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Peak Oil: A Different Perspective

General Ideas

I recently came across PERFECT STORM – ENERGY, FINANCE, AND THE END OF GROWTH. It’s a well-written and thoroughly-researched 2013 report issued by Tullet Prebon, a British financial services firm (in the wholesale financial and energy sectors), authored by Dr. Tim Morgan, Global Head of Research.

This effort presents a sobering take—from a nuanced, slightly different perspective—on the issue of peak oil and our energy supply future. [Unless otherwise noted, quotes are taken from that PDF report.]

[T]he critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

The report devotes more than two-thirds of its coverage to an excellent analysis of economics and growth in recent years, and the challenges we all face. Warning that future economic growth is not a guarantee no matter what economic measures are instituted [Gail Tverberg is among those who cover this topic regularly; her work is well worth reviewing], Dr. Morgan urges a greater understanding of what lies back of any economic prosperity.

A central argument set out in this report is that economic problems will remain insoluble for so long as policymakers concentrate on monetary issues rather than on the ‘real’ economy. We go further than this, arguing that the physical economy is, in essence, an energy system or, to be somewhat more precise, a surplus energy equation.

Much of the section devoted to energy and its great significance in ushering in our modern society over the past two centuries focuses not so much on peak oil as it is more commonly discussed [e.g, production declines, rates of production].

Instead, echoing themes raised by, among others, the terrific work of Charles Hall [see this], while supporting much of what I and peers have also written about [see these: 1. 2. 3. 4.], the Tullet Prebon study emphasizes the vital importance of energy returns: how much input is needed to provide supply as measured against the energy actually “left over.” It’s an important concept almost never discussed by those who proclaim energy abundance, yadda, yadda, yadda.

The mathematics of EROEI are pretty straightforward. If the EROEI is 50:1, this means that 50 units are extracted for each unit invested in the extraction process….
An absolute decline in available energy volumes, serious though that would be, is not the immediate concern. The truly critical issue is the relationship between energy extracted and the amount of energy consumed in the extraction process. Known as the Energy Return on Energy Invested (EROEI), this is the ‘killer equation’ where the viability of the economy is concerned. Put very simply, there is no point whatsoever in producing 100 barrels of oil (or its equivalent in other forms of energy) if 100 barrels (or more) are consumed in the extraction process….
Though described earlier as an energy equation, a more precise definition of the economy is that it is a surplus energy dynamic, driven by the difference between energy extracted and energy consumed in the extraction process….
[T]he progression in energy sourcing is moving unmistakably and inexorably towards ever-lower EROEIs.

As with other factors affecting fossil fuel production, we ignore to our eventual and great detriment the energy investment needed to extract the supplies we all need for just about everything we do, own, and use. Assuring the public that we have X gazillion of barrels of oil still to be extracted is impressive only until you get to the end of the sentence.

After that, considerations about expenses, quality, and similar ought to be part of the dialogue we should be having much more often and to a much greater degree than we are. So too must we recognize exactly how much energy and effort are needed to provide us with the supplies we’ve come to expect. EROEI is not rocket science.

Production, exploration, and all of the related activities which constitute the entirety of oil production depends on those very resources in the first instance. If more and more energy and effort are required on the front end, what’s left over is necessarily less than was the case with the “easy” production efforts associated with conventional crude oil.

We don’t have to wait until we’re at the “100 barrels in to get 100 barrels out” stage before realizing energy production and supply challenges will pose enormous problems that ripple throughout economies world-wide. Waiting for that moment is actually about the worst thing we can do.

Engaging in different conversations with all the facts on the table—now—would be a good idea.

I’ll have more thoughts on this the next time.

Peak Oil Matters



18 Comments on "Peak Oil: A Different Perspective"

  1. rockman on Tue, 1st Apr 2014 1:45 am 

    “…there is no point whatsoever in producing 100 barrels of oil (or its equivalent in other forms of energy) if 100 barrels (or more) are consumed in the extraction process….”

    And there is no point in using 20 bbls of oil to produce 100 bbls of oil if you sell those 100 bbls for less than it cost you to drill that well. “EROEI is not rocket science.” No it isn’t. And neither is basic oil patch economics which, unlike EROEI, determines what gets drilled.

    Again some folks way over estimate how much energy, including that which is embedded, it takes to drill and complete a well.

  2. andya on Tue, 1st Apr 2014 2:31 am 

    Here is a thought . o O (writing an entire article in bold makes it fucking annoying to read)

  3. dashster on Tue, 1st Apr 2014 4:59 am 

    That report also chastises the madness that was sending as many OECD jos as possible to Chindia, euphemistically referred to as globalization.

  4. Bandits on Tue, 1st Apr 2014 7:40 am 

    “Again some folks way over estimate how much energy, including that which is embedded, it takes to drill and complete a well”.
    __________________

    It doesn’t take an Einstein to see that EROEI is declining with increasing pace.
    Whether “the oil patch” gives a crap or not about EROEI it will bite them in the ass soon enough.

    Declining EROEI is the defining energy predicament. If it was not a concern then energy would still be cheap and economic growth would be a forgone conclusion.

    Globalization was a response to increasing local production costs and a medium to increase profits by opening new markets.

    The problem with that though was it exploded the human population and facilitated countries into developing and developed consumers of all kinds of resources.

    Unlike the Roman Empire, countries were conquered by “peaceful” means. But similar to the Roman conquests, the conquered lands have become restless. The tenuous connection between globalization and prosperity is collapsing.

  5. Davy, Hermann, MO on Tue, 1st Apr 2014 10:28 am 

    Rock, as always set the boys here straight, last I heard we are in a market economy. Price is the dominant fixture of our complex global interconnected society. The economics of the global markets is price discovery in a simplified sense. Price is one thing we can all agree on globally. We all have a price. It is how we trade and exchange with people across the globe we have little knowledge of personally. If the price discovery on an oil play is positive enough you oil folks drill. You don’t give a RA if the eroi is low if it makes money you are on it. This is not going to change until we see a financial breakdown and the social economic order shifts to an alternative. An alternative that could be a command economy by the military. The point is price rules at the moment. The current financial system is very unhealthy but price still dictates resources so look to the money.

  6. poaecdotcom on Tue, 1st Apr 2014 2:33 pm 

    “last I heard we are in a market economy. Price is the dominant fixture of our complex global interconnected society. The economics of the global markets is price discovery in a simplified sense. Price is one thing we can all agree on globally. We all have a price.”

    I Do not agree – the author was correct. Available Energy is EVERYTHING and the dominant fixture in ALL ECONOMIES. I wish we did have a true market economy but we have something far from that nowadays, where fossil fuels are subsidized (overtly and under the table) and that more “money” will be gifted to the industry to scrape at tar dirt or to frack marginal plays until the Ponzi collapses under its own weight. Oil is so sexy that it is worth spending 100 barrels of oil EQUIVALENT ENERGY (nat gas, nuke, etc) to get 100 barrels of oil energy (energy transformation subject to the second law). We are “loosing money” on the marginal barrel of oil today but that is not going to stop us relentlessly tearing up the planet for it, when we can rabidly print money to do it – until we can’t of course!!

  7. ronpatterson on Tue, 1st Apr 2014 2:41 pm 

    I have always agreed with Rockman on this issue. Because there is no way to truly calculate the energy required to drill a well and produce oil, we should simply abandon that concept.

    For instance, what is the energy embedded in human labor? What is the energy embedded in the production of the drill bit, or the rig, or… well you get the idea.

    What we should be concentrating on is ROI, not EROEI. Return on investment is what ultimately drives the production of oil, or anything else for that matter.

    ROI in the shale gas industry is just terrible. That is why the gas well rig count is dropping. That is why companies are exiting the business and selling off their assets.

    The same thing will happen in the oil industry if the drilling and operating costs keep rising but the price of oil does not rise to match.

  8. poaecdotcom on Tue, 1st Apr 2014 3:00 pm 

    “there is no way to truly calculate the energy”

    (1) there is, but we do not (yet?)have the sophistication

    (2)Whether it can be calculated (easily) or not does not mean it is not exist or that it is not relevant

    All this ROI stuff is a HUMAN CONSTRUCT not tied to any sound laws of the universe.

  9. shortonoil on Tue, 1st Apr 2014 3:03 pm 

    “Again some folks way over estimate how much energy, including that which is embedded, it takes to drill and complete a well.”

    Some people underestimate the immense amount of energy it takes to produce hydrocarbons. Drilling the well only entails a part of the total energy needed to supply the finished product. The raw crude must also be refined, and then distributed; crude sitting in a tank in Cushing has zero potential to power the economy.

    The total energy to produce petroleum, and its products is depicted by the ETP model (Total Production Energy) – its derivation, and interpretation is the bases of our 57 page report. When the total energy (extraction, processing, and distribution) needed to produce a unit of petroleum becomes equal to its energy content its cost will become irrelevant. It will no longer act as an energy source, and will have no value to the general economy. The energy requirements of the entire production process must be evaluated to produce an accurate determination for the petroleum depletion event.

    As to whether it is $s or energy units that constitute the critical metric for analysis that is easily deduced. By employing the correct conversation function (which must include a time variable) they can be shown to be equivalent. $s can be expressed as BTU, and BTU as $s. The choice is a matter of preference; an economist will choose $, an engineer BTU. Although it is likely that the engineer will understand $s better than the economist will understand BTU. But, they are both equivalent, and they both have the same restraints imposed on them by the laws of physics.

    http://www.thehillsgroup.org

  10. poaecdotcom on Tue, 1st Apr 2014 3:15 pm 

    “they both have the same restraints imposed on them by the laws of physics”

    Laws of physics? The Fed could print $10 trill tomorrow?!. But they could NOT pull 10 trill BTUs out of thin air.

  11. Davy, Hermann, MO on Tue, 1st Apr 2014 3:31 pm 

    Short/Poa/Ron, great discussion. I want to add a dimension just for your consideration. I agree with you all on the physics of oil and what is required to make it an energy source. My question is how can you price oil/food/and or water in relation to all the other resources modern man deals with. In my mind you cannot put them in the same category. Oil/food/water are items of criticality for the entire system. Without them you do not have a modern human support system. If we take that to another level then if it takes more energy to get the oil out of the ground then the oil produces ‘AND’ this is not too excessively expensive than it should be drilled/refined/ and distributed IMHO. There is little substitution for oil except around the edges (electric/gas vehicles). This means if you have coal/gas/nuk/hydro that can subsidize oil production you must consider this at a societal level. Of course this eroi deficit must be within reason a small negative. I might add the fact that oil is too expensive to get out of the ground might depend solely on the failure of the financial system to allow efficient application of capex and liquidity. The case may be the oil is profitable to remove in a different economic setting. In a crash which may be coming we may not be able to produce oil in many plays because the financial cost preclude it yet, the oil has a positive eroi. “NOW” short I am humble in my arrogance meaning please right me if my small brain that thinks it is large is off track!

  12. poaecdotcom on Tue, 1st Apr 2014 3:43 pm 

    Good points Davy.

    Oil/food/water are at the top of the food chain but you can use oil to get water (desalinization) and Argi-business uses 10 calories of ff (mostly oil) for every 1 calorie of digestible food. So, our entire economic paradigm shifting to the allocation of capital to oil extraction AT ALL COSTS.

    “This means if you have coal/gas/nuk/hydro that can subsidize oil production you must consider this at a societal level. ”

    Correct, that is happening now. Tar sands is simply an energy arbitrage based on low cost nat gas (and water)

    “The case may be the oil is profitable to remove in a different economic setting.” I actually disagree with this statement as the low hanging fruit is gone/going due to our incredibly leveraged current, uber complex, economic paradigm. I cannot imagine an agrarian society drilling in deep oceans!!

  13. shortonoil on Tue, 1st Apr 2014 5:49 pm 

    “This means if you have coal/gas/nuk/hydro that can subsidize oil production you must consider this at a societal level.”

    Any time one energy form is converted into another it is going to cost. If you have a surplus of energy from coal/gas/nuk/hydro that may be an option. If you don’t, then you are worse off than when you started! But, as oil winds down it is most likely that there is not going to be a surplus of energy from anything. As the global trade system deteriorates from petroleum depletion the economic system that produce those energy forms is going to go with it.

    It appears that our only option will be to reform into local, mostly self sustaining economies. No more big government, no more international conglomerates, the energy soon will not be there to support them. And it can be done; the Amish have been doing it for two hundred years, and the Amish aren’t poor.

  14. poaecdotcom on Tue, 1st Apr 2014 5:57 pm 

    I agree short. Roll up our sleeves, build a local agrarian based community and preferably as soon as bloody possible!!

    I’m off to plant some seeds 🙂

  15. shortonoil on Tue, 1st Apr 2014 6:08 pm 

    “Laws of physics? The Fed could print $10 trill tomorrow?!. But they could NOT pull 10 trill BTUs out of thin air.”

    You are confusing currency with money. Money is the representation of goods and services. A dollar bill has no intrinsic value, except for the paper it is printed on. Its value is established when someone agrees to exchange it for something. Most of the currency that the FED has been issuing is sitting on some bank ledger sheet. There is no value in the economy to exchange for it. Which is the simple reason why QE has not, and can not work. The FED can only print currency, not money. With our debt based fiat system, money has to be loaned into existence, and then put to work. There is no other way to create it. The only thing the FED’s printing has done is transfer money from the bottom 99% to the top 1%.

    QE has created no jobs, no BTU. Only a huge number of IOUs, of which there is no one to honor them, and probably never will be. The FED is bound by the laws of physics. They can’t create something out of nothing. “Matter and energy can be neither created nor destroyed”, 1’st Law.

  16. Davy, Hermann, MO on Tue, 1st Apr 2014 6:50 pm 

    Short said – It appears that our only option will be to reform into local, mostly self sustaining economies. No more big government, no more international conglomerates, the energy soon will not be there to support them. And it can be done; the Amish have been doing it for two hundred years, and the Amish aren’t poor.

    Agreed short but this will be for the few and the lucky in the transition. The transition could very well be like the biblical event in the book of Revelations. Even a gentle landing at a much lower agrarian level will be more painful than all of us can imagine. We have been living like kings and many if not most of us will be living like peasants. If not us than our younger generation. I am over 50 so I will be lucky to have another 10 to 20 years without the medical system we have today. I am making a big effort to be healthy but let’s face it without modern health care few of us older folks are going to live to our mid 80’s. It is nice to have Short’s conclusion from a well-supported scientific point of view. And yes, Short, the Amish and Mennonites are role models. I have studied them closely. There are many around central Missouri. They have large families and tight communities. Their adoption of technology is based upon how it will impact the community and not on how productive it will make them. Productivity is secondary.

  17. poaecdotcom on Tue, 1st Apr 2014 6:55 pm 

    My point is/was that the FED could print 10 trillion dollars of currency, subsidize the oil industry (money) regardless of the net energy produced. (Fuzzy Human construct stuff)

    BUT they could never print energy (1st Law).

    Our complex society is a direct consequence of available ENERGY, currency / money is simply the lubrication.

    As our complexity slowly succumbs to second law it is prudent to focus on the NET ENERGY not the Lubricant and to not obfuscate the two.

  18. indigoboy on Tue, 1st Apr 2014 7:16 pm 

    This is a good thread with many valid points. Rockman is correct up to the wellhead and shortonoil is right on economics beyond the wellhead. I just wonder if we need to become more visceral, and ask the question, NOT is it cost effective, NOT does it make EROEI sense, NOT is there value in doing it, but in (slaves per gallon terms) ~ ‘is it worth it for society?
    A gallon of processed fuel will move an armoured vehicle 3 miles into Ukraine.
    A gallon of processed fuel will Rotovate half an acre of my garden ready to seed.
    A gallon of processed fuel will move a bus full of children in Bangladesh 15 miles to school.
    Surely, as we head towards EROEI, we are going to have to ‘triage’, fuel use for the things we as a society believe, ‘is worth it’?

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