Gail Tverberg: Why There's No Economically Sustainable Price For Oil Anymore

News & Current Events Public News & Current Events
,
1

Actuary Gail Tverberg returns to provide an update on where we are in the global energy story. Her outlook is not rosy: she doesn't see a path for society to transition to an affordable, plentiful substitute to petroleum as a transportation fuel. The physics as well as the funding do not pencil out, at least with today's known technologies.

Without such a solution in hand, the world finds itself now mired in a scenario where there really is no long-term workable range for the price of oil. It's either "too high" and demand suffers, or "too low" and producers can't afford to extract it. The acceptable middle ground has disappeared:

When on the rising side of the Hubbert curve, everybody has good wage level and everybody can feed themselves. You can build new oil wells and everything works out fine. But what happens as you get past the 50% mark is that you no longer have enough oil coming out for the economy to keep growing. It starts going down. And what happens then is that the economy doesn’t function in the same way. You start getting the prices to spike as you try to get higher-cost oil out. And this is what we saw in the 2007-2008 period.

The price of oil spikes and you get recession. Then the price of oil comes back down. But wages don't recover and you get the very low price problem that we have right now. So it doesn’t work right. You can’t keep getting the same amount of oil out, essentially because the wages of the people don’t stay up high enough in order to afford the output of the economy.

At this point, it has gotten bad enough that there is no price that works. The price that producers need is higher than what the market will bear.

If we go to a place like Saudi Arabia, you'd say: They can get it out of the ground for $20 a barrel. But then when you look at it, you discover that they really need a much higher price if you include in all of the taxes and all of the funding they need to keep social order, import lots of wheat and the many other things that their economy needs, and build a desalination plant. So they really can’t get along on $20 a barrel. They learned how they can get along on $100 or $120 a barrel, but they can’t get along on $50 a barrel  -- even in Saudi Arabia.

So you end up with a situation where there isn’t any kind price that really will work. 

Click the play button below to listen to Chris' interview with Gail Tverberg (46m:06s).

This is a companion discussion topic for the original entry at https://peakprosperity.com/gail-tverberg-why-theres-no-economically-sustainable-price-for-oil-anymore/

2

Chris and Gail, thanks for the fascinating discussion on our current energy situation/predicament, and what we might expect going forward.  I loved Gail's analogy of a future with less available energy, likening it to telling a person they are going to go on a 600 calorie/day diet, and what a fantastic thing this will be to look forward to (not!).
Even though we are aware of the Energy "E" here, I still find it eye-opening to look at the world through the Energy lens.  It sure puts a different perspective and focus on things (like Gail's warning of the "600 calorie diet" to come).

Thanks for the great podcast Chris and Gail; it was a real treat to listen-in on a conversation between two people who are so well versed on our energy predicament. 

3

Hope your mare is settled and your milch coo has freshened.

4

Gail makes a good point that there is a continuous cost for maintenance, depreciation, replacement with new at end of life. 15 years is a long life for a wind turbine at sea due to the corrosive effects of salt water.

5

Capitalism is domed and from its ashes New Capitalism will emerge.
In New Capitalism money serves money serves humanity, humanity does not serve money.

In New Capitalism it is illegal to make a profit. Every cent has to be justified before a board of humans. Unauthorised profits attract Severe penalties. 

Planned obsolescence  is illegal. Product lifetime projected use and disposal are mandated. A clear plan of design usage and disposal must be submitted before production may commence. Priority will be given to products that are designed to last last centuries. All bearings are standardized.

Human work is considered an evil and a maximum per dollar cost of the finished product is mandated. (ie 1 minute per dollar cost.)

Arts and non profit amusements are exempt from scrutiny. As soon as money changes hands for these amusement the full weight of The Committee of Humans is brought to bear.

 

6

$50 Trillion?
That rings a bell. That is the amount that Catherine Austin Fitts mentions that has gone AWOL. Hmmm.?

I have long since given up on In-the-box thinking. Give me a good EM drive and the Japanese and I will go get all the energy you need…But there is a caveat. You wont be able to live at the bottom of this gravity well anymore.

Why? Because we turn energy into babies. 

https://youtu.be/HCeEzmmCd5c

7

Another great Tverberg discussion. Something that needs to be considered on any artificial means of sustaining the oil industry is that the energy it takes to produce a usable barrel of oil is approaching 1/1 ratio. So price is a symptomatic problem not the real problem hense money can't fix the problem neither will military force. We've exceeded oils life cycle. For more information visit www.thehillsgroup.com. Also view this complementary video. https://m.youtube.com/watch?v=k7gJcfjyFpA

8

A search showed the correct site to be www.thehillsgroup.org. It has a very good and detailed prediction of the current and future price of oil. It is headed down very rapidly as the usable energy available (EROEI) drops.  EROEI is what runs the economies of the world. When EROEI hits zero oil becomes wothless. Except for borrowing from future prosperity there is no way to prop up the dropping EROEI. Whenever the word gets out that all that borrowed money will not be repaid the game is finally up.
Right now we are in a hybrid phase of weakening EROEI + confidence in technology + confidence in borrowed money being repaid.  If my Prius runs out of gas, it is not long before all the stored battery electrons are gone and the fancy technology is useless.  The Hill's Group is putting us out of gas in about 6 years!

9

aggrivated,
Thanks for going a bit further to find the correct website. I'm always leery of following any links from a new member who only has 1 post. (Sorry, John Roberts. It usually ends up at some spam site.) Since aggrivated posted the correct link, it suddenly became interesting to me. So, I clicked there. I read the home page first and was intrigued enough to subsequently read all the pages.

The website is really just a store front for selling their $69 paper on "Depletion: A determination for the world's petroleum reserve." If they are like most store front sites, they're giving away 1/2 to 3/4 of the content for free in order to get customers interested enough to fork out the $69 for the full report (2013.) The order page was updated in December, 2015 and now shows the price for version 2 to be $28. (It disturbs me that they haven't bothered updating all their pages. It isn't that much work.)

From what I saw of their approach, they're looking at the amount of petroleum in the ground from the perspective of thermodynamic laws and price. An analogy for the model is that we always pick the low hanging fruit first. Once it is gone, we need to do more work to get the higher fruit. At some point, there is still fruit on the tree, but because it is more work to retrieve than it is worth, it essentially doesn't exist.

They are looking at the ETP, an acronym for Total Production Energy. (First time I'd seen this.) It is similar to EROEI, but they claim that they can determine it from 3 variables only. Here is a paragraph from their "overview" page that explains the basic concept of their methodology:

The smaller error results from a much more compact model than what is produced by the quantity approach. To be implemented, the quantity approach requires the evaluation of thousands of values; usually many of them are not precisely known. The energy approach (the ETP model,Total Production Energy) requires only three. The model is derived from the fundamental physical properties of petroleum, First and Second Law statements, and the cumulative production history of petroleum. To generate values the model requires the mass of crude removed over a period of time, the mass of water removed, and the temperature of the reservoir. Although somewhat complex from a mathematical perspective, it employs only one value of which we are not very certain; that is, petroleum's production history.
When they say "temperature of the reservoir," they are talking about the API (American Petroleum Institute) temperature. There is a strong negative correlation between API and BTUs contained in a unit of petroleum. A low temperature reservoir (light, sweet crude) has more energy per unit than a high temperature reservoir (heavy, sour crude.)

It takes a lot of energy to get the finished product to the end consumer. Because the easy to find oil gets exploited first, more and more energy is required going forward. (It is net energy that we consumers get.) At some point, the energy required to get the oil explored, drilled, pumped, transported, refined, delivered, and sold requires all the embedded energy. At that point, petroleum is no longer an energy source. It can still be used as an energy carrier by using other sources of energy (eg. windmills) to pump oil.

One outcome of their methods is the petroleum price curve (first graph) shown on this page: http://www.thehillsgroup.org/depletion2_022.htm.

The Maximum Consumer Price curve was also developed from the ETP model. It represents the maximum price that the end consumer can pay for petroleum. It is based on the observation that the price of a unit of petroleum can not exceed the value of the economic activity that the energy it supplies to the end consumer can generate.
The price curve has a sharp kink in it starting in 2012 when half the energy contained in oil was needed to produce the end product. From that point on, utility to the end consumer drops rapidly and the maximum price drops rapidly. Their calculations say that by 2020, the maximum consumer price will be $11.76 per barrel. That's down considerably from 2016's maximum consumer price of about $65. In 2013, when they wrote their report, the max price was about $95 per barrel. Is that why the price has plummeted or is it just a huge coincidence?

++++++++++++++

I don't know that I buy their methodology, but it is an interesting take on the situation. What adds credence to their predictions is that oil prices have generally followed their predicted price. We'll know in the next few years if the economy can actually handle oil prices as high as they are now. This information will stay close to the front of my mind for a few years.

Nonetheless, information that doesn't influence a decision is just noise. For me, I'm not going to change any decisions as a result of being informed about this. If I had children who were considering future careers or about to make a big life changing decision, I'd buy the report and read it.

Their calculations necessarily work on averages. To be an average, half has to be more and half has to be less. As prices drop, the less efficient wells/reservoirs can't be operated profitably. They won't expand at these fields. At some point, they'll stop pumping because it isn't worth it. Fields that still have good EROEI can still be operated profitably, but we'll have much less petroleum available to drive the economy. The overall economy will suffer mightily.

Perhaps this is the real reason we invaded Iraq. They have large, higher than average EROEI petroleum reservoirs. Perhaps this is why Hillary is talking tough about Russia since they have military weaponry that can stop us from getting "our" oil out from under Iraq.

For those who think that Hubbert's peak is a bunch of BS … they may be right (for the wrong reason.) Hubbert thought we would transition to nuclear power as our main energy source before we ran out of oil. Without having a replacement energy source for petroleum, his curve may have been too optimistic.

Grover

10

I agree with you that the rather precise tracking of the oil price grabbed my attention more than their approach.   Their approach seems valid, but there are so many moving parts in the energy world that getting as accurate correlation to the price as they are getting could just be pure luck.
If, as Chris seems hopeful, Thorium reactors get going in China, even if they don't share the science openly, then it will lessen the world wide demand for fossil fuels in general and change the timing. I would check back from time to time and see if the site gets either updated or is at least still accurately tracking oil's price. 

I would love it if Chris could get an interview with the site's founder and see what the back story is on his research.

11

aggrivated,

I agree completely! I would love to hear a layman's version of the material. Chris is excellent at distilling complex topics like this and making common sense of it all.

After sleuthing a bit, I found the first graph from http://www.thehillsgroup.org/depletion2_022.htm
that I referenced in post #8. Note the black "Maximum Consumer Price" line. If that is all we can afford, we're in a world of hurt. I wouldn't put too much faith in Thorium. It takes a long time to scale up and learn the necessary lessons. If their analysis is correct, we don't have that time. Our petroleum enabled lifestyle will come to a screeching halt in short order. Even the CB printing won't be able to supersede physical reality.

It's better to develop personal action plans to put in place if this comes to pass. Where do you want to die? Where can you go and what can you do to thrive while still alive? At what point is it too late to make a move? I'd say that we still have a couple of years before things get dire. By 2020, it may be too late to do anything about it. At some point, you'll be cemented in place.

Grover

12

[quote=Grover]
. . . The price curve has a sharp kink in it starting in 2012 when half the energy contained in oil was needed to produce the end product. From that point on, utility to the end consumer drops rapidly and the maximum price drops rapidly. Their calculations say that by 2020, the maximum consumer price will be $11.76 per barrel. That's down considerably from 2016's maximum consumer price of about $65. In 2013, when they wrote their report, the max price was about $95 per barrel. Is that why the price has plummeted or is it just a huge coincidence?

/quote]

Coincidence, or worse. First, the oil price did not begin to drop until June 2014. What actually happened with oil prices in 2014 is complex, but a large part is explained by the fact that U.S. oil production increased by about 4 million barrels per day between 2010 and 2014, due primarily to new production from shales and tight sands. That destabilized the supply/demand balance leaving OPEC and Saudi Arabia with the decision to either cut production to sustain prices or to cut prices and try to eliminate their new competition. What is actually likely to happen in the future is that some of the new competitors will live (e.g., Permian basin) and some new market balance will be achieved somewhere in the vicinity of $70 per barrel. Don't hold your breath waiting for that $11.76 barrel of oil.

Stan

I don't know of any present production for which half of the energy contained in oil is needed to produce the end product. The worst cases of which I am aware are shale and tight sands production for which the ERoEI is no worse than 10, on average, at the wellhead. That means that for each barrel of oil extracted, 0.9 barrels of oil was used in the drilling and completion process. To that we add the refining and distribution losses of about 15% and we have about 75% of the available energy delivered to the consumers.

Now it is true that the consumers may use a good portion of their 75% to build highways, produce pipe and drilling rigs, run service stations and garages and all the rest of the businesses that revolve around oil, but as long as there is enough remaining energy to see that all are fed and clothed, that game will continue. There are humongous oil reserves available in the world with an ERoEI of 10 but we are not in an equilibrium economic situation with that yet. The interesting question is whether they can sustain a world economic structure that was built with an ERoEI of about 100.

 

 

13

Coincidence, or worse. First, the oil price did not begin to drop until June 2014. What actually happened with oil prices in 2014 is complex, but a large part is explained by the fact that U.S. oil production increased by about 4 million barrels per day between 2010 and 2014, due primarily to new production from shales and tight sands. That destabilized the supply/demand balance leaving OPEC and Saudi Arabia with the decision to either cut production to sustain prices or to cut prices and try to eliminate their new competition. What is actually likely to happen in the future is that some of the new competitors will live (e.g., Permian basin) and some new market balance will be achieved somewhere in the vicinity of $70 per barrel. Don't hold your breath waiting for that $11.76 barrel of oil.

Stan

I don't know of any present production for which half of the energy contained in oil is needed to produce the end product. The worst cases of which I am aware are shale and tight sands production for which the ERoEI is no worse than 10, on average, at the wellhead. That means that for each barrel of oil extracted, 0.9 barrels of oil was used in the drilling and completion process. To that we add the refining and distribution losses of about 15% and we have about 75% of the available energy delivered to the consumers.

Now it is true that the consumers may use a good portion of their 75% to build highways, produce pipe and drilling rigs, run service stations and garages and all the rest of the businesses that revolve around oil, but as long as there is enough remaining energy to see that all are fed and clothed, that game will continue. There are humongous oil reserves available in the world with an ERoEI of 10 but we are not in an equilibrium economic situation with that yet. The interesting question is whether they can sustain a world economic structure that was built with an ERoEI of about 100.

 

 

14

Interesting discussion, but I think most of the PP crowd is aware of the mechanics oil price. The really sad part of the whole situation is that we are using debt to keep the bubble from collapsing. The fundamentals of supply and demand will, in the long run, determine how this situation plays out. The essentials of societal collapse have proven, demonstrably over the centuries, to be dependent on cheap labor/energy. As scarcity raises its ugly head, so goes the inequality of its citizens. So what's going to change/ Thank you Jamie Dimon:

Goldman Sachs has been increasing its derivatives volumes since the crisis, and it had a portfolio of about $48 trillion at the end of 2013. Bloomberg Businessweek recently reported that as part of its growth strategy, Goldman plans to sell more derivatives to clients. Citibank, too, has been increasing its derivatives portfolio, despite the numerous capital and regulatory challenges, In fact, its portfolio has risen by over 65 percent since the crisis — the most of any of the four banks — to $62 trillion.
 
15

Ruby Carrot made a video to set everyone's nostrils aflare in indignation.
Ignorance plus ego will do that.

https://youtu.be/KM82RW7_II4

16

Stan,

To begin, I want you to understand that I have zero experience with oil exploration, production, refining, distributing, marketing, or selling. I have some experience in building infrastructure for transportation. I'm more or less just reporting my thoughts and impressions of what I read in the public version of their paper. I don't know what energy/financial/etc. costs they are including in their calculations to say that we've passed the point where half the energy produced is needed to produce the next unit. If you've got experience in any of these endeavors, you have me at a disadvantage.

That said, if you look at the graph I posted, you'll see that oil prices bounced considerably from the neat best-fit black line. That prices didn't fall until June 2014 isn't too damning. Gail has been saying for years (I'm paraphrasing) that the price of oil will be set by what the consumers can afford. I see the kink in the graph and the sharp downward slope as denoting what consumer utility remains as more and more of the available energy is consumed in the production of final goods.

If consumers still have credit available, they can overpay for the product. It is when credit is constrained or people have a wake up call and realize that the product isn't worth the current price … that's when things change. As an example, the price of beef has skyrocketed the last few years. I love a good steak, but it isn't worth mortgaging the farm to get one. As a result, I reserve good steaks for special occasions. When the price eventually drops to what I consider reasonable, I may indulge more frequently. If the price drops sufficiently, any day of the week that ends in "y" is special enough.

Back to your post … if producers go out of business and others don't ramp up production, supply will be constrained and price will jump to balance supply and demand. (Isn't that the way free markets are supposed to work?) But, looking at it from a consumer's viewpoint, how much are they going to consume if the price goes up? (If credit weren't available, it would be an easier calculation.) People would use less until supply and demand were balanced. If the average consumer's internal calculator says that oil is only worth $11.76 per barrel, they won't consume oil that averages more than that. If suppliers can't supply sufficient oil for $11.76 per barrel, our whole energy based economy grinds to a standstill.

So, frankly, I'm not holding my breath waiting for $11.76 oil.

Stan, remember that we're talking all-in prices here. Just because a well head can produce 10:1 EROEI doesn't mean that all of them do so. Some are duds. That has to be factored in. Then, you have materials like steel pipe, fracking fluids, equipment, labor hours, land leases, taxes, etc. - and that's just to get a product at the well head. Crude oil needs to be transported to a refinery, refined, and then distributed to the gas stations for the end consumer. All of those energy costs need to be included.

I know when I buy gasoline, there are federal and state taxes included in every gallon I buy. Theoretically, that pays for all the infrastructure I drive on. (It is really just the down payment, but let's pretend that it covers all the costs.) At current unit prices, the taxes alone add approximately 15% to the final cost. All of those costs need to be included for they diminish the value of the oil to the consumer. That may be what the authors refer when they say that half the energy is lost.

If your example is reasonable, we get 10 units of oil at the well head for 0.9 units invested. Then, we've got the magic 15% overhead for refining, etc. That adds 1.5 units of investment and a remainder of 8.5 units. So, we've invested 2.4 units to net 8.5 units. In your simple example, we're down to about 3.5 EROEI. It goes down quickly, doesn't it?

I'd appreciate if you read their public documents and can find where they went wrong. It took me a little more than an hour to read everything. If you've got experience with oil, you should be able to do it quicker. Let us know what your thoughts are.

Thanks in advance,

Grover

17

Horrible discussion.  I couldn't listen to the end, for the first time ever on a podcast. Wow, are we great at standing around shooting fish in a barrel or what.  This is the definition of insanity, having the same discussion over and over again and expecting different results.  Rob Hopkins figured this out a long time ago, that negative environment campaigning was ineffective, what was needed was postulating an alternative - even it is not positive.  600 calorie diet, please! Isn't the purpose of analysis to discover solutions?  Wasn't the name of the site changed to "Peak Prosperity".
We know that enlightened change ahead of the problem is not going to happen for the mass majority of people, economics is going to drive change.  Large centralized solutions are not going to work for the reasons cited in detail again.  Centralized exploration of diffuse solutions is unlikely especial because of vested interests of those currently benefiting, and momentum of existing capital investments.

I did read Gail back in the days of the Oil Drum, detailed analysis back then was appropriate, but now?  We are going to transition somehow, even if it's mad max, mass die off.  But what we do now does matter, even if it is .5% less mad max than it otherwise would have been.  Even the "dumb guy in the street" who is so often put down already knows in his bones that things are not right and is starting to do something without any detailed knowledge of what is "going on". Certainly the younger generations are getting it.

There is still this almost unconscious background double speak here, which is truly where the problem lies.  We are so concerned with detailing out the "problem", that we are unconsciously buying into the infinite growth paradigm as the only solution which created the very paradox we say that we are trying to avoid. Kids not moving out their parents basement is cited as problem, because why?  Less population growth and less consumption.  Isn't that the solution!?!?! Isn't that what we are looking for?  Does is it mean a terrible quality of life for the child because he is not going to have the American dream?

He get married later in life, has fewer children himself.  The family doesn't fracture, no mortgage, perhaps less money pressure, parents are there for the grand kids, perhaps he can do something more meaningful with his life because he is not on the maximize material consumption treadmill? Few material possessions and a smaller living space, is that worth destroying the planet for.  There is so much material to explore in this transition, please lets not rehash the same old stuff.  It is unproductive.

18

You sound angry. Oh yeah, there is a lot to be angry about: burning fossil fuels until the polar ice caps melt, not having any fossil fuels to burn, etc., etc. But are you saying we shouldn't be discussing this stuff?
I think this is some really important stuff. Should we read it critically? Of course. Should we try to "put a good face on it"? Maybe that would be disingenuous. But maybe phrases like "where do you want to die" should be left out of the discussion.

But like I was saying, this is really important stuff, so let's keep the discussion going. Knowing when and if TEOTWAWKI (the end of the world as we know it) is coming would help me get properly focused!

19

On the one hand there is ongoing analysis and discussion of resource depletion and its financial consequencs. On the other is the AA for oil addicts.I would also like to see a more focused attention to the second area, but like AA it must be led by the sober. I, personally, am attending meetings regularly but also fall off the wagon frequently. Maybe those members more successful will gain a podcast forum focused on their struggles and successes.

20

I was listening to a radio program about the battle of Flanders Field in WW1.
An observer saw a man up to his waist in mud begging for help. There was none to be had. Tens of thousands of men were drowning in mud.

A while later the observer passed that way again and the man had sunk up to his neck and had lost his mind. He was howling at the moon. 

Such is the nature of a predicament.