Dec 232014
 December 23, 2014  Posted by at 11:01 am Finance Tagged with: , , , , , ,

John Vachon Hull-Rust-Mahoning pit, largest open pit iron mine in the world, Hibbing, Minnesota Aug 1941

This is another entry by our friend Euan Mearns, orginally posted at Energy Matters.

Euan: A few commenters have mentioned peak oil recently. I am cautious about making forecasts and predictions and prefer instead to observe and document the data as the peak oil story unfolds. I have in fact published a couple of charts recently illustrating aspects of peak oil, one showing a possible peak in the rest of the world that excludes N America and OPEC (Figure 1). The other showing the undulating plateau in conventional crude + condensate that has persisted since 2005 (Figure 2). In my last post on oil price scenarios two of those showed global oil production capacity 1 to 2 Mbpd lower in 2016 than 2014. If that comes to fruition, will we have passed peak oil but does it matter?

Figure 1 Global oil production has been split into three geo-political categories: 1) USA and Canada, 2) OPEC and 3) the Rest of the World (RoW). RoW production bears the hallmarks of having peaked in the period 2005 to 2010 and this has consequences for oil prices, demand and prosperity in parts of the world, especially the OECD. Most of the growth in oil supply has been in the USA and Canada where the market has been flooded with expensive oil. Data are crude oil + condensate + natural gas liquids (C+C+NGL) and exclude biofuels and refinery gains that are included by the IEA in their total liquids number.

The current “low oil price crisis” is providing a clear and new perspective on the nature of the peak oil problem. If low price does indeed destroy high cost production capacity then this will raise the question if the high cost sources can ever be brought back? IF low price kills the shale industry can it come back from the dead?

Figure 2 Conventional crude oil + condensate production has been on an undulating plateau just over 73 million barrels per day (Mbpd) since May 2005, that is for almost 10 years and despite record high oil prices! Note that chart is not zero scaled in order to amplify details. Click chart for large version.

The response of the oil price to scarcity in the period 2002 to 2008 was for it to shoot up. And the response of the energy industries to scarcity and high price was to develop high cost sources of energy – shale oil and gas and renewables. The longevity and permanence of these new initiatives has always been dependent upon our ability and willingness to pay. Of course, most of us who have cars continued to use them but have perhaps subliminally modified our behaviour through driving less or buying more fuel efficient vehicles. OECD oil consumption has at any rate been in decline and robust economic growth has been elusive. Is this due to the peak oil story unfolding?

The global finance and energy system is unfortunately rather more complex than that. The creation and expansion of debt is of course central to creating demand for oil and other energy sources. Without QE the global economy may have died in 2009 and demand for oil with it. Gail Tverberg produced an interesting chart that may illustrate this point (Figure 3). However, back in 2008 / 09 OPEC trimmed 4 Mbpd from their production and this equally explains why the price rebounded so strongly then. The end of QE3 may have contributed to the recent fall in demand, but the price has fallen so precipitously because OPEC has not compensated by reducing production.

Figure 3 QE appears to have impacted demand for oil and may have created the lines of credit enabling energy companies to produce high cost gas and oil at a loss. But the oil price has been equally controlled by OPEC controlling supply. Chart by Gail Tverberg.

The big picture is made even more complex by climate concern and a growing raft of energy policies in Europe and the USA designed to reduce CO2 emissions while singularly failing to do so meaningfully. And so at a time when clear engineering thinking was required on how to tackle the potential impacts on society of energy scarcity in the global economy we got instead ‘Green Thinking’. Future generations will look back on this era with bewilderment.

Against this backdrop, I will now move on to the main topic of this post which is the concept of broken markets and Hubbert’s peak. For those who do not know, Hubbert’s peak is peak oil by another name and while wise guys may want to invent a multitude of definitions I will stick to the simple definition of the month or year when global oil production reached a maximum volume or mass and thereafter went into inexorable decline. The impact of this on Mankind is normally expected to be negative since oil is the lifeblood of the global economy. The reason for this happening could be because we discovered something better than oil that substituted oil out of existence (that wouldn’t be bad) or because of scarcity oil became too expensive to produce (perhaps where we are now) or because Greens in government like Ed Davey and Barack Obama set out to undermine the fossil fuel industries which just a few years ago I would have found impossible to believe. We live in interesting times.

The world economy as we know it runs on fossil fuels and in particular a relatively small number of truly gigantic fossil fuel reserves such as the Ghawar oil field in Saudi Arabia, the Black Thunder coal field in Wyoming and the Groningen gas field in The Netherlands. Both Ghawar and Groningen are showing signs of age, along with the hundreds of other super giant fossil fuel deposits. The stored energy in these deposits flows out at enormous rate and at little financial or energy cost. It is these vast energy supplies and surpluses that provide the global economy with economic surplus. It is indeed the lifeblood. But the world has run out of these super giant deposits to exploit and we are finding it increasingly difficult to find large enough numbers of their smaller cousins to keep the wheels of the global economy well oiled ;-)

The focus has thus turned to low grade resource plays. The resource plays offer near infinite amounts of energy but require large amounts of effort to gather that energy. The ERoEI is lower than what went before, perhaps much lower, but for so long as the energy return is positive, we have indeed learned that Man’s inventiveness and commitment can exploit these resources. One of the main questions I want to pose here is, is it possible for these resource plays to participate in the global economic system as it has existed for many decades that has become known to us as capitalism?

The first example of broken energy markets I want to look at is wind power. Both onshore and in particular offshore wind are expensive forms of intermittent electricity. Wind advocates will argue that the intermittency does not matter and will point gleefully to the low electricity prices achieved when the wind blows strongly across Europe resulting in over-supply that dumps the price. Wait a minute though, high cost and low price is a toxic mix that does not jive with capitalism. The more wind resource installed on the system the greater the size the unusable surplus and economic penalty becomes.

Why have the wind producers not gone out of business? It’s because the markets are rigged such the wind producers are given priority to market and receive a guaranteed price. This is a monopoly! The consumers don’t benefit because they have to pay the guaranteed price to the wind monopoly. The losses end up in the hands of the traditional generators who see their prices dumped and need to chew on the losses whilst providing the invaluable balancing services for free.

Providing back up services for when the wind doesn’t blow is another problem newly addressed in the UK with the new “capacity market”. The government is calling this a ‘market’ while it is in fact a component part of the wind monopoly. Companies are being paid to maintain generating capacity on stand by to cover periods when the wind doesn’t blow. Again the consumer has to foot the bill. One day quite soon, UK and other European governments are going to have to explain to their electorates why they have distorted the electricity market so badly, delivering a monopoly to wind producers, destroying the traditional market participants with the bill being met by the consumer who receives zero benefits. This can only be explained if it is underlain by rampant corruption or sheer stupidity.

The second example of a broken energy market I want to explore is the US shale industry. This shares certain characteristics with the wind industry in that it is a high cost but potentially very large resource. But the mechanism for integration of this resource into the market is rather different. The problem with shale gas is that over-supply has resulted in the US gas price being dumped below the level where many shale operators can make a profit. Consumers in this case benefit through getting both secure and low priced gas. But the shale operators have reportedly racked up large losses that have been covered by expanding debt. These losses may yet come home to roost with the consumer if debt defaults result in a new credit crunch where the debts are socialised via government bailouts of the banking sector.

If it were possible to produce shale gas at $1 / million btus then everyone would be happy. Consumers would be getting secure and cheap energy and producers would be making handsome profits to distribute to shareholders. That is how capitalism is supposed to work. The system as it has operated seems broken.

US Light tight oil (LTO) production appears now to have created the same problem for the liquids plays where the entrance of expensive liquids in the market have contributed to the crash in the oil price. This has created risks for the LTO operators. It remains to be seen if the LTO sector sees mass insolvencies and default on loans that may socialise these losses. The introduction of high cost LTO has also undermined the whole of the higher cost component of the conventional oil sector. If LTO could be produced in large quantities for $20 / bbl then there would be no problem since this source would go on to substitute for the higher cost conventional sources of supply. But with costs closer to $60-$80 this is not going to happen. The conundrum for capitalism is the introduction of large quantities of higher cost energy to the system.

At this point I have to admit that nuclear power may be subject to similar limitations. It is difficult to view the Hinkley Point new nuclear build in the UK as a triumph for the consumer or the country. A better way to manage such enormous capital expenditure on vital infrastructure is via the state. The costs may eventually be socialised to the tax payer, but at least the energy is reliable and amongst the safest forms of power generation ever developed and the taxation system distributes costs in an equitable way.

A form of society could undoubtedly exist powered by nuclear, wind and shale gas. But it would be a society supported by the state with far larger numbers working in the energy industries than now, producing lower surpluses, the energy production part perhaps running at a perennial loss. Those losses have to be covered by either higher price or via the taxation system. Either way, the brave new world that awaits us will be characterised as the time of less that will be in stark contrast to the time of plenty many of us enjoyed during the 20th Century.

Home Forums Broken Energy Markets and the Downside of Hubbert’s Peak

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    John Vachon Hull-Rust-Mahoning pit, largest open pit iron mine in the world, Hibbing, Minnesota Aug 1941 This is another entry by our friend Euan Mear
    [See the full post at: Broken Energy Markets and the Downside of Hubbert’s Peak]

    V. Arnold

    Thank you Euan Mearns; I learn more here than any other site that I visit.
    Costs; the true costs are predictably hidden or just ignored. Fracking may prove to be the single biggest environmental/human disaster in U.S. history and maybe even the planet.
    Aquifers; our most valuable resource, are being destroyed/poisoned by extraction industries.
    We humans have a very strange way of costing our activities.
    Aboriginal’s have the most accurate assessment standards and are treated with contempt.
    This is going to bite us in the ass and ultimately kill us.
    Why are these realities regularly ignored when assessing extraction’s true costs?

    Dr. Diablo

    There are many ways to run the economy–large, centralized projects run by the state is just one of them, and I would argue, one of the worst. By the evidence given here, wind, shale, nuclear–all run by or greatly interfered with by the state–are riddled with graft, fraud, safety violations, and basic engineering inefficiencies so massive that otherwise good ideas are barely energy positive (if at all, see Ethanol, or all-in costs to fracking groundwater). With such a track record, why on God’s earth would you promote the State as a solution to anything?

    The other way to run the economy would be to abandon huge, centralized, capital-intensive projects in favor of small-scale, localized solutions. 1/5 of electricity is wasted in transmission. Another 1/5 is wasted in vampire loads like TVs and cell charging cubes. Clearly, you could close 20% of all power generators today. The easy, low-cost answer is efficiency coupled with production so localized it is basically generate-in-place. We have this: it’s called a off-grid photovoltaic system. Is the cost-per-watt high? Yes. But yes only until you realize the astronomical subsidies the rest of the energy system is pulling out of the taxpayers. What were the numbers yesterday? Near trillion a year, worldwide? Re-allocating that dead-loss system would more or less pay for the generate-in-place system while the challenge of generating enough power would focus attention on lowering consumption to rational levels.

    But that isn’t the point, is it? Clearly the point of the system is not to provide energy or a higher quality of life to citizens but to concentrate profits, and more importantly, control. No one profits from efficiency. No one profits from independence. So because power and control are our sole fascinations, they are not promoted, although rational, healthy people would see them as self-evident. We all know the other system is better, healthier, and more sustainable. That’s why we can’t have it, and existing powers of the states, corporations, and oligarchs will fight tooth and nail right down to the collapse of society to defend their wealth and power. Which is only to be expected, really. I’m only pointing out that the solution is cheap, easy, and obvious, requiring nothing but a change in mind and focus–the money and tech are there. But I’m not holding my breath for it.

    And as long as otherwise smart people promote only large-scale, centralized power-and-control projects, we can’t even have the discussion.


    Well said Diablo.
    “And as long as otherwise smart people promote only large-scale, centralized power-and-control projects, we can’t even have the discussion.”
    Reminds me of the non-debate surrounding Obama care. Single payer was considered for ..mmm.. maybe 5 minutes.
    Even if large scale solutions turn out to be the most viable for any given problem, other ways of looking at solutions should be included.
    Maybe a mix of large and small, regionally tailored energy plans would allow Wind- for example- to be used locally and not viewed as needing a large grid to justify its implementation.


    The author displays a chilling disregard for climate issues. Renewable subsidies must be provided at the very least – trumping concerns about consumer prices, fossil-fuel profitability or the mechanisms of capitalist markets – if we are to rescue a habitable planet from the holocaust into which the power-elite is intent on driving us. If such incentives (or even more forceful policy leading rapidly to renewables replacing fossil fuels) contributes to systemic collapse, then the blame falls squarely on the shoulders of ignorant commentators and market-players (consumers perhaps most of all) for decades of their hubris.


    If in reality the risks of loss are socialized so that banks are TBTF then oil then essentialy we are becoming defacto socialists. State control of energy and banking with price controls seems to lie in our future as state run subsidized utilities. Either that or chaos as yoyo capitalism maes stable investment impossible.


    Maybe I’m overlooking deliberate abstraction for the sake of a pure market analysis (although he happily subverts market forces when convenient: “a new credit crunch where the debts are socialised via government bailouts”, “A better way to manage such enormous capital expenditure on vital infrastructure is via the state”) but phrases like “governments are going to have to explain to their electorates why they have distorted the electricity market so badly, delivering a monopoly to wind producers”, “If it were possible to produce shale gas at $1 / million btus then everyone would be happy” or “If LTO could be produced in large quantities for $20 / bbl then there would be no problem” nonetheless leave me fuming.

    Euan Mearns

    Thanks to all for your generous support 😉 A few thoughts…..

    In counting costs, you always have to count the benefits too. Ask, is it a good thing that Small Pox was eradicated? Or would it be better if it were still at large keeping the population in check?

    It is a fact that we have 7+ billion souls. The planet and its diversity will survive despite us for hundreds of millions more years. So who or what are we preserving the planet for? I have as much if not more concern about preserving habitat diversity than most and simply pissed off that we seem to be destroying habitats right left and centre in the name of Green.

    In the UK, most of the large centralised energy infrastructure was built by the state. I gather that in the USA, energy industries were so heavily regulated so as to be The State in all but name until 1992. BP was owned by the UK State as recently as the 1980s. I am not advocating State control simply looking for alternatives.

    About 2% of power is lost to transmission. The math I learned at school makes that 1/50th 😉

    The other way to run the economy would be to abandon huge, centralized, capital-intensive projects in favor of small-scale, localized solutions.

    Good luck with roads, air travel, higher education and research, food production and medical research with that model. Without the huge centralised resource, we would not be able to have this conversation.


    “pissed off that we seem to be destroying habitats right left and centre in the name of Green”

    Please do not drop that in as if it were established fact; to me it is meaningless.

    Euan Mearns

    I’m not wanting to excuse the ripping apart of Alberta (which is up to the Canadians) but 1) burning or rain forest in Indonesia and killing loads of orang-utans to make way for nut oil plantations, 2) clearing rainforest in Brazil to make way for sugar cain 3) burning US hard wood forests in England to make electricity 4) REE mining in China 5) hydro electric dams that kill salmon and 6) wind turbines that reportedly kill many raptors; are collectively not to be swept under the carpet IMO. There is no such thing as a free lunch in energy world.

    John Day

    Thank You Euan,
    Even if each of us does not have the identical viewpoint, due to our different roles and expertise, we should value the analysis you have given, which is broadly applicable outside the UK.
    In Texas, where I live, a lot of electric load comes from running air conditioning in the summer, when the sun shines, so solar helps match production and load.
    There are lots of specific regional differences that have to be considered in reducing buffer and swing capacity expenses.
    To some degree, load needs to learn to follow supply better, too.
    Global warming may already have is baked to a crisp. Models diverge widely based on analysis of positive feedback loops.
    This will be a hard transition, and I don’t know how hard, but I’m looking at the back yard turned into kitchen=garden, and I will bike 14 miles to work in a little while.
    I’m seeking to adapt in anticipation of events now beginning to unfold.

    John Day

    Oh, Yves Smith at Naked Capitalism has a very good complimentary (shorter) piece to this today.

    Euan Mearns

    PV powering AC in hot sunny places makes sense when you have lots of folks living in hot sunny places.

    Humanity changes in small steps. Sometimes lots of small steps in a short period of time. Private enterprise is not a silver bullet. We are in for a period of adjustment between State and private control.

    PS hope the word order here is better than in my prior comment 😉


    At a slight risk of thread diversion, Hinkley Point is a disaster all round. They saw us coming. All the risks are socialised. And still no long term waste storage solution.

    The more I read, the more i am convinced we are headed for a low energy intensity future. The majority will return to agriculture.


    Euan or others,
    Society struggles to account for externalities except through heavy-handed legislation, so it is always apples-and-oranges when comparing various energy sources and their taxes or supports. Still, the obvious points, as they have been since 2005/6 when I self-educated via The Oil Drum, remain:
    1) When talking about any peak or production level of oil the discussion must include “at what price” else it is meaningless. It is not yet clear to me, even after 5 years of apparent success, that the world really affords $100 oil.
    2) There is no fundamental issue with backstopping intermittent renewables with fossil fuels, other than cost penalties. Any use of renewables, or better still efficiency and conservation, will postpone fossil fuel peaks and delay climate or ecological impacts….but it comes at a cost.

    High oil prices enabled technology development for shale that will persist through a fairly significant downturn, as marginal cost of production on the downturn will be much less than on the upswing. The US, if it manages to gain an energy policy, could elect to protect its own industry, and complicate the world economy more with trade wars. If we are indeed at the cusp of the next step down, that would be a natural progression of post-globalism.

    Still, I don’t get as doomerish as in 2006-8 as we watched the trainwreck unfold, as the gov’ts have proven to be really good at spinning the plates. The difference between envisioned collapse scenarios (the slow ones, anyway) and what we have now is that the little guys are feeling the pressures as envisioned yet the main indicators look rosy, so there is global cognitive dissonance. I’d bet higher fractions of GDP go to energy over time, and lifestyles ratchet down, but I still struggle to see a fast-crash collapse.


    [“Either way, the brave new world that awaits us will be characterised as the time of less that will be in stark contrast to the time of plenty many of us enjoyed during the 20th Century.”]

    If you ever wonder what psychological leanings got us this far into painting ouselves in a corner; you’d probably be hard pressed to come out with a more splendid specimen:

    Segment of relevance: 4:15 – 6:05

    It’s quite the anthropological case of study. How a guy in his position can be so stunningly full of shit. It is not ignorance that made him look like the idiot he is; it’s Willful ignorance -aka- ideology.
    Even Pickens is incredulous and started to loose it….lol
    It’s hilarious if you manage to watch the thing from a detached enough perpserctive.
    It’s an epic archival footage if you ask me…

    steve from virginia

    Just dropping by to say that central banks cannot ‘print money’ or create new credit. What they can do is shift bits of purchasing power around to their clients from everyone else. If you take fifteen minutes and think about it you can see how silly it is for any firm to simply give away its product willy-nilly. What the central banks do is lend against collateral … which tends to be the IOU for a loan that has been already made. By making unsecured loans commercial banks create new money, that is, money (credit) that did not exist in any form before the loan was made.

    Purchasing power flows from customers to oil drillers leaving too few with funds able to support high prices. What appears to have caused the oil price crash is Abenomics which has contributed to the decline of the yen by 35% in a matter of months. That means Japanese customers = 35% poorer, taking a bite out of global consumption. American- and S. European non-speculators are also broke = more bites out of consumption. China is slowing down … you get the picture.

    Assuming peak oil was supposed to take place in the future: the ongoing crash means it is happening right now. All your tar sand, deepwater, arctic and fracking plays are too costly to pursue, so are oil plays where above ground costs have ballooned out of control such as in Iran where corrupt fingers of government are in the oil pie.

    Energy deflation is running away on its own, Saudi oil minister is simply admitting it. There is nothing they can do but hold on and pray. We should do the same.

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