THE IMPLICATIONS OF PEAK ENERGY

13 03 2016

SIMON MICHAUX

Dr Simon Michaux has a Bach App Sc in Physics and Geology and a PhD in mining engineering. He has worked in the mining industry for 18 years in various capacities. He has worked in industry funded mining research, coal exploration and in the commercial sector in an engineering company as a consultant. Areas of technical interest have been: Geometallurgy; mineral processing in comminution, flotation and leaching; blasting; mining geology; geophysics; feasibility studies; mining investment; and industrial sustainability.

Our current society is one based on whim. Whatever we want can be had if we have the money. Not only can we have what we want any time we want it, it’s the done thing to throw it away and buy something else when it breaks or the latest upgrade comes out. We are conditioned to believe there are no limits within the current framework, and growth is our reason to be. The ‘how’ we can have all this fantastic stuff is considered someone else’s problem. But with a growing middle class population, for how long will it be possible to utilise finite, non-renewable resources in this linear fashion?

To date, our civilisation has been built on non-renewable natural resources.  What has facilitated all this is our sources of energy – the master resource.  Oil, coal and gas has accounted for the vast amount of industrial development over the last 160 years.

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World population, per capita-, and total energy consumption by fuel as a percentage of 2011 consumption, 1850-2011

Currently, we are a petroleum based society, where petroleum products and petrochemicals derived from oil provide goods and services for most of the vital requirements of our industrial civilisation. Everything from food production to plastics manufacture is dependent on oil in some form (there are some synthetic alternatives but they are costly and not as effective as natural crude oil as a raw feed product). World growth in GDP, energy consumption and oil consumption all correlate to demonstrate this basic concept.  The world economy is dependant not just on oil but high quality and high net energy oil.

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But all is not well with the oil sector.  Between 2000 and 2012, $2.6 Trillion USD was invested in oil infrastructure CAPEX, with no gain in oil production (this data includes shale oil production in USA).¹  Global crude and condensate production has plateaued since approximately 2005. The problem with this is world population is 13.8% larger now than in 2005 (7.4 billion people 5/2/2016 vs 6.5 billion in 2005). Increasingly unconventional sources of oil are being used to meet demand, where these sources are expensive to extract and struggle to meet the desired quantities.

Increasingly, conventional sources of crude oil have been difficult to discover and exploit. The picture below shows the pattern of oil discovery, listing all of the major plays that have dominated oil production.

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There will come a point where total oil production will peak and decline, the question is just when this will happen. Conventional crude oil production peaked in 2006, something now recognised by the International Energy Agency (Source: IEA World Energy Outlook 2010). Unconventional sources like tight oil (also known as shale oil) in the US have come on line to meet demand requirements, which have for some discredited previous predictions around peak oil.

However, The global combination of conventional crude oil production and unconventional oil production is predicted to peak and decline very soon, according to various studies. A sophisticated analysis on oil production has been conducted by retired actuary Gail Tverberg, where total oil production is predicted to have peaked in the year 2015. Others have suggested that we are in fact past peak, such as the report released by the Energy Watch Group (EWG), which claims that peak oil production (conventional and unconventional) happened around the year 2012.

conventional and unconv
Source: Zittel, W. et al, Fossil and Nuclear Fuels – the supply outlook Energy Watch Group March 2013

Gas as a commodity is important to our industrialisation. As industrial sites require large quantities of power, a gas fired power station is often installed. Acquiring data for gas production has been difficult but it is believed that conventional production of natural gas peaked in the year 2011 (data is spotty). To meet industrial demand, unconventional sources of gas like fracking and Coal Seam Gas (CSG) have been developed. Unconventional gas supply was believed to replace conventional sources of gas, and is in the process of doing so.

gas production
Gas supply scenario projections until 2030. Source: Zittel, W. et al, Fossil and Nuclear Fuels – the supply outlook Energy Watch Group March 2013

Coal is another energy resource that our industrial grid depends on to generate its electricity requirements. It is also often the case that the domestic power grid that supplies electricity is dependent on coal. The EWG report has a peak in coal production at approximately the year 2020. Four years away. Even if this estimate is imprecise, as it now takes about five years to build an industrial power station, it would behove us all to consider a replacement energy source.

geography
Global coal production. Source: Zittel, W. et al, Fossil and Nuclear Fuels – the supply outlook Energy Watch Group March 2013

Each energy source often serves different purposes, so one resource cannot necessarily directly replace another.  For the purposes of comparison though, all energy sources discussed have been put onto one graph:

 

energy sourcespeak energy reference

(Another good estimate has been provided by G. Tverberg  in “A Forecast of Our Energy Future; Why Common Solutions Don’t Work”)

Peak total energy is projected to be approximately in the year 2017. This means that industrialisation in a global context, based on the current rules of the game, will soon tip into contracting economies – the end of growth based economics. As this challenges would have taken 20 years to meet with an engineered alternative (once a viable one has been presented) (Hirsch 2005), the implications of the above charts are quite serious. Even if the projection was incorrect by 10 years, our industrial society would still be faced with an unprecedented challenge.

To examine the usefulness of a replacement energy source, the Energy Return On Energy Invested ratio (EROEI) is used, which is the ratio of the amount of usable energy acquired from a particular energy resource to the amount of energy expended to obtain that energy resource.

Oil when it was originally discovered was very good and returned about 100 units of energy for every one invested.  Now it’s around 12-18:1.  Most alternative energy sources are much lower than what oil currently delivers.  To put this in perspective, the European medieval society EROEI was Approximately 1.5:1.  For our industrial society to function, an EROEI ratio of 10:1 is required.

eroei
Energy Return On Energy Invested (EROEI ratio)

What this means is we have no replacement energy source that is as calorically dense as oil. It is simply not practical to replace oil as an energy source and maintain current energy demands. Colloquially, oil is butter-fried-steak wrapped in bacon and alternative energy is lettuce. This is why peak oil is so relevant and is the rate determining issue amongst the network of problems facing society at this time. With the possibility of peak energy on the horizon, the solution may lie in a fundamental upgrade to the operating system for our economy.

Notes

  1. Data collection stopped at 2012 because since then, there has been a non linear pattern unfolding in the form of global economic stagnation.  Currently the Baltic Dry Index is at a historic low (currently 332), where it was about 600 during the worst of the global correction of 2008.  This means global trade is at a historically low level.  More time is required to determine the true nature what is happening now.




Implications of declining EROI on oil production 2013 by David J. Murphy

21 06 2015

Quite technical but a good read if you are so inclined……..

Posted on by

Murphy, David J. December 2, 2013. The implications of the declining energy return on investment of oil production. Trans. R. Soc. A 2014 372

[This is a great paper on EROI, highly recommended. Without EROI studies, we risk building energy capturing contraptions that end up being useless, consuming more oil than generated, the Easter Island Heads of our former civilization. Alice Friedemann, energyskeptic.com]

Declining production from conventional oil resources has initiated a global transition to unconventional oil, such as tar sands. Unconventional oil is generally harder to extract than conventional oil and is expected to have a (much) lower energy return on (energy) investment (EROI). Recently, there has been a surge in publications estimating the EROI of a number of different sources of oil, and others relating EROI to long-term economic growth, profitability and oil prices. The following points seem clear from a review of the literature: (i) the EROI of global oil production is roughly 17 and declining, while that for the USA is 11 and declining; (ii) the EROI of ultra-deep- water oil and oil sands is below 10; (iii) the relation between the EROI and the price of oil is inverse and exponential; (iv) as EROI declines below 10, a point is reached when the relation between EROI and price becomes highly nonlinear; and (v) the minimum oil price needed to increase the oil supply in the near term is at levels consistent with levels that have induced past economic recessions. From these points, I conclude that, as the EROI of the average barrel of oil declines, long-term economic growth will become harder to achieve and come at an increasingly higher financial, energetic and environmental cost.

Introduction

Today’s oil industry is going through a fundamental change: conventional oil fields are being rapidly depleted and new production is being derived increasingly from unconventional sources, such as tar or oil sands and shale (or tight) oil. Indeed, much of the so-called ‘peak oil debate’ rests on whether or not these sources can be produced at rates comparable to the conventional mega-oil fields of yesterday.

What is less discussed is that the production of unconventional oil most likely has a (much) lower net energy yield than the production of conventional crude oil. Net energy is commonly defined as the difference between the energy acquired from some source and the energy used to obtain and deliver that energy, measured over a full life cycle (net energy=E(out)- E(in)). A related concept is the energy return on investment (EROI), defined as the ratio of the former to the latter (EROI=E(out)/E(in)). The ‘energy used to obtain energy’, E(in), may be measured in a number of different ways. For example, it may include both the energy used directly during the operation of the relevant energy system (e.g. the energy used for water injection in oil wells) as well as the energy used indirectly in various stages of its life cycle (e.g. the energy required to manufacture the oil rig). Owing to these differences, it is necessary to ensure that the EROI estimates have been derived using similar boundaries, i.e. using the same level of specificity for Ein. Murphy et al. [1] suggested a framework for categorizing various EROI estimates, and, where applicable, I will follow this framework in this paper.

Estimates of EROI are important because they provide a measure of the relative ‘efficiency’ of different energy sources and of the energy system as a whole [2,3]. Since it is this net energy that is important for long-term economic growth [3–6], measuring and tracking the changes in EROI over time may allow us to assess the future growth potential of the global economy in ways that data on production and/or prices cannot.

Over the past few years, there has been a surge in research estimating the EROI of a number of different sources of oil, including global oil and gas [7], US oil and gas [8,9], Norwegian oil and gas [10], ultra-deep-water oil and gas [11]and oil shale[12]. In addition, there have been several publications relating EROI to long-term economic growth, firm profitability and oil prices [3, 13–15].

The main objective of this paper is to use this literature to explain the implications that declining EROI may have for long-term economic growth. Specifically, this paper: (i) provides a brief history of the development of EROI and net energy concepts in the academic literature, (ii) summarizes the most recent estimates of the EROI of oil resources, (iii) assesses the importance of EROI and net energy for economic growth and (iv) discusses the implications of these estimates for the future growth of the global economy.

(a) A brief history of energy return on investment

In the late 1960s, Charles Hall studied the energy flows within New Hope Creek, in North Carolina, USA, to understand the migration patterns of the fish within the stream. His conclusions [16] revealed that, by migrating, the fish were able to exploit new sources of food, which, after accounting for the additional energy cost of migration, conferred a large net energy gain upon the fish. In other words, owing to the abundance of food in the new locations, the fish were able to gain enough energy not only to ‘pay’ for the energy expenditure of that migration but also to grow and reproduce. Comparing the energy gained from migration to the energy expended in the migration process was ostensibly the first calculation of EROI.

In the autumn of 1973 the price of oil skyrocketed following the Arab oil embargo (the so-called ‘first oil shock’), which sent most OECD economies tumbling into recession. The apparent vulnerability of OECD nations to spikes in the price of oil led many researchers to focus on the interaction between the economy and energy. Then, in 1974, the journal Energy Policy dedicated a series of articles to the energy costs of production processes. The editor of this series, Peter Chapman, began the series with a paper titled ‘Energy costs: a review of methods’, and observed that ‘this subject is so new and undeveloped that there is no universally agreed label as yet’ [17], and followed up two years later with a second paper [18]. Today this area of research is spread among a number of different disciplines, including, but not limited to, ecological economics, industrial ecology and net energy analysis, and the EROI statistic is just one of many indicators calculated.

Also during this period researchers started using Leontief input–output tables as a way to measure the use of energy within the economy [19–22]. For example, Bullard & Herendeen [23] used a Leontief-type input–output matrix to calculate the energy intensity (in units of joules per dollar) of every major industrial sector of the US economy. Even today this paper serves as a useful model for other net energy analyses [8,24]. In addition, a workshop in Sweden in 1974 and one at Stanford, CA, in 1975 formalized the methodologies and conventions of energy analysis [25,26].

In 1974, the US Congress enacted specific legislation mandating that net energy be accounted for in energy projects. The Nuclear Energy Research and Development Act of 1974 (NERDA) included a provision stating that ‘the potential for production of net energy by the proposed technology at the stage of commercial application shall be analyzed and considered in evaluating proposals’. Further influential papers by the Colorado Energy Research Institute, Bullardet al.and Herendeen followed this requirement [27–29]. Unfortunately, the net energy provision within the NERDA was never adopted and was eventually dropped.

In 1979, the Iranian revolution led to a cessation of their oil exports (the second oil shock), which precipitated another spike in the price of oil and squeezed an already strained US economy. Responding to this, and in an attempt to control deficits and expenditure, President Reagan of the USA enacted Executive Order 12291 in 1980. This order mandated that ‘regulatory action shall not be undertaken unless the potential benefits to society from the regulation outweigh the potential costs to society’.

 

In other words, all US regulatory action had to show a net monetary benefit to US society, and the idea of measuring benefits in terms of net energy fell even further from the policy arena.

Net energy analysis remained insignificant in US energy policy debates until the dispute over corn ethanol emerged 25 years later [30,31].

Although the political emphasis had now shifted towards economic analysis, the 1980s still provided useful papers on net energy analysis (e.g. [32]). In 1981, Hall published ‘Energy return on investment for United States petroleum, coal, and uranium’, which marked the first time that the acronym EROI was published in the academic literature [33]. Later that year, Hall & Cleveland [34] published ‘Petroleum drilling and production in the United States: yield per effort and net energy analysis’. This paper analyzed the amount of energy being produced per foot drilled and found that the ratio had been declining steadily for 30 years. Further publications by Hall and colleagues then tested hypotheses relating economic growth to energy use, introduced explicitly the concept of energy return on investment and examined the EROI of most major sources of energy [35,36].

Following growing concern about environmental impacts, climate change and sustainability, documented in the Brundtland Report in 1987 [37], emphasis began to shift from energy analysis to greenhouse gas (GHG) emissions and life-cycle analysis. Life-cycle analysis (LCA) itself was born out of the process and input–output analyses codified in the aforementioned energy literature of the 1970s and 1980s, and can be used to calculate EROI and other net energy metrics. Beginning around the turn of the century, researchers began to recognize the complementarity between LCA and net energy and began publishing on the matter [38].

There was another surge in publications in net energy analysis in the 2000s, due mainly to a growing global interest in renewable energy, and therefore an interest in metrics that compare renewable energy technologies. The debate about whether or not corn ethanol has an EROI greater than one is a good example [30,31]. There has also been a number of studies using the input–output techniques developed in the 1970s to track emissions production and/or resource consumption across regions [39].

Today, research within the field of net energy analysis is expanding rapidly. The main renewable energy options, including, but not limited to, solar photovoltaics, concentrating solar, wind power and biofuels, have each been the focus of studies estimating their net energy yield [31,40,41].

Furthermore, with the expansion of oil production into ultra-deep water, tar sands and other unconventional sources, as well as developments with shale gas, there has been a renewed interest in whether or not these sources of energy have EROI ratios similar to conventional oil and gas, and publications are expected to be forthcoming .

Recent estimates of the energy return on (energy) investment for oil and gas production

There has been a recent resurgence in EROI studies for liquid fuels, beginning with Cleveland [ 8], who estimated the EROI for oil and gas extraction in the US, Gagnon et al. [7], who estimated the same EROI for the whole world, and a number of additional studies that were contained in a 2011 special issue of the journal Sustainability. This section reviews the findings of these papers. Unless otherwise noted, all of the oil EROIs reported here are equivalent to the standard EROI (EROIstnd), as reported in Murphy et al. [1], which means that both the indirect and direct costs of energy extraction are included in the EROI calculation, but costs further downstream, such as transportation and refinement, have been omitted.

Cleveland [ 8]estimated two values for the EROI of US oil and gas that differed in the method of aggregating different types of energy carrier. The first method used thermal-equivalent aggregation, i.e. volumes of natural gas and oil are combined in terms of their heat content in joules. The second method uses a Divisia index, developed by Berndt [42], and uses both energy prices and consumption levels to adjust for the ‘quality’ of each energy carrier. Quality corrections are often used in energy analysis to adjust for the varying economic productivity of different energy carriers—for example, since electricity is more valuable, in terms of potential economic productivity, than coal, it is given more weight in the aggregate measure [43]. Quality-corrected measures better reflect the ability of energy carriers to produce marketable goods and services, so are arguably more useful.

The EROI values calculated using the energy quality-corrected data for US oil and gas production are consistently lower than those calculated from the non-quality-corrected data. This reflects the fact that many of the inputs to production are high-quality (i.e. high-priced) energy carriers such as electricity and diesel, while the outputs are unprocessed crude oil and natural gas.

Nevertheless, both estimates show the same trend over time: namely, an increase until the early 1970s, a decline until the mid-1980s, a slight recovery until the mid-1990s, followed again by decline (figure 1).

According to Cleveland, the overall downward trend from the 1970s till the mid-1990s is the result of higher extraction costs due to the depletion of oil in the USA. The up and down fluctuations within this aggregate trend are likely to be linked to changes in oil prices influencing the rate of drilling in the USA, with higher prices encouraging more drilling in less promising areas, which in turn leads to a lower yield and a lower aggregate EROI. Gagnon et al. [7] estimated the EROI for global oil and gas from 1992 to 2006 using the same energy aggregation techniques as Cleveland [8], i.e. both thermal equivalence and Divisia indices. In both cases, the EROI at the wellhead was around 26 in 1992 and increased to 35 in 1999 before declining to 18 in 2006 (figure 1).

It is not surprising that the EROI for global oil and gas is higher than that for the USA considering that oil production peaked in the USA in 1970 due mainly to the depletion of its biggest oil fields, while global production continued to flow and even increase from the mega-oil fields of the Persian Gulf.

US producers are increasingly reliant upon smaller and poorer-quality fields in difficult locations (e.g. deep water) together with the enhanced recovery of oil from existing fields—all of which are relatively energy intensive. In contrast, most OPEC members are still producing oil from high-quality supergiant fields.

The first few years of the Gagnon dataset and the last few years of the Cleveland dataset overlap in the early 1990s and both show a general increasing trend. The results from Gagnon et al. [7] then show that the increase in the early 1990s reaches a maximum in 1999, followed by a monotonic decline through the 2000s. Much like the Cleveland paper, Gagnon et al. assume that the decline is due to the depletion of easy access resources, but, as mentioned earlier, this trend also could be dependent on the trend in oil prices.

In addition to the estimates of Cleveland [ 8] and Gagnon et al. [7], Guilford et al. [9] estimated the non-quality-corrected EROI of conventional oil and gas production for the USA. They found that the EROI of oil production has declined from a peak of 24 in the 1950s to roughly 11 in 2007 (figure 1). By deriving separate estimates for exploration and production, they show how depletion reduces the rate of production from existing fields and gives incentives for increased exploration for new fields, both of which lower the aggregate EROI. They also suggest that natural gas is subsidizing oil production and that the EROI for oil alone is likely to be much lower.

Figure 1. EROI estimates from three sources, Gagnon et al. [7], Cleveland [8] and Guilford et al. [9]. The Gagnon et al. [7] data represent estimates of the EROI for global oil and gas production using aggregation by Divisia indices. The Cleveland [8] data represent the trend in EROI values for US oil and gas production calculated using the Divisia indices to aggregate energy units. The Guilford et al. [9] data represent estimates of the EROI of US oil production from 1919 to 2007

Despite differences in coverage and approach, the results from these three studies are broadly consistent, namely a general increase in EROI until 1970, then a general decline until the early 1980s, an increase through the mid-1990s and then a decline.

Grandell et al. [10] estimated the EROI of oil production from Norwegian oilfields to be roughly 20 in

  1. They also note that as the fields deplete they expect the EROI to decline further. Brandt [44] estimatedthattheEROIfromCalifornianoilfieldshasdeclinedfromover50 in the 1950s to under 10 by the mid-2000s. Similarly, Hu et al. [45] estimated that the EROI from the Daqing oil field, the biggest oil field in China, had declined from 10 in 2001 to 6.5 by 2009.

Two other recent EROI estimates of particular importance are those of Moerschbaecher & Day [11], who estimated the EROI of ultra-deep-water (depths greater than 1524 m or 5000 feet) production in the Gulf of Mexico, and Cleveland & O’Connor [12], who estimated the EROI of oil shale production.

Moerschbaecher & Day [11] estimated the EROI for deep-water oil production to be between 7 and 22. The range in EROI values is due to a sensitivity analysis performed by the authors that incorporated three different energy intensity values as proxies for the energy intensity of the ultra-deep-water oil industry. They also noted that, owing to the large infrastructure requirements of the deep-water oil industry, the real value is probably closer to the lower end of the range presented.

Cleveland & O’Connor [12] estimated that the EROI for oil shale production using either surface retorting or in situ methods was roughly 1.5, much lower than for other unconventional resources. Oil shale is the production of oil from kerogen found in sedimentary rock and is distinct from ‘shale oil’ or, preferably, ‘tight oil’, which is oil trapped in shale or other impermeable rock. Oil shale is discussed here because the western USA has vast resources of oil shale, but production costs are much higher than for other forms of unconventional oil [46].

The following summarizes the aforementioned studies:

  • EROI 11: average for US oil production today, down from roughly 20 in the early 1970s
  • EROI 17: global average, down from EROI of roughly 30 in 2000
  • EROI 10: ultra-deep-water oil production is probably less than 10
  • EROI 1.5: Oil shale (kerogen), not tight oil (aka ‘shale’ oil)

Energy return on (energy) investment, oil prices, and economic growth

The economic crash of 2008 occurred during the same month that oil prices peaked at an all-time high of $147 per barrel, leading to numerous studies that suggested a causal link between the two [47,48]. In addition, other researchers involved in net energy analysis began examining how EROI relates to both the price of oil and economic growth [3,13,15,49–51].

Murphy & Hall [3] examined the relation between EROI, oil price and economic growth over the past 40 years and found that economic growth occurred during periods that combined low oil prices with an increasing oil supply. They also found that high oil prices led to an increase in energy expenditures as a share of GDP, which has led historically to recessions. Lastly, they found that oil prices and EROI are inversely related (figure 2), which implies that increasing the oil supply by exploiting unconventional and hence lower EROI sources of oil would require high oil prices. This created what Murphy & Hall called the ‘economic growth paradox: increasing the oil supply to support economic growth will require high oil prices that will undermine that economic growth’.

Other researchers have come to similar conclusions to those of Murphy & Hall, most notably economist

James Hamilton [47]. Recently, Kopits [50], and later Nelder & Macdonald [49], reiterated the importance of the relation between oil prices and economic growth in what they describe as a ‘narrow ledge’ of oil prices. This is the idea that the range, or ledge, of oil prices that are profitable for oil producers but not so high as to hinder economic growth is narrowing as newer oil resources require high oil prices for development, and as economies begin to contract due largely to the effects of prolonged periods of high oil prices. In other words, it is becoming increasingly difficult for the oil industry to increase supply at low prices, since most of the new oil being brought online has a low EROI. Therefore, if we can only increase oil supply through low EROI resources, then oil prices must apparently rise to meet the cost, thus restraining economic growth.

Skrebowski [51]provides another interpretation of the relation between oil prices and economic growth in what he calls the ‘effective incremental oil supply cost. It should be noted there are wide divergences in estimates of oil development costs depending on what is included and the treatment of financial costs, profits and overheads. Those used here are estimates of the prices needed to justify a new, large development.’

According to data provided by Skrebowski, developing new unconventional oil production in Canada (i.e. tar sands) requires an oil price between $70 and $90 per barrel. Skrebowski also indicates that new production from ultra-deep-water areas requires prices between $70 and $80 per barrel. In other words, to increase oil production over the next few years from such resources will require oil prices above at least $70 per barrel. These oil prices may seem normal today considering that the market price for reference crude West-Texas Intermediate ranged from $78 to $110 per barrel in 2012 alone, but we should remember that the average oil price during periods of economic growth over the past 40 years was under $40 per barrel, and the average price during economic recessions was under $60 per barrel (dollar values inflation adjusted to 2010) [3]. What these data indicate is that the floor price at which we could increase oil production in the short term would require, at a minimum, prices that are correlated historically with economic recessions.

Heun & de Wit [15] found indicates that the price of oil increases exponentially as EROI declines [equation and explanation snipped, see pdf]. They suggest that the nature of the relation between EROI and the price is such that the effect on price becomes highly nonlinear as EROI declines below 10.

Figure 2. Relationship between oil prices and EROI. (Adapted from Murphy & Hall [3].)

King & Hall [13] examined the relation between EROI, oil prices and the potential profitability of oil-producing firms, termed energy-producing entities (EPEs). They found that for an EPE to receive a 10% financial rate of return from an energy extraction process, which, for example, has an EROI of 11, would require an oil price of roughly $20 per barrel.3 Alternatively, a 100% financial rate of return for the same extraction project would require $60 per barrel (figure 3). King & Hall also echoed Heun & de Wit, suggesting that the relationship between EROI and profitability becomes nonlinear when the EROI declines below 10.

The pertinent results from the literature summarized in this subsection are as follows:

  • there appears to be a negative exponential relationship between the aggregate EROI of oil production and oil prices;
  • there appears to be a comparable relationship between EROI and the potential profitability of oil-producing firms;
  • the relationship between EROI and profitability appears to become nonlinear as the EROI declines below 10;
  • the minimum oil price needed to increase global oil supply in the near-term is comparable to that which has triggered economic recessions in the past.

Understanding the relationship between energy return on (energy) investment and net energy

The mathematical relation between EROI, net energy and gross energy can be used to explain why, at around an EROI of 10, the relation between EROI and most other variables, such as price, economic growth and profitability, becomes nonlinear. The following equation describes the relation between EROI, gross and net energy [3]:

Equation 3.2 net energy = gross energy (1 – 1/ EROI)

Figure 3. Oil price as a function of EROI. The lines on the figure correspond to various rates of monetary return on investment (MROI). (Adapted from King & Hall [13].)

Using this equation, we can estimate the net energy provided to society from a particular energy source or (rearranging) the amount of gross energy required to provide a certain amount of net energy [52].

We can interpret equation (3.2) as follows:

  • an EROI of 10 delivers to society 90% (1 – .2 = 90%) of the gross energy extracted as net energy
  • an EROI of 5 will deliver to society 80% (1 – .2 = 80%)
  • an EROI of 2 will deliver only 50% (1 – .5 = 50%).

This exponential relation between gross and net energy means that there is little difference in the net energy provided to society by an energy source with an EROI above 10, whether it is 11 or 100, but a very large difference in the net energy provided to society by an energy source with an EROI of 10 and one with an EROI of 5. This exponential relation between gross and net energy flows has been called the ‘net energy cliff’ [53]and it is the main reason why there is a critical point in the relation between EROI and price at an EROI of about 10 (figure 4).

Figure 4. The 'net energy cliff' graph, showing the relation between net energy and EROI. As EROI declines, the net energy as a percentage of total energy extracted declines exponentially. Note that the x-axis is in reverse order. (Adapted from Mearns [53].)

Calculating the minimum energy return on (energy) investment at the point of energy acquisition for a sustainable society

‘The true value of energy to society is the net energy, which is that after the energy costs of getting and concentrating that energy are subtracted.’ H. T. Odum [6]

According to equation (3.2), as EROI declines, the net energy provided to society declines as well, and, at some point, the amount of net energy will be insufficient to meet existing demand.

The point at which the EROI provides just enough net energy to society to sustain current activity represents the minimum EROI for a sustainable society.

But estimating empirically the actual minimum EROI for society is challenging. Hall et al. [24] estimated that the minimum EROI required to sustain the vehicle transportation system of the USA was 3. Since their calculation included only the energy costs of maintaining the transportation system, it is reasonable to expect that the minimum EROI for society as a whole could be much higher.

Exploring the minimum EROI for a sustainable society is beyond the scope of this paper. Instead, I will examine how, in theory, the minimum EROI could be calculated by using some simple models. I will first do this by examining how the idea of net energy grew from analyzing the energy budgets of organisms.

The energy that an organism acquires from its food is its gross energy intake. Let us assume, for simplicity’s sake, that an organism consumed 10 units of gross energy, but to access this food it expended 5 units of energy. Given these parameters, the EROI is 2 (=10/5) and the net energy is 5. It is important to note that the expended energy created an energy deficit (5 units) that must be repaid from the gross energy intake (10 units) before any growth, for example, in the form of building fat reserves or reproduction, can take place.

An economy also must have an influx of net energy to grow. Let us assume that Economy A produces 10,000 units of energy at an EROI of 10, which means that the energy cost of acquisition is 1,000 units and the net energy is 9,000. Like organisms, economies also have energy requirements that must be met before any investments in growth can be made. Indeed, researchers are now measuring the ‘metabolism of society’ by mapping energy consumption and flow patterns over time [54]. For example, economies must invest energy simply to maintain transportation and building infrastructure, to provide food and security, as well as to provide energy for direct consumption in transportation vehicles, households and business, etc. The energy flow to society must first pay all of these metabolic energy costs before enabling growth, such as constructing new buildings, roads, etc.

Building off this idea of societal metabolism, we can gain additional insight into the relationship between EROI and economic growth by differentiating between 3 main uses of energy by society:

  1. Metabolism, which could be described as the energy and material costs associated with the maintenance and replacement of populations and capital depreciation (examples include food consumption, bridge repair or doctor visits)
  2. Consumption: the expenditure of energy that does not increase populations or capital accumulation and is not necessary for metabolism (examples include purchasing movie tickets or plane tickets for vacation; in general, items purchased with disposable income)
  3. Growth, the investment of energy and materials in new populations and capital over and above that necessary for metabolism (examples include building new houses, purchasing new cars, increasing populations).

Figure 5. (a-d) Flow diagrams relating net energy, EROI and gross energy production for a hypothetical Economy A. Each diagram describes the energy flows according to a different EROI, where the EROI is (a) 10, (b) 5, (c) 2 and (d) 1.5

Figure 5 (a-d) illustrates how the flows of energy to the three categories change as EROI declines. Let us assume that the metabolism of Economy A requires the consumption of 5000 units of energy per year. So, of the 10,000 units of energy extracted, 1,000 must be reinvested to produce the next 10,000, and another 5,000 are invested to maintain the infrastructure of Economy A. This leaves 4,000 units of net energy that could be invested in either consumption or growth (figure 5a).

As society transitions to lower EROI energy sources, a portion of net energy that was historically used for consumption and/or growth will be transferred to the energy extraction sector. This transfer decreases the growth and consumption potential of the economy. For example, let us assume that, as energy extraction becomes more difficult in Economy A, it requires an additional 1,000 units of energy (2,000 total) to maintain its current production of gross energy, decreasing the EROI from 10 to 5 and the net energy from 9,000 to 8,000. If the metabolism of the economy remains at 5,000 units of energy, Economy A now has only 3,000 units of energy to invest in growth and/or consumption (figure 5b).

If the EROI for society were to decline to 2, the amount of energy that could previously be invested in growth and consumption would be transferred completely to the energy extraction sector. Thus, given the assumed metabolic needs of Economy A in this example, an EROI of 2 would be the minimum EROI needed to provide enough energy to pay for the current infrastructure requirements of Economy A, or, to put it another way, an EROI of 2 would be the minimum EROI for a sustainable Economy A. If the EROI were to decline below 2, for example in some biofuel systems [31], then the net energy provided to society would not be enough to maintain the infrastructure of Economy A, resulting in physical degradation and economic contraction (figure 5d).

There are a few caveats to this discussion of the minimum EROI that need to be addressed. First, it is important to remember that this is a simple example with hypothetical numbers, and, as such, the minimum EROI for our current society is probably, and maybe substantially, higher. Second, over time, efficiency improvements within the economy can mitigate the impact that lower EROI resources have on economic growth by increasing the utility of energy. That said, the exact relation between energy efficiency improvements and declining EROI is yet to be determined. Third, the model assumes that metabolic needs will be met first, then consumption and growth. This may not necessarily be the case.

It is quite possible that there could be growth at the expense of meeting metabolic needs. Likewise, we can consume at the expense of growth or metabolism. Either way, the net energy deficit that results from declining EROI will become apparent in one of the three sectors of energy use.

The gross energy requirement ratio

‘Now, here, you see, it takes all the running you can do, to keep in the same place.’ The Red Queen, in Through the looking-glass [55,p.15]

Another way to explore the impact that a decline in EROI can have on net energy flows to society is to consider the ‘gross energy requirement ratio’ (GERR). The GERR indicates the proportional increase or decrease in gross energy production that is required to maintain the net energy flow to society given a change in the EROI of the energy acquisition process. The GERR is calculated by dividing the gross energy requirement (GER) of the substitute energy source by the GER of the reference energy source.

The GER is the minimum amount of gross energy production required to produce one unit of net energy.

Both of these equations are outlined below [2]:

Equation 5.1 GER(X) = EROI(X) / EROI(X) – 1

Equation 5.2 GERR = GER(X) / GER(REF)

The GERR is most useful when examining how transitioning from high to low EROI energy sources will impact the net energy flow to society. For example, the average barrel of oil in the USA is produced at an EROI of roughly 11 [9]. Using equation (5.1), an EROI of 11 results in a GER of 1.1, i.e. 1.1 units of gross energy must be extracted to deliver 1 unit of net energy to society, with the 0.1 extra being the amount of energy required for the extraction process. For comparison, delivering one unit of net energy from an oil source with an EROI of 5 would require the extraction of 1.25 units of oil. If conventional oil at an EROI of 11 is our reference GER, and our substitute energy resource has an EROI of 5, then the GERR is 1.14. This GERR value indicates that, if society were to transition from an energy source with an EROI of 11 to one with an EROI of 5, then gross energy production would have to increase by 14% simply to maintain the same net energy flow to society. The net effect of declining EROI is to increase the GERR, requiring the extraction of larger quantities of gross energy simply to sustain the same net energy flow to society (figure 6).

Implications for the future of economic growth

The implication of these arguments is that, if we try to pursue growth by using sources of energy of lower EROI, perhaps by transitioning to unconventional fossil fuels, long-term economic growth will become harder to achieve and come at an increasingly higher financial, energetic and environmental cost.

Figure 6. The GERR as a function of declining EROI. In this example, the reference EROI was 11. As such, the GERR value associated with an EROI of 4 represents the proportional increase in gross energy required to deliver one unit of net energy if society transitioned from an energy source with an EROI of 11 to one with an EROI of 4.

Revolutionary technological advancement is really the only way in which unconventional oil can be produced with a high EROI, and thus enhance the prospects for long-term economic growth and reduce the associated financial, energetic and environmental costs. This technological advancement would have to increase the energy efficiency of unconventional oil extraction or allow for increased oil recovery from fields discovered already [56]. Alternatively, there could be massive substitution from oil to high EROI renewables such as wind or hydropower [57].

It is difficult to assess directly how much technological progress is being or will be made by an industry, but we can get a glimpse as to how the oil industry is faring by comparing how production is responding to effort. If new technological advancements, such as hydraulic fracturing and horizontal drilling, represent the types of revolutionary technological breakthroughs that are needed, then we should at least see production increasing relative to effort. The data, however, do not indicate that this is the case. From 1987 to 2000, when the US oil industry increased the number of rigs used to produce oil, there was, as expected, a corresponding increase in the amount of oil produced (figure 7 not shown, see paper). But from 2001 to 2012 the trend shows very little correlation between drilling effort and oil production.

Biofuels are the only currently available non-fossil substitute for oil that is being produced at any sizable scale, but factors such as economic cost, land-use requirements and competition with food production restrict their potential contribution (see [58]). Most importantly, the EROI of most large-scale biofuels5 is between 1 and 3 [30,31], which means that we would be substituting towards a fuel that is even less useful, from a net energy perspective, for long-term economic growth. Others claim that substituting towards renewable electricity is the key; for example, Jacobson & Delucchi [59] argue that wind and solar energy could power global society by 2030. Even if their analysis stands up to scrutiny (and some claim that it does not [60,61]), the high price of oil in the transition period may provide a significant constraint on economic growth. Without high levels of economic growth, the investment capital needed to build, install and operate renewable energy will be hard to acquire.

The other option is to construct coal-to-liquids (CTL) or gas-to-liquids (GTL) operations, but even these solutions have their own difficulties (see [62]). For example, both CTL and GTL operations represent an energy conversion process, not an energy extraction process, which, in terms of EROI, simply adds to the cost of producing the final fuel and lowers the overall EROI. CTL and/or GTL will most probably lead to a significant increase in GHG emissions [63]. For GTL, there is a narrow window of low gas prices and high oil prices in which the GTL process can remain profitable [63]. Achieving profitability is easier in a CTL operation because of cheap coal, but the future availability, quality and cost of that resource is also becoming uncertain [64]. And, again, it will most probably be decades until any sizable portion of global demand for oil is met from a series of GTL or CTL plants, and in the mean-time economies will still be struggling to grow in a high oil price, low oil EROI environment.

Lastly, increasing oil production from low EROI resources is expected to degrade the global environment at an accelerated rate, for two main reasons. First, on average, the environmental impact per unit of energy is larger for unconventional oil than for conventional oil. GHG emissions, for example, are somewhere between 15% and 60% higher for gasoline and diesel produced from tar sands when compared to that produced from conventional petroleum [65,66]. Similarly, the water used per unit of energy produced is also much higher for most low EROI sources of energy [67]. Second, declining EROI increases the GERR. As society switches to lower EROI resources, simply maintaining the flow of net energy to society will require a proportionally larger amount of gross energy extraction, thus increasing the environmental impact associated with that extraction. This evidence indicates that the environmental impacts of energy extraction are most probably related exponentially to EROI, mimicking the relation between EROI and price (figure 8). This relationship holds as long as the flow of net energy to society remains the same or even increases despite a decrease in EROI. The relationship weakens if, when met with lower EROI resources, we simply decrease our effort in energy acquisition, i.e. embrace conservation.

The ecology of societal succession

‘Energy fixed tends to be balanced by the energy cost of maintenance in the mature or “climax” ecosystem.’ E. P. Odum [68]

Societal succession from the beginning of the Industrial Revolution to today mimics ecosystem succession in important and illuminating ways. The early stages of ecosystem development are marked by rapid growth (figure 9a), where the energy fixed through photosynthesis (gross photosynthesis) is greater than the energy consumed through respiration, resulting in a gain of net energy in the ecosystem. This gain in net energy leads to the accumulation of biomass (the energy equivalent of biomass in the context of society is embodied energy). As Odum [68] observed, as succession occurs, the gross photosynthesis of the ecosystem tends to balance with respiration as the steady-state, or ‘climax’, successional stage is reached. In other words, in the climax stage, almost all of the energy fixed by the ecosystem is used in maintenance respiration by the biomass that has accumulated over the years.

The simple diagram of forest succession (figure 9a not shown)is reflected by societal succession (figure 9b not shown)since the beginning of the Industrial Revolution until today. Figure 9 shows how gross photosynthesis is equivalent to humanity’s gross energy production-i.e. the total biomass, coal, oil, natural gas, etc. produced each year. Forest respiration is the equivalent of societal metabolism-i.e. the energy and material costs associated with the maintenance and replacement of populations and capital depreciation. The accumulation of biomass is the equivalent of societal growth-i.e. investments in populations and infrastructure that will increase overall societal metabolism. Lastly, the net energy provided to society is that left after accounting for the metabolic needs of society (i.e. net energy = gross energy production – societal metabolism). Historically, we have simply found and produced more energy as the metabolism (i.e. energy demand) of society grew. Indeed, the exponential increase in global economic output over the past 200 years is highly correlated with the same exponential increase in energy consumption (figure 10).

The question is: can global society continue to produce enough energy to outpace the increased metabolic requirements of a growing, and now very large, built infrastructure? Answering this question for each energy source is clearly beyond the scope of this paper, but the answer for oil seems clear, as the production of conventional oil seems to have peaked in 2008 [71], and both unconventional oil and other feasible substitutes have a much lower EROI. Both of these factors are likely to place contractionary pressure on the global economy by decreasing the flow of net energy to society.

The main difference between society and nature, in terms of figure 9, is in the reason for the peak and initial decline in gross energy acquisition. In forests and other natural ecosystems, the amount of gross photosynthesis declines and reaches parity with respiration as the forces of competition and natural selection create a steady-state, or ‘climax’, ecosystem. These forces exist also for society, but they are in the form of declining EROI, geological depletion, environmental degradation, climate change, water pollution, air pollution, land-cover change and such, and all the other factors that are occurring today that make it harder and harder to produce energy easily. In the end, ecosystems are able to successfully transition from a growth-oriented structure to a steady state; it is unclear whether society will be able to do the same.

Figure 10. GDP as a function of energy consumption over the past 200 years. (Adapted from Kremmer [69] and Smil [70].)

Summary

The concept of energy return on investment (EROI) was born out of ecological research in the early 1970s, and has grown over the past 30 years into an area of study that bridges the disciplines of industrial ecology, economics, ecology, geography and geology, just to name a few. The most recent estimates indicate that the EROI of conventional oil is between 10 and 20 globally, with an average of 11 in the USA.

The future of oil production resides in unconventional oil, which has, on average, higher production costs (in terms of both money and energy) than conventional oil, and should prove in time to have a (much) lower EROI than conventional oil. Similar comments apply to other substitutes such as biofuels. The lack of peer-reviewed estimates of the EROI of such resources indicates a clear need for further investigation.

Transitioning to lower EROI energy sources has a number of implications for global society.

  1. It will reallocate energy that was previously destined for society towards the energy industry alone. This will, over the long run, lower the net energy available to society, creating significant headwinds for economic growth.
  2. Transitioning to lower EROI oil means that the price of oil will remain high compared to the past, which will also place contractionary pressure on the economy.
  3. As we try to increase oil supplies from unconventional sources, we will accelerate the resource acquisition rate, and therefore the degradation of our natural environment.

It is important to realize that the problems related to declining EROI are not easily solved. Renewable energy may indeed represent the future of energy development, but renewables are a long time off from displacing oil. Lastly, it seems apparent that the supply-side solutions (more oil, renewable energy, etc.) will not be sufficient to offset the impact that declining EROI has on economic growth. All of this evidence indicates that it is time to re-examine the pursuit of economic growth at all costs, and maybe examine how we can reduce demand for oil while trying to maintain and improve quality of life. A good summary of these problems is also given in Sorrell [72].

For society, we can either dictate our own energy future by enacting smart energy policies that recognize the clear and real limits to our own growth, or we can let those limits be dictated to us by the physical constraints of declining EROI. Either way, both the natural succession of ecosystems on Earth anddeclining EROI of oil production indicate that we should expect the economic growth rates of the next 100 years to look nothing like those of the last 100 years.

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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.





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”. www.cassandralegacy.blogspot.com


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 Are The Gas Wells? Queensland, Australia

30 04 2014

csg22This is scary as…….  worse, NONE of this gas is even produced for OUR consumption, it’s all headed overseas for profit, and even the profits aren’t staying here?  There’s NOTHING in it for us except destruction of our future on a grand scale….. and it MUST STOP.

Share widely please…..  the rest of Australia needs to wake up!





Crash on Demand? A Response to David Holmgren

10 01 2014

My recent post on David Holmgren’s long essay regarding his belief we are in for a prolonged “Brown Tech” phase before collapse occurs has been well read according to the stats WordPress give me as part of the service they offer bloggers….  Nicole Foss, whom I had the great pleasure of meeting in late 2012, has just written another great article as a response to David’s work…….  It is well worth the read.

I’m reblogging it here for your convenience, without all the introductory stuff that has already been well covered

Nicole Foss

Nicole Foss

here.  To read it in its entirety, go here.

Nicole’s website is ALWAYS worth a visit, full of fascinating links that will keep you away from doing work in the garden for hours…!

 

In his recent essay, Holmgren says that he had initially been expecting a more rapid contraction in available energy, and with it a substantial fall in greenhouse gas emissions. Instead, new forms of unconventional fossil fuels have been exploited, sustaining supply for the time being, but at the cost of raising emissions, since these fuels are far more carbon intensive to produce. Holmgren understands perfectly well that unconventional fossil fuels are no answer to peak oil, given the terribly low energy profit ratio, but the temporary boost to supply has postponed the rapid contraction he, and others, had initially predicted. In addition, demand has been falling in major consuming countries as a result of the impact of financial crisis on the real economy since 2008, further easing energy supply concerns. For this reason, the Green Tech and Brown Tech scenarios, based on modest energy decline, appear more plausible to him than the Earth Steward and Lifeboat scenarios predicated upon rapid energy supply collapse. However, Green Tech would have required a major renewable energy boom sufficient to revitalize rural economies, and he recognizes that there appears to be no time for that to occur. Nor is there the collective political will to take actions to power-down or reduce emissions.

He concludes that the Brown Tech scenario appears by far the most likely, and is, in fact, already emerging. Rather than geological, biological, energetic or climate limits striking first, he suggests, in line with our view at TAE, that perturbations in the highly complex global financial system are likely to shape the future in the shorter term. As such he has become far more interested in finance, recognizing that the world has been pushed further into overshoot by throwing money at the banks, while transferring risk to the public on a massive scale, which is setting us up for a major financial reset. In combination with the climate chaos Holmgren anticipates that governments will need to assume control, moving from a market to a command economy.


Finance, Energy and Complexity

There is much I agree with here, most notably the primacy of financial collapse as a driver of short term change. The situation we find ourselves in is at such an extreme in terms of comparing the enormous overhang of virtual wealth in the form of IOUs with the actual underlying collateral that the reset could be both rapid and devastating. This could produce a number of cascading impacts on supply chains in a short space of time, as Holmgren acknowledges in citing David Korowicz’s excellent essay on the subject – Trade Off. This is likely to make governments choose to take control, but also likely to make that very difficult, and therefore very unpleasant. In some places control may win out, leading to a Brown Tech type of outcome after the dust has settled, and in others a more chaotic state may dominate, leading to more of a Lifeboat scenario. The difference may not hinge on energy supply alone, although this may well be a significant factor in some places.

It is our view at TAE that for a time energy limits are not likely to manifest, as lack of money will be the limiting factor in a major financial crisis. At the present time, with modestly increasing energy supply, the delusion of far greater increases to come, and falling demand, energy is already ceasing to be a pressing concern. As liquidity dries up, and demand falls much further as a result of both lack of purchasing power and plummeting economic activity, this will be even more the case. The perception of glut lowers prices, and this will hit the energy industry very hard due to its rapidly increasing cost base, and therefore its dependency on high prices. As prices fall and the business case disappears, much of the expensive supply will dry up, including most, if not all, of the unconventional fossil fuels currently touted as the solution.

Prices are likely to fall faster than the cost of production, leaving profit margins fatally squeezed. While money remains the limiting factor, few may worry about the energy future, but the demand collapse will lead to a supply collapse in the future due to lack of investment for a long time, the concurrent decay of existing infrastructure no one can afford to maintain, transport disruption due to a lack of letters of credit, and the impact of intentional damage inflicted by angry people. Financial crisis takes the pressure off temporarily, but a the cost of aggravating the energy shortfall, and the impact of that shortfall, in the longer term.

Producing energy from “low energy profit ratio” energy sources requires a financial system capable of providing copious amounts of affordable capital, and is dependent on the availability of cheap conventional fossil fuels in order to supply the up-front energy necessary for what are highly energy intensive processes. In energy terms, low energy profit ratio energy sources are nothing more than an extension of the current high energy profit ratio conventional fossil fuel era, which is what sustains the current level of socioeconomic complexity. The financial system is one of its most complex manifestations, and therefore one of its most vulnerable.

Once the financial system has the accident that is clearly coming, we will be looking at a substantial fall in societal complexity, but that fall in complexity will eliminate the possibility of engaging in such highly complex activities as fracking, horizontal drilling, exploiting the deep offshore or producing solar photovoltaic panels and inverters. “Low energy profit ratio” energy sources cannot by themselves maintain a level of socioeconomic complexity necessary to produce them, hence they will never be a meaningful energy source.

This is true of both unconventional fossil fuels and renewable power generation. The development of low energy profit ratio energy sources rests largely on Ponzi dynamics, and Ponzi schemes tend to come to an abrupt end.

Once this becomes clear, the gradual fall in supply is likely to morph into a rapid one. As the ability to project power at a distance depends on energy supply, and that may be compromised, perhaps within a decade, maintaining any kind of large scale command economy may not be possible for that long. However, consolidating access to a falling energy supply at the political centre under a command scenario, at the expense of the population at large, may sustain that centre for somewhat longer.

Seen through an energy profit ratio and complexity lens, a Green Tech scenario appears increasingly implausible. Green Tech – the use of technology to capture renewable energy and convert it into a concentrated form capable of doing work – is critically dependent on the fossil fuel economy to build and maintain its infrastructure, and also to maintain the level of socioeconomic complexity necessary for it, and the machinery it is meant to run, to function. A renewable energy distant future is certainly likely, but not a technological one. One can have green or tech, but ultimately not both.


Scale, Hierarchy and ‘Functional Stupidity’:

A substantial point of agreement between Holmgren’s work and ours here at TAE is that the scale Brown Tech would operate on in a constrained future would be national rather than international. There are many who worry about One World Government under a fascist model. This may have been the trajectory we have been on taken to its logical conclusion, but if crisis is indeed proximate, then we are very unlikely to reach this point. We have likened layers of political control to trophic levels in an ecosystem, as all political structures concentrate wealth at the centre at the expense of the periphery which they ‘feed upon’:

The number of levels of predation a natural system can support depends essentially on the amount of energy available at the level of primary production and the amount of energy required to harvest it. More richly endowed areas will be able to support -more- complex food webs with many levels of predation. The ocean has been able to support more levels of predation than the land, as it requires less energy to cover large distances, and primary production has been plentiful. A predator such as the tuna fish is the equivalent, in food chain terms, of a hypothetical land predator that would have eaten primarily lions. On land, ecosystems cannot support that high a level predator, as much more energy is required to harvest less plentiful energy sources.

If one thinks of political structures in similar terms, one can see that the available energy, in many forms, is a key driver of how complex and wide-ranging spheres of political control can become. Ancient imperiums achieved a great deal with energy in the forms of wood, grain and slaves from their respective peripheries. Today, we have achieved a much more all-encompassing degree of global integration thanks to the energy subsidy inherent in fossil fuels. Without this supply of energy (in fact without being able to constantly increase this supply to match population growth), the structures we have built cannot be maintained.

The international level of governance is comparable to a top level predator. When the energy supply at the base of the pyramid is reduced, and the energy required to obtain it increases, as will inevitably be the case in this era of sharply falling energy profit ratios, the system will lose the ability to support as many layers of ‘predation’. We are very likely to lose at least the top level, if not more levels on the way down as energy descent continues. A national level of Brown Tech may last for a while, but as energy descent continues, so will the diminution of the scale and complexity at which society can operate.

Living on an energy income, supplemented with limited storage in the form of grain or firewood or water stored high in the landscape, and also limited ability to physically leverage effort with slavery or the use of draft animals, does not provide the same range of possibilities as living on our energy inheritance has done. Without fossil fuels, the technology of the ancient world (Rome for instance) is probably the most that an imperial degree of energy concentration can provide. Greater concentration is possible when a wide geographical area comes under a single political hegemony and feeds a single political centre at a high level of political organization. Lower levels of political organization (ie during the inter-regnem in between successive imperiums) would provide for less resource concentration and therefore would sustain a lower level of socioeconomic complexity and ‘technology’.

Energy is not the only factor determining effective organizational scale, however. The functionality of the financial system is a major determinant of the integrity of supply chains, and hence social stability. Societal trust is vital, and can be extremely ephemeral. The more disruptive a future of limits to growth, across a range of parameters, the further downward through Holmgren’s nested scenarios we are likely to go.

In building scenarios, I would add rapid versus gradual financial crisis as a separate parameter. Personally, I believe a rapid financial crash combined with an initially slow, but then increasingly rapid fall in energy supply is the most likely scenario. Financial crisis can cause many of the effects Holmgren discusses in his scenario work in relation to energy and climate impacts.