Tags: collapse* + eroi* + peak energy*

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  1. The Wall Street Journal recently ran an article called, Glut of Capital and Labor Challenge Policy Makers: Global oversupply extends beyond commodities, elevating deflation risk. To me, this is a very serious issue, quite likely signaling that we are reaching what has been called Limits to Growth, a situation modeled in 1972 in a book by that name.

    What happens is that economic growth eventually runs into limits. Many people have assumed that these limits would be marked by high prices and excessive demand for goods. In my view, the issue is precisely the opposite one: Limits to growth are instead marked by low prices and inadequate demand. Common workers can no longer afford to buy the goods and services that the economy produces, because of inadequate wage growth. The price of all commodities drops, because of lower demand by workers. Furthermore, investors can no longer find investments that provide an adequate return on capital, because prices for finished goods are pulled down by the low demand of workers with inadequate wages.

    The “secret formula” humans have had for winning in our competition against other species has been the use of supplemental energy, adding to the energy we get from food. There is a physics reason why this approach works: total population by all species is limited by available energy supply. Providing our own external energy supply was (and still is) a great work-around for this limitation. Even in the days of hunter-gatherers, humans used three times as much energy as could be obtained through food alone.

    In my view, the formula that has allowed humans to keep winning the battle against other species is the following:

    Use increasing amounts of inexpensive supplemental energy to leverage human energy so that finished goods and services produced per worker rises each year.
    Pay for this system with debt, because (if supplemental energy costs are cheap enough), it is possible to repay the debt, plus the interest on the debt, with the additional goods and services made possible by the cheap additional energy.
    This system gradually becomes more complex to deal with problems that come with rising population and growing use of resources. However, if the output of goods per worker is growing rapidly enough, it should be possible to pay for the costs associated with this increased complexity, in addition to interest costs.
    The whole system “works” as long as the total quantity of finished goods and services rises rapidly enough that it can fund all of the following: (a) a rising standard of living for common workers so that they can afford increasing amounts of debt to buy more goods, (b) debt repayment, and interest on the debt of the system, and (c) and an increasing amount of “overhead” in the form of government services, medical care, educational services, and salaries of high paid officials (in business as well as government). This overhead is needed to deal with the increasing complexity that comes with growth.

    The formula for a growing economy is now failing. The rate of economic growth is falling, partly because energy supply is slowing (Figure 3), and partly because we need more and more every year to do the same things.

    One way of viewing our problem today is as a crisis of affordability. Young people cannot afford to start families or buy new homes because of a combination of the high cost of higher education (leading to debt), the high cost of fuel-efficient new cars (again leading to debt), the high cost of resale homes, and the relatively low wages paid to young workers. Even older workers often have an affordability problem. Many have found their wages stagnating or falling at the same time that the cost of healthcare, cars, electricity, and (until recently) oil rises. A recent Gallop Survey showed an increasing share of workers categorize themselves as “working class” rather than “middle class.”

    It is this affordability crisis that is bringing the system down. Without adequate wages, the amount of debt that can be added to the system lags as well. It becomes impossible to keep prices of commodities up at a high enough level to encourage production of these commodities. Return on investment tends to be low for the same reason. Most researchers have not recognized these problems, because they are narrowly focused and assume that models that worked in the past will continue to work today.
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  2. The EROI that has fueled our development so far will soon be gone as fossil fuels deplete and decline in quality, and we cannot make up the difference by substituting renewables. What’s even more troubling, though, is that EROI does not appear to decline in a linear fashion.

    The implications of this analysis are troubling to say the least.

    Globally, the net return on our prevailing energy staples oil and gas1 has declined into the range of 20:1 – 30:1. A look at the state of global development today suggests that this is an EROI that makes it difficult for societies to achieve a high quality of life. The EROIs of renewable technologies fall at or below this range.

    Now look at what happens in an EROI range of 10:1 – 20:1. The exponential EROI function begins to drop off sharply. This is termed the “net-energy cliff.” A society moving through this range of declining EROI becomes increasingly less able to support high levels of techno-social complexity. We in the affluent West have come to take the fruits of this complexity for granted as the sine qua non for a high standard of living as well as our birthright in perpetuity.

    This analysis has two take-home messages for E4C readers and everyone involved in engineering for global development. First, it is unlikely that the developing world will ever "develop" as such. And second, the affluent developed world will face catabolic “de- development,” as energy sources dwindle and eventually fail to support the upper levels of the hierarchy of energy needs. Catabolism occurs when a society depletes its resources, can no longer grow and begins to dissassemble its infrastructure to consume it for energy, as John Michael Greer explains.

    The first priority should be to gain more experience developing technologies that are scaled to the resource constraints of the future. And we need to do this not simply out of moral obligation to the world's poor, but also because, in short order, we are going to need those same technologies ourselves.

    To set appropriate targets for this innovation, we have to accept the probability that the developed world of the future will look a lot more like the developing world of today, and not the reverse as has traditionally been assumed in the development sector.
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  3. With the coming of the industrial revolution, both of the lines shifted substantially from their previous position, as shown in the second chart. Obviously, the torrent of cheap abundant energy gave the world’s industrial nations access to an unparalleled wealth of resources, and this pushed the dividing line between what was affordable and what was unaffordable quite a ways over toward the right hand side of the chart. A great many things that had been desirable but unaffordable to previous civilizations swung over from category C into category A as fossil fuels came on line. This has been discussed at great length here and elsewhere in the peak oil blogosphere.

    Less obviously, the dividing line between what was useful and what was useless also shifted quite a bit toward the bottom of the chart, moving a great many things from category B into category A. To follow this, it’s necessary to grasp the concept of technological suites. A technological suite is a set of interdependent technologies that work together to achieve a common purpose. Think of the relationship between cars and petroleum drilling, computer chips and the clean-room filtration systems required for their manufacture, or commercial airliners and ground control radar. What connects each pair of technologies is that they belong to the same technological suite. If you want to have the suite, you must either have all the elements of the suite in place, or be ready to replace any absent element with something else that can serve the same purpose.

    What makes this relevant to the charts we’ve been examining is that most support technologies have no value aside from the technological suites to which they belong and the interface technologies they serve. Without commercial air travel, for example, most of the specialized technologies found at airports are unnecessary.

    Once energy and resource use per capita peak and begin their decline, though, a different reality comes into play, leading over time to the situation shown in the third chart.

    It’s habitual in modern economics to insist that such bottlenecks don’t exist, because there’s always a viable alternative. That sort of thinking made a certain degree of sense back when energy per capita was still rising, because the standard way to get around material shortages for a century now has been to throw more energy, more technology, and more complexity into the mix. That’s how low-grade taconite ores with scarcely a trace of iron in them have become the mainstay of today’s iron and steel industry; all you have to do is add fantastic amounts of cheap energy, soaring technological complexity, and an assortment of supply and resource chains reaching around the world and then some, and diminishing ore quality is no problem at all.

    It’s when you don’t have access to as much cheap energy, technological complexity, and baroque supply chains as you want that this sort of logic becomes impossible to sustain. Once this point is reached, bottlenecks become an inescapable feature of life. The bottlenecks, as already suggested, don’t have to be technological in nature—a bottleneck technology essential to a given technological suite can be perfectly feasible, and still out of reach for other reasons—but whatever generates them, they throw a wild card into the process of technological decline that shapes the last years of a civilization on its way out, and the first few centuries of the dark age that follows.

    The crucial point to keep in mind here is that one bottleneck technology, if it becomes inaccessible for any reason, can render an entire technological suite useless, and compromise other technological suites that depend on the one directly affected.

    All this has immediate practical importance for those who happen to live in a civilization that’s skidding down the curve of its decline and fall—ours, for example. In such a time, as noted above, one critical task is to identify the technological suites that will still be viable in the aftermath of the decline, and shift as much vital infrastructure as possible over to depend on those suites rather than on those that won’t survive the decline. In terms of the charts above, that involves identifying those technological suites that will still be in category A when the lines stop shifting up and to the left, figuring out how to work around any bottleneck technologies that might otherwise cripple them, and get the necessary knowledge into circulation among those who might be able to use it, so that access to information doesn’t become a bottleneck of its own

    That sort of analysis, triage, and salvage is among the most necessary tasks of our time, especially for those who want to see viable technologies survive the end of our civilization, and it’s being actively hindered by the insistence that the only possible positive attitude toward technology is sheer blind faith.
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  4. "People will never see the connection to oil. They will assume the issue is all financial, and can be fixed with a new financial system."

    Energy consumption is integral to “holding our own” against other species.

    All species reproduce in greater numbers than need to replace their parents. Natural selection determines which ones survive. Humans are part of this competition as well.

    In the past 100,000 years, humans have been able to “win” this competition by harnessing external energy of various types–first burned biomass to cook food and keep warm, later trained dogs to help in hunting. The amount of energy harnessed by humans has grown over the years. The types of energy harnessed include human slaves, energy from animals of various sorts, solar energy, wind energy, water energy, burned wood and fossil fuels, and electricity from various sources.

    Human population has soared, especially since the time fossil fuels began to be used, about 1800.

    Because the world is finite, the greater use of resources by humans leads to lesser availability of resources by other species. There is evidence that the Sixth Mass Extinction of species started back in the days of hunter-gatherers, as their ability to use of fire to burn biomass and ability to train dogs to assist them in the hunt for food gave them an advantage over other species.

    Also, because of the tight coupling of human population with growing energy consumption historically, even back to hunter-gatherer days, it is doubtful that decoupling of energy consumption and population growth can fully take place. Energy consumption is needed for such diverse tasks as growing food, producing fresh water, controlling microbes, and transporting goods.

    We began an economic growth cycle back when we began using fossil fuels to a significant extent, starting about 1800. We began a stagflation period, at least in the industrialized economies, when oil prices began to spike in the 1970s. Less industrialized countries have been able to continue growth their growth pattern longer. Our situation is likely to differ from that of early civilizations, because early civilizations were not dependent on fossil fuels. Pre-collapse skills tended to be useful post-collapse, because there was no real change in energy sources. Loss of fossil fuels would considerably change the dynamic of the outcome, because most jobs would become obsolete.

    Most models put together by economists assume that the conditions of the growth period, or the growth plus stagflation period, will continue forever. Such models miss turning points.

    we cannot ramp up all of the physical infrastructure needed (pipelines, steaming equipment, refining equipment) without badly cutting into the resources needed to “grow” the rest of the economy. A similar problem is likely to exist if we try to ramp up world oil and gas supply using fracking.

    he link between energy and the economy comes both from the supply side and the demand side.

    With respect to supply, it takes energy of many types to make goods and services of all types. This is discussed in Item 2 above.

    With respect to demand,

    (a) People who earn good wages (indirectly through the making of goods and services with energy products) can afford to buy products using energy.

    (b) Because consumers pay taxes and buy goods and services, growth in demand from adequate wages flows through to governments and businesses as well.

    (c) Higher wages enable higher debt, and higher debt also acts to increase demand.

    (d) Increased demand increases the price of the resources needed to make the product with higher demand, making more of such resources economic to extract.

    11. We need a growing supply of cheap energy to maintain economic growth.

    12. Oil prices that are too low for producers should be a serious concern. Such low prices occur because oil becomes unaffordable. In the language of economists, oil demand drops too low.

    A common belief is that our concern should be oil prices that are too high, and thus strangle the economy. A much bigger concern should be that oil prices will fall too low, discouraging investment. Such low oil prices also encourage civil unrest in oil exporting nations, because the governments of these nations depend on tax revenue that is available when oil prices are high to balance their budgets.

    The issue we are now seeing is the reverse–too low oil prices for oil producers, including oil exporters. These low oil prices are contributing to the unrest we see in the Middle East. Low oil prices also contribute to Russia’s belligerence, since it needs high oil revenues to maintain its budget.
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  5. In his most recent State of the Union address, President Obama touted “more oil produced at home than we buy from the rest of the world—the first time that’s happened in nearly 20 years.” It’s true: U.S. crude oil production has increased from about five million barrels per day to nearly 7.75 mb/d over the past five years (we still import over 7.5 mb/d). And American natural gas production is at an all-time high.

    But there’s a problem. We’re focusing too much on gross numbers. (The definition of gross I have in mind is “exclusive of deductions,” as in gross profits versus net profits., though other definitions apply here, too.) While these gross numbers appear splendid, when you look at net, things go pear-shaped, as the British say.

    Our economy is 100 percent dependent on energy: With more and cheaper energy, the economy booms; With less and costlier energy, the economy wilts. When the electricity grid goes down or the gasoline pumps run dry, the economy simply stops in its tracks.

    But the situation is actually a bit more complicated, because it takes energy to get energy.

    With money as with energy, we are doing extremely well at keeping up appearances by characterizing our situation with a few cherry-picked numbers. But behind the jolly statistics lurks a menacing reality.

    We’ll never run out of any fossil fuel, in the sense of extracting every last molecule of coal, oil, or gas. Long before we get to that point, we will confront the dreaded double line in the diagram, labeled “energy in equals energy out.” At that stage, it will cost as much energy to find, pump, transport, and process a barrel of oil as the oil’s refined products will yield when burned in even the most perfectly efficient engine.

    between 2005 and 2013, the industry spent $4 trillion on exploration and production, yet this more-than-doubled investment produced only 4 mb/d in added production.

    It gets worse: All net new production during the 2005-13 period came from unconventional sources; of the $4 trillion spent, it took $350 billion to achieve a bump in production. Subtracting unconventionals from the total, world oil production actually fell by about a million barrels a day during these years. That means the oil industry spent over $3.5 trillion to achieve a decline in overall conventional production.

    Last year was one of the worst ever for new discoveries, and companies are cutting exploration budgets. “It is becoming increasingly difficult to find new oil and gas, and in particular new oil,” Tim Dodson, the exploration chief of Statoil, the world’s top conventional explorer, recently told Reuters. “The discoveries tend to be somewhat smaller, more complex, more remote, so it is very difficult to see a reversal of that trend…. The industry at large will probably struggle going forward with reserve replacement.”

    To people concerned about climate change, much of this sounds like good news. Oil companies’ spending is up but profits are down. Gasoline is more expensive and consumption has declined.

    There’s just one catch: None of this is happening as a result of long-range, comprehensive planning. And it will take a lot of effort to minimize the human impact of a societal shift from relative energy abundance to relative energy scarcity. In fact, there is virtually no discussion occurring among officials about the larger economic implications of declining energy returns on investment. Indeed, rather than soberly assessing the situation and its imminent economic challenges, our policymakers are stuck in a state of public relations-induced euphoria, high on temporarily spiking gross U.S. oil and gas production numbers.

    The obvious solution to declining fossil fuel returns on investment is to transition to alternative energy sources as quickly as possible. We’ll have to do this anyway to address the climate crisis. But from an energy accounting point of view, this may not offer much help.

    IF OUR ECONOMY RUNS on energy, and our energy prospects are gloomy, how is it that the economy is recovering?

    The simplest answer is that it’s not—except as measured by a few misleading gross statistics. Every month the Bureau of Labor Statistics releases figures for new jobs created, and the numbers look relatively good at first glance (113,000 net new jobs for January 2014). But most of these new jobs pay less than those that were lost in recent years. And unemployment statistics don’t include people who’ve given up looking for work. Labor force participation rates are at their lowest level in 35 years.
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  6. according to Boyd it is not only the availability of cheap oil that is in decline but rather what is in decline is the general availability of energy sources which provide a high amount of energy in return for energy invested.

    Boyd’s view revolves around a measure economists refer to as EROI, which measures the ratio between the amount of energy returned relative to energy invested. Thus we might better label Boyd a peak EROI Theorist for he believes that increasingly we will need to invest more energy in order to get energy back, as we have used up the vast majority of easily accessible high energy sources of oil, natural gas and to a lesser extent coal.

    The importance of EROI is that to a large extent it determines the prosperity of society. The higher the EROI, the higher the prosperity levels, as we are able to direct more energy back into society rather than into producing more energy. According to Boyd, “our modern societies have become so hooked on nearly-free energy… with an EROI of at least 8 : 1 being required to maintain the high living standards and complex society to which we have become accustomed”.

    Higher up the sophistication level Boyd cites that a societal EROI of up to 14:1 is required to support such things as good education, health care, and the arts. As the EROI continues to drop, however, it is not only the arts that we have to worry about, rather as Boyd’s book illustrates the implications are potentially far reaching and devastating with the potential to reverse global prosperity and to do so rather unequally.

    What all of this means for investors is that, at best, growth may cease at the global level in the relatively near future. Once you accept that growth will cease, all of the current ‘common sense’ assumptions about investing, such as the assumption of making money from money, cease to be true. Completely different assumptions will be required, including an understanding that the future will be a less wealthy place than the present. This realization » could destabilize and crash the financial system.
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  7. Energy use statistics, within food systems and throughout the economy more generally, are just numbers on a page. In the flesh-and-blood world however, there are real consequences to having a food system that requires so much energy to function. First, and perhaps most obviously, heavy demand for energy in the service of producing, processing, distributing and consuming food forges a link between food and fuel prices. When fuel prices rise or become volatile, food prices must follow. When food prices rise and become volatile, that challenges the food security of billions of people worldwide, leading to hunger, starvation and social unrest. Only by radically reducing the energy costs associated with procuring food can this link be severed.
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  8. we are experiencing slowly descending net energy. Put simply, this means that in the good old days you could simply drill a hole in the ground and high quality cruse oil would gush upwards. This low hanging fruit had a rate of return of about 300 - that is, you got 300 units of oil back for every 1 you put into it. This ratio is known as EROEI (Energy Return On Energy Invested).

    Those days of extremely high net energy have gone, but we have configured our modern world as if they would stay forever. These days, oil is in increasingly more difficult places to get at, and the stuff that is there is comparatively low quality stuff with a low EROEI. Basically put, the low hanging fruit has been well and truly picked.

    Other stores of energy have varying EROEIs ranging from coal with about 80, nuclear with about 10 and corn ethanol of about 1 (i.e. you get as much energy back as you put into growing, transporting and refining it, meaning it is not worth the bother). Renewables have a range of EROEIs that are open to debate but tend to be of the order of 10 or less. This means they are technically viable as an energy source (all other things being equal) but would need to be scaled up on a truly humongous scale to get anywhere near what fossil fuels give us today.
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