Some food for thought for a Sunday.

Excellent follow on chat from the must watch video I posted last week.

Perhaps there was a time when it wasn’t important to be knowledgeable, but now is not that time. I highly recommend everybody watch/listen to this, because it is the best thing I have seen for a while showing the big picture of where we are, and where we are going:

Since all our money is loaned onto existence, our economy has to grow exponentially. Martenson proves this point empirically by showing a 99.9% fit of the actual growth curve of the last 40 years to an exponential curve. If we wanted to continue on this path, our debt load would have to double again over the next 10 years. By continually increasing our debt relative to GDP we are making the assumption that our future will always be wealthier than our past. He believes that this assumption is flawed and that the debt loads are already unmanageable.

Martenson explains how exponential growth works and why it is so scary that our economy is based on it. In an example he illustrates how unimaginably fast things speed up towards the end of an exponential curve. He shows that an exponential chart can be found in every one of the three “E’s” for instance in GDP growth, oil production, water use or species extinction. Due to the natural limitations on resources, Martenson comes to the conclusion that we are facing a serious energy crisis.

This energy predicament is namely that the quantity of oil as well as the quality of oil are in decline. He shows that oil discoveries peaked in 1964 and oil production peaked 40 years later. Martenson also shows how our return on invested energy is rapidly declining – the “cheap and easy” oil fields have already been exploited. In 1930 the energy return for oil was 100:1 or greater. Today it is already down to 3:1 and newer technologies such as corn-based ethanol only provide a 1.5:1 return. Martenson predicts that the time in between oil shocks will get shorter and shorter and that oil prices will go much higher.

Not only oil but also other natural resources are being rapidly used up as well. At the current projected pace of use, known reserves for many metals and minerals will be gone within the next 10 to 20 years. The energy needed to get these non-renewable resources out of the ground is growing exponentially. So we live in a world that must grow, but can’t grow and is subject to depletion. The conclusion out of all this is that our money system is poorly designed and that we need to rethink how we do things as quickly as possible.

VIA ZeroHedge

I thought this was worth a post since once you understand this, it makes it a lot easier to understand the global economic situation we are living through right now:

Energy returned on energy invested is the ratio of the amount of usable energy acquired from a particular energy resource to the amount of energy expended to obtain that energy resource. When the EROEI of a resource is less than or equal to one, that energy source becomes an “energy sink”, and can no longer be used as a primary source of energy.

A society will generally exploit the highest available EROEI energy sources first, as these provide the most energy for the least effort. With non-renewable sources, progressively lower EROEI sources are then used as the higher-quality ones are exhausted.

For example, when oil was originally discovered, it took on average one barrel of oil to find, extract, and process about 100 barrels of oil. That ratio has declined steadily over the last century to about three barrels gained for one barrel used up in the U.S. (and about ten for one in Saudi Arabia)

Since the discovery of fire, humans have increasingly used exogenous sources of energy to multiply human muscle-power and improve living standards. Some historians have attributed our improved quality of life since then largely to more easily exploited (i.e. higher EROEI) energy sources.

(ED NOTE: declining EROEI therefore can go some way to explain our current economic situation)

Thomas Homer-Dixon demonstrates that a falling EROEI in the Later Roman Empire was one of the reasons for the collapse of the Western Empire in the fifth century CE. In “The Upside of Down” he suggests that EROEI analysis provides a basis for the analysis of the rise and fall of civilisations.

Evidence also fits the cycle of Mayan and Cambodian collapse too. Joseph Tainter suggests that diminishing returns of the EROEI is a chief cause of the collapse of complex societies. Falling EROEI due to depletion of non-renewable resources also poses a difficult challenge for industrial economies. (ED NOTE: somewhat of an understatement)

You can read more about EROI here.

Post inspired by BikerMetric.

Oil demand (excluding biofuels) rises from 87 million barrels per day (mb/d) in 2010 to 99 mb/d in 2035. The total number of passenger cars doubles to almost 1.7 billion in 2035. Sales in non-OECD markets exceed those in the OECD by 2020, with the centre of gravity of car manufacturing shifting to non-OECD countries before 2015. The rise in oil use comes despite some impressive gains in fuel economy in many regions, notably for passenger vehicles in Europe and for heavy freight in the United States. Alternative vehicle technologies emerge that use oil much more efficiently or not at all, such as electric vehicles, but it takes time for them to become commercially viable and penetrate markets. With limited potential for substitution for oil as a transportation fuel, the concentration of oil demand in the transport sector makes demand less responsive to changes in the oil price (especially where oil products are subsidised).
The cost of bringing oil to market rises as oil companies are forced to turn to more difficult and costly sources to replace lost capacity and meet rising demand. Production of conventional crude oil – the largest single component of oil supply – remains at current levels before declining slightly to around 68 mb/d by 2035.

(Editors note: So as expected, we are on the bumpy plateau of peak oil, and as expected the first damaging effects are economic as has been witnessed since 2008)

To compensate for declining crude oil production at existing fields, 47 mb/d of gross capacity additions are required, twice the current total oil production of all OPEC countries in the Middle East.

Over the next 25 years, 90% of the projected growth in global energy demand comes from non-OECD economies; China alone accounts for more than 30%, consolidating its position as the world’s largest energy consumer. In 2035, China consumes nearly 70% more energy than the United States, the second-largest consumer, even though, by then, per-capita energy consumption in China is still less than half the level in the United States. The rates of growth in energy consumption in India, Indonesia, Brazil and the Middle East are even faster than in China.

VIA IEA

(Editors note: Interesting report which confirms a lot of what has been said for a while about peak oil, but it seems like they tend to make projections with a ruler and don’t take into account the KNOWN unkowns, yet alone the significantly larger quantity of UNKNOWN UNKNOWNS, I.E. The non-linear economic and social effects)

With 40% of the world in or near recession, how come oil prices are still so high and much higher than last year, when the economies in Europe and the U.S. were expanding? The number of vehicle miles driven in the U.S. is still below the level reached 43 months ago and at the same level as early 2005. The price of a barrel of oil in early 2005 was $42. The U.S. is using the same amount of oil, but the price is up 112%. It seems the U.S. isn’t calling the shots when it comes to the worldwide supply/demand equation.

It would probably be a surprise to most people that U.S. oil consumption today is at the same level it was in 1997 and is 10% lower than the peak reached in 2005. This is not a reflection of increased efficiency or Americans gravitating towards smaller vehicles with better mileage. Americans are still addicted to their SUVs and gas guzzling luxury automobiles. It’s a reflection of a U.S. economy that has been in a downward spiral since 2005.

China’s oil consumption per capita has increased over 350% since the early 1980s to an estimated 2.7 barrels per year in 2011. Consumption per capita has risen nearly 100% in just the past decade. Oil consumption per capita in the U.S. currently ranks among the top industrialized nations in the world at 25 barrels per year. However, today’s consumption levels are approximately 20% lower than they were in 1979. China overtook the United States in auto sales in 2009. They now sell approximately 15 million new vehicles per year. India sells approximately 2 million new vehicles per year. The U.S. sells just over 12 million new vehicles per year. In China and India there are approximately 6 car owners per 100 people. In the U.S. there are 85 car owners per 100 people.

The Energy Information Administration issued their latest forecast and it does not bode well for lower prices:

Despite continued concerns over the pace of the global economic recovery, particularly in developed countries, the US Energy Information Administration expects worldwide oil consumption to increase this year and next spurred by demand in developing countries. US oil consumption, however, is forecast to contract from a year ago. Worldwide oil demand, led by China, will increase by 1.4 million b/d in 2011 to average 88.19 million b/d and by 1.6 million b/d in 2012, outpacing average global demand growth of 1.3 million b/d from 1998-2007, before the onset of the global economic downturn.

Continued at Zero Hedge here…

Drowning in debt, the OECD did have one little nest egg tucked away in the form of strategic petroleum reserves (SPR). Yesterday the International Energy Agency (IEA), an OECD organisation, decided to raid these meager savings in order to try and keep the global growth party alive. The recognition that high oil and energy prices were threatening a weak and faltering recovery is an admission by the OECD that high oil prices were threatening recession.

The decision yesterday to release 60 million barrels from strategic reserves over a 30 day period sent already weak and falling oil prices through the floor with Brent futures down 8% at one point. This represents 4% of total OECD public stocks of crude oil and refined products that totals 1547 million barrels.

Many believe that the $900 billion of quantitative easing in the USA has underpinned the most recent commodities spike. Ask the question where the global economy would be right now without QE? Rising demand colliding with inelastic supply is the technical cause of high and volatile oil prices. The logical solution is to boost supply and reduce demand. Yesterday’s action by the IEA is designed to do the exact opposite of that since the aim is to reduce price. This will boost demand and hurt high cost oil producers in the OECD.

My own view on the OECD economies is that anemic growth in many countries has likely already turned negative mirrored by already falling oil prices. Higher taxes, reduced public spending and the burden of high energy prices lie at the heart of this problem. But there seems no way out. Countries like the UK require strong economic growth to repair their public balance sheets to avoid the risk of default. This growth requires growing supplies of cheap energy. 60 million barrels of oil, 18 hours of global consumption, is the latest sticking plaster to be rolled out.

Interesting thread continued here with lots of good comments.

There is another good write up about it here too.
Once the oil price starts getting high (over $85 is high, over $110 is very high), the high oil prices start causing recessionary influences, because citizens have to cut back on other goods. Oil and food prices usually rise and fall together, because a lot of oil is used in food production.

Unfortunately, if high cost oil is what sinks the economy, high cost green energy is of very little help. We have been misled in this regard. It doesn’t even matter if the government provides a subsidy for expensive green energy–it still comes back around to sink the economy, because higher taxes are needed–either that, or it adds to the overly burdensome debt situation. Once citizens are charged higher taxes, the effect is very much the same as if citizens had paid the high prices to begin with–it reduces their discretionary income, and thus tends to be recessionary.

Not like it wasn’t expected or anything. Is there a plan B? hell no. I am no fan of nuclear power really but it seems all countries are decommissioning their nuclear plants right about the time we will need them more than ever.

LONDON (Reuters) – OPEC followed this week’s failure to reach an output deal with a forecast world oil supplies would begin to fall short later this year, draining inventories just when demand is expected to hit a seasonal peak.

In its monthly report published Friday, OPEC said world demand for its oil would average 30.7 million barrels per day (bpd) in the second half of the year, much higher than the 28.97 million bpd the 12-member group produced in May.

The figures suggest the world will be undersupplied by 1.73 million bpd — enough to meet demand in an economy the size of France.

I read this full chapter of the WEO report and pulled out some excerpts for you. They try to put a positive spin on it somewhat, but clearly acknowledge for the first time the serious nature of peak oil on the global economy. This fact alone is fairly significant, even if rather late:

The persistent increase in oil prices over the past decade suggests that global oil markets have entered a period of increased scarcity. Given the expected rapid growth in oil demand in emerging market economies and a downshift in the trend growth of oil supply, a return to abundance is unlikely in the near term.

Consumption levels of many natural resources, including crude oil, have already risen above precrisis peaks, largely reflecting robust demand in emerging and developing economies.

There is considerable uncertainty about how strong the tension will be between rapid growth in oil demand in emerging market economies and the downshift in oil supply trends.

The key question for the future is how the larger and likely growing number of maturing oil fields will affect the global oil supply outlook. In particular, is the broad stagnation in oil production over the past five years temporary or more permanent?

Hear, hear.

http://www.oilposter.org

Not in complete agreement with this article as to start a transition away from oil would be a good outcome and high oil prices should help, the trouble is there is nothing really to transition to yet. Or at all. Plus, as much as I loved the electric KTM SX prototype I tested, internal combustion engines are still much more versatile and will be around for a (long) while yet, just being increasingly more expensive to run (assuming of course enough oil makes it out of MENA to run them). At least motorcycles get great MPG. The KTM 690 engine just won the distinction of being the most fuel efficient bike in South Africa , averaging 3.0 Liters/100km (78.4 mpg) in Econorun 2010.

As Colin Cambell said, We’re entering the second half of the age of oil. How steep the slide down the back is remains to be seen, but if you want to somewhat understand where we are at, this article is a good place to start:

The political class and their mouthpieces in the corporate controlled mainstream media are desperately trying to spin the oil price surge as a temporary inconvenience that will not derail their phony recovery story. Brent crude closed at $116 per barrel yesterday. West Texas crude closed at $104 per barrel. Unleaded gas has risen by 22% in the last month and 60% since September 1, 2010. I’m sure this slight increase hasn’t impacted Ben Bernanke or Lloyd Blankfein. Their limo drivers just charge it to their unlimited expense accounts. Joe Sixpack, driving his 15 mpg Dodge RAM pickup, is now forking over an extra $1,200 per year in gas expenditures, not to mention more for everything impacted by oil such as food, utilities, and anything transported to their local Wal-Mart by truck (everything). Luckily, the Federal Reserve and crooked politicians only care about their comrades in the top 1% elitist society, for whom oil is an investment, not an expense.

http://www.zerohedge.com/article/guest-post-there-are-no-good-outcomes

The global economy had no sooner put in its first year of solid growth when world oil demand, like a jack in the box, sprang to a new record high. China alone added almost a million barrels a day to global demand, which ended the year at more than 87 million barrels a day. And demand shows no sign of abating this year.

It was far from clear where the world was going to find another two million barrels a day of new supply to meet another year of demand growth. That would be in addition to the nearly four million barrels a day of new production that must be brought on simply to replace what is lost every year in depletion.

Then came the turmoil in North Africa and the Middle East. Now it’s even less clear where that oil will be flowing from. The region of the world that was expected to pump that additional oil supply, utilizing its supposedly ample spare capacity, is now falling into anarchy.

In reality, that official spare capacity hasn’t existed for years. Confidential cables from the U.S. embassy in Riyadh recently released by Wikileaks confirm what skeptics like the late Matt Simmons long suspected. Saudi Arabia, OPEC’s biggest producer, and the country holding the world’s largest oil reserves, has little more to give.

Continue reading..

The low-hanging fruit of this world is gone. If you understand that, you’re halfway there. We’ve got nearly seven billion people on this world all chasing for the same goods.

A couple of weeks ago wikileaks docs showed how Saudi Arabia, the world’s largest oil exporter had overstated their reserves by 40%, so their production numbers are of great interest. The repercussions of not only a peaking SA but the speed in which their internal demand is growing and choking off exports are somewhat alarming. It is telling that countries are keeping more oil for themselves despite brent crude now being at a high of $102 a barrel.

“OPEC’s oil exports fell 2 percent in December from a month earlier as Saudi Arabia, the world’s largest exporter, reported a decrease of 4.9 percent. Total world output fell 14 percent in December from a month earlier to 55.5 million barrels a day, the lowest since 2002, mainly due to a drop in non-OPEC production, particularly in Latin America.”

From Bloomberg.

We can’t all be net importers.  Amongst other things, the chart below gives you an idea of why Egypt ran into financial problems and the government decided to cut fuel and food subsidies, resulting in a revolution.

VIA

KabOOOOM:

As the Guardian reports on 4 just declassified cables, “The US fears that Saudi Arabia, the world’s largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show. The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom’s crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%.” Could the OPEC cartel’s capacity for virtually unlimited supply expansion to keep up with demand have been nothing but a bluff? That is the case according to Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, who met with the US consul general in Riyadh in November 2007 and “told the US diplomat that Aramco’s 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached.” And yes, that conspiracy concept of peak oil is specifically referenced: “According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as “peak oil”.” And it gets worse: “Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap.” Look for Saudi Arabia to go into full damage control mode, alleging that these cables reference nothing but lies.

http://www.guardian.co.uk/business/2011/feb/08/saudi-oil-reserves-overstated-wikileaks

VIA

Saudi Oil Production and Reserves – Reasons Behind Wikileaks Concerns

At the same time as the stock markets are hitting fresh multi year highs, foodstamp Recipients in America have also hit a new record Of 43.6 Million. Up 14.5% in a year.

Oil hit a 28 month high of 92 dollars yesterday.

The stability of the global economy is under threat due to oil prices entering a “dangerous zone,” according to the IEA’s Chief Economist, Fatih Birol.

Dr Birol’s warning follows new analysis from the IEA which found that oil import costs for member countries of the Organisation for Economic Co-operation and Development have shot up by $200 billion to $790 billion at the end of 2010.

“Oil prices are entering a dangerous zone for the global economy” warns Dr Birol. “The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers.”

(EDITORS NOTE: Wake up?? Not like there are any alternatives, they already raised taxes here on petrol and Diesel considerably and do we drive less? Not really, it’s still by far the easiest and quickest way to get around, and while we can, we will drive, all that happened was we just got a fair bit poorer. Solutions? Not really. Not yet.)

Despite a dip yesterday, oil prices have been climbing steadily in recent weeks, pushing close to $100 a barrel. On Monday Brent Crude reached $95 a barrel, its highest price for over two years, while the WTI price hit $89, up from $79 this time last year.

The analysis from the IEA, an energy policy advisor for its 28 member countries and beyond, also found that the European Union’s oil import bill grew by $70 billion last year. This figure is equal to the combined budget deficits of Greece and Portugal.

http://www.iea.org/index_info.asp?id=1737

A Peak in conventional crude oil production in 2006 as stated by the 2010 World energy outlook, should logically coincide in a short space of time with a peak in net oil exports, as the producing countries have less oil to export and keep the oil they need for themselves. If these peaks did happen, they should show up in a corresponding decline in the oil available for other countries, especially the worlds biggest oil consumer, the U.S.

Well, total net imports were 7.793 million barrels per day in the last report. That is an import level below any week since the week ending February 27th 1998.

“The crude numbers are shocking,” said Andre Julian, chief financial officer and senior market strategist at OpVest Wealth Management in Irvine, California. “A near-term shortage of crude in the U.S. is forming. Prices could easily hit $100 by the end of the year based on this report.”