Despite Soaring Prices the Oil Industry Stands To Lose

The true cost of energy is not measured in dollars

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The days of Big Oil are numbered. Contrary to modern beliefs it is not going to be killed by the environmental movement, court decisions or conscious investment choices. There is a more hideous process in the background working against not only the most polluting business ever, but its modern adversaries as well. They just don’t know it... yet.

People always had to spend energy in order to get more energy. They had to do the hard work on the fields — sometimes involving animal work — to grow food which then provided energy in return. This was not much different to any other business involving energy today: now, instead of pulling a plow, you have drill holes, install pipes and power up your pumps to get oil; or mine, smelt, manufacture, deliver then install solar panels and wind turbines to do the other hard jobs for you.

On thing remains certain: it always costs energy to get more energy, and just like in case of any other kind of investment, you have to earn (much) more than what you have invested before your equipment fails due to ageing.

The problem, rarely recognized by many, is that this ratio of energy invested vs energy harvested is not fixed. At all. And no, it’s not improving. Despite all technological advancements it is getting worse with every passing year, with every new oil well drilled and — as you will see it later — with every new solar panel or wind turbine installed. As the authors wrote:

“The total energy needed for the oil liquids production thus continually increase from a proportion equivalent today to 15.5% of the gross energy produced from oil liquids, to the half in 2050. We thus foresee an important consumption of energy to produce future oil liquids.”

This ever worsening trend of energy return on investment has started to bite back especially hard on the US shale patch. As Tsvetana Paraskova wrote on oilprice.com:

“Despite calls on U.S. oil firms to ramp up production, many producers are being plagued by rising costs and supply chain bottlenecks.”

What she fails to explain here is that new wells require more drilling, more sand, more water, more equipment and material than ever, because the best of the sweet spots, where oil flows more abundantly are now drilled. What places now remain require more and more effort to milk, not to mention the fact that wells drilled a couple of years ago are now have to be replaced at an ever increasing pace to keep production at least leveled. This increased material demand has created supply bottlenecks as well as cost increases everywhere… But why? Sand, water and steel are abundant, isn’t it? Well:

a) besides oil you only have so much sand and freshwater in given area — and when you need an ever increasing amount of both in a land already depleted by previous drilling activity… well, tough luck, as the saying goes;

b) you need lots of energy to build and power those machines, carry that additional load of sand and water on site (from ever further away), while energy itself starts to become a limited resource with an ever increasing price.

So when energy prices from coal (used to make the tons of steel for the drilling rigs, pipes, pump jacks etc), diesel made from oil (used to power trucks carrying sand and water on site), and natural gas (used to generate electricity for some of the drilling equipment) rises through the roof, the whole business model behind ‘drill baby drill’ goes south. And as the same process plays out all around the globe,

the oil industry suddenly finds itself fighting a battle it cannot win.

An ever worsening return on investment can kill any business. Since mining and drilling is driven by physics and geology, the relentless rise in energy costs (investment) is a vicious cycle, one which is impossible to break. Something you can safely call a predicament.

As old giant oil fields (like in Saudi Arabia) deplete slowly they too require ever more energy to keep production leveled. New sites, as we have seen above, are even worse. What this translates into is a classical ‘red queen race’ where you have to run ever faster to stay in place. Drill more and more, ever deeper, but ever faster depleting wells. Pump more CO2, seawater, or whatever at hand down the pipes to keep production levels up — while burning ever more energy in the process. The barrel is getting empty and everybody sucks as hard he or she can.

On one hand this is the best news ever for the climate and the environment in general. On the other, it spells the end of high energy modernity. If you had hopes that nuclear, ‘renewables’ or batteries will save us, I have to disappoint you. These technologies (as all technology currently in use) require mining (already eating up 10% of our energy), metallurgy and transportation — all powered by coal oil and gas, and all subject to worsening returns on investment.

As the energy return on energy invested (EROEI) on oil falters, so will the EROEI of nuclear, batteries, hydrogen, wind and solar; as these technologies are all dependent on fossil fuel based transport, mining and so on. If this alone weren’t enough, the metals (copper, uranium, metallurgical grade silicon, nickel etc.) themselves require ever more energy to be extracted. You have to haul more and more rock, grind it into ever smaller pieces, pump and turn more and more freshwater into acid and so on to get the same amount of metal as yesterday, as the metal content of ores are falling as well. We have used up the better quality ores first and turned them into consumer gadgets, cars, bridges, power lines etc. — now all hungry for ever more power to operate and to be maintained.

Nice circle of love, isn’t it?

I have serious doubts, if these factors had been accounted for in economic projections, which are usually built up from historic data and are focusing solely on the monetary requirements of projects vs the real material and energy demands. According to JP Morgan for example we now need1.3 trillion dollars of investment by 2030 to meet our ever increasing energy demand. (Before you ask: not because they have suddenly realized that we will need more and more energy to mine metals, or to keep oil flowing, but because demand will be “driven by emerging economies and their efforts to develop and lift their citizens out of poverty”— sic! (1))

Don’t let the seemingly huge amount of money distract you though: almost three times that much was conjured into existence in single year (2020) in one country (the US) alone. The inevitable question is, whether we have that much resources to buy? If not, how much (more) their price is going to increase? Will there be enough untapped reserves to complete these projects (both petroleum and renewable)? Can the mining / drilling industry scale up to meet the task? Last but not least, can the already battered ecosystem withstand an additional pollution burden, without sliding ever closer to collapse?

I’ve many good reasons to believe that the answer to all these questions is: not likely. Don’t expect anyone in power to admit this though.

There is a hint however on what to expect in the JP Morgan report — although it has not been put to proper context:

global end-use spending on energy was set to rise to 9.5% of GDP in 2022 from a 2015–2019 average of 8.4%.

This isn’t a seemingly large number, but in fact it signifies how close we’ve got to the precipice. Knowing how distorted GDP is (kept relatively high by reporting inflation artificially low, and blown up by an unprecedented amount of debt) it seems already feasible that real GDP is barely growing at all, while energy prices keep slowly eating away ever more from the same pie.

In fact this what interpreting science would suggest anyway. There is no activity without the use of energy — no matter if it’s value added or not. And if you have to pay 2–3 times as much for the same amount of power (be it electricity, coal, natural gas etc.) then it is obvious that less money will remain in your pocket to spend on anything else. If you look at money as claim on energy, and debt as a claim on future energy, then if the energy invested in obtaining energy increases, so must the price of that newly obtained energy rise. In other words:

if the energy cost of energy climbs so must the relative value of that energy increase to the economy

Otherwise we would have a classic debt bubble: where claims simply could not be met. (If this reminds you eerily to the situation we are in today, you are not entirely mistaken. Did you also notice, that none of the above phenomena has anything to do with COVID or the War in Ukraine?)

The warning sign relatively few people recognize here, is that over a certain threshold (in terms of relative energy expenditure), growth inevitably turns into a recession.

In previous cases this limit was around 10% of the GDP spent on energy. When it first happened in the early 1980's the economy was saved by cheap borrowing — making Alaskan and North Sea oil accessible. Next time, in 2008 money had to be printed to make shale oil look like a good idea. Now we are at 9.5% again — and the trend keeps going in the wrong direction. This 10% also happens to be equal to the 1:10 EROEI ratio — the number where civilizations tend to fall off the energy cliff.

Something to contemplate… which oil executives certainly did.

All in all, should any government try to ‘solve’ this worsening energy returns predicament with even more money printing, then — lacking adequate new supplies of abundant energy — the only predictable result will be even more inflation… The only answer to this dilemma would be to find a brand new energy resource, fully independent of oil. As we have seen, none of the proposed ‘solutions’ fit this criteria… Not even fusion, which requires thousands of tons of rare exotic metals for each reactor, a fact rarely if ever mentioned when talking about ‘abundant energy’.

So when fossil fuels finally go down… well that’s going to be the end of a very destructive, polluting, globe wrecking story, but also the end of an era marked by unprecedented abundance in human history. It is no exaggeration to say, that we are witnessing a birth of a new epoch. One which is marked by excessive pollution, climate change and ecological collapse left behind by industrialization and a battered population to suffer the consequences. Seeing how close we are to tipping into a long slow net energy decline, it looks increasingly safe to say, that this is (or shall I say, was?) the peak of human civilization in terms of numbers and technological advancement. You have seen that, lived through it and — if you were lucky — enjoyed its benefits.

Congratulations!

Now a future of a rather different kind awaits.

Until next time,

B

Notes:

(1) I could write volumes on how Western — and now East Asian — economies are robbing the developing world of their human and mineral resources, leaving nothing but even more poverty, war and pollution behind.