De Crash Course 19 & 20
Deze crash course gaat over de veranderingen die de maatschappij te wachten staan. Economische, maar ook maatschappelijke. De focus is uit de aard van de herkomst op de USA, maar ook voor West-Europa bevat het nuttige lessen. Komende weken zullen we er met regelmaat een aantal toepasselijke lessen uit (her)publiceren.
NB: de link naar de gesproken tekst zit onder de link waar de duur staat aangegeven!
Engelstalige transcriptie Chapter 19 – Energy economics
Now we connect the second E – energy – to the first – the economy and embark on the precise line of thinking that led me to completely change my lifestyle and I call it energy economics.
And the central point to this chapter is this: as we’ve shown in previous chapters of the Crash Course, our global economy depends on continual growth to function. And not just any kind of growth; but exponential growth.
But in order to grow, it must receive an ever-increasing input supply of affordable energy and resources from the natural world. What I’m about to show you is a preponderance of data that indicates those inputs will just not be there in the volumes needed to supply the growth that the world economy is counting on.
In short, on top of all the debt and other economic messes we’ve made for ourselves, constraints from the natural world will increasingly place limits on economic growth in a way we haven’t had to deal with over the past century.
This is why I’m so confident in the claim that the next 20 years will be completely unlike the past 20.
So understanding the dynamics at play here is key to forecasting what the future will be like. Since energy is the master resource, that’s where we’re going to start.
Before 1870, the world got nearly 100% of its energy from biomass – trees and peat and things like that, and the world’s population stood at just 1.3 billion at that time.
But then coal use exploded onto the scene, and then 50 years after that oil began to occupy a significant portion of the energy mix. Since the first use of fossil fuel energy, a stored form of chemical energy which means it’s the same as food in the larder, the global population has expanded more than 5 times, total energy use by 18 times, and the world’s economy by more than 80-fold.
Now take a look at this chart of global energy use by source, or type, of energy. Its shape should be familiar to you by now. It is non linear… everything we think we know about the economy, our ease of life, and the way the world works was formed during a period when the most massive liberation of stored chemical energy (in the form of fossil fuels of course) occurred.
The world’s main energy source was all biofuels up to 1860 and then coal began to sneak in, in 1870, but did not make up half the energy mix until 1910 a full 50 years later.
Even though it was first drilled in 1869, oil did not become a full third of the energy mix until 1960 – more than 90 years later.
And natural gas first starts to sneak into the picture in 1910 but has not yet achieved parity with coal and oil yet, although it’s getting close.
The point here is that energy transitions, from one energy source to the next take many decades and for a good reason – each form of energy has a huge amount of embedded capital tied up in it. Even though steam ships were more cost effective, it took decades before the final sailing ships rotted away into disuse.
Ditto for the transition from coal to oil for transportation.
Likewise, we should expect that any transition to solar energy will take many decades, a minimum of four, but perhaps as many as six or even ten. The question here is, do we have that much time?
The connection I am drawing here is both simple and immensely important – both human population and the global economy expanded to their current size primarily because of fossil fuel energy.
With sufficient surplus energy humans can construct remarkably complex creations in short order as these pictures of oil-rich Dubai taken only 17 years apart can attest.
Now we can state the next key concept of the crash course, social complexity relies on surplus energy. By extension so does economic complexity. Societies that unwillingly lose either their social or economic complexity, or both, are notoriously unpleasant places to live. Given this, shouldn’t we pay close attention to how much surplus energy we’ve got and what we’re using it for?
To illustrate this important concept let’s take a quick tour through the idea of energy budgeting. It is the same as household budgeting but we’re budgeting energy instead of dollars. It works like this.
At any given time, there is a defined amount of energy that is available to use as we wish. Let’s put everything into this square – solar, wind, hydro, nuclear, coal, petroleum, natural gas, perhaps a tiny spot of algae and anything else I’ve happened to miss
That’s our total pool of energy to use any way we wish. But if we want to have more energy next year, we obviously have to invest some of our current energy stores into producing tomorrow’s energy. We must also invest some of today’s energy in building and maintaining the capital structure that allow us to collect and distribute the energy we use to maintain our complex society. Roads, pipelines bridges, electrical pylons, and buildings would go into this category.
What’s left over can be used for consumption. Part of this goes into basic living needs such as water, food, & shelter leaving the rest for discretionary things like trips to the Galapagos, purchasing hoola-hoops or tiny racing sailboats.
To simplify this even more, we can divide energy up into two big buckets; energy that must be reinvested to keep everything going and energy that we can more or less choose what to do with.
This is exactly analogous to your earnings. Suppose your household earns $50,000 per year and your total taxes are 30%. This leaves you $35,000 to buy food, pay for your shelter, purchase gasoline for your car and maybe do a few other things besides.
If this suddenly flipped around and you found yourself with only $15,000 of take home pay your situation would change drastically.
Perhaps you could only afford food and shelter while the car and new electronics and vacations become mere distant memories. Your life would be forcibly simplified in terms of the number of things you could afford to buy or do. It would be unpleasant.
So I want you to begin to think of the amount of energy that we have to reinvest in order to get more energy as the same thing as the tax on your salary.
And here’s why.
Forget all about how much money energy costs because it is actually irrelevant, especially when money is printed out of thin air. Instead we are going to focus on how much energy it takes to get energy because as I am going to show you that is what really matters. Fortunately, the concept is easy and it’s called Net Energy.
For this chapter, we’re going to measure net energy by dividing the amount of energy we get by the amount of energy we had to use in order to get that energy. Energy Out over Energy In.
Energy in is the tax while energy out is our take home pay. Imagine that if the total energy it took to get an oil well drilled was one barrel of oil and 100 barrels was found.
We’d say that our net energy return was 100:1. In this example, the tax we paid was 1 out of 100, or 1%. Another phrase for this that you will frequently encounter is Energy Returned on Energy Invested which goes by the acronym E.R.O.E.I.
We’re just going to stick with Energy out divided by Energy in for this section as it’s easier to visualize and is essentially the same thing.
Now let’s make this visual by graphically comparing the relationship between energy out and energy in. The red part is the amount of energy we put in and the green part is how much we got out, or the Net Energy, and we’re displaying them such that they always sum to 100%.
In the first scenario the energy out divided by energy in yields a value of 50, meaning that 1 unit of energy was used to find and produce 50 units of energy.
In other words, 2% was used to find and produce energy leaving us a net 98% to use however we see fit. We could also call this part the Surplus Energy available to society.
Even at a Net Energy ratio of 15, the surplus energy available to society remains quite high.
This surplus energy, of course, is what supports all of our economic growth, technological progress and our wonderfully rich and complicated society.
Now I want to draw your attention to what happens over here on this part of the chart between the readings of 10 and 5. The Net energy available to society begins to drops off in a manner that should be familiar to you after seeing the section on exponential charts. Only this hockey stick points down.
Below a reading of “5” and the chart heads down in earnest hitting zero when it gets to a reading of “1”. When it takes one unit of energy to get a unit of energy, there is zero surplus and there’s really no point in going through the trouble of getting it. Below a reading of five and we are on the energy cliff.
To find out why this is an enormously important chart, let’s look at our experience with Net Energy with respect to oil.
In 1930, for every barrel of oil used to find oil, it is estimated that 100 were produced giving us a reading of 100 to 1, which would be way off this chart to the left.
By 1970 fields were a lot smaller and oil often deeper or otherwise trickier to extract and the net energy gain was now down to a value of 25 to 1. Still a very good return with lots of green beneath it. By the 1990s, this trend continued with oil finds returning somewhere between 18 and 10 to 1.
And today? It is estimated that recent oil finds are returning somewhere between 10 to 1 and 3 to1 net energy. Why is the net yield dropping?
Because in the past, a relatively small amount of energy was required to create the metal for a small rig and the finds were massive, plentiful and relatively shallow.
Today much more energy is required to find energy. Exploration ships and rigs are massive – if we put our humble 1930’s rig to scale it looks like this.
And today more wells are being drilled to greater depths to find and produce smaller and smaller fields all of which weigh upon our net energy. And not only is harvesting oil from these more challenging deposits more costly; it’s also introduces a much higher degree of risk. When, failure occurs, as the Deepwater Horizon proved to us, the economic and ecological costs can skyrocket.
And what about the allegedly massive amounts of oil contained within the so-called tar sands and oil shales? The ones often described as equivalent to “several Saudi Arabias?”
We’ll talk about these in greater depth in coming chapters, but for now, we’ll simply note the net energy values for these are especially poor and in no way comparable to the 100 to 1 returns found in Saudia Arabia. Further, the water and environmental costs associated with them are disturbingly high.
While the evidence on net energy returns of nuclear power is conflicting, it’s safe to say that the old fashioned boiling water reactors of the type that failed spectacularly at Fukushima in 2011 is a LOT less than what newer designs might offer.
Once full-cycle clean up and decommissioning costs are factored in all we can say is that the jury is still out on nuclear at this point.
And what about renewable energy sources? Methanol, which can be made from biomass, sports a net energy of about 3, while biodiesel offers a net energy return of somewhere around 2.
Corn-based ethanol, if we’re generous, might produce a net energy return of just slightly over one, but could also be negative according to some sources. If we add in all the other new sources for usable liquid fuels that we just talked about, we see that they are all somewhere “on the face of the cliff”.
Unless we very rapidly find ways of boosting the net energy of these options we’ll simply find far less surplus energy for our basic needs and discretionary wants.
Solar and wind are both capable of producing pretty high net returns but these are producing electricity, not liquid fuels for which we already have an extensive investment in a distribution and use.
Oh, and by the way, where’s the so-called hydrogen economy on here? Right here(!). Because there are no Hydrogen reservoirs anywhere on earth, every single bit of it has to be created from some other source of energy at a loss.
In other words hydrogen is an energy sink. In creating and then using hydrogen, we lose energy and that’s not pessimism, that’s the law. The Second Law of Thermodynamics to be exact. Because hydrogen is a carrier of energy, not a source, it is more accurately described like this. A battery.
Now, to make an absurd argument because nobody would be this foolish, suppose Congress made the decision to, saaaaay, try and run our society on Corn-Based ethanol? What could we expect there?
Well, if we adjust our graph to reflect that decision we see a whole lot of red and very little green. The tax is very high, while our take-home pay is very low.
By way of commentary, I find it somewhat telling that out of all the possible alternative energy sources, this is the one that congress chose to advance with billions and billions in subsidies.
I mean, short of directly launching barrels of oil into outer space it’s hard to imagine a more foolish idea…
An important point here is that even if the government completely subsidized ethanol to the point that it only cost you a penny a gallon to buy, we would soon find ourselves living in a shrunken, ruined economy.
And the reasons why have already been covered. With less surplus energy less societal complexity is possible. Under an ethanol regime we’d find many cherished job positions would vanish.
Publicatie 4 juli 2014
Engelstalige transcriptie Chapter 20 – Peak Cheap oil
OK – we’re up to the chapter on Peak Cheap Oil and this one is a doozy.
This is one of the most important chapters, this is a big subject, and I wish to acknowledge that much of this chapter stands on the shoulders of the hundreds of dedicated people who have gathered the data, made the points, and tirelessly worked to advance our understanding of the role of energy in our lives.
I tip my hat to these sources and many others.
Energy is the lifeblood of any economy. But when an economy is based on an exponential debt-based money system and that is based on exponentially increasing energy supplies, the supply of that energy therefore deserves our very highest attention.
But we need to be careful here because it’s a mistake to lump all types of energy together because they have very different uses in our economy and they are not interchangeable.
What we’re going to examine in this chapter on Peak Cheap Oil is transportation fuels. The liquids we put in our trucks and cars and airplanes. Why?
Because 95% of everything that moves from point A to point B across the globe does so based on petroleum derived liquid fuels. This makes petroleum quite special and unique.
Said another way, currently natural gas and coal cannot be substituted for oil. It’s not reasonable to lump them all together. In fact, it would be risky to do so, as it would lead us to make some very bad decisions about our future.
In order to understand what “Peak Cheap Oil’ means, we need to share a common understanding about how oil fields work and how oil is extracted.
A common misperception is that an oil rig is plunked down over an oil field, a pipe is inserted and then oil gushes from a big, underground lake or cavern that eventually gets sucked dry.
It turns out that it is pretty much just solid rock down there and oil is only found in porous rocks, like sandstone, that permit the oil to flow through the rocks crevices and pores.
No vast caverns or lakes of oil exist down there. Oil has to be carefully extracted from what turns out to be a very solid rock matrix.
It’s better to think of a conventional oil field like a margarita where the oil is the tequila mix and the rock is the crushed ice.
When an oil field is tapped we find that the amount of oil that comes out if it follows a very prescribed pattern over time that ends up resembling a bell curve.
At first, shortly after the drink is discovered, there’s just one straw in our margarita but then with excitement more and more straws are stuck in and more and more drink rather easily flows out of the glass.
But then that dreaded slurping sound begins and now, no matter how many new straws are inserted and no matter how hard they are sucked upon, the amount of margarita coming out of the glass declines until it is all gone and we are only left with ice.
That’s pretty much exactly how an oil field works.
Every oil field exploited to date has exhibited this same basic extraction profile. And what is true for one is equally true when we measure across many oil fields and then sum the result.
Because individual fields peak, so to do collections of fields. Peak Oil, then, is NOT an abstract theory so much as it is a physical description of an extremely well characterized physical phenomenon.
How much oil remains to be discovered is a theory, but the process by while oil fields depleted is rather well-understood. Peak Oil is simply a fact.
Also, Peak Oil, is NOT synonymous with “running out of oil”. At the moment of the peak roughly half the oil that was there in the first place still remains.
But something interesting happens at the half-way mark. Where oil gushed out under pressure at first, the back half usually has to get laboriously pumped out of the ground at higher cost, obviously.
Where every barrel of oil was cheaper to extract on the way up, the reverse is true on the way down. Each barrel becomes more costly in terms of time, money and energy to extract. Eventually, it costs more to extract a barrel of oil than it is worth and that’s when an oil field is abandoned.
Here’s our experience with oil in United States. From the first well drilled in 1859 until 1970 more and more oil was progressively pumped from the ground.
But after that point less and less came out of the ground. It is said, then, that the US hit a peak of oil production in 1970 at just under 10 million barrels a day and today produces less than that. Those are the facts.
Counting ONLY crude oil consumption here, the remaining balance of the United States’ 15 million barrel a day crude oil habit is met by imports. That is, the US imports close to half of its daily needs.
Although the amount of oil the US imports is falling due to the combined effects of producing more and consuming less, the temporary boost from shale oil should be seen as exactly that; a relative flash in the pan. We’ll cover that in more detail in the next chapter
Now in order to produce oil, you have to first find it, right? It’s pretty hard to pump something you haven’t found. US oil discoveries peaked in 1930, which yields a gap between a peak in discovery and a peak in production of 40 years. Remember that number.
Here’s an interesting aside. Suppose we wanted to become “independent from imported oil” and decided to replace those 7 million imported barrels with some other form of energy.
Ignoring for the moment that you cannot substitute electricity for liquid fuels, Those 7 million barrels represent the same power equivalent as more than 500 additional nuclear power plants.
Considering the concerns we have with the 104 we have operating right now, I think it’s safe to say nuclear power is not a realistic candidate for reducing oil imports.
Well then how much would we have to increase our solar wind and biomass energy production to equal 7 million barrels a day?
There we’d have to increase our currently installed base by a factor of 1,400. Not 1400%. 1,400 times as much.
When we look at worldwide oil discoveries we find that those increased in every decade up to the 1960’s and then have decreased in every decade since then with future projections looking even more grim.
The exact peak of discovery? That was in 1964, 44 years ago, and that is another cold, hard, indisputable fact.
Remember, in order to produce oil you have to find it first.
And here is the third, and final fact about production I want to present. This is a chart of global crude oil production only – it leaves out biofuels and natural gas liquids.
Why? Well, they only amount to roughly 10 million barrels a day collectively, and they’re not used nearly with the ubiquity oil is in global transportation.
Conventional crude is the easy, high-energy yield stuff and it is what the world’s past 100 years of growth has been built upon.
We can see here that since mid-2004, for some reason, oil production has been flat. Whatever the reason for this is, it isn’t price because oil has climbed from $50 a barrel to around $100 a barrel in 2012 and 2013.
And it isn’t because oil companies have been skimping on investments in oil exploration and production – those budgets have more than doubled from $300 billion in 2005 to $700 billion in 2013.
If ever there was a strong incentive to get oil out of the ground and off to market, $100 a barrel is it; and spending $700 billion is ample sign of dedication to that cause.
And yet, despite all that, global production remains nearly unchanged. In just a few short years, it’s now costing us double to extract roughly the same amount of oil out of the ground.
What’s clearly at work here is that we’re finding more oil, but it’s expensive. Even vastly increased oil budgets have only managed to battle the declines in conventional oil to a standstill.
Interestingly, the global peak in discoveries was exactly 40 years prior to the leveling off of this production graph possibly echoing the US gap between the discovery and production peaks.
I’m soft-pedaling this to an enormous degree. Let me be blunt. If we are already at peak, as these data suggest is possible, then we are in trouble.
However, the most urgent issue before us does not lie with identifying the precise moment of peak oil.
That is, truthfully, an academic distraction because the economic dislocations will begin as soon as there’s a gap between supply and demand that is solved by higher prices.
Here’s a very simple and clever way to think about the supply and demand problem that was developed by Dallas geologist Jeffrey Brown which he calls the export land model.
Suppose that we have a hypothetical country that produces 2 million barrels of crude a day but which is declining at 5% a year.
We’d note that, at first, they’d be able to export 2 million barrels; but after ten years that would decline to one and a quarter million barrels a day. This seems manageable. But now, suppose that this country uses oil itself, as all countries do.
Taking that into account, we see that our hypothetical country consumes 1 million barrels a day, with this internal demand increasing by 2.5% a year. This is also reasonable.
So, what happens to future exports under this model? They go to zero in just ten years. This is the miracle of compounding but in reverse where exports are eaten into from both ends.
It turns out that this is a very realistic scenario because we can already observe that production is declining even as demand is increasing in a number of countries.
When world production will hit its exact peak is a matter of some dispute with estimates ranging from right now to some 30 years away. But as I said before, the precise moment of the peak is really just an academic concern.
What we need to be most concerned with is the day that world demand outstrips available supply. It is at that moment that the oil markets will change forever and probably quite suddenly.
First we’ll see massive price hikes, that’s a given. But do you remember the food ‘shortages’ that seemingly erupted overnight back in February of 2008?
Those were triggered by the perception of demand exceeding supply, which led to an immediate export ban on food shipments by many countries.
This same dynamic of national hoarding will certainly be a feature of the global oil market once the perception of shortage takes hold. When that happens, our concerns about price will be trumped by our fears of shortages
In order to understand why oil is so important to our economy and our daily lives, we have to understand something about what it does for us.
We value any source of energy because we can harness it to do work for us. For example, every time you turn on a 100-watt light bulb, it is the same as if you had a fit human being in the basement pedaling as hard as they could to keep that bulb lit.
That is how much energy a single 100-watt light bulb uses. In the background while you run water, take hot showers, and vacuum the floor, it is as if your house is employing the services of at least 50 such extremely fit bike riders.
This “energy slave count” if you will, exceeds that of some kings in times past. It can therefore truly be said that we are all living like kings. Although we may not appreciate that because it all seems so ordinary that we take it for granted.
And how much ‘work’ is embodied in a gallon of gasoline, our most favorite substance of them all? Well, if you put a single gallon in a car, drove it until it ran out, and then turned around and pushed the car home you’d find out.
It turns out that a gallon of gas has the equivalent energy of 500 hours of hard human labor, or 12-and-a-half 40 hour work weeks.
So how much is a gallon of gas worth? $4 $10? Is you wanted to pay this poor man $15 and hour to push your car home then we might value a gallon of gas at $7,500.
Here’s another example. It has been calculated that the amount of food that average North America citizen consumes in year requires the equivalent of 400 gallons of petroleum to produce and ship.
At $4/gallon that works out to $1600 of your yearly food bill is spent on fuel, which doesn’t sound too extreme.
However, when we consider that those 400 gallons represent the energy equivalent of 100 humans working year round at 40 hours a week, then it takes on an entirely different meaning.
This puts your diet well out of the reach of most kings of times past. Just to put this in context, as it is currently configured, food production and distribution uses fully 2/3rds of our domestic oil production. This is one reason why a cessation of imports would be, shall we say, disruptive.
Besides the way that oil works tirelessly in the background to make our lives easy beyond historical measure, oil is a miracle in other ways. In this picture , a typical American family was asked to cart out onto their front lawn everything in their house that was derived from oil. That’s quite a sight.
How easily could we replace the role of oil in our style of consumer-led, growth-based economy? Not very.
We currently use oil mainly for transportation, sitting at right around 70% of all oil consumption. The next biggest block is for industrial purposes followed by residential which means heating oil.
This last, tiny little sliver? That’s oil used to generate electricity. With the exception of Biofuels, which I’ll get to later, all renewable energy resources either provide heat or electricity meaning that even if we entirely replaced ALL of the electricity and heat currently provided by oil with renewables, we’d only be addressing these tiny slices here.
And in the industrial processes, oil is the primary input feedstock to innumerable necessities of life such as fertilizer, plastics, paint, synthetic fibers, innumerable chemical processes, and flying around. When we consider other potential fuel sources we find that they are mostly incapable of fulfilling these needs.
Biofuels and coal could potentially fill some of these functions but certainly not without a massive reinvestment program and not anytime soon.
Let’s review a few key facts. You have to find oil before you can produce it and key fact #1 is that world oil discoveries peaked in 1964.
US discoveries peaked in 1930 and 40 years later production peaked. We are now 44 years after the global discovery peak.
Key fact #2 is that world production of conventional crude has been flat for the past 8 years even as prices have increased by more than 100%.
Taken together, key facts #1 and #2 suggest the possibility that Peak Oil is already upon us.
If true, then we are going to wish with all our hearts that we had begun preparing for this moment a decade or more ago.
Key fact #3 is that the US oil imports are the energy equivalent of more than 500 nuclear power plants which is five times as many nuclear plants as currently exist in America and nearly twice the total number of nuclear plants in the entire world.
The next key concept of the Crash Course is that Peak Cheap Oil is a well defined process that is nothing more than a physical description of how oil fields age.
We have literally thousands of studied examples under our belts and given the preponderance of evidence, the debate on Peak Oil is over. It is a mathematical inevitability at current consumption levels. Only when the peak will arrive is up for discussion.
Mostly hidden from us in plain sight is Key Concept #10: The amount of work that oil performs in service to the average person is equivalent to having hundreds of slaves.
It is this work that makes our lives what they are; staggeringly comfortable by historical standards. The average middles class life in western society would be the envy of kings in times past.
The next key concept of the crash course is that oil is a magical substance of finite supply but of unlimited importance. This cannot be overstated.
Transitioning from one fuel source to another is a devilishly expensive proposition posing enormous challenges with respect to cost, scale and time.
Our species transitioned over many decades from wood to coal because coal was a better fuel source.
And we transitioned over several decades from coal to oil for the same reason. In both cases this happened because the new fuel source was plentiful, cheap, and higher-yielding in terms of energy output per unit of weight compared to the older fuel.
Nobody has been able to advance any candidates as our next source of transportation energy that is better than oil on all three counts.
A common pushback to this point is a firm belief many people hold that new technological breakthroughs will ride to our rescue here.
I’ll explain in a future chapter why this is very likely to prove a false hope.
All I’ll do here is remind you that technology is not a source of energy – it may well help us to better exploit our existing energy sources by extracting them more easily, or consuming them more efficiently – but technology can’t create energy for us.
The Second Law of Thermodynamics prevents that. So, it is a big mistake to confuse technology with energy sources.
And finally, what we really need to keep a careful eye out for is the supply of oil being exceeded by demand and this raises the next Key Concept: Oil exports are being hit two ways; by rising demand and declining production.
This raises the prospect that the moment when the world’s nations finally realize that there is not enough oil to supply everybody may come much sooner than most suspect.
Exponential functions are hard for most humans to grasp and oil exports are being doubly-squeezed, subjecting them to a surprisingly high rate of decline.
This completes an immensely brief tour through peak cheap oil. If you have not already done so, you owe it to yourself to become knowledgeable on this subject due to its unequalled importance.
We have links aplenty on the essential books, papers, articles, websites and other resources on PeakProsperity.com.
In the next section we will address the current quote-unquote revolution occurring in shale oil and gas. I’ll explain why its impact is likely to be short-lived, and why it really won’t offer much help in addressing our energy predicament.
Publicatie 4 juli 2014
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