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Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply?

Oil and other commodity prices have recently been dropping. Is this good news, or bad?

Figure 1. Trend in Commodity Prices since January 2011. Brent spot oil price from EIA; Australian Coal from World Bank Prink Sheet; Food from UN's FAO.

Figure 1. Trend in Commodity Prices since January 2011. Brent spot oil price from EIA; Australian Coal from World Bank Prink Sheet; Food from UN’s FAO.

I would argue that falling commodity prices are bad news. It likely means that the debt bubble which has been holding up the world economy for a very long–since World War II, at least–is failing to expand sufficiently. If the debt bubble collapses, we will be in huge difficulty.

Many people have the impression that falling oil prices mean that the cost of production is falling, and thus that the feared “peak oil” is far in the distance. This is not the correct interpretation, especially when many types of commodities are decreasing in price at the same time. When prices are set in a world market, the big issue is affordability. Even if food, oil and coal are close to necessities, consumers can’t pay more than they can afford.

A person can tell from Figure 1 that since the first part of 2011, the prices of Brent oil, Australian coal, and food have been trending downward. This drop in prices continues into September. For example, as I write this, Brent oil price is $97.70, while the average price for the latest month shown (August) is $105.27. It is this steeper, recent drop, which many are concerned about.

We are dealing with several confusing issues. Let me try to explain some of them.

Issue #1: Over the short term, commodity prices don’t reflect the cost of extraction; they reflect what buyers can afford.

Oil prices are set on a worldwide basis. The cost of extraction varies around the world. So it is clear that oil prices will not match the cost of extraction, or the cost of extraction plus a reasonable profit, for any particular producer.

If oil prices drop, there is a temptation to believe that this is because the cost of production has dropped. Over a long enough period, a drop in the cost of production might be expected to lead to lower oil prices. But we know that many oil producers are finding current oil prices too low. For example, the Wall Street Journal recently reported, “Royal Dutch Shell CEO: Can’t deny returns are too low. Ben van Beurden prepared to shrink company in order to boost returns, profitability.” I wrote about this issue in my post, Beginning of the End? Oil Companies Cut Back on Spending.

In the short term, low prices are likely to signal that less of the commodity can be sold on the world market. Commodities such as oil and food are very desirable products. Why would less be needed? The issue, unfortunately, is affordability. Affordability depends largely on (1) wages and (2) debt. Wages tend to be fairly stable. The likely culprit, if affordability is leading to lower demand for desirable products like oil and food, is less growth in debt.

Issue #2: Economic growth tends to produce a debt bubble. 

Many economists believe that technological innovation is the key to economic growth. In my view, economies need a combination of the following to have economic growth of the type experienced in the last 100 years:1

(Increase in debt) + (cheap-to-extract fossil fuels) + (cheap-to-use non-fossil fuel resources) +  (technological innovation)

In such a case, debt keeps increasing as an economy grows. Unfortunately, this economic growth is only temporary, because resources tend to become more expensive to use over time, making the “cheap” resources required for economic growth disappear.

The problem underlying the rising cost of resources (both for fossil fuels and others) is that we tend to use the cheapest-to-extract resources first. Technological innovation continues to occur, but as diminishing returns hit both fossil fuels and other resources, there are larger and larger demands on technology to keep costs in line with what workers can afford. Eventually, the cost of resources (net of technological improvements) rises too much, and economic growth is cut off. By this time, a huge mountain of debt has been built up.

Let me explain further how this happens. Without fossil fuels, the world is pretty much stuck with the goods that can be made with wood, or from other basic resources such as animal skins, cotton, flax, or clay. A small quantity of metal and glass goods can be made, but deforestation quickly becomes a problem if an attempt is made to “scale up” the quantity of goods that require heat in their production.2

Once inexpensive coal became available, its availability opened the door to technological innovation, because it provided heat in quantity that had not been available previously. While ideas such as the steam engine had been around for a long time, the availability of inexpensive coal made the production of metals needed for the steam engine, plus train tracks and railroad cars, available at reasonable cost.

With the ability to make steel and concrete in quantity (both requiring heat) came the ability to make hydroelectric dams and electrical transmission lines, thus enabling electricity for public consumption. Oil, as a liquid fuel, paved the way for widespread use of additional innovations, such as private passenger automobiles, mechanized farm equipment, and airplanes. Between coal and oil, many workers could leave farming and begin jobs in other sectors of the economy.

The transformation that took place was huge: from wooden tools and human or animal labor to a modern industrial society. How could such a big change take place? Before the change, the ability to generate a profit that might be used for future capital investment was very limited. Also, the would-be purchasers of products made in an industrial economy were very poor. I would argue that the only way of bridging this gap was debt. See my earlier posts, Why Malthus Got His Forecast Wrong and The United States’ 65-Year Debt Bubble.

The use of debt has several advantages:

  1. It allows the consumer to buy the end product made with the new resources, assuming the end product isn’t too expensive relative to the consumer’s earnings.
  2. It gives resource-extracting businesses the money they need to buy equipment and to hire workers, prior to the time they have earned profits from resource extraction.
  3. It gives the companies the ability to build factories, before they have accumulated profits to pay for the factories.
  4. It allows governments to fund needed infrastructure, such as roads and bridges, before having the tax revenue available to pay for such infrastructure.
  5. Most importantly, the “demand” generated by (1), (2), (3) and (4) raises the price of resources sufficiently that it makes it profitable for companies in the business to extract those resources. 

Because of these issues, debt and cheap fossil fuels have a symbiotic relationship.

(1) The combination of debt, inexpensive fossil fuels, and inexpensive resources of other kinds allows the production of affordable goods that raise the standard of living of those using them. The result is what we think of as “economic growth.”

(2) The economic growth provides the additional income needed to pay back the debt with interest. The way this happens is indirectly, through what is sometimes described as “greater productivity of workers.” This greater productivity is really human productivity enhanced with devices made possible by fossil fuels, such as sewing machines, electric milking machines, and computers that allow workers to become more productive. Indirectly, the higher productivity of workers benefits both businesses and governments, through higher sales of goods to consumers and through higher taxes. In this way, businesses and governments can also repay debt with interest.

Higher-priced resources are a problem. Higher-priced resources of any kind tend to “gum up the works” of this payback cycle. Higher-priced oil in particular is a problem. In the United States, when oil prices rise above about $40 or $50 barrel, growth in wages stops.

Figure 2. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

Figure 2. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

With higher oil prices, the rise in the standard of living stops for most workers, and good-paying jobs become difficult to find. There are a couple of reasons we would expect wages to stagnate with higher oil prices:

(1) Competition with cheaper energy sources. When oil prices rose, countries using a very high percentage of oil in their energy mix (such as the PIIGS in Europe, Japan, and United States) became less competitive in the world economy. They tended to fall behind China and India, countries that use much more coal (which is cheaper) in their energy mix.

Figure 3. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

Figure 3. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

(2) Need to keep the price of goods flat. Businesses need to keep the total price of their products close to “flat” despite rising oil prices, if they are to continue to sell as much of their product after the oil price increase as previously. Oil is one major cost of production; wages are another. An obvious way to offset rising oil prices is to reduce wages. This can be done in several ways: outsourcing work to a lower cost country, greater automation, or caps on wages. Any of these approaches will tend to produce the flattening in wages observed in Figure 2.

Based on Figure 2, an oil price above $40 or $50 per barrel seems to put a cap on wages, and indirectly leads to much less economic growth. Even if we didn’t hit this oil price limit–for example, if we had discovered a liquid fuel that could be produced in quantity for less than $40 barrel–we would eventually hit some kind of growth limit. For example, the limit might be climate change or too much population for food production capability. Even too much debt can be a limit, if citizens’ incomes don’t rise in a corresponding manner. At some point, it becomes impossible even to make interest payments if the debt level is too high. Indirectly, citizens wages even support business and government debt, because business revenues and tax revenues depend indirectly on wages.

Issue #3: Repaying debt is very difficult in a flat or declining economy.

Once growth stops (or slows down too much), the debt bubble tends to crash, because it is much more difficult to repay debt with interest in a shrinking economy than in a growing one.

Figure 4. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 4. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

The government can hide this issue for a very long time by rolling over old debt with new debt and by reducing interest rates to practically zero. At some point, however, the system seems certain to fail.

Not all debt is equivalent. Debt that simply blows bubbles in stock market prices has little impact on commodity prices. In order to keep commodity prices high enough for producers to want to continue to produce them, the debt really has to get back into the hands of the potential buyers of the commodities.

Also, any changes that tend to reduce world trade push the world economy toward contraction, and make it harder to repay debt with interest. Thus, sanctions against Russia, and Russia’s sanctions against the US and Europe, tend to push the world toward debt collapse more quickly.

Issue #4: Rising oil and other commodity prices are a problem, especially for countries that are importers of those commodities.

Most of us are already aware of this issue. If oil prices rise, or if food prices rise, our salaries do not rise by a corresponding amount. We end up cutting back on discretionary purchases. This cutback in discretionary purchases leads to layoffs in these sectors. We end up with the scenario we had in the 2007-2009 recession: falling home prices (since higher-priced homes are discretionary purchases), failing banks, and many without jobs. See my article Oil Supply Limits and the Continuing Financial Crisis.

The reason that low oil and other commodity prices are welcomed by many people now is because the opposite–high oil and other commodity prices–are so terrible.

Issue #5: Falling oil and other commodity prices are a problem, if the cost of production is not dropping correspondingly. 

If commodity prices drop for any reason–even if it is because a debt bubble is popping–it is going to affect how much companies are willing to produce. There is going to be a tendency to cut back in new production. If prices drop too far, it is even possible that some companies will leave the market altogether.

Even if it doesn’t look like a country “needs” the current high oil price, there may still be a problem. Oil exporters depend on the high taxes that they are able to obtain when oil prices are high. If they cannot collect these taxes, they may need to cut back on programs such as food subsidies and new desalination plants. Without these programs, civil disorder may lead to cutbacks in oil production.

Issue #6: The growth in oil sales to China and to other emerging markets has been fueled by debt growth. This debt growth now seems to be stalling.

Growth in oil consumption has mostly been outside of the United States, the European Union, and Japan, in the recent past. China and other emerging market countries kept demand for oil high.

Figure 5. Oil consumption by part of the world updated through 2013, based on BP Statistical Review of World Energy 2014 data.

Figure 5. Oil consumption by part of the world updated through 2013, based on BP Statistical Review of World Energy 2014 data.

Ambrose Evans-Pritchard reports, China’s terrifying debt ratios poised to breeze past US levels. He shows the following chart of China’s growth in debt from all sources, including shadow banking:

Figure 6. China's total debt, based on chart displayed in Ambrose Evans-Pritchard article.

Figure 6. China’s total debt, based on chart displayed in Ambrose Evans-Pritchard article.

This rise in debt now seems to be slowing, based on a Wall Street Journal report. A person wonders whether this stalling debt growth is affecting world oil and other commodity prices.

Figure 7. Figure from WSJ article PBOC Struggles as Chinese Borrowers Hold Back.

Figure 7. Figure from WSJ article PBOC Struggles as Chinese Borrowers Hold Back.

Other emerging markets also seem to be experiencing cutbacks. Since 2008, the United States, Europe, and Japan have had very easy money policies. Some of the money available at low interest rates was invested in emerging markets. Now the WSJ reports, Fed Dims Emerging Markets’ Allure. According to the article investors, investors are taking a more cautious stance on new investment because of fear of rising US interest rates.

Of course, other issues affect debt and world commodity demand as well. If interest rates rise, they many have a tendency to shrink new lending, in general, because loans become less affordable. Sanctions of one country against another, such as the US against Russia, and vice versa, also tend to reduce demand.

Issue #7: Debt bubbles have been a problem in past collapses.

According to Jesse Colombo, the Depression was to a significant result the result of debt bubbles that built up during the roaring twenties. Another, longer-term cause would seem to be the loss of farm jobs that occurred when coal allowed tasks that were previously done by farm workers to be done by either electricity or by horses pulling metal plows. The combination of a debt bubble and loss of jobs seems to have parallels to our current situation.

Many believe the subprime housing bubble crash contributed to the Great Recession. The oil price spike of 2007 and 2008 played a major role as well.

Issue #8: If we are facing the collapse of a debt bubble, it is quite possible that prices of many commodities will fall. This could possibly lead to a collapse in the supply of many types of energy products, more or less simultaneously.  

Figure 8, shown below, is a very rough estimate of the kind of decline in energy use we could be facing if a debt collapse leads to very low prices of many types of fuels simultaneously. Prices of many commodities crashed in 2008, and it was only with massive intervention that prices were propped up to 2011 levels. After the beginning of 2011, prices began sinking again, as shown in Figure 1.

Figure 8. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Figure 8. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Clearly governments will try to prevent another sharp crash in commodity prices. The question is whether they will be successful in propping up commodity prices, and for how long they will be successful. In a finite world, fossil fuel energy production eventually must decline, but we don’t know over precisely what timeframe.

Issue #9: My steep decline contrasts with the “best case” forecast of future oil consumption given by M. King Hubbert. 

M. King Hubbert wrote about a scenario where another type of fuel completely takes over, before oil and other fossil fuels are phased out. He even discusses the possibility of making liquid fuels using very cheap nuclear energy. The way he represents the situation is the following:

Figure 9. Figure from Hubbert's 1956 paper, Nuclear Energy and the Fossil Fuels.

Figure 9. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.

In such a scenario, it is possible that oil supply will begin to decline when approximately 50% of resources are exhausted, and the down slope of the curve will follow a symmetric “Hubbert curve.” This situation seems to represent a best possible case; it doesn’t seem to represent the case we are facing today. If a debt collapse occurs, much of the remaining fuel is likely to stay in the ground.

Issue #10: Our economy is a networked system. Increasing debt is what keeps the economy inflated. If wages fail to keep pace with debt growth, the system seems likely to eventually crash.

In previous posts, I have represented the economy as a self-organized networked system, consisting of businesses, consumers, governments (with laws, regulations, and taxes), financial system, and international trade.

Figure 10. Dome constructed using Leonardo Sticks

Figure 10. Dome constructed using Leonardo Sticks

One reason the economy is represented as hollow is because the economy loses its capability to make goods that are no longer needed–such as buggy whips and rotary dial phones. Another reason why it might be represented as hollow is because debt is used to “puff it up” to its current size. Once the amount of debt starts shrinking, it makes it very difficult for the economy to maintain its stability.

Many “peak oilers” believe that if we have a problem with the financial system, all we have to do is start over with a new one–perhaps without debt. Everything I can see says that debt is an essential part of the current system. We could not extract fossil fuels in any significant quantity, without an ever-rising quantity of debt. The problem we are encountering now is that once resource costs get too high, the debt-based system no longer works. A new debt-based financial system likely won’t work any better than the old one.

If we try to build a new system without fossil fuels, we will be really starting over, because even today’s “renewables” are part of the fossil fuel system.3 We will have to go back to things that can be made directly from wood and other natural products without large amounts of heat, to have truly renewable resources.

Notes:

[1] This is really a simplification of the real issues. As world population grows, it is necessary to obtain an increasing amount of food from the same arable land. Thus, it is necessary to find new processes to increase food production, at the same time that soil is quite possibly degrading. Soil is in a sense a “resource other than fossil fuels,” but I have not mentioned this issue specifically.

Growing pollution problems are in some sense an indirect cost of extracting fossil fuels and other resources. These represent another growing cost that I have not specifically identified. Furthermore, there are indirect expenses that do not fit neatly into any category, such as required desalination plants to handle growing populations in areas where water is scarce. We may need to consider mitigation expenses of all types as part of the “cost of resource extraction.”

My point is that it becomes increasingly difficult to offset these many cost increases with technological innovations. Furthermore, if no changes are made, a larger and larger share of both the workforce and resources are required for maintaining the status quo, leaving fewer workers and a smaller quantity of resources to “grow” the economy.

[2] Wind and water are additional sources of energy, but they are sources of mechanical energy, not heat energy, so are not helpful unless they can be converted first to electricity, and then to heat. In quantity, they never were very large in pre-fossil fuel days.

Figure 11. Annual energy consumption per head (megajoules) in England and Wales 1561-70 to 1850-9 and in Italy 1861-70. Figure by Tony Wrigley from Opening Pandora's Box. Figure originally from Energy and the English Industrial Revolution, also by Tony Wrigley.

Figure 11. Annual energy consumption per head (megajoules) in England and Wales 1561-70 to 1850-9 and in Italy 1861-70. Figure by Tony Wrigley from Opening Pandora’s Box. Figure originally from Energy and the English Industrial Revolution, also by Tony Wrigley.

[3] Of course, any existing “renewable” will continue to work until it needs repairs that are unavailable. Other parts of the system (such as electric transmission lines, batteries, inverters, and attached devices such as pumps) may fail more quickly than the renewables themselves.

Filed under: Financial Implications Tagged: debt bubble, economic growth, low commodity prices, low oil prices, wage growth

Content Discussion

Gail Tverberg's picture
Gail Tverberg on September 27, 2014

I agree with you that wealth concentration is now worse than what GINI coefficients show, because concentration of wealth in businesses adds to the concentration of wealth among individuals. 

I am not sure I follow some of your other points. Wages for “common workers” is down a lot, in part because of competition with wages in “warm” parts of the world, where workers can live pretty well, without heating their homes. Homes also don’t need to be a sturdy, so living costs are lower. This wage competition doesn’t make our cost lower, though. It just means that an awfully lot of young people are having a hard time finding good-paying jobs.

We also have a problem with diminishing returns, when it comes to oil, fresh water, and quite a few minerals. The cost of extraction keeps rising, whether or not workers can pay for the required higher cost of extraction. The big issue now is that companies are saying, “We will cut back on new development, because current oil prices are not high enough to justify the cost of extraction.” The latest announcement in this direction came yesterday, when Norway’s Statoil announced that it was cancelling a proposed Alberta Oil Sands development. You may claim that prices are high enough for shale extraction, but they clearly are not for other types of extraction. This is a huge problem.

The world is finite. As we approach limits of many different kinds (cheaply extractable oil, fresh water that can be obtained without desaliniation, metal ores of concentrations that we used to get in the past), economic relationships change. Economists have put together models as if the world has no limits. This is clearly untrue. It is the limits that make past models no longer work. We need models that reflect today’s reality, but we don’t have them.

 

Robert Bernal's picture
Robert Bernal on September 28, 2014

Even though I’m a “tech fix guy”, I enjoyed reading your post and all the comments at ourfiniteworld.com. I try not to become depressed because I believe that it is possible to overcome the next dark age (and peak CO2) by use of advanced nuclear. I especially like that graphic which Hubbert made. Most scientist of the time already knew about the vast potential of nuclear.

We must use our fossil store (and debt creation) wisely!

fireofenergy

Roger Brown's picture
Roger Brown on September 29, 2014

The world is not necessarily economically finite.

2% growth for 2000 years would result in an expansion of global economic activity by 158 million billion times. Do you believe that human economic activity will expand by this amount?

Gail Tverberg's picture
Gail Tverberg on September 29, 2014

The amount of a resource in the ground provides a very high upper limit for what can be extracted. A much more important limit is the fact that we need a whole system in place to get the resource out. Part of what we need is a high enough price to make extraction of the resource profitable for companies. In order for that to happen, workers need to be able to buy goods that require the use of the resource. Very often that requires debt, and in fact, growing debt.

Our problem now is very different from a “resources in the ground problem.” It is much more a “young people don’t have jobs, so they can’t afford houses or cars” problem. When they cannot afford houses or cars, then the “demand” for oil drops below the cost of extraction. That is the problem we are encountering now.  

Roger Brown's picture
Roger Brown on September 29, 2014

Jason,

Your statement was that the world is not necessarly economically finite, with the logical implication that it is potentially economically infinite. I am glad to see that you do not actually believe in such nonsense. The curve of economic exansion will indeed rollover some day, maybe conveniently after your lifetime and mine, maybe not. However, there is a lot more a stake in the case of optimistic projections about global economic expansion that there is about the extension of Moore’s Law. If the rate of information technology advance slows down the physical implications for basic human welfare are small. On the other hand if we wait until short term markets signals tell us that supplies of rock phosphate are running short before we try to develop alternate sytems of food production the result could be starvation for million of people. If optimism about developing decarbonized energy sources  is incorrect then the consequences of GHG emissions could potentially be catastrophic. More generally if resources rise to great and extent, and economic system based on assumption of endless will undergo an financial collapse and will have to find new methods of organizing economic production. 

Robert Bernal's picture
Robert Bernal on September 29, 2014

If there is not enough demand for high priced rents and mortgages, those will also go down accordingly. Thankfully, much of the industrial equipment is already built. Prices for tools will also come down a bit if need be.  

Now is the time to redevelop advanced nuclear, before inflation kicks into high gear. It’s fuel process is only a small part of the overall costs, unlike hydrocarbons.

Joris van Dorp's picture
Joris van Dorp on September 30, 2014

The amount of a resource in the ground provides a very high upper limit for what can be extracted.”

Gail, others and myself have told you repeatedly that nuclear fuels provide an upper limit which is essentially inexhaustible. The earth contains about 500 trillion tons of uranium and thorium, each ton of which can provide 3 GWyears of heat. The oceans contain 4 billion tons of uranium, which can be economically(!) extracted for use in fast spectrum nuclear reactors that are ready to build today. (In fact, Russia is building commercial nuclear reactors of this type as I write this.) Surface runoff replenishes the oceans at a rate of 35.000 tons of uranium each year, providing a fully renewable and inexhaustible source of cheap energy for society equal to the output of 35.000 fast-spectrum nuclear power plants of 1GW continuous electrical power each. This electrical power can arguably be produced so cheaply that it can be used to provide fully synthetic liquid fuels to directly replace crude oil.

This matter is – in my opinion – of the utmost importance to any discussion about ‘limits’ to what human society can sustainably achieve in terms of economic output, quality of life and environmental protection. Even M.K. Hubbert recognised these facts, as the chart you show in your article demonstrates. You should recognise these facts too, in my opinion.

I have been following and enjoying your articles for many years (you are one of the very people who got me seriously interested in the “Peak Oil” issue a long time ago) and I continue to hope you will seriously (i.e. free from gross anti-nuclear propaganda) incorporate The Nuclear Option in your scope of analysis sooner rather than later.

Gail Tverberg's picture
Gail Tverberg on September 30, 2014

Even if fracking reduces oil production costs for shale oil, this is only a small share of the world’s production. As you indirectly point out, the cost of other oil production is still rising. We have (more or less) one world oil price. This price needs to be high enough for oil with the highest marginal cost of production. When you include the tax needs of governments of oil exporting countries, there are many countries with problems at current price levels–for example Russia and Venezuela. New Canadian Oil Sands production is becoming unprofitable.

Growth in fracked US oil helps pump up local US economies, but the low world oil price creates a problem worldwide. The economic growth related to fracked US oil relates mostly to the growing payrolls in areas with oil exctraction. We will have to see how long this growth lasts–quite possibly not very long.

US natural gas is cheap, but many producers are having problems with the price. Hence, all of the agitation for natural gas exports. The hope is that these would drive up US natural gas prices.

Gail Tverberg's picture
Gail Tverberg on September 30, 2014

My concern about nuclear is the issue of whether they can be safely operated in a world that is falling apart for other reasons–a financial system that is breaking; a system that provides too low a price for oil, natural gas, coal, and electricity.

In such a system, safeguards that we have been used to, including the availability of electricity going into a nuclear power plant may be lacking. The ability to pay workers may disappear. The ability to keep electrical transmission lines repaired is likely to decline over time, making electricity from nuclear less and less useful. The ability to decommission such plants will disappear, cleating a much higher hazard for nuclear waste problems. These plants have only a 60 year or so lifetime. They require fossil fuels to build, so it is unlikely that we can build replacements. 

Thorium reactors aren’t really ready for prime time yet. I cannot imagine one being built in this country, without the process being tested more and perfected. The low cost idea is only in theory, until production can really be put in place.

Another issue is timing. We have a world of financial woes right now. We need a solution right now–not five or ten years from now.

A related issue is cost. Ramping up nuclear would take huge investment right now, at a cost that countries could not afford. You may think nuclear is cheap, but it depends on the amount of safety controls built in. The cost is quite high in the US. It is likely quite a bit lower is less saftety conscious parts of the world.

 

Gail Tverberg's picture
Gail Tverberg on September 30, 2014

See my comment to van Dorp above on nuclear. I think it has “issues” as well.

Joris van Dorp's picture
Joris van Dorp on September 30, 2014

Considering the gravity of your conclusion that the world is going to fall apart, you are not doing justice to the subject of nuclear power. If you believe the world will fall apart due to lack of cheap energy, you need to prove that nuclear energy can’t take over where fossil fuels are likely to – or need to – leave of. You have not done so.

First of all, your argument that the world ‘might’ fall apart and hence that we should not do this or that is worthless. If we assume that the world will fall apart, there is nothing left for us to do. We might just as well give up. I will never give up, if not for my own sake, then for the sake of my children and children everywhere. I spit on such defeatism. It is the lowest form of anti-humanism and I hate it. Lead, follow, or get out of the way Gail.

Nuclear plants do not require fossil fuels to build, since they can provide power at a cost that is low enough to produce fully synthetic liquid fuels that can compete with $100 crude oil, as has been demonstrated on this site and elsewhere many times. Hubbert demonstrated it as well. So quite contrary to your assertion that nuclear won’t survive fossil fuel depletion, nuclear technology might well be the only energy technology that does survive, namely by making possible the production of cheap liquid fuels indefinitely.

Thorium is nice, but superfluous. Uranium can provide all the energy we will every need. This is undeniable.

The ‘low-cost’ idea is not theory. It is practice. Nuclear plants built in the first wave of construction in the 70’s and 80’s produce energy cheaper than coal right now (unless they are killed by politics which has happened in a few isolated cases). You imply that Chinese nukes which are very costeffective are somehow less safe than those built in the West. You need to prove that. The fact is that Chinese nukes are built according to the same standards – and in fact the very same design specifications – as they are in the West, since the Chinese bought Western technology. The argument that they are building unsafe nukes because otherwise they would not be building them so costeffectively is nothing but gross anti-nuke propaganda.

Finally, you claim that the up-front investment of a new wave of nukes cannot materialise in a world of financial woes. This shows your lack of understanding of basic economics, because quite the opposite is the case. Our financial woes are largely the result of a lack of investment and debt creation. Nuclear power plants are very good investments because they are certainly far cheaper than renewables, and – if done well – they are cheaper than fossils. That means that nuclear power projects should easily attract capital and hence provide unsubsidized jobs and wealth long into the future.

The only reason we are not investing (in the West) is because of the cost of antinuclearism. Antinuclearism affects public acceptance, and without minimal public acceptance nothing is investment grade. If we can destroy rabid antinuclearism with reliable and objective information, we can enable nuclear power, save our economies and save our planet.

In my honest opinion that’s a rather more attractive vision than just giving up, hunkering down and kissing our asses goodbye like you seem to be advising.

Joris van Dorp's picture
Joris van Dorp on September 30, 2014

“It is the limits that make past models no longer work. We need models that reflect today’s reality, but we don’t have them.”

The point is that the limits are not nearly reached. Only the limit of conventional – free gushing – oil is reached (which is a very serious issue, but which is not an end-all and be-all for human civilisation as we know it). Limits of other energy production are not reached by a long shot. As explained above, nuclear will replace fossils without problem. (Wind and solar can serve in niche applications if people want them and weather allows.)

In any case, we should realise in my opinion that if we fail at keeping the wheels on human progress by making sure investment in cheap energy is timely and sufficient, then the result will not be failure of our electricity system or other infrastructure. Apart from some cataclysmic natural event such as a meteor strike or supervolcano, electricity is here to stay, forever. What will fail is our prosperity. Electricity and other energy services will become luxury goods. In the worst possible scenario, things will become so bad that people themselves will become fuel – in the form of the corpses of starved paupers or war victims – to serve the needs of the rich elite as fuel for ‘biomass’ burning power plants.

Not so long ago, 95% of the human population was a serf or a slave. That could happen again in the future, but in that future, electricity and modernity will still exist in large measure, but only for a much smaller group of people. True, the electric grid might not be maintained everywhere, but it will be maintained where is serves the needs of the rich elite. It is should be the concern of everyone else – and I include myself firmly in that group – that energy does not become a luxury good, even while we eliminate environmental destruction at the same time. Only nuclear can help us do that.

Robert Bernal's picture
Robert Bernal on September 30, 2014

We have no choice. We have to keep the ones we have running and redevelop the ones that are essentially meltdown proof. Silly Nixon and Clinton stopped the commercial development stage die to political reasons.

We must treat it like the interstate highway project of so long ago – the kids don’t know it yet, but that what will save them, their economy and their planet.

Print the extra debt, I don’t care!

Gail Tverberg's picture
Gail Tverberg on September 30, 2014

Electricity isn’t really the same whether it is made with coal, wind, or solar PV. Disptachable power has distinct advantages over intermttent sources, making dispatchable more valuable.

I would argue that the savings provided by intermittent renewables are much more comparable to the savings of fuel to fossil fuel powered plants than to the cost of electricity. If intermittent renewables are added to a system, it is not possiblle to reduce the amount of fossil fuel generation back-up by much, because required backup is determined by the annual peak in generation. Renewables typically do little to offset this peak, which is very often in the winter. Staffing of fossil fuel plants remains pretty much the same, and owners still expect to earn an andequate returen on investment. The fossil fuel plants are ramped up and down as much or more, so the wear and tear on them is not really lessened either. Transmission costs are the same or higher. So the savings are mostly fuel savings, perhaps offset by higher transmission costs.

I would agree with you that the cost of generation from coal plants is very low. The issues I raise make the difference between the value of generation from intermittent renewables and the value of generation from coal plants even greater than you suggest.

I suppose there should be an offset for higher carbon generation. But without the offset, the size of the difference is huge. Intermittent renewables are much more expensive. 

 

Robert Bernal's picture
Robert Bernal on October 2, 2014

I believe the number one thing against nuclear is public acceptance. Had past US presidents not cut the commercial development phase of the meltdown proof designs, it would be a lot easier to get the ball rolling about saving the future. The fuel charge is negligible. From there, it is up to people in the industry to fast track the most reasonable design.

Bob Bingham's picture
Bob Bingham on October 2, 2014

Very interesting article and it is true that price has a way of limiting sales and therefore supply. If the price of oil drops and the oil companies can’t supply at the lower price, more transport can be transfered to electricity. There are huge gains to be made with solar and wind and geothermal is hardly touched.

Oil is a fantastic fuel which is cheaper than Coca Cola and if it was four times the price it would still be good value but not sqanderd on unneccessary driving.

Climate change and food production are looming threats and if it coincides with an energy crisis we could be in real trouble.   

Geoffrey Styles's picture
Geoffrey Styles on October 2, 2014

Gail,

Among other things, your analysis seems to ignore the cyclical nature of oil and gas prices. Even if your assumptions about low prices and growing debt burdens proved true, shrinking future production, that very shrinkage would boost prices again, especially in a world in which billions remain under-served for energy. That would fuel a new wave of investment and, since knowledge of shale deposits and horizontal drilling/hydraulic fracturing knowhow won’t disappear–even if some companies did–inevitably boost production again, perhaps even more quickly than in the most recent cycle.

And while high oil prices haven’t helped renewables and EVs as much as policy has, plummeting oil prices would surely hurt them. How many people would pay up for an EV or even a hybrid if they thought $2 gasoline was in prospect again (last seen in the US in 2009)?

Paul O's picture
Paul O on October 2, 2014

You should direct your question to Bill Clinton, John Kerry, Hazel O’leary and other Democrats.

Robert Bernal's picture
Robert Bernal on October 2, 2014

Climate change is not quite as serious as many think it is. That’s because ocean acidification is even more serious (nevermind mere seal level rise). We are absolutely at some percenage of the way there already (hopefully, still minute), that is of converting the Holocene into the anthropocene (gigadeath).

It will take many tens of thousands of square miles of PV just to power the excess CO2 cleanup assuming the mining and pulverizing of some abundant material that absorbs CO2, or the energy required to sequester it as described briefly in this link…

http://phys.org/news/2013-05-scientists-co2-sequestration-technique-supergreen.html

It will take about 2 million more to power 10 billion at the high standards we all deserve (which includes the extra energy to build storage and to account for inefficiency of that storage).

Obviously, the biosphere will fry before all that capacity is built cheaper (intrinsically) than nuclear which is safer than most think (especially reprocessed fuel and molten salt reactors).

Oh, I didn’t count all the extra energy required for desalination (required for excess CO2 and naturally caused drought and for topping off pumped hydro storage, which may not quite be the most efficient but is the one with the highest EROI). I have attempted various different methods for the energy math, but every time I come to the conclusion that nuclear is far more dependable requiring far less land. There is no need for nuclear meltdowns because it should be made passively safe.

Here is an interesting link that somebody pointed me to. It’s not about the politics, just science.

http://www.hiroshimasyndrome.com/nuclear-waste-is-it.html

Robert Bernal's picture
Robert Bernal on October 2, 2014

http://www.dailykos.com/story/2012/06/05/1097574/-Nuclear-Power-and-Public-Opinion-What-the-polls-say#  proves that public acceptance is not very excited about building nuclear which (partly) explains why past presidents dis-avowed it.

Deflection (from the truth) is indeed irresponsible! I blame most for not doing their energy research and not doing the math.

Robert Bernal's picture
Robert Bernal on October 3, 2014

So, is it true that the NRC will permit modular molten salt reactors? Are these “new” meltdown proof designs being subsidized at the same level as wind or solar? Not since the great president JFK, did the U.S have any real hope!

Edit, I mistakingly placed an incorrect link.

Here’s one that I am already familiar with http://www.phyast.pitt.edu/~blc/book/chapter9.html

 

And here’s the 1990’s book it came from http://www.phyast.pitt.edu/~blc/book/

Bob Bingham's picture
Bob Bingham on October 3, 2014

As far as I am aware we have notfound more oil than we are producing for decades and there is no more cheap oil, Fracking is short lived and deep sea oil is very expensive. Peak oil is not apparent yet but it has not gone away and we need to prepare for a life without oil.  .

Paul O's picture
Paul O on October 3, 2014

That is like saying that FITs and Massive spending first by China, then by Germany were a bussiness responsibility.

Robert Bernal's picture
Robert Bernal on October 3, 2014

The powers that be will NOT let that happen, so I’m probably wasting my time even thinking about it. however, I won’t give up and… thanks for agreeing that we need clean energy at the large scale!

Geoffrey Styles's picture
Geoffrey Styles on October 3, 2014

Please delete duplicate.

Geoffrey Styles's picture
Geoffrey Styles on October 3, 2014

Willem,

As I think you’d agree from numerous other comments you’ve posted on TEC, a major reason the cost of that incremental RE was so high was that so much of it was installed in unsuitable places: e.g., over $100 B worth of PV in Germany with an average capacity factor of 10% or less (i.e. average annual generation 1/10th of nameplate capacity) or wind turbines in locations with less than excellent resources, driven by poorly-targeted subsidies.

And think about your $2 T figure in terms of the debt that concerns Gail so much in this post. Unlike fossil fuel development, which includes a large component of cash from operations, RE depends mainly on debt, both direct and indirect. Many projects are heavily financed with modest equity–fairly typical for power projects in general–but they also include large components of government subsidies which in cases like the US are funded largely (I would argue entirely, as low-priority federal or state spending compared to other categories) by government borrowing.

Joris van Dorp's picture
Joris van Dorp on October 7, 2014

I think I see your point very clearly N Nadir, and I am familiar with a good part of the large number of essays, comments and articles that you have written on this site and elsewhere, which resonate with my understanding of the issues such as it is.

I suppose that the only solution to the predicament that you identify above is to settle for the fact that it must be states that implement nuclear power directly – in combination with a suitable program of strengthening physics education and public consultation – at least until the development of nuclear power has progressed to the level that the population is enjoying tangible benefits from nuclear power development and is largely free from extraordinary fear of – and gross ignorance about – nuclear energy.

That is a goal everybody can help realise. Whatever the drawbacks of nuclear energy, an important advantage is that merely the persistent demand for sound science and reason in politics and public affairs will result in nuclear’s selection as the preferred tool of fighting environmental destruction, energy poverty and resource depletion.

A national nuclear power program  can create (and has created in the past) a win on all fronts: jobs, environment, science mastery and economics. I continue to believe that these benefits will be recognised again sooner rather than later. I continue to believe that solid argumentation does eventually triumph over ignorance and fear, although clearly there are many reasons why that triumph does not occur automatically. In my country at least, the obtuse non-nuclear energy policy ‘agreed by a broad body of social partners’ is already falling apart and is likely, perhaps, to make way for something informed by science rather than infantile and hollow ideology.

P.S. I seem to detect some cynicism and resignation in your posts. I would say to you the same thing I say to Ms. Tverberg. Don’t be defeatists! There is real philosophical peace to be found in perpetually striving for the better, even if the striving appears fruitless. Isn’t there?