Peak Energy - Peak Economy

SUBHEAD: We have come fully to the end of the age of exuberance and the only remaining question is: How gracefully will we ride the decline? Image above: Off-road downhill in a Chevy Blazer. From (http://www.4wdandsportutility.com/adventures/rockies/0810_4wd_hotel_rock_road_trail_ride/photo_09.html). By George Mobus on 22 June 2010 in Question Everything - (http://questioneverything.typepad.com/question_everything/2010/06/peak-energy-peak-economy.html) What is Happening?

When you cut into an artery and can't stop the bleeding, you know what happens don't you? The victim dies.

These are dark days for the Ecos. Plagued by a chronic and progressive disease (CO2 poisoning), she is now been wounded grievously. On the one hand one might look at the seemingly tiny wound to the Earth in the Gulf of Mexico and think that it is so small relative to the vastness of the oceans that surely this one small gusher (I refuse to use the word 'spill' since in English this has a very different meaning than the phenomenon we are witnessing) can't spell the death of the Ecos.

In a sense I would agree it isn't the complete death of the planet. But it could be the death of the Ecos as we have known it, just as is likely the case with global warming. We humans are responsible for the demise of species and ecologies. It is impossible to tell how far this destruction will go before the Ecos establishes a new stability.

This is, of course, a completely anthropocentric point of view. The Ecos has undergone so many cycles of die-off and rebirth over its lifetime that this is probably just a replay of an ancient pattern. We don't like it because it affects us. Life, in its totality, probably doesn't care what we like or dislike.

As if the wound wasn't bad enough, now there are speculations of erosion of the casing and bore hole with the possibility of a collapse of the integrity of the sea floor around it. In the worst-case scenario we could see thirty years of oil gushing from the Gulf depths. The damage to the Ecos and humanity that this would cause is beyond the pale.

Obama put a six-month moratorium on deep water drilling. But now the oil folks are protesting and a Federal judge has put a block on that moratorium. The reason given by the plaintiff; the world is desperate for more oil and deep water may be the only additional sources we can find. What does that tell us? About ourselves?

What is About to Happen?

The monetary cost of extracting oil is about to skyrocket. The oil gusher in the Gulf is going to cost far more than the $20 billion that Obama got from BP. Cue the insurance companies. Just the cost of insurance for drilling is going to get a whole lot more expensive. These are real costs that have to eventually be accounted for in the cost of extraction in general.

Then there will be the increased cost to society for developing and maintaining a regulatory system for the purpose of preventing these kinds of accidents. Those too are real costs even if they don't show up in the cost accounting of oil companies directly.

Actually what will show up in their accounting will be the higher costs of prevention from new technology and especially redundancy needed to make drilling in deep water safer. In plain terms, the total cost of extraction is going up. That means the impact on energy return on energy invested (ER0EI) is going to be huge.

The ERoEI of offshore oil is already quite low, around 15:1 according to Charles Hall and Jessica Lambert. It will decline much further still with these additional costs associated with deep water drilling. And that, in turn, means that the net energy we get will decline further and faster still (see: Economic Dynamics and the Real Danger).

Couple this fact with the fact that global oil extraction is already in decline (we have passed the peak according to people I truly believe know what they are talking about!) and we have a truly dangerous situation developing.

You've seen a version of the below graph several times before. This is from my computer model of the systems dynamics of energy flows from finite sources such as fossil fuels. I've marked this version with labels, A, B, and C to discuss what kinds of things are happening at each of these 'inflection' points. These are the points in the dynamic history of energy flow when things change.

Point A is what we call the 'knee' of an exponential growth. This is the point at which the slope of the tangent to the curve (from calculus) is exactly one. Prior to that point the slope had been less than one. Afterward it is greater than one. And it grows greater as the system growth accelerates at an accelerating pace. This is the period William Catton called the "Age of Exuberance" (Overshoot).

Along with the rise of energy flow during this period (roughly the late 1700's to about 1960, to put it into historical perspective), world population expanded exponentially as well (see the graph in the Wikipedia article).

Some authors have felt that the two growth phenomena are linked causally. An overly simplistic version would have world population expanding because of the growing abundance of fossil fuel energy. But, while they are correlated phenomena, we have to be careful not to infer any form of one-way causality here.

The fact is that the expansion of fossil fuel extraction was driven by demand, the combination of increasing numbers of people and their individual increasing demand for more energy. The latter was made possible because so many very clever people kept inventing new ways to consume high power energy to save people time and effort. Since people are highly motivated to save time and effort, both as individuals and in profit-making firms, they clamored for more machines to do their work and do it faster.

With the increasing ease (and safety) afforded by using machines to do our work for us life became more supportive of procreation! Infant mortality went down. Nutrition improved (at least in terms of calories). And old people lived longer with improved life extending medical procedures and medicines.

As long as EROI for oil (especially) remained relatively high (costs in the above graph staying relatively low), the energy extraction firms were highly motivated to produce more product, even though they were drawing down a fixed, finite resource in doing so. The growth of population, consumption per capita, and the supply of fossil fuel-based energy were mutually reinforcing through the human psyche and the money-measured economy. The exponential rise is explained by this form of circular causality or positive feedback loops. During the age of exuberance there seemed to be nothing but growth in sight.

Point B, however, represents a very subtle, unnoticed shift. All the while that positive feedbacks were driving growth higher and higher a number of socioeconomic and physical facts were at work to strengthen the negative feedback loops. Namely the combined effects of increasing complexity and depletion of resources both contributed to increasing energy costs for extracting gross energy (the raw fossil fuels).

Since no one bothered to measure net energy (gross minus costs) in addition to net profit in monetary terms, no one detected the shift back to a tangent slope of less than one. Over the history of the age of exuberance economists had decided that the money system had no more relationship to physical reality and it was free to be whatever it could be. And people had decided they cared about money more than understanding physical reality.

Still physical reality would not be denied. Something was different and started to be felt in the developed economies of the world. Everything was costing more as time went on. This is because energy, not money, is the real currency of the economy. It is required for all economic activity and, thanks to the Second Law of Thermodynamics, once energy is used doing work it is gone and more must be added to do any kind of value added work.

In other words, energy use (and loss) accumulates in supply chains. Monetary costs do too, but not quite in the way that energy does, since money circulates (and recirculates) whereas energy goes on a one-way trip through the economy. Thus money had already been decoupled from its real purpose, which was to inform us how much energy (work) we could command.

Over the whole history of economic growth we had gotten into the habit of borrowing money to finance new activities. At first this was borrowing from savings — previously earned income that was surplused. Initially these surpluses were our best form of insurance against future troubles.

But with energy flow increasing and troubles largely mitigated by technology we slowly changed our attitude about keeping this money (representing work) aside for a rainy day. We started using it to finance current projects that would/should pay back larger profits in the future, thus allowing us to pay back the loan with interest plus still make a profit from the value of the work we would accomplish in that future time.

Then things changed. Energy flow started to decelerate. It was subtle and totally off the radar screen, so to speak. But less energy flow means less work can be accomplished. The rate of creation of assets began to decline ever so slightly.

Along with this phenomenon came a condition for people in the OECD (Organization of Economic Cooperation and Development)) countries. They had grown used to using lots of energy for anything they wanted to do. They had been increasing the material wealth aspect of their standard of living. They had been demanding, and getting, increasing monetary incomes to pay for their high-energy lifestyles (Americans, on top of getting used to all the material goods became profligate wasters of energy).

So costs for manufacturers and some service providers were going up due to wage inflation, but also because the accumulation of energy costs were starting to hurt. This was made explicit during the 1970s OPEC (Organization of Petroleum Exporting Countries) oil embargo, but quickly forgotten when the political emergency passed. But as fossil fuel extraction costs continued to climb, slowly but surely as the resources became harder and harder to find and get to, the pressure on energy price rises could not be denied.

The brilliant capitalists responded with two very rational but completely misguided responses. The first was to seek lower labor costs by moving production and some services off-shore from the major energy consuming labor force in the OECD countries. Globalization was ramped up to new levels as corporations sought labor pools that required lower wages since their lifestyles consumed far less energy. Corporations could substitute cheaply priced bunker fuel for expensive living OECD labor.

Related to this was the tendency to look the other way as immigrants, some legal, seeking employment flooded into OECD countries. They too were willing to labor for less pay since they had lower consumption habits.

The second response was to keep up appearances through the use of creative financial products. Essentially it started with churning real estate to create the illusion of appreciating prices. Make loans to people who probably didn't have a hope of doing more and better work in the future and they would never earn the income necessary to service their mortgages. But it didn't matter.

First you bundle the bad debts into a package and dice it up so that you give the appearance of spreading and hedging risk, thus creating a marketable piece of paper. You create wealth with a magic wand, when all else fails. Not only did this magic give an opportunity to bankers and Wall Street boys to make great commissions, it gave the politicians cover.

When you added all the 'dollars' created by these transactions into the GDP (Gross Domestic Production) it made it look like growth of the economy was on track. Of course, all the while the purchasing power of the middle and lower class was evaporating. Even two wage earners per family didn't do the trick of keeping up with the Joneses. Real wealth was already in contraction by the 1970s and what wealth was being produced was being increasingly absorbed by the top one percent of the population (in the US anyway).

After point B in the graph (~1970) things started to degrade at an increasing rate. The cost of energy, which represents the true cost to society to have an industrial system, rose inexorably. The curve of cost in the graph looks kind of linear, but in fact it is also exponential, just at a very slow rate of acceleration. In reality it probably took a sharp upturn after the advent of ocean drilling which required much more expensive equipment (platforms) and infrastructure (oil ports and ships).

Meanwhile the growth of population had gained considerable momentum, even as the live birth rate dropped in OECD countries; more mouths to feed on oil and natural gas powered agriculture. Developing countries were being subsidized by the OECD breadbaskets of the world and to many who lived there it must have seemed like the promise of development was finally turning their way. Birth rates in these countries continued to be high while death rates declined due to the support from OECD benefactors.

Now we are either approaching or already past point C. Peak oil may not be the same as the peak of total energy flow, but it is probably pretty close. The reason is that oil is the most usable of all the fuels we use. It takes a lot of diesel fuel, for example, to remove mountain tops and dig the coal seams as well as transport the coal to the power plants. So oil plays a role as a king pin energy source. When it reaches the peak of extraction rate, the costs of extraction of other fossil fuels will surely start to climb - meaning that total net energy will decline.

One of the semi-surprising results of my physical model is the revelation that the peak of net energy precedes that of gross energy by some number of years, perhaps ~30. This makes sense on first principles and if we are near or approaching the peak of gross energy extraction then we have likely already passed the peak of net energy — the energy we absolutely need to maintain our civilization.

As disruptive and painful as the deceleration of energy flow has been and the various dislocations it has been causing for the last thirty to fifty years, imagine how bad it will be when there is zero growth of net energy flow. In point of fact, I assert that what we are witnessing now is the coming undone of the social, political, and economic fabric of our civilization as the energy truth of it has hit full force.

Most of the population still has no clue as to what is causing all of the turmoil, on a global basis, and the seemingly endless string of calamities and incompetencies and ineffectivenesses that have become a hallmark of our time (If we could put a man on the moon, why can't we fix ...?).

Just one decade into the 21st century we are keenly aware that things are just not right and dimly aware that it might not get better anytime soon. More people today feel on the brink of catastrophe without actually understanding why. Yet the reason is so simple. We broke into the energy bank beneath our feet and spent the funds on as much junk as good investments and we did it at all possible breakneck speed. And now we are bankrupt.

What Happens After That?

Unless somebody comes up with an as yet unanticipated source of energy, a real source that doesn't violate the First or Second Laws of Thermodynamics, a source that provides the level of power that fossil fuels have done, there is only one possible conclusion. Oh, and if you think that the solution is in technology or so-called alternative (e.g. solar, wind, nuclear, etc.) you should read this.

We have to face up to the hard fact that fossil fuels provided something quite extraordinary that enabled us to invent wonderful machines and consumables that simply hastened the drawdown of those fossil fuels. And now we are about to reach the point where it takes too much energy to extract the next unit of fossil fuel energy. And we simply cannot support the kind of life we have had with that power.

As the graph shows it is all downhill from point C. We have come fully to the end of the age of exuberance and the only remaining question is: How gracefully will we ride the decline?

There are, doubtless, some things we could do if we were wise enough to get started right now, that might ease the pain and suffering somewhat. There is a huge amount of wastage currently in the system that, if cut out, would extend and soften the slope of the downhill side of the curve.

Even though alternatives are not currently a long-term solution (since they cannot produce enough excess power to replicate themselves before the end of their life cycles), taking a lot of the energy we currently spend on war and highway repairs might better serve by being invested in some combination of alternatives that will help keep the wheels coming off entirely while we are speeding along at breakneck pace.

But as readers know, I am very cynical about our capacity for wisdom. Ergo, the bottleneck approaches. The best bet for humanity is to prepare for the worst and invest in the kind of people we would hope could make it through the bottleneck. People who might seed some future species of humanity that would not make the same mistakes we have. Not just because they will not have the energy bank, but because in all matters they will be inherently far wiser than we have been. To put it, ironically, in somewhat faith-based terms, I believe that is our salvation.

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