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The Crocodiles of Reality

The Crocodiles of Reality thumbnail

I’ve suggested in several previous posts that the peak oil debate may be approaching a turning point—one of those shifts in the collective conversation in which topics that have been shut out for years or decades finally succeed in crashing the party, and other topics that have gotten more than their quota of attention during that time get put out to pasture or sent to the glue factory.  I’d like to talk for a moment about some of the reasons I think that’s about to happen, and in the process, give a name to one of the common but generally unmentionable features of contemporary economic life.

We can begin with the fracking bubble, that misbegotten brat fathered by Wall Street’s love of Ponzi schemes on Main Street’s stark terror of facing up to the end of the age of cheap abundant energy. That bubble has at least two significant functions in today’s world. The first function, as discussed in these essays already, is to fill an otherwise vacant niche in the string of giddy speculative delusions that began with the stock market boom and bust of 1987 and is still going strong today. As with previous examples, the promoters of the fracking bubble dangled the prospect of what used to be normal returns on investment in front of the eager and clueless investors with which America seems to be so richly stocked these days.  These then leapt at the bait, and handed their money over to the tender mercies of the same Wall Street investment firms who gave us and zero-doc mortgages.

You might think, dear reader, that after a quarter century of this, there might be a shortage of chumps willing to fall for such schemes. Whatever else might be depleting, though, the supply of lambs eager to be led to that particular slaughter seems to be keeping up handily with the demand. We live in what will doubtless be remembered as the Golden Age of financial fraud, an era of stunning fiscal idiocy in which even the most blatant swindles can count on drawing a crowd of suckers begging to have their money taken from them. Millennia from now, the grifters, con men, and bunco artists of civilizations yet unborn will look back in awe at our time, and wish that they, too, might be fortunate enough to live in an era when tens of millions of investors passionately wanted to believe that the laws of economics, thermodynamics, and plain common sense must surely be suspended for their benefit.

To some extent, in other words, the fracking bubble is simply one more reminder that Ben Franklin’s adage about a fool and his money has not lost any of its relevance since the old rascal slipped it into the pages of Poor Richard’s Almanac. Still, there’s more going on here than the ruthless fleecing of the unwary that’s the lifeblood of every healthy market economy. The fracking bubble, as most of my readers will be well aware, has not only served as an excuse for ordinary speculative larceny; it’s also provided a very large number of people with an excuse to scrunch up their eyes, stuff their fingers in their ears, shout “La, la, la, I can’t hear you,” and thus keep clinging to the absurd faith that limitless resources really can be extracted from a finite planet.

For the last three or four years, accordingly, the fracking bubble has been the most common item brandished by practitioners of peak oil denial as evidence that petroleum production can too keep on increasing forever, so there!  The very modest additions to global petroleum production that resulted from hydrofracturing shales in North Dakota and Texas got talked up into an imaginary tidal wave of crude oil that would supposedly sweep all before it, and not incidentally restore the United States to its long-vanished status as the world’s premier oil producer. All that made good copy for the bunco artists mentioned earlier, to be sure, but it also fed into the futile attempts at denial that have taken the place of a sane energy policy in most industrial societies.

The problem with this fond fantasy is that the numbers don’t even begin to add up. The latest figures, neatly summarized by Ron Patterson in a recent post, show just how bad the situation has become. Each year, on average, the oil industry has had had to increase its investments by 10% over the previous year to get the same amount of oil out of the ground.  Even $100-a-barrel oil prices won’t support that kind of soaring overhead cost for long, and the problem has been made worse by the belated discovery that many of the shale beds ballyhooed in recent years don’t have anything like as much oil as their promoters claimed.  As a result, oil companies around the world are cutting back on capital investment and selling off assets. That’s not the behavior of an industry poised on the brink of a new age of abundance; it’s the behavior of an industry that has just slammed face first into hard supply limits and is backing away groggily from the impact site while trying to stanch the bleeding from deep fiscal cuts.

As a result, with mathematical certainty, a great many overpriced assets are going to lose most of their paper value in the years ahead of us, a great many businesses that have made their money providing goods and services to the drilling industry are going to downsize sharply or simply go bankrupt, a great many wells that can’t make money even at exorbitant oil prices are going to be shut in or go undrilled in the first place, and a very, very great many people who convinced themselves that they were going to get rich by investing in fracking are going to end up poor. It’s not going to be pretty.  Exactly what effect this is going to have on the price of oil is an interesting question; my guess, though it’s only a guess, is that a couple of years from now the price of oil will spike, possibly to the $250-$300 a barrel range, then crash to $60 a barrel, and slowly recover to $175 or so over a period of several years.

This has a great deal of relevance to the project of this blog.  The last time petroleum production failed to keep pace with potential demand, and the price of oil spiked accordingly, peak oil came in from the fringes and got discussed publicly in the pages of newspapers of record.  That window of opportunity gaped open from 2004 to 2010, roughly speaking, and during that period a great deal got accomplished. That was when peak oil stopped being a concern of the furthest fringe and found an audience in many corners of contemporary alternative culture, when local groups—some under the Transition Town banner, others outside it—began to organize around the imminence of peak oil, and when books on resource depletion and its consequences found a market for the first time since the early 1980s.

Those are significant gains. It’s true, of course, that these achievements didn’t make peak oil go away, or find some gimmick that will keep the lifestyles of the industrial world’s more privileged inmates rolling merrily along for the foreseeable future. What sometimes gets forgotten is that neither of those things was ever possible in the first place. The hard facts of our predicament have not changed a bit:  the age of cheap abundant energy is ending; the economic systems, social structures, and lifestyle habits that were made possible by that temporary condition are accordingly going away, and nothing anyone can do will bring them back again, not now, not ever.

It’s worth being precise here:  for the rest of the time our species endures, we will have to deal with much more sharply constrained energy supplies than we’ve had handy over the last few centuries. That doesn’t mean that our descendants will be condemned to huddle in caves until the jaws of extinction close around them; I’ve argued at quite some length in one of my books that the endpoint of the mess we’re currently in, centuries from now, will most likely be the emergence of ecotechnic societies—societies that maintain relatively high technology on the modest energy and resource inputs that can be provided by renewable sources. I’ve suggested, there and elsewhere, that there’s quite a bit that can be done here and now to lay the foundations for the ecotechnic societies of the far future. I’ve also tried to point out that there’s quite a bit that can be done here and now to make the unraveling of the age of abundance less traumatic than it will otherwise be.

To my mind, those are worthwhile goals. What makes them difficult is simply that any meaningful attempt to pursue them has to start by accepting that the age of cheap abundant energy is ending, that the lifestyles that age made possible are ending with it, and that wasting all those fossil fuels on what amounts to a drunken binge three centuries long might not have been a very smart idea in the first place. Any one of those would be a bitter pill to take; all three of them together are far more than most people nowadays are willing to swallow, and so it’s not surprising that so much effort over the last few decades have gone into pretending that the squalid excesses of contemporary culture can somehow keep rolling along in the teeth of all the evidence to the contrary.

The frantic attempts to sustain the unsustainable driven by this pretense have done much to make the present day such a halcyon time for swindles of every description. Not all of those, however, have taken aim at the wallets of what we might as well call the lumpen-investmentariat, that class of people who have money to invest and not a clue in their heads that Wall Street might not have their best interests at heart. Some of the most colorful flops of recent years have instead attracted money from a different though equally gullible source: government subsidies for new energy technologies.

Those of my readers who were part of the peak oil scene a decade ago, for example, may remember the days when ethanol made from American corn was going to save us all.  Many of the same claims more recently deployed to inflate the fracking bubble were used to justify what was described, at the time, as America’s burgeoning new ethanol industry, but the target for these exercises was somewhat different. A certain amount of investment money from the clueless did find its way into the hands of ethanol-plant promoters, to be sure, but the financial core of the new industry was a flurry of federal mandates and federal and state subsidies, which in theory existed to lead America to a bright new energy future, and in practice existed to convince the voters that politicians really were doing something about gasoline prices that had just risen to the unheard-of level of $2 a gallon.

You won’t hear much about America’s burgeoning new ethanol industry these days. A substantial fraction of the ethanol plants that were subsidized by governments and lavishly praised by politicians a decade ago are bankrupt and shuttered today, having failed to turn a profit or, in some cases, cover the costs of construction.  The critics who pointed out that the burgeoning new industry made no economic sense, and that making ethanol from corn uses more energy than you get from burning the ethanol, turned out to be dead right, and the critics who dismissed them as naysayers turned out to be dead wrong. Still, the ethanol plants had accomplished the same two functions as the fracking bubble did later: it sucked a great deal of money into the hands of its promoters, and it helped everyone else pretend for a while that the end of the age of cheap abundant energy wasn’t going to happen after all.

It’s hardly the only example of the phenomenon.  Since I don’t want green-energy proponents to feel unduly picked on, let’s turn to the other side of the energy picture and take a look at nuclear fusion. Since the 1950s, a sizeable body of nuclear physicists have kept themselves gainfully employed and their laboratories stocked and staffed by proclaiming nuclear fusion as the wave of the future. In just another twenty years, we’ve repeatedly been told, clean, safe nuclear fusion plants will be churning out endless supplies of energy, if only the government subsidies keep pouring in. After sixty years of unbroken failure, even politicians are starting to have second thoughts, but the fusion-power industry keeps at it, pursuing a project that, as respected science writer Charles Seife pointed out trenchantly in Sun In A Bottle: The Strange History of Fusion and the Science of Wishful Thinking, has more in common with the quest for perpetual motion than its overeager fans like to think.

Every few years the media carries yet another enthusiastic announcement that some new breakthrough has happened in the quest for fusion power. Now of course it’s worth noting that none of these widely ballyhooed breakthroughs ever amount to a working fusion reactor capable of putting power into the grid, but let’s let that pass for now, because the point I want to make is a different one. As I pointed out in a post here last year, the question that matters about fusion is not whether fusion power is technically feasible, but whether it’s economically viable. That’s not a question anyone in the fusion research industry wants to discuss, and there are good reasons for that.

The ITER project in Europe offers a glimpse at the answer.  ITER is the most complex and also the most expensive machine ever built by human beings—the latest estimate of the total cost has recently gone up from $14 billion to $17 billion, and if past performance is anything to go by, it will have gone up a good deal more before the scheduled completion in 2020.  That stratospheric price tag results from the simple fact that six decades of hard work by physicists around the world, exploring scores of different approaches to fusion, have shown that any less expensive approach won’t produce a sustained fusion reaction. While commercial fusion reactors would doubtless cost less than ITER, it’s already clear that they won’t cost enough less to make fusion power economically viable. Even if ITER succeeds in creating its “sun in a bottle,” in other words, that fact will be an expensive laboratory curiosity, not a solution to the world’s energy needs.

My more attentive readers will doubtless have noticed that the flaw in the current round of glowing prophecies of a future powered by fusion plants is the same as the flaw in the equally glowing sales pitches for corn-based ethanol fuel plants a decade ago. Turning corn into ethanol, and using the ethanol to fuel cars and trucks, is technically feasible; it just doesn’t happen to be economically viable. In the same way, whether fusion power is technically feasible or not may still be up in the air, but the question of its economic viability is not. The gap between technical capacity and economic reality provides the ecological niche in which both these projects make their home, and a great many other alleged solutions to the energy crisis of our time inhabit that same niche.

I’d like to suggest that it’s high time to put a name to the technological fauna that fill this role in our social ecology, and I even have a name to propose.  I think we should call them “subsidy dumpsters.”

A subsidy dumpster, if I may venture on a definition, is an energy technology that looks like a viable option so long as nobody pays attention to the economic realities. Because it’s technically feasible, or at least hasn’t yet been proven to be unfeasible, promoters can brandish enthusiastic estimates of how much energy it will yield if only the government provides adequate funding, and point to laboratory tests of technical feasibility as evidence that so tempting a bait is within reach. The promoters of such schemes can also rely on the foam-flecked ravings of economists, who have proven to be so stunningly clueless about energy in recent years, and they can also count on one of the pervasive blind spots in modern thinking: the almost visceral inability of most people these days to think in terms of whole systems. Armed with these advantages, they descend upon politicians, and if energy costs are an irritation to the public—and these days, energy costs are always an irritation to the public—the politicians duly cough up a subsidy so they can claim to be doing something about the energy problem.

Once the subsidy dumpster gets its funding, it goes through however many twists and turns its promoters can manage before economic realities take their inevitable toll. If the dumpster in question has to compete in the marketplace, as fuel ethanol plants did, the normal result is a series of messy bankruptcies as soon as the government money runs short. If it can be shielded from the market, preferably by always being almost ready for commercial deployment but never actually quite getting there—the fusion-research industry has this one down pat, though it’s fair to say that the laws of nature seem to be giving them a great deal of help—the dumpster can keep on being filled with subsidies for as long as the prospect of an imminent breakthrough can be dangled in front of politicians and the public. Since most people these days consistently mistake technical feasibility for economic viability, there’s no shortage of easy marks for this sort of sales pitch.

There are plenty of subsidy dumpsters in the energy field just now. What makes this all the more unfortunate is that quite a few of them are based on technologies that could be used in less self-defeating ways. Solar power, to name only one example, could make a huge dent in America’s energy needs, if the available resources focused on proven technologies such as solar water heaters; once this sensible approach is replaced by attempts to claim that we can keep the grid powered by paving some substantial fraction of Nevada with solar PV cells, though, we’re in subsidy-dumpster territory, as a recent study of Spain’s much-lauded solar program has shown. Renewable energy is a viable option so long as its sharp limits of concentration and intermittency are kept in mind; ignore those, and pretend that we can keep on living today’s extravagant lifestyles on a basis that won’t support them, and you’ve got a perfect recipe for a subsidy dumpster.

Now it’s only fair to point out that the energy issue is far from the only dimension of modern life that attracts subsidy dumpsters. Name a current crisis here in America—joblessness, urban blight, decaying infrastructure, and the list goes on—and there are plenty of subsidy dumpsters to be found, some empty and rusting like yesterday’s ethanol plants, some soaking up government funds like the ITER project, and many more that are still only a twinkle in the eyes of their eager promoters. Still, I’d like to suggest that subsidy dumpsters in the energy field have a particular importance just now.

The end of the age of cheap abundant energy requires that we stop using anything like as much energy as we’ve been using in recent decades. Any approach to dealing with the crisis of our age that doesn’t start by using much less energy, in other words, simply isn’t serious. The parade of subsidy dumpsters being hawked to politicians these days is merely one more attempt to refuse to take our predicament as seriously as it deserves, and thus serves mostly as a way to make that predicament even worse than it has to be. By and large, to borrow a neatly Pharaonic turn of phrase from one of my longtime readers—tip of the archdruidical hat to Robin Datta—that’s the trouble with spending all your time splashing around in the waters of denial; all that happens, in the final analysis, is that you attract the attention of the crocodiles of reality.

The Archdruid Report

11 Comments on "The Crocodiles of Reality"

  1. J-Gav on Thu, 13th Mar 2014 4:12 pm 

    “Subsidy dumpsters” looks like a valid new concept. Folks will generally go for those before backtracking and doing ‘the right thing’… if the crocs haven’t gotten them in the meantime.

  2. Northwest Resident on Thu, 13th Mar 2014 5:11 pm 

    “We live in what will doubtless be remembered as the Golden Age of financial fraud, an era of stunning fiscal idiocy in which even the most blatant swindles can count on drawing a crowd of suckers begging to have their money taken from them.”

    “Never give a sucker an even break.” — W.C. Fields

    I don’t understand how some of our Cornucopian fellow-posters can read this article and still be optimistic that BAU will be continuing at any level far into the future. I guess that a defining feature of a Cornucopian is that person believes what he/she wants to believe and finds “evidence” to support those beliefs, at the same time filtering out any information that doesn’t jive with what they want to believe. For truly pragmatic, aware and objective observers, the logical conclusions in regards to peak oil and its implications are obvious. I think this article highlights some of those obvious implications — in the Druid’s own word-excessive but still enlightening and fundamentally logical way.

  3. shortonoil on Thu, 13th Mar 2014 7:05 pm 

    When you talk to them, the 1% that’s on the receiving end of the FED’s $1 trillion a year money fest, they admit that the world is a mess, but not for them; and it won’t be. The idea that their two extra vacation condos, paid for by part of that $1 trillion, would be money better spent on other things, like geothermal heating and power, wind farms, and solar is just not acceptable. When you tell them that the oil age will end abruptly, and maybe violently you get a litany of reasons why it won’t; why it can’t.

    Ethanol, fusion, and shale do not, and will not produce energy. For most however they produces something much more valuable; a veil. A thin layer of illusion that hides them from their ultimate destination. They worship other gods who will take them to another place. The gods of human inventiveness, cleverness and technology, and they must be given their sacraments. To do otherwise makes one a heathen, a barbarian, a terrorist among the flock. One who is steering us away from the promise land bequeathed to us by the MSM, and American Idol.

    The 1% won’t change their path. They will play the role of the Red Queen, and run ever faster and faster to a destination that can’t be reached. All the while holding their veil of illusion before them. If the Druid is speaking to them, they aren’t listening. No crocodile would dare crawl through their veil!

  4. ghung on Thu, 13th Mar 2014 7:12 pm 

    NR: “…that person believes what he/she wants to believe and finds “evidence” to support those beliefs…”

    Seems like an age ago I was in a private Catholic school. Non-Catholics like myself went to a class called “Character Development” while the Catholic kids went to mass or whatever. We had a an entire course on avoiding confirmation bias (or how to not delude one’s-self). Should be mandatory for all school kids; would save us all a lot of trouble, money and time, possibly even the planet.

  5. PapaSmurf on Thu, 13th Mar 2014 7:39 pm 

    “When you tell them that the oil age will end abruptly, and maybe violently you get a litany of reasons why it won’t; why it can’t.”

    The evidence so far seems to be that it won’t be abrupt. So far the bulk of the evidence points to a long and slow decline for oil.

    They seem to be correct and you seem to be wrong.

  6. MSB fanboy on Thu, 13th Mar 2014 8:53 pm 

    PapaSmurf, for a slow decline to happen it assumes we are as logical getting ‘substantially poorer’ then we were getting ‘substantially richer’. Point being will a world of higher prices, fewer jobs, increasing wealth disparity, political gridlock, etc.. etc.. be just as a stable world as when we were increasing oil production.
    If you are right and it is stable there will be a slow decline.
    If you are wrong and people riot over living standards reducing weekly, chaos etc… then expect a sharp decline.
    Of course the point is moot, as once the financial game is done and the goldilocks price is superseded we should expect a decline by demand bought about by cost of supply.
    Myself 🙂 im just watching the show

  7. DC on Thu, 13th Mar 2014 9:21 pm 

    JMG is of course, correct when he points out the almost all the ‘alt-energy’ scams out there atm, are mostly subsidy sinks. Suprised he didnt mention the hydrogen economy hoax as well. But he didn’t really need to, corn and fusion work fine as examples. The only thing he said I would take issue with, is his contention that a ‘working’ fusion power station would likely cost less than ITER current expenditures. Thats hardly likely. FISSION power stations are running upwards of 10 billion now. A fusion station would be anywhere from five to ten times more complex than any fission NPS. So Im not sure why the AD wrote that. There is no way a ‘fuser’ would cost a mere 20 billion(in todays dollars). But that may be a moot point anyhow, since I doubt any of us will live to see a ‘profitable’, much less a working fusion station in our lifetimes.

    Still, he should have spent a little time talking about *old* energy subsidies as well, not just ‘new’ ones. If oil, coal, gas wasnt supported by subsidies that dwarf anything ITER, solar, wind, or even corn receive,combined, what would that do to the economics of oil? Fact is, as much as people like to dump on fusion funding, and I totally agree on that particular point, the funds put into fusion are a drop in the bucket compared to the subsidy gravy train big fossil\big fission has received in the last century. There is simply no comparison between the two.

    Of course, cornys and tech-no optimists, always trot out that ‘economies of scale, or ‘learning’ curve, will kick in and make H2, Fusion, Corn, cold fusion, and Di-lithium crystals cost-competitive. But even thats rare, most proponents of these schemes tend to avoid the topic of cost as much as possible.But competitive with what though is never clearly explained and explored. Never mind the awkward fact that corn bio-fools, and most other forms of energy production already operate at economy of scale, are heavily subsidized and operating at or near their maximum ‘efficiency'(though that is not saying much), and they are still ‘too expensive’ for most people-now in 2014. Look at how amerikans go into fits if the price of a gallon of gas goes up a dime.

  8. Makati1 on Fri, 14th Mar 2014 2:36 am 

    I always enjoy the druids articles. I don’t see a long slow decline, but a series of sharp drops, small at first but eventually, over the big cliff that ends it all forever. If you look at the total system, it is impossible for anyone but a super computer to keep track of even a small percentage of it. And there are no real ‘facts’ to put into the equation. Certainly not from governments or the financial sector. Without those facts, nothing is predictable.

    That is why I am just watching the show. I do believe we are in the last act and the fat lady is spraying her throat for the final song. Do we have until 2020? 2018? 2016? This year? We shall see.

  9. Davy, Hermann, MO on Fri, 14th Mar 2014 11:17 am 

    Makati said – I don’t see a long slow decline, but a series of sharp drops, small at first but eventually, over the big cliff that ends it all forever.

    Do we have until 2020? 2018? 2016? This year? We shall see.

    Well, Makati, maybe you hit the nail. I see a potential correction this year. This will be the year China attempts to manage its corporate debt crisis and property bubble. As we all know the outcome of managing a bubble never work out positive. This will undoubtedly have a negative knock on effect to Europe with more deflationary activity with loss of China exports and Chinese bank exposure. In the US its only sweet spot, stock market, is a blind engineer on a runaway train. When one looks only at fundamentals everything is in place for a bear market i.e. Interest rates going up, leverage corrections, and business cycle adjustment. It will correct 30% when SHTF in China, Europe, and maybe Ukraine. Then there is Crimea. Surely the US idiotic political leadership will screw this situation up. US is in reality impotent militarily with Crimea and everyone knows it so they will do something stupid economically. Russia has already drank the Jim Jones cool aid for its economy. Russia was not doing particularly well before Crimea but now it will bleed slowly especially if it steps into Easter Ukraine to take care of its fellow Russians there. Military adventures are one thing for the US when you can print money but Russia is a second rate corrupt and unstable economy based on commodities. Commodities are influenced significantly by China and growth. Well it has stocked up on Gold so it can piss that away because the Ruble will tank. 2016 is a good time for the second more serious correction. The global markets will take the 2014 correction somewhat in stride because confidence will not be lost. By 2016 with no recovery and no economic tools for global leadership to stimulate blind exuberance, and possibly black swans, confidence will tank more into panic. Two years of bad news will unravel a global economy significantly with bankruptcies and sovereign debt problems, oh yea there is still a sovereign debt problem. Emerging markets will be basket cases with their currencies in crisis raising rates and stifling growth further. Climate, food, and water will only get worse. And of course energy will still be an issues even with reduced demand but the energy card will hit in 2018. When that plays out the real confidence will be lost and we will see a spiral downward to the hard landing in 2020. In 2020 we will see an economy 50% lower than today with multiple failed states and widespread hunger. There will be brush fire wars. Globalism will be falling apart from loss of confidence. Trade will seize up as countries’ economies fail and protectionism shows its ugly head. Guys this is actually optimistic. Status quo BAU will continue barely so spent nuk fuel ponds and wmds will still be managed but just barely. Electricity will still work intermittently in most places. Most places will be hungry except of course the failed states where famine will be the norm. The global world will look like North Korea does now.

  10. Northwest Resident on Fri, 14th Mar 2014 2:35 pm 

    “In 2020 we will see an economy 50% lower than today with multiple failed states and widespread hunger.”

    If we’re lucky…

  11. rollin on Fri, 14th Mar 2014 6:57 pm 

    I am going to assume a housing glut in the next decade.

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