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An update on the energy crisis

Abandoned factory building. Image source: Pixabay

It’s been a while since I wrote about the global energy crisis — so it’s time for a recap on the topic. As it looks today, this little energy crunch might evolve into something very consequential. Yes, it can happen that this crisis will be solved somehow, and the monster of depletion (the Voldemort of economics) will be put to rest again, at least for a while. It is perfectly possible however, that we are entering the first phase of a long, slow and permanent economic collapse. Let’s take a tour around the world, and see where we might be heading.

The first stop on our journey is the mighty Kingdom of Oil — the go to place if you need more of the black gold. For the casual onlooker it looks like they have many decades worth of oil left, with plenty of spare capacity to increase “production”. But is it really there? According to Simon Watkins from oilprice.com:

at the beginning of 1989, Saudi Arabia claimed proven oil reserves of 170 billion barrels. Only a year later, and without the discovery of any major new oil fields, the official reserves estimate had somehow increased by 51.2 percent, to 257 billion barrels. Shortly thereafter, it increased again to 266 billion barrels or so, a level that persisted until a slight increase in 2017 to 268.5 billion barrels.

Interesting. I’m not surprised however: a country, whose existence and peace hinges upon the belief that they have an endless supply of oil is naturally inclined to exaggerate the quantity of it’s reserves. But then he continues:

On the other side of the supply-demand equation, from 1973 to the end of last week, Saudi Arabia pumped an average of 8.162 million barrels per day of crude oil. Therefore, taking 1989 as a starting point (with 170 billion of crude oil reserves officially claimed in that year), in the subsequent 32 years Saudi Arabia has physically pumped and removed forever, a total of 95,332,160,000 barrels of crude oil. Over the same period, there has been no significant discovery of major new oil fields. Despite this, Saudi Arabia’s crude oil reserves have not gone down, but rather have actually gone up. This is a mathematical impossibility on this scale.

Food for thought… Amidst uncertainties around how much oil actually is in the country they increasingly turn towards natural gas, but that too seems to be a little over-hyped. The seemingly huge quantities (an estimated 200 trillion cubic feet) of gas is a meager amount even for Saudi Arabia itself (not to mention the world’s thirst for liquid natural gas). According to Mr. Watkins:

This amount is not even enough to cover the current volume of highly polluting fuel oil being burned for power generation in Saudi Arabia, even if Aramco’s already elevated gas production holds steady.

The Jafurah gas project has a very pragmatic goal in my view: to replace at least some of the oil burned domestically — so that more will be left for export. Besides, it paints a green picture of Saudi Arabia making “progress” towards net zero… While in fact they are turning every stone to postpone the inevitable demise of fossil fuels, and to maximize profits. This shouldn’t come as a surprise. “Renewables” or nuclear cannot replace oil on the scale needed and within the time frame mandated by depletion and climate change (not to mention the immense income from it). If you have doubts, calculate how many wind farms and solar panels and/or nuclear power plants would be needed to replace the energy provided by oil (not just the electricity part).

According to the Saudi’s narrative underinvestment in oil seems to be the biggest problem, which is generally true. It looks like the dream of bright greens has finally came true after all those years of protesting and fighting… In fact divestment in fossil fuels seems to be nothing more than virtue signalling while global demand for oil is growing relentlessly.

This is a very strange place to be. On one hand we should rejoice that oil will be left under miles of rock and the climate will be saved. On the other hand this will also guarantee a permanent economic decline. Every bit of the economy is dependent on fossil fuels: either for physical inputs, heat or long distance/bulk transport; electricity is just 20% of the total energy consumed. At the time of writing these lines oil prices seem to be high enough (around 80 USD). So where is the money then? If it’s not because of the greens, why don’t we see a boom in oil investment and an uptick in “production”?

Oil supermajors are posting blockbuster earnings, but still reluctant to increase investment in any meaningful way. Let’s take Exxon for example, raising capital spending from 16–19 billion USD this year to 20–25 billion a year. Don’t let this “huge” increase fool you however: 5 billion USD in additional capital spending is barely enough to keep the same level of extraction (i.e. to compensate for the decline in conventional resource “production”). Where do the windfall profits go then? The answer is: stock buybacks. 10 billion USD has been allocated for this purpose annually, starting next year — which is exactly double the increase in investments. If you ask me, this how you professionally exit a business: pay back your debts, decrease the amount you spend on dividends (you don’t have to pay for the stocks you own), and cut all but the most profitable projects. If the world would be full of oil — as economists presume — and reserves would be as big and lucrative as producers want us to believe, would one of the biggest supermajors let it’s “production” flatline amid rising oil prices? I guess not. Besides, high oil prices also mean high risk: demand will be destructed by them eventually, restoring the supply-demand balance, but leaving the economy in tatters.

Knowing the nature of the beast, this moment in history was only a question of when, not if: as large, easy to access, high quality reserves start their long slow decline, ever more energy intensive methods and harder to access fields had to be brought online. Besides taking up a lot of energy, this costs an awful lot of money. With ever rising energy prices, it seems we have reached the point where only the most lucrative projects would be financed: leaving the rest of the “proven”, but too risky to finance, too energy intensive to extract and too costly to refine reserves in the ground. Such a beautiful irony: capitalism, with it’s unquenchable thirst for profit is now pulling the rug out from under itself, because it’s no longer profitable enough to power it. It’s no wonder then, that a global oil shortage now seems inevitable.

This is the exact same reason why shale (tight) oil drillers have stopped expanding their business: they have realized how unprofitable (capital and energy intensive) their way of extraction is, and now focus their efforts to pay back their investors, and close their unfinished businesses (complete DUCs), while climbing a veritable landslide to maintain “production”. Without investment increasing exponentially to offset rapidly falling extraction, the heydays of tight oil will be history within a couple of years.

The latest oil & gas “production” data from all 32,229 horizontal wells in the Permian (Texas & New Mexico) that started producing from 2008/2009 onward, through July 2021. Notice how quickly (exponentially) extraction falls from the first moment oil starts flow from the wellhead. Source: Shale Profile

The worlds biggest importer of oil and gas, China, has another huge problem, beside facing a long (and potentially ever) lasting oil shortage. Coal. They have failed to increase “production” in tandem with economic growth in the past decade, and continue to fail to do so amidst the recent energy crisis. Coal prices broke records by the day since June (and was near record heights between 2016 and 2019 too), which should’ve “brought additional supply online” (as if mines were manufacturing the black rock like paper clips). While it is true that it takes some time to open a new mine, but considering for how long this is a problem, isn’t it possible that they are actually running out of coal?

China is burning half(!) of all the black rock extracted around the world each year, and with their current consumption rate they would eat up their own reserves in a mere 37 years (source: BP Statistical Review of World Energy 2021). Knowing that depletion doesn’t happen overnight (it is rather a long curve reaching it’s zenith at the point when half of the resource is still underground, then sloping downwards from there), it is perfectly possible that China has reached (or will reach within years) the peak of their coal production and the figures will start to fall lower and lower from there — no matter what. Any coincidence with their net zero target and emission’s peak date?

The only option left for China to prevent an instant economic meltdown as a result of soaring coal prices, was to cap them. The problem with this approach is that demand could quickly outstrip supply and physical shortages would pop-up all over the place. In order to prevent this a number of energy intensive operations had be closed temporary. Starting with aluminum alloy supply, and forcing steel production on its knees.

If we were indeed ready to transition away from fossil fuels, I wonder how would one build a wind turbine without steel rebars in it’s concrete base, and a huge steel column in the middle? Not to mention frames for solar panels, (electric) cars, battery casings — and the list goes on. “Renewables” are just as dependent on fossil fuels as anything else. It is just a matter of time to see the first shortage / price hike on photovoltaic panels and turbines.

Speaking of shortages I made a quick search on the most energy intensive businesses to see which products might be next on the list:

List of the most energy intensive businesses. Source: US Energy Information Administration

It is probably no surprise that food might be next, following a shortage of natural gas (an input to fertilizer production) and ever higher diesel prices (for tractors, combines, trucks, etc.) through increased refining costs. This will certainly cause inflation to rise well into 2022 in the developed world, and will probably mean hunger for the less lucky part of the population.

The rest of the industries on the list above have already been effected by energy shortages in due order. Iron and steel. Nonferrous metals (e.g.: aluminum alloys). Oil refining. Paper pulp production — hitting book printing hard this time, but when it starts to affect paper packaging it could hamper logistics of everything from breakfast cereals to televisions. Without a quick fix to this energy crisis (not price-wise, but availability-wise), the situation can escalate rather quickly, and infect less energy intensive industries as well — putting the entire world economy at a risk of falling into a recession.

Energy is the economy. Energy is life. It pains me to write this, but we are still relying more than 80% for our energy needs on fossil fuels — and with a looming global oil shortage, peak natural gas and coal, humanity faces the toughest challenge of its history. It’s not that we are running out of these fuels, rather we are being slowly and painfully deprived of them. Drop by drop – death by a thousand cuts. With COP26 starting this week, “tackling” climate change seems to be the biggest concern of humanity. If the energy crisis continues to develop into a global recession, then into a full scale depression however, we will remember COP26 as the good old days.

Truth to the matter, the only solution to both problems would be the same simple approach: a managed de-growth of the economy. Learning to live with less and less energy, and as a result: less and less industrial activity and pollution (including, but not limited to CO2). This would entail something like fuel rationing and/or quotas, and/or following an Oil Depletion Protocol… I would not bet the farm though on COP26 reaching the same conclusion and not trying to perpetuate the net zero myth.

Until next time,

B

A critic of modern times - offering ideas for honest contemplation.