Oil Industry Investments Rapidly Becoming Uneconomic

My letter to The Southland Times published in today’s paper:


I heartily agree with Richard Soper [October 29] that Environment Southland is “not a green pressure group”.

Clearly that label cannot apply either to the Rockefeller Brothers Fund, the Norwegian Sovereign Wealth Fund, etc.

Oil is rapidly becoming an uneconomic option and divestment is actually the prudent economic decision.

Responsible institutional investors globally are weighing the evidence and making the choice on an economic and moral basis.

Right now, the oil industry is being driven to a crisis point by the combination of restricted cash flow due to depressed oil prices, and declining return on investment from (ever harder to access) new reserves.

Well before the current low prices prevailed, oil majors were issuing profit warnings, and performing desperate accounting manoeuvres such as share buy-backs to sustain their investor’s yields.

BP, Shell, ConocoPhillips, Saudi Arabia, are all in major trouble, with investors calling for capital restraint. Witness also the fracking ponzi schemes unravelling in the USA, where investors promised high returns have been continuously disappointed.

Additionally, the global economy appears to be sinking further into a deflationary spiral, which may well serve to depress oil prices further, worsening the crisis as noted recently by Goldman Sachs.

The coming oil supply crisis that this inevitably leads to is a major risk to our entire economy here in New Zealand. Investing in risk reduction in this context, preparing our community for an energy and capital constrained future, would be a far better use of our capital.

This would show they are taking the welfare of our children, and our children’s children seriously.

Nathan Surendran

Here’s the fully referenced version: http://bit.ly/1XNyPFt

Here’s hoping Environment Southland and Venture Southland take note…

And here’s an image to accompany the letter which reinforces my case that any industry cannot do well with declining productivity of capital on the scale the oil industry is currently seeing, making it a BAD INVESTMENT…

oil - capex vs production

We desperately need to get serious as a community, nation and species, about the need to leave oil before it leaves us!

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Southern Energy and Resilience – Newspaper Edition

I’ve compiled many of my ‘go to’ news feeds into a helpful newspaper format (you can subscribe for daily emails) for those who are interested in reading around the issues I’m blogging about. You can access it via the link: Southern Energy and Resilience – News Feeds in paper format

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Our Renewable Future

“There is probably no credible future scenario in which humanity will maintain current levels of energy use.”

Transition to 100% renewable energy? Sure.

Maintain current levels of growth and consumption? Not gonna happen.

Note the current percentage renewables contribute to total global energy…


Note this doesn’t mean that we shouldn’t roll out as much renewable energy generation as we can… It’s just that the lower ‘energy profit’ from creating renewable energy machines and processes, relative to fossil fueled ones, means that the ‘net energy’ left after gathering the energy resource is so low that it won’t allow us to continue the rate of material throughput our industrial civilisation requires to function in its present form. There’s also the issue of non-substitutable uses of liquid fuels for heavy transport vehicles, and many other considerations.

To learn more, this highly readable book, ‘Our Energy Future’ from the Post Carbon Institute comes highly recommended! The book is freely available online here: www.ourrenewablefuture.org

View the book’s authors presenting on the report, go to this link. NZ refrigerated food exports get a mention in the discussion of decarbonising the food supply chain in this segment of the presentation.

For a very encouraging, up to date as at June 2016 presentation about ‘The Winning of The Carbon War’ by Jeremy Leggett, click here. The playing field is shifting fast!

I’ve been actively writing and engaging with local and national government on this issue for several years now, and have created quite a few resources of my own, as submissions to various consultation processes. I focus on the “3 E’s” – Economics, Energy and Ecosystems, and the fundamental limits these place on the solution spaces available to us going forwards. Here’s a selected bibliography to date:

Continue reading


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Submission to ICC on the draft ‘Code of Practice’

Subsequent to my original submission below, I submitted a further response in writing on the day of my spoken submission, as I found the council’s response to be evasive, dismissive and generally unsatisfactory: bit.ly/1VGMHmW

The Southland Times has picked up on this, and has written an article here: bit.ly/1NO4HsH

Here’s the comment I’ve posted on the article:

I’ll be very interested to see how the residents of Invercargill feel about this issue that I raised in my submission to ICC – thanks to The Southland Times for assisting in publicising this issue! – I’d like to suggest a change: probability is twice as high as the one-in-ten recommended by Standards New Zealand.” should probably read: “The probability is twice as high as the one-in-ten recommended by Standards New Zealand, which means the intensity of the event is around 1/3 LOWER. As such, drains installed to the ICC 5% AEP will flood with a much smaller event, leading to significantly more surface water ponding.”

This is based on my understanding from the High Intensity Rainfall Dataset from NIWA http://hirds.niwa.co.nz/hirds_data/Invercargill%20/NZMG/5411541/2152696/2,4,6/IFD which also demonstrates how rainfall intensity will increase with increased mean air temperatures.

Just carrying on with a particular design standard, especially one that is below the NZS recommendation from 2010, and just ‘because it’s been done like this for 30 years’ is in no way defensible in the face of the challenges that Climate Change (and other ‘Planetary Boundaries’) and resource depletion (as I outlined in my submission to the council’s Long Term Plan last year: bit.ly/1BJBHqL) pose to our current way of life.

This was also only one of several issues that I raised in my submission (bit.ly/1Y2FxXG). We need to think a LOT harder about these issues as a community, and that process starts by having public debate on the issues, and coming to a mutual understanding. In the council’s response to my original submission, their summarisation of my comments for councillors misrepresented my views in several key areas, and I submitted a further response on the day of my spoken submission bit.ly/1VGMHmW

The predicted effects of climate change will be very difficult to deal with, and I have sympathy for ICC’s predicament with regard to how and where to expend the ratepayers capital effectively, it’s a very hard problem… It also mirrors the more general predicament we all face, which is that what has worked in the past is no longer working in many respects, and this situation will only worsen over time. These are symptoms of biophysical Limits to Growth that we face, and are an issue I continue to work with the Wise Response society to publicise to the general public. The New Zealand parliament would do well to form something similar to the UK’s All Party Parliamentary Group.
“Four and a half decades after the Club of Rome published its landmark report on Limits to Growth, the study remains critical to our understanding of economic prosperity. This new review of the Limits debate has been written to mark the launch of the UK All Party Parliamentary Group (APPG) on the Limits to Growth. It outlines the contents of the Club of Rome’s report, traces the history of responses to it and dispels some of the myths surrounding it. We unravel the arguments that have raged for forty years in its aftermath and explore more recent findings which relate to the original hypothesis. As Prof Tim Jackson summarises the report in his recent CUSP blog, if the Club of Rome is right, the next few decades are decisive. One of the most important lessons from the study is that early responses are absolutely vital as limits are approached. Faced with these challenges, there is also clearly a premium on creating political space for change and developing positive narratives of progress. A part of the aim of the APPG is to create that space.” bit.ly/1Y2Hjbo

Even though central government isn’t taking these things seriously, local and regional government can and should act to educate itself and others on the implications and positive responses. My submissions aim to assist this process.

The newly forming discipline of Transition Engineering as described by Susan Krumdieck, Daniel Kenning and others (bit.ly/transitionengineering) approaches these complex systems challenges as a ‘systemic’ problem, and doesn’t shy away from dealing with the complexity. It also respects the fundamental constraints that nature imposes on our future ‘solution spaces’ and aims not to pursue options the fundamentals don’t support. Here’s an excellent talk by Susan on the subject: bit.ly/1NrLTdc – I love her ‘flying elephant’ test. Already a classic, up there with ‘if you’re in a hole, stop digging’…

Original Submission follows:

Schema Consulting Ltd
Nathan Surendran
60 Dublin Street
021 209 6286

16 March 2016


I wish to be heard by the Councillors and Mayor in support of my submission.


By not giving a larger portion of the copyrighted standard in the consultation document, giving the context for proposed amendments, the council has failed to provide a fair ‘public’ consultation. This biases the responses to professionals who have access to the full document, and excludes the views of the citizens of the city who do not have

Despite having followed periodically the consultsouth website (why isn’t there a ‘subscribe via email’ option?!) informing people of consultations, and the council’s Facebook page, I only found out about this consultation on Thurs 14th, 1 day before it closed. As I stated last year, the council needs to signal these consultations much better…

My submission to the council’s draft LTP (http://bit.ly/1BJBHqL) last year identified 3E’s – Economics, Energy, and Ecology that will shape the solution spaces available to us as a city. NZS 4404:2010 is designed for ‘Green Streets and Livable Communities’ (Hall http://bit.ly/1NrLSpR).

As Prof Susan Krumdieck (University of Canterbury – http://bit.ly/1NrLTdc), Prof Charles Hall (http://stanford.io/1yifujq) and other leading academics and industry specialists are communicating, declining Energy Return On Investment ‘EROI’ for our fossil fuel supply means we will have to work within a much reduced energy budget. This is quite aside from the imperative to reduce industrial pollution such as CO2 emissions to prevent negative ecosystem impacts. Both of these limitations on future activity come at a time when the economic ponzi scheme that has created mostly cheap credit (in financial terms) since the dropping of the gold standard in the 1970’s is ‘topping out’, leading to a potentially quite prolonged period of stagnation as limits to credit expansion are reached and breached globally. We will have no option but to work within the much reduced number of ‘solution spaces’ that this confluence of issues leaves open to us in subsequent decades. This will require us to change substantially the narrative we live by, the story we tell ourselves of who we are. This change from a ‘Sacred Money and Markets’ story, to a ‘Sacred Life and Living Earth’ story, over time, in response to the limits imposed on us by our finite planet, will alter radically the trajectory we are currently on. It will give us cause to explore significantly different urban forms, which I mention as ‘Agrihoods’ or villages (even within the city’s current boundaries), to use the more mundane title. This was the subject of a recent 15 minute presentation I gave recently at an Innov8 Invercargill event (presentation http://bit.ly/1pWlsXS and a voice recording: http://bit.ly/1MiV70h).

Specific comments:

1.9 Bonds and charges – Amend clauses as below 1.9.1 Uncompleted works The amount of the bond shall be 150% of the estimated value of the uncompleted work or a value agreeable to the TA plus a margin to cover additional costs estimated to be incurred by the TA in the event of default.

Who is to be the arbiter of what is ‘agreeable to the TA’? How are the public supposed to comment on this proposal if no indication of the potential size of the financial impact (as a percentage of the estimated value, for example) is given? Does it introduce the potential for restrictions to developments proceeding?

I propose this amendment be removed from the code of practice document, as it gives the potential for a perception of restrictive amounts being demanded arbitrarily, or for political or anti-competitive reasons.

Table 3.2 – Road design standards

  1. The changing of the minimum road widths to 3 and 6m from the recommendation in the NZS is going to cost the rate payer an additional 8%  (approximately; 5.5/6=0.9167) for the upkeep and maintenance of future roads developed which are vested with the council.
  2. I understand that wider roads are seen as a feature of the city, giving it a different character. The historic basis as I understand it was the turning circle of a horse drawn cart.. There are clear trends in car ownership, and particularly future cost rises in the price of ashphalt, reductions in vehicle ownership through passenger vehicle automation, declining affordability / availability of fuel due to resource depletion, etc . For future developments, given these undisputable trends, please provide rationale as to why the council is proposing this amendment?
  3. Please advise if there is other rationale that I am not aware of, and please also give an estimate of projected roading infrasturcture increases, so this can be communicated as a potential future liability to rate payers…


4.3.5 Design criteria

The following is to be added to the end of the clause.

The design shall be based on the Rational Formula,

i.e. Q=k*C*i*A where…

  1. Please provide reference as to the origin of this formula. If it wasn’t included in the NZS, why does the council feel it necessary to insert it? Without rationale for this change, how can the proposed amendment be assessed by a member of the public? (I’m aware that a google search provides answers like these: http://www.lmnoeng.com/Hydrology/rational.php – I’m pointing out the poor quality of the consultation document). Design storms

All new primary stormwater systems shall be designed to cope with climate change adjusted design storms of at least the annual exceedance probability (AEP) set out in table 4.1 unless specific approval has been obtained from the TA. with a 20% annual exceedance probability (AEP), a 20% AEP design storm has a return period of 5 years. All new secondary systems shall be designed to cope with 1% AEP (100 year return period) design storms.

Table 4.1 Recommended AEP for design Storms Not part of Code

  1. I dug out Table 4.1 – took a while…

NZS 4404_2010 - Table 4.1 AEP's.png


  1. It is unclear, to say the least, why the council is choosing to go from “at least 10% (where no secondary path exists)”, to only “20%” of the AEP in this proposed amendment. As I pointed out in my submission to the ICC LTP last year, rainfall intensities are set to increase, due to the increased moisture carrying capacity of a warmer climate.
  2. One possibility that comes to mind is that the council has decided to accept the reality of having to abandon large parts of the city to climate change induced sea level changes within the next 50-100 years, and is willing to reduce the infrastructure provision to induce localised flooding events to incentivise people to move, and reduce its drainage expenditure.
  3. Another is that the council is suffering from denial about the ongoing changes to weather patterns in a broad sense (notwithstanding the 30+ years without a major flooding event in Southland – not to be taken as a sign that such events won’t happen), and wishes to change the weather by changing its code requirements…
  4. Why specifically did they choose to go to a higher probability, lower impact event, which is the opposite direction to other TA’s such as QLDC (below), Hamilton, and probably others? Vegetated swales Rain gardens Minimum pipe sizes Minimum gradients and flow velocities


  1. For the above clauses, refer to my comments on Design storms Minimum cover

6.3.3 Future development

AND ALL OTHER CLAUSES AFFECTED BY THE STATEMENT “Replace clause with the following

  1. Replace what clause with the following!!! How are we supposed to comment on this? Design flow

based on 0.7 litre/second/hectare (l/s/ha).

  1. What is the basis for this figure? Needs rationale to be appropriate for comment…



  1. As I noted in my comments to the LTP last year, the council should consider rainwater collection as a serious alternative to mains water supply, and as a future resilience upgrade for the city, which could be encouraged in the place of the proposed secondary water supply for the city that is included in council plans elsewhere. I do not accept the council’s rationale for dismissing my proposal in its response to by submission on a fire fighting basis as other cities in drier parts of NZ that have adopted this approach have clearly considered this, and found a way around it.



  1. In line with other TA’s globally, recognising the threat to their citizens from sole reliance on the supermarket infrastructure and gardening for food supply, I request that the council consider introducing an incremental experiment with edible planting for the parks department. Allocate an initial 5% of the planting budget for an experiment with edible planting, and increase this yearly, as species and locations that ‘work’ in the local context are identified.
  2. Consider putting an emphasis on edible planting for new residential developments, and limiting grass as a percentage of total section size, as is currently done with hard cover % to stabilise drainage. This would also go some way to reducing the issue I raise regarding the 20% AEP above, as planting for perennial and annual edibles increases soil porosity and organic matter content relative to grass cover, reducing runoff. Perhaps insert something into 7.2.1 Approval regarding this?


Due to the inadequate time available, I have been unable to review this document past page 36. I will try to find time over the weekend to make some brief comments on this, which I will submit as an addendum to this submission.

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How Economic Growth Fails

Another great piece from Gail Tverberg, particularly important when it comes to understanding the depressed commodity prices affecting the NZ economy and other export dependent nations globally:

Our economy is like a pump that works increasingly slowly over time, as diminishing returns and other adverse influences affect its operation. Eventually, it is likely to stop.

As nearly as I can tell, the way economic growth occurs (and stops taking place) is as summarized in Figure 3.


Figure 3. Overview of our economic predicament

As long as (a) energy and other resources are cheap, (2) debt is readily available, and (3) “overhead” in the form of payments for government services, business overhead, and interest payments on debt are low, the pump can continue working as normal. As various parts of the pump “gum up,” the economic growth pump slows down. It is likely to eventually stop, once it becomes too difficult to repay debt with interest with the meager level of economic growth achieved.

Commodity prices are also likely to drop too low. This happens because the wages of workers drop so low that they cannot afford to buy expensive products such as cars and new homes. Growing purchases of products such as these are a big part of what keep the economic pump operating.

Our Finite World

We all know generally how today’s economy works:

Figure 1 Figure 1

Our economy is a networked system. I have illustrated it as being similar to a child’s building toy. Ever-larger structures can be built by adding more businesses and consumers, and by using resources of various kinds to produce an increasing quantity of goods and services.

Figure 2. Dome constructed using Leonardo Sticks Figure 2. Dome constructed using Leonardo Sticks

There is no overall direction to the system, so the system is said to be “self-organizing.”

The economy operates within a finite world, so at some point, a problem of diminishing returns develops. In other words, it takes more and more effort (human labor and use of resources) to produce a given quantity of oil or food, or fresh water, or other desirable products. The problem of slowing economic growth is very closely related to the question: How can the limits we are reaching be expected to play…

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Human domination of the biosphere: Rapid discharge of the earth-space battery foretells the future of humankind

Following last night’s post, I come across this in my blog feed today! Serendipity!!

“Most people who argue about the viability of their [insert favorite technology] only see that viability in terms of money. Energy, to most people is such a nebulous concept that they do not see the failures of their techno Utopian solutions…….”

Damn the Matrix

Chris Harries, a follower of this blog, has found an amazing pdf file on XRayMike’s blog that is so amazing, and explains civilisation’s predicaments so well, I just had to write it up for you all to share around.  I think that the concept of the Earth as a chemical battery is simply stunning…….. the importance of this paper, I think, is epic.

The paper, written by John R. Schramskia, David K. Gattiea , and James H. Brown begins with clarity…

Earth is a chemical battery where, over evolutionary time with a trickle-charge of photosynthesis using solar energy, billions of tons of living biomass were stored in forests and other ecosystems and in vast reserves of fossil fuels. In just the last few hundred years, humans extracted exploitable energy from these living and fossilized biomass fuels to build the modern industrial-technological-informational economy, to grow our population to more than 7…

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Tony Seba’s ‘exponential increase’ in technology will save us – a rebuttal (of sorts)

World renown techno-utopian idealist, and singularitarian, Tony Seba was recently brought to Southland by Venture Southland and Callaghan Innovation to talk to business leaders about the current rate of change in technology and how this is a highly disruptive force to be reckoned with… I didn’t attend the rather expensive seminar, however I do keep coming across links to his talks, etc.

I’ve reviewed a couple of his talks, and I feel I need to put some stuff into writing:

Firstly, what I’m NOT saying:

  1. I’m not saying he’s wrong about the impressive pace of technological change ongoing (although I do think there must be diminishing returns to increases in technological complexity somewhere in there…)
  2. I’m not denying that the idea of being able to continue to do more, but with less, is attractive. It’s just plain and simple NOT POSSIBLE. The future we face from this point forward is doing LESS with LESS (although it can be more fulfilling and finally free up that social / leisure time that technology originally promised us) as I’ve written about here: http://bit.ly/14oMDiO
  3. Having said that, the type of disruption that Tony envisages, IF we can keep our techno-industrial civilisation going in the face of declining net energy available, and through the upcoming GFC MK2 (which again is partially attributable to declining energy profit as a root cause http://bit.ly/1Ips07m) would certainly help with sustainability in any foreseeable future.

Secondly, the rebuttal, in the form of some thoughts and estimates on the potential for renewable electricity generation to replace liquid fossil hydrocarbons as a way to move us and our stuff around (based on what he presents here: https://youtu.be/dUEBDVGXeTE and here: https://youtu.be/lKTHr4diXoc ):

Tony Seba’s thesis that solar’s costs are decreasing exponentially is unfortunate, as he misses (ignores) several key constraints on solar (taking NZ as an example):

1.) Liquid fuel for transport’s declining ROI is leading to a disastrous situation brewing in oil supply, something that has been known for a very long time, and which the current depressed price per barrel is bringing about that bit quicker: http://on.wsj.com/1et7tmb

2.) Solar and EV’s is not liquid fuel for transport, and there are no electric mine trucks, HGV’s, etc as the battery tech is not good enough. You could say well we can at least electrify personal transport, and you’d be right, but we can’t do this for heavy goods vehicles, which comprise 40%ish of NZ’s fuel consumption (See page 25: http://bit.ly/1VIF5OP), and all of the inputs that industry across the globe relies on to produce all the tech that we use the electricity to power.

3.) I question given point 1, and its concomitant deleterious effects on the economy, whether we have sufficient potential profitability to be able to make a wholesale replacement of our vehicle fleet (even only 20% of it, if you subscribe to his arguments on reducing requirements for vehicles) going forwards, never mind the huge investment in infrastructure to power them. Solar requires a lot of material inputs and the input costs will expand rapidly as other limits affect overall industrial productivity and EROI of extraction activities. These blog posts from Gail Tverberg have lots of highly illuminating points in that direction: http://bit.ly/1uEfevy http://bit.ly/1qDeFgB http://bit.ly/1kS6L2o http://bit.ly/TOXvkL http://bit.ly/11nLEOw

4.) All hydro electricity generation in NZ is only 14.5 kWh/person/day (84.2 PJ/annum 2012 figures from IEA: http://www.iea.org/Sankey/index.html#?c=New Zealand&s=Balance) and in the same year our energy consumption for transport from fossil fuel was 32.6 kWh/person/day (189.6 PJ/annum), never mind that the hydro generation capacity is mostly spoken for for other uses.

5.) Can we make up the balance with solar? Our potential for solar energy generation (using the estimation methodology here: http://withouthotair.com/c6/page_38.shtml). NZ population 2012 was 4.4M (https://www.google.co.nz/search?q=nz+population+2012) and 1 petajoule = 277,777,778 kilowatt hours so our fossil fuel liquids consumption was:
189.6 [PJ/annum] /365 = 0.5194520548 [PJ/day]
277777778 [kWh/PJ] => 144292237.558356 [kWh/day]
4433000 population => 32.55 [kWh/person/day] for Transport energy use.
We can get around 8-9 kWh/p/day PV generation based on this estimate for NZ: http://hot-topic.co.nz/wp-content/uploads/2009/11/ScaddenEnergyNZ.pdf. Add another 15% of the 84.2PJ of hydro if Tiwai Point shuts down, which equates (using the same calculation as above) to another 2.17 [kWh/person/day]
So the potential energy deficit to be met from another very low carbon emission source is around 32.55-11 which is approx 21.55 kWh/person/day… 

6.) At best solar is a fossil fuel extender, and it’s potential in terms of being a fossil fuel replacement is routinely and systemically overestimated, as most methodologies don’t account for the energy required to replace it at the end of its useful life: http://bit.ly/TOUHnN

Here’s some food for thought from a more believable source: Nate Hagens on Energy

Edit: This also from Nafeez Ahmed:

As oil prices have slumped over the last few years due to both the shale gas and Saudi oil gluts, the decline in profitability has forced oil majors to slash investments and shut down costly operations.

US industry experts now forecast that these events are setting the world up for an oil price spike, which could begin in the next six months to two years. There can be little doubt that the US government is aware of the industry’s fears.

Robert Hirsh, a former senior energy programme advisor for government contractor Science Applications International Corporation, wrote a major report on peak oil for the US Department of Energy in 2005.

He predicts a likely global oil shock by 2017, accompanied by a stock market crash, inflation, and unemployment.

He also points out that the Pentagon recognises the risk.

As oil production decreases due to the cost-cutting contraction of industry operations, along with declines from aging fields, the International Energy Agency predicts an increase in demand growth by the end of this year.

As demand rises, the question is how quickly existing oil and gas wells can increase global output in the face of this rapidly diminishing spare capacity.

The answer is not very. Over the next two years, around 200 major international oil and gas projects have been scheduled for final investment approvals. But due to the price collapse – and with it the collapse in profitability – the vast majority of them face postponement, or cancellation.

According to Tim Dodson, executive vice president for exploration at Statoil ASA, the industry is “struggling big-time to replace their oil resources and reserves”.

This is part of a wider pattern over the last decade. Oil majors like Royal Dutch Shell, British Petroleum, ConocoPhillips, ExxonMobil and Chevron have all seen their production fall year-over-year by 3.25 percent. Oil and gas extracted last year has not been replaced by new reserves.

The business model of the shale gas industry is so shaky, according to legendary US hedge-fund manager James Chanos, that when prices do rebound as demand growth hits the limits of declining supply, the oil majors will still be in trouble.

The end of oil, the next crash

With insufficient oil available amidst a price rebound, markets will be massively incentivised to flee expensive fossil fuels, empowering cheaper, alternative energy forms.

Oil majors, still facing high production costs and huge debt obligations, will have to grapple with further borrowing to kick-start costly investments in new production projects. But in the corresponding climate of a new economic recession triggered partly by oil price spikes, how likely is this?

Like Hirsh, Charles Maxwell, a senior energy analyst at Weeden & Co., forecasts a price spike in the next few years. “That’s going to bite us big time. 2019 is going to be hell.”

Five years ago, Maxwell told Forbes that “around 2015, we will hit a near-plateau of production around the world, and we will hold it for maybe four or five years. On the other side of that plateau, production will begin slowly moving down. By 2020, we should be headed in a downward direction for oil output in the world each year instead of an upward direction, as we are today”.

That prediction in 2010 appears to be transpiring today.

“And at around 2015, we will be unable to produce the incremental barrel in the global system. So a tightness of supply will begin to be felt,” Maxwell warned Forbes. “Let’s say in 2013, we may produce 1 percent more oil than we did the year before and then if we have a demand growth of 1¼ percent in 2013, we’ll be very slightly tightening the system. The difference between supply and demand is not going to be very much at first. It would not normally cause a big rise in price. On the other hand, in 2014, that tightness begins to grow and it is now a trend. By 2015 perhaps we’re only able to produce 0.50 percent more with about 1.25 percent higher demand, so that we’re 0.75 percent short.”

The next global recession, though, is likely to begin as oil prices bottom out further, potentially forcing many oil companies to virtually shut down production, facing the prospect of further write-downs and bankruptcies that could make the 2008 sub-prime mortgage crisis look a like a walk in the park.”

– See more at: http://www.middleeasteye.net/columns/iran-deal-about-staving-coming-oil-shock-1366649799#sthash.yTne8Z31.HkuJwopG.dpuf

Further Reading:

  • “Peak oil turned out to be a more complex phenomenon than theorists originally anticipated. It has not been experienced as a precise ‘moment’ or ‘event’, but rather as a dynamic interplay between various forces that have provoked some adaptive adjustments (such as demand destruction or increased investments) in incremental and multidimensional ways. There may never be a ‘shock moment’ of peak oil’s arrival; instead, peak oil may continue to play out as a gradual, unplanned transition to a new set of energy and consumption patterns that are less oil dependent, giving rise to social, economic, and ecological impacts that no one can predict with any certainty. The evolving interrelationship of geological, geopolitical, economic, cultural, and technological variables has continued to surprise analysts – both the ‘cornucopians’, who claim there is nothing to worry about, and the ‘doomsayers’, who think collapse is imminent, as well as everyone in between. No doubt there will be more twists still to come in this energy tale.But what seems clear is that the consequences of peak oil are not going away. Whether the next twist arrives in the form of a new war or financial crisis, a new technology, a bursting shale bubble, or perhaps a radical cultural shift away from fossil fuels in response to climatic instability, intellectual integrity demands that analysts continue to revise viewpoints asfurther evidence continues to arrive. This issue is too important to be governed by ideology.”
    6 page academic paper on the economics of oil: The New Economics of Oil: Alexander, S. 2014 Melbourne Sustainability Issues paper No. 2, Melbourne Sustainable Society Institute http://bit.ly/1HXWhsj
  • In a new book (March 2014), former oil geologist and government adviser on renewable energy, Dr. Jeremy Leggett, identifies five “global systemic risks directly connected to energy” which, he says, together “threaten capital markets and hence the global economy” in a way that could trigger a global crash sometime between 2015 and 2020. http://bit.ly/1HXWQmb
  • The Energy Policy paper “Global oil risks in the early 21st century”, previously referenced in my submissions to Long Term Plans earlier in the year:
    The combination of increasingly difficult-to-extract conventional oil combined with depleting super-giant and giant oil fields, some of which have been producing for 7 decades, has led the International Energy Agency (IEA) to declare in late 2010 that the peak of conventional oil production occurred in 2006 (IEA, 2010). Conventional crude oil makes up the largest share of all liquids commonly counted as “oil” and refers to reservoirs that primarily allow oil to be recovered as a free-flowing dark to light-colored liquid (Speight, 2007). The peak of conventional oil production is an important turning point for the world energy system because many difficult questions remain unanswered. For instance: how long will conventional oil production stay on its current production plateau? Can unconventional oil production make up for the decline of conventional oil? What are the consequences to the world economy when overall oil production declines, as it eventually must? What are the steps businesses and governments can take now to prepare? In this paper we pay particular attention to oil for several reasons. First, most alternative energy sources are not replacements for oil. Many of these alternatives (wind, solar, geothermal, etc.) produce electricity— not liquid fuel. Consequently the world transportation fleet is at high risk of suffering from oil price shocks and oil shortages as conventional oil production declines. Though substitute liquid fuel production, like coal-to-liquids, will increase over the next two or three decades, it is not clear that it can completely make up for the decline of oil production. Second, oil contributes the largest share to the total primary energy supply, approximately 34%. Changes to its price and availability will have worldwide impact especially because alternative sources currently contribute so little to the world energy system (IEA, 2010).Oil is particularly important because of its unique role in the global energy system and the global economy. Oil supplies over 90% of the energy for world transportation (Sorrell et al., 2009). Its energy density and portability have allowed many other systems, from mineral extraction to deep-sea fishing (two sectors particularly dependent on diesel fuel but sectors by no means unique in their dependence on oil), to operate on a global scale. Oil is also the lynchpin of the remainder of the energy system. Without it, mining coal and uranium, drilling for natural gas and even manufacturing and distributing alternative energy systems like solar panels would be significantly more difficult and expensive. Thus, oil could be considered an “enabling” resource.

    Oil enables us to obtain all the other resources required to run our modern civilization.

    Peak oil is the result of a complex set of forces that includes geology, reservoir physics, economics, government policies and politics.”


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Nine Reasons Why Low Oil Prices May “Morph” Into Something Much Worse

An explanation for continuing depressed commodity prices from an energy perspective from”our finite world”:

“We are running short of options for fixing our low commodity price problem.

The ideal solution to our low commodity price problem would be to find substitutes that are cheap enough, and could increase in quantity rapidly enough, to power the economy to economic growth. “Cheap enough” would probably mean approximately $20 barrel for a liquid oil substitute. The price would need to be correspondingly inexpensive for other energy products. Cheap and abundant energy products are needed because oil consumption and energy consumption are highly correlated. If prices are not low, consumers cannot afford them. The economy would react as it does to inefficiency.

See Figure 12. World GDP in 2010$ (from USDA) compared to World Consumption of Energy (from BP Statistical Review of World Energy 2014)

These substitutes would also need to be non-polluting, so that pollution workarounds do not add to costs. These substitutes would need to work in existing vehicles and machinery, so that we do not have to deal with the high cost of transition to new equipment.

Clearly, none of the potential substitutes we are looking at today come anywhere close to meeting cost and scalability requirements. Wind and solar PV can only built on top of our existing fossil fuel system. All evidence is that they raise total costs, adding to our “Increased Inefficiency” problem, rather than fixing it.

Other solutions to our current problems seem to be debt based. If we look at recent past history, the story seems to be something such as the following:

Besides adopting QE starting in 2008, governments also ramped up their spending (and debt) during the 2008-2011 period. This spending included road building, which increased the demand for commodities directly, and unemployment insurance payments, which indirectly increased the demand for commodities by giving jobless people money, which they used for food and transportation. China also ramped up its use of debt in the 2008-2009 period, building more factories and homes. The combination of QE, China’s debt, and government debt brought oil prices back up by 2011, although not to as high a level as in 2008 (Figure 7).

More recently, governments have slowed their growth in spending (and debt), realizing that they are reaching maximum prudent debt levels. China has slowed its debt growth, as pollution from coal has become an increasing problem, and as the need for new homes and new factories has become saturated. Its debt ratios are also becoming very high.

QE continues to be used by some countries, but its benefit seems to be waning, as interest rates are already as low as they can go, and as central banks buy up an increasing share of debt that might be used for loan collateral. The credit generated by QE has allowed questionable investments since the required rate of return on investments funded by low interest rate debt is so low. Some of this debt simply recirculates within the financial system, propping up stock prices and land prices. Some of it has gone toward stock buy-backs. Virtually none of it has added to commodity demand.

What we really need is more high wage jobs. Unfortunately, these jobs need to be supported by the availability of large amounts of very inexpensive energy. It is the lack of inexpensive energy, to match the $20 oil and very cheap coal upon which the economy has been built, that is causing our problems. We don’t really have a way to fix this.”

Our Finite World

Why are commodity prices, including oil prices, lagging? Ultimately, it comes back to the question, “Why isn’t the world economy making very many of the end products that use these commodities?” If workers were getting rich enough to buy new homes and cars, demand for these products would be raising the prices of commodities used to build and operate cars, including the price of oil. If governments were rich enough to build an increasing number of roads and more public housing, there would be demand for the commodities used to build roads and public housing.

It looks to me as though we are heading into a deflationary depression, because prices of commodities are falling below the cost of extraction. We need rapidly rising wages and debt if commodity prices are to rise back to 2011 levels or higher. This isn’t happening. Instead, Janet Yellen is talking about raising interest…

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