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Richard Heinberg on why low oil prices do not mean there is plenty of oil, EROI, collapse

General Ideas

[ Yet another wise, thoughtful, and wide-ranging essay from my favorite writer of the many facets of a civilization about to decline as it is starved of the fossil fuels that feed it.  Although the topics are quite varied, Heinberg weaves them into a cloth that is more than the sum of the parts in explaining how the future may unfold.

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report ]

Richard Heinberg. 2017-4-25. Juggling Live Hand Grenades. Post Carbon Institute.

Here are a few useful recent contributions to the global sustainability conversation, with relevant comments interspersed. Toward the end of this essay I offer some general thoughts about converging challenges to the civilizational system.

  1. “Oil Extraction, Economic Growth, and Oil Price Dynamics,” by Aude Illig and Ian Schiller. BioPhysical Economics and Resource Quality, March 2017, 2:1.

Once upon a time it was assumed that as world oil supplies were depleted and burned, prices would simply march upward until they either crashed the economy or incentivized both substitute fuels and changes to systems that use petroleum (mainly transportation). With a little hindsight—that is, in view of the past decade of extreme oil price volatility—it’s obvious that that assumption was simplistic and useless for planning purposes. Illig’s and Schiller’s paper is an effort to find a more realistic and rigorously supported (i.e., with lots of data and equations) explanation for the behavior of oil prices and the economy as the oil resource further depletes.

The authors find, in short, that before oil production begins to decline, high prices incentivize new production without affecting demand too much, while low prices incentivize rising demand without reducing production too much. The economy grows. It’s a self-balancing, self-regulating system that’s familiar territory to every trained economist.

However, because oil is a key factor of economic production, a depleting non-renewable resource, and is hard to replace, conventional economic theory does a lousy job describing the declining phase of extraction. It turns out that once depletion has proceeded to the point where extraction rates start to decline, the relationship between oil prices and the economy shifts significantly. Now high prices kill demand without doing much to incentivize new production that’s actually profitable), while low prices kill production without doing much to increase demand. The system becomes self-destabilizing, the economy stagnates or contracts, the oil industry invests less in future production capacity, and oil production rates begin to fall faster and faster.

The authors conclude:

Our analysis and empirical evidence are consistent with oil being a fundamental quantity in economic production. Our analysis indicates that once the contraction period for oil extraction begins, price dynamics will accelerate the decline in extraction rates: extraction rates decline because of a decrease in profitability of the extraction business. . . . We believe that the contraction period in oil extraction has begun and that policy makers should be making contingency plans.

As I was reading this paper, the following thoughts crossed my mind. Perhaps the real deficiency of the peak oil “movement” was not its inability to forecast the exact timing of the peak (at least one prominent contributor to the discussion, petroleum geologist Jean Laherrère, made in 2002 what could turn out to have been an astonishingly accurate estimate for the global conventional oil peak in 2010, and global unconventional oil peak in 2015). Rather, its shortcoming was twofold: 1) it didn’t appreciate the complexity of the likely (and, as noted above, poorly understood) price-economy dynamics that would accompany the peak, and 2) it lacked capacity to significantly influence policy makers. Of course, the purpose of the peak oil movement’s efforts was not to score points with forecasting precision but to change the trajectory of society so that the inevitable peak in world oil production, whenever it occurred, would not result in economic collapse. The Hirsch Report of 2005 showed that that change of trajectory would need to start at least a decade before the peak in order to achieve the goal of averting collapse. As it turned out, the peak oil movement did provide society with a decade of warning, but there was no trajectory change on the part of policy makers. Instead, many pundits clouded the issue by spending that crucial decade deriding the peak oil argument because of insufficient predictive accuracy on the part of some of its proponents. And now? See this article:

  1. “Saudi Aramco Chief Warns of Looming Oil Shortage,” by Anjli Raval and Ed Crooks, Financial Times, April 14, 2017.

The message itself should be no surprise. Everyone who’s been paying attention to the oil industry knows that investments in future production capacity have fallen dramatically in the past three years as prices have languished. It’s important to have some longer-term historical perspective, though: today’s price of $50 per barrel is actually a high price for the fuel in the post-WWII era, even taking inflation into account. The industry’s problem isn’t really that prices are too low; it’s that the costs of finding and producing the remaining oil are too high. In any case, with prices not high enough to generate profits, the industry has no choice but to cut back on investments, and that means production will soon start to lag. Again, anyone who’s paying attention knows this.

What’s remarkable is hearing the head of Saudi Arabia’s state energy company convey the news. Here’s an excerpt from the article:

Amin Nasser, chief executive of Saudi Aramco, the world’s largest oil producing company, said on Friday that 20 [million] barrels a day in future production capacity was required to meet demand growth and offset natural field declines in the coming years. “That is a lot of production capacity, and the investments we now see coming back—which are mostly smaller and shorter term—are not going to be enough to get us there,” he said at the Columbia University Energy Summit in New York. Mr. Nasser said that the oil market was getting closer to rebalancing supply and demand, but the short-term market still points to a surplus as U.S. drilling rig levels rise and growth in shale output returns. Even so, he said it was not enough to meet supplies required in the coming years, which were “falling behind substantially.” About $1 [trillion] in oil and gas investments had been deferred and cancelled since the oil downturn began in 2014.

Mr. Nasser went on to point out that conventional oil discoveries have more than halved during the past four years.

The Saudis have never promoted the notion of peak oil. Their mantra has always been, “supplies are sufficient.” Now their tune has changed—though Mr. Nasser’s statement does not mention peak oil by name. No doubt he would argue that resources are plentiful; the problem lies with prices and investment levels. Yes, of course. Never mention depletion; that would give away the game.

  1. “How Does Energy Resource Depletion Affect Prosperity? Mathematics of a Minimum Energy Return on Investment (EROI),” by Adam R. Brandt. BioPhysical Economics and Resource Quality, (2017) 2:2.

Adam Brandt’s latest paper follows on work by Charlie Hall and others, inquiring whether there is a minimum energy return on investment (EROI) required in order for industrial societies to function. Unfortunately EROI calculations tend to be slippery because they depend upon system boundaries. Draw a close boundary around an energy production system and you are likely to arrive at a higher EROI calculation; draw a wide boundary, and the EROI ratio will be lower. That’s why some EROI calculations for solar PV are in the range of 20:1 while others are closer to 2:1. That’s a very wide divergence, with enormous practical implications.

In his paper, Brandt largely avoids the boundary question and therefore doesn’t attempt to come up with a hard number for a minimum societal EROI. What he does is to validate the general notion of minimum EROI; he also notes that society’s overall EROI has been falling during the last decade. Brandt likewise offers support for the notion of an EROI “cliff”: that is, if EROI is greater than 10:1, the practical impact of an incremental rise or decline in the ratio is relatively small; however, if EROI is below 10:1, each increment becomes much more significant. This also supports Ugo Bardi’s idea of the “Seneca cliff,” according to which societal decline following a peak in energy production, consumption, and EROI may be far quicker than the build-up to the peak.

  1. “Burden of Proof: A Comprehensive Review of the Feasibility of 100% Renewable-Electricity Systems,” by B.P. Heard, B.W. Brook, T.M.L. Wigley, and C.J.A. Bradshaw. Renewable and Sustainable Energy Reviews, Volume 76, September 2017, Pages 1122–1133.

This study largely underscores what David Fridley and I wrote in our recent book Our Renewable Future. None of the plans reviewed here (including those by Mark Jacobson and co-authors) passes muster. Clearly, it is possible to reduce fossil fuels while partly replacing them with wind and solar, using current fossil generation capacity as a fallback (this is already happening in many countries). But getting to 100 percent renewables will be very difficult and expensive. It will ultimately require a dramatic reduction in energy usage, and a redesign of entire systems (food, transport, buildings, and manufacturing), as we detail in our book.

  1. “Social Instability Lies Ahead, Researcher Says,” by Peter Turchin. January 4, 2017, Phys.org.

Over a decade ago, ecologist Peter Turchin began developing a science he calls cliodynamics, which treats history using empirical methods including statistical analysis and modeling. He has applied the same methods to his home country, the United States, and arrives at startling conclusions.

My research showed that about 40 seemingly disparate (but, according to cliodynamics, related) social indicators experienced turning points during the 1970s. Historically, such developments have served as leading indicators of political turmoil. My model indicated that social instability and political violence would peak in the 2020s.

Turchin sees the recent U.S. presidential election as confirming his forecast: “We seem to be well on track for the 2020s instability peak. . . . If anything, the negative trends seem to be accelerating.” He regards Donald Trump as more of a symptom, rather than a driver, of these trends.

The author’s model tracks factors including “growing income and wealth inequality, stagnating and even declining well-being of most Americans, growing political fragmentation and governmental dysfunction.” Often social scientists focus on just one of these issues; but in Turchin’s view, “these developments are all interconnected. Our society is a system in which different parts affect each other, often in unexpected ways.

One issue he gives special weight is what he calls “elite overproduction,” where a society generates more elites than can practically participate in shaping policy. The result is increasing competition among the elites that wastes resources needlessly and drives overall social decline and disintegration. He sees plenty of historical antecedents where elite overproduction drove waves of political violence. In today’s America there are far more millionaires than was the case only a couple of decades ago, and rich people tend to be more politically active than poor ones. This causes increasing political polarization (millionaires funding extreme candidates), erodes cooperation, and results in a political class that is incapable of solving real problems.

I think Turchin’s method of identifying and tracking social variables, using history as a guide, is relevant and useful. And it certainly offers a sober warning about where America is headed during the next few years. However, I would argue that in the current instance his method actually misses several layers of threat. Historical societies were not subject to the same extraordinary boom-bust cycle driven by the use of fossil fuels as our civilization saw during the past century. Nor did they experience such rapid population growth as we’ve experienced in recent decades (Syria and Egypt saw 4 percent per annum growth in the years after 1960), nor were they subject to global anthropogenic climate change. Thus the case for near-term societal and ecosystem collapse is actually stronger than the one he makes.

Some Concluding Thoughts

Maintaining a civilization is always a delicate balancing act that is sooner or later destined to fail. Some combination of population pressure, resource depletion, economic inequality, pollution, and climate change has undermined every complex society since the beginnings of recorded history roughly seven thousand years ago. Urban centers managed to flourish for a while by importing resources from their peripheries, exporting wastes and disorder beyond their borders, and using social stratification to generate temporary surpluses of wealth. But these processes are all subject to the law of diminishing returns: eventually, every boom turns to bust. In some respects the cycles of civilizational advance and decline mirror the adaptive cycle in ecological systems, where the crash of one cycle clears the way for the start of a new one. Maybe civilization will have yet another chance, and possibly the next iteration will be better, built on mutual aid and balance with nature. We should be planting the seeds now.

Yet while modern civilization is subject to cyclical constraints, in our case the boom has been fueled to an unprecedented extreme by a one-time-only energy subsidy from tens of millions of years’ worth of bio-energy transformed into fossil fuels by agonizingly slow geological processes. One way or another, our locomotive of industrial progress is destined to run off the rails, and because we’ve chugged to such perilous heights of population size and consumption rates, we have a long way to fall—much further than any previous civilization.

Perhaps a few million people globally know enough of history, anthropology, environmental science, and ecological economics to have arrived at general understandings and expectations along these lines. For those who are paying attention, only the specific details of the inevitable processes of societal simplification and economic/population shrinkage remain unknown.

There’s a small cottage industry of websites and commenters keeping track of signs of imminent collapse and hypothesizing various possible future collapse trajectories. Efforts to this end may have practical usefulness for those who hope to escape the worst of the mayhem in the process—which is likely to be prolonged and uneven—and perhaps even improve lives by building community resilience. However, many collapsitarians are quite admittedly just indulging a morbid fascination with history’s greatest train wreck. In many of my writings I try my best to avoid morbid fascination and focus on practical usefulness. But every so often it’s helpful to step back and take it all in. It’s quite a show.

EnergySkeptic



20 Comments on "Richard Heinberg on why low oil prices do not mean there is plenty of oil, EROI, collapse"

  1. coffeeguyzz on Tue, 10th Apr 2018 3:59 pm 

    Serious question …

    Do these guys ever get tired of being wrong?

  2. Anonymouse1 on Tue, 10th Apr 2018 4:09 pm 

    Why don’t you ask whineberg yourself nony?

  3. Cloggie on Tue, 10th Apr 2018 4:45 pm 

    “However, many collapsitarians are quite admittedly just indulging a morbid fascination with history’s greatest train wreck.”

    Amen.

    Take note, “peak oil community”.

  4. MASTERMIND on Tue, 10th Apr 2018 5:07 pm 

    The Peak Oil Dump
    https://www.reddit.com/r/peakoil/comments/8b9pyd/the_peak_oil_dump/

  5. Duncan Idaho on Tue, 10th Apr 2018 6:40 pm 

    Richard Heinberg is such a optimist!
    “But every so often it’s helpful to step back and take it all in. It’s quite a show.”
    You are getting it Richard—–

  6. Sissyfuss on Tue, 10th Apr 2018 8:26 pm 

    Oil is finite, can’t say the same about cornies.

  7. Boat on Tue, 10th Apr 2018 8:47 pm 

    Let’s get through the first crisis. Remember how shortonoil and almost the entire board bought into that ETP crap and took your money for the report.
    World collaspe at the end of 2018. Oil rigs in cobwebs. That started around 3 years ago. Now days nary a mention of ETP. Demand was to die and prices drop.
    So I kept investing in the market and was rewarded by being correct. No crash, plenty of oil.

  8. MASTERMIND on Tue, 10th Apr 2018 9:05 pm 

    Oil Basics and The Limits to Economic Growth

    The average real price of oil since 2005 is 2.5 times higher than in the period 1986-2004. Even at today’s depressed oil prices, the real price of oil-$55 per barrel—is 55% higher than the in 1986-2004 of $34 per barrel. Economists and politicians cannot understand why the economy won’t grow but never consider the underlying cost of energy.

    Energy is the economy and oil is the master energy resource. The global economy developed when oil prices averaged $34 per barrel. When oil prices increased to more than $85 per barrel after 2005, economic growth could not continue. No business can withstand a 2.5-fold increase in underlying cost and make a profit. Although oil prices are lower since the price collapse in 2014, they are still 50% higher than in the 1990s.

    Economic growth is unlikely at these underlying energy costs.

    Source: Art Berman
    http://www.artberman.com/oil-basics-the-limits-to-economic-growth/

    Source: Hamilton (2009)
    https://www.brookings.edu/bpea-articles/causes-and-consequences-of-the-oil-shock-of-2007-08/

    Source: IEA
    http://www.iea.org/textbase/npsum/high_oil04sum.pdf

    Source: IMF
    https://www.imf.org/external/pubs/ft/oil/2000/

  9. MASTERMIND on Tue, 10th Apr 2018 9:33 pm 

    Could anti-Semitism be on the rise in Canada?
    https://www.theglobeandmail.com/politics/article-could-anti-semitism-be-on-the-rise-in-canada/

    Yup just like Greg..Sad..

  10. Cloggie on Wed, 11th Apr 2018 1:47 am 

    Back on topic: new record 8.8 MW offshore wind turbine installed in the waters of Scotland:

    https://cleantechnica.com/2018/04/10/worlds-most-powerful-wind-turbine-installed-at-vattenfalls-european-offshore-wind-deployment-centre/

    The bigger the turbines become, the lower the per MW installation cost. Installation of a single wind tower costs 24 hours, the installation of a 1 GW 150 x 7 MW wind farm 3-4 months.

    Take Holland… average electricity consumption 13 GW 24/7/365. Installed base 29 GW to cover every possible non-managed demand. Assume offshore capacity factor 50%. Holland would need 2 x 13 = 26 GW nameplate windpower, assuming storage is in place (mainly hydrogen). A single installation ship can realize this installed base in 26 x 4 = 104 months = 8 years! We have such a ship:

    https://deepresource.wordpress.com/2017/09/22/crane-aeolus-jack-up-vessel-being-upgraded/

    In fact we have several such ships, so we can help other countries as well (against a friendly fee).

    Holland can accomplish the electricity transition before 2030 “with two fingers in the nose” and with two additional ships the rest of the transition as well, also before 2030. Critical is not installed raw kWh, critical is storage. Until 2030 there is enough conventional fossil fuel left to get the job done. In fact $150 oil would greatly stimulate the rush into renewables. Conventional energy prices can’t be high enough.lol

    Anybody who claims that renewables can’t get the job done should get his head checked.

  11. Cloggie on Wed, 11th Apr 2018 1:52 am 

    How much time will the transition take?

    There is a precedent in Holland, switching from oil/coal to natural gas:

    https://deepresource.wordpress.com/2017/08/05/the-speed-of-the-energy-transition/

    It took a decade to attach every home to the newly build natural gas grid. No reason to assume it will take more than a decade to switch from natural gas to hydrogen/solar panels/e-vehicles.

  12. Anonymouse1 on Wed, 11th Apr 2018 2:36 am 

    So, cloggen-berg, if it is only going to take a decade to get the chosen ones to promised land, why not just bypass all that low-tech hydrogen (whatevers), robo cars crap and whatnot, and beeline straight to matter teleportation and zero-point energy? Think of all the money that will be saved bypassing all that primitive 20th tech, like solar panels. Black hole generators, a Mr Fusion(tm) in every flying electric robo-cars trunk. Cities under the sea. Oh wait a minute, that is sea-level rise. Just stick a dome over Tel Aviv and you’ll be as dry as a popcorn fart, right cloggraham?

  13. Cloggie on Wed, 11th Apr 2018 2:49 am 

    You’re a smart mister, anonymouse and not easy to deceive!

    /rolleyes

  14. Kat C on Wed, 11th Apr 2018 4:19 am 

    Except for the obligatory optimism good article. Heinberg was lees optimistic when he wrote his first book. I think he just decided optimism was a better way to go to the end. In his first book he suggested that one of the possible outcomes was that a game of last man standing would be played by the major players. I suppose you could call what has happened in the last few days the first round of that (if we are there it will be a very short round) or perhaps at this point we are only playing the game of chicken.

    we teeter on the edge of WWIII. The end could come from climate change, peak oil, or war. War is ahead this week.
    Game of chicken explained
    https://www.youtube.com/watch?v=u7hZ9jKrwvo
    Blackstone Intelligence on US/Syrian/Russian war imminent
    https://www.youtube.com/watch?v=f8HRcISVwYM&t=1236s
    Tuker Carlson on the insanity of it all
    https://www.youtube.com/watch?v=cSGf2ZpDENU&t=6s

    I don’t think Russia will back down, so if the US and its allies don’t WWIII is upon us

  15. Cloggie on Thu, 12th Apr 2018 5:46 am 

    I’m amazed that nobody of the resident energy doomers try to refute my back-of-envelope calculation of 1:47 am showing how easy it is to set up a renewable energy base with 8 years, for a country that is by far the largest electricity consumer in Europe.

    I guess doomerism is a lifestyle rather than an objective attitude.

  16. Davy on Thu, 12th Apr 2018 6:46 am 

    There is a lot more to it nederdreamer. I think you are getting to where you are unable to reality test.

  17. MASTERMIND on Thu, 12th Apr 2018 8:19 am 

    Clogg

    Peak oil is a liquids fuels problem not an electricity problem renewable s can solve. And everyone on this blog knows that renewable’s are a false hope.

  18. Cloggie on Thu, 12th Apr 2018 9:31 am 

    “Peak oil is a liquids fuels problem not an electricity problem renewable s can solve. And everyone on this blog knows that renewable’s are a false hope.”

    Thinking and knowing are two entirely different things. This is an Anglo-centric blog and historically Anglo history = history fossil fuel. Continental Europeans always had to be very economically with energy and that is going to pay out now for us big time. Since we use far less energy per capita as North-Americans it is proportionally easier for us to accomplish the transition.

    Europe is the origin of science and technology and nobody doubts it can be done.

  19. Cloggie on Thu, 12th Apr 2018 10:35 am 

    “world 1% renewable energy” latest:

    Portugal more than 100% renewable electricity throughout March

    https://cleantechnica.com/2018/04/12/renewable-energy-meets-100-of-portugals-march-electricity-needs/

    Europe is not “the world” folks, sorry bout that.

  20. MASTERMIND on Thu, 12th Apr 2018 11:17 am 

    Clogg

    Your source is bullshit…and fake news from Big tech…

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