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April 21, 2015

Bulletin 202: Earth Day tomorrow: truth or consequences – about oil, which is politically central

Dear friends and colleagues –

(Note: I prepared this note a little over a month ago (on March 16) but due to other responsibilities I couldn’t edit and send it at the time.  It’s just an incomplete sketch but the subject is so important I’ve decided to send it out in the hopes that one or two people will read it.  Since tomorrow is Earth Day, this seems a fitting time.)

Oddly, the number of national security, energy, foreign policy, and climate professionals in the U.S. who understand where we stand in the history of oil seems to be quite small.  Yet understanding oil is crucial to these fields, for the simple reason that oil is central to all modern economies and it’s a depleting, scarce resource, the production of which stands (within the accuracy of the data) at an all-time, never-to-be-exceeded high-point.  One way or another, in a short or shorter time, it’s downhill from here. 

And it’s odd, because the inevitable depletion of oil has been understood since oil was first seriously used as a fuel more than a century ago. 

Jane Jacobs (Dark Age Ahead) reminds us (as if we needed it) that in a highly technological civilization, technocrats – experts – have to know what they are doing and have a high degree of professional integrity, or that civilization will eventually fail.  Not to put too fine a point on the matter, in the U.S. at least our top policy “experts” often have neither.  Key professions have become so bureaucratized that even good people often hardly know when they are glossing over something essential in favor of today’s required spin, or required silence.  Personally and culturally, intellectual curiosity gradually gets replaced by a desire for personal security and career advancement.  Sometimes this is rationalized by the hope that a higher position – advancement in government, tenure in academia – will allow the freedom to investigate more freely and speak out more effectively. 

But this seldom happens.  The silence emanating from top government and academic scientists about the nature, gravity, and oncoming speed of the crises our civilization faces is truly deafening.  Smart people high in this administration have very much dropped the ball on energy and climate, first and foremost by concealing key truths about both subjects.  Surely, you say, the White House has been giving us the straight scoop about climate at least?  If you think that you are not really grasping the nettle.  Oil is an even more “secret” subject – secret in plain sight.

This administration, and both political parties, have long since digested the political impact of President Carter’s July 15, 1979 “crisis of confidence” speech, which heavily focused on energy and oil in particular.  Nobody wants to talk about unpleasant energy truths that could seriously damage election prospects, asset values, and foreign policy. 

Hence this short plea, again, for conscientious professionals to take a good hard look at the oil situation and start thinking, writing, and talking about what they find.  As I said in Bulletin 200, we are at a turning point in oil.  This turning point is the second eye-wall of the “peak oil storm,” in Tom Whipple’s metaphor.  Only this storm will last a lot longer and destroy a lot more than any hurricane. 

Here is a briefing of ours, not a bit original, prepared in October of last year and still somewhat current, just when the present ominous downturn in oil price was beginning.  If you look back through earlier blog entries at Forget the Rest you will find more, with links to carry you further.  The published literature is voluminous and fully available for review, as we have often done over the past decade in numerous talks, bulletins, and discussions. 

A well-documented summary of recent developments can be found in “The Paradox of Oil: The Cheaper It Is, the More It Costs,” (Samuel Alexander, Simplicity Institute, March 2015).  In a lighter and more popular vein, the 2006 documentary “A Crude Awakening: The Oil Crash” by Basil Gelpke and Ray McCormack has aged rather well and is a good introduction.  I saw it the other evening and found nothing terribly wrong with it. 

Gail Tverberg has a thoughtful recent post, “The oil glut and low prices reflect an affordability problem,” which, like the Alexander piece above, addresses a key point I might not have made fully clear in that recent “Turning Point” blog post. 

The oil glut we are experiencing now reflects a worldwide affordability crisis. Because of a lack of affordability, demand is depressed. This lack of demand keeps prices low–below the cost of production for many producers. If the affordability issue cannot be fixed, it threatens to bring down the system by discouraging investment in oil production. 

This lack of affordability is affecting far more than oil products. A recent article in The Economist talks about LNG prices being depressed. LNG capacity ramped up quickly in response to high prices a few years ago. Now there is a glut of LNG capacity, and prices are far below the cost of extraction and shipping for many LNG suppliers. At least temporary contraction seems likely in this sector.

If we look at World Bank Commodity Price data, we find that between 2011 and 2014, the inflation-adjusted price of Australian coal decreased by 41%. In the same period, the inflation-adjusted price of rubber is down 58%, and of iron ore is down 59%. With those types of price drops, we can expect huge cutbacks on production of many types of goods.

Why am I writing about this, given our main focus on nuclear disarmament? 

Here is a prediction.  I will estimate, based on data presented in the above links and elsewhere, that the rate of production of U.S. and also global oil (crude oil plus condensate, “C+C”) will peak this year (2015).  Globally, this guess is sensitive to events in a number of countries; these contingencies could be listed but let’s not, for now.  It’s a pretty strong guess and it’s one shared by others (see Ron Patterson’s take), give or take a year or so.  Only a few countries could, even in theory, increase oil production.  Meanwhile depletion continues everywhere, at a rate the International Energy Association (IEA) has estimated at about 7% annually, i.e. about 5.5 million barrels per day.  To keep production flat, oil producers must develop and put online new production of roughly 455,000 barrels per day every month to compensate for the depletion of existing fields. 

According to the DOE, U.S. oil production is peaking about now (“Kemp: US Oil Production Is Probably Peaking Right Now, Reuters, Rigzone, Wednesday, April 08, 2015)

U.S. crude production will peak this month, according to revised forecasts published by the country's Energy Information Administration (EIA).

Output will average 9.37 million barrels per day (bpd) in April and the same in May before falling to 9.33 million bpd in June and 9.04 million bpd by September, the EIA predicted in the April edition of its Short-Term Energy Outlook (STEO).

Production is expected to peak a month earlier and 10,000 bpd lower than the EIA forecast in the January STEO, reflecting continued low wellhead prices and a sharper-than-expected slowdown in new well drilling.

Production is forecast not to exceed this month's level for another 18 months. The EIA has cut its forecast for the end of 2016 by 230,000 bpd compared with three months ago.

Prospects for increasing production back to today’s level in 18 months are however about zero, for very persuasive reasons set forth by David Hughes (“Drilling Deeper: A Reality Check on U.S. Government Forecasts for a Lasting Tight Oil & Shale Gas Boom,” his preceding report “Drill, Baby, Drill: Can Unconventional Fuels Usher in a New Era of Energy Abundance?”) and by other independent analysts cited in the above links and presentations.  A recent National Geographic article hits the nail on the head in its title (“How Long Can the U.S. Oil Boom Last? The long-term problem for oil frackers isn't just low prices. It's low reserves,” Dennis Dimick, December 19, 2014.)

The Energy Department's estimate of "proved reserves" of shale oil—those that can be recovered economically today—is only about ten billion barrels. That's about a sixth of technically recoverable reserves, and less than a year and a half's worth of current consumption. Proved reserves include all currently known U.S. oil shale resources-North Dakota Bakken, Texas Eagle Ford, Colorado and Nebraska Niobrara, Texas Barnett, and others.

In contrast, the proved reserves from just three Middle East nations—Saudi Arabia, Kuwait, and the United Arab Emirates—total more than 460 billion barrels. That's 46 times U.S. shale oil reserves, and more than 12 times the total U.S. oil reserves.

Those estimates help explain why the IEA projects the Middle East as "the major source of future supply growth," long after the U.S. shale oil boom has run its course. Price is important, but whether oil exists at all is even more so.

Two comments on this are in order.  First, those three Middle Eastern countries do not have anywhere near those oil reserves (See for example this 2008 analysis by Gail Tverberg, this 2010 analysis by Euan Mearns, and 2011 Wikileaks revelations of statements of Dr. Al Husseini, former Executive VP of Saudi Aramco, reported here by Time).  Second, to quote Ron Patterson, “[e]conomically recoverable shale oil reserves, at $55 a barrel, are a lot less than 10 billion barrels.”

Just as a mental experiment, let’s assume oil production declines from 2016 through 2020 at a conservative average of 1% per year, or 5% overall.  Bear in mind that emergency drilling to keep production constant or increasing in the short run will just decrease production more rapidly later.  Pointedly, wells drilled in shale peter out very quickly, typically on the order of 85% in three years (see slide 47 here, from David Hughes). 

Once begun, the rate of decline will increase over time, on average.  We don’t know by how much, but let us say for the sake of argument, to 2% per year for the 2020-2025 period and 3% per year for the 2025-2030 period.  This scenario leads to a 26% decline in oil production from present levels by 2030.  (This is a grossly similar result to model results recently published by Dennis Coyne, to pick one of these independent forecasts almost at random.) 

Meanwhile the amount of oil being exported will decline faster than production (as it has been already), with the significant assumption that exporting countries remain sovereign and able to act in their own economic interests. 

Further, if oil markets provide oil to the highest bidders, and free trade continues in oil, countries where the marginal barrel of oil produces greater value will be able to outbid others for the oil on offer.  That is, China can pay more than the U.S. can. 

This smooth, gradually-increasing decline contains many optimistic assumptions about economics and politics.  Financial crises, wars and insurrections, epidemics, droughts, major volcanoes and earthquakes, major storms and floods, famines, major terrorist attacks and nuclear meltdowns generally tend to lower economic activity and hence demand, and may also take a portion of supply off the market.  Unaffordability and demand destruction leads to lower prices, lower capital expenditures in the oil industry, and lower subsequent production. 

The implications of this quite reasonable estimate are unknowable in detail, but will be generally severe.  Physicist David Korowicz is among those who have attempted to do so (See “Tipping Point: Near-Term Systemic Implications of a Peak in Global Oil Production: An Outline Review,” Feasta & The Risk/Resilience Network, 2010; and “Trade-Off: Financial System Supply-Chain Cross-Contagion: A study in global systemic collapse,” Feasta, 2012).  There is a lively exploration and debate taking place on these topics on various blogs.  The first of these papers argues that

The key to understanding the implications of peak oil is to see it not just directly through its effect on transport, petrochemicals, or food say, but its systemic effects. A globalising, integrated and co-dependant economy has evolved with particular dynamics and embedded structures that have made our basic welfare dependent upon delocalised ‘local’ economies. It has locked us into hyper-complex economic and social processes that are increasing our vulnerability, but which we are unable to alter without risking a collapse in those same welfare supporting structures. And without increasing energy flows, those embedded structures, which include our expectations, institutions and infrastructure that evolved and adapted in the expectation of further economic growth cannot be maintained.

This will evolve as a systemic crisis; as the integrated infrastructure of our civilisation breaks down. It will give rise to a multi-front predicament that will swamp governments’ ability to manage. It is likely to lead to widespread disorientation, anxiety, severe welfare risks, and possible social breakdown. The report argues that a managed ‘de-growth’ is impossible.

We are at the cusp of rapid and severely disruptive changes. From now on the risk of entering a collapse must be considered significant and rising. The challenge is not about how we introduce energy infrastructure to maintain the viability of the systems we depend upon, rather it is how we deal with the consequences of not having the energy and other resources to maintain those same systems. Appeals towards localism, transition initiatives, organic food and renewable energy production, however laudable and necessary, are totally out of scale to what is approaching….What we require is rapid emergency planning coupled with a plan for longer-term adaptation.

In his second paper Korowicz argues that

As the globalised economy has become more complex and ever faster (for example, Just-in-Time logistics), the ability of the real economy to pick up and globally transmit supply-chain failure, and then contagion, has become greater and potentially more devastating in its impacts. In a more complex and interdependent economy, fewer failures are required to transmit cascading failure through socio-economic systems. In addition, we have normalised massive increases in the complex conditionality that underpins modern societies and our welfare. Thus we have problems seeing, never mind planning for such eventualities, while the risk of them occurring has increased significantly. The most powerful primary cause of such an event would be a large-scale financial shock initially centring on some of the most complex and trade central parts of the globalised economy.

The argument that a large-scale and globalised financial-banking-monetary crisis is likely arises from two sources. Firstly, from the outcome and management of credit over-expansion and global imbalances and the growing stresses in the Eurozone and global banking system. Secondly, from the manifest risk that we are at a peak in global oil production, and that affordable, real-time production will begin to decline in the next few years. In the latter case, the credit backing of fractional reserve banks, monetary systems and financial assets are fundamentally incompatible with energy constraints. It is argued that in the coming years there are multiple routes to a large-scale breakdown in the global financial system, comprising systemic banking collapses, monetary system failure, credit and financial asset vaporization. This breakdown, however and whenever it comes, is likely to be fast and disorderly and could overwhelm society’s ability to respond.

We consider one scenario to give a practical dimension to understanding supply-chain contagion: a break-up of the Euro and an intertwined systemic banking crisis. Simple argument and modelling will point to the likelihood of a food security crisis within days in the directly affected countries and an initially exponential spread of production failures across the world beginning within a week. This will reinforce and spread financial system contagion. It is also argued that the longer the crisis goes on, the greater the likelihood of its irreversibility. This could be in as little as three weeks.

The questions Korowicz raises are important but hardly the whole point.  The main point is simple: as Florentine chemistry professor Ugo Bardi has taught us, quoting Seneca, “the way to ruin is rapid”:

It would be some consolation for the feebleness of ourselves and our works if all things should perish as slowly as they come into being; but as it is, increases are of sluggish growth, but the way to ruin is rapid.

Historically, oil consumption growth and GDP growth are fairly closely linked, with oil demand historically increasing at about 0.75 x GDP (Kopits, slide 25 here).  Kopits concludes that high oil prices over the past few years (“unaffordability” in Tverberg’s terminology) has sapped 1-2% from OECD GDP growth (ibid, slide 36).  In Matt Mushalik’s words, “the global economy cannot grow ‘normally’ again.”  Ever.  What does that imply about the validity of Congressional Budget Office (CBO) economic and tax receipt projections, upon which congressional budget plans are built? 

Let us now ask ourselves how all this, which is only very briefly and partially sketched here, bears on this administration’s plan to spend $1 trillion operating and modernizing the U.S. nuclear arsenal.  

As mentioned in Bulletin 201, by 2021 U.S. nuclear weapons will not have an adequate funding source already.

Modernizing the nation’s nuclear deterrent will begin to create “affordability problems” starting in 2021, Under Secretary of Defense for Acquisition, Technology and Logistics Frank Kendall told the Senate Armed Services Strategic Forces Subcommittee this week. The 2021 period is just outside the five-year window included in budget documents earlier this year, and coincides with the beginning of construction on the Ohio Class replacement nuclear submarine, work on the long-range strike bomber, as well as a significant uptick in warhead refurbishment work. “In 2021 we’re going to start to have a problem finding ways to afford these systems,” Kendall said. “We will work to do that. It’s a very high priority and we will work to do that. But it’s going to be a challenge for us.”

Kendall said the modernization funding issues are about a “$10 billion a year problem” for the 2020s for which the Pentagon doesn’t currently have an answer. “We don’t have an obvious solution right now to that problem,” Kendall said after the March 4 hearing. “Deputy Secretary [of Defense Bob] Work has a team that I’m co-leading looking at that, looking at options. We’re going to be talking about that as we build the FY ‘17 budget.” Kendall stressed that difficult decisions would need to be made about national priorities. “I don’t think the United States of America cannot afford it,” he said. “It’s a choice. We can afford it if we choose to.” (“As Admin. Makes Pitch for Modernization Support, ‘Affordability Problems’ Loom,” Todd Jacobson, Nuclear Security and Deterrence Monitor, 3/6/15)

The AP explains (“GOP weighs increase in war funds to skirt Pentagon limits”, Andrew Taylor) what some of those “difficult decisions” might be about “national priorities” needed to fund nuclear weapons and the rest of the (rising) military budget:

Instead, they [House and Senate budget committees] will propose major spending cuts to programs such as Medicare, health care subsidies, food stamps and the Medicaid program for the poor and elderly to produce a budget that’s balanced.  Such cuts, if actually implemented later, would likely slash spending by $5 trillion or so over the coming decade from budgets that are presently on track to spend almost $50 trillion over that timeframe.

We do indeed face difficult decisions about national priorities.  If the only way to fund the military adequately, according to the leadership of these committees, is to cut $5 trillion from social programs over the coming decade, we are in serious trouble. 

Long before the first SSBNX submarine begins deployment in 2031 (to pick a nuclear modernization milestone that aligns with the above scenarios about oil production), the U.S. and other modern economies will be on the rocks, for a complex of compelling reasons that include but are not limited to the declining availability of affordable oil.  Economic crisis will likely come sooner than later.  In any case, the stability of nuclear supply chains is doubtful.  Tax receipts are doubtful.  Morale and quality of work on a panoply of nuclear modernization projects are also doubtful, because those projects are immoral – and ridiculously irrelevant and damaging to real security concerns. 

For the above reasons alone, I believe that by 2030, if the U.S. is not well along in a massive program of investment in post-oil transportation infrastructure, as well as a massive program in climate change adaptation, the U.S. economy will have massively failed.  If the U.S. attempts to juggle huge military outlays and invest in these new security threats at the same time, the U.S. economy will fail.  If the U.S. continues to strip buying power from half or more of its population and has nothing else on offer but a consumer-based economy, that economy will fail.  In short, if the U.S. government cannot change its priorities and those of our society to align with the reality nature has on offer, the U.S. economy and society will have begun an inexorable, chaotic, violent process of collapse. 

The usual late-stage imperial tactic to stave off collapse is war, but that too leads to collapse – or worse. 

The new investment pattern we need must carry with it, and be based upon, re-skilling and a new ethic of production (as opposed to consumption), personal agency, solidarity in fact and as an ideal, stewardship, and simplicity, or it will fail.  Such investment, and such an ethic, are politically incompatible with the maintenance and massive modernization of world-ending doomsday arsenals.  They run in two opposite directions – one runs back into the Cold War, driven by a hidden desire for the catastrophic Götterdämmerung we barely evaded the last time around, the other toward a life-affirming future. 

Can you see the successful completion of huge, complex nuclear modernization projects spanning a decade or more under skies darkened by continual, chaotic, economic and social collapse?  I can’t either. 

It bears emphasis that minor investments in an alternative energy path undertaken as part of an overall “business as usual” trajectory will fail.  Only responses at scale, which appears politically infeasible right now, will succeed.  The “impossible” is now the necessary.  If we had started the transition under Carter and kept going we’d be far ahead.  We didn’t.

Instead of awakening to our oil crisis, and our energy and climate crises more broadly, we are slipping into pretending “it ain’t so.”  Our stock market values and our foreign policy are now predicated on delusions.  We are increasingly investing in alternate realities, and projecting official delusions outward as propaganda.  This is very dangerous.  Dmitri Orlov mentions some reasons for this in his must-read essay, “Peak Oil Oppositional Disorder: Neurosis or Psychosis?”  His concluding remark: “If you thought that Peak Oil is about energy – think again. It may well turn out to be about delusion, resulting, personally, in ego-death and nationally – in psychotic tyranny.” 

You see the problem.  Lie about oil, energy, and climate, and finance, and the need for war, and the American Dream, and what patriotism means, and pretty soon you are lying about everything in our public life and much of the material and psychic armature of our private lives as well.  Our complex civilization will come to an end sooner from a rising sea of lies than it will from rising seas, per se. 

Self-delusion and propaganda are essential components of the (now-dominant) neoconservative path for dealing with late-stage imperial resource constraints – which is, simply, war and the devastation of any inconvenient sovereignties that get in the way.  These wars and devastation are autocatalytic – each war creates the need for more.  Following our path of devastation from Afghanistan to Iraq, to Libya, to Syria, to Yemen, to Ukraine, with more in between – from one “Nulandistan” to another – onward will destroy the United States, if not the world.  U.S. Special Forces were in 150 countries in the last three years.  The Pope wonders aloud if World War III has begun.  The inner logic of our downward spiral is expressed succinctly in Kremlin circles:

The war [in Ukraine] has been provoked to destroy the Russian World, to draw Europe into it, and to surround Russia with hostile countries. Unleashing this world war, America is trying to deal with its own internal problems….The bankruptcy of the US financial system, which is unable to service its foreign debt, the lack of investments to finance a breakthrough to a new technological order and to maintain America’s competitiveness, and the potential defeat in the geopolitical competition with China. To resolve these problems, Americans need a new world war. (Sergei Glazyev)

Oversimplifying a complex matter, the present extremely wasteful U.S. economy cannot truly grow without more cheap oil, which is not on offer and will never be on offer ever again – unless demand destruction in the rest of the world occurs or can be arranged, e.g. through financial and/or military (“hybrid”) warfare, corruption and what have you, while also retaining peace and stability in oil-producing countries.  Without a rapid, green transformation of the U.S. economy, developing countries, especially large ones (the BRICs), must sooner or later be held back as far as their growth in oil consumption goes.  China and India’s growth in oil consumption could, if production and consumption trends to date are extrapolated, consume all available oil exports by the early 2030s.  Oil-producing countries thus must be “owned” by us in one way or another, which has proved and will prove problematic to say the least.  Pipeline routes must be obtained and held.  Resource-rich Russia, which straddles the Eurasian heartland from Western Europe to China, is an inherent geopolitical nightmare which, in the neoconservative view, cannot be allowed sovereignty.  Most U.S. citizens, especially the old and the sick, are superfluous to these grand endeavors and can – indeed must – be thrown under the bus to pay for them.  Nature doesn’t matter and can go straight to hell.  That is the Hobbesian path we are on, in which a tyrannical minority, using the state, eat all the children like old Saturn (Goya’s picture). 

How much better would be autarkic renewable energy development – the “moral equivalent of war,” again hearkening back to Carter, this time to a 1977 speech, still very relevant. 

If you’ve read this far, thank you for your attention.  This, I believe, is a very partial picture of the wedge we face.  History asks us, “which side are you on?”

Greg Mello

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