This Energy Crisis Is Here To Stay
When it comes to energy these years, bad news seem to be popping up like mushrooms on a shiitake-farm. A recent flurry of articles on “The No. 1 Source for Oil & Energy News”, Oilprice.com, is a case in point. Wind farm projects going for broke. War in the Middle-East. Solar panels collecting dust in warehouses. Renewables businesses losing their profitability. What is still missing though is much needed context, the connection of these dots beyond the obvious political considerations. Join me in this quick sit-rep of sorts to see where are we with this energy crisis of ours in this tumultuous moment in history... Or shall I say, in the next chapter of The Long Emergency? Decide it for yourself.
Our globalized economy seems to be experiencing ever more “problems” taking an ever higher amount of investment to “solve”. And while governments all around the world could print and conjure up all the money they dared to imagine, all these efforts have achieved was an almost unprecedented wave of stagflation — a persistent combination of economic stagnation (or even decline) combined with record high inflation and debt levels. It certainly looks like the world economy has reached a point of diminishing returns on almost every front. Despite all the money and investment, the “problems” we were trying to “solve” just got bigger — and not a tad bit smaller. What’s wrong with you, World?
Well, what long time observers of the real economy of goods and services have seen coming is finally here. Actually, it has been knocking on our door since the middle of 2021. The world economy was sleepwalking into a deep energy crisis, affecting all sectors all at once. You see, this wee little energy “problem” we face today was never about money, which is simply a claim on goods and services (and thus the energy and resources making those available), but about energy itself. As the sources of profitable, cheap, high quality — although highly polluting — energy (aka fossil fuels) kept depleting, the industry was forced to drill and mine ever more, ever less profitable reserves, returning ever less energy for all the investments made. If you were looking for a textbook example for hitting diminishing returns look no further.
The making of transportation fuels, which has now become wholly dependent on all other sources of energy, is a case in point. From drilling and fracking for shale oil in Texas and New Mexico, through mining tar sands in Canada, to deepwater drilling in the Gulf of Mexico all new sources of oil required thousand-truckload deliveries of sand and equipment, or millions of cubic feet of natural gas in case of tar sands, not to mention the megawatts of electricity zipping through all those pumping and forwarding equipment. The energy industry has indeed become “a mad dog running round in circles trying to bite its flea infested tail” — investing ever more of its hard earned energy back into production.
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The situation is not at all different in the “renewables” side of the coin. (Yes, “renewables” and fossil fuels are just two equally unsustainable sides of the same coin.) Once you understand that if all the metals going into these devices needed an immense amount of diesel fuel to mine and move between factories, not to mention the mountains of coal and the untold millions of cubic feet of natural gas to smelt, melt and shape, then the so called “green future” could not possibly come as a replacement — only as a very costly burden on the already stretched thin fossil fuel infrastructure. The chart below tells it all.
And, as it is the case with fossil fuels, after extracting and using up the best, low cost, cheap and easy to mine metal ores, all what remains require ever more diesel, coal and natural gas to mine and refine every year…
Throw one more lump on that heap, if you please.
Now, if you add in the fact that if all of a sudden everyone wants to build wind turbines, electric cars (don’t forget about China), giant electric transformers, transmission cables, EV charging stations and so on, all you will get is raw material inflation, ruining even the best subsidized business models. Persistent cost increase is now hitting EV manufacturers like Tesla, the wind and solar industries equally hard, exposing the fact that without generous state subsidies these projects stand no chance at all. The only option remaining thus was to try and push on these additional costs onto consumers in the form of higher prices and higher electricity bills. The result: even higher inflation, and a lot of unsold EVs and solar panels sitting in warehouses and parking lots. Color me surprised… Not.
Renewables are hitting diminishing returns. And not only on the material and energy input side, but also on the electric output part of the story. We would not only need an untold amount of mining and transportation — all powered by ever more expensive diesel — but also a massive overhaul of the electric grid to accommodate them.
In order to achieve climate goals set by global governments, more than 80 million kilometers (49.7 million miles) of electric grids have to be added or refurbished by 2040, which is the “equivalent of the entire existing global grid,” according to the Oct. 17 IEA report. Even though “electrification and renewables deployment are both picking up pace,” there is a risk of the clean energy transition stalling due to a lack of “adequate grids to connect the new electricity supply with the demand.”
As a result, “at least 3,000 gigawatts (GW) of renewable power projects, of which 1,500 GW are in advanced stages, are waiting in grid connection queues — equivalent to five times the amount of solar PV and wind capacity added in 2022.” This is not to mention the fact that the energy production from already existing wind and solar farms’ too has to be curtailed to protect grid stability.
All this is entirely consistent with Lion Hirth’s 2013 study titled: The Market Value of Variable Renewables — The Effect of Solar and Wind Power Variability on their Relative Price. Adding wind above 30% of the total electricity produced and solar above 15% effectively halves their market value (reducing it to 50–80%) — exactly because of the additional investments needed to accommodate them… At least until the next threshold is reached where utilities would need to invest further still in ever more sophisticated and complicated electrical equipment and storage. If this is not a negative feedback loop, preventing the widespread adoption of renewables, then nothing is.
The statement, that solar and wind is cheaper than fossil fuels, is thus only true insofar as they are kept manufactured by cheap fossil fuels, and their intermittency could be balanced by the old and polluting technologies they aim to ‘replace’. And that latter means natural gas in most of the cases. A commodity which, by the way, is now in need of a whopping USD 7 trillion of investment in order to prevent supply crunches…
Meanwhile the IEA — the energy watchdog for OECD countries — utterly fails to address these mounting financial, technical, and supply chain issues and keeps reiterating the myth of “peak fossil fuel demand” — thereby denying the need for further investments in the oil&gas industry. How on Earth all those “renewables”, made out of finite metals and fossil fuels, ought to be built and operated then remains to be seen.
Oil majors do not seem to bother too much though, and keep investing in buying each other’s assets up. All the extra profits realized during the price hikes of 2022 has been spent on stock buy-backs last year and now mergers and acquisitions. Raising exploration budget (beyond levels indicated by inflation) was not on their shopping list. It clearly looks like to me that the industry no longer expects big finds to emerge, and is thus forced to work with its already existing stock of drilling locations. In this sense, these mergers are nothing more than desperate attempts to prop up one company’s oil reserves at the expense of another, something which otherwise could not be replaced due to depletion and a lack of economically viable resources.
As I stated before, mergers are not a sign of a booming business, but rather an efficiency measure. It provides a saving on the overhead costs, as opposed to extraction costs which are just keep rising and rising. And while eliminating one firm’s managerial class, and replacing it with excess from the new mother company’s administrative staff, may ensure at least the short term profitability of the oil business, it adds zero, nada, nuku to the overall output of the industry. One would be hard pressed to find a better real life example for rearranging the deck chairs onboard a sinking ship.
This is how the unfolding end of the oil age looks like: nothing terribly interesting happening on the surface, while the pillars of the industry (oil from cheap and easy to drill wells) fall one after the other. It’s not that we are running out of fossil fuels, there is plenty more to go. They just might prove to be exponentially more expensive to extract as we move towards ever harder to get resources, leaving us with an impossible choice between an unviable energy transition and a dying fossil fuel industry on a rapidly overheating planet. Did anyone mention diminishing returns?
This can end in many ways, but a successful green energy revolution is definitely not one of those. A more likely outcome is war over still existing sources of cheap(ish) to extract oil — something not entirely without historical parallels. (If you haven’t done so yet, I highly recommend reading this latter essay for context.) It is not hard to see, that as oil extraction — together with ALL other energy sources — hits diminishing returns, WWIII could simply be the thing coming next. The situation in the Middle-East, the last oil rich region of the world, can thus easily evolve into something much bigger. The ongoing military build-up certainly suggests that there is a substantially broader conflict in the offing. As Dr. Cyril Widdershoven, a long-time observer of the global energy market writes:
“From a military geopolitical perspective, the current alertness of Western forces, including the USA and Israel, is unparalleled. While all eyes are on the IDF and its neighbors, the significant buildup of US forces in the region is being concealed from public view. The only noticeable change in posture is the preparations made by Washington to safeguard US civilians and diplomats from becoming embroiled in the conflict. However, the hidden buildup of US Navy force projection capabilities, the deployment of advanced anti-missile systems, fighter squadrons, and an offensive capacity to target any regional adversary is unprecedented. Officially, Washington attributes these military moves and preparations to protecting US troops in the Middle East, given the increased attacks on their assets by Iran-backed militants in Iraq and Syria. However, it is evident that the focus extends beyond force protection.”
Considering the regional strategy of the world’s largest military power, perhaps this is not surprising at all. As if on cue, and in parallel with this unprecedented force build-up, yet another round of sanctions is already in preparation… And such actions, no matter how futile they may seem, are just the appetizer on the menu. Tumultuous times indeed.
A war fought over who controls the Middle-East, of course, could all too easily lead to a massive disruption to oil flows from the region — something which is not currently reflected in prices. The very real threat of a coming economic recession induced by a lack of energy, further exacerbated by the risk of a wider — if not global — military conflict, seems to have paralyzed the market. Now it seems all bets are off.
What’s the solution then? If I were an idealist, I would say societies around the world should voluntarily opt for re-learning how to live with less and less energy — starting immediately — with an ultimate goal to enable a civilized society to exist without any electricity or fossil fuels in a 50 year timescale. All nations should strive for making peace with one another and for a coordinated attempt to manage the coming energy descent. Will they really do that? Not a chance. Since energy is the economy, less and less of it would mean lower and lower economic activity. Something, which would quickly translate into lost profits and unservicable debts for governments and businesses alike, leading to a cascade of defaults and an eventual collapse in the supply of products and services. No one would vote for that, let alone willing to preside over it.
It is thus not hard to fathom why everyone is interested in upholding the status quo, one way or the other. Whether by pushing for a hopelessly technutopian green energy miracle, investments in a dying fossil fuel industry, or an unwinnable war, the world seems to be utterly reluctant to accept the fact that the good times are over. Despite all the hand waving this civilization is entirely driven by and completely depends upon fossil fuels in general and oil in particular. Substances, which are not only responsible for overheating the planet, but which are just as prone to hitting diminishing returns before physical depletion, as any other finite resource humanity has ever tapped. Thus, in the absence of an energy source wholly independent from oil and finite minerals, a forced paradigm shift away from mass consumption and high energy use is in due order. Whether it comes through enduring economic hardship, war or some combination of those two is yet to be seen.
Until next time,
Notes: Just as a peak and fall in coal production in Britain has led to WWI, the desire to control the new, emerging source of wealth — oil — has played an important role in kicking WWII into motion. Militarily, Germany was desperate to reach the oil rich region of the Caspian Sea, while Japan was fighting to gain control over the South-East Asian petroleum fields. Only after these attempts were successfully thwarted by the Allies was the war (powered by, and at least partially fought for oil) lost completely for the Axis Powers. Now that there is neither a new viable energy source, nor an emerging empire on the horizon, the current situation looks rather like a hell of a long and chaotic struggle to the last man standing. Interesting times indeed.
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