Net Energy End Game Theory …


The time frame is less than two years: the world becomes net energy negative. At that point there is no turning the clock back.

 

 

Gregor Macdonald discusses the end of inexpensive crude oil and the so-called production ‘Revolution’ hoopla with Chris Martenson’s (Peak Prosperity).

Gregor makes the point that the increase in crude prices after 1998 took a lot of analysts by surprise. Many predicted a decline to historical levels with drillers simply adding to output from inventory. This is a critical idea that remains in force to this day: that crude production is essentially low-cost, that crude is mis-priced, that manipulation is forcing prices higher, that prices will return to historical levels once manipulators are ‘surgically removed’ from the marketplace.

A fundamental principle of industrial modernity is oil can be wasted because it is cheap, it’s cheap because the only thing it’s good for is waste. The waste process is monetized, it is collateral for loans which ratchet the wasting process further along. After we borrow the first time, we borrow additional amounts in order to waste more as well as to service and roll-over the previous rounds of loans … Both the loans and the waste compound exponentially along with pressure on resources, the entire economy becomes saturated with debts and waste products while resources are exhausted.

What’s there not to like?

Problems emerge when crude oil is depleted and it becomes too costly to waste. If oil isn’t ‘waste-ably cheap’ customers cannot afford it, if the crude is not costly enough there are no returns for the driller. Our economic infrastructure has been built assuming cheap petroleum into the far distant future, our empire of ‘stuff’ is stranded by the high-priced variety … meanwhile, costly, difficult to extract crude is all that remains! Cost is the reef upon which the modern world has run aground: there isn’t enough margin remaining after paying the fuel bill to offer as collateral for new loans or to service debts … the fuel bill has to be very high or there is no more fuel!

A hundred years into the petroleum era and there are no ‘innovative’ scalable economic uses for crude other than to burn it! Despite massive conversion losses, cheap oil provides energy returns sufficient to support current living standards, not-wasting under the current regime doesn’t provide anything. Because of the absence of imagination and a shortage of high-cost/real value uses, the exhaustion of low-cost crude means the end of waste-based modernity: there is no ‘Plan B’.

 
Triangle of Doom 012113
 

Figure 1: From TFC Charts, continuous Brent monthly contract (click on for big). The top line represents what customers are able to pay, above that price there are no petroleum sales and price must decline as producers holding petroleum products cut their losses. The bottom line represents the ‘floor’ price that drillers must receive otherwise they cannot afford to bring new crude oil to the marketplace. There are a few things to keep in mind at all times:

– Since 2000, each incremental dollar (euro, yen or other currency) produces less crude than the dollar before. That is, today’s dollar produces less crude than yesterday’s dollar, tomorrow’s dollar will produce less crude than today’s. What is important is the relationship between the real cost of gaining fuel relative to the ability of the customers to meet this cost. This relationship is driven by the need of the driller to spend more in order to return less: this is net energy, it is currently declining, at some point net energy will become negative, that is, the use of energy will not provide returns, in the form of credit, sufficient to bring new energy supplies to the market.

– The gross amount of incremental credit available is the amount that the so-called customers are able to service at any time of roll-over credit that the establishment can cajole from lenders including central banks over a period of time. This incremental ‘serviceability’ or productivity of debt is decreasing … due to the negative feedback effects of high crude prices over time. See Charles A. S. Hall: ‘discretionary’ spending declines because more funds are diverted toward obtaining energy and away from the consumption of other goods and debt service, (PDF warning) Even though finance is creating more credit, that added credit is bringing less crude to the marketplace.

– It doesn’t matter how many discretionary dollars the establishment is able to cajole: at all times, the producer’s dollar is the same as the consumer’s dollar! Alternatively, the gallon of diesel fuel used by the driller is the same gallon (identical energy density) burned by the customer.

A change of the customer’s condition will have an adverse effect on the driller. The customer’s leverage or ability to borrow is increased at the expense of the driller’s leverage … and vice-versa … This is because money represents the same ‘energy cost’ to both.

Currency is nothing more than a proxy for the fuel used by the customer … which is the same fuel required by the driller to bring more crude into the marketplace. The driller cannot use one kind of dollar to gain fuel while the customer uses a different kind to waste the fuel.

Because modern ‘labor’ is waste, the customer must borrow … or some firm or institution must borrow for him. Gregor suggests workers were able to gain greater amounts in wages in the past when fuel was less costly: wages are credit, high wages represent the historical productivity of credit. Prices cannot rise further because the ability of customers to earn (borrow) is constrained by (relatively) high crude prices, the productivity of credit is diminished.

There are two sets of borrowers: customers and drillers. Both need to borrow to gain fuel. It costs more for the driller because he is constrained by geology while the customer is limited only by access to credit itself/wasting infrastructure. The relationship between the sets of borrowers conforms to game theory:

 
Crude Game Theory 1
 

Figure 2: Energy relationships in 1998 and prior, drillers and customers each borrow or don’t borrow. Not borrowing by either meant no economy and no petroleum produced which obviously did not occur. Both customers and drillers chose to borrow: drillers added to excess petroleum capacity making fuel more affordable. Customer borrowing became added gross domestic product (GDP). This amplified driller borrowing which made even more crude available at still lower prices!

There was no need to allocate between drillers or customers, they could ‘have it all’: by March, 1999 the world was …

 

Economist Cover 1

 

The famous cover for the Economist Magazine: it was an ugly cover … it was also incorrect about the future.

From 1998 onward, the productivity of each dollar invested in crude production over time has continually declined. This is the basis for the argument that Peak Oil occurred in 1998: that the baleful economic effects predicted to occur after Peak Oil started to be felt in 2000. To gain more crude oil drillers were required to add more wells, each well was more costly than the last, each well offered less crude oil than previous wells: the effect of this effort has been felt by oil consumers who have had to compete with the drillers for each dollar of credit.

 
Crude Game Theory 2
 

Figure 3: Post-1998, the brutal new game; the mutually-assured-destruction theory!

Borrowing by customers returns less GDP, borrowing by drillers returns less crude. When drillers borrow alongside their customers, they cannot keep pace because demand is easier to create than supply: automobiles are more easily had than new oil fields. Attempting to add to GDP (borrowing by customers) increases demand for crude which exhausts inexpensive fields faster, this in turn adds to the credit requirements of the drillers.

– When drillers borrow alongside customers for diminished return, borrowing costs pyramid. The outcome is the same as when neither drillers nor customers borrow, there is no economy, all are bankrupted by credit costs.

– The choice is for the customer to borrow at the expense of the driller or the other way around. Both customer and driller must compete for the same credit dollar: one gains at the expense of the other. The customers’ need for funds is absolute, they must borrow more than drillers or they cannot buy anything and there is no GDP growth. Drillers need for funds is absolute, they must borrow more than the customers otherwise there is less fuel for the customers:

 
Bakken 012013
 

Figure 4: Bakken output declines by Darwinian: when drillers cannot borrow, local oversupply of crude cannot be sold to meet costs, the drillers retire drilling rigs. Meanwhile, Bakken wells deplete rapidly, there is no way for drillers to ‘catch up’ after they have stopped drilling. If crude is not affordable now it will be less affordable — to both customers and drillers — tomorrow.

A few more things to keep in mind as we descend into the net-energy rat hole:

– Oil prices can only decline as there is diminished returns on each energy dollar … diminished GDP, diminished credit availability, diminished ability to meet ever-higher real extraction costs. Real energy costs will increase relative to the ability to meet them … even when nominal costs decline. The result is a net-energy death spiral or ‘energy deflation’ similar to Irving Fisher’s Debt Deflation. Whatever the fuel price happens to be at any given time it is too high. The price falls to meet the market, but fuel is removed from the market because of the drop in price, the ongoing shortage reduces the ability of customers to meet the price which is still too high … etc. The ‘real’ price of petroleum becomes higher over time accelerated by inadvertent ‘conservation by other means’.

– The inability of drillers to meet costs or to borrow sufficiently is illustrated by Royal Dutch Shell’s pathetic efforts to drill exploratory wells in the Chukchi and Beaufort Seas, (Rolling Stone):

 

The year closed on a particularly low note when, on New Year’s Eve, the Kulluk – one of two drilling rigs Shell sent to the Arctic – broke free from its tow ship in rough weather and ran aground on the rocky coast of Stikalidak Island while carrying more than 150,000 gallons of diesel.

But even before this mishap, the experiment had already been a severe disappointment to the company. In July, the Kulluk’s sister ship, the Noble Discoverer, slipped its anchorage and narrowly avoided a similar fate. Construction problems and equipment failures delayed drilling; just a day after work finally began in September, the Noble Discoverer had to stop again to make way for an incoming ice floe more than 30 miles long. An oil spill containment dome failed a required safety inspection, “crushed like a beer can” by underwater pressure. The Coast Guard, which is already investigating the Noble Discoverer for criminally inadequate pollution and safety controls, is now launching an investigation of the Kulluk incident. And in further bad news for Shell (and the Arctic), the Environmental Protection Agency announced yesterday that both the Kulluk and the Noble Discoverer repeatedly violated the Clean Air Act during the 2012 season.

 

The Kulluk is a 30-year old drilling barge that had been mothballed for 20 years before being brought back into service, the Noble Discoverer is 37-year old rust-bucket intended for duty in the relatively placid Gulf of Mexico. Shell’s Arctic effort is an improvised, cost- and corner-cutting jury rig rather than a serious effort, which would cost tens of billions of dollars and require many years of preparation that Shell appeared unwilling to invest.

– Pretty much all the oil that has been- recovered since 1858 has been wasted in automobiles and to fight wars. When shortages appear, the contestants for the oil that remains will be militaries and drivers.

– When net energy becomes negative — when the cost to extract oil cannot be met by the customer — there will be physical shortages. These shortages will be permanent: oil that cannot be afforded by customers in the present will not be magically affordable when these customers are poorer in the future. There will be no further rationing by access to credit, reduced amounts of oil will not deliver additional credit.

– Oil producing states tend to be autocratic: look for Norway, Denmark, the US, Canada and Mexico to become single-party states like Saudi Arabia or Iran. Because of autocrats ability to control access to energy, they will gain ascendancy with their populations’ eager consent. What is at stake for Americans and the West is democracy itself: a choice between the right to have a say in our own affairs versus the false-promises of energy-driven ‘prosperity’ offered by autocrats … the choice between driving a car or having a functioning republic.

– Oil shortages will manifest themselves as food shortages: even though there is likely to be plenty of food in general, there will be areas without food due to distribution problems.

– The time frame is less than two years then the world becomes net energy negative. At that point there is no turning the clock back. Not every oil producing region is showing diminished returns, these exceptions are the remaining large conventional fields that offer equal- or greater returns for each energy-dollar invested in them. At current rates of draw, these fields are being depleted rapidly. It is not necessary to note the field or the rate of decline, only to note the price of crude relative to the ability of the customer to meet that price. The time that remains to our current way of doing business is how long it takes for these last conventional fields to decline.

– This in turn is the time remaining to ‘prepare’: to move yourself or your family to a more pleasant place, to become an activist, to find a less petroleum-dependent job, to learn a post-petroleum skill or gain a post-petroleum avocation. When the US becomes net energy negative, the amounts of fuel available will diminish sharply. So to will be the ability of ordinary citizens to access that fuel … this will be so until a new allocation regime is in place, likely to be some form of hard rationing. In the new regime, the only citizens that will be free from the reach of authorities will be those who do not use fossil fuels or petroleum at all.

EDIT: Coal, nuclear, hydro-power, solar and wind, natural gas and other prime movers are dependent upon cheap, plentiful supplies of petroleum to power the necessary ships, trucks, trains and other forms of transportation. When supplies of petroleum diminish (finger cutting across throat gesture).

75 thoughts on “Net Energy End Game Theory …

  1. The Dork of Cork.

    Places with cheap electricity ( some limited eastern manufacturing will move back me thinks) are getting cocky.

    But I always liked this guy.
    http://www.youtube.com/watch?v=BotyxdQyQaA

    He treated Friedman with deep Skepticism when he visited back in 1987.

    If they give up their 4*4s (they don’t do public transport in Iceland) they only need enough diesel to fill the trawler tanks………….& customers to buy fish………

    Countries that depend on people buying cars will hit the dirt first.

    The EU project is dead DED DEAD

    ” the eurozone has revealed itself to be a different type of animal”

    He the Man.
    The Atlantic powers are slowly side stepping away from the Euro Soviet project

    Meanwhile Ireland remains the sickest joke of the market state era.
    What can one say about such a retarded dumb country.
    Words fail me on this one.

  2. Mark N

    Another stellar post Steve. I believe you are right and the first one that I know of to realize the importance of the triangle of doom. I believe that the current industrial ponzi economy will be toast when negative net energy becomes a reality. From what I can deduce about complex systems I believe the plutocracies that run most developed countries ( they let us pick from two approved candidates ) are in for a hard time of keeping things together.

    I was watching a documentary about Michael Burry of “The Big Short” fame. He described his years of research on sub-prime mortgages culminating in a decision to lay his cards down and short the sub-primes. Watching him describe the moment I knew I had to lay my cards down on peak oil and its effect on the economy. With a insane amount of luck I have purchased land deep in the Ozark Mountains with an off grid cabin. Rock and Roll dreams laid to rest ( I will play local for money because it is my only marketable skill) I now aim to become self reliant through permaculture. It has become clear it will be that or the soup line soon enough. It will not be easy but I stumbled into a community already living that way ( covenants against power, chemical farming, commercial logging ) and figure the hard ships will be worth putting my money where my mouth is. To quit researching and start acting. Like our blog host I encourage everyone to think hard about the future. My plan won’t work for everybody but I would have just looked at a population density map picked a far flung place to rent if money prevents buying land. There is still time to act but the Titanic is starting to list ever so slightly.

    JB said

    “The global corporations and financiers hold all the cards. It’s their game. If it’s in their best interest to come up with a solution, albeit a (more) criminal one, won’t they at least try to do so? Who is going to stop them? In the meantime, the average person is going to experience food and energy poverty, sure that’s a given. We’re all Greeks now”.

    I think Steve’s post from today would be my answer. I agree that it is the plutocracies game and they have surprised many people with their ability to extend and pretend. I totally agree that we are all Greeks now, I have even been saying that to my poor friends who have to endure my rants! I think that when we enter negative net energy waters there will be some catalyst for an economic meltdown like in Lehman in 2008. I think this one will be hard to fix due to credit constraints and will trigger the end of the current global ponzi. Pretty much what Raoul Pal was a little early in predicting here. http://www.businessinsider.com/raoul-pal-the-end-game-2012-6?op=1

    1. Jb

      Thanks, Mark for continuing the thread and the link. I’m inspired by your decision to make significant life changes. We are firmly routed in both worlds at the moment so I’m doing my best to adapt in place. (My chickens are thoroughly annoyed by the 1.5″ of snow that fell last night.)

      Whether it’s an economic meltdown, a war, or some other exogenous event, based on Steve’s Triangle, I suspect we won’t make it to the end of 2014. It seems to me that the further we go into the Triangle, the greater the risk of breaking through support lines.

      Terrific post, Steve – thanks.

      1. Mark N

        No problem JB, I always enjoy your comments. It was easier for me to make the jump off grid because my dream of making it in music is pretty much over. I have friends who have made it on the level that is realistic for not playing corporate shill music and a gas price change mid tour has made them make zero money when the tour is over.

        The thing I would like to know most is how will the plutocracy respond to the next crisis? The derivatives are quietly waiting to blow up the over leveraged global financial system. How long can the central banks buy sovereign debt? How long can governments make interest payments on the debt? The U.S. will pay almost 400 billion dollars in interest for one year with low interest rates! This can not continue long; I believe despite the fact that normal life continues industrial civilization is on the ropes.

        My chickens are not pleased either, but at least it is a little warmer. We are in very nearly the same part of Virgina if you ever think of moving to a low population density area let me know as it has been a hobby to follow real estate markets in low population density areas. Pocahontas County W.V. would be my first pick for you; just have to look at the Marcellus Shale map to steer clear of the fracking.

      2. Jb

        @ Mark,

        And my dream of being an architect for the rest of my life is fading fast too. Oh well, I’d rather be out turning the compost anyway. I planted Camellia sinensis seeds this morning; cross your fingers!

        “The thing I would like to know most is how will the plutocracy respond to the next crisis?”

        Ditto. I guess it depends on the nature of the crisis. I’m assuming the plutocracy is going to do everything they can to retain / grab control.

        Alex Smith / Radio Ecoshock did a great program this week. His interview with John Talberth was very interesting. Basically, he contends that the government is selling oil drilling leases to companies in order to shore up their balance sheets, give them leverage. It’s not about ‘energy independence’ at all. Maybe Steve can comment about this.

        Pocahontas County W.V. sounds nice. I’d like to get further west of Lake Anna if you know what I mean.

      3. steve from virginia Post author

        I like Talberth’s approach, to sue. Even if Talberth’s group doesn’t win, it forces the various interests to defend themselves, to go on record, which exposes more vulnerabilities for the next rounds of actions.

        My sense about all the govt leasing activity is that it is a ‘use it or lose it’ panic. Any oil has to get out in the market now … because it might not be available next year or the year after. Who is screwing whom in the driller/govt relationship? Most of the leases don’t hold marketable reserves. There is a lot of drilling activity for its own sake.

        If the US gains petroleum it isn’t because of drilling but cutting credit to Europe and destabilizing energy suppliers (to quash their demand). All that Greek and Spanish consumption is exportable … so is the Libyan, French and Italian. If Wall Street can beat the Europeans into the ground, that is 5+ million barrels per-day of consumption that can be ‘discovered’.

        This still doesn’t change the big picture … oil has to be sucked out of the ground and that little trick gets harder — and more expensive — every single day.

      4. Robert

        I follow energy stocks (mostly unconventional) for a living. I think you are missing the concept of “held by production”. Leases usually become permanent once any amount of production is obtained from a given zone. In the case of tight oil, that could be as little as 1% of the total wells that could be drilled in that zone. Government leases tend to be especially generous in that regard.

  3. dolph

    You are right about autocracy, but this game will take awhile to be played out.

    Credit and money are abstractions, easily replaced with one another. When the central banks began to monetize debt, they placed an effective bottom on the price of oil. The upper bound is the determined by the customer’s ability to pay with cash or cash equivalents (electronic), not credit per say. This again is determined by the central bank; if customers can’t pay, money will simply be given to them to do so.

    It is by this mechanism that a fraudulently high price of oil is established very quickly, which enables the harder forms of oil to come online.

    The waste base economy already crashed, but it wasn’t allowed to do so. In order to continue the game the central banks effectively took us off the oil standard…and onto a completely symbolic digital currency.

    We’ve all been swindled and taken for a ride. The endgame isn’t in a few years, the endgame is when every last source of fossil fuel is found and produced and consumed. And in the meantime we’ll build alot of nuclear plants. Which might take while…decades at least if not a half century or longer.

  4. p01

    “Oil producing states tend to be autocratic.”

    This is a very subjective statement. The general statement is:
    The natural state of a state is an autocratic state. 🙂
    –Civilization 101.

      1. steve from virginia Post author

        Two years is overdue … the shebang should have unraveled in 2008.

        What is underway right now is diminishing returns on asset price bubbles … hard on the heels of diminished returns on everything else.

        Two years if everything the establishment does is perfect, there are no critical wars and no major economic power fails (China, Japan, France).

    1. Reverse Engineer

      Yesterday, January 30, 2012 the Doomstead Diner passed the 2,000,000 mark in Page Hits in our first year of operation. Average DAILY page hits now are around 9000. This is close to what Mish or Karl get.

      My thanks to Steve for allowing me to Cross Post his Economic Analysis on the Diner.

      RE
      http://doomsteaddiner.org

      1. steve from virginia Post author

        Thanks RE …

        Economic Undertow should be good for 10 – 12 of those page views!

        I can’t say that this is the blog nobody reads any more …

        It’s the blog that a very select few read.

  5. Usman

    Thanks for this insightful post. The most revealing thing I gleaned is that there’s no such thing as productivity — only wastes and costs! Costs are increasing, and all we have to show for it is…. more waste. What a conundrum.

      1. steve from virginia Post author

        The reason behind gas flaring in Texas and the Dakotas: this is associated gas which emerges from oil wells. The oil is pumped into rail cars or trucks then shipped overland to refineries. Because the wells deplete rapidly there is no time to be lost in shipping the oil as fast as possible. Meanwhile, to build gas transmission infrastructure — gas separators, compressors, pipelines, etc. — would require several years during which the oil could not be shipped.

        It’s hard to keep a good story like ‘energy independent Saudi Arabia 2.0’ away from an eager public until some plumbing is installed.

        By the time the plumbing is installed the wells are depleted, anyway.

  6. Ken Barrows

    Let me play devil’s advocate for a moment, although I don’t dispute your conclusions with much vehemence.

    First, in the triangle of doom, how do we know the affordability line is sloping gently down to the right? Although people aren’t likely to do so, they could change their patterns and maybe make the line horizontal or even upward sloping. Second, do we have a good handle on what it costs to get that marginal barrel of oil out of the ground? Estimates seem to vary widely. I cannot argue though that the trend is upward and to the right. After all, I have never heard a counter argument, only that “reserves” have increased.

    Just wondering.

    1. steve from virginia Post author

      What matters is the convergence of costs. The customer borrows at the expense of the driller, the driller must borrow more because of geology and the consequences … of our previous waste.

      Priced in euros, the customer price has increased since 2008, the cost of the fuel has increased just as much, the floor price is higher in euros, there is still convergence.

      The convergence is built in, due to the relentlessly increasing costs to the drillers.

      The only way to escape convergence is for drillers to find those four or five more Saudi Arabias we keep hearing about instead of the teacup formations under icebergs that are being ‘explored’ and ‘produced’ today. Either that or customers must earn without borrowing. This can be done but only by very small-scale craft shop and horticulture enterprises that aren’t fuel dependent … the sorts of enterprises that are discussed here … and nowhere in the establishment.

      1. Ken Barrows

        Finding the four or five Saudi Arabias isn’t so hard. Like the new Australian “find,” right? Boy, it’s getting more and more ridiculous.

  7. Ravi Nathan

    Great post! The assumptions behind the downward sloping line need to be examined in more detail. There may be considerable cost savings from energy efficiencies. For example, with the last gas price spike, we saw a large move to public transportation. Similar efficiencies are available from better building insulation and design LEED type enhancements. The benefits from energy efficiencies has the potential to surprise, delaying the net energy cliff.

    1. Jb

      Energy efficiency is what we get whether we like it or not. Walking replaces cars because there is not enough credit for both consumers and producers (see above) or because there is simply not enough gas to go around as depletion exceeds the cost to bring affordable marginal sources to market.

      No gas = energy efficiency and sustainability!

      A LEED certified building is still one that uses enormous amounts of non-renewable fossil fuels and raw materials from all over the world. FSC certified African Mahogany anyone? Gimme a break. Site location, distances to mass transit, orientation, etc. are all major issues to contend with. Furthermore it is difficult and expensive to change occupant behavior. I have specified CA Title 24 certified lights only to have clients replace them a year after construction is complete.

      Disclosure: I was LEED v2.0, USGBC/GBCI certified (until I came to my senses) and have designed and consulted on numerous LEED Silver and Gold certified structures.

      1. Makati1

        LEED is another ‘red herring’ to make people think that they are doing something positive. A real energy savings would be to NOT build the building in the first place, but to retrofit an old building with a few energy savings systems. Reminds me of an insurance company near my home that bought a small farm on the corner of two main highways (80 acres) and began a new office park. They built themselves a HQ building with the energy saving features, and then clad it in copper and stone to eventually get the verdigris look. Well, it got the look but years AFTER the company went bankrupt. It seems that no one wanted to have an office there, so none of the development was sold/leased. It was just an 80 acre landscaped park that had to be maintained so the HQ building could be seen from the highway, and to meet township regs…lol.

        Your article confirms my thoughts on the future. I have been saying for years that it is not the number of barrels of oil/sludge/moonshine that is produced but the NET energy gained/lost. And it is obvious that we are losing, not gaining.

  8. Pingback: Net Energy End Game Theory… | Doomstead Diner

  9. steve from virginia Post author

    From Art Berman’s ASPO-USA presentation in November:

    (Berman) says there was no improvement in well efficiency between 2010 and 2011. In some cases it’s taking increasing numbers of wells to get the same amount of product. Berman says the costs are “astronomical.”

    It doesn’t matter how much reserves you have if customers cannot afford them.

    More from Art Berman concerning shale gas production:

    Rex Tillerson, the CEO of ExxonMobil, stated about shale gas, “We are all losing our shirts today.” Mr. Tillerson said in a talk before the Council on Foreign Relations in New York. “We’re making no money. It’s all in the red.”

    When the gas wells are shut in and extraction declines, the price will rise and fewer will be able to afford the higher price.

    Chris Nelder:

    As I explained in my end-of-year post, I think we’ll be kept in suspense for at least another year, and probably two or slightly more, before we see the terminal decline of global oil supply beginning to happen. It will be another year or two after that before the public and politicians catch on, as fuel prices reach truly painful levels. And it will be some years after that before the global economy responds with the denouement of the debt crisis.

    BTW: it is rather more likely that great numbers will lose their jobs and poverty will expand dramatically everywhere in the world … with declining prices never really declining fast or far enough.

    A little leadership right now would go a long way but it doesn’t look likely that we will find it.

  10. steve from virginia Post author

    From Kurt Cobb @ Resource Insights:

    The full cost of producing new oil for the 50 largest publicly traded oil companies in the world is $92 a barrel according to Bernstein Research. While average costs are lower because they include previously discovered conventional oil which is cheaper and easier to produce, the Bernstein report challenges the notion that new technologies will lead to cheaper oil. Those technologies including hydraulic fracturing will make it possible to extract previously uneconomic oil resources–but only at very high and rising costs. In fact, the cost of producing the marginal new barrel of oil has been rising at 14 percent per year since 2001, Bernstein says. Finding, developing and producing new oil isn’t getting cheaper; it’s getting much more expensive. So while oil prices could fall below the cost of producing new barrels for a while, they simply could not stay there unless the world were to become content with ever shrinking supplies of oil. No company will continue to drill for oil when each new well loses money.

    Cost matters … not much else!

  11. steve from virginia Post author

    Interesting article “Perfect Storm, Energy, Finance and the End of Growth” by analyst firm Tullett-Prebon (UK) hits some of the same diminishing returns targets found here.

    HT: Jim Hansen @ Master Resource Report:

    http://www.tullettprebon.com/Documents/strategyinsights/TPSI_009_Perfect_Storm_009.pdf

    Meanwhile, I’m fired!

    http://theconversation.edu.au/climate-change-signals-the-end-of-the-social-sciences-11722

    That big pile of dirt down the road is really in control …

  12. Robert

    Steve, about your point about drillers competing for the same capital as customers. When a company drills, it uses labor and machinery that itself took labor to produce. Aren’t the people who have those jobs also “customers”?

    BTW, not trying to be argumentative, but trying to understand where you are coming from. I think you are on to something about the financial crisis being linked to the energy crisis.

  13. steve from virginia Post author

    Sorry to be ambiguous … it goes with the territory.

    – In the largest sense, the entire economy is in the employ of the energy companies, because there is no ‘end product’ of the economy the entirety is underwater, it is supported by credit and faulty accounting.

    – In a conventional sense, the costs of bringing fuels to the market are an increasing percentage of GDP year over year. This implies there are consumers and producers as separate entities.

    Right now the cost to bring new fuels to market is very high and rising … even as some of those costs are payments to employees, to subordinate businesses, etc. When the costs in the conventional sense increase then they become burdensome to the rest of the economy … presuming the separate entities. Because there is a finite amount of credit at any given time, credit that flows toward energy producers is less available for the consumers. What matters is the change in the flows, the relationship between one flow and the others.

    The flows matter otherwise there would be no problem with producer costs. Right now they are + 5% of GDP. In ten years they would be 10% of GDP … as you say GDP is GDP. In ten more years they would be 20% … not a problem, right? Eventually costs become 100% of GDP: enter the faulty accountants adding more debt! in fifty years or so we will have arrived to where we are now!

    The consequence of less credit is fatal compared to the consequence of more credit. There are asymmetric outcomes: when more credit flows to a group, the group is not harmed materially: when there are credit constraints there are bankruptcies that multiply rapidly depending on to how credit is structured. Collateral for almost all loans is other loans, when some of these are seen as non-performing the entirety is suspect and participants lose confidence. What I’m trying to get at is that the fuel supply issue is not simply a matter of costs/EROI but the entwined relationship between fuel supply and credit flows.

    An example would be Lehman Brothers: when the firm was flush with credit there were no adverse effects (the bosses became richer) but the firm having a tiny bit less credit access in September, 2008 meant the entire shadow-banking system fell apart very quickly.

    Charlie Hall makes the divide between energy costs (supply) and discretionary spending (customers). Gail Tverberg has a slightly different take on the subject:

    http://ourfiniteworld.com/2013/01/24/how-high-oil-prices-lead-to-recession/#more-37654

    1. Robert

      Thank you for the thoughtful response Steve. I’ve got to get up really early tomorrow or I would write more, but I just wanted to say thanks.

  14. Ellen Anderson

    Hi Steve – I downloaded and read the Perfect Storm. Loved the gorgeous pictures and found the arguments well organized but nothing new. Moreover, I don’t like the punitive tone as if people really were given a choice as to how much they were to consume. (I think Americans have been stuffed like geese! The whole conversation about how to live has been controlled by corporations through their TV ads.) I also wonder about the article’s emphasis on decreasing production and increasing consumption considering that the central problem in industrial capitalism is over-production. What difference – in the really long run – does it make if you produce/consume too much in the west or in the east? To survive we have to produce much less (do less work overall) right? We should be thinking about what people really need in order to maintain the species. Civilizations have always created waste but not on an industrial scale. How much surplus must a civilized society generate in order to save Mother Earth and produce an occasional Mozart or really talented cave painters?

    1. steve from virginia Post author

      Yr not going to find a bunch of finance analysts saying, “The real problem we are having right now is finance analysts …” It hits too close to home.

      A bit like Jeremy Grantham … you know?

      The next 1,000 years are going to be very difficult.

      🙂

      1. Ellen Anderson

        I suppose so. If a picture is worth 1,000 words what were those particular pictures saying? Or were they just there to lend an air of gravitas and to get people to turn the pages? (Too bad our urban ruins aren’t as photogenic.)

      2. steve from virginia Post author

        Most people interested in finance industry reports tend to be bullish about everything and the reports tend to meet those expectations. It’s hard to change people’s attitudes with data — people ignore it — so an austere visual tone is sensible public relations.

        What seems odd about this report is the complete absence of any suggested strategy. I guess the client has to pay extra for that.

  15. The Dork of Cork.

    New Van sales data is a almost foolproof view of domestic economic activity.

    Jan to December reg is showing weakness in the UK (-7.9%) with a greater fall near the end of the year.
    Something major is happening in non Euro Sweden also with regs down -15.2% this year and -28.9% in December.

    DEFLATION
    http://www.acea.be/news/news_detail/commercial_vehicle_registrations_-12.4_in_2012_-23.4_in_december/

    Portugal ,Greece & Cyprus is again out their man
    With yearly declines of -52.2% , -41.7% & -46.9% from a already low 2011 base.

  16. The Dork of Cork.

    PS something major seems to be happening to the French van market – its much bigger then the German market given France has a tradition of heavy van use for farming and other delivery activities in a economy with much more internal activity then mercantile Germany,

    French van reg Y2007 :460,570
    reg Y2008 : 458,956
    Y2009 : 372,592 (first major fall)
    Y2010 : 415,449 (recovery)
    Y2011 : 426,654
    Y2012 : 381,233 (second fall)

    Also Germany is showing weakness in this sector – especially near the end of the year with a -13.1% drop in November & -24.3% drop in December.
    Y2007 :221,540
    Y2008 :223,234
    Y2009 :169,376
    Y2010 :196,533
    Y2011: 233,442
    Y2012 : 219,422.

    The fact that Germany only consumed half ~ the vans of smaller France highlights the still major differences between these 2 euro economies.

  17. The Dork of Cork.

    Dutch man with much the same accent observing a twizy on cold morning commute in the Hague I think………….

    http://www.youtube.com/watch?v=1_Op1IU7MXg&list=UUjcldiNQPm0-tyBP8jZLqoA&index=37

    Followed by some fun solex racing…………..people will always try to have fun.

    There is a hint of Holland during the second world war about these videos (although of course no way near as bad ., yet?) – with him hunting for firewood in a construction site / urban glasshouse).

    Its kind of sad really.
    As I imagine all of the cars in the lowlands burn more fuel then all the Panzer divisions were ever capable of burning.

  18. Robin

    Almost all public transport buses in Naples are sitting idle in their depots today. The ANM, Azienda Napoletana Mobilità, has communicated via Facebook and Twitter that it is no longer able to purchase the fuel, apparently due to government and regional spending cutbacks. Since 2009 the number of buses servicing the city has almost halved, from 600 to 350.
    Public transport in Milan is still working alright, thanks to the money gotten from allowing businesses to cover all surface available with ads and little screens playing commercials.

  19. The Dork of Cork.

    @JB
    It says (google translate)

    30/01/2013 Service unsecured
    01.29.2013
    We inform our esteemed clientele that the 1/30/2013 morning, low fuel, the service is not guaranteed.

    29/01/2013 IRREGULARITIES ‘ZONE FLEGREA, CHIAIA, VOMERO
    29.01.2013
    We inform our esteemed clientele that due to unavailability of fuel irregularities of Phlegraean area, Chiaia, Vomero. We apologize for any inconvenience

    Dork – because Italy is not a nation state it cannot go to war.
    Well the caveat is its Naples ………………but
    It cannot buy up all the available oil for public transport at the expense of lets say private cars running low.
    Creating more shortages

    In other words rationing seems impossible in the EU market state construct.

    We are headed toward epic breakdown me thinks.

    Even though the UK is the ultimate market state its fat controllers will return to nation state like conditions to preserve their claims.

    Its time.

    1. Jb

      The shortages and breakdowns are fascinating, in a macabre sort of way.

      Petroplus went out of business from a lack of extended credit. Refinery problems in California resulted in high prices and petrol station closings. Pharmacies are running out of critical medicine in Spain due to credit / reimbursement problems. And now buses stop running in Naples due to credit problems.

      As isolated incidents, these appear as background noise to everyone per-occupied with ‘business as usual.’ Perhaps ‘it’s time’ for another seizure of the global financial market? It is certainly time for these interruptions to become BAU for the western world.

  20. The Dork of Cork.

    “Opening highway 2” the Italian way……………..

    These guys really really crack me up.

    http://www.youtube.com/watch?v=eBCkcCDf-a0&list=UUj21S-zObwO7s770K98uU_Q

    From Reuturs

    “ANM said it hoped its services would be back to normal later on Wednesday. Italian newspapers reported that fuel companies had cut supplies to the transport operator because it owed them too much money.

    ANM said it was a victim of cuts to local authority funding in a government austerity program aimed at shoring up Italy’s public finances, which has also included an increase in fuel taxes.”

    Dork – The euro system monetary & fiscal corruption would make the Mafia blush.

    Its such a strange dysfunctional beast.
    That seems unable or unwilling to farm the sheep on a even semi sustainable basis.

  21. James

    I’ve come to the unfortunate conclusion that we were all born into and are functioning parts of an ecosystem malignancy that began long before fossil fuels were discovered. Primitive men with primitive tools, living in bands the equivalent of pre-malignant cells. Tumors feeding upon the landscape have arisen from nutritive ground, absorbing nutrition from immediate surroundings, vascular paths and roadways extending into forest, plain and river delta.

    The cultures and specializations that arose within these tumors were enabled by growth and energy flow, weapons development being especially effective in determining which clonal line would effectively compete for available nutrition.

    The discovery of fossil fuels has greatly accelerated the growth and competition amongst tumors and greatly enhanced their metastasis. Just like cancer, man can find little meaning in his life except for growth and consumption. Inside the tumor the cheers resound for three, four, five, eight percent growth, even as the body from which the tumors emerged begins to show signs of serious illness.

    Recent history was the greatest time to be alive, safely inside the growing tumor, expropriating more than our share of glucose from a withering body and causing irreparable damage as we metastasized and became rich. But now the cancer will not only be starved of nutrients as the ecosystem homeostasis seeks new balance, it will be subjected to radiation therapy (Fukishima and more to come), chemotherapy (from the massive amounts of toxins that the overall system can no longer handle) and finally it will be subjected to thermotherapy in which rising temperatures will kill significant numbers of tumors in increasingly arid, hot climates and along the coasts. Unfortunately the ecosystem will likely perish along with us.

    We shall experience Easter Island part II writ large with the cannibalism (North Korea), warfare, disease, enslavement and ecosystem unwinding experienced during the short tenure of the Rapa Nui culture. Sustainability is not in the cards for an organism that loads the deck in its favor by using a new and rapidly evolving extra-somatic tool kit. Life inside the tumor is cushy now, but it won’t always be as the metastatic cancer takes down the ecosystem.

    1. steve from virginia Post author

      I would believe very little of what the western media has to offer about North Korea. The country is open to China and has raw materials it trades … similar to Myanmar/Burma.

  22. The Dork of Cork.

    The latest IEA oil market report.
    http://omrpublic.iea.org/omrarchive/18jan13full.pdf

    Italy now consumes less then half of the German oil consumption !!
    It also consumes slightly less then Spain despite having a extra 13 and a half ~ million people.

    OECD Demand based on Adjusted Preliminary Submissions – November 2012

    Germany 2.5 MBD (2.1% PA growth)
    France 1.8 MBD (3.9 % PA growth)

    Italy 1.24MBD (-11.8% PA growth)
    Spain 1.26MBD (-7.2% PA growth)

    Who got to eat those Italian & Spanish oil rations ?

    UK consumption also down massively
    UK 1.47MBD (-7.8% PS growth)

  23. The Dork of Cork.

    Also much like Ireland (although Ireland was of course far more extreme) & others during the Euro years………….

    A liberalization of labour flows was meant to increase “wealth”
    Of course it did not.
    Its real objective was a extraction of labour value via the destruction of the real remaining capital base.

    From Italian demographics wiki

    In addition, after centuries of net emigration, from the 1980s Italy has experienced large-scale immigration for the first time in modern history. According to the Italian government, there were 4,570,317 foreign residents in Italy as of January 2011

    http://www.tradingeconomics.com/italy/population

    Such a poor country with a rapidly declining fossil fuel ration cannot now afford such population increases if it is to sustain even a moderate standard of living.

    1. steve from virginia Post author

      There are a lot of Africans in Italy.

      Some of them move on to other countries or are moved on by the police.

      Italy has a long coastline and it is costly for the authorities to keep unwanted immigrants out. Thousands arrive every day, many as tourists. The same is true for Greece and Spain. There are also immigrants from destabilized Balkan states.

      Many of the immigrants are very poor and make few demands on the system. The ambitious immigrant will earn in the underground economy and use the proceeds to buy a car. People immigrate to Italy and other advanced countries in order to be able to own and drive a car. Even if a car can be had in places such as Mexico, Senegal and Mauritania, there are fewer good roads or places to drive to. Also, funds are earned to remit to home countries although there are fewer remittances to Africa than there are from N. America to Latin America.

      Other immigrants in Italy are retirees from Northern European countries. These individuals keep the pathetic Italian economy afloat. Any disorder in Italy as is occurring in Greece or Spain would chase many of these prosperous immigrants away, leaving impoverished natives and the Africans behind.

  24. The Dork of Cork.

    So Between 1978 and 2001 the population was within the 56 million range

    What happened in 2002 again ?

    Me thinks the real standard of living per person has crashed.

  25. The Dork of Cork.

    January is normally by far the busiest month for Irish new car regs……

    http://www.beepbeep.ie/stats?sYear%5B%5D=2013&sYear%5B%5D=2012&sRegType=1&sMonth%5B%5D=1&sMonth%5B%5D=12&x=32&y=6

    sales are down 18.82% from 21,302 units in Jan 2012 to 17,293 units in Jan 2013.

    However the new car reg plates may change the buying dynamics
    Old system
    C – 12 – 456 (where C = Cork county , 12 = year 456 = number of units reg.)

    C – 131 -456 (13 1 = year first 6 months of year)
    C -132 -4560 (13 2 = year last 6 months)

    Very strange I know………………………..Irish car buying psychology
    Or maybe its just Irish psychology

    Anyway July car reg will probably tell where Irish car regs are going this year.

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