Energy Spiral
We are facing an energy crisis which can quickly spin out of control, triggering a cascading collapse of industries first in Europe, then during the coming years and decades, throughout the rest of the world as well. In my previous post I was referring to this crisis as an insidious feedback loop, slowly working its way through the economy:
Energy builds into everything, and ultimately feeds back into its own production. Oil. Coal. Natural Gas. Metals going into reactors and ‘renewables’. This is a classic self-reinforcing feedback loop, one that is very hard to escape. And just because this has been happening under the radar up until recently — a trend best described by a hockey-stick curve — it does not mean that it can’t spiral out of control very fast.
Year after year it costs more and more to produce the next unit of energy. How could this turn into a vicious circle ultimately leading to the loss of energy essential to every economic activity?
Can the recent price increases explain what is going on? I guess I don’t have introduce you to high energy prices: they kill households and industries alike. Of course prices may vary greatly based on where you live: depending on the local energy mix, foreign exchange rates, geopolitics, or how sunny or windy it gets, but these factors only serve to conceal the fact that something went deeply wrong.
Prices are in fact a very bad measure of value or actual costs. Since both metals and fossil fuels are traded in huge quantities on stock exchange floors by pension funds, energy companies, hedge funds and other investors (often leveraged by large amounts of debt), prices reflect the mental state of these traders much more than what it originally costed to mine these materials and what value they actually provide to society.
Focusing rabidly on prices, or even worse: arriving on conclusions based on them alone, is akin to building a house using a tape measure which is changing its length by the hour. Imagine that in the morning you measure 10 feet for the length of a wall you just raised yesterday, then by noon you read 8 feet, only to realize by afternoon that your wall has actually “grown” to 12 feet in length. Good luck making sound decisions based on that.
Price increases in and of themselves do not explain what is really going on; they are the symptom not the root cause. One has to be always keenly aware of the underlying mechanisms, affecting not only the future price of a given commodity, but ultimately its long term availability — something economists lacking a solid understanding of physics steer clear of. Based on this understanding one can have a sense that things do not bode well for our industrial civilization… Not because of a war, sanctions or monopolies, but because of geology. Politics are just making matters worse.
We have to drill deeper and further for the next barrel of oil. Our wells dry up faster, forcing us to drill yet another one. We have to dig deeper, and haul away more rocks to get to the next ton of ever lower grade (1) copper — a metal essential in everything electric. Simon P. Michaux wrote a study in 2021 for the Geological Survey of Finland, in which he explained:
What this means, is the cost of mining is being driven up, as each of the higher quality deposits are extracted and processed. In particular, the truck and shovel fleet in open pit mining is required to haul much more ore per unit of metal, resulting in an increase in diesel fuel consumption. To put things in appropriate context, decreasing grade does not mean that the supply of copper in the ground is running out. It does mean that the supply of copper that is economical to extract is declining, forcing the production cost going up. It also makes mining very reliant on the energy (diesel fuel in particular).
And here, with rising fuel costs, we’ve got (our first) feedback loop. In case you missed it: behind the ebbs and flows of gasoline prices there is a worldwide diesel crisis, already long in the making:
Global diesel and other distillate fuel stocks have been on the decline for a while now, and there is no reversal of this trend in sight. Demand, on the other hand, has been growing, leading to a widening shortage.
This is a much bigger problem than it seems at first sight: it seems we are unable to produce this fuel at a higher rate despite growing demand (2). Diesel is the lifeblood of this urbanized, industrial society. Trucks and ships not only carry tons of copper ore from a mine, but food and waste as well — not to mention the thousand truckloads of sand, water and pipes to drill the next oil well. If the price of diesel goes up, the cost of mining and drilling goes up too — not to mention the cost of transporting the freshly ‘produced’ oil and copper (or anything else). Mining the seabed will not solve this issue.
Trying to electrify the mining/transportation business on the other hand would instantly drive up demand for the very metals excavators and trucks are busy unearthing and hauling — which in turn would cause an even more serious diesel fuel shortage… Choose a finger to bite.
If this were not enough, there is another self-reinforcing feedback loop pushing oil prices (and thus the price of everything) even higher. Food. Since 8 kcal of energy goes into the production, delivery and preparation of every kcal you consume as food, it should not come as a surprise that energy price increases directly lead to food price increases. And here comes OPEC and Saudi Arabia into the picture. As I wrote back in last October:
Well, it seems Saudis cannot increase production, and might not even want to, as they need oil prices above 76 USD to balance their budgets and finance their massive welfare program. It’s worth noting here that Saudi Arabia is a net food importer: if food prices rise (due to higher fertilizer costs for e.g.), their breakeven price for oil rises too… posing a huge security risk for them. If they fail to generate high enough revenues for a long enough time from oil they will be forced to make (further) cuts to public welfare.
After the war in Ukraine broke out oil prices shot through the roof, encouraging the Saudis to keep pushing production higher and higher. They’ve made a killing on these high prices as they were able to sell their product well above the 76 USD mark for quite a while. It shouldn’t come as a surprise then, that after prices started fall (in fears of a coming recession) they have chosen to cut oil production to keep prices above this limit.
With that said, Saudi Arabia seems to be the only OPEC country left to play around with its production levels (3), the rest of the cartel is struggling to keep up with them. In the US only Texas and New Mexico could keep growing their extraction rates thanks to the Permian, while other states are already in decline. The rest of the world fares no better.
Rising drilling costs — now combined with relentlessly rising food prices — are disincentivizing production growth in oil exporting countries all around the world. This is making world supply even shorter, oil prices even higher and grocery bills higher still. Add in climate change — caused by the burning of oil among many other things — leading to lower crop yields, and you’ve got a maddeningly complex vicious cycle acting to lower both oil and food production.
It is no wonder then that oil companies keep lowering what they spend on exploration. They know, but never admit, that a large amount of oil waiting to be discovered lies in hard to reach places, and in far smaller quantities than it would worth the effort recovering them. This year, despite record revenues, big oil has reduced spending on exploration by 60% — yes, more than a half — resulting in shrinking reserves. They have simply stopped replacing what they consume each year. The message could not be any clearer: retirement is coming folks, time to liquidate what you have and fill your pockets.
Peak oil is an economic question, but not something that we can manipulate with financialization, lax regulation or pipelines for much too long. It looks like we are fast approaching a situation where oil prices will be too low for producers (once we factor in food prices and the energy cost of extracting oil (4)), at the same time when the world economy is becoming increasingly unable to afford these high prices.
Over the past twenty years we kept denying that peak oil exists, let alone it’s around the corner — so we did not have to do anything in preparation. Now, that it is here — heck, in fact it is most probably far behind us, back in 2018 — we entertain ourselves with provoking nuclear superpowers and spending billions on wars which could have been easily avoided by keeping a few very simple promises. Cooperation? Mutual aid? No, we are blowing up each other’s pipelines here, instigate rebellions there and force entire regions to accept self-imposed poverty instead. This is how we “solve” our predicaments in the West.
Now, with the latest OPEC cut and embargoes on Russian oil entering into force later this year, we will be most probably witnessing the onset of the long-long descent of the oil age. And with it, lacking any adequate, truly independent backup, the long descent of our industrial civilization as well.
There are a number of vicious cycles already activated, from the food-oil-climate change trio to the diesel crisis at hand. Throw in an exponential (energetic) cost increase to mine metals, and it’s no wonder that we already have a copper supply shortfall on the horizon. And there is no way to make up for the missing volumes with recycling either. Not the best news for our ‘renewable’ future. The trickery done on stock exchanges with metal and oil prices and losses covered by debt and government subsidies can hide this uncomfortable truth for a while — but not forever. It starts to become increasingly clear that:
We are not only facing peak oil here, but at the same time, peak metals as well.
Resource depletion and energy decline are economic processes. Not in an artificial monetary sense as humans like to think about it, but in its true, ecological meaning. In Nature everything revolves around the capture and redistribution of matter and energy — the human ecosystem is no different. Once a resource gets overexploited — oil in our case, or a food source in a natural setting — the given ecosystem collapses, and a new, better adapted version takes its place. But that is a topic to discuss at another time.
Until then,
B
Notes:
(1) Lower quality ores require more crushing and leaching to get the copper out. This requires more water to be pumped uphill, and consequently more wastewater to be disposed of — not to mention the increased electricity consumption of the machinery doing the crushing itself. It’s easy to see how this process is taking more energy per unit of pure copper compared to processing high grade ores, now gone.
(2) Pundits tend to dismiss the diesel predicament by blaming it on a lack of investment in refining capacity — all ultimately due to the electrification of road transport. As someone working in the EV business I can tell that this is utter bullshit, spun by economists and politicians. EVs only replace gasoline use (and only a tiny winey fraction of that), but does not solve the issue of diesel at all. As a veteran petroleum geologist can testify the diesel shortage is coming from the lack of suitable oil to make diesel from — a result of depleting conventional wells. Light tight oil from the Permian simply cannot be turned into diesel in adequate quantities, and heavy oils from Venezuela can only be converted to this fuel by using a lot of natural gas — whose price is also rising rapidly.
(3) The Saudis are touting that they can produce 13 million barrels a day, but they’ve never ever managed to sustain an output of 11 million for more than a month, indicating that this is their practical limit. Now, they are cutting back shortly after surpassing this invisible limit, again.
(4) It is one thing to maintain this oil production plateau and pay only for the energy used up by the pumping equipment (aka marginal cost, hence the record profits), but it’s quite another to invest in new production, or replacing old wells.
