Year: 2015

The 1841 book, Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay, describes a variety manias and bubbles throughout history and is still considered by many to be important in the study of social psychology and psychopathology. Will a future edition include a chapter on electric cars? Will Telsa’s peak market capitalization of over $37 billion (as of 9/12/2014) be compared to the peak of the Dutch tulip mania, where a single tulip bulb sold for more than 10 times the annual income of a skilled carpenter?

“We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.” – Charles Mackay

 

In a recent speech at the North American International Auto Show, Tesla CEO Elon Musk defended electric cars, saying, “electric motors were ‘fundamentally’ better than gasoline engines in terms of efficiency.” I am not sure what Mr. Musk meant, but let’s look at some figures.
Do electric motors have less loss converting electricity to mechanical power?
Perhaps Mr. Musk means that electric motors have less loss converting electricity to mechanical power than gasoline engines have converting gasoline into mechanical power? Surely Mr. Musk knows that is a facile argument – electricity is a way to store energy, but it’s not the source of energy. The electricity has to be generated first. To calculate the total impact of a vehicle, one must consider both the source of the energy and the impact of manufacturing (and later disposing of) the vehicle. When one considers the total life cycle impact of a vehicle, the picture is murkier.

 

Are EVs more economically efficient?

Maybe Mr. Musk means an EV is more economically efficient? Tesla’s website offers a calculator that is supposed to help determine this. Their base case uses a cost of electricity of $0.12 per kWh and a cost of gasoline of $3.90 per gallon, with the gasoline vehicle getting 22 mpg. Using these figures, the Tesla is indeed more cost effective to operate than a gasoline vehicle. But, the price of gasoline has plummeted since their August 12, 2014 benchmark – the national average is now $2.14 per gallon. And, according to the U.S. Department of Transportation, the average fuel economy of cars in the U.S. is 36 miles per gallon. Using these figures, the Telsa Model S is still more economically efficient to operate than a gasoline car, $.035 per mile vs. $0.59 per mile.
But we also have to look at the source of the electricity. Across the U.S., 39% of electricity comes from coal. Perhaps the case Mr. Musk is making is that a coal-power car is more economically efficient than a gasoline powered car? That is not something to brag about, is it?
A coal-powered car?

Coal-powered cars are worse for the planet than gasoline powered cars, according to a recent study published by the National Academy of Science. When one considers both air quality and carbon dioxide emissions, the authors actually conclude:
“EVs powered by grid-average electricity … have greater negative impacts than do vehicles powered by gasoline.”
Wait, what? A Tesla Model S usually sells for more than $100,000 or more than three times the average price of a new car in the U.S. and are subsidized by federal and state governments up to $10,000 and they are worse for the planet than a gasoline car? (Related question: Why we are subsidizing expensive cars for rich individuals that save them operating expense while causing more environmental damage?)
Changing the Grid

Well, one might argue, it will all make sense once we change the grid. What if the electricity comes from less carbon-intense sources? California’s electricity comes from 60% natural gas, 12% hydroelectric, 9% nuclear, 7% wind, 7% geothermal, 3% biomass and 2% solar. According to the National Academy study, a EV powered from a grid that has 60% of its electricity from natural gas and 40% from “WWS” (wind, water, and solar) has about 61% less harmful impact to the planet than a gasoline car. That’s good, right?
Yes, but there is a major problem. It is very expensive to move to a less carbon intense electrical grid. I live in California, so I know. Our electricity at home has a marginal cost of$ 0.36 per kWh (not the $0.12 Tesla uses in their calculator base case). The Tesla Model S can go 265 miles on 85 kWh, according to Tesla, or $0.115 per mile. A $50,000 BMW 5 series gets 34 miles per gallon, according to BMW. Premium gasoline at my local gas station this morning was $2.49 per gallon so the BMW costs $0.073 per mile to operate. A California Tesla S owner paid twice as much for his car, and pays 58% more to operate it. (In case you are wondering, at $3.92 per gallon, the Tesla S owner breaks even on fuel cost). And the BMW has a range of 629 miles vs. the Tesla’s 265 miles and can be refueled in 5 minutes at any of the 168,000 gas stations in the U.S.
The Facts

The fact is that in most places in the U.S., EVs cause more harm to the planet than gasoline cars. If we invest enormous amounts to move to a less carbon intense electric grid (as California has done) AND spend 2x to 3x as much for our vehicles AND spend 58% more to operate those vehicles, than we can significantly reduce the harmful impact of automobile use (for the few that can afford to buy and use them).
Fortunately, there is a better way to reduce the harmful impact of automobiles while maintaining affordability and utility. In a paper we published at the SAE World Congress in April 2014, we reported test results that show we can already meet the fully phased-in 2025 LEV III / Tier 3 emissions standard while improving efficiency vs. a gasoline engine by 86%. Using the data from the National Academy study, this engine will reduce harmful impact of emissions and carbon dioxide by 42% – at about the same costs as today’s engines and vehicles, using the same gasoline, and now in a vehicle with a range of over 1000 miles (San Diego to Boston with just two stops!)
If we put this new and better engine into a hybrid vehicle, we can reduce harmful impact of the car by 60% compared to today’s gasoline car – virtually the same benefit as the expensive low carbon grid with an expensive EV with expensive electricity. But because of its much greater affordability and utility, this is a vehicle customers will want to buy and drive, without subsidy.
The Future

Petroleum based fuels are a finite resource. At least EVs prepare for a post-petroleum future, don’t they? Not so fast.
In a paper recently published by IEEE, Dr. Sebastian Verhelst makes the argument that the ultimate solution for transportation is using solar power to formulate methanol or DME[1] from H₂0 and CO₂for use in an efficient, clean internal combustion engine. Because methanol and DME have no carbon-carbon bonds, it does not generate particulate matter – the main contributor to health impacts cited by the National Academy in their recent study. Because the fuels are formed from carbon dioxide in the atmosphere, their net carbon contribution is zero. In other words, rather than electricity carrying energy from where it is produced to where it is used in our vehicles, methanol is better suited to be the energy carrier because of the better cost and utility of creating, carrying, and using the energy.
Mass Impact Requires Mass Adoption

So maybe the hundreds of billions of dollars being invested in electric vehicles and infrastructure are misdirected and ill-fated. If an Achates Power engine, running on gasoline initially and methanol eventually, can deliver the same or better benefits at much lower cost and much higher utility…well economic gravity takes over. A better solution that costs about the same as today’s engines and vehicles, delivers much better efficiency and much lower environmental impact is a solution that consumers will want to buy and use. To have mass impact, we have to have mass adoption. To have mass adoption, a solution has to be both environmentally sustainable and economically sustainable. It has to be cost effective for consumers on its own because it is impossible to subsidize at scale. Despite massive subsidies and despite historically high fuel prices until just recently, EVs have had virtually zero impact because they have had virtually zero adoption – according to the Wall Street Journal, just 0.3% of new vehicles registered in the U.S. since the start of 2012 are fully electric powered.
We must do better. And we can – with the right solution. Achates Power is that solution.

The present collapse of oil prices finds some parallel with a much older case: that of whale oil and “whale bone” in the 19th century; both being commodities which suffered depletion and a production peak. Note the very strong oscillations that occur at around the peak and seem to increase with time. Note also how the average price levels stabilized at some point: there is a limit to what people are willing to pay for any commodity. It was true for whale oil, it is true for crude oil. Hence, it is likely that oil prices will keep increasing for a while, but then will stabilize, at least as an average. Image from a 2008 post by Ugo Bardi on “The Oil Drum”

In 2008, I published a post on “The Oil Drum” (reproduced below) where I tried to predict the behavior of crude oil prices on the basis of a comparison with the historical case of whale oil. In the first half of the 19th century, whale oil was an important commodity used mainly as fuel for oil lamps. It was, theoretically, a renewable resource, but whales were killed so fast that they didn’t have enough time to reproduce and reconstitute their numbers. So, whale oil behaved as if it was a nonrenewable resource: it suffered of depletion. As I reported in the post, its production showed a symmetrical, bell shaped curve and a clear “Hubbert peak.”

In 2008, we were nearly at the end of a phase of rapid growth of oil prices; a trend that – at the time – seemed to be unstoppable. But I made the point that prices could not keep rising forever. I stated that:

“…the historical data for whaling tell us that an exponential rise of the prices is not the only feature of the post-peak market. The prominent feature is, rather, the presence of very strong price oscillations. We can attribute these oscillations to a general characteristic of systems dominated by feedback and time delays. Prices are supposed to mediate between offer and demand, but tend to overcorrect on one side or another. The result is a succession of demand destruction (high prices) and offer destruction (low prices)”

It seems that this is exactly what we are seeing for crude oil: very strong price oscillations. Just a few months after that my post was published, oil prices did indeed collapse. Today, we are seeing something similar and we tend to interpret the present downward cycle as the result of strategic choices or conspiracies, but this is mostly an illusion (the illusion of control). Rather, it seems that the market cannot regulate production as a function of progressive depletion without these cycles of demand destruction and offer destruction which eventually lead to a decline in production. Comparing with the behavior of whale oil prices, we see that in the future we may expect further oscillation and an overall trend of growth in the years after the production peak. However, prices should eventually stabilize, at least on the average.

In this comparison, we need to take into account that there is a fundamental difference to take into account when comparing the case of whale oil and that of crude oil. Whereas whale oil was smoothly replaced by a cheaper and more abundant resource (kerosene), no such possibility is in sight for crude oil. Eventually, however, what changes is just how much people are willing to pay for something. People were still buying whale oil when kerosene was dominating the market; they were willing to pay a moderate premium for a product that was perceived as of superior quality. In the case of crude oil, people may be willing to pay a lot of money to obtain a product they desperately need. Yet, there is a limit even to desperation: prices cannot rise to infinity. After a certain point, people will simply have to consume less. This seems to be what’s happening right now in many regions of the world; for instance, in Italy, oil consumption has declined of 35% over the past 10 years.

So, in the future, oil prices may not rise as much as it could be feared, but may well rise high enough to make oilunaffordable for many of us.

http://cassandralegacy.blogspot.it/2014/12/the-collapse-of-oil-prices-lessons-from.html

The term shale revolution has been used so much that it almost has no meaning anymore. But were shales ever really the energy panacea promised or merely a self styled hype machine? Would the frenzy in drilling ever have truly taken off if it weren’t for cheap money? These are valid questions which have not been explored adequately because too many investors, journalists and elected officials were caught up in shale mania. But was this ever truly an exercise that would provide long term benefits to American consumers?

It is an inarguable fact that shales have produced copious quantities of hydrocarbons in the past few years but this is not really surprising given that the wells, by their very nature, produce the most oil or gas they will ever produce in the first twelve months or so of their lives. So when the industry engages in a frenzy of drilling and brings many wells online very rapidly and essentially all at once, then it stands to reason that it will look like an enormous success. For a short while.

The problem is that operators have not been able to maintain a stable long term production profile. Looking at the following chart, one can see why.

A great portion of all new wells being drilled in the best of our shale plays are doing nothing more than replacing declines in older wells. And older, in this case, means a mere 4-5 years. Not decades. If one considers the per well production in both the Bakken and the Eagle Ford, it peaked in June, 2010. Although there have been countless wells added since that time, the production per each individual well has never reached that level again. This is highly problematic in the long run.

Even EIA is now admitting that shales as a whole are likely to peak in just a few years. And this has been corroborated by other entities like the University of Texas and independent geologists such as Dave Hughes in his comprehensive report, Drill, Baby, Drill. Without a long term reliable supply, shales become a blip of enhanced output in an otherwise slippery slope of downward production profiles.

Industry also promised that electricity costs would fall thanks to cheap and abundant natural gas supplies but this too has not happened. Residential electricity costs have risen steadily and relentlessly for more than a decade in spite of the shale revolution.

Wholesale costs too have risen negating the notion that natural gas would forever replace coal as the fuel of choice for power generation. In fact, utilities that have the ability have been simply switching between coal and nat gas leaving natural gas to trade in a range of about $3.50-4.50/mcf. And yet, most shale gas plays don’t breakeven at this price.

And then there is the industry darling: promises of energy independence. This notion has been repeated ad infinitum by industry representatives and elected officials. And it makes a good and effective sound bite. But it is completely false. Firstly, all the rhetoric about getting off Middle East oil is just that…rhetoric. The U.S. actually imports very little oil from the Middle East. The problem has never been where the oil came from but who controlled the price. This latest plunge in prices leaves no doubt as to who has the power. It is the low cost producer. And that is not shale operators. Even if shales produced enough for us to use them solely, they are expensive and operators would need the price per barrel to be about $80-85. Oil being a fungible commodity can easily be substituted by crude from elsewhere. So if there is a producer, such as the Middle East, who can undercut that price, why would we not buy that product?

We have also heard a great deal about jobs creation thanks to the shale revolution. This, too, has turned out to short lived. Layoffs were announced almost immediately as the price of oil careened downward. It is clear that these jobs were wholly dependent upon a high oil price and a corporate willingness to bet that OPEC would cut production as shale production rose in order to maintain pricing equilibrium. But that bet borders on the ridiculous. Why should the lower cost producer cut its market share in order to give more market share to the high cost producer. Out of the goodness of their hearts? This goes against every rule of free markets and confuses business with philanthropy. And yet, the oil and gas industry actually expected this to happen.

The shale revolution has unfortunately been characterized by a distinct lack of critical analysis. Would it be nice to be energy independent? Of course. But you can’t do it unless you can provide the cheapest version of your product out there. Or force Americans to use your higher cost crude. Would we not create jobs and economic benefit if shales could produce copiously for decades and decades? Yes, but drilling would need to ramp up considerably, perhaps even beyond the capacity of the industry at present and that entails considerable encroachment and land use. Would it not be wonderful if the price of gasoline stayed at $2/gal. You betcha! But shales simply cost too much to drill and complete so to give the operator a fair profit, they would need considerably more than $45/bbl. and gasoline prices would rise again.

It is time for us to be more circumspect about the shortcomings of shales. They are not all that they are purported to be.

http://peakoil.com/production/hype-broken-promises-and-shales

At the essential center of the framework of the Crash Course is the almost insultingly simple idea that endless growth on a finite planet is an impossibility.

It is so simple it could be worked out by a clever 4 year-old. And yet it must not be so simple because the main narrative of every economy in every corner of the globe rests on the idea of endless, infinite growth.

Various rationalizations and mental dodges are made in people’s minds to accommodate the principle of endless growth.  Some avoid thinking of it all together.  Some think that perhaps we will escape into space, and continue our growthful ways on some other yet-to-be named planet(s).  Most simply assume that some new wondrous technology will arise that can allow us to avoid pesky limits.

Whatever the rationalization, none stand up well to simple math and cold logic.

At the very heart of endless growth lies the matter of energy.  To grow forever requires infinite amounts of energy.  Growth and energy are linked in a causal way.

If you want mountains to grow higher you need tectonic forces to push them there.  If you want a child to grow taller, food energy is absolutely required.  If you want more people building more houses, driving more cars, and wearing more clothes, you need energy, energy and more energy.

Perhaps because long-term thinking is not one of humanity’s greatest gifts, very few can appreciate just how we’ve fashioned an entire economy and related set of belief systems around fossil fuel energy that has only been with us for a scant few hundred years.

Even more importantly, because we are consuming a few percent more of it with every passing year, 75% of all fossil fuel energy has been consumed in just the past 50 years.  And we’ve been burning coal and drilling for oil for well over 150 years…boy, those stadiums fill up quick towards the end, don’t they?

The mistake is to think that those past 50 years are just the new normal and the even bigger mistake is to overlook the central and essential role of fossil fuel energy in creating the world we see around us.

The Dissipating Organism

Forget everything we know about technology and oil and gas and coal and all the rest.  Set that aside and step over into the role of being a dispassionate observer from another planet.

As you look upon all the life forms on earth and classify each according to it’s main role – predator, prey, scavenger, parasite, and so on – what role would you assign to humans?

To perform this classification you would observe, very carefully, the main activities of each species to see what they spent that majority of their time doing.

As you watch from a great height you’d notice humans moving about, 24 hours a day, 365 days a year, in a great flurry of activity.  From a strictly biological and scientific perspective they seem to be doing one thing with the most focused and determined energy; they are taking concentrated forms of energy and naturally occurring elements and dispersing them at vastly less concentrated levels.

Humans may have other features and functions, but their primary one is ‘dispersal agent.’

Oils and coal and natural gas are dispersed as waste heat.  Silver is mined, refined further, and then lost atom by atom in various innumerable processes.  Rich soils with thousands of years of carefully accumulated major and minor minerals are mined one crop at a time and then irrecoverably diluted into the seas.

Taken together, the main purpose of humans seems to be as dispersal agents as if  Gaia had decided enough was enough and it needed a species to come along and widely scatter all these concentrated pockets of energy and minerals so that the process of concentration could begin anew.

As I view any of the hundreds of beautiful videos on Vimeo showing time-lapse traffic patterns from cities around the world,  I cannot avoid seeing them as elegant expressions of a species seemingly intent on turning fossil fuels into waste heat an carbon dioxide as fast as they possibly can.

Downtown Las Vegas strip traffic time-lapse from VJLoops.tv on Vimeo.

24 hours a day, 365 days a year, in every major city around the world, there are cars and trucks jamming the roads.  There is no ‘night-time’ in this story when the world completely rests.  One side takes a few hours off while the other side takes over.

Whether we call this progress or folly is merely an indication of which internal belief system we happen to have installed.  Let’s pretend the value judgment is an irrelevant distraction to the main point.  It doesn’t matter at all how we judge the situation.

The main point is that 80% of all human economic, political and cultural organization, specialization, and even collective biomass are simply expressions of energy consumption.  Whether that’s folly or progress does not alter the fact that currently 7.2 billion humans exist in the arrangements they do because of fossil fuels.

Fossil fuels provide 80% of all our current energy.  That’s a whopping high percentage and the hundreds of quadrillions of BTUs represented by that number will not be easily or cheaply replaced by any combination of alternative energies that we currently could deploy.   In fact, there are exactly zero credible plans for completely replacing fossil fuels to be found anywhere in the world.  Everybody has the same plan; continue obtaining the majority of their energy needs from fossil fuels while growing their economies.

That’s the plan and if it does not make you uncomfortable on some level, then I would gently suggest that some more time ought to be spent studying energy’s role in supporting life, and especially complex arrangements of life.

The Race

If there’s a dominant belief system installed across the developed world it is a faith in technology.

Some of that is very well placed faith.  Technology has delivered incredible advances, efficiencies and understandings that just a few short decades ago would have been indistinguishable from magic.

We are making advances all the time, and for as long as we have a complex society that can support advanced technology we will continue making advances.

There are, however, a few keys to understanding how and when we have misplaced faith in technology.

One key point lost on many people is that technology cannot create energy.  It can only transform it.  Perhaps we’ll someday be surprised by a breakthrough in low energy nuclear reactions (LENR) or zero-point energy or some other fantastical breakthrough, but until then we have to go with what we know to be true.

Technology has not yet, ever, in the long history of humans, created energy.  The laws of thermodynamics rule over us like gravity itself, always there exerting and imposing their all-encompassing embrace on every energy transaction.

Energy can neither be created nor destroyed, only transformed.  Oil (concentrated) becomes waste heat (diffuse) + work (if harnessed).

So that’s the first limitation of technology….it cannot create the hundreds of quadrillions of BTUs of energy we currently extract and need from fossil fuels.  It can help us use it more efficiently, find more of it, get it out more cheaply, and other fun things, but it does not create the energy.

The second key point is that technology is really only as useful as the culture is advanced.  There are obvious signs that our cleverness with inventing technology exceeds our cultural maturity to use it wisely.

GPS is one of the greatest inventions ever, and I love it and use it constantly.   I doubt I would visit twisty, uninuitively laid out Boston nearly as confidently or as often without GPS.

But it also allowed fishing trawlers to steam out 100 miles and drop their massive and destructive drag nets precisely 6 inches to the side of where they left off last week leaving no accidental hiding spots and fisheries were ruined.

That is, the technology allowed us to do things that we lacked the ability to self-regulate properly.  It also has routinely had many more unanticipated consequences than we seemed to appreciate.

The first humans with concentrated radioactive substances were about as safe as monkeys with guns.  We learned, but that came after the accidental deaths.

As I see it, nearly all of the difficulties we have with technology are due to the fact that we push technology into service before we really appreciate all of its pros and cons.

It has been said that most technology was designed to address the problems caused by prior technology, and there’s some truth to that.

I am often asked if I would be thrilled if humans did get their hands on unlimited clean energy, and I have to give an unequivocal ‘no’ at this point because it seems to me that we’d merely use it to continue on our present path of growth at any cost.

Maybe in the future once we have the cultural ability to self-regulate our seemingly insatiable desire for ‘more’ endless clean energy would be a fantastic thing.  But right now we don’t even know how to slow down a fishery before it completely collapses, which is a trivial thing compared to managing to live in balance with entire ecosystems.

The race, then is between technological development, cultural advancement, and declining resources.  Can we bring appropriate technologies on line fast enough to prevent the loss of the societal complexity required to support that same technology?

That is the question, and I’m not clear on the answer yet.

I do note that we have the capability to build light, high-mileage vehicles but we cling to the large, heavy and fuel inefficient vehicles in many parts of the world.

We have the capability to heat nearly all of our water using the sun but instead we typically use fossil fuels.  Not because they are cheaper over any reasonable frame of time, but simply  we don’t yet do it differently.

That is, we lack the cultural awareness and urgency that would mandate solar hot water heaters.  We do this because we still have a narrative of technological prowess and the recent (and temporary) shale oil victory to comfort our core beliefs.

There are literally thousands of better technologies out there that make economic, energy and ecological sense but we don’t really use them except at the margins.

Faced with this observation the usual response is to say that ‘the market will take care of that’ implying both that the market is a rational place and that the market has enough time to work things out.

To my mind, neither assumption is correct.

The Looming Oil Crunch

The good news is that shale oil has bought us some time in the peak oil story, but the less good news is that it bought us no time in the Peak CheapOil story.

The best news for the Peak Oil story was an unprecedented decline in oil demand brought about by the twin conditions of too much debt and high oil prices.  The loss of demand in Europe and the US handily outpaced the gains in US shale production and therefore was the larger contributor to balancing the supply/demand equation.

Again, we do not beat the allegedly dead horse of Peak Oil because we cannot let go of an idea, but because it remains just as vital today as when it was first described back in the 1990’s.  Even more so because we have more data to work with and we are that many years closer to its eventual arrival.  Adding to the urgency is the fact that no major government besides Sweden’s has even uttered the phrase ‘peak oil’ let alone begun to publicly plan for its eventual arrival.

There are a number of combining forces that will cause future oil price spikes.

The current price of oil at under $80 per barrel for Brent crude is insufficient to support any of the newest unconventional projects out there.

Ultra deepwater, tar sands and all but the very best sweet spots in the very best shale plays are uneconomic at current oil prices.  The way we can detect that this is true is by the slashing of capital budgets in all the oil majors that are committed to these projects, something that began last February even when oil was some $30 per barrel higher.

With shale oil helping to contribute to today’s lower oil prices it has caused the cessation of development within countless other large and expensive oil projects.

While not immediate, the loss of these projects will certain constrain future oil supplies 2-3 years down the line.

For every single oil exporting country with the sole exception of Russia,  what is also true is that their domestic demand is rising even as their production (in many cases) is falling.

Rising demand and falling production provide a double squeeze on exports which are, after all, the only thing that oil importing nations really care about.  Who cares how much the world is producing?  All that matters to an importer is how much is for sale, and at what price?

On the demand side, oil demand growth continues in the developing world and Asian countries.  So much so that it’s possible to project a time in the future when China and India alone will import 100% of all available exported oil.

Obviously that won’t happen without some form of price war or shooting war, but it tells us something about the trajectory we are on.  If it looks, feels and smells like there’s no serious planning for the future, then that’s probably the case.

Recently the International Energy Agency put these same sorts of dots together an issued a warning:

U.S. Shale Boom Masks Threats to World Oil Supply, IEA Says

Nov 1, 2014

The U.S. shale boom masks threats to global oil supply including Middle East turmoil, conflict in Ukraine and the difficulty of unconventional oil production beyond North America, the International Energy Agency said.

“The global energy system is in danger of falling short of the hopes and expectations placed upon it,” the IEA said today in its annual World Energy Outlook. “The short-term picture of a well-supplied oil market should not disguise the challenges that lie ahead as reliance grows on a relatively small number of producers.”

Global oil consumption will rise to 104 million barrels a day in 2040 from 90 million barrels a day in 2013, driven by demand for transport fuel and petrochemicals in developing countries, the report said.

To meet that growth and replace exhausted fields will require about $900 billion a year in investment by the 2030s as oil companies develop fields from Canada’s oil sands to the deep waters off Brazil, the IEA said.

(Source)

There’s a lot to unpack in those statements from the IEA, so let’s begin with the punchline…the IEA has only projected world demand for oil to grow from 90 million barrels per day (mbd) to 104 over the next 27 years.

That’s a rate of growth of just 0.5% per year!

Never in modern economic world history has there been a period of low oil growth of such length.  Never.  My prediction is that if we did only achieve that 0.5% rate of oil growth the world economy would be in a shambles long before 2040.

Economic growth requires energy, oil specifically and high net energy oil even more specifically.

This brings us to point number two.  The IEA has projected that some $900 billion a year will be required to bring on enough incremental (expensive) oil to even achieve that paltry rate of 0.5% growth.

Let’s really look at that for a moment, shall we?  If it’s going to take $900 billion to deliver what pencils out to an additional 483,000 barrels per day of oil growth, that means the yearly incremental new flow to the world will be 176 million barrels (= 365 * 483,000).

Hmmmm…but at $900 billion that means the world will effectively be investing $900 billion more but getting 176 million new barrels so those incremental barrels are costing some $5,100 each.

I know this is an odd way to look at it because in reality the $900 billion will be bringing vastly more oil to the table than the 176 M barrels, but existing oil is declining at the same time so the net oil to the world is going to cost a huge amount compared to historical efforts.

The bottom line here is that when the IEA casts about and looks at the reality of oil projects across the world they see that only a very heavy and sustained program of investment approaching one trillion dollars a year has any chance of (barely) offsetting existing declines.

And that new oil, excepting only whatever Iraq and Iran have left to bring to the party, is vastly more expensive than in times past.

Which brings us to the IEA’s  conclusion which is that shale oil is actually doing two things;  driving the price of oil down below the price required for this massive investment program, and masking the supply issues by temporarily providing extra oil.

Emphasis on ‘temporary’ because the average shale field in the US peaks about ten years after the drilling begins in earnest and all US shale fields are currently projected to peak somewhere around 2020.

The risk the IEA sees is that shale oil, coupled to a generally weak global economy, could conspire to keep oil prices down below the new project threshold long enough to cause real trouble in the future.

My personal bottom line, though, is that the $900 billion yearly oil spent to achieve an underwhelming 0.5% yearly supply increase is not going to provide the necessary economic growth required to justify the mountains of debt already on the books, let alone expanding that pile robustly as the financial sector seems to need.

More subtly, but even more importantly, the new oil that $900 billion will bring is lower net energy oil, the sort that has far less surplus contained within it that the world can use to maintain its current complexity and order.

Think of current oil as having 100 arbitrary units of net energy stored within it that society can use however it wishes.  Then imagine that the new oil only has 50 units of net energy in it.  As we blend ever-increasing amounts of ‘50’ oil with ever-shrinking quantities of ‘100’ oil, the amount of net energy steadily sinks towards the ‘50’ mark.

One day people wake up and notice that they seem to be able to support less, accomplish less, and that fewer types of jobs that pay less are available.  This is what we’d expect to see in a world of declining net energy.

Conclusion

If technology requires a complex society to build and maintain it, and our dreams and hopes are pinned on even more complex and useful technology in the future, but net energy from new oil plays is shrinking, then it might not be wise to pin all our hopes on technology.  Perhaps there should be some other plans in the works too.

Given sufficient energy sources I am convinced that technology would simply continue to advance, and eventually our ability to live with and manage it would catch up to the technology.

But I imagine that process taking decades, centuries even, because cultures change slowly.

However, according to the best oil data available, we don’t have decades and centuries to fiddle about and hope.

The US shale plays are going to peak in 2020, give or take a year or two, and that’s practically tomorrow in the grand scheme of things.  Other relentless declines in existing fields are continuing even as you read this.

24 hours a day, 365 days a year.  And that process is speeding up, not slowing down, as the developed world joins the fray with stunning quickness.

A lot of things could go wrong with the IEA forecasts, and they’ll certainly get some things wrong.  It’s the nature of the business.

Demand could be higher than 0.5% per year and so supplies will either fall short of investments or prices will need to go higher to support even higher spending on oil exploration and development.  Future finds may be less robust than they imagine and therefore more expensive. Existing fields may decline faster or slower than they have modeled which will throw things off quite a bit.

But through all that uncertainty we can note the obvious trend; oil is getting harder to find and more expensive to produce.

And humans, being the dissipating agents we are, will continue to gobble up this magical substance with relentless focus every minute of every day until it is gone.

All of this is why I continue to regret the degree to which the western media has gone out of its way to portray the energy predicament as nothing more than a problem which can be easily addressed through a program of investment and being ever-more clever.

Instead I wish we could simply note that oil has no scalable substitutes, we support billions of people by growing food with it, and that every political, financial, portfolio, and institutional entity has the same underlying assumption; the next twenty years are going to be exactly like the past twenty years.

Somehow, magically, more oil will be there, it will be affordable, and nobody will have to make any adjustments to their main habits of spending more than they have, and consuming more next year than this year.  We can just keep borrowing more than we earn forever, and therefore current stock and bond markets are reasonably priced.

To a scientist like myself, the energy story is everything.  If you get that, you are armed with the information you need to understand the general direction of things.

The only thing we don’t know is what our respective cultures will choose to preserve as we are forced to jettison various unproductive habits and livelihoods.

As I wrote in a recent comment on the thread on millennials being broke:

As we slip down the energy cliff, we cannot know exactly what each culture will decide to jettison as ‘unnecessary’ activities.  Some decided to cut down trees and erect giant stones right to the end.  A different culture would have chosen some other activity.

The question to ask is, what are our equivalents of giant stones?  What will *not* disappear as the green area shrinks?

My best guess is that we’ll cling to technology as the last things to erect before we succumb to reality.  Maybe that’s just talking my own book, as they say on Wall Street, because that would imply the internet will be salvaged/preserved at any and every cost.

So that’s the question before us, what are our ‘giant stones?’  Answer that and you’ll know which jobs, investments, and products will be relatively secure and which won’t.

http://peakoil.com/generalideas/keep-your-eyes-on-the-prize