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Energy Risk and Limits: What Can We Do?

The energy limit we are running into is a cost limit. I would argue that neither the Republican or Democrat approach to solving the problem will really work.

The Republicans favor “Drill Baby Drill”. If the issue is that the price of oil extraction is too high, additional drilling doesn’t really fix the problem. At best, it gives us a little more expensive oil to add to the world’s supply. The Wall Street research firm Sanford Bernstein recently estimated that the non-Opec marginal cost of production rose to $104.50 a barrel in 2012, up more than 13 per cent from $92.30 a barrel in 2011.

US consumers still cannot afford to buy high-priced oil, even if we extract the oil ourselves. The countries that see rising oil consumption tend to be ones that can leverage its use better with cheaper fuels, particularly coal (Figure 1). See Why coal consumption keeps rising; what economists missed. The recent reduction in US oil usage is more related to young people not being able to afford to drive than it is to improved automobile efficiency. See my post, Why is gasoline mileage lower? Better gasoline mileage?

Figure 1. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world

Figure 1. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.

The Democrats favor subsidizing high-priced energy approaches that wouldn’t be competitive without such subsidies. Government debt is at 103% of GDP. It is hard to see that the government can afford such subsidies. Also, it is doubtful that the supposed carbon-saving benefit is really there, when all of the follow-on effects are included. Buying wind turbine parts, solar panels, and goods that use rare earth minerals (used in many high-tech goods, including electric cars and  wind turbines) helps to stimulate the Chinese economy, adding to their coal use. Furthermore, the higher taxes needed to pay for these subsidies reduces the spendable income of the common worker, pushing the country in the direction of recession.

So what do we do as an alternative, if neither the Republican or Democrat approach works? I would argue that we are dealing with a situation that is essentially unfixable. It can be expected to morph into a financial crash, for reasons I explained in How Resource Limits Lead to Financial Collapse. Thus, the issue we will need to mitigate will be debt defaults, loss of jobs, and possibly major changes to governments. If we are dealing with a financial crash, oil prices may in fact be lower, but people will still be unable to afford the oil because of other issues, such as lack of jobs or lack of access to money in their bank accounts.

Because neither political party can fix our problem, I expect that most of our responses will necessarily be individual, personal responses. These are a few ideas:

1. Get out of debt situations, if it is easy to do. There are a lot of people who own stocks on margin, or who own an expensive house with a big mortgage on it. Now, with prices of stocks and homes both higher, would be a good time to get out of both types of debt. Sell the stock or buy a less expensive house, without the mortgage.

Equities and home prices both seem to be inflated now, indirectly because of Quantitative Easing. Some recent analysis suggests that real (that is, inflation adjusted) interest rates are rising partly because inflation is falling.  The reason that inflation is falling is because oil prices are lower (Figure 2). Comparing the first four months of 2013 with the first four months of 2012, oil prices are about $9 per barrel lower. Oil prices are lower because of reduced demand due to economic contraction, especially in Europe.

Figure 2. Spot oil prices and actual refiners acquisition costs, based on EIA data.

Figure 2. Spot oil prices and actual refiners acquisition costs, based on EIA data. Refiners acquisition costs are what refiners actually pay for oil.

In the past month, there has also been an uptick in interest rates (even apart from the declining inflation component). According to the Wall Street Journal, “Yields on the benchmark 10-year U.S. Treasury note now stand above 2.1%—still low by historic standards, but nearly half a percentage point higher than at the start of May.” Mortgage rates are also reported to be half a percentage point higher than they were six months ago.

There are a number of risks with rising real interest rates and falling inflation. One is that the higher interest rates will trigger lower stock prices and lower house prices. Another is that deflation will continue, making debt payback more difficult. If this happens, it is something that the Fed can’t handle with its monetary easing policy. Interest rates can go to zero, but not below. A third issue, especially if interest rates rise further, is the adverse impact on the US government financial situation.

2. Reduce your expectations about what investments can do for you. Dmitry Orlov, who has had experience with the collapse of the Former Soviet Union, made the remark, “There are two kinds of investments: those that lose all their value at once, and those that lose value slowly.” Paper investments are a particular problem, because they can decline in value very quickly if conditions change. Even real estate can be a problem, though, because governments can take away what you thought you owned, or raise taxes to a level that you cannot afford. If you buy something and have to move, but cannot take the object with you, you will likely lose the value you invested. The only things that are really yours to keep (at least until your declining years) are skills that you learn.

3. Take up a hobby that will provide food for your family (planting a few fruit or nut trees, adding a garden, raising a few chickens, or learning to hunt/fish). Taking up hobbies such as these provide several functions: They provide a diversion away from the problems of the day, and let you feel like you are doing something helpful. They may actually provide a cushioning effect, if there is a sharp downturn. Taking up such hobbies can provide a useful skill for the future. In some cases, it may make sense to purchase land for purposes such as these. If considering doing this, a person should take note of items (1) and (2) above. It takes quite a long time to get started, and you can’t take the improved land with you, if you have to leave.

4. Learn to appreciate nature, family, and simple joys that can’t easily be taken away. It is possible to be happy, regardless of circumstances. We can find many good things in every day. Obsessing over the future is not really helpful. Don’t tie your happiness to having more “stuff”; you are likely to be disappointed. Learn to sing happy songs, or how to play a musical instrument. Or memorize uplifting poetry or religious writings.

5. Build a network of friends. If things go downhill, we can’t expect to use a gun to ward off intruders, night and day. If nothing else, we will run out of ammunition. Over the long term, the approach that is likely to be successful is working together with other community members toward a common goal.

6. Learn new skills, if you are concerned about job loss. Try to think of what will be needed in a lower-energy world. People will always need dentists and midwives, regardless of how poor they are. Buggy whip manufacturers went out of business long ago. Maybe we will need them back!

7. If you want to develop larger-scale plans (such as for cities or regions), keep them cheap and easy to implement. Governments are already running short of funds to implement plans. Look for approaches that are inexpensive to put in place, such as car-sharing plans. Alternatives that worked years ago, such as boats and canals, might be considered as well.

8. Aim for a flexible approach to problems. We don’t know things will turn out. Water may be in very short supply in one part of the country. Or job opportunities may open up in a place far from home. Even more than in the past, we are likely to need to be able to change our plans on short notice. 

Gail Tverberg's picture

Thank Gail for the Post!

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Discussions

I K's picture
I K on Jun 3, 2013 2:53 pm GMT

You couldn’t be more wrong. 

The world in fifty years will be an immensely more wealthy place. A far far greater jump in wealth than that which occurred in the past fift

I K's picture
I K on Jun 4, 2013 12:52 am GMT

It is a certainty that we will advance and not regress the only question is how quickly we will advance.

The first important thing to note is that still, today in 2013, the majority of the worlds people live in non industrialised nations or under industrialised nations. People often think the industrial revolution happened 200 years ago, when in fact it is happening right now. Once that is mostly done most the world will have a wealth equivalent to “the west”.

The next phase is the intelligence revolution which will bring with it a much greater leap in wealth and productivity. An example of this is computer driven vehicles. Worth around $10T annually. With this new found wealth and most the world industrialised we won’t have to opt for the cheapest option we can opt for the most acceptable. So regarding energy we can opt for more expensive nuclear or high capacity factor wind rather than coal. and projects that seem far fetched like a massive global grid would become an almost trivial build

Also dont forget that modern man is really a brand new species. The earth is 5 billion years old and we have only had civilisation for about 5,000 years and what we would perhaps call modern civilisation for 200 years. Who is to say what we will become in 2,000 years let alone the 2 billion years we will call this rock out home. What is certain is that considering the timeframe we will be here humans will do far more net good for the critters of earth than any bad.

Gail Tverberg's picture
Gail Tverberg on Jun 4, 2013 1:38 am GMT

We are reaching limits of too many sorts for the kinds of things you are expecting to happen. In many parts of the world, we are running short of fresh water. We are running short of cheap oil. Pollution of various sorts is becoming more of an issue. The people who don’t have access to energy in the poorer parts of the world can’t expect to get such access, because there is not possibly enough to go around.

We know that in the past, when human populations overshot and collapsed, the way it happened was as a fianancial colllapse-governments were not able to collect enough taxes from citizens who were mostly getting poorer and poorer. Debt kept growing, until something stopped it. We seem to be headed on this path now.

 

I K's picture
I K on Jun 4, 2013 1:46 am GMT

Yet we are magnitudes more wealthy both materially and scientifically than the Romans were two thousand years before us so we did not collapse and go into decline. The Romans may have but the Romans were not a species but a group of humans.

Two thousand years is a tick on the 5 billion year old clock that is earth.

Romes decline was a nanosecond on that clock before another nanosecond saw the advancement continue

Randy Voges's picture
Randy Voges on Jun 4, 2013 3:45 am GMT

I second Paul O’s observation that the underlying issue is philosophical.  When someone observes that the “problem” is “essentially unfixable”, my ornery engineer response is why anybody can expect there to be a “fix” in the first place.  Because we live in a deeply flawed world filled with imperfect human beings, the best we can hope for is to formulate a workable policy that also seeks to mitigate the inevitable tradeoffs that come with it (corollary point: don’t use the word ‘solution’ in the context of a policy discussion. Ever.).  As I’ve commented elsewhere, the point is easier to grasp if you already believe in Original Sin or you’ve studied the Second Law of Thermodynamics.

Nathan Wilson's picture
Nathan Wilson on Jun 4, 2013 8:36 am GMT

Suggestions #9, Keep “living large” until the bubble pops!

Actually, as a fellow child of Star Trek, I agree with everything Paul O said, except the part about the difficulty of replacing oil.  

Of course we know a way to replace oil, we are just dragging our feet because we don’t like the answer.  We know how to make sustainable electricity (i.e. nuclear or renewables); we know how to make hydrogen from electricity (electrolysis); we know how to make liquid fuel from H2 (e.g. ammonia using air, or methanol using biomass).

Such a sustainable synthetic fuel would cost around $8/gge (gallon of gasoline equivalent energy), a worst-case value assuming no technical advancements.  Fortunately, we also know how to make cars that get 60 miles per gallon (hint: they would be smaller and slower, and they would use only high “octane” fuel, not gasoline-based flex-fuel, many would be hybrids); here‘s a two-seater prototype car from VW that gets 120 mpg on diesel or 260 mpg in plug-in hybrid mode.

So we could phase out oil at any time, and it would not raise our transportation cost a cent.  We just choose not to do so; it’s more fun “living large!”

Nathan Wilson's picture
Nathan Wilson on Jun 4, 2013 7:35 am GMT

Gail, there are techno-fixes for all of these problems.  We just have to put our pre-conceived ideologies aside, and let science be our guide.  Human society is built of rock, steel, aluminum, and energy; our planet will never run out of these abundant feedstocks, everything else is recyclable or substitutable (and whatever we do run out of is floating in space, waiting for us to reach out and retrieve).

We don’t have to waste fresh water growing crops; the right crops will grow just fine in the sea.  We don’t have to waste fresh water growing our lawns; we can decorate our yards with rocks like they do in Arizona.  We don’t have to waste food growing cows with 10% energy efficiency; we can engineer chickens with red meat, or grow a meat substitute in a vat full of sea water and methane.  We don’t have to shrink back to tiny populations living off the land.

Victory is ours for the taking!

I K's picture
I K on Jun 4, 2013 11:15 am GMT

All of that is probably doable but imho we are nowhere near any sort of limit for any sort of resource. We barely scratch the crust of earth.

The main problem seems to be that we have no daily understanding of big numbers. You show a picture of a big coal mine to most people and they say wow thats huge while not appreciating that ants respire some some 100% to 1000% aa much co2 as all the coal burnt on earth

Rick Engebretson's picture
Rick Engebretson on Jun 4, 2013 3:15 pm GMT

Thanks again Gail for sharing your thoughts. I don’t know about a lot of things, but I’ve known some of the great agriculturists of the 20th century, so I’ll pretend for the moment I learned something.

Most of the comments deeply trouble me. I never got the impression that providing food, water, energy, shelter, or security was so easy. People in the midwest US worked hard to develop the “green revolution,” now the “genetics revolution.” Others provided steel, medical, etc. They settled this area, moving from starving “old countries,” without electricity or freeways less than 150 years ago and marvelled at their innovation success. And they were thankful and were proud to provide so many others.

I don’t know how we will keep food or energy productivity so high. And I don’t even know where we will find many with competent opinions. But I do know I will go on record defending these great people from the arrogance of the modern age.

If some think it will be so easy, please do something useful and show us. As for the financial industry, “where’s the beef.”

Gail Tverberg's picture
Gail Tverberg on Jun 4, 2013 3:33 pm GMT

The issue with these solutions is that they all take energy–both for the initial investment and for ongoing operations. It is energy that we are particularly having problems with–it is becoming more costly to extract (even for natural gas–the prices don’t reflect the higher costs much yet). When they become more costly, what happens is that the additional expenditure on energy related goods leaves less for other things, and tends to lead to recession. If we look historically, salaries stagnated when oil prices rose, so the rising price of oil (and natural gas) cannot be expected to be offset by higher salaries.

WIth recession, investment is not made in these solutions, and the whole things falls apart.

 

I K's picture
I K on Jun 4, 2013 9:38 pm GMT

no one is suggesting exponential growth in population or consuming goods will continue or that it is required only that it will continue to the point where the majority of humans are rich.

So for instance in the USA electricity consumption is not going to double it will stay steady or even fall from todays level of ~4,000TWh Whereas in china it will probably double over the next ten years. but just like the USA after a certain point it will be steady. (probably around 10,000TWh) The exponential growth is impossible cheer leaders seem to be suggesting that people expect it to continue for ever. it will continue only for a fairly short period more. perhaps only for the next 30-60 years after which point the human population will probably not increase and resource use will not increase. The real question is can we grow to a point where say 8 of the 10B humans can live like Europeans. I think that’s easily achievable all it requires is that most the world goes through the industrial revolution

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