ground to facilitate it and it makes it harder for us to attract investment from major traditional oil investment markets such as the US because if you look at it pound for pound, you are investing in a remote area in a remote part of the globe,” he said.

Don’t expect that chart to change any time soon……..


12 01 2015

Below is Geoff Chia’s article “advice for sustainability activists in 2015”. Feel free to forward this email to everyone ad infinitum. Maybe not a lot new from this source, but it sure is more informative than mainstream rubbish.

After writing this article, Geoffrey discovered this interview with Thomas Lewis, a journalist with many decades experience investigating and reporting environmental issues, who came to the same conclusion:

Here is a podcast by financial guru Richard Martin

He sounds the alarm about the fraudulent and precarious nature of the global financial system. In particular he explains the bogus nature of the shale oil derivatives and associated junk bonds (collapse of which may well trigger the next, more catastrophic GFC). He is an expert in financial matters but unfortunately does not understand peak oil.

You may need to read the following a few times to fully comprehend the various machinations taking place today:

Current low oil prices are a result of demand destruction (slowing of growth in China + recession/depression everywhere else in the world), combined with the Saudis insanely continuing to pump their oil at full throttle (they are well down the slope past peak oil, but they still have the largest reserves in the world). Such Saudi behaviour defies logic in a rational market, but the political motives are clear (which the Saudis devised in conjunction with John Kerry in September last year)

Predatory low oil pricing is now decimating the Iranian and Russian economies* and could even cause them to crash, an outcome greatly desired by the US who so far have been singularly impotent in forcing either regime to toe the US line. As for the Sunni Saudis, they regard Shia Iran as their heretical enemy and Russia as a godless Satan. This strategy, if drawn out, will also cause collateral damage to the US shale oil industry, however that was doomed anyway from the start. In the short term, Bakken/Eagle Ford will continue pumping like crazy, even if no profit is made, as they are riding on the momentum from old investments (which will never see a long term return**). They need to maintain the illusion of ongoing viability, despite their lousy EROEI, to prop up their share prices and recruit more suckers investors. Furthermore Obama, as directed by his masters (the usual wunch of bankers) has now removed legal protection of public savings from oil derivative fraud (akin to the US government previously repealing Glass-Steagall) which means that if the oil derivatives collapse, the “too big to fail” banks will once again be bailed out by public funds obtained from taxes on the dying middle class and more quantitative easing (AKA printing funny money). Savings accounts will not be safe. Anyone else, everywhere else, who has been stupid enough to invest in the US sharemarket (perhaps your superannuation fund managers?) can kiss their investments goodbye.

What would you do if you were Russian or Iranian? Grit your teeth and ride things out till the oil price inevitably rises again and you can once more make a profit, then trade your oil in currency other than the US dollar (or use barter arrangements eg X barrels of oil for Y number of Chinese solar PV panels). Elimination of the greenback petrodollar is guaranteed to cause the collapse of the US economy. If Iran and Russia are however blocked in their attempts to recover from their own economic collapse and escape the petrodollar, they can always resort to the “continuation of policy by other means” to paraphrase von Clausewitz. If my country is imploding and the Saudis are to blame, I may as well lob a missile into Riyadh, as I have nothing to lose. And so the great game continues.

Meanwhile the dumb sheeple are blissfully pumping cheap oil at the bowsers to fill their monstrous SUVs but have no clue as to what is going on. What was Mr T’s famous catchphrase again?

Brand New Year, same old dirty tricks. Hope you have a happy one anyway.

*Iranian and Russian breakeven oil production costs are substantially higher than Saudi costs. Low oil prices cause the Iran and Russia economies to bleed money. Saudis can even price their oil below Saudi production costs for a while, due to their huge financial reserves.

**big players such as Shell and Sumitomo were well aware of the bogus accounting of shale oil returns, which is why they pulled out. Other players were captured by hubris and irrational exuberance akin to tulip mania. Money flooded into shale oil junk bonds as a result of the US Reserve Bank’s ZIRP, but the chickens will be coming to home to roost soon.



  1. First and foremost, it is essential to understand and accept that the massive die-off of the majority of humanity (indeed, the majority of all species) is guaranteed and inevitable over the next few decades, no matter what you or anyone else does, even if all anthropogenic greenhouse gas emissions were to cease immediately. Get over it. Stop wasting your precious time and energy trying to influence National1 or International policies. Even if you succeed in turning society around right now, we are well past the point that it will make any difference whatsoever. Runaway destruction of our ecosystems has spiralled out of control and we have already fallen off the cliff. In 2012, I myself abandoned the conceit and delusion that I could “save the world”, when the scientific evidence for the irreversible decompensation of our global ecosphere became overwhelming and indisputable. The mainstream media paint a false picture to the sheeple to keep them subdued and distracted, to avoid provoking mass panic. This article is meant for intelligent people capable of objective, reality-based thinking. The only thing you can do now that will make any difference, is that which lies within your own individual control. It is to determine your own personal fate.

  2. A small proportion of the population will be able to survive, even thrive, during and after the coming collapse. Who will they be? Those who prepare now and plan ahead will have the best chance. You must therefore seize your opportunity while there is still time, before the complete meltdown of this fraudulently propped-up global financial scam wipes out your bank balance, before economic collapse triggers the eruption of extremists in your neighbourhood (just as the Great Depression led to Nazism, the Greek implosion to Golden Dawn and the Syrian collapse to ISIS) and before all your options are lost. It is imperative you discuss with and advise people about the measures needed now, so that the tiny handful who are receptive to this message can mitigate against future hardships and horrors. If you fail to take action now and remain inert and paralysed like a stunned mullet, you are passively submitting to the slings and arrows of outrageous fortune and will very likely die horribly.

  3. It is not selfish to try to save yourself and your loved ones, while the rest of humanity perish. There is nothing noble about you going down in flames alongside the clueless sheeple and those denialists who reviled you in the past for being “alarmist”. Indeed it will be stupid and pointless for you to join them. They had their chance, refused to listen and will reap what they sowed. The people we should mourn are those who have historically contributed little to this global catastrophe, but who will suffer the most eg subsistence farmers in Bangladesh or Africa.

  4. The actions you must take to survive the great unravelling of industrial civilisation actually correspond exactly with the ethical actions you should take anyway to set a good example to others. The best way to convince others is not by words, but by deeds. To serve as a role model, to practice what you preach. There is no point campaigning to shut down coal fired power stations unless you first show others how they can live well without using coal fired power. Your actions will consist of drastically reducing your ecological footprint, liberating yourself from a corrupt, rapacious and destructive capitalist system and pursuing a meaningful and joyful life in a cooperative community. Talk less and do more.

  5. Do not get bogged down by the proponents of near term human extinction. They are a nihilistic cult with nothing to offer but inertia, hopelessness, misery and despair, despite their attempts to put a positive spin on suicide. Even if NTHE ultimately does occur, it still remains eminently worthwhile at this time for you to aim for the best quality, longest duration lifespan you can possibly achieve. For the patient with terminal cancer, the ethical physician must endeavour to minimise their suffering and maximise the quality and duration of their remaining life. As long as you are not in excruciating pain or in unremitting distress, your survival instinct will dictate that you keep on keeping on. Humanity’s best strategy to avoid extinction is not by attempting to preserve the cities nor prolong industrial civilisation (which is precisely what is destroying our living planet) but by establishing a multitude of self sufficient off-grid communities all around the world. All it takes to avoid NTHE is for just one community to succeed in the long term. By saving yourself you could well be saving humanity as a species.


  1. Try to expand your social network. Seek out like minded individuals you can trust, who are interested in pursuing an ethical sustainable lifestyle.
  2. Withdraw your money from the Ponzi scheme known as the Sharemarket. Get rid of debt. Convert your cyberwealth into assets of real world value. Lack of finances is not necessarily an impediment to escaping the corrupt mainstream establishment. Practical knowledge, experience and abilities (carpentry, metalwork, plumbing, electrical, agricultural skills etc) will be in great demand, however simply possessing good common sense, physical health and a willingness to learn and contribute are the most important assets, which you can offer to homestead planners who will be keen to snap you up. The most precious commodities of the future will not be gold, silver or diamonds (which the wise will regard with disdain) but the qualities of trustworthiness, reliability and diligence. These are the riches of the future which will bind individuals and communities together.

  3. Purchase suitable land in a remote2 location with reliable fresh water supplies, as little affected by the future projections of climate change as possible, on which to establish your permaculture homestead.

  4. Construct one or more large lockup sheds (with attached large rainwater tanks), in which you can store agricultural tools, fertiliser, water purifying equipment, emergency food supplies and other essential startup items. One or more containers placed there will also be useful, if you can arrange that. When you ultimately empty out your large shed of its contents, it can be used as multipurpose building eg workshop, community hall etc.

  5. It may be necessary to erect a permaculture enclosure to protect your crops from being consumed by the local wildlife.

  6. Participants must construct their dwellings. These must be designed to be off-grid ie. completely independent of centrally controlled electrical, water and sewage utilities. Time, money and ethical considerations may preclude the construction of conventional concrete and steel buildings. Restrictive and backward codes of the local council may prevent you from building cheap, innovative dwellings such as Earthships (which are labour intensive and take a long time to build anyway). One way to bypass these obstacles is to construct tiny houses on wheels3. They cost less than 20% of a standard house, can be built to passive solar principles (and incorporate the essential wood stove/heater) and can provide all your usual creature comforts and amenities (even a home movie theatre) albeit in a smaller space. Furthermore they can be custom built by you right now, right where you live, then towed to your homestead later. Timing of the move is crucial and must obviously be done before the collapse of the current infrastructure leads to fuel scarcity and blockade of the highways. If time becomes very short, you can purchase a standard caravan immediately, although they are generally designed to be plugged into the grid and will not be ideal to live in long term (although much better than a tent).

  7. Security issues for your community may be the most fraught and difficult to work out. In the USA where guns proliferate, paranoia leads to the accumulation of weapons and fearful continuous surveillance. My advice to Americans is to move to Alaska, Washington State or Oregon. Even better if you can, is to emigrate to NZ, Canada or southern Chile (the latter only if you are a fluent Spanish speaker) which probably has the best long term prospects of all. In Oz, I personally favour remoteness, obscurity and good relations with your neighbours as the best means of protection4. Dogs on your property may help, but avoid aggressive breeds which may be a danger to children.

  8. The above steps will not guarantee you a good outcome (nothing can) but will dramatically increase your chances of achieving a good outcome. At the very least, engaging in hopeful activity in the company of other good people will shield you from despair. Even if things don’t ultimately work out, at least you will go down fighting and in control of your own destiny, rather than be a passive lamb to the slaughter. Apart from good planning, the main factors which will determine whether your community succeeds or fails in the long term will be the quality of your participants5, your framework of governance6 and a good deal of luck.

Geoffrey Chia, January 2015


  1. Unless you live in NZ, which may be the only country in the world with any hope of saving the majority of its population. This is based on its favourable location and soils, low population density, high level of renewable energy infrastructure including electric railways and my belief (although I could be mistaken) that the majority of Kiwis are not certifiably insane (unlike the rest of the world where the inmates have taken over the asylum).

  2. Well away from large cities which will be the “killing fields of the future”. Small towns in agricultural areas may potentially be viable.

  3. Lara Nobel, a graduate architect now completing a building qualification, will be presenting this topic at the Queensland Skeptics meeting in Brisbane in March 2015. There is a wealth of information about tiny houses on the web.

  4. In the future time of petroleum scarcity, the “marauding hordes” will not be able to invade you en masse if your homestead is more than one fuel tank away from a major city and they do not know your location. Good neighbours can provide advance notice if random dodgy strangers are seen making their way on foot through the countryside. As survivors, they will be resourceful. If they also turn out to be decent and hardworking, let them share in your homestead chores with a view to eventually joining up.

  5. Every member must contribute. Psychopaths must be expelled. People steeped in non-evidence based bullshit (eg belief in homeopathy or that the MMR vaccine causes autism) must be excluded, because their forcefully held nonsensical and harmful ideologies will obstruct sensible decision making initiatives. People steeped in superstition eg belief in God, gods or ghosts must be excluded, because their delusions will distort rational thinking of impressionable young people and may pose a future risk of turning your community into a cult. The reason why this global human experiment is failing is because of idiocracy, ie. rule by idiots, who must be excluded from your community. The only hope for humanity is for sapient people to survive and populate future generations.

  6. The basic principle being that decisions must be made on the basis of evidence, reason and fairness to confer the greatest amount of good to the greatest number of people in your community on a long term basis.

Geoffrey Chia is a Cardiologist/Physician based in Brisbane, Australia, who convened the group “Doctors and Scientists for Sustainability and Social Justice” from 2006 to 2013

The collapse of oil prices and energy security in Europe

17 11 2014

This is a written version of the brief talk I gave at the hearing of the EU parliament on energy security in Brussels on Nov 5, 2014. It is not a transcription, but a shortened version that tries to maintain the substance of what I said. In the picture, you can see the audience and, on the TV screen, yours truly taking the picture.

Ladies and gentlemen, first of all, let me say that it is a pleasure and an honour to be addressing this distinguished audience today. I am here as a faculty member of the University of Florence and as a member of the Club of Rome, but let me state right away that what I will tell you are my own opinions, not necessarily those of the Club of Rome or of my university.

This said, let me note that we have been discussing so far with the gas crisis and the Ukrainian situation, but I have to alert you that there is another ongoing crisis – perhaps much more worrisome – that has to do with crude oil. This crisis is being generated by the rapid fall in oil prices during the past few weeks. I have to tell you that low oil prices are NOT a good thing for the reasons that I will try to explain. In particular, low oil prices make it impossible for many oil producers to produce at a profit and that could generate big problems for the world’s economy, just as it already happened in 2008.

So, let me start with an overview of the long term trends of oil prices. Here it is, with data plotted from the BP site.

These data are corrected for inflation. You see strong oscillations, but also an evident trend of growth. Let’s zoom in, to see the past thirty years or so:

These data are not corrected for inflation, but the correction is not large in this time range. Prices are growing, but they stabilized during the past 4-5 years at somewhere around US 100 $ per barrel. Note the fall during the past month or so. I plotted these data about one week ago, today we are at even lower prices, well under 80 dollars per barrel.

The question is: what generates these trends? Obviously, there are financial factors of all kinds that tend to create fluctuations. But, in the end, what determines prices is the interplay of demand and offer. If prices are too high, people can’t afford to buy; that’s what we call “demand destruction”. If prices are too low, then it is offer that is destroyed. Simply, producers can’t sell their products at a loss; not for a long time, at least. So there is a range of prices which are possible for oil: too high, and customers can’t buy, too low, and companies can’t sell. Indeed, if you look at historical prices, you see that when they went over something like 120 $/barrel (present dollars) the result was a subsequent recession and the collapse of the economy.

Ultimately, it is the cost of production that generates the lower price limit. Here, we get into the core of the problem. As you see from the price chart above, up to about the year 2000, there was no problem for producers to make a profit selling oil at around 20 dollars per barrel. Then something changed that caused the prices to rise up. That something has a name: it is depletion.

Depletion doesn’t mean that we run out of oil. Absolutely not. There is still plenty of oil to extract in the world. Depletion means that we gradually consume our resources and – as you can imagine – we tend to extract and produce first the least expensive resources. So, as depletion gradually goes on, we are left with more expensive resources to extract. And, if extracting costs more, then the market prices must increase: as I said, nobody wants to sell at a loss. And here we have the problem. Below, you can see is a chart that shows the costs of production of oil for various regions of the world. (From an article by Hall and Murphy on The Oil Drum)

Of course, these data are to be taken with caution. But there are other, similar, estimates, including a 2012 report by Goldman and Sachs, where you can read that most recent developments need at least 120 $/barrel to be profitable. Here is a slide from that report.

So, you see that, with the present prices, a good 10% of the oil presently produced is produced at a loss. If prices were to go back to values considered “normal” just 10 years ago, around 40 $/barrel, then we would lose profitability for around half of the world’s production. Production won’t collapse overnight: a good fraction of the cost of production derives from the initial investment in an oil field. So, once the field has been developed, it keeps producing, even though the profits may not repay the investment. But, in the long run, nobody wants to invest in an enterprise at so high risks of loss. Eventually, production must go down: there will still be oil that could be, theoretically, extracted, but that we won’t be able to afford to extract. This is the essence of the concept of depletion.

The standard objection, at this point, is about technology. People say, “yes, but technology will lower costs of extraction and everything will be fine again”. Well, I am afraid that it is not so simple. There are limits to what that technology can do. Let me show you something:

That object you see at the top of the image is a chunk of shale. It is the kind of rock out of which shale oil and shale gas can be extracted. But, as you can imagine, it is not easy. You can’t pump oil out of shales; the oil is there, but it is locked into the rock. To extract it, you must break the rock down into small pieces; fracture it (this is where the term “fracking” comes from). And you see on the right an impression of the kind of equipment it takes. You can be sure that it doesn’t come cheap. And that’s not all: once you start fracking, you have to keep on fracking. The decline rate of a fracking well is very rapid; we are talking about something like a loss of 80% in three years. And that’s expensive, too. Note, by the way, that we are speaking of the cost of production. The market price is another matter and it is perfectly possible for the industry to have to produce at a loss, if they were too enthusiastic about investing in these new resources. It is what’s happening for shale gas in the US; too much enthusiasm on the part of investors has created a problem of overproduction and prices too low to repay the costs of extraction.

So, producing this kind of resources, the so called “new oil” is a complex and expensive task. Surely technology can help reduce costs, but think about that: how exactly can it reduce the energy that it takes to break a rock into fine dust? Are you going to hammer on it with a smartphone? Are you going to share a photo of it on Facebook? Are you going to run it through a 3D printer? The problem is that to break and mill a piece of rock takes energy and this energy has to come from somewhere.

Eventually, the fundamental point is that you have a balance between the energy invested and the energy returned. It takes energy to extract oil, we can say that it takes energy to produce energy. The ratio of the two energies is the “Net Energy Return” of the whole system, also known as EROI or EROEI (energy return of energy invested). Of course, you want this return to be as high as possible, but when you deal with non renewable resources, such as oil, the net energy return declines with time because of depletion. Let me show you some data.

As you see, the net energy return for crude oil (top left) declined from about 100 to around 10 over some 100 years (the value of 100 may be somewhat overestimated, but the trend remains the same). And with lower net energies, you get less and less useful energy from an oil well; as you can see in the image at the lower right. The situation is especially bad for the so called “new oil”, shale oil, biofuels, tar sands, and others. It is expected: these kinds of oil (or anyway combustible liquids) are the most expensive ones and they are being extracted today because we are running out of the cheap kinds. No wonder that prices must increase if production has to continue at the levels we are used to. Then, when the market realizes that prices are too high to be affordable, there is the opposite effect; prices go down to tell producers to stop producing a resource which is too expensive to sell.

So, we have a problem. It is a problem that appears in the form of sudden price jumps; up and down, but which is leading us gradually to a situation in which we won’t be able to produce as much oil as we are used to. The same is true for gas and I think that the present crisis in Europe, which is seen today mainly as a political one, ultimately has its origin in the gradual depletion of gas resources. We still have plenty of gas to produce, but it is becoming an expensive resource.  It is the same for coal, even though so far there we don’t see shortages; for coal, troubles come more from emissions and climate change; and that’s an even more serious problem than depletion. Coal may (perhaps) be considered abundant (or, at least, more abundant than other fossil resources) but it is not a solution to any problem.

In the end, we have problems that cannot be “solved” by trying to continue producing non renewable resources which in the long run are going to become too expensive. It is a physical problem, and cannot be solved by political or financial methods. The only possibility is to switch to resources which don’t suffer of depletion. That is, to renewable resources.

At this point, we should discuss what is the energy return of renewables and compare it to that of fossil fuels. This is a complex story and there is a lot of work being done on that. There are many uncertainties in the estimates, but I think it can be said that the “new renewables“, that is mainly photovoltaics and wind, have energy returns for the production of electrical energy which is comparable to that of the production of the same kind of energy from oil and gas. Maybe renewables still can’t match the return of fossil fuels but, while the energy return of fossil energy keeps declining, the return of renewables is increasing because of economies of scale and technological improvements. So, we are going to reach a crossing point at some moment (maybe we have already reached it) and, even in terms of market prices, the cost of renewable electric power is today already comparable to that of electric power obtained with fossil fuels.

The problem is that our society was built around the availability of cheap fossil fuels. We can’t simply switch to renewables such as photovoltaics, which can’t produce, for instance, liquid fuels for transportation. So, we need a new infrastructure to accommodate the new technologies, and that will be awfully expensive to create. We’ll have to try to do our best, but we cannot expect the energy transition – the “energiewende” – to be painless. On the other hand, if we don’t prepare for it, it will be worse.

So, to return to the subject of this hearing, we were discussing energy security for Europe. I hope I provided some data for you that show how security is ultimately related to supply and that we are having big problems with the supply of fossil energy right now. The problem can only increase in the future because of the gradual depletion of fossil resources. So, we need to think in terms of supplies which are not affected by this problem. As a consequence, it is vital for Europe’s energy security to invest in renewable energy. We shouldn’t expect miracles from renewables, but they will be immensely helpful in the difficult times ahead.

Let me summarize the points I made in this talk:

Thank you very much for your attention and if you want to know more, you can look at my website “Resource Crisis”.

Ugo Bardi teaches at the University of Florence, Italy. He is a member of the Club of Rome and the author of “Extracted, how the quest for mineral wealth is plundering the planet” (Chelsea Green 2014)

Where is the price of oil heading?

6 10 2014

In the sidebar at right of this blog is a live WTC (West Texas Crude) price chart.  I’ve been watching it intently because WTC has been in the low 90’s for some time, and has actually gone under it as I write.  What is going on?  There is a lot of debate about this all over the internet at the moment too….  is this a ‘sign’ that the October financial heebee jeebies are about to strike, again?

Take a look at this chart (lifted from Nicole Foss’ website)

Data from Reuters, IEA, Deutsche Bank and Bloomberg

At the current $90 price, not even Saudi Arabia (which has just posted its first deficit) can break even.  So what is causing this collapse in the oil price?

There is much speculation that ‘someone’ wants to punish Putin for his demeanours in the Ukraine, but if this ‘someone’ is American, then they are seriously hurting the shale oil companies there who can’t even make a profit when oil is at $100….  Or is this someone’s way of ensuring, if you can even put it that way, that GFC MkII doesn’t happen…… yet?  Are we seeing short-term trends? Ironically, the current prices – and remember, oil dropped to $40 in 2008 – are set to cause such mayhem in production and investment due to the fact that much has changed in the oil industry since 2008, that prices must go up again no matter what the economy does.  We are seeing the proverbial rock and a hard place today…….

There is also much confusion in the media, as Ilargi explains:

How reliable are OPEC numbers? Are those just the ones members themselves report? Saudi Arabia has a deficit, AND they cut prices, AND they cut production? I can’t say I’ve figured out either the real actions, or the reasons behind them, but that doesn’t make any sense as a stand-alone set of facts. So why do they do it, if they do, if these things are accurate? We’ve yet to find out.

Saudi enjoys some of the lowest production costs, excluding capital expenditure on new projects, in the region of $2 per barrel, giving it a large margin to soak up a sudden drop-off in price. This compares with estimated production costs in the North Sea which are in the region of $50 per barrel, according to Oil & Gas UK figures.

The graph puts Saudi production costs at $90 per barrel, and the Telegraph, which published the graph, puts it at $2? Please explain, guys. Is that $88 per barrel in “capital expenditure on new projects”?

But then again, today’s modern media just copy/paste stuff without ever checking their facts, the people who put articles in these papers are usually totally ignorant of facts.  I was just shown an article in the Cairns Post (Nth Qld) claiming a new solar farm was going to be built near Cooktown, one of the highest rainfall places in Australia, illustrating the story with a solar thermal plant that would only be built in a desert somewhere.  Then adding that this would alleviate post cyclonic blackouts (told you it rains a lot there!) because the solar plant would be more reliable…….  Hello?  Power goes down when the grid goes down from downed power lines, not because power generators are blown away!  FAIL….  Believe nothing you read in mainstream media is my new motto.  But I digress….

Ilargi continues with……:

Fracking has helped the US achieve its highest oil production levels since 1986 over the last two months at a rate of 8.5m bpd. The threat of a full lifting of the ban on exports has also helped the US to drive down the price and potentially cripple the Russian economy. Moscow is largely dependent on crude sales for foreign currency earnings and oil trading at around $80 per barrel for a period of months could bring the country to its knees.

Something tells me that Putin is far more aware of the reality of the shale industry than Americans are. Which is that shale oil has a present, but no future.

[..] if Opec fails to cut production in response to the current trend in falling oil prices then around 9% of US “tight oil” output would be immediately rendered uneconomic at a level of $90 per barrel. This figure would rise to 39% should prices slump as low as $80 per barrel.

Again, I don’t believe this for a second. It may be true is you exclude capital costs, but what if you include them, as in normal accounting, and what happens when interest rates rise, in an industry that’s borrowed itself up to its infinity and beyond?

Cute article, nice try, but in the end it leaves far too many questions.

Yep……  oil’s future is in serious doubt if these shennanigans continue, and as a result, so will the future of renewables.

Watch this space.