1. Things hidden in plain sight
2. A Fourth Turning
3. Limited Resources
4. It’s different this time
3. Limited Resources
Forty years ago, a teenager in China gathered sticks for two days. On the third day, he carried two bundles of firewood to his village and returned with two kilos of rice. The two kilos of rice would provide 7000 calories to his family. Three days of his labour had consumed 6000 calories, giving and energy return on energy invested (EroEI) of around 1.17. That teenager is now a Professor at a University in the West of Ireland, and much else has changed both in China and in the rest of the world.
To fully grasp the changes to ERoEI that have taken place since the invention of the steam engine, a process that encouraged the replacement slave labour by fuel powered machine. That led to the later development of the horseless carriage, a rash of innovations and eventually to the events surrounding the Wall Street Crash of 1929. Hence that Crash is a good place to start.
There are a number of parallels with the situations of today. There was a concern the the world was about to run out of oil, for example, and the USA had stored six months worth of crude oil against that eventuality. There was concern that US Banks, with the support of the Federal Reserve, had made loans that would never, for all practical purposes, be paid back. The majority of these loans had been made by big US banks to German banks, (see Tobias Straumann’s book “1931: Debt, Crisis and the rise of Hitler” for a good writeup)
Among other things, the reluctance of the French to forego privilege pushed boom into bust just at the moment when loan agreements were about to be made, and undermining the credibility of the centre of German politics. The picture of joblessness and depression in the USA that followed is, however, incomplete. Almost at the exact moment of the Wall Street Crash, a boom in oil exploration in Texas began with the discovery of what was at that moment, the world’s biggest oilfield.
Crude oil extraction, at least in its initial stages is remarkable for its ERoEI. The energy returned is well over 100 times the initial energy expended. The rush to extract oil in 1930 was such that US Marshals were instructed to shut in several of the wells in Texas to maintain the market price of crude oil. With this cheap accessible resource in place and technology transfers taking place amid war preparations taking place in Europe, especially Nazi Germany and in the Soviet Union, world industrial production recovered within a few years.
Soon after the Second World War finished, the world’s largest ever oilfield was discovered in Saudi Arabia. Giant oil companies moved to control this resource in the 1950’s and in the 1960’s they expanded their control to corner the market in uranium.
In some ways, money, credit, and energy have comparable effects on the world’s economies. With enough energy, mineral resources are almost unlimited. With enough cheap energy, it might be supposed that the entire Andes mountain range in South America could be refined into constituent industrial metals such as copper and iron. But even the largest oilfields eventually run dry, or to be more precise, the cost of extraction becomes unaffordable. Other sources of energy are more expensive to extract or to adapt to replace the products available form crude oil. Here, expensive equates to a fall in ERoEI.
This increase in costs does not happen in isolation. Ores containing industrial metals and other minerals become exponentially more costly to extract and to refine. The refining process leaves more spoil and created more pollution as extraction demands more inputs and losses in opportunity costs. And over time, the population of the world increases, and their expectations for consumable goods also increases. When the physical limitations on resources are known, and they have been for some time, inflexion points can be predicted more or less accurately to within a few years.
That last statement needs some explanation. In 1974 “Limits to Growth” (LTG) was published, suggesting that the earth’s resources were finite, that demand was continuing to grow, and offering some alternative futures. There was some controversy soon after, but the “Business As Usual” (BAU) model withstood the test of time remarkably well. It is left to the reader to research this further.
From LTG we learn that per capita productivity should have peaked between 2015 and 2020 and will decline thereafter. We already know that conventional crude oil production peaked some years ago, and increases in output have come via unconventional resources. There are several implications and outcomes.
The use of unconventional resources increases the costs of production, both in financial terms and in the cost of production and in the energy invested in extraction. This impacts the ERoEI of crude oil production. The lifestyle currently enjoyed worldwide, but particularly in Western economies is closely tied to energy consumption. The greater the energy used, the greater the GDP. As more energy is expended in resource extraction, not just oil, savings have to be made elsewhere. In terms of energy density, only fissile uranium has greater energy density than oil, and using this safely is expensive. To maintain our lifestyle an ERoEI of greater than the present value of eleven is needed. As the ERoEI falls, progressive adjustments to lifestyles must be made.
It is important to remember that choices must be made. With sufficient free energy we would never run out of oil, or out of minerals such as copper. The conventional way to allocate resources is through pricing. As resources become scarce, they become unaffordable. Conventionally, we think of high prices as the limit to consumption. That may not the way the future works. Somewhat controversially, the Hill group have argued that as our lifestyle becomes re-priced, the price of oil will fall.
(The Debunking is here: Debunking ‘Lower Oil Supply Will Raise Prices’)
The situation in the oil markets is this: Producers need $70 per barrel; Consumers need $40 per barrel. A bifurcated market for oil. There seems no reason to suppose that the same situation cannot exist in other markets for commodities.
Bear in mind that the market for crude oil is a tiny fraction of economic activity. All that is needed is a small economic surplus that goes exclusively toward the purchase of crude oil, and prices could quickly rise above $70 per barrel. To believe that the economy will expand thus creating a surplus, is the same as believing that it isn’t different this time, and that the cure for low prices is high prices.
There’s something here hidden in plain sight:
Notice that the price sort of flip-flops from over $70 per barrel to under $40 per barrel in inflation adjusted prices. See also the comments in this link : https://ourfiniteworld.com/2018/04/19/why-oil-prices-cant-rise-very-high-for-very-long/
“Economics 101”, to use an American expression, says that the demand curve slopes downwards and the supply curve slopes upwards with increasing prices. Where the two cross is the price the market will pay. The thing that is missed here is that market prices for between $40 and $70 per barrel are unstable.
Control Engineers see these unstable Systems, intending to control them, but knowing that some Systems cannot be controlled. The Systems attract the interest of Engineers and Mathematicians to develop their science, but in practical terms these sorts of non-linearities tend to be a right pain to control, and are best avoided. But what makes this oil market different? What’s going on here? and what happens next?
More importantly, is it “Different this time”? And is this because our Lifestyle can no longer be supported as ERoEI falls?
[See also Bang-Bang Control System, Limit Cycle, Hysteresis, BIBO stsbility]