Scarcity and shortage

Several things make it hard to talk about Peak Oil these days. At the bright end of the Reasons To Be Cheerful About Oil spectrum, there are no zombies or Mad Max gangs on our streets. Some Peak Oilers were die-hard doomsters, so the absence of A-Grade harbingers of apocalypse surely proves that it has not, will not, indeed cannot happen.

Also, there are no shortages of fuel (or at least very few) to be seen. Commonsense decrees that Peak Oil and queues at petrol (gas) stations will go hand in hand.

But that’s just it. Scarcity and shortage are very two different phenomena. They exist at opposite ends of the supply chain.

Scarcity is when the supply of something is limited and no amount of money, technology or prayer will increase the flow rate.

Shortages happen when demand exceeds supply at the point of delivery. You might get a temporary shortage of fuel locally if a tanker driver oversleeps. Here in the UK, we’ve only had prolonged national shortages on two or three occasions since WW2: first back in the days of the OPEC oil embargoes and, more recently, when farmers and truckers blockaded refineries to protest high diesel prices in 2000.

Theory says that scarcity of crude oil shouldn’t lead to actual shortages. That’s because if the supply of crude gets tight, the markets send price signals up the delivery chain. So pump prices go up and in turn demand goes down. It’s that bloody Invisible Hand again.

Plateau

Except that right now, oil is getting scarcer. Conventional crude production is stuck on a plateau so that the short-lived gains from fracking in the US only make up for declines elsewhere. Total world liquids production keeps inching up but a lot of those liquids can’t do the same job as crude and you get the impression the IEA would count the coffee in the rigger’s flasks if it could in order to present an optimistic figure.

OK, what about demand? Well, the basic driver of demand – registered motor vehicles – is going up in leaps and bounds. Having taken 120 years to reach one billion combustion-engined road vehicles worldwide in 2010, we’re on track to reach two billion in under 10 years from now.

By rights, the price of oil should be ratcheting up rapidly so that all that demand will be satisfied without shortages arising at the point of delivery. Instead it is stuck sullenly around $50 a barrel. That’s barely enough to cover the cost of extracting a lot of the remaining conventional crude, let alone very high-cost resources like tight (fracked) oil or tar sand.

Sacrifices

The oil companies (and by extension everyone in the industrial world) are now caught between a rock and a hard place. The experiment with very high oil prices that lasted from 2011 to 2014 showed that consumers will cut back on fuel use rather than make sacrifices elsewhere in their budgets.

But without those high prices, oil producers can’t profitably extract what oil is available. They’re trapped. They can’t satisfy the all demand for $40 oil but if the price gets better from their point of view (i.e. higher) the demand goes away.

Conventional wisdom says that consumers will try to keep driving until their eyes bleed – partly because they have to to get to work and shop for essentials. But that’s no longer true.

People with sufficient money (which usually means capacity to take on debt) can upgrade to more fuel-efficient cars. Those who don’t have the means have to find ways to use less.

That is easier than people think. The average private car spends between 95% and 98% of its time unoccupied and stationary. Unless the vehicle is only used for essential trips – say commuting to work – there’s almost always a way to cut down on mileage. After all, the owner is only increasing their non-use of the vehicle by perhaps 1%.

But from the oil company’s angle, a 1% increase in vehicle non-use translates into a 20%-50% drop in that consumer’s demand for petroleum. You can see that in the 25%-30% falls in oil consumption in Greece and Italy, which have been at the sharp end of enforced conservation since the onset of the eurozone crisis in 2008.

Millennials

This has got huge potential to carry on for a long time. Certainly longer than most oil producers can live with. Millennials are generally happy to take their own sweet time getting a driving licence and even then it’s not a given that they’ll immediately enter the car market. Ride-sharing among commuters has barely got started and it could increase rapidly if real incomes keep falling and fuel costs rise.

Boiled down to brass tacks, the problem is this. Crude oil is scarce and it’s getting scarcer. The reason there are no queues at the pumps is that scarce crude creates a shortage of affordability. That is because the alternative ‘high tech’ petroleum sources, like tight oil, kill their producers unless the global oil price rises to the point of driving marginal consumers out of the demand pool.

Imagining that people will overcome their inability to afford cheap petroleum by switching to electric or hydrogen cars is on par with Marie Antoinette’s brainwave about getting the starving poor to eat cake instead of bread. (Yeah, yeah, I know that’s a mistranslation of cake. But that’s to say that even la Reine Marie was smarter than today’s economists and policymakers. And look what happened to her).

Finally, this is much, much bigger than something that’s just an awkward predicament for the automobile industry and its consumers. Oil is the master resource. It is essential for extracting other fuels and feeding the world. It built the bulk of today’s civilisation’s infrastructure (more than half of which didn’t exist yet when I was born in the mid 1950s).

Oil scarcity will heavily constrain humanity’s ability to unhook itself from oil dependency. For a detailed analysis of how that works in the macroeconomic context, read Oops! Low oil prices are related to a debt bubble on Gail Tverberg’s Our Finite World site.

And if you start seeing queues for fuel in more OECD countries, give a little smile. As bad as that will be, at least it will be a sign that the energy crisis has reached the point where people need to stop pretending and start dealing with it.

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Broke and broken

Sooner or later people will have to start listening to the folk who keep Britain moving.

Civil engineers tend to be a phlegmatic bunch. Design it. Build it. Move on to the next project. But in recent years they’ve been getting more and more vocal about the widening gap between the imaginary future peddled by our leaders and the one that’s probably really in store for us.

The Institution of Civil Engineers interviewed hundreds of professionals in industry and government for a new report, State of the Nation: Infrastructure 2014. The consensus is that our power, water and transport infrastructure is starting to crumble from to neglect and the effects of severe weather. The media immediately jumped on the weather angle (cue pointless arguments about the reality of climate change), rather ignoring the ICE’s other point, which is that what we actually face is a shortage of capital.

The Guardian reported the ICE’s vice-president Keith Clark saying:

‘It will become more difficult to run all services in all conditions: it will not always be cost-effective. Funding will always be constrained as their are only two sources-tax and user charging – both ultimately falling on the consumer. Clearly there are some difficult decisions ahead…what networks can and should operated 24/7 in what conditions.’

The engineers also pointed to the narrowing gap between energy supply and demand. As Gail Tverberg tirelessly explains on her blog, we live in a system where energy shortages lead to capital shortages and vice versa. Power politics will influence where the consequences bite will first and hardest internationally but the ICE’s blunt language shows it doesn’t believe Britain will be able to stave them off for very long.

Not so long ago, the ICE put out a report on Britain’s prospects for breaking its dependence on fossil fuels before they become so scarce and costly to extract that we can’t run our economy on them. The short answer is that we cannot do it in time. As you’d expect, no government policies were visibly harmed by the report and since then the story has all been about fracking saving the day. Too bad that fracking’s great white hope is on schedule to turn to dust in a year two, at around the same time as conventional oil and natural gas liquids begin to decline inexorably.

So, even with the best will in the world and the most judicious applications of scarce capital to the maintenance of  existing infrastructure, the ICE believes we’re eventually going to have to put up with intermittent power, water and transportation. Quite how that verdict squares with our leaders’ persistent determination to pour billions into vanity projects like HS2 or a third runway at Heathrow or Gatwick is anyone’s guess.

Taking the fracking Mickey

Fog, mist or hazy darkness. An energy system that has passed its sell-by date and is slowly evanescing into darkness.

You have to hand it to Dr Chris Cornelius. Calling his offshore fracking business Nebula Resources betrays a wry sense of humour if ever there was one.

Of Nebula’s plans to explore for tight gas in the Irish Sea, Dr Cornelius said:

“We’re very comfortable that the resource is there and the numbers are absolutely ginormous. Is any of that exploitable? That’s the billion dollar question and we won’t know that for many years.”

Quadranting has to assume that the resource being referred to is gas rather than the credulity of investors. After all, Wall Street has successfully strip-mined the latter in the US. Fortunes have been made in the shale gas business. But all too often it was from flipping leases and selling derivatives based on nebulous expectations, rather than selling gas at a profit.

Of course, a big rise in gas prices could easily turn tight offshore gas into a viable game for the frackers. Good for them. But, if you’re a customer, that’s the economics of ‘let them eat cake’.

In space, nebulae form when suns burn through virtually all their fuel. These stars finally eject their outer layers in a bright shell of gas, which lasts a few ten thousands of years before diffusing into the surrounding vastness. In another five billion years, it will happen to our own sun.

Right now, it’s a pretty close analogy to the experience of the oil and gas industry. As it burns through the last of the cheap reserves, fracking and arc tic exploration become the last, bright, hope of holding everything together.

But going after ever harder, deeper and more difficult resources is really just the final flourish of a burnt-out system. Dr Cornelius is clearly a smart guy. If he’d wanted to suggest that offshore fracking is really is hot stuff after all, he could easily have named his company Corona (after the superheated plasma surrounding the sun).

But as it’s called Nebula, I guess we’re being invited to draw our own conclusions.

Maths and realities

Overlying the human aspect of the Grangemouth closure is this indefinable feeling that the news story is being very closely choreographed.

All along, the national news angle has been that the threat to the petrochemical operation and refinery is rooted in union intransigence.

It’s that hoary old news media trajectory, which says that stick-in-the-mud unions prefer to shoot themselves in the foot by refusing to make reasonable concessions. If only they would roll over, goes the story, new investment will pour in and magically turn around the fortunes of the plant.

Yesterday, the BBC’s main online news story on Grangemouth ran to 1,600 words and mentioned unions 16 times. Only right at the end of the story did it mention the fact that the site as a whole is losing £120 million a year.

According to the BBC report, the petrochemical side of the business is losing £50 million a year, or £62,500 per full-time employee. That leaves the refinery losing £70 million a year, or £122,000 per full time employee.

Spread over the entire workforce, which includes around 2,000 contractors, the site’s owner is losing around £750 per week per worker.

Political

You have to ask what kind of concessions would be required from 800 petrochemical workers in order to turn around losses on that scale. And in any case the basis of the union dispute, according to the BBC story, seems to be more political (it’s linked to the Falkirk vote-rigging row) than industrial.

What’s not been mentioned in any of the coverage I’ve seen is the fact that the UK simply has more oil refining capacity than it can use.

Last year’s stories about the US becoming an exporter of refined petroleum products largely failed to mention how the situation arose.

The States used to import large volumes of petrol from the UK. That was until high oil prices drove domestic US consumption down to the point where local refineries could happily meet demand there.

Slump in fuel demand

So the US market has gone. British petrol and diesel demand has slumped too. Developing countries have a fast-growing appetite for road fuels – but as part of their development they’ve built their own refineries and petrochemical plants.

Now Grangemouth’s owner says it needs to invest £300 million (£90,000 per worker) in the petrochemical plant to reconfigure it to profitably handle a dwindling supply of low-ethane crude from the North Sea.

In the oil business of 20 years ago, £300 million would have been a sprat to catch a mackerel (more like a basking shark). In today’s world, where OECD fuel demand and economic buying power is fast fading in the face of $100 crude, such an investment easily starts to look like good money being thrown after bad.

From a purely business perspective, closing the plant now rather than later has to make mathematical sense under the circumstances.

I realise that that argument ignores the devastating economic and social impact that closure would have on a wide area around the plants. However, that prospect doesn’t explain why the unions, rather than the global economics of unaffordable oil, are being put in the frame for the threat to Grangemouth.

Myth

Scrapping a facility that puts fuel in our cars and plastics for our gadgets goes entirely against the grain of our core modern myth of progress. Oil is the magic nourishment that, when used to feed human ingenuity, delivers a bright new today and an almost impossibly brighter and shinier tomorrow.

Don’t tell us it’s not true! Shutting an oil refinery is tantamount to admitting that God doesn’t love us any more.

We must have sinned. Or rather, since we ourselves still believe deeply in Progress and Man’s Predestined Journey to the Stars, someone else must have sinned.

Hence the immediate, almost unconscious, finger-pointing at the unions. They are every media outlet’s shorthand for Luddite, dog-in-the-manger, anti-progressivism. Why, they are so backward-looking that they don’t want to give up their final salary pensions! (Note that many of the Daily Telegraph readers shaking with fury over this red threat to bonnie Scotland are themselves retired on final salary, index linked pensions).

Taxpayer subsidy

Unless there really is some way of reconfiguring Grangemouth to operate at a profit, any deal to keep it going will probably involve some kind of hidden taxpayer subsidy to the owners. From a social perspective, the benefit to region and country from a subsidy might be greater than the costs of letting the plant close. It would also be a sweet deal for the company and the politicians.

If the plant is ‘saved’ for a few more years of operation, the owners will get public cash to mitigate their losses while the politicians take the credit for keeping it going. If it closes, it will be all the unions’ fault – even though it currently looks as though they will accept the terms of the ‘rescue package’.

Funny isn’t it? The myth of progress is increasingly used to browbeat and scapegoat people into believing that it is their own fault when they have to accept the smelly end of the stick.

And yet the idea persists (especially in media like the BBC) that the future will be wonderful because humans can and will overcome anything reality throws at us, including a self-destructing financial system, insufficient natural resources and a rapidly-destabilising climate.

Well I guess if things don’t work out as promised, we can always find a union to blame it on.

Peak oilers right about Saudi Arabian production

Kjell Aleklett of Uppsala University had to politely endure a calculated put-down from Dr Fatih Birol, chief economist of the International Energy Agency when Aleklett dared to question the IEA’s compulsively gung ho projections for oil production during a presentation in Stockholm this week.

This weekend, Aleklett is presenting his analysis of the IEA’s World Energy Outlook 2012 at the annual conference of the Association for the Study of Peak Oil and Gas, in Texas.

There’s a lot of good stuff in the article linked above but the following quote just nicely puts the IEA’s position over the years into context:

Eight years ago, when I began to criticise the WEO projections, WEO-2004 predicted oil production in Saudi Arabia of 22.5 Mb/d in 2025. Now WEO-2012 paints a completely different picture. In 2011 Saudi oil production was 11.1 Mb/d and the IEA now predicts this will decline to 10.6 Mb/d by 2020 before growing to 10.8 Mb/d in 2025! Then production will continue to grow to reach 12.3 Mb/d by 2035. In the criticism that I advanced in 2004 I said that 22.5 Mb/d for Saudi Arabia in 2025 was completely unrealistic. The IEA’s current prediction of 10.8 Mb/d in 2025 shows that I was correct.

They’ve halved their projection for Saudi output in just eight years but still they tell us that everything will be just hunky dory for at least the next 25. Yeah right.

We won’t run out of oil in my lifetime or my kids’. But we’re already running short of the flow rates we need to keep our economy from stagnating.

And that’s a situation that no amount of friendly bluffing from the good Dr Birol can disguise for much longer.

No friends for electric cars

That fizzling noise in the marketing-o-sphere is the sound of something terminal happening to Electric Cars 1.0.

By now, the UK’s roads were supposed to be filling rapidly with the silent swooshing of a juiced EV market. Instead, the EV scene is flatter than an iPhone 4 battery at 2.30 in the afternoon.

Leasing companies are lining up to tell their customers not to waste any more time on mains powered motors.

“Slow burning” is how the kindest commentators in the fleet car sector are describing battery-powered cars’ potential. After all, what is the commercial point of acquiring them for fleet use?

On a coalface-to-wheel basis, EVs emit more CO2 than dozens of more-capable combustion models. Functionally, they’re pants. In return for costing a small fortune to buy, their pathetic range is designed to keep a driver on tenterhooks most of the way from London to (nearly) Swindon – or Newbury if it’s cold, dark and raining.

Cargo cult

QuadRanting has always averred that current EVs are simply a cargo cult response to the withdrawal of the cheap liquid fossil fuel that enabled the Age of Happy Motoring; facsimiles of real cars.

Driving an EV is not a happy thing to do. The EV-makers’ latest throw of the dice – the Tesla S – is said to be good for 300 miles on a charge. But so what? Buying the additional 140 miles-worth of batteries adds £15,000 to the price of the 160-mile base model, which already costs thirty grand.

You could buy an equally roomy, year-old, ex-demo Passat or A4 with 12,000 miles on the clock for that £15k and then, if you wished, spend the £30k you’d saved by avoiding the Tesla on approximately 230,000 miles worth of diesel.

OK, so the Tesla’s a luxury car but, again, so what? If the answer to EVs’ shortcomings is to make toys for rich boys at the meagre rate of 12,000 units a year, that’s the biggest ‘sod off’ to the herd since Marie Antoinette urged starving commoners to switch to cake.

Trick question

So, if EVs are neither cheap nor cheerful nor plentiful nor environmentally sound, what are they for? It turns out that the answer to that question is the same as the response the trick question on QI: nobody knows.

The makers, who are being sucked into a monster whirlpool of overcapacity and disappearing demand for combustion cars in Europe, can barely give their pricey, heavy, range-crippled EVs away.

Nissan has sold 12,000 Leafs so far instead of the 44,000 p.a. it was counting on. It is planning to sell a ‘budget’ version of the car next year at a £4k discount to the current tag of £30,000 after we taxpayers chip in for the £5k Government subsidy per car.

Look dearie, if I wanted a budget Nissan that’d only do 70 miles before needing a good rest, I’d buy a knackered £950 Micra with two gallons of petrol in its tank.

Plain stupid

That’s the circle that EVs in their current form cannot square. If the proles are being priced out of conventional cars by the global debt implosion and peak oil, it’s plain stupid to try offering them super-pricey, barely functional EVs instead.

The future of mass vehicle ownership is in 2-wheelers and microlight cars – a shift the manufacturers are resisting as furiously as you’d expect of corporations with billions tied up in the wrong products.

Even so, I reckon we’ll see the first Ford scooters and GM microlight prototypes before 2020. Of course, this will require a complete rethink of road rules and infrastructure design to accommodate millions of lightweights among the legacy of conventional cars.

Ironically, by then Europe will have shovelled trillions of euros into perpetuating the current, doomed automotive infrastructure as it tries to stimulate its way out of GD2. It’s going to be interesting.

La fine della strada

Ugo Bardi reports a summary of a September press release from the Italian “Unione Petrolifera” in “Italy implodes” on his Cassandra’s Legacy blog

Automotive fuels have shown the following trends: gasoline has seen a reduction of 18.2% in consumption while diesel fuel has seen a 15.6% reduction, both compared with September 2011. Summed together, the consumption of the two fuels was 16.3% lower than in Sept 2011. In this month, the sales of new cars have shown a contraction of 25.5% compared with Sept 2011. The first nine months of 2012 have seen a contraction of 20.4% in the sales of new cars.

Those falls in the space of a year are breathtaking. Fuel and auto sales are falling in the UK too, but nowhere near so far or so fast.

The difference is due more to Quantitative Easing than to fundamental economic differences. Outside the euro, and with some of its own oil remaining  the UK can delay the day of reckoning but it cannot avoid its appointment with destiny (in the form of declining ERoEI) for ever.

Italy is the UK writ larger and sooner, and Spain and France are not far behind. Three of Europe’s ‘big five’ auto economies are undergoing unprecedented contraction.

This collapse will expose how deeply the ‘real’ (i.e manufacturing and trading) economies of these countries, as well as the UK and Germany, rely on auto making, trading and servicing.

Some of the commenters on Bardi’s blog entry view what’s happening as simply a cyclical economic downturn. One even speculates that the ‘savings’ Italians are making from eschewing cars and gasoline will flow into other domestically-made goods and services.

Energy slaves

Savings? There are no meaningful savings when the average European person requires the daily services of 200 ‘energy slaves’ – 95% of which come from fossil fuels.

What’s happening in Italy (and Spain and France) is deadly serious. It is the weakening and incipient collapse of a main pillar of the real economy.

Moreover, it is a positive feed back loop. If the economy does not burn oil, it doesn’t generate the real purchasing power to buy and drive autos. Without auto activity, the country burns less oil.

The simple answer would be to pump cheaper oil into Italy and Europe’s other struggling economies. But the end of ‘easy’ oil and declining net exports have blocked that escape route.

For once, Senna the Soothsayer from the old BBC sitcom Up Pompeii would be on the money with her catchphrase “Woe, woe and thrice woe.”

All the same, I’ll give the last word to a 21st century Cassandra. No, not Bardi but Massimo de Carlo of the “Mondo Elettrico” blog:

I have no words. An abyss, an abyss, an abyss. No movement because there is no work. No consumption because there is no money. Oil is not used because it is not there. Stop.