Off the keyboard of Steve from Virginia
Published on Economic Undertow on January 23, 2013
The time frame is less than two years: the world becomes net energy negative. At that point there is no turning the clock back.
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
Gregor Macdonald discusses the end of inexpensive crude oil and the so-called production ‘Revolution’ hoopla with Chris Martenson’s (Peak Prosperity).
Gregor makes the point that the increase in crude prices after 1998 took a lot of analysts by surprise. Many predicted a decline to historical levels with drillers simply adding to output from inventory. This is a critical idea that remains in force to this day: that crude production is essentially low-cost, that crude is mis-priced, that manipulation is forcing prices higher, that prices will return to historical levels once manipulators are ‘surgically removed’ from the marketplace.
A fundamental principle of industrial modernity is oil can be wasted because it is cheap, it’s cheap because the only thing it’s good for is waste. The waste process is monetized, it is collateral for loans which ratchet the wasting process further along. After we borrow the first time, we borrow additional amounts in order to waste more as well as to service and roll-over the previous rounds of loans … Both the loans and the waste compound exponentially along with pressure on resources, the entire economy becomes saturated with debts and waste products while resources are exhausted.
What’s there not to like?
Problems emerge when crude oil is depleted and it becomes too costly to waste. If oil isn’t ‘waste-ably cheap’ customers cannot afford it, if the crude is not costly enough there are no returns for the driller. Our economic infrastructure has been built assuming cheap petroleum into the far distant future, our empire of ‘stuff’ is stranded by the high-priced variety … meanwhile, costly, difficult to extract crude is all that remains! Cost is the reef upon which the modern world has run aground: there isn’t enough margin remaining after paying the fuel bill to offer as collateral for new loans or to service debts … the fuel bill has to be very high or there is no more fuel!
A hundred years into the petroleum era and there are no ‘innovative’ scalable economic uses for crude other than to burn it! Despite massive conversion losses, cheap oil provides energy returns sufficient to support current living standards, not-wasting under the current regime doesn’t provide anything. Because of the absence of imagination and a shortage of high-cost/real value uses, the exhaustion of low-cost crude means the end of waste-based modernity: there is no ‘Plan B’.
Figure 1: From TFC Charts, continuous Brent monthly contract (click on for big). The top line represents what customers are able to pay, above that price there are no petroleum sales and price must decline as producers holding petroleum products cut their losses. The bottom line represents the ‘floor’ price that drillers must receive otherwise they cannot afford to bring new crude oil to the marketplace. There are a few things to keep in mind at all times:
– Since 2000, each incremental dollar (euro, yen or other currency) produces less crude than the dollar before. That is, today’s dollar produces less crude than yesterday’s dollar, tomorrow’s dollar will produce less crude than today’s. What is important is the relationship between the real cost of gaining fuel relative to the ability of the customers to meet this cost. This relationship is driven by the need of the driller to spend more in order to return less: this is net energy, it is currently declining, at some point net energy will become negative, that is, the use of energy will not provide returns, in the form of credit, sufficient to bring new energy supplies to the market.
– The gross amount of incremental credit available is the amount
that the so-called customers are able to service at any time of roll-over credit that the establishment can cajole from lenders including central banks over a period of time. This incremental ‘serviceability’ or productivity of debt is decreasing … due to the negative feedback effects of high crude prices over time. See Charles A. S. Hall: ‘discretionary’ spending declines because more funds are diverted toward obtaining energy and away from the consumption of other goods and debt service, (PDF warning) Even though finance is creating more credit, that added credit is bringing less crude to the marketplace.
– It doesn’t matter how many discretionary dollars the establishment is able to cajole: at all times, the producer’s dollar is the same as the consumer’s dollar! Alternatively, the gallon of diesel fuel used by the driller is the same gallon (identical energy density) burned by the customer.
A change of the customer’s condition will have an adverse effect on the driller. The customer’s leverage or ability to borrow is increased at the expense of the driller’s leverage … and vice-versa … This is because money represents the same ‘energy cost’ to both.
Currency is nothing more than a proxy for the fuel used by the customer … which is the same fuel required by the driller to bring more crude into the marketplace. The driller cannot use one kind of dollar to gain fuel while the customer uses a different kind to waste the fuel.
Because modern ‘labor’ is waste, the customer must borrow … or some firm or institution must borrow for him. Gregor suggests workers were able to gain greater amounts in wages in the past when fuel was less costly: wages are credit, high wages represent the historical productivity of credit. Prices cannot rise further because the ability of customers to earn (borrow) is constrained by (relatively) high crude prices, the productivity of credit is diminished.
There are two sets of borrowers: customers and drillers. Both need to borrow to gain fuel. It costs more for the driller because he is constrained by geology while the customer is limited only by access to credit itself/wasting infrastructure. The relationship between the sets of borrowers conforms to game theory:
Figure 2: Energy relationships in 1998 and prior, drillers and customers each borrow or don’t borrow. Not borrowing by either meant no economy and no petroleum produced which obviously did not occur. Both customers and drillers chose to borrow: drillers added to excess petroleum capacity making fuel more affordable. Customer borrowing became added gross domestic product (GDP). This amplified driller borrowing which made even more crude available at still lower prices!
There was no need to allocate between drillers or customers, they could ‘have it all’: by March, 1999 the world was …
The famous cover for the Economist Magazine: it was an ugly cover … it was also incorrect about the future.
From 1998 onward, the productivity of each dollar invested in crude production over time has continually declined. This is the basis for the argument that Peak Oil occurred in 1998: that the baleful economic effects predicted to occur after Peak Oil started to be felt in 2000. To gain more crude oil drillers were required to add more wells, each well was more costly than the last, each well offered less crude oil than previous wells: the effect of this effort has been felt by oil consumers who have had to compete with the drillers for each dollar of credit.
Figure 3: Post-1998, brutal new game, new mutually-assured-destruction theory!
Borrowing by customers returns less GDP, borrowing by drillers returns less crude. When drillers borrow alongside their customers, they cannot keep pace because demand is easier to create than supply: automobiles are more easily had than new oil fields. Attempting to add to GDP (borrowing by customers) increases demand for crude which exhausts inexpensive fields faster, this in turn adds to the credit requirements of the drillers.
– When drillers borrow alongside customers for diminished return, borrowing costs pyramid. The outcome is the same as when neither drillers nor customers borrow, there is no economy, all are bankrupted by credit costs.
– The choice is for the customer to borrow at the expense of the driller or the other way around. Both customer and driller must compete for the same credit dollar: one gains at the expense of the other. The customers’ need for funds is absolute, they must borrow more than drillers or they cannot buy anything and there is no GDP growth. Drillers need for funds is absolute, they must borrow more than the customers otherwise there is less fuel for the customers:
Figure 4: Bakken output declines by Darwinian: when drillers cannot borrow, local oversupply of crude cannot be sold to meet costs, the drillers retire drilling rigs. Meanwhile, Bakken wells deplete rapidly, there is no way for drillers to ‘catch up’ after they have stopped drilling. If crude is not affordable now it will be less affordable — to both customers and drillers — tomorrow.
A few more things to keep in mind as we descend into the net-energy rat hole:
– Oil prices can only decline as there is diminished returns on each energy dollar … diminished GDP, diminished credit availability, diminished ability to meet ever-higher real extraction costs. Real energy costs will increase relative to the ability to meet them … even when nominal costs decline. The result is a net-energy death spiral or ‘energy deflation’ similar to Irving Fisher’s Debt Deflation. Whatever the fuel price happens to be at any given time it is too high. The price falls to meet the market, but fuel is removed from the market because of the drop in price, the ongoing shortage reduces the ability of customers to meet the price which is still too high … etc. The ‘real’ price of petroleum becomes higher over time accelerated by inadvertent ‘conservation by other means’.
– The inability of drillers to meet costs or to borrow sufficiently is illustrated by Royal Dutch Shell’s pathetic efforts to drill exploratory wells in the Chukchi and Beaufort Seas, (Rolling Stone):
The year closed on a particularly low note when, on New Year’s Eve, the Kulluk – one of two drilling rigs Shell sent to the Arctic – broke free from its tow ship in rough weather and ran agroundon the rocky coast of Stikalidak Island while carrying more than 150,000 gallons of diesel. But even before this mishap, the experiment had already been a severe disappointment to the company. In July, the Kulluk’s sister ship, the Noble Discoverer, slipped its anchorage and narrowly avoided a similar fate. Construction problems and equipment failures delayed drilling; just a day after work finally began in September, the Noble Discoverer had to stop again to make way for an incoming ice floe more than 30 miles long. An oil spill containment dome failed a required safety inspection, “crushed like a beer can” by underwater pressure. The Coast Guard, which is already investigating the Noble Discoverer for criminally inadequate pollution and safety controls, is now launching an investigation of the Kulluk incident. And in further bad news for Shell (and the Arctic), the Environmental Protection Agency announced yesterday that both the Kulluk and the Noble Discoverer repeatedly violated the Clean Air Act during the 2012 season.
The Kulluk is a 30-year old drilling barge that had been mothballed for 20 years before being brought back into service, the Noble Discoverer is 37-year old rust-bucket intended for duty in the relatively placid Gulf of Mexico. Shell’s Arctic effort is an improvised, cost- and corner-cutting jury rig rather than a serious effort, which would cost tens of billions of dollars and require many years of preparation that Shell seems unwilling to invest.
– Pretty much all the oil that has been- recovered since 1858 has been wasted in automobiles and to fight wars. When shortages appear, the contestants for the oil that remains will be militaries and drivers.
– When net energy becomes negative — when the cost to extract oil cannot be met by the customer — there will be physical shortages. These shortages will be permanent: oil that cannot be afforded by customers in the present will not be magically affordable when these customers are poorer in the future. There will be no further rationing by access to credit, reduced amounts of oil will not deliver additional credit.
– Oil producing states tend to be autocratic: look for Norway, Denmark, the US, Canada and Mexico to become single-party states like Saudi Arabia or Iran. Because of autocrats ability to control access to energy, they will gain ascendancy with their populations’ eager consent. What is at stake for Americans and the West is democracy itself: a choice between the right to have a say in our own affairs versus the false-promises of energy-driven ‘prosperity’ offered by autocrats … the choice between driving a car or having a functioning republic.
– Oil shortages will manifest themselves as food shortages: even though there is likely to be plenty of food in general, there will be areas without food due to distribution problems.
– The time frame is less than two years then the world becomes net energy negative. At that point there is no turning the clock back. Not every oil producing region is showing diminished returns, these exceptions are the remaining large conventional fields that offer equal- or greater returns for each energy-dollar invested in them. At current rates of draw, these fields are being depleted rapidly. It is not necessary to note the field or the rate of decline, only to note the price of crude relative to the ability of the customer to meet that price. The time that remains to our current way of doing business is how long it takes for these last conventional fields to decline.
– This in turn is the time remaining to ‘prepare’: to move yourself or your family to a more pleasant place, to become an activist, to find a less petroleum-dependent job, to learn a post-petroleum skill or gain a post-petroleum avocation. When the US becomes net energy negative, the amounts of fuel available will diminish sharply. So to will be the ability of ordinary citizens to access that fuel … this will be so until a new allocation regime is in place, likely to be some form of hard rationing. In the new regime, the only citizens that will be free from the reach of authorities will be those who do not use fossil fuels or petroleum at all.
EDIT: Coal, nuclear, hydro-power, solar and wind, natural gas and other prime movers are dependent upon cheap, plentiful supplies of petroleum to power the necessary ships, trucks, trains and other forms of transportation. When supplies of petroleum diminish (finger cutting across throat gesture).
Off the keyboard of Monsta666
Discuss this article at the Diner Newz Channels Table inside the Diner.
So 2012 has ended and we can look forward to another year tentatively wondering if 2013 will finally be the year when TEOTWAWKI arrives. In a morbid kind of way we find ourselves in a most peculiar position; on the one hand we wish for extra time to get some extra preps in but on the other we almost wish for it to come and finally get rid of the doomer fatigue that seems to plaguing the old veteran doomers. I know it is next to impossible predicting what will come in 2013 with any degree of certainty. In fact predicting such stuff is largely a fool’s game which could explain why economists and politicians like to base their careers on such predictions. Still, despite this fact I am willing to lay my neck on the line and try and predict what may come about in the following year. I just hope my predictions are not so bad so I end up being a head shorter.
The beginning of the year promises to start with a bang as we get front row seats on how the fiscal cliff will be handled. Even now I wonder as I type this on December 30th whether I have started too early with the guessing game and should allow the year to end properly before dishing out the predictions to see if a deal is finally made on the eleventh hour. If the worst does indeed come to pass we can expect a series of ($370 billion) tax hikes and ($230 billion) spending cuts which will amount to about $600 billion. Seeing as that is half the entire deficit one has to wonder how that will affect the economy. I should add that the main thing that has kept the US afloat has been this wild deficit spending, without it we are likely to see a big plunge in growth rates if we can even believe the massaged GDP numbers. According to Filch Ratings they are saying that this fiscal cliff could cut world GDP growth in half. And toadd to all these fiscal cliff dramas is the fact that Timothy Geithner recently stated that the US will hit its debt ceiling of $16.394 trillion on December 31st 2012 and can only extend this limit by two months at which point the US would default so at this point congress will have to decide on what to do about the fiscal cliff AND debt ceiling.
What seems most likely to me is the debt ceiling will be raised while the payroll tax holiday will be allowed to expire; people will need to make more payments towards Medicare, long-term unemployed benefits will end and people will see a hike in personal taxes. To me I predict and this is only based on a hunch that the Bush-cuts, at least for the vast majority of Americans, will be extended for a little longer. However if we are to assume the worst then the combination of taxes rises will cost the average American $3,500 or $2,000 for middle-earners which consist of 60% of the population. Scary numbers and the results should be pretty predictable if this cliff really comes to pass. One need only look at the experiences of the UK and other European countries who engaged in cuts to see what will happen. Not only did those cuts cause a recession but they did not even reduce the budget as much as promised. In fact if the subsequent recession is bad enough then deficits could even rise on the count of lower tax revenues and higher expenses that need to be paid for the rising unemployment. On this end I predict the deficit will be cut but only to about $900-800 billion.
As for broader US energy situation, I foresee softening prices for oil with WTI oil prices likely to remain around the $90 mark and may even dip as low as $75 if the fiscal cliff induced recession really bites hard, a bold prediction perhaps especially coming from a peak oiler. The shale gas situation should see some more dramas developing here as the rig count for gas has consistently been dropping throughout this year.
US Active rigs engaged in oil/gas drilling, according to Baker Hughes.
Seeing as these shale gas wells have such steep decline rates it seems quite possible that a peak of natural gas production will come at some point in 2013. As a result I predict natural gas prices to exceed $5 per million BTUs. These higher natural gas costs are likely to raise energy bills for the average US consumer thus reducing discretionary incomes even further. Speaking of high costs the drought of 2012 is also likely to lead to an inflation in food prices although I do not expect it to hit the wallets of the American too badly, the ones that are likely to suffer the most from these food price hikes are the people who live in poorer nations that rely on US food exports.
So with all those points put into consideration, I predict a recession coming (official one that is) for the US how big it will be is an interesting question…
2013 promises to offer much of the same as 2012, despite an almost year long recession that only showed growth in the quarter following the Olympics Cameron seems hell bent on carrying out further austerity measures. It is all done under the misguided belief that spending cuts will reduce the colossal deficit. It doesn’t take a genius to see this strategy has clearly failed in mainland Europe but in typical Tory fashion which takes clear abandon of common sense they will consider the UK a special case that is different to the irresponsible pigs. Problem is the fundamentals of high debt:
UK Public Debt with growth projections until 2015.
And exploding deficit says there is not much difference between the two and despite assertions to the contrary these cuts have done nothing to bring the deficit down. England’s deficit for the financial year of 2012/13 is projected to be even higher than the financial year of 2011/12. For those unfamiliar the austerity measures only began in earnest in 2012.
In fairness to Cameron as big as the public debt problem is it is not the main issue. You see if you aggregate British private and public sector debt then the amount comes to 507% GDP! What’s more it maybe even as high as 900% if you want to include liabilities and obligations such as public sector pensions. That is no typo! It is all the product of an economy that is too heavily centred on banks not to mention having a debt based monetary system (again no word in the media or schools about how money is REALLY made) but that is another story that deserves its own tale… To put this into perspective the PIIGS states of Portugal, Ireland, Italy, Greece and Spain have total debt loads of 356%, 663%, 314%, 267% and 363% respectively. The only thing staving Britain from bankruptcy is the low interest rates it pays on bonds but those low rates can’t last forever especially if foreign investors finally catch on we are broke… It would seem the EU crisis can have some unintended benefits for Britain!
In any case with higher energy bills, petrol, housing and food prices coupled with anaemic growth in wages it is hard to see anything but another year of recession. Overall I predict the economy will contract over the full course of the year but “official” unemployment will hover around the same total which is 7.8% or 2.51 million people. I should add however that this unemployment is clearly massaged as many unemployed people will be shifted into training programs that go nowhere or the unemployed will be encouraged to become “self-employed” for one hour a week… In addition some of the people on job seekers will be booted out of their benefits. Nothing will really change as a result of these shenanigans but Cameron can at least look smug with the outstanding improving figures these games will produce.
I can see the papers trumpeting any news that suggest extra jobs are being created; the thing they will be loath to mention is the fact most of these jobs are part-time or worse zero contract hour jobs which pay hardly anything. It continues to amaze me how senior economists such as Stephanie Flanders can continue to be baffled that service jobs paying £6 an hour for 30 or less hours a week cannot create a recovery! It is times like this where I almost want to hide the fact I studied economics…
As for the energy situation in England well the island is mostly tapped out. The North Sea continues to post double digit decline rates (this year it is 18%) and could even dip below 1mb/d next year which is a far cry from its peak of 2.7 mb/d in 1999. Hardly any mention of this in the media but it will have a significant effect on the economy as we will need to import more expensive oil (assuming demand does not fall) and that will increase the trade AND fiscal deficit. The same story holds true for natural gas although as usual the government has the hair brained idea that UK fracking of shale gas can somehow solve that problem. In any case the overall energy strategy for the UK can at best be described as muddled and the name of the game seems to be denial. If we can deny the worsening energy situation hard enough then maybe, just maybe, it will go away and solve itself. Alas it is never so. My advice, look at the energy bills as an indicator of how much gas and oil this country has. The onward trend is up. Oil prices have only levelled off recently due to the poor economy and the continued postponing of the planned rises in fuel tax duty. We can expect those breaks in fuel duty to end going into January 2013 however. My prediction for UK gas prices is it will top £1.50 a litre for unleaded petrol at some point in 2013.
I am almost at a loss to say what will happen in the EU. Upon reflection of 2012 I am actually a little surprised by how well the people from the PIIGS nations are taking austerity considering the sky-high unemployment and worsening future outlook. It cannot last and it is only a matter of time before Europe experiences its own “Arab Springs”. Saying that I do not see an implosion of the Euro as an imminent event so I am predicting there will still be a Euro come the end of 2013. Super Mario has made his intentions very clear that he will buy bonds in unlimited quantities to keep European banks afloat. While I am not suggesting this can ever be the ultimate solution I do think if Mario keeps true to his words then the sinking ship should hold for another year. Italian and Spanish bonds which are arguably the most important factors to consider have declined in recent months in light of this news so it is having its intended effect.
What’s more the temporary rescue funds provided used to help Greece, Ireland and Portugal will become permanent with the establishment of the European Stability Mechanism (ESM). This coupled with the relaxation of meeting various fiscal targets and the likely restructuring (politically correct way of describing a default) of Greek debts should ensure some measure of stability so that this charade can go on a little longer. Sure these measures are never a REAL solution but they do buy time which is what can kicking is all about. I am sure if need be extraordinary measures will be taken to safe to the Euro as there is no way the Euro will collapse on the year Merkel runs for election this coming November.
As always though, it is the issue of growth that will continue to be an issue that can undermine all the plans mentioned above. I don’t think it really counts as a prediction to say Greece, Spain and Italy will experience further recessions as austerity measures continued to bite. What becomes harder to predict is how Germany and some of the northern states will fair. The Bundesbank currently projects that growth for the German economy will be around 0.4% in 2013. Considering how these predictions are invariably over optimistic I will stick my neck out on this one and predict an overall recession for Germany in 2013. Could get burnt as the call is a little dicey but let us see how things fair out, eh?
The Far East, which for the purpose of this article consists of the Asian tigers (Hong Kong, Singapore, South Korea and Taiwan) plus China and Japan. These economies are generally regarded by many pundits as the future of the world economy with the influence of west waning in favour of the east. Indeed some go so far to claim that the 21st century will be the Asian century in the same token the 20th century was the US and 19th UK. Yet when we look back on 2012 we find the growth rates of several of these economies have been slipping.
To take the poster child of Asia let us look at China which posted a robust growth rate of 7.2% for the last quarter (if you can even believe the numbers). While this may sound impressive it has been the seventh consecutive quarter of declining growth. However seeing as much of their governmental figures are manufactured to the extent that even Li Keqiang – the favourite to become the next head of state – suggests that the figures are manmade we might need to consider that maybe, just maybe these numbers are bogus. As usual most of the mainstream press seem to ignore this inconvenient fact preferring to side with the China bulls. Fact is the best way to gauge China’s economic performance is not through GDP numbers but by monitoring electricity production/consumption, rail cargo volume and bank lending (as recommended by Li Keqiang). On that front China’s performance has not been doing so well with some regions reporting a 10% year-on-year decline. It remains to be seen how accurate this form of measuring is but what we can say is that since 2008 China has depended less on exports and more on investments to drive its economy. What is more investment now makes up a whopping 48% of GDP. To put this into context Japan and South Korea; who are other export driven economies that are also heavily dependent on fixed capital investments reached a peak investment rate of just under 40% of GDP.
Such a high investment figure suggests there is likely to be numerous bubbles as there an oversupply AND misallocation of capital, witnesses the ghost cities, bridges to nowhere and empty malls as proof of this wasted industrial capacity. So what do I predict for 2013 for China you ask? Well the Chinese government will NEVER report negative growth numbers so I can only predict growth if I hope to be right. However I do think China will actually grow in real terms not by much but some however since we can say the numbers are so fudged we will never really know how right (or wrong) my prediction will be, well I suppose there is always the chance of another Chinese revolution and in that case I would definitely be wrong if I predicted growth. But I don’t think the time has come for that… Yet!
As for the other economies of Asia Japan continues to experience more woes with recessions and more surprising their balance of trade going negative for a number of quarters. For an export nation to have the value of their imports exceed exports for numerous months can only be described as a disaster. To stop the rot newly elected president Shinzō Abe has pledged to fully open the money printing press spigot to devalue the yen. In addition in an attempt to shore excess imports of fossil fuels and bring back the trade deficit to the positives he has foolishly pledged to restart Japan’s nuclear plants. I guess nuclear disasters don’t have the impact they once had or consensus based group think is unusually strong in Japan… In any case despite such measures I do not predict many good things for the land of the rising sun and see another recession in 2013 with Abe being the next prime minister to pass through the revolving doors of Kantei soon after 2013. Some people suggest that Japan will be the surprise package that implodes financially due to its burgeoning public debt levels of 235.8% GDP but I do not see that crisis happening in 2013 later certainly but not now. For the crisis to really take effect bond rates need to rise and since about 90% of bonds are held by Japanese investors  the risk of interest rates rising quickly are not high, for now. The number of foreigner holders of Japanese bonds is rising however due to the fact that Japanese pension pay-outs to pensioners now exceeds pension contributions from existing employed workers so in time interest payments on bonds will rise.
The Asian tigers should see more promising growth and I expect them to show more positive results for 2013 so I will make a fairly bullish prediction and say that growth for these economies will exceed about 3%. A fun fact to keep in mind is that South Korea’s economy is heavily based on big conglomerates which are known as chaebol in South Korea. In fact the five largest chaebol control 57% of the GDP of South Korea so if you want to monitor the countries fortunes just look out for how Samsung, Hyundai, LG, SK and Lotte are performing.
It is hard to make any firm bets on what the outlook for the global economy will be for 2013 especially since the whole fiscal cliff issue has yet to be resolved. What we can say with some degree of certainty is the economic conditions in Europe are likely to worsen as further austerity measures are applied. Greece has been in a solid recession for many years and there is little evidence to think why this should not continue. As for the other PIIGS nations, wage reductions will be made in order to make the southern European states more competitive but this will lower economic output and increase unemployment. Expect to see more protests and strained nerves as the economic troubles we have seen in Greece begin to spread in earnest to Spain and Italy and as always low economic growth will lead to more bank problems/bails outs. These lower wages will also harm Germany who is a major exporter to these regions and since those nations are poorer they will buy less BMWs.
Poor performances in Europe is also likely to negatively impact other exporting nations such as China and the Asian tigers so growth is likely to slow there as well. Japan on the other hand will continue losing ground to its competitors so at best they will see further stagnation but more likely there will be another recession. The low interest rates in Japan and its perception as a safe haven will insure the Yen remains strong much to the chagrin of its exporting industries.
As for overall growth of the world economy, it is likely that there will be some growth overall but it will be small and it will be less than what we have seen for 2012. I will not discount the possibility of an outright global recession especially if the fiscal cliff is handled poorly in the US. Other issues to be aware of is the effects of the 2012 drought which is likely to lead to food inflation across the globe. The poorer countries in Africa the Middle-East and India will suffer to a disproportionate degree to these higher food prices. This will lower growth in those regions as incomes become squeezed and we cannot discount the possibility of food riots erupting in localised regions if prices rise high enough.
On the energy front 2013 should mark a few interesting landmarks namely that global coal consumption is likely to exceed oil for the first time in 60 years. This has come about because oil production since 2005 has roughly plateaued at 74mb/d while coal production has ramped up due to high growth of Asian nations which primarily use coal for electricity generation.
However these Asian nations have not just increased their consumption of coal, they have also increased their thirst for oil and 2013 should also mark the time when total oil consumption of the developed OECD countries will fall below 50% which will be an unprecedented event.
Predicting oil prices for 2013 will be a challenge, on the one hand you have rising demand with a constrained supply which will serve to higher prices but at the same time the on-going demand destruction in the West will lower prices. As a result I predict that average Brent prices of oil will for the most part stagnant at around $110 for the year which has been the average price for 2012. I cannot say with any certainty when we will leave the plateau in global crude oil production but according to the grapevine the year I keep hearing is 2015 which finally enough is what a former expert in the IEA is suggesting. In any case, global oil net exports are likely to decrease over 2013 as has been the general trend since 2005.
 = US Senate leader Harry Reid voices fiscal cliff fear (BBC)
 = All-out U.S. ‘fiscal cliff’ could cut world growth in half: Fitch (REUTERS)
 = Geithner: Debt Limit of $16.39 Trillion Will Be Met New Year’s Eve (CNSNews)
 = Q&A: The US fiscal cliff (BBC)
 = Rotary Rig Count (Baker Hughes)
 = Total Planned* Public Spending (UK Public Spending)
 = Office for National Statistics (ONS) data
 = Osborne Says He Needs More Time to Rid U.K. of Budget Deficit (Bloomberg)
 = Total Debt in Selected Countries Around the World (Global Finance)
 = The End of Britain (MoneyWeek)
 = UK unemployment falls by 82,000, says ONS (BBC)
 = North Sea oil tax revenues fall offers glimpse into a diminishing future (the guardian)
 = Labour loses fuel rise delay vote (BBC)
 = All hope not lost (The Economist)
 = Spanish Bond Yields Drop to 8-Month Low (Bloomberg)
 = Bundesbank Slashes 2013 German Growth Forecast to 0.4% (Bloomberg)
 = China’s economy slows but data hints at rebound (BBC)
 = China’s GDP is “man-made,” unreliable: top leader (REUTERS)
 = Capital controversy (The Economist)
 = Yen Weakens to 20-Month Low on Abe BOJ Pledge; Euro Drops (Bloomberg)
 = IMF urges Japan to tackle debt problem (Financial Times: Google headline name to see full story)
 = OECD: Japan Public Debt in ‘Uncharted Territory’ (Wall Street Journal)
 = Japanese pension assets fall as payouts exceed contributions (Pensions & Investments)
 = Business as usual for South Korea’s chaebol under Park (Yahoo! News)
 = Oil will decline shortly after 2015, says former IEA oil expert (The Oil Drum)
 = Updated “Gap” Charts, using annual data through 2011 (The Oil Drum: westexas)
Off the keyboard of Monsta666
Discuss this article at the Energy Table inside the Diner
Energy despite its utmost importance is a topic that doesn’t receive much attention and is a subject that is poorly understood particularly in the mainstream media or even economics. It is curious to think that this is the case especially if we consider that without energy nothing would literally happen. Taken in this context it is easy to see why energy could be regarded as the most critical resource for without it there would be no life on planet Earth.
It seems that one of the major reasons we forget about the importance of energy and take it for granted is the fact energy is ubiquitous in modern day society. If one cares to look outside their window it is likely they will see numerous cars whizzing around at high speeds (they are high if we compared their speeds to humans and animals which was the historic norm before the industrial age). If one thinks about this last point it can be quite an enlightening process; how much energy does it take to cart an object that weighs in excess of 1000kg at around 30MPH? Then think all this energy can be found in a single gallon of gasoline/diesel. And as startling as this thought maybe we can say we consume even more energy in total in our homes and workplaces and that is despite the fact there are over one billion cars – which nearly all run on oil – running across our planet. Quite a thought isn’t it? 
So in short we can say we are addicted to using energy. However this should not come as any surprise because man has always needed SOME energy to ensure his survival. The amount needed for basic survival is relatively modest however since the only real energy source man needed at first was direct consumption through food to stay alive. However through time man found other external inputs of energy that made life easier for him. The heat from fire allowed man to keep warm not to mention allowed him to cook and provide a source of light in the dark. Domesticated animals also reduced the burden of labour in the fields and allowed great productivity not just in hunting but also in managing the fields when man shifted to agriculture.
These external inputs of energy not only allowed man to extend his natural range of environments he could live on but it also spurred growth in population and prosperity as external energy meant more of the burden of labour could be shifted away from man. As time went on the number the external sources of energy increased and so did the amount of energy used by man. It was not until man began harnessing fossil fuels in earnest however that his energy use suddenly exploded. The graph below can clearly attest to this fact.
While this final fact is widely known it is still quite difficult to fully grasp and appreciate how much of a boon these fossil fuels were to mankind. To illustrate just how much energy we can obtain from these fossil fuels I feel it is best to apply a little maths. To make comparisons between different energy sources it is necessary to know what a BTU is. For people unfamiliar with the term a BTU stands for British Thermal Unit and one BTU represents the energy required to heat one pound (454g) of water by one degree Fahrenheit which comes to approximately 1055 joules.  Now if we consider the most expensive fossil fuel, which is oil, then we will find that burning one barrel of oil (42 US gallons or 159 litres) releases 5.8 million BTUs or 6.1 gigajoules of energy.  These large numbers may seem rather abstract and arcane but if we covert this total energy content into man hours then the facts can be more easily absorbed. The energy delivered from 6.1 gigajoules would equate to a man spending 1.45 million kilocalories. If we assume a man consumes somewhere between 100-200 kilocalories an hour then that would mean a barrel of oil produces the equivalent amount of energy as 7,290-14,597 hours of labour depending on how hard the man works. Assuming there are 48 forty hour weeks a year that equates to 3.8-7.6 years of human labour. Armed with this information it makes you wonder how we can ever consider a barrel of oil is overpriced at $90 dollars a barrel when one barrel delivers the equivalent of 3.8-7.6 years labour!
To put this into an even greater context if we decided to pay the man a decent wage of $10 an hour then we would need to pay him anywhere between $73,000-$146,000 to deliver the same amount of work as a barrel of oil. With this perspective it becomes clear what a boon fossil fuels have been proven to be as effectively we have been using these fuels as “energy slaves” due to the fact they produce so much energy at such a low cost. With energy being so cheap it becomes obvious just how profitable the exercise of replacing man and animal labour with capital powered by cheap fossil fuels has been as the price differential between the two markets is simply enormous. And let us not forget in all this that oil is the most expensive fossil fuel in today’s market and its price is abnormally high when compared to historical prices so it was even more economical in the past than it is today.
Saying all that we do need to recognise the flaws in making such comparisons or more generally, using BTUs in general. That is not all work achieved with a certain resource can be easily substituted with another resource for example no amount of men dragging a car would make it travel at 30MPH as could be achieved if the car was powered by oil. Therefore the figures above can only deal with the total energy expenditure and allow comparisons on that end but they say nothing about the quality of the work achieved nor can they describe how easily the work can be substituted with another resource. This is an important concept to grasp as quite often it is stated that we can substitute oil consumption with renewable, nuclear or even coal and gas energy which while such statements are true to a certain extent, not all uses can be substituted for. Coal, renewables and nuclear energy cannot be easily made into a liquid fuel as these energy inputs are primarily used for electrical generation or home heating. It is this lack of fungiblity which results in people often making the distinction between a liquid fuel crisis and an energy crisis as these are two distinct phenomenon as each crisis poses a different set of problems and will therefore require a different set of solutions (assuming solutions even exist) to solve or manage if there are no viable solutions.
Despite these limitations or perhaps because of them we can reach certain conclusions. The increase in the availability and affordability of energy has done more than reduce the cost and amount of work that can be achieved. It has also played a big part in increasing productivity. This increase in productivity comes because, as described in the previous paragraph, there are certain forms of work that can only be utilised with fossil fuels and these activities cannot be done regardless of the amount of men employed in particular tasks. Jobs that are energy intensive such mining, steel production or heavy vehicle transport all require intense and constant inputs of energy. Since they require intense AND constant energy inputs these tasks cannot easily be substituted into labour nor is renewable energy a suitable candidate for substitution due to its intermittent nature. However it cannot be denied all these economic activities contribute to increased productivity as less labour will be needed to be deployed to accomplish these tasks (assuming these tasks could be completed at all without fossil fuels).
Many mining operations such as the tar sands mining operation in Canada would be much harder if not outright impossible without cheap abundant energy inputs provided by fossil fuels.
A more troubling fact does emerge from this however and that is it becomes apparent that our modern industrial society is heavily dependent on not just abundant energy but cheap energy to remain viable. Even today with oil priced at $90 a barrel which is still an excellent deal when taken in the context described above this price is sufficiently high that many developed economies struggle to grow quickly due to the “high” energy costs as we are repeatedly reminded by the media. In fact these high energy costs have resulted in much demand destruction in the major OECD countries for oil that are most sensitive to price changes as demonstrated in graph below.
This demand destruction primarily manifests itself through higher unemployment and reduced oil consumption from remaining employed workers due to a decline in real wages. This high price of oil has not curbed demand in all countries as the developing economies, which are less sensitive to price increases, continue to demand more of the product. This demand increase of the non-OECD countries is roughly equal to the decreased demand in the OCED countries so overall global oil demand has remained constant at around 30 billion barrels per annum.
The more significant trend has not been with changing patterns in oil consumption but with the changing energy mix in which the global economy utilises. Since oil is priced at $90 it is the most expensive fossil fuel in the market. In the US the next most expensive fossil fuel is coal which is priced at $68.15 per short ton. Seeing as one short ton on average releases 19.6 million BTUs of energy which is roughly three times that of a barrel of oil we see that coal is just over 4 times cheaper than oil on BTU basis. In light of this fact it would be natural to think and expect coal consumption to rise rapidly during this period however coal consumption has actually declined in recent years (for the US at least) because the cheapest fuel in recent years has been natural gas which reached levels as low as $1.90 per million BTUs earlier this year. Seeing as coal has been priced generally been priced at around $3 per million BTUs for the last three years it is easy to see how natural gas consumption has surged.
It should be noted however that at this present moment natural gas is currently priced at $3.48 per million BTUs (accurate at time of writing) and seems to be rising in the past few months. If natural gas price rise much further then coal will become the cheapest fossil fuel in the US and demand for this fuel should increase provided the trend of rising natural gas prices continues. If we talk about fuels on a global basis the story is quite different as globally coal is by far the cheapest commodity and it is these cheap prices that have caused global coal demand to surge in recent years. The high price of oil and the fact that main users of coal (Eastern Asia) have seen rapid economic growth in recent years have been other contributing factors in the increase in the amount of coal demanded.
If this trend of growing coal consumption continues it will not be long before coal becomes the top source of energy in the world and this is a fact that is likely to catch many people by surprise. Saying that, one should throw some caution to this current trend of surging coal demand as it is quite likely that growth in the global economy will slow down and may even decline. If that is the case then the rate of increase in demand will decline or demand may even decline entirely should the world enter a global recession.
Another important consideration and one that is almost universally overlooked in the mainstream is the concept of Energy Return on Energy Invested (ERoEI). In the second part of this topic I will discuss this concept in more detail and also explore the laws of thermodynamics that is largely neglected in the media and economics in general. Do not worry; it will not be a boring physics session with lots of large scary numbers. In any case I wish all diners a merry Christmas and a happy new year.
 = World Vehicle Population Tops 1 Billion Units (WARDSAUTO)
 = British thermal unit (Btu) (Business Dictionary)
 = Barrel of oil equivalent (Wikipedia)
 = Coal News and Markets (EIA)
 = What is the average heat (Btu) content of U.S. coal? (EIA)
 = Coal News and Markets Archive (EIA)
 = Commodity Prices (CNN Money)
Off the keyboard of Gail Tverberg
Published on Our Finite World on October 17, 2012
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
We keep hearing about the many benefits of natural gas–how burning it releases less CO2 than oil or coal, and how it burns with few impurities, so does not have the pollution problems of coal. We also hear about the possibilities of releasing huge amounts of new natural gas supplies, through the fracking of shale gas. Reported reserves for natural gas also seem to be quite high, especially in the Middle East and the Former Soviet Union.
But I think that people who are counting on natural gas to solve the world’s energy problems are “counting their chickens before they are hatched”. Natural gas is a fuel that requires a lot of infrastructure in order for anything to “happen”. As a result, it needs a lot of up-front investment, and several years time delay. It also needs changes on the consumption side (requiring further investment) that will allow this natural gas to be used. If the cost is higher than competing fuels, this becomes a problem as well.
In many ways, natural gas consumption is captive to other things that are happening in the economy: an economy that is industrializing rapidly will easily be able to consume more natural gas, but an economy in decline will find it hard to scrape together funds for new ways of doing what was done previously, now with natural gas. Increased use of renewables seems to call for additional use of natural gas for balancing, but even this is not certain, because in many parts of the world, natural gas is a high-priced imported fuel. Political instability, often linked to high oil and food prices, creates a poor atmosphere for new Liquefied Natural Gas (LNG) facilities, no matter how attractive the pricing may seem to be.
In the US, we have already “hit the wall” on how much natural gas can be absorbed into the system or used to offset imports. US natural gas production has been flat since November 2011, based on EIA data (Figure 1, below).
Even with this level of production, and a large shift in electricity production from coal to natural gas, natural gas is still on the edge of “maxing out” its storage system before winter hits (Figure 2, below).
Figure 2. US natural gas in storage, compared to five-year average. Figure prepared by US Energy Information Administration, Weekly Natural Gas Storage Report as of October 5, 2012.
World Natural Gas Production
The past isn’t the future, but it does give a little bit of understanding regarding what the underlying trends are.
World natural gas production/consumption (Figure 3) has been increasing, recently averaging about 2.7% a year. If we compare natural gas to other energy sources, it has been second to coal in terms of the amount by which it has contributed to the total increase in world energy supplies in the last five years (Figure 4). This comparison is made by converting all amounts to “barrels of oil equivalent”, and computing the increase between 2006 and 2011.
Figure 4. Increase in energy supplied for the year 2011, compared to the year 2006, for various fuels, based on BP’s 2012 Statistical Review of World Energy data.
In order for natural gas to be an energy savior for the world, natural gas consumption would need to increase far more than 2.7% per year, and outdistance the increase in coal consumption each year. While a modest increase from past patterns is quite possible, I don’t expect a miracle from natural gas.
Natural Gas: What Has Changed?
The basic thing that has changed is that fracking now permits extraction of shale gas (in addition to other types of gas), if other conditions are met as well:
- Selling price is high enough (probably higher than for other types of natural gas produced)
- Water is available for fracking
- Governments permit fracking
- Infrastructure is available to handle the fracked gas
Even before the discovery of shale gas, reported world natural gas reserves were quite high relative to natural gas production (63.6 times 2011 production, according to BP). Reserves might theoretically be even higher, with additional shale gas discoveries.
In addition, the use of Liquified Natural Gas (LNG) for export is also increasing, making it possible to ship previously “stranded” natural gas, such as that in Alaska. This further increases the amount of natural gas available to world markets.
What Stands in the Way of Greater Natural Gas Usage?
1. Price competition from coal. One major use for natural gas is making electricity. If locally produced coal is available, it likely will produce electricity more cheaply than natural gas. The reason shale gas recently could be sold for electricity production in the United States is because the selling price for natural gas dropped below the equivalent price for coal. The “catch” was that shale gas producers were losing money at this price (and have since dropped back their production). If the natural gas price increases enough for shale gas to be profitable, electricity production will again move back toward coal.
Many other parts of the world also have coal available, acting as a cap on the amount of fracked natural gas likely to be produced. A carbon tax might change this within an individual country, but those without such a tax will continue to prefer the lower-price product.
2. Growing internal natural gas use cuts into exports. This is basically the Exportland model issue, raised by Jeffrey Brown with respect to oil, but for natural gas. If we look at Africa’s natural gas production, consumption, and exports, this is what we see:
Figure 5. Africa natural gas production, consumption, and exports, based on BP’s 2012 Statistical Review of World Energy.
In Africa, (mostly northern Africa, which exports to Europe and Israel), consumption has been rising fast enough that exports have leveled off and show signs of declining.
3. Political instability. Often, countries with large natural gas resources are ones with large oil resources as well. If oil production starts to drop off, and as a result oil export revenue drops off, a country is likely to experience political instability. A good example of this is Egypt.
Figure 6. Egypt’s oil production and consumption, based on BP’s 2012 Statistical Review of World Energy.
No matter how much natural gas Egypt may have, it would not make sense for a company to put in an LNG train or more pipeline export capability, because the political situation is not stable enough. Egypt needs oil exports to fund its social programs. The smaller funding amount available from natural gas exports is not enough to make up that gap, so it is hard to see natural gas making up the gap, even if it were available in significant quantity.
Iran is a country with large natural gas reserves. It is reportedly looking into extracting natural gas for export. Again, we have a political stability issue. Here we have an international sanctions issue as well.
4. “Need the natural gas for myself later” view. A country (such as Egypt or the United States or Britain) that has been “burned” by declining oil production may think twice about exporting natural gas. Even if the country doesn’t need it now, there is a possibility that vehicles using natural gas could be implemented later, in their own country, thus helping to alleviate the oil shortage. Also, there are risks and costs involved with fracking, that they may not choose to incur, if the benefit is to go to exporters.
5. Cost of investment for additional natural gas consumption. In order to use more natural gas, considerable investment is needed. New pipelines likely need to be added. Homeowners and businesses may need to purchase gas-fired furnaces to raise demand. If it is decided to use natural gas vehicles, there is a need for the new vehicles themselves, plus service stations and people trained to fix the new vehicles. Additional natural gas storage may be needed as well. Additional industrial production is difficult to add, unless wages are low enough that the product being sold will be competitive on the world market.
Existing “pushes” toward better insulation have the effect of reducing the amount of natural gas used for heating homes and businesses, so work in the opposite direction. So do new techniques for making nitrogen-based fertilizer using coal, rather than using natural gas.
6. Touchy balance between supply and consumption. If additional production is added, but additional uses are not, we have already seen what happens in the United States. Storage facilities get overly full, the price of natural gas drops to unacceptably low levels, and operators scramble to cut back production.
The required balance between production and consumption is very “touchy”. It can be thrown off by only a few percent change in production or consumption. Thus an unusually warm winter, as the United States experienced last year, played a role in the overly full storage problem. A ramp up of production of only a few percent can also cause an out of balance situation. Unless a developer has multiple buyers for its gas, or a “take or pay” long-term contract, it risks the possibility that the gas that is has developed will not be wanted at an adequate price.
7. Huge upfront investment requirements. There are multiple requirements for investing in new shale gas developments. Each individual well costs literally millions of dollars to drill and frack. The cost will not be paid back for several years (or perhaps ever, if the selling price is not high enough), so debt financing is generally needed. If fracking is done, a good supply of water is needed. This is likely to be a problem in dry countries such as China. There is a need for trained personnel, drilling rigs of the right type, and adequate pipelines to put the new gas into. While these things are available in the United States, it likely will take years to develop adequate supplies of them elsewhere. All of the legislation that regulates drilling and enables pipeline building, needs to be in place as well. Laws need to be friendly to fracking, as well.
Growth in Exports to Date
Exports grew as a percentage of natural gas use through about 2007 or 2008.
Figure 7. World natural gas exports as percentage of total natural gas produced, by year, based on EIA data (older years) and BP’s 2102 Statistical Review of World Energy for 2010 and 2011.
In recent years, natural gas exports have fallen slightly as a percentage of total gas extracted. Thus, if world natural gas supplies have risen by an average of 2.7% per year for the past five years, exports available for import have risen a little less rapidly than the 2.7% per year increase. A major ramp-up in export capability would be needed to change this trend.
While we hear a lot about the rise in exports using LNG, its use does not seem to be adding to the overall percentage of natural gas exported. Instead, there has been a shift in the type of export capacity being added. There are still a few pipelines being added (such as the Nord Stream pipline, from Russia to Germany), but these are increasingly the exception.
The Shale Gas Pricing Debate
Exactly what price is needed for shale gas to be profitable is subject to debate. Shale gas requires the payment of huge up-front costs. Once they are drilled and “fracked,” they will produce for a long period. Company models assume that they will last as long as 40 years, but geologist Arthur Berman of The Oil Drum claims substantial numbers are closed down in as few as six years, because they are not producing enough natural gas to justify their ongoing costs. There is also a question as to whether the best locations are drilled first.
Logically a person would expect shale-gas to be quite a bit more expensive to produce than other natural gas because it is trapped in much smaller pores, and much more force is required to extracted it. In terms of the resource triangle that I sometimes show (Figure 8, below), it epitomizes the low quality, hard to extract resource near the bottom of the triangle that is available in abundance. We usually start at the top of the resource triangle, and extract the easiest and cheapest to extract first.
Berman claims that prices $8.68 or higher per million Btu are needed for profitability of Haynesville Shale, and nearly as high prices are needed to justify drilling other US shale plays. The current US price is about $3.50 per million Btu, so to be profitable, the price would need to be more than double the current US price. Prices for natural gas in Europe are much higher, averaging $11.08 per million Btu in September 2012, but shale gas extraction costs may be higher there as well.
The US Energy Information Administration admits it doesn’t know how the economics will work out, and gives a range of projected prices. It is clear from the actions of the natural gas industry that current prices are a problem. According to Baker Hughes, the number of drilling rigs engaged in natural gas drilling has dropped from 936 one year ago to 422, for the week ended October 12, 2012.
Backup for Renewables
One area where natural gas excels is as a back up for intermittent renewable energy, since it can ramp up and down quickly. So this is one area where a person might expect growth. Such a possibility is not certain, though:
1. How much will intermittent renewables continue to ramp up? Governments are getting poorer, and have less funds available to subsidize them. They do not compete well on when they go head to head with fossil fuels, nuclear, and hydroelectric.
2. When intermittent renewables are subsidized with feed in tariffs, and requirements that wind power be given priority over fossil fuels, it can provide such an unlevel playing field that it is difficult for natural gas to be profitable. This is especially the case in locations where natural gas is already higher-priced than coal.
The Societal “Recipe” Problem
Our economy is built of many interdependent parts. Each business is added, taking into account what businesses already are in place, and what laws are in effect. Because of the way the economy currently operates, it uses a certain proportion of oil, a certain proportion of natural gas, and more or less fixed proportions of other types of energy. The number of people employed tends to vary, too, with the size of the economy, with a larger economy demanding more employees.
Proportions of businesses and energy use can of course change over time. In fact, there is some flexibility built in. In particular, in the US, we have a surplus of natural gas electricity generating units, installed in the hope that they would be used more than they really are, and the energy traded long distance. But there is less flexibility elsewhere. The cars most people drive use gasoline, and the only way to cut back is to drive less. Our furnaces use a particular fuel, and apart from adjusting the temperature setting, or adding insulation, it is hard to make a change in this. We only make major changes when it comes time to sell a car, replace a furnace, or add a new factory.
In my view, the major issue the world has been dealing with in recent years is an inadequate supply of cheap oil. High priced oil tends to constrict the economy, because it causes consumers to cut back on discretionary spending. People in discretionary industries are laid off, and they tend to also spend less, and sometimes default on their loans. Governments find themselves in financial difficulty when they collect fewer taxes and need to pay out more in benefits. While this issue is still a problem in the US, the government has been able to cover up this effect up in several ways (ultra low interest rates, a huge amount of deficit spending, and “quantitive easing”). The effect is still there, and pushing us toward the “fiscal cliff.”
The one sure way to ramp up natural gas usage is for the economy as a whole to grow. If this happens, natural gas usage will grow for two reasons: (1) The larger economy will use more gas, and (2) the growth in the economy will add more opportunities for new businesses, and these new businesses will have the opportunity to utilize more natural gas, if the price is competitive.
I have compared the situation with respect to limited oil supply as being similar to that of a baker, who is trying to bake a batch of cookies that calls for two cups of flour, but who has only one cup of flour. The baker is able to make only half a batch. Half of the other ingredients will go unused as well, because the batch is small.
To me, discovering that we have more natural gas than we had before, is analogous to the baker discovering that instead of having a dozen eggs in his refrigerator, there are actually two dozen in his refrigerator. In fact, he finds he can even go and buy more eggs, if he is willing to pay double the price he is accustomed to paying. But the eggs really do not fix the missing cup of flour problem, unless someone can find a way to change eggs into flour very cheaply.
Basic Energy Types
To me, the most basic forms of energy resources are (1) coal and (2) oil. Both can be transported easily, if it is possible to extract them. Natural gas is very much harder to transport and store, so it is in many ways less useful. It can be made work in combination with oil and coal, because the use of coal and oil make it possible to build pipelines and make devices to provide compression to the gas. With coal and oil, it is also possible to make and maintain electric transmission lines to transport electricity made with natural gas.
I sometimes talk about renewable energy being a “fossil fuel extender,” because they hopefully make fossil fuels “go farther”. In some ways, I think natural gas is an extender for oil and coal. It is hard to imagine a society powered only by natural gas, because of the difficulties in using it, and the major changes required to use it exclusively.
In the earliest days, natural gas was simply a “waste product” of oil extraction. It was “flared” to get rid of it. In many parts of the world, natural gas is still flared, because the effort it takes to collect it, transport it, and make it into a useful product is still too high.
The hope that natural gas will be the world’s energy savior depends on our ability to make this former waste product into a product that will replace oil and coal. But unless we can put together an economy that needs and uses it, most of it probably will be left in the ground. The supposedly very high reserves will do us no good.
Off the Keyboard of Gail Tverberg
Published originally on Our Finite World on August 29th, 2012
Discuss this article at the Epicurean Delights Smorgasbord of the Diner
The tie between energy supply, population, and the economy goes back to the hunter-gatherer period. Hunter-gatherers managed to multiply their population at least 4-fold, and perhaps by as much as 25-fold, by using energy techniques which allowed them to expand their territory from central Africa to virtually the whole world, including the Americas and Australia.
The agricultural revolution starting about 7,000 or 8,000 BCE was next big change, multiplying population more than 50-fold. The big breakthrough here was the domestication of grains, which allowed food to be stored for winter, and transported more easily.
The next major breakthrough was the industrial revolution using coal. Even before this, there were major energy advances, particularly using peat in Netherlands and early use of coal in England. These advances allowed the world’s population to grow more than four-fold between the year 1 CE and 1820 CE. Between 1820 and the present, population has grown approximately seven-fold.
When we look at the situation on a year-by-year basis (Table 1), we see that on a yearly average basis, growth has been by far the greatest since 1820, which is the time since the widespread use of fossil fuels. We also see that economic growth seems to proceed only slightly faster than population growth up until 1820. After 1820, there is a much wider “gap” between energy growth and GDP growth, suggesting that the widespread use of fossil fuels has allowed a rising standard of living.
The rise in population growth and GDP growth is significantly higher in the period since World War II than it was in the period prior to that time. This is the period during which growth in which oil consumption had a significant impact on the economy. Oil greatly improved transportation and also enabled much greater agricultural output. An indirect result was more world trade, which enabled production of goods needing inputs around the world, such as computers.
When a person looks back over history, the impression one gets is that the economy is a system that transforms resources, especially energy, into food and other goods that people need. As these goods become available, population grows. The more energy is consumed, the more the economy grows, and the faster world population grows. When little energy is added, economic growth proceeds slowly, and population growth is low.
Economists seem to be of the view that GDP growth gives rise to growth in energy products, and not the other way around. This is a rather strange view, in light of the long tie between energy and the economy, and in light of the apparent causal relationship. With a sufficiently narrow, short-term view, perhaps the view of economists can be supported, but over the longer run it is hard to see how this view can be maintained.
Energy and the Hunter-Gatherer Period
Humans, (or more accurately, predecessor species to humans), first arose in central Africa, a place where energy from the sun is greatest, water is abundant, and biological diversity is among the greatest. This setting allowed predecessor species a wide range of food supplies, easy access to water, and little worry about being cold. Originally, predecessor species most likely had fur, lived in trees, and ate a primarily vegetarian diet, like most primates today. The total population varied, but with the limited area in which pre-humans lived, probably did not exceed 1,000,000, and may have been as little as 70,000 (McEvedy).
Man’s main source of energy is of course food. In order to expand man’s range, it was necessary to find ways to obtain adequate food supply in less hospitable environments. These same techniques would also be helpful in countering changing climate and in mitigating deficiencies of man’s evolution, such as lack of hair to keep warm, limited transportation possibilities, and poor ability to attack large predators. The way man seems to have tackled all of these other issues is by figuring out ways to harness outside energy for his own use. See also my previous post, Humans Seem to Need External Energy.
The earliest breakthrough seems to be the development of man’s ability to control fire, at least 1 million years ago (Berna). The ability to cook food came a very long time ago as well, although the exact date remains uncertain. A diet that includes cook food has a number of advantages: it reduces chewing time from roughly half of daily activities to as little as 5% of daily activities, freeing up time for other activities (Organ); it allows a wider range of foods, since some foods must be cooked; it allows better absorption of nutrients of food that is eaten; it allows smaller tooth and gut sizes, freeing up energy that could be used for brain development (Wrangham).
There were other advantages of fire besides the ability to cook: it also allowed early humans to keep warm, expanding their range in that way; it gave them an advantage in warding off predators, since humans could hurl fiery logs at them; and it extended day into night, since fire brought with it light. The wood or leaves with which early man made fire could be considered man’s first external source of energy.
As man began to have additional time available that was not devoted to gathering food and eating, he could put more of his own energy into other projects, such as hunting animals for food, making more advanced tools, and creating clothing. We talk about objects such as tools and clothing that are created using energy (any type of energy, from humans or from fuel), as having embedded energy in them, since the energy used to make them has long-term benefit. One surprising early use of embedded energy appears to have been making seaworthy boats that allowed humans to populate Australia over 40,000 years ago (Diamond).
The use of dogs for hunting in Europe at least 32,000 years ago was another way early humans were able to extend their range (Shipman). Neanderthal populations, living in the same area in close to the same time-period did not use dogs, and died out.
With the expanded territory, the number of humans increased to 4 million (McEvedy) by the beginning of agriculture (about 7,000 or 8,000 BCE). If population reached 4 million, this would represent roughly a 25-fold increase, assuming a base population of 150,000. Such an increase might be expected simply based on the expanded habitat of humans. This growth likely took place over more than 500,000 years, so was less than 0.01% per year.
Beginning of Agriculture – 7,000 BCE to 1 CE
Relative to the slow growth in the hunter-gatherer period, populations grew much more quickly (0.06% per year according to Table 1) during the Beginning of Agriculture.
One key problem that was solved with the beginning of the agricultural was, How can you store food until you need it? This was partly solved by the domestication of grains, which stored very well, and was “energy dense” so it could be transported well. If food were limited to green produce, like cabbage and spinach, it would not keep well, and a huge volume would be required if it were to be transported.
The domestication of animals was another way that food could be stored until it was needed, this time “on the hoof”. With the storage issue solved, it was possible to live in settled communities, rather than needing to keep moving to locations where food happened to be available, season by season. The domestication of animals had other benefits, including being able to use animals to transport goods, and being able to use them to plow fields.
The ability to grow animals and crops of one’s own choosing permitted a vast increase the amount of food (and thus energy for people) that would grow on a given plot of land. According to David Montgomery in Dirt: The Erosion of Civilization, the amount of land needed to feed one person was
- Hunting and gathering: 20 to 100 hectares (50 to 250 acres) per person
- Slash and burn agriculture: 2 to 10 hectares (5 to 25 acres) per person
- Mesopotamian floodplain farming: 0.5 to 1.5 hectares (1.2 to 3.7 acres) per person
Thus, a shift to agriculture would seem to allow a something like a 50-fold increase in population, and would pretty much explain the 56-fold increase that took place between from 4 million in 7,000 BCE, to 226 million at 1 CE.
Other energy advances during this period included the use of irrigation, wind-powered ships, metal coins, and the early use of iron of tools (Diamond) (Ponting). With these advances, trade was possible, and this trade enabled the creation of goods that could not be made without trade. For example, copper and tin are not generally mined in the same location, but with the use of trade, they could be combined to form bronze.
In spite of these advances, the standard of living declined when man moved to agriculture. Hunter-gatherers were already running into limits because they had killed off some of the game species (McGlone) (Diamond). While agriculture allowed a larger population, the health of individual members was much worse. The average height of men dropped by 6.2 inches, and the median life span of men dropped from 35.4 years to 33.1 years, according to Spencer Wells in Pandora’s Seed: The Unforeseen Cost of Civilization.
Deforestation rapidly became a common occurrence, as population expanded. Chew lists 40 areas around the world showing deforestation before the year 1, many as early as 4000 BCE. Montgomery notes that when the Israelites reached the promised land, the better cropland in the valleys was already occupied. In Joshua 17:14-18, Joshua instructs descendants of Joseph to clear as much of the forested land in the hill country as they wish, so they will have a place for their families to live.
Energy, Population, and GDP: Year 1 to 1820
Table 1 shows that during the period 1 to 1000, both population and economic output were very low (population, 0.02% per year; GDP, 0.01% per year). During this period, and as well as in the early agricultural period (between 7,000 BCE and 1 CE), there was a tendency of civilizations that had been expanding to collapse, holding the world’s overall population growth level down. There were several reasons for collapses of well-established societies, including (1) soil erosion and other loss of soil fertility, as people cut down trees for agriculture and for use in metal-making, tilled soil, and used irrigation (Montgomery) (Chew), (2) increasingly complex societies needed increasing energy to support themselves, but such energy tended not to be available (Tainter), (3) contagious diseases, often caught from farm animals, passed from person to person because to population density (Diamond), and (4) there were repeated instances of climate change and natural disturbances, such as volcanoes (Chew).
Even after 1000 CE, growth was limited, due to continued influence of the above types of factors. In most countries, the vast majority of the population continued to live on the edge of starvation up until the last two centuries (Ponting). Most growth came from expanded acreage for farming.
There were exceptions, however, and these were where growth of population and GDP was greatest.
Netherlands. Kris De Decker writes about the growing use of peat for energy in Netherlands starting in the 1100s and continuing until 1700. Peat is partially carbonized plant material that forms in bogs over hundreds of years. It can be mined and burned for processes that require heat energy, such as making glass or ceramics and for baking bread. Because it takes hundreds of years to be formed, mining exhausts it. Mining also causes ecological damage. The availability of peat for fuel was important, however, because there was a serious shortage of wood at that time, because of deforestation due to the pressures of agriculture and the making of metals.
Wind was also important in Holland during the same period. It produced primarily a different kind of energy than peat; it produced kinetic (or mechanical) energy. This energy was used for a variety of processes, including polishing glass, sawing wood, and paper production (De Decker). Measured as heat energy (which is the way energy comparisons are usually made), wind output would have been considerably less than the heat energy from peat during this time period.
Maddison shows population in Netherlands growing from 300,000 in the year 1000 to 950,000 in 1500; 1,500,000 in 1600 and 1,900,000 in 1700, implying average annual population growth rates of 0.23%, 0.46%, and 0.24% during the three periods, compared to world average annual increases of 0.10%, 0.24%, and 0.08% during the same three periods. Netherlands’ GDP increased at more than double the world rates during these three periods (Netherlands: 0.35%, 1.06%, and 0.67%; world: 0.14%, 0.29%, and 0.11%.)
England. We also have information on early fuel use in England (Wigley).
Here, we see that coal use began as early as 1561. To a significant extent coal replaced fire wood, since wood was in short supply due to deforestation. Coal was used to provide heat energy, until after the invention of the first commercially successful steam engine in 1712 (Wikipedia), after which it could provide either heat or mechanical energy. Wind and water were also used to provide mechanical energy, but their quantities remain very small compared to coal energy, draft animal energy, and even energy consumed in the form of food by humans.
Maddison shows population and GDP statistics for the United Kingdom (not England by itself). Again, we see a pattern similar to Netherlands, with UK population and GDP growth surpassing world population and GDP growth, since it was a world leader in adopting coal technology. (For the three periods 1500-1600, 1600-1700, and 1700-1820, the corresponding numbers are Population UK: 0.45%, 0.33%, 0.76%; Population World: 0.24%, 0.08%, 0.46%; GDP UK: 0.76%, 0.58%, 1.02%; GDP World: 0.29%, 0.11%, 0.52%.)
Growth “Lull” during 1600s. Table 1 shows that both population growth and GDP growth were lower during the 1600s. This period matches up with some views of when the Little Ice Age (a period with colder weather) had the greatest impact.
If the weather was colder, crops would likely not have grown as well. More wood would be needed for fuel, leaving less for other purposes, such as making metals. Countries might even been more vulnerable to outside invaders, if they were poorer and could not properly pay and feed a large army.
Coal Age for the World – 1820 to 1920 (and continuing)
When the age of coal arrived, the world had two major needs:
- A heat-producing fuel, so that there would not be such a problem with deforestation, if people wanted to keep warm, create metal products, and make other products that required heat, such as glass.
- As a transportation fuel, so that walking, using horses, and boats would not be the major choices. This severely limited trade.
When coal arrived, it was rapidly accepted, because it helped greatly with the first of these–the need for a heat-producing fuel. People were willing to put up with the fact that it was polluting, especially in the highly populated parts of the world where wood shortages were a problem. With the availability of coal, it became possible to greatly increase the amount of metal produced, making possible the production of consumer goods of many kinds.
Between 1820 and 1920, which is the period when coal came into widespread use, the world’s use of energy approximately tripled (Figure 3). The large increases in other fuels later dwarf this increase, but the use of coal was very significant for the economy. Table 1 at the top of this post shows a fairly consistent rise in GDP growth as coal was added to the energy mix in the 1820 to 1920 period.
With the invention of first commercially successful steam engine in 1712 (Wikipedia), coal could also be used for processes that required mechanical energy, such as milling grain, running a cotton gin, or weaving cloth. It also helped as a transportation fuel, in that it could power a railroad train or steam boat. Thus, it did help with the second major energy need noted above. It was not very suitable for airplanes or for private passenger cars, though.
One invention that was made possible by the availability of coal was the widespread use of electricity. Without coal (or oil), it would never have been possible to make all of the transmission lines. Hydroelectric power of the type we use today was also made possible by the availability of coal, since it was possible to create and transport the metal parts needed. It was also possible to heat limestone to make Portland cement in large quantity. The first meaningful amounts of hydroelectric power appeared between 1870 and 1880, according to the data used in Figure 3.
Agriculture was helped by the availability of coal, mostly through the indirect impacts of more/better metal being available, more ease in working with metals, improved transportation, and later, the availability of electricity. According to a document of the US Department of Census, changes were made which allowed more work to be done by horses instead of humans. New devices such as steel plows and reapers and hay rakes were manufactured, which could be pulled by horses. Later, many devices run by electricity were added, such as milking machines. Barbed-wire fence allowed the West to become cropland, instead one large unfenced range.
Between 1850 and 1930, the percentage of workers in agriculture in the US dropped from about 65% of the workforce to about 22%. With such a large drop in agricultural workers, rising employment in other parts of the economy became possible, assuming there were enough jobs available. If not, it is easy to see how the Depression might have originated.
If we look at the coal data included in Figure 3 by itself, we see that the use of coal use has never stopped growing. In fact, its use has been growing more rapidly in recent years:
The big reason for the growth is coal consumption is that it is cheap, especially compared to oil and in most countries, natural gas. China and other developing countries have been using coal for electricity production, to smelt iron, and to make fertilizer and other chemicals. Coal is very polluting, both from a carbon dioxide perspective, and from the point of view of pollutants mixed with the coal. For many buyers, however, “cheap” trumps “good for the environment”.
A look at detail underlying China’s coal consumption makes it look as though the recent big increase in coal consumption began immediately after China was admitted to the World Trade Organization, in December 2001. With more trade with the rest of the world, China had more need for coal to manufacture goods for export, and to build up its own internal infrastructure. The ultimate consumers, in the US and Europe, didn’t realize that it was their demand for cheap products from abroad that was fueling the rise in world coal consumption.
Addition of Oil to World Energy Mix
Oil was added to the energy mix in very small amounts, starting in the 1860s and 1870s. The amount added gradually increased though the years, with the really big increases coming after World War II. Oil filled several niches:
- It was the first really good transportation fuel. It could be poured, so it was easy to put into a gas tank. It enabled door-to-door transportation, with automobiles, trucks, tractors for the farm, aircraft, and much construction equipment.
- It (and the natural gas often associated with it) provided chemical fertilizer which could be used to cover up the huge soil deficiencies that had developed over the years. Hydrocarbons from oil also provide herbicides and insecticides. Oil also enabled the door-to-door transport of mineral additions to the soil mix, enhancing fertility.
- Oil is very easy to transport in a can or truck, so it works well with devices like portable electric generators and irrigation pumps. It can be used where other fuels are hard to transport, such as small islands, with minimal equipment to make it usable.
- With the huge change in transport enabled by oil, much greater international trade became possible. It became possible to regularly make complex goods, such as computers, with imports from many nations. It also became possible to import necessities, rather than using trade primarily for a few high-value goods.
- Hydrocarbons could be made into medicines, enabling defeat of many of the germs that had in the past caused epidemics.
- Hydrocarbons could be used to make plastics and fabrics, so that wood and crops grown to make fabrics (such as cotton and flax) would not be in such huge demand, allowing land to be used for other purposes.
- Hydrocarbons could provide asphalt for roads, lubrication for machines, and many other hard-to-replace specialty products.
- The labor-saving nature of machines powered by oil freed up time for workers to work elsewhere (or viewed less positively, sometimes left them unemployed).
- The fact that tractors and other farm equipment took over the role of horses and mules after 1920 meant that more land was available for human food, since feed no longer needed to be grown for horses.
If we look at oil by itself (Figure 5, below), we see much more of a curved figure than for coal (Figure 4, above).
My interpretation of this is that oil supply is more constrained than coal supply. Coal is cheap, and demand keeps growing. Oil has been rising in price in recent years, and the higher prices mean that consumers cut back on their purchases, to keep their budgets close to balanced. They can’t afford as many vacations and can’t afford to pave as many roads with asphalt. Oil is still the largest source of energy in the world, but coal is working on surpassing it. In a year or two, coal will likely be the world’s largest source of energy. Together, they comprise about 60 percent of today’s energy use.
If we look at per capita fuel consumption based on the same data as in Figure 3, this is what we see:
Figure 6 indicates that there was a real increase in total per capita energy consumption after World War II, about the time that oil consumption was being added in significant quantity. What happened was that coal consumption did not decrease (except to some extent on a per capita basis); oil was added on top of it.
If we look at world population growth for the same time period, we see a very distinct bend in the line immediately after World War II, as population rose as the same time as oil consumption.
Clearly, the arrival of oil had a huge impact on agriculture. Unfortunately, the chemical fix for our long-standing soil problems is not a permanent ones. Soils need to be viewed as part of an ecological system, with biological organisms aiding in fertility. Soils also need an adequate amount of humus, if they are to hold water well in droughts. There are natural things that can be done to maintain soil fertility (add manure, terrace land, use perennial crops rather than annual crops, don’t till the land). Unfortunately, using big machines dependent on oil, plus lots of chemical sprays, tends to operate in the opposite direction of building up the natural soil systems.
Our Energy Niche Problem
There are other fuels as well, including nuclear, wind energy, solar PV, solar thermal, biofuels, and natural gas. The production of all of these are enabled by the production of oil and coal, because of the large amount of metals involved in their production, and because of the need transport the new devices to a final location.
All of these other fuels tend have their own niches; it is hard for them to fill the big coal-oil niche on the current landscape. Solar thermal and natural gas are both directly heat-producing, and play a role that way. But it is hard to see how adequate metals production would continue with these fuels alone. Of course, with enough electricity, we could create the heat needed for metal production. The catch would be creating enough electricity.
“Cheap” is a very important characteristic of fuels to buyers. Coal is clearly beating out oil now in the area of “cheap”. Natural gas is the only one of the other energy sources that is close to cheap, at least in the United States. The catch with US natural gas is that producers can’t really produce it cheaply, so its long-run prospects as a cheap fuel aren’t good. Perhaps if the pricing issues can be worked out, US natural gas production can increase somewhat, but it is not likely to be the cheapest fuel.
One of the issues related to finding a replacement for oil and coal is that we already have a great deal of equipment (cars, trains, airplanes, farm equipment, construction equipment) that use oil, and we have many chemical processes that use oil or coal as an input. It would be very costly to make a change to another fuel, before the end of the normal lives of the equipment.
Over the long haul, energy sources have played a very large and varied role in the economy. In general, increases in the energy supply seem to correspond to increases in GDP and population. Necessary characteristics of energy supply are not always obvious. We don’t think of low-cost as an important characteristic of energy products, but in the real world, this becomes an important issue.
As we move forward, we face challenges of many types. The world’s population is still growing, and needs to be housed, clothed, and fed. None of the energy sources that is available is perfect. Our long history of using the land to produce annual crops has left the world with much degraded soil. The way forward is not entirely clear.
I will look at some related issues in upcoming posts.
Off the Keyboard of RE
Another “Official” thread to join the Earthquake, Flood, Tornado and Hurricane threads here in the Diner. Main difference, this thread isn’t in “Natural” disasters under Geological and Cosmological Events, its in the Man-Made category under Energy problemos. OK, I know a few of you think HAARP is causing the Weather problems and a few more than that think the Climate change is Anthropogenic, but Blackouts aren’t open to dispute or conspiracy theorizing. They ARE a man made problem.
Anyhow, to lead off this thread, Newz of the Day is that India had a major Blackout Monday Morning during the Rush Hour Commute, knocking out power to more than 300M people. That’s right, power to approximately a population size equal to that of the ENTIRE FSofA!
According to the story, power was being restored after the grid collapse, but meanwhile for a few hours SEWAGE TREATMENT PLANTS went offline also. Once the power goes out for more than a few hours, how long do you think it takes for Cholera to spread through Delhi and Calcutta?
Also according to said story, India is chronically short of electric power with 100sM people still not connected to the grid, and has an aging transmission network in need of upgrade, AND needs to build some NUKES!
Who is gonna front up money for India to upgrade here to Electric v2.0? The guys who did the IPO on Electric v1.0 left with the credit and they ain’t coming back here.
Some speculation on stuff not included in this story. What caused the grid to crash? It is unlikely there was a major surge in demand that overwhelmed the transformers, so likely it came from the supply end. All it really takes is for a couple of decent size power plants to go off line and the rest of them become overloaded unless you can adjust quickly by rolling around Brownouts to the customers. I’ll bet a coupleof plants are just FRESH OUT of Coal to burn here and the municipalities running them are FRESH OUT of MONEY to buy more.
So the Indians are getting the grid up again here, but one has to suspect probably 10% of the customers won’t get their lights back on here anytime too soon if EVER. In order to make sure the Delhi trains keep moving and Calcutta Sewage Plants keep processing the shit, somebodies out on the periphery will have to go back to Candle Power.
How long before Delhi and Calcutta go Lights Out for GOOD? Over/Under on this, 5 years MAX IMHO. When they do, call in the Zombie Squad, that’s 30M people easy who also go Offline.
Probably a bit longer before it’s Lights Out permanently on this side of the pond. Make no mistake though, this Show IS Coming Soon to a Theatre Near You.
Continue reading the main story Related Stories Indian workers protest power cuts Watch Indian students who study on railway platforms
A massive power cut has caused disruption across northern India, including in the capital, Delhi.
It hit a vast swathe of the country affecting more than 300 million people in Punjab, Haryana, Uttar Pradesh, Himachal Pradesh and Rajasthan states.
Power Minister Sushil Kumar Shinde said 60% of the supply had been restored and the rest would be reinstated soon.
It is unclear why supply collapsed, but states using more power than they were authorised to could be one reason.
Mr Shinde said he had appointed a committee to inquire into the causes of the blackout, one of the worst to hit the country in more than a decade.
Travel chaos The outage happened at 02:30 local time (2100 GMT) on Monday after India’s Northern Grid network collapsed.
Monday morning saw travel chaos engulf the region with thousands of passengers stranded when train services were disrupted in Punjab, Haryana and Chandigarh.
Delhi Metro railway services were stalled for three hours, although the network later resumed service when it received back-up power from Bhutan, one official said.
Traffic lights on the streets of the capital were not functioning as early morning commuters made their way into work, leading to gridlock.
Water treatment plants in the city also had to be shut for a few hours.
Officials said restoring services to hospitals and transport systems were a priority.
Power cuts are a common occurrence in Indian cities because of a fundamental shortage of power and an ageing grid. The chaos caused by such cuts has led to protests and unrest on the streets.
Earlier in July, crowds in the Delhi suburb of Gurgaon blocked traffic and clashed with police after blackouts there.
Correspondents say that India urgently needs a huge increase in power production, as hundreds of millions of its people are not even connected to the national grid.
Prime Minister Manmohan Singh has long said that India must look to nuclear energy to supply power to the people.
Estimates say that nuclear energy contributes only 3% to the country’s current power supply. But the construction of some proposed nuclear power stations have been stalled by intense local opposition.
We talk about the possibility of reducing fossil fuel use by 80% by 2050 and ramping up renewables at the same time, to help prevent climate change. If we did this, what would such a change mean for GDP, based on historical Energy and GDP relationships back to 1820?
Back in March, I showed you this graph in my post, World Energy Consumption since 1820 in Charts.
Figure 1. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects and together with BP Statistical Data on 1965 and subsequent. The biofuel category also includes wind, solar, and other new renewables.
Graphically, what an 80% reduction in fossil fuels would mean is shown in Figure 2, below. I have also assumed that non-fossil fuels (some combination of wind, solar, geothermal, biofuels, nuclear, and hydro) could be ramped up by 72%, so that total energy consumption “only” decreases by 50%.
Figure 2. Forecast of world energy consumption, assuming fossil fuel consumption decreases by 80% by 2050, and non fossil fuels increase so that total fuel consumption decreases by “only” 50%. Amounts before black line are actual; amounts after black lines are forecast in this scenario.
We can use actual historical population amounts plus the UN’s forecast of population growth to 2050 to convert these amounts to per capita energy equivalents, shown in Figure 3, below.
Figure 3. Forecast of per capita energy consumption, using the energy estimates in Figure 2 divided by world population estimates by the UN. Amounts before the black line are actual; after the black line are estimates.
In Figure 3, we see that per capita energy use has historically risen, or at least not declined. You may have heard about recent declines in energy consumption in Europe and the US, but these declines have been more than offset by increases in energy consumption in China, India, and the rest of the “developing” world.
With the assumptions chosen, the world per capita energy consumption in 2050 is about equal to the world per capita energy consumption in 1905.
I applied regression analysis to create what I would consider a best-case estimate of future GDP if a decrease in energy supply of the magnitude shown were to take place. The reason I consider it a best-case scenario is because it assumes that the patterns we saw on the up-slope will continue on the down-slope. For example, it assumes that financial systems will continue to operate as today, international trade will continue as in the past, and that there will not be major problems with overthrown governments or interruptions to electrical power. It also assumes that we will continue to transition to a service economy, and that there will be continued growth in energy efficiency.
Based on the regression analysis:
- World economic growth would average a negative 0.59% per year between now and 2050, meaning that the world would be more or less in perpetual recession between now and 2050. Given past relationships, this would be especially the case for Europe and the United States.
- Per capita GDP would drop by 42% for the world between 2010 and 2050, on average. The decrease would likely be greater in higher income countries, such as the United States and Europe, because a more equitable sharing of resources between rich and poor nations would be needed, if the poor nations are to have enough of the basics.
I personally think a voluntary worldwide reduction in fossil fuels is very unlikely, partly because voluntary changes of this sort are virtually impossible to achieve, and partly because I think we are headed toward a near-term financial crash, which is largely the result of high oil prices causing recession in oil importers (like the PIIGS).
The reason I am looking at this scenario is two-fold:
(1) Many people are talking about voluntary reduction of fossil fuels and ramping up renewables, so looking at a best case scenario (that is, major systems hold together and energy efficiency growth continues) for this plan is useful, and
(2) If we encounter a financial crash in the near term, I expect that one result will be at least a 50% reduction in energy consumption by 2050 because of financial and trade difficulties, so this scenario in some ways gives an “upper bound” regarding the outcome of such a financial crash.
Close Connection Between Energy Growth, Population Growth, and Economic Growth
Historical estimates of energy consumption, population, and GDP are available for many years. These estimates are not available for every year, but we have estimates for them for several dates going back through history. Here, I am relying primarily on population and GDP estimates of Angus Maddison, and energy estimates of Vaclav Smil, supplemented by more recent data (mostly for 2008 to 2010) by BP, the EIA, and USDA Economic Research Service.
If we compute average annual growth rates for various historical periods, we get the following indications:
Figure 4. Average annual growth rates during selected periods, selected based on data availability, for population growth, energy growth, and real GDP growth.
We can see from Figure 4 that energy growth and GDP growth seem to move in the same direction at the same time. Regression analysis (Figure 5, below) shows that they are highly correlated, with an r squared of 0.74.
Figure 5. Regression analysis of average annual percent change in world energy vs world GDP, with world energy percent change the independent variable.
Energy in some form is needed if movement is to take place, or if substances are to be heated. Since actions of these types are prerequisites for the kinds of activities that give rise to economic growth, it would seem as though the direction of causation would primarily be:
Energy growth gives rise to economic growth.
Rather than the reverse.
I used the regression equation in Figure 5 to compute how much yearly economic growth can be expected between 2010 and 2050, if energy consumption drops by 50%. (Calculation: On average, the decline is expected to be (50% ^(1/40)-1) = -1.72%. Plugging this value into the regression formula shown gives -0.59% per year, which is in the range of recession.) In the period 1820 to 2010, there has never been a data point this low, so it is not clear whether the regression line really makes sense applied to decreases in this manner.
In some sense, the difference between -1.72% and -0.59% per year (equal to 1.13%) is the amount of gain in GDP that can be expected from increased energy efficiency and a continued switch to a service economy. While arguments can be made that we will redouble our efforts toward greater efficiency if we have less fuel, any transition to more fuel-efficient vehicles, or more efficient electricity generation, has a cost involved, and uses fuel, so may be less common, rather than more common in the future.
The issue of whether we can really continue transitioning to a service economy when much less fuel in total is available is also debatable. If people are poorer, they will cut back on discretionary items. Many goods are necessities: food, clothing, basic transportation. Services tend to be more optional–getting one’s hair cut more frequently, attending additional years at a university, or sending grandma to an Assisted Living Center. So the direction for the future may be toward a mix that includes fewer, rather than more, services, so will be more energy intensive. Thus, the 1.13% “gain” in GDP due to greater efficiency and greater use of “services” rather than “goods” may shrink or disappear altogether.
The time periods in the Figure 5 regression analysis are of different lengths, with the early periods much longer than the later ones. The effect of this is to give much greater weight to recent periods than to older periods. Also, the big savings in energy change relative to GDP change seems to come in the 1980 to 1990 and 1990 to 2000 periods, when we were aggressively moving into a service economy and were working hard to reduce oil consumption. If we exclude those time periods (Figure 6, below), the regression analysis shows a better fit (r squared = .82).
Figure 6. Regression analysis of average annual percent change in world energy vs world GDP excluding the periods 1980 to 1990 and 1990 to 2000, with world energy percent change the independent variable.
If we use the regression line in Figure 6 to estimate what the average annual growth rate would be with energy consumption contracting by -1.72% per year (on average) between 2010 and 2050, the corresponding average GDP change (on an inflation adjusted basis) would be contraction of -1.07% per year, rather than contraction of -0.59% per year, figured based on the regression analysis shown in Figure 5. Thus, the world economy would even to a greater extent be in “recession territory” between now and 2050.
Population Growth Estimates
In my calculation in the introduction, I used the UN’s projection of population of 9.3 billion people by 2050 worldwide, or an increase of 36.2% between 2010 and 2050, in reaching the estimated 42% decline in world per capita GDP by 2050. (Calculation: Forty years of GDP “growth” averaging minus 0.59% per year would produce total world GDP in 2050 of 79.0% of that in 2010. Per capita GDP is then (.790/ 1.362=.580) times 2010′s per capita income. I described this above as a 42% decline in per capita GDP, since (.580 – 1.000 = 42%).)
Population growth doesn’t look to be very great in Figure 4, since it shows annual averages, but we can see from Figure 7 (below) what a huge difference it really makes. Population now is almost seven times as large as in 1820.
Figure 7. World Population, based on Angus Maddison estimates, interpolated where necessary.
Since we have historical data, it is possible to calculate an estimate based on regression analysis of the expected population change between 2010 and 2050. If we look at population increases compared to energy growth by period (Figure 8), population growth is moderately correlated with energy growth, with an r squared of 0.55.
Figure 8. Regression analysis of population growth compared to energy growth, based on annual averages, with energy growth the independent variable.
One of the issues in forecasting population using regression analysis is that in the period since 1820, we don’t have any examples of negative energy growth for long enough periods that they actually appear in the averages used in this analysis. Even if this model fit very well (which it doesn’t), it still wouldn’t necessarily be predictive during periods of energy contraction. Using the regression equation shown in Figure 8, population growth would still be positive with an annual contraction of energy of 1.72% per year, but just barely. The indicated population growth rate would slow to 0.09% per year, or total growth of 3.8% over the 40 year period, bringing world population to 7.1 billion in 2050.
Energy per Capita
While I did not use Energy per Capita in this forecast, we can look at historical growth rates in Energy per Capita, compared to growth rates in total energy consumed by society. Here, we get a surprisingly stable relationship:
Figure 9. Comparison of average growth in total world energy consumed with the average amount consumed per person, for periods since 1820.
Figure 10 shows the corresponding regression analysis, with the highest correlation we have seen, an r squared equal to .87.
Figure 10. Regression analysis comparing total average increase in world energy with average increase in energy per capita, with average increase in world energy the independent variable.
It is interesting to note that this regression line seems to indicate that with flat (0.0% growth) in total energy, energy per capita would decrease by -0.59% per year. This seems to occur because population growth more than offsets efficiency growth, as women continue to give birth to more babies than required to survive to adulthood.
Can We Really Hold On to the Industrial Age, with Virtually No Fossil Fuel Use?
This is one of the big questions. “Renewable energy” was given the name it was, partly as a marketing tool. Nearly all of it is very dependent on the fossil fuel system. For example, wind turbines and solar PV panels require fossil fuels for their manufacture, transport, and maintenance. Even nuclear energy requires fossil fuels for its maintenance, and for decommissioning old power plants, as well as for mining, transporting, and processing uranium. Electric cars require fossil fuel inputs as well.
The renewable energy that is not fossil fuel dependent (mostly wood and other biomass that can be burned), is in danger of being used at faster than a sustainable rate, if fossil fuels are not available. There are few energy possibilities that are less fossil fuel dependent, such as solar thermal (hot water bottles left in the sun to warm) and biofuels made in small quantities for local use. Better insulation is also a possibility. But it is doubtful these solutions can make up for the huge loss of fossil fuels.
We can talk about rationing fuel, but in practice, rationing is extremely difficult, once the amount of fuel becomes very low. How does one ration lubricating oil? Inputs for making medicines? To keep business processes working together, each part of every supply chain must have the fuel it needs. Even repairmen must have the fuel needed to get to work, for example. Trying to set up a rationing system that handles all of these issues would be nearly impossible.
GDP and Population History Back to 1 AD
Angus Maddison, in the same data set that I used back to 1820, also gives an estimate of population and GDP back to 1 AD. If we look at a history of average annual growth rates in world GDP (inflation adjusted) and in population growth, this is the pattern we see:
Figure 11. Average annual growth in GDP in energy and in population, for selected periods back to the year 1 AD.
Figure 11 shows that the use of fossil fuels since 1820 has allowed GDP to rise faster than population, for pretty much the first time. Prior to 1820, the vast majority of world GDP growth was absorbed by population growth.
If we compare the later time periods to the earlier ones, Figure 11 shows a pattern of increasing growth rates for both population and GDP. We know that in the 1000 to 1500 and 1500 to 1820 time periods, early energy sources (peat moss, water power, wind power, animal labor) became more widespread. These changes no doubt contributed to the rising growth rates. The biggest change, however, came with the addition of fossil fuels, in the period after 1820.
Looking back, the question seems to become: How many people can the world support, at what standard of living, with a given quantity of fuel? If our per capita energy consumption drops to the level it was in 1905, can we realistically expect to have robust international trade, and will other systems hold together? While it is easy to make estimates that make the transition sound easy, when a person looks at the historical data, making the transition to using less fuel looks quite difficult, even in a best-case scenario. One thing is clear: It is very difficult to keep up with rising world population.
As we come to the close of the Age of Oil and the automobile, the Older Technology of the Railroads is often held up as a possible solution, at least in the medium term. Jimmy Kuntsler in particular is a fan of this idea. In this article, I’m going to look at the many variables involved with a conversion back to Rail technology as an intermediate level solution to the more general collapse of other Transport Technologies more recently evolved, namely Air and Truck.
Today I took a trip with my students on the Alaska Railroad which runs a right of way from Seward all the way up to Fairbanks. We just did a small part of the trip, from Wasilla to Talkeetna. This right of way was carved out beginning in 1903, and has gone through a succession of Bankruptcies, and currently is Goobermint Owned by the State of Alaska, which bought it fromDa Federal Goobermint in 1985, which bought it out of Private ownership in 1967, after the 1964 Earthquake basically trashed the Anchorage Hub.
In 1903 a company called the Alaska Central Railroad began to build a rail line beginning at Seward, near the southern tip of the Kenai Peninsula in Alaska, northward. The company built 51 miles (82 km) of track by 1909 and went into receivership. This route carried passengers, freight and mail to the upper Turnagain Arm. From there, goods were taken by boat at high tide, and by dog team or pack train to Eklutna and the Matanuska-Susitna Valley. In 1909, another company, the Alaska Northern Railroad Company, bought the rail line and extended it another 21 miles (34 km) northward. From the new end, goods were floated down the Turnagain Arm in small boats. The Alaska Northern Railroad went into receivership in 1914.
About this time, the United States government was planning a railroad route from Seward to the interior town of Fairbanks. President Taft authorized a commission to survey a route in 1912. The line would be more than 470 miles long and provide an all-weather route to the interior. In 1914, the government bought the Alaska Northern Railroad and moved its headquarters to “Ship Creek,” later called Anchorage. The government began to extend the rail line northward.
In 1917, the Tanana Valley Railroad in Fairbanks was heading into bankruptcy. It owned a small 45-mile (72 km) 3 ft (914 mm) (narrow-gauge) line that serviced the towns of Fairbanks and the mining communities in the area as well as the boat docks on the Tanana River near Fairbanks.
The government bought the Tanana Valley Railroad, principally for its terminal facilities. The government extended the south portion of the track to Nenana and later converted the extension to standard gauge.
In 1923 they built the 700-foot (213 m) Mears Memorial Bridge across the Tanana River at Nenana. This was the final link in the Alaska Railroad and at the time, was the second longest single-span steel railroad bridge in the country. U. S. President Warren G. Harding drove the golden spike that completed the railroad on July 15, 1923, on the north side of the bridge. The railroad was part of the US Department of the Interior.
The railroad was greatly affected by the Good Friday Earthquake which struck southern Alaska in 1964. The yard and trackage around Seward buckled and the trackage along Turnagain Arm was damaged by floodwaters and landslides. It took several months to restore full service along the line.
In 1967, the railroad was transferred to the Federal Railroad Administration, an agency within the newly created US Department of Transportation.
In 1985, the state of Alaska bought the railroad from the U.S. government for $22.3 million, based on a valuation determined by the US Railway Association. The state immediately invested over $70 million on improvements and repairs that made up for years of deferred maintenance. The purchase agreement prohibits the Alaska Railroad from paying dividends or otherwise returning capital to the state of Alaska (unlike the other Alaska quasi-entities: Alaska Permanent Fund Corporation, Alaska Housing Finance Corporation (AHFC), and Alaska Industrial Development and Export Authority (AIDEA)).
If you look at the Map of the AK Railroad and what part of the State it actually covers, it is quite small really. It just goes around 470 miles in a REALLY big patch of land. Despite the great WEALTH of minerals in Alaska which even this short track of rail can transport, it STILL is not a really profitable venture overall, and less profitable all the time as the Energy to run it becomes ever more expensive. Maintenance costs each year are horrendous, because the freeze-thaw cycle plays havoc with the tracks, and really the whole railroad track itself can only be used for maybe 6 months of the year.
Nevertheless, despite the fact it isn’t really Profitable and never has been, it is still LESS energy and materials consumptive than the road system is, as limited ALSO as this is up here in Alaska. Laying right of way for even a 2 Lane road is quadruple what a Rail Track takes, and then it all has to be graded and paved over. A Rail Track only takes Gravel, some wood ties, thin metal rails and spikes to hold them in place. It is way simpler to build and less energy consumptive than Roadways are to build.
On the trip up, the conductor who has been riding this Railway for some 40 years pitched out stories along the way over the Intercom. He throws out Newspapers along the way to people who have cabins and even McMansions along the route that are pretty much inaccessible by roads. A bit of an anachronism now since just about for the whole route I was able to access 4G Wireless Internet so all those cabins also can access the net this way.
Anyhow, for the most part even in the fairly populated stretch between Wasilla and Talkeetna, this railroad line is the ONLY tie to “civilization” these folks have on a daily basis, and only for about half the year. Rest of the time, they are pretty much cut off, and most of them will bring in their Supplies during the summer months by a variety of Oil powered means, 4 wheelers and Float Planes mostly since there are lakes all over the place to land a float plane on. Once the fuel is no longer available for that transport, it seems unlikely to me that just the Railroad can supply these folks, though maybe it can with some adjustments.
What the railroad is mainly operating on now is the Tourist Trade, of which we were a small local part. For each of us, it cost $70 to take the railroad all of about 50 miles of its total route, a 1.5 hour trip overall roughly. Basically not a whole lot different length of travel than you would take on the LIRR Commuter Train if you live middle of Long Island. That was for a ONE WAY trip, we took a Schoolbus back.
Obviously, without the Tourist Trade and people paying these exorbitant prices for the chance to look out the windows at the great beauty of the Last Great Frontier, making this Railroad run at a profit is probably impossible, at least under current Global monetary parameters anyhow.
I do suspect the Alaska Railroad will last longer than the Road system will though. It can still be powered by Coal and Steam, in fact there is a plan in the works I believe to bring a Steam Powered Engine back on the tracks to pull a Tourist Train on this line. Right now though, all the Trains both for Tourists and for Coal from the Healy Mine are pulled by Diesel-Electric Locomotives. Impressive Machines they are also. It may be possible to keep these behemoths running for a while since there still is some Oil left on the Slope and perhaps some more also in ANWR, though without a huge infrastructure project to build pipelines into ANWR, even if the Oil is there getting it OUT will be close to impossible. If the Oil can be retrieved, there is also a small Refinery around Fairbanks which can supply the rairoad with Diesel. But of course also, there are all the Maintenance issues with these Locomotives, and I am not sure the local Foundries and metal shops are capable of doing a lot more than superficial repairs right now.
The isues with the climate and so forth are not as extreme with the rail system down in the Lower 48, but the system is of course also much larger. Trying to maintain all this track and all the cars to pull MOSTLY bulk commodities will be extremely difficult, and getting either Diesel or Coal even to these trains will also become increasingly more expensive and difficult. It may last longer than the Carz and Trucks, but it still always is and was a system that was subsidized by Cheap Energy, and in fact NEVER made a REAL Profit at anytime in its existence, even right at the beginning. Building this system created a HUGE overhang of Debt, and Railroad Companies have been going Bust perpetually since the first Transcontinetal Railroad was built. In the end, the remaining Railroad system that exists on a Passenger Level is Goobermint Owned pretty much exclusively now. Private Entrepreneurs don’t buy passenger railroads. Even buying Commodity Shipping Railroads is a dicey proposition, ask Warren Buffet about that one with Burlington-Northern.
Regardless of ABSOLUTE profitability in Railroads though, on a Societal level with so many people in so many places we still do need some means to move goods to them, and Railroads can do this way better than Trucks and Planes can, to be sure. Fact is, that like large Ships, Locomotives can be designed to run on Bunker Fuel, which is basically Unrefined Oil. Cars and Trucks and Planes can never run on Bunker Fuel. Because of the SCALE of a Lcoomotive, it can burn virtually anything, and in fact could even be Nuke Powered. Not that I support that idea, I am just saying it is way more flexible in it’s energy sourcing than the later transport schemes are.
As I walked around Talkeetna, it was very pleasant. Even had its own Brewery! For the exceedingly small population that lives in Talkeetna (even less than where I live in the lower Mat-Su Valley), I think they prbably can be self sufficient in most things and need little from the outside world to be delivered to them by train, even if the train only came through once a month or so during the summer months. There IS plenty of energy to run trains along this 470 mile track for a long time to come, if you use Bunker fuel and the Coal in the Healy Mines to run Steam driven turbines instead of Diesel-Electric. It won’t last FOREVER, but it can provie a transtitionary mechanism for moving the comodities and trade goods as necessary between comunities. NOT a People Mover. Like the Carz, trains are a big waste of energy to move Peoples around, and peoples do not NEED to move around so much over such great distances. perhaps it should be as it once was, a Once in Lifetime thing to make a Great Journey out beyond your Little Town, and that which only a few Adventurous Souls would undertake at all to begin with. WHY do you realy need to leave the Little Town of Talkeetna anyhow? Or the Little Town of Anatevka for that matter either?
Unfortunately of course, the Little Town of Talkeetna will suffer here quite soon as the Tourist Trade drops off the Map, and while overall I think it could be Self-Sufficient, MOST of the people currently living there are not READY for such a life yet. So what is most likely to occur is that Talkeetna will in fact DEPOPULATE,and the Railroad if it manages to continue onward will stop there No More. Many Cabins are going Empty now as the economics spin downward.
Talkeetna and places like it though, while they will not be comfortable or all that pleasant once this spin down really gets rolling are WAY better places to be than the Big Shities. Truly, this is the LAST GREAT FRONTIER. In my heart, I believe that anyone who wil make it through the Zero Point will be living in places like this, at the far edge of industrial civilization bordering on the full primitive. I am GLAD I am here now, I am GLAD the course of my life brought me to this wonderful place where there remains some semblance of the purity that once existed on this Planet. So much is GONE now, and it will not be repaired in even the lifetimes of our Grandchildren in the places Industrialization and Capitalism have already destroyed it. Not gone here though, not completely, not YET on the LAST GREAT FRONTIER.