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Broken Energy Markets And The Downside Of Hubbert’s Peak
Authored by Euan Mearns of Energy Matters blog, via The Automatic Earth blog,
A few commenters have mentioned peak oil recently. I am cautious about making forecasts and predictions and prefer instead to observe and document the data as the peak oil story unfolds. I have in fact published a couple of charts recently illustrating aspects of peak oil, one showing a possible peak in the rest of the world that excludes N America and OPEC (Figure 1). The other showing the undulating plateau in conventional crude + condensate that has persisted since 2005 (Figure 2). In my last post on oil price scenarios two of those showed global oil production capacity 1 to 2 Mbpd lower in 2016 than 2014. If that comes to fruition, will we have passed peak oil but does it matter?

Figure 1 Global oil production has been split into three geo-political categories: 1) USA and Canada, 2) OPEC and 3) the Rest of the World (RoW). RoW production bears the hallmarks of having peaked in the period 2005 to 2010 and this has consequences for oil prices, demand and prosperity in parts of the world, especially the OECD. Most of the growth in oil supply has been in the USA and Canada where the market has been flooded with expensive oil. Data are crude oil + condensate + natural gas liquids (C+C+NGL) and exclude biofuels and refinery gains that are included by the IEA in their total liquids number.
The current “low oil price crisis” is providing a clear and new perspective on the nature of the peak oil problem. If low price does indeed destroy high cost production capacity then this will raise the question if the high cost sources can ever be brought back? IF low price kills the shale industry can it come back from the dead?

Figure 2 Conventional crude oil + condensate production has been on an undulating plateau just over 73 million barrels per day (Mbpd) since May 2005, that is for almost 10 years and despite record high oil prices! Note that chart is not zero scaled in order to amplify details. Click chart for large version.
The response of the oil price to scarcity in the period 2002 to 2008 was for it to shoot up. And the response of the energy industries to scarcity and high price was to develop high cost sources of energy – shale oil and gas and renewables. The longevity and permanence of these new initiatives has always been dependent upon our ability and willingness to pay. Of course, most of us who have cars continued to use them but have perhaps subliminally modified our behaviour through driving less or buying more fuel efficient vehicles. OECD oil consumption has at any rate been in decline and robust economic growth has been elusive. Is this due to the peak oil story unfolding?
The global finance and energy system is unfortunately rather more complex than that. The creation and expansion of debt is of course central to creating demand for oil and other energy sources. Without QE the global economy may have died in 2009 and demand for oil with it. Gail Tverberg produced an interesting chart that may illustrate this point (Figure 3). However, back in 2008 / 09 OPEC trimmed 4 Mbpd from their production and this equally explains why the price rebounded so strongly then. The end of QE3 may have contributed to the recent fall in demand, but the price has fallen so precipitously because OPEC has not compensated by reducing production.

Figure 3 QE appears to have impacted demand for oil and may have created the lines of credit enabling energy companies to produce high cost gas and oil at a loss. But the oil price has been equally controlled by OPEC controlling supply. Chart by Gail Tverberg.
The big picture is made even more complex by climate concern and a growing raft of energy policies in Europe and the USA designed to reduce CO2 emissions while singularly failing to do so meaningfully. And so at a time when clear engineering thinking was required on how to tackle the potential impacts on society of energy scarcity in the global economy we got instead ‘Green Thinking’. Future generations will look back on this era with bewilderment.
Against this backdrop, I will now move on to the main topic of this post which is the concept of broken markets and Hubbert’s peak. For those who do not know, Hubbert’s peak is peak oil by another name and while wise guys may want to invent a multitude of definitions I will stick to the simple definition of the month or year when global oil production reached a maximum volume or mass and thereafter went into inexorable decline. The impact of this on Mankind is normally expected to be negative since oil is the lifeblood of the global economy. The reason for this happening could be because we discovered something better than oil that substituted oil out of existence (that wouldn’t be bad) or because of scarcity oil became too expensive to produce (perhaps where we are now) or because Greens in government like Ed Davey and Barack Obama set out to undermine the fossil fuel industries which just a few years ago I would have found impossible to believe. We live in interesting times.
The world economy as we know it runs on fossil fuels and in particular a relatively small number of truly gigantic fossil fuel reserves such as the Ghawar oil field in Saudi Arabia, the Black Thunder coal field in Wyoming and the Groningen gas field in The Netherlands. Both Ghawar and Groningen are showing signs of age, along with the hundreds of other super giant fossil fuel deposits. The stored energy in these deposits flows out at enormous rate and at little financial or energy cost. It is these vast energy supplies and surpluses that provide the global economy with economic surplus. It is indeed the lifeblood. But the world has run out of these super giant deposits to exploit and we are finding it increasingly difficult to find large enough numbers of their smaller cousins to keep the wheels of the global economy well oiled ![]()
The focus has thus turned to low grade resource plays. The resource plays offer near infinite amounts of energy but require large amounts of effort to gather that energy. The ERoEI is lower than what went before, perhaps much lower, but for so long as the energy return is positive, we have indeed learned that Man’s inventiveness and commitment can exploit these resources. One of the main questions I want to pose here is, is it possible for these resource plays to participate in the global economic system as it has existed for many decades that has become known to us as capitalism?
The first example of broken energy markets I want to look at is wind power. Both onshore and in particular offshore wind are expensive forms of intermittent electricity. Wind advocates will argue that the intermittency does not matter and will point gleefully to the low electricity prices achieved when the wind blows strongly across Europe resulting in over-supply that dumps the price. Wait a minute though, high cost and low price is a toxic mix that does not jive with capitalism. The more wind resource installed on the system the greater the size the unusable surplus and economic penalty becomes.
Why have the wind producers not gone out of business? It’s because the markets are rigged such the wind producers are given priority to market and receive a guaranteed price. This is a monopoly! The consumers don’t benefit because they have to pay the guaranteed price to the wind monopoly. The losses end up in the hands of the traditional generators who see their prices dumped and need to chew on the losses whilst providing the invaluable balancing services for free.
Providing back up services for when the wind doesn’t blow is another problem newly addressed in the UK with the new “capacity market”. The government is calling this a ‘market’ while it is in fact a component part of the wind monopoly. Companies are being paid to maintain generating capacity on stand by to cover periods when the wind doesn’t blow. Again the consumer has to foot the bill. One day quite soon, UK and other European governments are going to have to explain to their electorates why they have distorted the electricity market so badly, delivering a monopoly to wind producers, destroying the traditional market participants with the bill being met by the consumer who receives zero benefits. This can only be explained if it is underlain by rampant corruption or sheer stupidity.
The second example of a broken energy market I want to explore is the US shale industry. This shares certain characteristics with the wind industry in that it is a high cost but potentially very large resource. But the mechanism for integration of this resource into the market is rather different. The problem with shale gas is that over-supply has resulted in the US gas price being dumped below the level where many shale operators can make a profit. Consumers in this case benefit through getting both secure and low priced gas. But the shale operators have reportedly racked up large losses that have been covered by expanding debt. These losses may yet come home to roost with the consumer if debt defaults result in a new credit crunch where the debts are socialised via government bailouts of the banking sector.
If it were possible to produce shale gas at $1 / million btus then everyone would be happy. Consumers would be getting secure and cheap energy and producers would be making handsome profits to distribute to shareholders. That is how capitalism is supposed to work. The system as it has operated seems broken.
US Light tight oil (LTO) production appears now to have created the same problem for the liquids plays where the entrance of expensive liquids in the market have contributed to the crash in the oil price. This has created risks for the LTO operators. It remains to be seen if the LTO sector sees mass insolvencies and default on loans that may socialise these losses. The introduction of high cost LTO has also undermined the whole of the higher cost component of the conventional oil sector. If LTO could be produced in large quantities for $20 / bbl then there would be no problem since this source would go on to substitute for the higher cost conventional sources of supply. But with costs closer to $60-$80 this is not going to happen. The conundrum for capitalism is the introduction of large quantities of higher cost energy to the system.
At this point I have to admit that nuclear power may be subject to similar limitations. It is difficult to view the Hinkley Point new nuclear build in the UK as a triumph for the consumer or the country. A better way to manage such enormous capital expenditure on vital infrastructure is via the state. The costs may eventually be socialised to the tax payer, but at least the energy is reliable and amongst the safest forms of power generation ever developed and the taxation system distributes costs in an equitable way.
A form of society could undoubtedly exist powered by nuclear, wind and shale gas. But it would be a society supported by the state with far larger numbers working in the energy industries than now, producing lower surpluses, the energy production part perhaps running at a perennial loss. Those losses have to be covered by either higher price or via the taxation system. Either way, the brave new world that awaits us will be characterised as the time of less that will be in stark contrast to the time of plenty many of us enjoyed during the 20th Century.
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"[If] we discovered something better than oil that substituted oil out of existence (that wouldn’t be bad)"
Oh, no, that would be terrible. Think of all the high paying energy-related jobs that would be lost! If they ever came up with a truly safe, cheap zero-emission energy source (cold fusion or whatever) we would all sit around in our houses playing Xbox until we starved to death.
In case you forgot, we already sent all the good jobs overseas.
Tell the gov't to back out of the energy markets the majority of these problems will go away. Especially the green morons.
Jesus H. Phuckin' Christ. All ZH talks about is the way markets are broken and the Fed is distorting everything. And then when a REAL price discovery is going on in the energy markets the ONLY (??) solution is for the Federal government to build nuclear power plants and socialize the costs.
Companies go bancrupt and people get hurt by capitalism. Deal with it. Let the energy shake out continue. In the end we will all be better off.
A few years back the supercar was pronounced dead after the EU set up new efficiency regulations. Last year the best supercar in history was released, and.... it's a hybrid. Best F1 car, hybrid.
Dinosaurs need to be left in the past. And.. governments have always been deeply involved in energy production, oil has been subsidized to the tune of trillions of taxpayer dollars - that false 'let the market decide' argument also needs to be left in the dust.
You're sure right on subsidies. Don't you think we'd get some price discovery if the Saudies had to use their own navy to escort tankers out of the Persian Gulf? We've been artificially depressing the true cost of their oil for decades. Just like real estate - location, location, location... So sorry that their product is located in a shitty neighborhood. I guess we'll just keep picking up the tab for the real cost of delivery so that they can increase market share. Mullet in the mirror.
"... if the Saudies had to use their own navy to escort tankers out of the Persian Gulf?"
If the Saudies did not require US Dollars to buy their oil then the US Dollar would have already collapsed.
Then again, if the US did not consume more than it produces it would not have to counterfeit US Dollars via the "Federal" Reserve. And then we wouldn't have to ask the Saudies to ask for US Dollars for their oil and they would have to pay for a Navy to escort their tankers.
I discount anything Euan Mearns says because he's a complete fool who denies the existence of anthropogenic global warming. This is akin to denying evolution. Total fool and also a shill for the oil industry.
The way I look at it, anyone who still buys the AGW story belongs in the movie Idiocracy. You just have to have no scientific sense at all to fall for it. No warming for 18 years now. Climate models that don't work and never have. Hurricanes and tornadoes at cyclic lows. More ice than ever in Antarctic, ice growing every year for 3-4 years now in the Arctic. Cold, cold winters. On and on.
And of course our favorite that is just, oh so funny. Any cold records, snow records, super snow storms are always cause by AGW. Hilarious!!
And don't give us that 97% BS. I and most every other skeptic would be in that 97%.
And another thing. Really, that whole Peak Oil theory is based on a bogus idea. Russia (World's Number 1 Producer) developed the Abiotic theory over many years, scientifically, and applied it to become number one. The whole dinosaurs make oil idea is just hogwash. It's another theory of scarcity and high prices. There are many articles out there you can read about it, but here is the best introduction to the subject.
http://www.engdahl.oilgeopolitics.net/Geopolitics___Eurasia/Peak_Oil___R...
Transformer = poor performer. I see you've set aside this special time to humiliate yourself in public. You're wrong on every score, but if you're too lazy to find out the truth, why should I bother trying to educate you?
Yep, a fugitive from Idiocracy.
"This is akin to denying evolution."
Don't want to rain on anybody's pointy-headed parade, but the theory of evolution is just that -- a theory. And why is it important that it be rammed down the throat of every schoolchild in America?
The bible as typically intrepreted seems unrealistic, but of course there are no other possibiities.
Righto, the dollar may have collapsed so... About the correct price of oil in dollars, in a capitalist market shouldn't it reflect some measure of economic value? Meaning if real costs were considered the commodity would be priced higher. We're not trying to facilitate monetary malpractice on our account by providing moral hazards to them are we? Oops. If that's it should we stop, just asking? I'm thinking of Chris Farley in 'Almost Heros' trying to learn the difference between the capital and small letter 'A'.
The energy situation can't be swept under the rug. They've been doing a lot of sweeping for a lot of years with the rest of the economy. Oil is about to drag the rest of it all back out from under the rug. It's not going to be pretty, because the fact is your point, corrections happen, BUT... they DIDN'T let it correct, when they should have.
I am truly hosed then, I don't have an Xbox.
PS4 is better anyway.
XB1 looks like a 1970s VCR.
Oil is used for many things other than energy anyway.
How much oil is required to produce a tire?
Approximately seven gallons. Five gallons are used as feedstock (from which the substances that combine to form synthetic rubber are derived), while two gallons supply the energy necessary for the manufacturing process.
Energy Independence - The Big Lie
There's a good spreadsheet there about a third down the article listing some of the many things that require petroleum in their production.
"Oil is used for many things other than energy anyway."
That's the sad part, that we burn it instead of saving oil for so many other useful things.
Usually, they are different chemicals that are on the crude oil; they get separated at the refinery, and used each for its purpose. I don't know how much gasoline or diesel could be used for other purposes, such as plastics or pharmaceuticals.
@This can only be explained if it is underlain by rampant corruption or sheer stupidity.
Or both.
Actually, wind power from properly sited large turines is quite cheap - comparable to fossil fuel grid pricing.
Wood and active solar, the original renewable fuels. Support truth in design at the up and coming constitutional convention.
Oh those Flemish paintings of Dutch windmills from the 17th century.
They surely fetch millions. Now, that's a real return on wind energy!
Water is acutally quite cheap to. In fact it falls from the sky for free.
....except when it doesn't rain, you can learn more by studying the recent meteorology of California.
This article states that in some areas (like in the UK for example) there are periods where the wind does not blow.
There simply is no replacing oil and nuclear. The world needs to figure out if they want to pollute the Earth or live like cavemen.
Society may also accept whole chickens for $0.10 each. And it would be nice to have chocolates free on Sundays.
That's why we need better batteries.
( DING DING DING )
But it results in a double system. Lets say you want to run a whole town on your cheap power. Set up 15 of them. But where's the power going to come from when the wind slows down or stops? Sure, when they spin, the power is cheap. What about when they don't? You can decide to do without electricity when the units stop working. You'll have electricity when the wind blows. A bit difficult to manufacture anything under those conditions, no? So cheap is just a snapshot: turbine spinning on a nice windy day at top speed, everyone happy. Right at that moment. Electricity is at the whim of the wind. Don't know how many people would want to live like that.
"Actually, wind power from properly sited large turines is quite cheap"
Except when the wind is not blowing.
Why is it that you guys just don't get it??????
If the wind doesn't blow you don't get any electricity, period.
So let's say that you are having your appendix removed and the wind stops blowing.
Or you are going up the elevator at the Empire State building and the wind stops blowing ...................................................................
In order to back up the wind turbines you have to have a fossil fed electrical power plant. The way that you generate electricity at fossil power plants is by HEATING WATER to turn it into steam.
It takes time, hours, to heat the water so that you can make steam. Which means that the backup facility needs to be heating the water 24 hours a day.
Are you people stupid?
Don't you get it? Wind power is a fuck.ng scam!!!!!!!!!!!!!!!!!!!!!!!!!
When the financial asset ponzi ends, it will all make sense. Wind isn't overly expensive from a TCO risk adjusted basis if there was true factor cost discovery.
So you're saying there's a chance?
This guy will probably become a poster-child for Alzheimers. What a remarkable compendium of false assumptions , shallow thinking and nineteenth-century reasoning. The author clearly lacks no comprehension whatsoever that things are they way they are for no greater reasons than those dictated by the self-interest of the centers of fiat finance. In a manner of speaking not entirely metaphorical, J.P. Morgan still has a stranglehold on Tesla –the man; not the car.
How many articles have you read by Euan? Right.
I know, if they just let Tesla's inventions out, we'd all have free energy right?
The EROEI of a wind farm, including all of the turbine manufacturing materials and systems materials installation costs, will probably be negative. A wind farm with a cumulative "nameplate" turbine rated capacity of, say, 1,000 MW will over the course of a year erratically produce only ~210 MW due to the vagaries of the wind.
The EROEI drops as the size of the wind farms relative to the entire power grid rises. This is because rapid gas-fired generators are required to provide power when the wind is not blowing or is blowing too fast, as noted above. These gas-fired generators have to be included in the EROEI for the wind farm.
The wind farms are subsidized by law that forces electric power utilities to pay rates higher than their own generating plant rates. If that continues and increases it could force private utilities out of the market.
Then the public will discover that they have been conned once again.
Simple solutions:
1) charge more for electricity
2) lower the price of electricity when the wind is blowing, and charge more when it is not. Same with solar, when it is sunny, lower the price of electricity.
Who says that demand gets to dictate to supply when to exist? Let supply shape demand instead.
Who the hell can really tell what it actually "costs" to pull oil out of the ground with so many centrally planned distortions in these markets?
You have the costs of global fiat currencies depreciating, artificial environmental regulations that serve as barriers to entry to sustain the monopolies, HFT algos, a quadrillion dollars of derivatives, banks owning refineries and warehousing extra supply to drive up prices, non-GAAP accounting tricks, zero and negative percent interest rates, etc, etc, etc.
I don't think anyone could say with any degree of certainty what the actual cost is to extract oil with so many millions of financial inefficiencies that exist only serve to enrich the oligarchs.
Basically QE hid the fact that lowered demand, was dropping the oil price. QE enabled Wall Street's casino gambling. Now that the casino is (probably temporarily) closed, oil is once more being closer to an honest, instead of rigged, market.
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Damn Touch Screens. (Sorry)
euan mearns
Thank you Tylers. Really Great stuff.
Enough leaves in Europe and North America to heat hot water and heat a home using compost piles and almost NO change in quality of life.
This is a problem of imagination, nothing more - can be solved this year.
If we didn't have oil, who would we kill? There's no power play in sun and wind.
This is wrong and unduly pessimistic. Solar electric is cheapest and available locally. Once people figure out to have patience (heavy electric consumption such as clothes washing, dish washing, water heating, aluminum smelting etc) when the sun shines, they will realize high quality of living with high solar electric consumption. My grandparents woke up and went to bed with the sunlight. The best and most important source of energy is missing from this conversation. Your conclusions are nonsense.
Another peak oil/ global warming prophit...............
This shit is history.......
Find a new cause.............
Even the most diehard enviros and peak oilers realize the bullshit is over.............
Get a life!!!!!!!!!!!!!!!!!
If you want to get the world off of fossil fuel then stop spending your money on lawyers and start spending it on engineers.............
The stone age did not end because they ran out of stones.................
Hard done-by Ol' taxation system? LULZ MOAR F35S!