#258: Written in the skies

‘PEAK OIL’ AND THE UNFOLDING INFLEXION

On a glorious summer’s day towards the end of the Second World War, a German fighter ace, his squadron grounded for lack of fuel, sat in a deck-chair watching the vapour trails of American bombers write the end of the Third Reich across azure skies.

Metaphorically, a similar message is being sky-written now. According to Goehring & Rozencwajg – who are as good as it gets where energy analysis is concerned – Hubbert’s peak is finally here. Only hindsight, of course, can conclusively determine the moment at which “peak oil” became a reality, but G&R are very probably right.

With conventional oil production in decline since 2016, the only source of unconventional supply which remains capable of further increase is the Permian basin, located in six counties in West Texas.

This basin, say G&R, is within a year of its own peak, and we know how rapidly shale production declines once a basin slips onto the down-slope of the ‘drilling treadmill’. The rates of decline of individual shale wells tend to be very rapid, and a point inevitably arrives at which operators can no longer drill enough new wells to stop overall output declining.

OPEC claims to have 4 mmb/d of spare production capacity, but this – even if true, which is highly debateable – wouldn’t tide us over for long, with demand growing, and other sources of supply in relentless decline.

The peaking and impending decline of oil supply is sky-writing dramatic changes to activities hitherto taken for granted. It’s almost impossible to overstate the importance of oil for so many aspects of daily life.

Some examples are obvious, though many others are less so. Unless you believe, for instance, we can replace avgas with recycled cooking-oil, mass air travel is finished, not necessarily imminently, but inevitably. Flying may remain an option for the well-to-do, but huge economies of scale will be lost, and industries structured around low-cost flights will be left high and dry.

Much the same applies to motoring, despite the euphoria around EVs. Again, the better off will be able to transition to these, particularly in the world’s more prosperous countries. But we don’t have enough raw materials (or the energy to extract, process and deliver them) to replace all of the world’s 2 billion cars and commercial vehicles with electric alternatives and, even if we did, we’d have to power a large proportion of them with coal.

 

Technology – do not pass go

This, of course, is where those of a cornucopian persuasion play their supposed trump card, which is technology. The limitless potential of technological innovation is – alongside infinite growth, and the boundless beneficial potential of neoliberal economics – one of the three great myths of the age.

We have indeed taken enormous technological strides over the past two centuries, but that has been possible because the supply of low-cost energy has always, hitherto, been abundant. Technologies evolve to suit the energy available to power them, and the contrary proposition is ludicrous.

The critical issue, so often dismissed or ignored by the high priests of the new and shiny, is that the capabilities of technology are bounded by the laws of physics. The fact of the matter is that we can’t repeal Betz’ Law (which sets the maximum potential efficiency of wind turbines), or set aside the Shockley-Quiesser limit (which does the same for solar power).

With these limits understood, transformational improvements in conversion efficiencies are off the table, leaving us with the hard, costly and resource-intensive heavy slog of building capacity sufficient, not just to replace fossil fuel energy, but to offset intermittency as well.

This is where the term “renewable” ought to be subjected to far more critical examination than it has tended to receive so far. We can’t source the plastics required for the renewables sector without hydrocarbon feedstocks. Renewables can’t, of themselves, power the extraction, processing and delivery of the vast amounts of concrete, steel, copper, cobalt, lithium and a host of other resources required for the development, maintenance and eventual replacement of wind and solar power.

In short, “renewables” would merit that label only if they were capable of renewing – that is to say, replacing – themselves over time. This isn’t possible now, and there are few reasons to suppose that it will become so in the future.

Any pilot worth his or her licence knows that “Isaac (Newton) is always waiting” if they get something wrong. The starry-eyed visionaries of energy transition need to develop an equivalent awareness of the hard limits of physics.

Investors, incidentally, have their own version of tech mystique, which is the concept of infinite profitable growth vouchsafed by technology. Some of today’s technologies, such as online retailing, are of undoubted value, and a sizeable (though niche) future role exists for EVs.

But a large proportion of “tech” relies on a business model mistakenly assumed to be invulnerable to economic change. Huge swathes of “tech” are funded from the twin sources of subscriptions and advertising revenues, both of which are capable of rapid contraction as household discretionary prosperity shrinks, and as businesses endeavour to adapt to a less prosperous world. The ‘technology of “tech”’ may have moved on, but the business model has not.

 

A different kind of innovation

Those of us who favour a strong private enterprise component within a mixed economy recognize the stimulus to innovation provided by the competitive pursuit of increased profitability. There is no reason to suppose that innovation will decelerate, let alone cease, in a post-growth economy.

But the emphasis can be expected to shift fundamentally, as businesses seek cost control and resilience through the simplification of product and process, delayering, shortening supply-lines and circumventing ‘critical mass risk’. Leadership cadres don’t, as yet, have a body of knowledge about the management of contraction – and the necessary learning curve is likely to be steep – but, as ever, the innovative will lead the pack.

The coming decline in oil and broader fossil fuel supply, coupled with continuing cost increases and the lack of full-replacement alternatives, provides significant visibility on future trends. The world’s average person will become gradually less prosperous, a process exacerbated by rises in the real costs of energy-intensive necessities including food, water, housing and essential travel.

The result will be a leveraged contraction in the affordability of discretionary (non-essential) products and services. Labour intensity in the economy will reverse its long decline, absorbing workers released by contraction in the discretionary sectors.

To this extent, economic contraction is capable, at least in theory, of happening gradually. The same, though, cannot be said of the financial system. If the current financial system was a car, you wouldn’t buy it – it has no reverse gear, no brakes worthy of the name, steering that is rudimentary at best, a near-opaque windscreen giving almost no forward visibility, and a tendency to accelerate of its own volition.

As you may know, I believe that we can only seek to understand economic trends effectively if we embrace the concept of “two economies” – a “real economy” of material products and services, and a parallel “financial economy” of money and credit.

From this, it follows that money, having no intrinsic worth, commands value only as a ‘claim’ on the goods and services made available by the “real economy”. These “claims” exist in two forms – those that we exercise, transactionally, in the present, and those which we set aside for exercise in the future. Measured in relation to material prosperity, the exercise of excessive claims in the present is mediated by inflation, but the real problem resides in a huge excess of monetary ‘claims on the future’.

 

Buy now, crash later

This problem, too, might be arbitraged by inflation, but only if the inflationary degradation of forward claims isn’t cancelled out by the continuing creation of new excess claims to replace them. The authorities have considerable oversight and regulatory powers where orthodox, deposit-taking banks are concerned, but the locus of the problem has now shifted from conventional banking to the largely unregulated (and even largely unquantified) “shadow credit” sector.

Whenever somebody buys, say, a new refrigerator, a new car or an expensive holiday which he or she cannot afford – and which conventional banks would be unwilling to finance – we see the “shadow credit” system in action. Even if nothing more dramatic happens – and the dramatic is actually a great deal likelier to happen than not – the probability is that the system will be sunk by the unsustainable burden of continuing financial outflows imposed on households by the irresponsible funding of the unaffordable.

We aren’t, it should be emphasised, about to ‘run out of’ oil. Rather, what we face is a comparatively gradual decrease in supply, compounded by a continuing rise in ECoEs (the Energy Costs of Energy). Oil prices are unlikely to give us much in the way of forewarning – they might rise, in response to scarcity, but equally they might fall, driven lower by consumer impoverishment. The decline in oil supply is likely to accelerate, through switching, similar dynamics in other fuels.

It may seem obvious that less oil means less driving and less flying, but the real significance of oil contraction lies in what it means for ‘behind the scenes’ activities such as food production, petrochemical supply, and the distribution of products and raw materials.

The moment, as well as the implications, of “peak oil” have been debated over decades, and there is no particular practical significance attached to the precise date of its arrival. Moreover, surplus oil – that is, supply less its ECoE-cost of delivery – has already turned down, both on an aggregate and a per-capita basis.

But the symbolic meaning of the peak oil “moment” could hardly be more profound.