#27. Energy costs – necessity, not folly

IF YOU’RE FAMILIAR WITH THE SURPLUS ENERGY INTERPRETATION OF THE ECONOMY, it won’t surprise you one bit that the global cost of energy has soared – it’s exactly what those of us who understand these things have been expecting and predicting.
According to the SEEDS model, the total trend cost of energy this year should be of the order of US$5 trillion, a number which includes operating and downstream expenses as well as through-cycle exploration and developments costs.

There is, though, a curious notion doing the rounds, which says that the energy companies’ vast capital investment is a mistake, because renewables will sweep in under the radar and turn this commitment into a capital sink. Indeed, the huge sums now being invested in oil, gas and coal have even been likened to sub-prime.

Frankly, this notion is one of the sillier ones that I’ve encountered for quite some time. It assumes that renewables can be scaled up to the point where the oil, gas and coal being developed now will be undercut by cheaper fuels. It also – inevitably – calls technology to the aid of an argument which simply doesn’t hold water.

Let’s deal with technology first. Energy supply, no less than the universe more generally, is governed by the laws of science, and particularly by the laws of thermodynamics. Technology can improve how things are done within the envelope dictated by the laws of physics, but it can not bend that envelope.

Technology can make a solar panel more efficient, but it cannot capture a square metre of solar exposure on a panel the size of a postage stamp. Technology can make wind turbines more efficient, but cannot reduce their height to three feet or reduce blade size to six inches. Likewise, battery efficiency continues to improve, but the scope for this improvement is limited by the laws of physics.

 

WE NEED TO BE PRETTY SCEPTICAL ABOUT THE ASSUMED SCALING UP RENEWABLES. Let me cite for you Chris Martenson’s analysis of how we might replace the quantity of oil – not gas or coal, mind, just oil – consumed in 2009.

Chris sets out our non-fossil alternatives to oil like this:
– Increasing the number of nuclear reactors in operation from 400 to more than 6,800
– Building 17 million new wind turbines
– Covering 13 million acres with solar PV panels
– Committing 16 billion acres, or 135% of the globe’s arable land, to biofuels.

Taking the latter as an example, Chris is talking about replacing the volume of oil with fuel crops. But about half of the energy produced by biofuels is consumed in planting, harvesting, processing and transport, so to give us the same quantity of net or “usable” fuel we would need to cover 270% of our arable land with biofuel crops.

And this, of course, is just to replace oil. Add in gas and coal as well and we’re talking 720% of all arable land, so we’d need seven planets for the energy industry and an eighth one for food. You’d need a pretty defective radar not to see the snags there.

I could perform similar mathematics to show how other renewables aren’t a substitute for fossil fuels either. Instead, let me make a couple of other points. First, oil (in particular) gives us high density, concentrated energy that can be used directly. Renewables don’t give you that, which is why using electricity (most of which is made from fossil fuels) to propel cars is a bit of a gimmick.

Second, consider the minerals used in building any of the alternatives to fossil fuels. Mining copper, for instance, involves shifting 500 tonnes of rock for each tonne of copper extracted. This is done using huge diesel-powered vehicles, to which there is no realistic alternative. Our steelworks, smelting plants and similar vital facilities are legacy assets, built in an era of cheap energy – and they will not last forever.

 

THE REALITY IS SIMPLER. Soaring capex is a direct consequence of an escalation in unit costs as easy-to-access, low-cost supplies of energy are displaced by ever more expensive alternatives. The idea that this expenditure will be left stranded by renewables is a pipe-dream.

The correct conclusion to draw is that an on-going process of “energy sprawl” – in which energy absorbs an ever greater percentage of global GDP – is happening before our eyes.

I think you know my view of renewables. Some (like solar power) can provide a critical contribution to the energy picture. Others, typified by biofuels, are a disaster. Still others lie in between these polar extremes.

The explanation for the vast sums being invested by energy companies is simpler, and harsher, than the subprime parallel. Subprime was a purely financial form of idiocy, as are other cases of over-pricing homes – capital is diverted into an unproductive “sink” instead of being invested constructively. Energy costs are a completely different issue, governed by the laws of thermodynamics.

 

THERE ARE INDEED INVESTMENT LESSONS TO BE DRAWN from the escalating cost of energy, but these lessons do not involve wastage of capital by the energy giants.

Continued high energy prices should be very positive for solar operators, but commentators should focus just as much on the squeezing out of non-energy activities as an ever greater proportion of economic capacity is invested in essentials such as food, water, minerals and, of course, fuel.

11 thoughts on “#27. Energy costs – necessity, not folly

  1. While not a fan of Martenson, someday he may be right, what are your thoughts about gasoline consumption? He in The U.S. gasoline consumption is at 12 year lows and mileage driven is low as well. Meanwhile oil remains high (relatively), and refineries and “Big Oil” appear to be pressured (via SEC filings).

    Do you think this is a global trend? I only looked here in The U.S. (EIA), but I think it’s more reflective of a sluggish/stagnant economy. Sure we’re drilling in North Dakota, and exporting, but is it enough? I read those well start declining in 2019?

    • Let me start by saying that the US economy is weaker than the figures suggest – inflation seems understated, so real wages are weaker than they look. This is reflected in reduced gasoline consumption and lower miles travelled. The outlook in other countries (such as China) is widely believed to be more robust – the consensus seems to be that Chinese energy consumption “will double by 2030”, but I don’t believe the energy to do this actually exists….

      Shale wells are expensive to drill, but, above all, production declines very rapidly after start-up. Wall Street has persuaded American investors that shale is a hot ticket, so billions have been invested – these billions result in a lot of wells, and that means a lot of initial production, but output will slump rapidly if investment rates tail off (which is now happening). So shale production will slump from 2019 (or maybe even from 2017, according to some sources).

      Meanwhile, Big Oil has been scarred by shale. Shell has written off $2bn of shale investments, and XOM are “losing our shirts” (quote) on shale.

    • [quote]the consensus seems to be that Chinese energy consumption “will double by 2030?, but I don’t believe the energy to do this actually exists[/quote]

      I don’t understand that statement.
      1. Nobel laureate Carlo Rubbia calculates massive world-wide energy reserves: http://www.the-weinberg-foundation.org/2013/10/28/nobel-laureate-go-thorium/
      2. We’ve not even begun to exploit nuclear power, nor is China handicapped here by wrong models of safety (which, in the West, are basically the precautionary principle made law).

  2. Not many replies this time, Dr Tim. Hardly surprising. What can we say other than, “All ye who enter here: ABANDON HOPE!”

    • No hope for us if we continue to bury our heads in the sand and keep kidding ourselves that we have a god given right to our present standard of living .
      If you want to hear soothing fairy tales listen to George Osborne or the laugable ‘Independent office for budget responsibility’.

    • I certainly wasn’t looking for fairy tales, and I do admire the efforts of Dr Tim and others to bring us a sober look at various facets of our energy problems. I wonder how he regards the recent announcement that UK GDP has returned to 2008 levels? IMO, it certainly doesn’t FEEL that way.

  3. Adam

    The claim that real GDP is back to the 2008 peak is very unsatisfactory, because:

    – Debt (government and private) continues to increase, and is far higher now than it was in 2008

    – We continue to rely on borrowing to create “growth”

    – Our current account balance with the rest of the world is appallingly (and unsustainably) bad

    Overall, if you adjust GDP for borrowing and overseas obligations, the ongoing deterioration in “real” economic output continues to decline.

    Hope that helps?

    Tim

    • Thanks for the overview, Dr Tim. Yes, that makes sense. In looking back over this sad history, I can help remembering all those years of Gordon Brown as chancellor of the exchequer, followed by his brief but disastrous premiership. How he ever dares to show his face anywhere, I don’t know, and he still even manages to get paid a fortune for his “advice” these days. 😦

    • Brown was a disaster (and I thought he was bonkers, frankly). I guess the only reason anyone would pay for his advice would be to receive his recommendations and then do exactly the opposite!

    • Could immigration also be a factor – if say another 2 – 3 million have been added to the employment count then GDP will increase…but per capita GDP has gone down suggesting nobody will feel the benefit.
      Perhaps the treasury and George Osborne like mass immigration as it gives him something to boast about in employment totals and GDP….although they are useless yardsticks to the man in the street.

  4. Just found this site. I just wanted to comment that I think that electric vehicles will have a place in a high energy cost world, but not as a direct replacement for current automobiles. Reduce the top speed of vehicles to 20mph and you can get a really quite effective vehicle for hauling one or 2 people and some groceries using bicycle parts. I don’t know what we will do about peak oil, but I expect bicycles and their electric analogs will play a part in personal transportation. Assuming we can adapt.
    Thanks

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