The Good the Bad and the Ugly
by Dr Louis Arnoux
So, again, notwithstanding 270 years of Tooth Fairy magic… how come the GIW (Global Industrial World) is still ticking, albeit increasingly precariously?
In actual life, nothing happens without a self-powered energy supply chain. Colloquially, the second principle of thermodynamics can be formulated as “There ain’t such a thing as a free lunch”. That is, it takes energy to get energy. So, what our world runs on is the energy surplus delivered after the energy cost of accessing gross energy has been expended.
The point is that, during all of that time and until recently, dogged work by countless engineers has resulted in abundant net energy “sloshing around” throughout the GIW. Elites’ endless fantasies did not matter, besides the odd bankruptcies, so long as there was still abundant net energy available to sustain the industrial show. Now, this 270-year old fairy tale is ending and the elephants in the herd have begun rampaging wildly.
In the distant past, energy supply chains were all based on solar energy powering photosynthesis, with net energy delivered in the forms of crops. In the case of the GIW, the entire, global energy system is based on oil and net energy is delivered in the form of transport fuels. Accessing all other forms of energy rests on the ongoing delivery of net energy from oil. Let this sink in – absolutely all other forms rest on that, coal, gas, nuclear, geothermal, hydro, photovoltaics (PVs), wind turbines (WTs), biomass, animal feed and food for humans, as well as the myriad products and services in the standard consumerist package.
This is where we encounter a “slight glitch” with our next elephant. The capacity of present energy supply chains (aka Oil Industry and all the other energy sectors) to deliver net energy from oil is nearly completely depleted. We are going through the last 10 years of the Oil Age. This, well ahead of the Climate Emergency, is how Fossil Fuels can be cast in the role of the Bad – not inherently but as a direct consequence of 270 years of the GIW having been and remaining under the sway of the Tooth Fairy syndrome.
Figure 2 – Net energy from oil and global debt
Except for a few specialists like us, no one has seen this coming, nor cared to listen to repeated warnings since the 1990s, because, under the Tooth Fairy syndrome, the problem remained invisible. All that barrel counters (like the proponents of Peak Oil) and “bean counters” (aka accountants and finance people) could see is crude oil production and GDP going up and up… In fact, the whole matter remained masked under an ever-piling mass of global debt. As shown in Figure 2, total global debt began to shoot for the stars when the total net energy from oil delivered to the GIW (the orange curve) began to decline in 1981. Now, under the Covid-19 pandemic, with net energy from oil getting near zero, debt is shooting even more steeply to unprecedented heights. To keep the GIW going no matter what, in fully delusional fashion, elites keep borrowing like there is tomorrow… and on that thermodynamics-denying trajectory there won’t be any tomorrow. Recall again the warning of Schramski et al.: “The laws of thermodynamics have no mercy. Equilibrium is inhospitable, sterile, and final.”
Some twenty years ago, the oil reserves depletion process was much less advanced. Efforts to gauge where the world was along the overall depletion curve were burdened with large uncertainties. Now, even indirect approaches relying on barrel counting and bean counting, what I prefer to refer to as “reading tea leaves and writings on walls”, are enough to guess that all is not well in the oil world. In recent years, a string of reports by the likes of Chatham House, Deloitte, PwC, HSBC, Bloomberg, have piled up pointing in various approximate ways at the dangers of the oil industry as we currently know it disintegrating within about 10 years. Late last year, the Geological Survey of Finland released a much more comprehensive and robust analysis, over 500 pages long: Simon Michaux, 2019, Oil from a Critical Raw Material Perspective, Geological Survey of Finland (GTK). Dr Nafeez Ahmed’s summed it as: “We are not running out of oil, but it’s becoming uneconomical to exploit it” – highlighting how the oil industry “is on the brink of a meltdown” and the global energy situation dire in a much more immediate way than “mere” global warming. Michaux’s conclusions are worth focusing on:
The chorus of Tooth Fairy believers is always prompt to point out that, as oil gets scarce, prices will go up making the Good Renewables super competitive, rendering oil assets “stranded”, and thus that all will be well ever after… Their crude belief in “supply and demand” obscures the fact that the world does not run on crude but on net energy.
The Thermodynamics elephant dictates that about 38% of the gross energy in an average barrel of conventional crude will be lost as waste heat whatever the processes used to extract work from crude oil (refining, combustion in an internal combustion engine, etc.), aka no free lunch. For the more engineering minded, this waste is shown in Figure 3 (the gap between the blue and red horizontal bars). That maximum amount of work has to be split between what the oil industry uses to deliver net energy and what is delivered to end-users. We all know that the easy-to-access resources are long gone. Nowadays one has to search for oil in distant, difficult and deep locations, deep sea, Arctic, or hard to exploit resources, very heavy oils, tar sands or via fracking… and this entails ever growing energy costs of extraction, transport, refining and final delivery. That is, as depletion progresses, with each new barrel extracted, the total energy cost of delivering net energy per barrel (orange curve) grows closer and closer to the maximum available work (red bar). The consequence is that the amount of net energy that can be delivered to the non-oil part of the industrial world shrinks, and shrinks (the gap between the red bar and the orange curve). Eventually the total energy cost hits abruptly the maximum amount of available work (red bar) and the industry grinds to a halt.
Let’s stress this. Figure 3 explains why the end of the Oil Age is bound to be abrupt: hitting the red bar is more like a plane hitting a mountain side rather than landing smoothly on an Airport runway – with all the messy and tragic consequences…
With the above in mind we can now begin to see why oil prices going up with growing oil scarcity is a Tooth Fairy tale. As shown in Figure 4, in real life two key factors constrain the price of crude.
On the one hand, until recently, end-users had to accept the rapidly increasing societal cost of delivering net energy as driven by the total energy cost incurred by the oil industry (SOC blue trend) – we say societal because what matters is the total energy cost of delivering net energy to end-users in the non-oil side of the industrial world. This cost encompasses everything and everyone required to keep the oil industry operating, from wells and mines to grave (aka rubbish dumps), including the energy costs of approximately 2 billion people directly or indirectly involved in the matter – yet another very large “elephant-in-the-room”. Most analysts only consider the visible part of the oil industry, the oil rigs, platforms, pipelines, tankers, refineries, petrol stations. They ignore the huge oil support system stretching from iron ore and coal mines, and other materials, through the manufacturing of the masses of equipment required by the oil industry all the way to the energy costs of providing the financial, medical, legal, educational, policing, military, etc., services necessary to the industry. It is this ever-increasing total energy cost of delivering net energy from oil (the orange curve in Figure 3) that drives SOC up and up.
On the other hand, since about 2010, SOC has been overridden by the maximum affordable societal oil price (MASOP red trend), that is, the maximum price industrial society can afford to pay and still generate wealth and economic growth from the residual net energy per barrel. MASOP is driven by the relentless shrinking of delivered net energy. It should be obvious that much less economic activity could be generated in 2015 when only about 8% of the gross energy in a barrel reached end-users compared with 1900 when the proportion was about 61%. Soon after 2010, MASOP became lower than SOC. Regardless what the oil industry required to cover its costs and make money, the non-oil industrial world could only afford much less, and less in tune with rapidly declining net energy per barrel. MASOP is now the long-term price driver underlying the wild price fluctuations that keep occurring along with geopolitical events, pandemics, and the occasional “glut” or supply shortage. Long-term Crude oil prices are irretrievably falling to the floor – regardless of Tooth Fairy beliefs. Watching the SOC and MASOP interplay is an example of how, passing through the looking glass, we can gauge the enormous chasm between Tooth Fairy fantasies and the tangible world. It enables us to become aware of yet another fantasy – the famous “stranded assets” so many NGOs have been warning about, now also followed by central bankers. In the face of global warming, everyone has been warned that fossil fuels-based industries must face the threat that a large proportion of their assets soon will become stranded, unusable, thus worthless. There has never been, there aren’t any and there will never be any stranded assets. Oil in the ground is not an asset. It’s mere liquid rock. The actual assets are the science and engineering knowledge, expertise, skills and experience that enable the delivery of net energy. That capability is becoming exhausted. When it is no longer feasible to generate any economic activity from vanished net energy, the very large amounts of remaining oil stay where they are, underground and their price is zero. Stranded assets are an accounting fiction. So-called Peak Demand is the twin of stranded assets. Of late, Peak Demand has become a popular topic abundantly commented upon by countless pundits. Even OPEC is now apparently pondering it. The Covid-19 pandemic would precipitate it and Renewables would achieve it in its triumphant fight against global warming. It apparently never crosses the mind of “Peak Demanders” no more than that of “Peak Oilers” that what may be precipitating a drop in oil use is the same driver as for the MASOP oil price trend. If net energy can no longer be extracted from crude, oil loses all interest and so-called Demand becomes extinct just like oil prices…
The End of the Oil Age “elephant” is closely followed by its twin, the lack of a substitute. The GIW has no substitute self-powered energy chain ready to take the place of the rapidly dwindling oil-based one. This is where matters are in the process of turning Ugly. With no net energy able to be delivered everything grinds to a halt. In the face of thermodynamics, the Tooth Fairy is losing all her power.
Ominously, emerging from behind the surging mountain of global debt, we can now see appearing in stark relief the Energy Seneca and its avalanche of threats, Climate Emergency and all. It even begins to manifest itself in global GDP figures (Figure 5).
After about 230 years of growth, from the very early beginnings of the oil industry in 1745 in Pechelbronn, north-east France and in Ukhta, Russia, we estimate that net energy from oil per head of global population peaked in the early 1970s. Unbeknown to most, the GIW has been in thermodynamic decline ever since. The terminal phase of the Seneca got snowballing over 10 years ago. We are now reaching the edge of a thermodynamic “cliff”. Short of drastic, urgent action, by 2030 we will be well into tumbling down that cliff. In fact, as shown in Figure 5, the pandemic has abruptly shifted the timetable forward. Even accepting World Bank and IMF projections for a “rebound” of GDP in 2021, which remains to be seen, the trend is towards an unprecedented nose dive that will be extremely hard to avoid.
In these pandemic times though, the chorus of Tooth Fairy believers has gone into overdrive. Why? The solution was easy. Almost overnight, even politicians who until recently staunchly held onto budgetary rigour have bravely abandoned all restraints. In a matter of a few weeks global debt shot way up, trillion upon trillion in whatever currency, dwarfing the Quantitative Easings of subprime crisis fame. By now, many analysts, financiers, bankers, are pondering the consequences of it all. Many interpret the interplays between central banks and governments as meaning that much of the new debt actually functions as masses of “helicopter money” dropped liberally onto the faltering economies of the GIW. Implicitly, and even sometimes explicitly, the intent is that unrestricted parachuting of funds, famously created “out of thin air”, is “what it takes” to re-prime the global economic machinery and induce a rapid and robust “recovery” from the pandemic’s impacts. Such pure Tooth Fairy magic has been working since the 1970s. Why wouldn’t it work this time round?
The point is that up until now the delivery of net energy from oil, albeit progressively vanishing, still enabled a certain level of debt servicing – this is now gone. The present world system of fiat currencies built on debt, that emerged in the 1970s, functions on nothing but as a gamble that tomorrow will be the same as yesterday, except with a bit more and a bit better, and that this “growth for ever” will continue to enable the servicing of past debt, creating more as required or even merely printing more money to supply the “liquidity” the GIW requires to keep going.
Amazingly, the Tooth Fairy chorus never sees the herd of oil-fed Bad elephants that we have been watching romping through the Energy Seneca stage. Fossil net energy supplies have become so fragile. They will soon become extinct. The illusion of a future that sustained Tooth Fairy fiat currency magic is gone. There is no way that the ever-growing debt may be serviced and even less repaid. In the absence of a solid, self-powered energy supply system, there is no way that the flows of “thin air” liquidities could sustain the GIW beyond the edge of the cliff where it now stands.
The current trillions of funding in response to the pandemic amount to no more than a post-modern cargo cult. Where, after WWII, some Pacific Islanders built fake runways and mock-up planes made of wood and straw in the belief that they would magically attract more cargo deliveries of undreamed goods, like those they had seen during the war, now, governing elites hose down the GIW with simulated funds in the vain belief that the magic will keep working and that the consumerist cargo will keep being delivered – a very sad and tragic delusion; no self-powered net energy supplies, no goods, no services, nothing goes, Tooth Fairy gone, all present currencies are worthless, mere ghosts reminiscent of those walking dead zombie films – but few have yet noticed. With the Covid-19 pandemic and the impacts of responses to it accelerating the terminal loss of our world’s thermodynamic foundations, it’s the whole of economics and finance that has begun vanishing like mist in the morning sun… with nothing to replace their decision-making magic and no substitute in sight to the disappearing global energy supply system. Of course, countless economists, “Planet Finance” people, captains of industry or politicians will want to summarily dismiss what I have called the Tooth Fairy syndrome as ridiculous, preposterous, outrageous and worse. Yet, the facts are stubborn. They have been known for decades among the few of us who dared to venture through the looking glass. Anyone can believe that they know better and keep fantasising to their heart’s content. It’s their democratic privilege. They will do so at their own peril. Let’s just remind them of the robust advice given by some of their peers, the UK Chartered Institute of Management Accountants, about the sheer necessity to learn to think the unthinkable.
In Part 1 we met the cast and got acquainted with the Good, aka Thermodynamics.
In Part 2 we met the Bad, aka fossil Fuels.
This will lead us to look closely at the Ugly, aka Renewables in Part 3.
This romp with “elephants-in-the-room” will end in Part 4 where we will examine the energy trap we are now locked in with no possibility of exit, short of radical change, and where this may lead to if, by any chance, we do manage radical change: the Fourth Transition.
Nik Gowing and Chris Langdon, 2016, Thinking the unthinkable, Chartered Institute of Management Accountants. .
Nafeez Ahmed, 2020, We are not running out of oil, but it’s becoming uneconomical to exploit it, https://www.vice.com/en_us/article/8848g5/government-agency-warns-global-oil-industry-is-on-the-brink-of-a-meltdown.
The waste heat data Figure 2 is based on was obtained through a proxy for the total energy cost of operating the oil-based energy supply chain on a mine to grave basis, that is ,seeking to include everything and everyone required to enable the oil industry to keep delivering net energy from oil, from mining the iron ore for the steel and machinery, the concrete, etc., to the energy cost of the approximately 2 billion people involved directly and indirectly in net energy delivery, and all the way to disposal of final junk and waste left over by a mining industry now close to the end. Of course, this entails an error margin. Rather than focusing on a specific date for the end, what matters is to understand the overall dynamic, that the end is most likely to happen, at best, before or around 2030, that it cannot be but abrupt, and that the matter is purely one of thermodynamics. It cannot be “fixed” via incurring ever more debt, e.g. in the manner of US Shale Oil fracking. Mathematically literate and thermodynamically savvy readers can learn more, for example, by reading the mostly lay language paper: Berndt Warm, 2020, Why is the Average Crude Oil Price decreasing since 2008? or: Thermodynamics of Oil Production, https://www.researchgate.net/publication/340166220_Why_is_the_Average_Crude_Oil_Price_decreasing_since_2008_or_Thermodynamics_of_Oil_Production. The pioneering work for this approach was carried out from around 1970 onwards by Bedford Hill and his team of US oil industry engineers. Unfortunately, the way they reported their findings was clumsy and confusing, and dismissed summarily without critics attempting to find out what it was that they had been working on. From 2015 onwards, a number of us reanalysed and reworked the matter and concluded that their insights were correct. Dr Warm’s paper is the most recent and innovative presentation of this reworking.