Friday, January 5, 2018

The Impending Curtailment of Conventional Oil and the Total Resource Curtailment

In a previous post titled "The Soft Belly of the Oil Industry", I mentioning the impending unlocking of numerous negative feedbacks affecting the oil industry. I argued that the gradual increase of production costs, the need of reducing emissions, the weakened demand created by the electrification of transport, and more were going to take the industry on a ride along the "Seneca Cliff." Here, Geoffrey Chia goes beyond that, arguing that the negative feedbacks generated by a collapsing oil industry will affect the whole economic system.  It may be pessimistic as an interpretation, but it is a perfectly possible chain of events.  

Why the impending curtailment of Conventional Oil will lead to Total Energy curtailment and Total Resource curtailment

by Geoffrey Chia, January 2018

Outside of Medicine I am an expert in nothing*. In depletion matters I defer to the resource and energy experts such as Professor Ugo Bardi and Alice Friedemann who have conducted painstaking research and performed exhaustive quantitative analyses to arrive at robust conclusions. My main use, if I have any use at all, is to transmit important concepts from the experts to the general public in a qualitative manner, sometimes using my own original visual metaphors and bad jokes, which may hopefully facilitate better understanding by the lay audience. I also tend to view these issues through a medical lens in terms of diagnosis, prognosis and management planning, my aims being to prevent or minimise human morbidity (suffering) and mortality (premature death). Unfortunately due to gross overshoot, humanity are now well past any hope of cure and we are now into the phase of palliative care of a terminally ill industrial civilisation.

I have written and talked much about the imminent catastrophic curtailment of net conventional oil and why unconventional oils are a fraudulent mirage. We will soon tumble down a steep "net oil cliff". Alice Friedemann has done a superb job explaining why curtailment of just one petroleum fraction, diesel, will lead to Total Energy curtailment. Without the services provided by diesel powered vehicles and machinery, coal and natural gas fired electricity generators will be starved of fuel, nuclear power plants will fail and even renewable energy grids will ultimately fail for lack of maintenance. Conventional Oil cliff = Total Energy cliff.

Petroleum curtailment will also lead to Total Resource curtailment. Prof Bardi has written volumes about resource depletion and the Seneca cliff. Industrial agriculture will collapse in the absence of petroleum powered machines to till and sow the land, to apply (fossil fuel derived) fertiliser and pesticides, pump irrigation water, harvest the crops and to process and distribute the products.

The extraction, production and distribution of mineral resources will also collapse with petroleum curtailment. Below (in green italics) is my take on the economic relationship between the two. The main message I wanted to confer from that snippet was that "market price" cannot be used as an index of the abundance or scarcity of a commodity. The contemporary price of a commodity is highly dependent on whether conventional oil also happens to be abundant at that time (among many other factors, including supply vs demand and market distortions). Minerals which are depleting can still be cheap if conventional oil is plentiful, as was the case in the 1990s. If however both the minerals and conventional oil are depleting, which they are now, mineral production will eventually inevitably tumble down a Seneca cliff.

If all the critical outputs which support industrial societies are scheduled to tumble down their respective Seneca cliffs, if the collapse of global industrial civilisation is imminent and inevitable, what can sapient people do to mitigate against future suffering and premature death?
Seek out trustworthy like minded folks and set up your off-grid permaculture community in a rural climate resilient location.

The Ehrlich-Simon wager:

On a slight tangent, let us briefly mention the famous bet in 1980 between the environmentalist Paul Ehrlich and economist Julian Simon regarding the future prices of five selected minerals. After ten years it was found that all the prices had fallen, hence Simon was declared "winner" and economists around the world trumpeted their triumph over the scientists. Ehrlich's error was to make the bet on the basis of price, which as we mentioned is a rubbery variable prone to all sorts of fluctuations, distortions and manipulations. 

The point Ehrlich wanted to make was that as time goes by, it becomes progressively more difficult for us to harvest, process and deliver the same amount of product (e.g. metal ingots). This is because we would have previously harvested all the "low hanging fruit", the easy pickings, ab initio. We always transition from initially easily scooping up high concentration ores to eventually scrounging the depths for low grade dregs. If Ehrlich had bet that the ENERGY costs of delivering the same amount of product would be higher after ten years (actually a fifteen or twenty year bet would have been preferable), he would have made a better wager. This is an example of how even the smartest of scientists can run into trouble when trying to extrapolate the future on the basis of that most unreliable of variables, price.

The situation is more complicated however. Just like petroleum, minerals go through a phase of rising extraction, a peak of extraction then terminal decline. Even if extraction of a particular ore is entering terminal decline, if that time period coincides with increasing energy availability (as was the case around 1990 with abundant petroleum available pre Peak Oil), then even though ore extraction and processing require more energy, the product may be cheaper due to energy being cheap at the time.

On the other hand, was Simon's victory a result of greater wisdom or intelligence with regard to how prices work? Actually, no, it was just dumb luck, as was explained in David Murphy's 2011 post in TOD:

Moral of this story? Making judgements and predictions based on price is prone to all sorts of pitfalls.

* Inside of a dog it is too dark to read – famous Marxist quote (Groucho, not Karl)

Postscript: Financial fraud perpetrated by conventional oil companies:

Here is an honest discussion (unlike most economic discourses which are dishonest) in 2015 between top US economists and ivy league professors Joseph Stiglitz (originally trained in Physics) and Robert Reich (originally trained in Law) who both served in the Clinton administration and who both decried Obama's unconditional bailout of the investment banks during the financial crisis of 2008/9.

They explain that bonus payments to US corporate executives have nothing to do with performance but have everything to do with the share price of their companies. This represents a huge perverse incentive for those executives to prop up the share prices of their companies by any means possible.

To me, this explains much of the behaviour of the conventional oil companies over the past decade or so, which have included:
  1. Exaggerated reporting of their existing reserves and hyped up fabrication of future oil "yet to be found" and oil fields "yet to be developed". This is easily done by paying prostitute "research institutes" such as CERA to give the oil companies the figures they want, much in the same way that the corrupt bankers paid prostitutes such as Standard and Poor's to give the subprime mortgage bundles AAA ratings.
  2. Mergers of oil companies into ever bigger amalgamations, a swathe of which have been happening in recent years
  3. Quiet buyback of their own shares to create artificial demand for their shares in the stockmarket and hence keep their share price artificially propped up. Robert Reich described this as blatant insider trading. This behaviour has been particularly exhibited by the largest dinosaur of them all, Exxon Mobil. If it was true there is still plenty of conventional oil to be found, they would be using their capital to find and develop those future oil fields instead of buying back their own shares. The reality is that over more than a decade, their massive exploratory expenditures have yielded only a tiny trickle of conventional oil. The fact is that they have now essentially given up the quest for any more conventional oil and are now engaged in monumental economic fraud to deceive the public that their terminally ill companies, now on artificial ventilatory life support, still have some breath in them.
G. Chia, January 2018
 Even Isaac Newton fell victim to stock market fraud


Ugo Bardi is a member of the Club of Rome, faculty member of the University of Florence, and the author of "Extracted" (Chelsea Green 2014), "The Seneca Effect" (Springer 2017), and Before the Collapse (Springer 2019)