The end of the Oil Age, as we knew it

Dr Louis Arnoux
43 min readAug 17, 2017

Part 3 of Looking down the barrel — the Tooth Fairy & the Dragon-King

This is our fifth GB post on the global demand for something else. Our two previous posts cast light on two “thermodynamic elephants” roaming in the “globalised industrial world room”, the GIW — the loss of access to bioenergy and the loss of access to oil. We characterised the second elephant as being in fact a Dragon-King, the Oil Fizzle Dragon-King (OFDK), that is, a very high probability abrupt process of very high impact that nonetheless almost no one saw coming because they were blinded by their beliefs, prejudices and short term interests. We are now going to look more in depth down the barrel, into the fizzling out, that is, the oil dynamics that triggered OFDK, as this will give us insight as to what may be coming next and how best to address OFDK. Most importantly, OFDK heralds the end of fiat currencies and an explosion of the demand for cryptocurrencies anchored in sound thermodynamics.

The Oil Fizzle Dragon-King in brief

Figure 1 — This is not a Black Swan

Earlier we summarily defined Dragon-Kings by contrast with the better-known Black Swans. The latter “live” at the tail end of probability distributions; that is, they do not occur very often but when they do they have high impacts, e.g. a stock exchange crash.

In turn, Dragon-Kings have a very high probability of occurrence; that is, they should be obvious and everyone should expect and see them coming. But they don’t, because, in short, they don’t look. People sleepwalk into them and suffer the consequences — and in the main they do despite warnings, alerts, begging even to, at the very least, open one eye…

Figure 1 summarises the matter concerning OFDK. The horizontal axis presents a simplified distribution of the oil price differential to the mean on a yearly basis. The 1947 to 2011 mean price was €34.3 per barrel. The values recorded are the number of times the price differed from the mean to greater or lesser extents for a range of price difference brackets (less than €20 difference, difference between €20 to €40, etc.). The vertical axis records the frequency of such occurrences for the various price differential brackets on the horizontal axis. The blue line is the trend line for the distribution of oil price differences to the long-term mean for the 1985–2014 period.

Occasionally, large price differences do occur, say over €60/bbl or even €80/bbl difference to the mean, that is prices in the order of €100/bbl or more. This area is where Black Swans occur, e.g. as happened around 2008. Since 2014 we are in a wholly other kind of situation, one where the price differential to the mean is trending towards what it more frequently is, below €40/bbl — except that the ultimate differential is not above but below the mean. In other words, we are not in a situation where, as some expect, prices end up reverting to the €34.3 per barrel mean or close to it, but instead we are in the highly probable situation, that should have been anticipated but remained unexpected, where relative to the mean, that prices now trend toward zero. As we outlined it in the previous post, the reason being that there is no longer enough residual net energy per average barrel to generate much economic activity from it — declining activity per barrel, declining price, regardless of what it costs to the oil industry to extract it, transport it, refine it and distribute the end-products…

As Figure 1 summarises, there is much more to OFDK than just the net energy fizzling out of the barrel. The fizzling out is what triggers a chain of consequences, falling domino-like, big enough to crash the whole of the globalised industrial world as we know it, the GIW, in very short order. Or in other words, OFDK is now the chief reason for the global demand for something else that we began to examine in the previous posts, aka paradigm change.

Oil as you (probably) don’t know it

In very limited amount various forms of oil or bitumen have been in use since the oldest antiquity, extracted from natural seepages. The oil industry began very modestly in 1745 in Pechelbronn, northern Alsace, France (with a first refinery built in 1857) and in Uktha, Russia, followed with developments in Baku in 1846.[1] The next significant oil resource development took place in the USA with Edwin Drake’s 21 metres well in Titusville, Pennsylvania, in 1858. Which was followed with the first great wave of oil drilling and the emergence of an oil-based industry. However, this remained a rather modest affair until the Spindletop Lucas 1, a 347 metres deep well in Beaumont, Texas, in 1901. This well flowed at an initial rate of close to 100,000 barrels/day, more than the total of all producing wells in the USA at the time. Lucas 1 marked the birth of the global oil industry. However, it was only after the mid 1950s that global oil production overtook coal and that concerns progressively emerged as to the ultimate size of what had become a major global resource, critical to ongoing world development. Ever since, debates have raged about “how much was left” and what came to be known as “Peak Oil”. However, nearly all assessments mix wide varieties of oil from heavy oils, through sour and sweet crudes, and all the way to light tight oils (LTOs) and condensates lumping them together indiscriminately, often referred to as C + C, standing for conventional crude and condensates. Statistics also list liquids that in addition to C + C also include natural gas plant liquids (NGPL), other biofuels, coal to liquids (CTL), natural gas to liquids (GTL), kerogen (oil shale), and refinery gains. These other liquids account for about 16% of total liquids.

Such “apples and oranges” mixes are oblivious that the quality of what is included as “oil” has changed substantially over the nearly three centuries of oil’s industrial exploitation and that the globalised industrial world (GIW) does not run on oil but on a wide variety of transport fuels. Between oil in situ and the transport fuels used within the GIW stands a globalised oil industry (OI) that has grown enormously complex since its 1745 modest beginnings and most importantly an industry that on its own is now a dominant energy user globally.

Even more to the point, it takes energy to obtain energy, and much more specifically, it takes oil to get oil and from this oil to deliver oil-derived fuels. The entire GIW is built on oil, understood as being a primary energy resource, that is, a resource that can be used to deliver a positive net energy flow to the GIW, in addition to the energy that the OI requires to deliver such a flow. It is in that sense and that sense only that oil can be deemed a primary energy resource.

Marion King Hubbert is internationally famous for the paper he presented in 1956 to the American Petroleum Institute in which he anticipated the peaking of US oil production in 1970.[2] It is from his original work that the notion of “Peak Oil” emerged. However, Hubbert was well aware that “counting barrels” was not good enough. In a famous reply to David Nissen (of Exxon) he had stressed the primary energy status of oil, the need to think in terms of the thermodynamics of oil-based fuel production and the consequential limit to the industry’s life:

So long as oil is used as a source of energy, when the energy cost of recovering a barrel of oil becomes greater than the energy content of the oil, production will cease no matter what the monetary price may be. During the last decade we have very large increases in the monetary price of oil. This has stimulated an accelerated program of exploratory drilling and a slightly increased rate of discovery, but the discoveries per foot of exploratory drilling have continuously declined from an initial rate of about 200 barrels per foot to a present rate of only 8 barrels per foot.[3]

Put bluntly, unlike diamonds, oil is mined not because it is pretty to look at but to deliver net energy to the GIW in order to fuel its economic activity: only sound thermodynamic approaches focusing on net energy delivered per barrel can provide accurate assessments of the depletion process. However, Hubbert’s stern warning was never heeded.

Since Hubbert’s time the replenishment of reserves through new discoveries has become a critical matter. The world has moved a long way from the easy 21 metres depth of Drake’s well to the challenges of the so-called “pre-salt” fields, that is, oil lying under large salt deposits, some 300km off-shore Brazil or Angola, at ocean’s depth of over 2km and rock depths of some 2.7km, or to the challenges of the off-shore Arctic. Discoveries peaked during the 1960s. As we noted in the previous post, they are now very low and far from compensating the rapid depletion of existing reserves. According to the 2016 BP Statistical Review of World Energy, in 2015 proven reserves declined by 2.4Gbbl while the GIW used some 33.5Gbbl of all liquids (except from biomass, coal and natural gas derivatives). In other words, presently the OI is not replenishing the stock of crude it draws from to deliver net energy to the GIW.

Quality of supply is also relentlessly declining. Refineries are being re-engineered to process both heavier, metallically contaminated, and high sulphur crude and also increasingly lighter fractions, such as eminently variable light tight oils (LTOs) also known as “Shale Oil”. In this respect, let’s recall that only some 40% of all hydrocarbons, that is, typically conventional sweet crude, contain enough gross energy to be used to deliver net energy to the GIW in the form of transport fuels. This is not the case concerning heavy oil, tar sans, or LTOs. In short, “oil”, in the broadest sense of the word, is increasingly displaying typical symptoms of latter stage depletion.

Furthermore, we must also recall that almost 60% of the world’s oil production comes from less than 1% of its fields, the Giant oil fields. Most Giants currently in production are getting very old. The main field of the Kingdom of Saudi Arabia (KSA), Ghawar, is a perfect example. It is almost 70 years old. It was originally estimated to be a 70 Giga barrel (70Gbbl) field. However, it has already produced 85Gbbl. It is probably nearing the end of its production life. Once Giants like Ghawar are gone there will be no way to replace them. In 2007, Fredrik Robelius presented an extensive study of the Giants.[4] Robelius concluded that the Giants would enter into catastrophic decline soon, which we conservatively translate to probably well before 2030.

Once Giants go into decline there are no other fields to substitute for them, regardless of the price one may be prepared to pay. In spite of all the current talk of shale oil, tar sands, bitumen and more, none of these resources can replace the approximately 40 million barrels per day (40Mb/day) coming from that handful of Giant fields. Robelius’ work highlights that there is just no way to obtain such a large amount of oil from other smaller fields at the rate required by the decline of the Giants. In other words, in its present state, the OI is bound to go into catastrophic decline right along with the Giants — hence the importance of figuring out the state of depletion more reliably than merely “counting barrels”hence also our focus in this series of posts on the urgent need for something else enabling us to address unprecedented emerging challenges.

From the outset, we have stressed the primary character of oil — in the present state of the GIW access to net energy from oil is required to access all other forms of energy, including so-called “renewables”. Let’s specify this further. For its ongoing functioning and growth, the GIW relies on over 1.3 billion land transport vehicles, plus a global merchant fleet of over 1.75 billion dead weight tonnes (dwt), plus over 362,000 active aircrafts. So, instead of Peak Oil concerns expressed in undifferentiated crude volume terms, assessments of ultimately recoverable oil reserves (URR), years of production based on ratios of reserve to annual production (R/P), or even (unavoidably rough) estimates of energy returns on energy investments (EROEI or EROI), what is far more critical is the actual status of transport fuel supplies. In other words, after 272 years of exploitation of oil resources, where does the OI stands in terms of its ability to continue delivering the energy the GIW requires for transport over and above what the OI uses for its own processes? Put colloquially, what the GIW requires is a “fuel gauge” telling unambiguously how far it is from “running on empty.”

The PPS “iceberg”

Figure 2 — The global “Oil Barrel”

Figure 2 summarises the best estimate GB has of the transport fuel relevant oil resource. View it as one gigantic “barrel”. This refers to conventional sweet crude, with degrees API between 30o and 45o. All other forms of oil are of no significant interest for the production of transport fuels (TFs) in that they require energy coming from another source in order to deliver TFs to the GIW — they are not self-sustaining sources of primary energy for the production of TFs.

Figure 2 indicates that in 2017 we are past the mid-point of the depletion S curve. This curve could be determined with enough accuracy, based on empirical data, precisely because we are beyond the mid point.

However, this is far from enough to tell us where the GIW stands in terms of depletion. Recall figure 5 in our fourth post, about an impending Oil Pearl Harbor. We stressed that over a third of the gross energy in the barrel is not available to produce work. This is due to the second principle of thermodynamics. This amount invariably ends up as waste heat, regardless of the details of the technology used to produce work. This means that on Figure 2, the total “ceiling” of up to 2.4 trillion barrels will never be reached. Or more accurately what vitally matters to us is not that ceiling but the actual ceiling in terms of net energy that can be used in the form of transport fuels. Converted back into barrel equivalents, this means that the real ceiling is much lower than that shown on Figure 2, that is, probably not that far from where we presently stand in 2017.

Figure 3 — Introducing the PPS

To progress towards a reliable fuel gauge, we need to consider the oil world as it really is and not in the fuzzy and foggy ways of pundits and journalists. Figure 3 presents a summary of the actual oil world. Let’s take a rapid tour.

Within the Earth-System at varying depths are found geological formations holding oil and/or natural gas (bottom left corner of Figure 3). These are neither resources nor reserves per se. They become so only if we have the knowledge, transformed into technologies, themselves transformed into equipment, not only to extract them but also to transform them into end-products of use to the GIW (top part of Figure 3).

In Drake’s time a gang of largely unskilled workers sufficed to dig 21 metres deep and the resulting oil was not significantly processed. Nowadays, an enormous industrial complex is required, the Petroleum Production System (PPS), that occupies the best part of Figure 3.

The PPS comprises three main parts: the Oil Exploration and Production sub-system, focused on wellheads (bottom left of Figure 3 above the oil fields); the Oil Industry proper, focused on oil transport, refining, storage, and distribution of end-products (mid-part of Figure 3); and a third sub-system that most people ignore but that is essential, the Oil Industry Support sub-system (OS, bottom right hand corner of Figure 3). In this perspective, let’s clarify that what we call the GIW is the whole of the industrial world less the PPS (top of Figure 3).

The green arrows on Figure 3 represent the key energy flows involved in the whole system. What matters to the GIW (i.e. to all of us not in the PPS) is the top left green arrow, the net energy delivered by the PPS to the GIW, ED. What happens within the PPS, the GIW could not care less so long as ED is sufficient to the GIW’s requirements and so long as the gross energy contained in the extracted oil (EG, large bottom left arrow) is large enough to encompass the energy used by the PPS (ETP) plus ED plus the waste heat generated overall (orange arrows on Figure 3).

Figure 4 — Four arrows for a complex system

It ensues that the whole enormously complex system comprising PPP, GIW and oil reserves, can be summarised energy-wise by way of four arrows representing key energy flows, plus waste heat finally released to the Earth-System, as depicted on Figure 4. It is this approach that enabled initially THG, then us, to construct what we think of as a fuel gauge, to assess how much ED is left to fuel the GIW.

Figure 5 — An enormous “iceberg”

To appreciate fully the meaning of that fuel gauge, we must first highlight the structure of the PPS. As portrayed on Figure 5 the PPS comprises an enormous part that remains generally unseen, like the submerged part of an iceberg. The Oil Industry is the “visible” part (OI, comprising oil platforms, refineries, petrol stations, etc.). The Oil Industry Support sub-system (OS) is the “submerged” part. The OS produces all the goods and services required by the OI to operate. Without it the OI could not operate, in fact there would not be any OI. As symbolised by icons on Figure 3, the OS encompasses a wide variety of businesses and organisations, civil and military, manufacturers of equipment, metal and coal mines, legal, financial, medical services, transport means and much more. The PPS equals the OI plus the OS. Overall we estimate that the PPS involves very roughly some 2 billion people globally who, beside the energy directly used in the PPS, also use an enormous amount of energy. As depletion progresses resources of declining quality have to be used by the PPS that are increasingly difficult to access, transport and process, all requiring relentlessly more energy and all necessitating a relentless growth of both OI and OS.

A Transport fuels gauge

Overall, the system depicted on Figure 4 can be thought of as a business, the PPS, having as sole client the GIW. The PPS drains oil reserves that it is presently not able to replenish in order to deliver its sole product, ED, to the GIW. The question is: how long can this last? The ancillary questions are: how much time have we got to set in place something else and what this something else may be?

GB won’t detail here how our fuel gauge is constructed. This is detailed in the paper we referred to in our previous post. Let’s simply stress again that our gauge is an index built from available data concerning the whole of the PPS that tracks the relentless increase of the total amount of energy, ETP, used by the PPS out of the gross energy, EG, contained in an average barrel of sweet crude.[5]

Figure 6 — Gauging the end

EG is well known. It’s represented by the pale blue horizontal bar on Figure 6, i.e. 6.2 GJ/bbl (Gigajoule per barrel). The whole of the PPS plus GIW have to fit below that bar.

We then have to deduct the unavoidable losses as dictated by the second principle of thermodynamics. This is represented by the dark blue bar on Figure 6, i.e. 4.4 GJ/bbl. In addition we have to take into account inefficiencies beyond the minimal amount of waste heat imposed by the second principle. This is represented by the red bar, i.e. 3.85GJ/bbl. Overall the OI operates rather efficiently. Most of those additional inefficiencies between dark blue and red bars are at the end-users’ level (e.g. badly tuned car engines, traffic jams, worn out vehicles, etc.).

The red bar is our absolute ceiling. What’s below it is the total amount of work that is actually available per barrel. This amount has to be shared between the PPS and the GIW. Obviously the PPS takes its cut first, ETP, since this is the energy it requires to deliver ED to the GIW. So ED is what’s left after the PPS has used its cut. The orange curve traces the relentless growth of the PPS’ cut (ETP) as resource depletion progresses. Basically, unavoidably, each new barrel extracted requires a bigger amount of energy than all the preceding barrels. So, ED is what’s left between the orange curve and the red bar. It cannot but shrink relentlessly.

Figure 6, is the diagrammatic version of the summary we presented on figure 5 of our fourth post. Our fuel gauge does not purport to encompass all the energy flows within the PPS. We see it as a first approximation, a conservative one. We have shown earlier that we have enough indications that the depletion process is already at an advanced stage (e.g. Giant oil fields are known to be close to catastrophic decline). It is therefore prudent to adopt a conservative stance.

As shown on Figure 6, our ETP index indicates that the mid point was reached around 2012. This is the point when the PPS used half the gross energy in an average barrel. This is also the point when the amount of economic activity that could be generated from net energy (ED) delivered to the GIW became less than the oil price the OI required to operate at the profitability levels that prevailed until this point. As we explained in our previous post (figure 6), the system reacted with a lag and 2 years later oil prices did crash.

Recall that in 1900 about 61% of the gross energy in a barrel was reaching end user as net energy. In 1916 it was about 7%. Our fuel gauge indicates that by 2022 it will be about nil. This concerns the average barrel. All barrels are not created equal. Some still come from reserves that require less energy to deliver ED than the average while others come from sources that do require much more energy than the average. The latter is also the case for all non-conventional sources, tar sands, heavy crude, LTOs, etc.

To put it colloquially, the parts of the OI that retain access to reserves that are better than the average in term of ETP costs, will be the last “to put the key under the door mat” (places like Kuwait come to mind, if they manage to survive politically). Conversely, the parts that are worse to far worse than the average can be expected to get into deeper and deeper trouble well before 2022.

Reading tea leaves and writings on walls

The above perspective will look excessively grim to many readers. How could it be that bad when “mainstream” experts from the industry claim decades of increasing oil supply ahead of us and staunchly deny “Peak Oil”? How could the end of the Oil Age be so abrupt? In Post 4, Figure 7, we hinted that a growing number of industry players and financial analysts have begun to reach similar conclusions, albeit often in partial and somewhat “foggy” ways. We have already mentioned the sharp work of Robelius on the fate of Giant oil fields. The Appendix at the end of this post provides numerous further examples of analysts from financial or industry sources reading tea leaves and writings on walls about the end of the Oil Age, as we know it. We could add many more to the above snippets. Almost each week brings more to the fore.

A recent paper by Michael Dittmar of the Institute of Particle Physics, Zurich, Switzerland, adds more substance than the above limited perspectives and largely recoups our analysis. Dittmar’s approach belongs to the Export-Land class of oil modelling pioneered by Dallas geologist Jeffrey Brown. It considers the individual situation and dynamics of oil producing, exporting and consuming countries to arrive at a synthetic global perspective. Dittmar’s timing for the end of the Oil Age is similar to ours. He concludes as follows:

“To put it mildly, the obtained modelled results for future regional oil consumption in almost every part of the planet disagree strongly with essentially all economic-growth-based scenarios like the one from the IEA in their latest WEO 2016 report. Such scenarios assume ongoing growth and would have us believe that the oil required to support such growth will be discovered and produced. It won’t. Even if the models presented in Part I and Part II of this analysis are not perfect, they do reflect the Limits to Growth that are at this point becoming more obvious by the day. By 2020 it may be clear to almost everyone that the current oil-based way of life in the developed and developing countries has begun a terminal decline. Whenever that terminal decline begins, one can only hope that people around the globe will be able to learn, quickly, how to live with less and less oil every year, and how to avoid war and other forms of violence, as we travel the path to a future with less and less oil…”[6]

The beginning of the end

We have stressed it. Our fuel gauge is conservative. In our view, as shown on Figure 6, if maximum efficiencies were achieved throughout the PPS and the GIW, the critical time horizon would be about 2030. Some parts of the OI may manage to drag production slightly further but, in the absence of “something else” able to change the “game”, the PPS as we know it is nearing its end. In other words, less than 15 years remain to address the challenge at the core of OFDK.

Let’s clarify this situation further. At the point in time when the energy cost of the PPS, ETP, equals the maximum available work per average barrel, that is, at the latest around 2030, there is no net energy left to the GIW to generate any economic activity whatsoever from that barrel. Since the whole point of the PPS is to enable the GIW to generate economic activity out of the net energy delivered to it by the PPS, at this critical point, an average barrel of oil has no residual value — no net energy means no residual economic activity generated, hence no value for the oil that could be produced upstream within the PPS; hence the PPS disintegrates and valueless oil stays underground, “stranded”, regardless of the potential climate change related policies that some advocate.

Figure 7 — Slowly annihilating one’s client

Figure 7 depicts nearly the full span of the Oil Age. Not many people will have ever thought of it this way. It explains why OFDK remains largely unseen. Most analysts and decision-makers focus on ever growing aggregate oil production — a production that until recently has been closely correlated with global GDP growth (correlation factor, R2 = 0.90). This is the blue curve on Figure 7. If we now deduct unavoidable waste heat that no one can use, not the PPS and not the GIW, we obtain the green curve. If we then consider the increasing fraction of the net energy from oil used by the PPS and deduct it we obtain the orange curve. Coming back to our simple model of the PPS having as sole client the GIW, it then becomes clear that to operate, the PPS has been using more and more energy in order to supply its client, the GIW. All was well till about the mid-1970s both PPS and GIW grew more or less apace. However, since the mid-1970s the PPS has been progressively starving the GIW of net energy. The PPS did not have any other choice. Given the choices made long ago concerning transport technologies (internal combustion and/or gas turbines), in order to continue delivering net energy, the PPS had to starve its own sole client…

None of the above could transpire in global aggregate statistics that do not differentiate between PPS and GIW. With the PPS growing faster than the GIW was shrinking, until recently global GDP kept growing and all could appear OK. The global DGP was tracking along the growth of oil production, except that unseen by the pundits, less and less of the oil-derived energy was going to the GIW and more and more was retained by the PPS. This could not continue forever though. Came a point when the growth of the PPS could not compensate for the increasing strain felt by the GWI.

Figure 8 — An ominous trend

As Figure 8 shows, global GDP has been faltering since 2012, something unprecedented since the 1960s. This is likely to continue under OFDK impacts (correlation factor of the trendline, R2 = 0.99).[7]

While the main media presently talk of an “oil glut” that would be caused by an over-abundant oil supply, a number of analysts have come to consider the weakness of the demand… Once more, it should be obvious that a rapidly declining net energy per barrel entails a decline of the economic activity that can be generated per barrel and that eventually this manifests itself in aggregate demand and the global GDP.

Concerning the medium-term, to the 2022 and 2030 time horizons, the PPS does not have many other choices than to keep pumping. This is why, on Figure 7, we have called our 2016–2030 scenario the “Shadoks Scenario” in reference to the famous French cartoon series of the 1980s where the Shadoks were forever pumping for the sake of pumping because “Better to pump even if nothing happens than to risk something worse happening by not pumping”.

OFDK means that the Oil Age does not end when oil runs out. Instead it ends when net energy per average barrel fizzles out, which began to happen in 2102 and, by our estimates, at the very latest will be over by about 2030. This also means that oil is presently in the process of ceasing to be a primary energy source.

This situation does not mean that the OI is going to just “curl up and die.” There is plenty of evidence showing that, since 2012, the OI has entered into a process of self-cannibalisation that is typical of any mining industry approaching the end of its life and battling to survive. This involves reducing staff, trimming down costs, postponing maintenance, a large number of businesses going bankrupt or being acquired by others, acquiring at fire sale prices equipment or reserves disposed of by other members of the OI, pressuring members of the OS to bring its costs down, and building a new role for what is now becoming a vital component of the PPS, “debt-that-cannot-be-repaid”, a key factor that we will examine further in subsequent posts. Beyond self-cannibalisation are a number of moves that the PPS can make to attempt to survive, including a shift, already under way, towards natural gas as well as XTL developments (anything X to liquids, L — coal, natural gas, biomass, electricity from wind, solar, etc., to liquids). At the present stage though, none of these can save the PPS. All are still far too costly, lead times remain too long and efficiencies too low.

Even if our estimates turn out too conservative and the terminal phase of the Oil Age actually takes a bit longer, the empirical evidence we noted in our previous post and at the beginning of the present post, particularly concerning the fate of the Giant fields, support our conclusion that we are in this terminal phase. As we have seen earlier, a number of major PPS players and financial analysts have “read tea leaves and writings on walls”. Given the stakes, an error margin of plus or minus five years about the 15 years time horizon for the end of the Oil Age is irrelevant when developing an entirely new infrastructure energy industry globally in order to substitute for an existing one usually takes in the order of 50 years.[8] That is, our fuel gauge work casts a crude light on that urgent demand for something else that we begun to analyse in our earlier posts. Besides food supply systems, the PPS is the largest and most vital complex of industries in the world. Yet, irrespective of any considerations concerning global warming and the use of fossil fuels, the GIW simply cannot continue to depend on a PPS that is progressively starving it by absorbing nearly all the energy available from oil. This challenge is happening now and a great deal faster than any climate change threat.

However, this major demand for something else than the PPS as we know it does not mean that we can safely rush to conclusions and place all our bets on electric vehicles (EVs) — as many pundits now advocate. Presently the global EV fleet grows at a high rate (well over 50%/year) but still represents only some 0.1% of total 1.3 billion on road light duty vehicles (without forgetting trucks, sea and air transport where in the main EVs do not apply). Current enthusiasm for EVs must not detract from whole system replacement (WSR) challenges since, as we have just stressed the timeframe for WSR is typically in the order of 50 years. Beside the timeframe challenge, there is also the matter of energy storage. There is simply not enough Lithium for WSR on a global scale. So, while there is no doubt in our minds that EVs have a niche role to play, they cannot scale to WSR-size vis-à-vis the PPS, especially not over the timeframe for its disintegration.

To figure out where all of this leads us, it is important to realise that the OFDK challenge does not concern the PPS in any generic sense. Instead we face a dilemma. That is, on the one hand the PPS as we presently know it is no longer viable and may kill the GIW, on the other hand, oil-derived molecules have an energy density some 66 times greater than Li-based batteries and remain vital to the GIW — for the foreseeable future we need them no matter what, no oil-derived molecules, no GIW, and this concerns the fate of over 7 billion people. We can see here the outline of the demand for something else concerning the PPS and global transport. Within the 15 years timeframe, the demand is for one (or more) novel technology integration(s) that would use only existing, proven technologies (there is not time for anything much else, blue sky wise) to do better, much better than the PPS, not only in terms of producing transport fuels but also in terms of transacting exchanges along the corresponding value chains in ways that would eliminate the current awfully inefficient so-called “oil market” — which is where our provisional set of something else specs comes in. In fact, at GB, we have computed that doing such a thing is perfectly feasible and that it would reduce the energy requirement of a modified PPS by over 60%. It would also largely eliminate any global warming impacts the PPS may have. We will come back to this a few posts further down, as there are several other facets of OFDK that we must clarify first.

For now, let’s takeaway the conclusion that, the extremely short timeframe for the end of the Oil Age, hardly 15 years, places stringent constraints on the mounting but still largely unseen demand for something else. Addressing it must enable retaining sustainably the use of oil-derived molecules and must also catalyse a speedy transformation of the PPS to achieve drastic reductions in its energy requirements within an amazingly short timeframe. Not only is this crucial for the GIW, but also is constitutes an unprecedented entrepreneurial opportunity.

The second take away conclusion is that under the financial impact of OFDK on both the PPS and GIW we cannot see how fiat currencies as we know them could survive much beyond 2022. Currency-wise, the world needs something else that is anchored in sound thermodynamics. As OFDK unfolds, we can expect a huge demand for cryptocurrencies able to scale past the size of fiat ones. However, as we observed in Post 2 — Elephants in the cryptocurrency room, none of the present cryptocurrencies can yet scale to that demand.

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If you have followed our posts to this point, a reminder:

This series focuses on the emerging global demand for something else than what we currently have concerning energy and all other aspects of living in the globalised industrial world (the GIW). Most importantly it concerns money, the end of fiat currencies over the next few years and their unavoidable replacement with cryptocurrencies backed with sustainable energy supplies.

The posts gradually explain the rationale for the solutions that we are developing to address that global demand for something else. A subsequent series will explain our solutions themselves and our entire approach to creating a sustainable and scalable energy backed cryptocurrency.

GB’s next post will focus on OFDK’s causes and internal dynamics in order to refine further our something else specs concerning new means of access to energy, new class of networking and new means of transacting value.

GB’s previous posts in the demand for something else series are:

Post 1: Hello, this is GB…

Post 2: Elephants in the cryptocurrency room — current fiat currencies have no future; however, cryptocurrencies can’t scale to the global demand for something else; in particular they require far too much energy and are overlaid on top of an Internet also requiring far too much energy; and, like fiat currencies, they are disconnected from the sole reliable and necessary anchor of value into the thermodynamics of any social activity.

Post 3: Looking down the barrel — the Tooth Fairy and the Dragon-King; Part 1: Loss of access — humankind is rapidly losing access to all the sources of energy it depends on; the threats are dual, loss of access to bioenergy and loss of access to net energy in oil; those losses translate into loss of access to all other energy forms; Post 3 focuses on the loss of access to bioenergy; this loss will be complete by about 2030; this loss frames in stringent ways how to address the demand for something else.

Post 4: Looking down the barrel — Part 2 The threat of an Oil Pearl Harbor the oil price crash of late 2014 onwards marks the entry on the world scene of the Oil Fizzle Dragon-King (OFDK), a high probability, high impact process that almost no one saw coming; at the heart of OFDK is the rapid fizzling out of net energy from oil; net energy in the form of transport fuels is what enables the entire economic activity of the globalised industrial world (GIW); by about 2022 net energy per average barrel is expected to be about nil — zero net energy means zero value; in consequence oil prices are highly unlikely to ever recover durably; instead they are in the process of crashing to the floor — a kind of protracted Oil Pearl Harbor heralding the disintegration of the oil industry as we know it; which sets out the time frame for addressing the demand for something else.

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Appendix — Reading tea leaves and writings on walls about the end of the Oil Age

  • Ward, Karen, Zoe Knight, Nick Robins, Paul Spedding and Charanjit Singh. 2011. Energy in 2050 — Will fuel constraints thwart our growth projections? HSBC.

The authors explore the necessity of major changes ahead in response to oil and energy challenges: “Anyone who drives a car, heats a home, or runs a factory has every reason to be concerned about the strains on global energy resources in the next four decades. Either the world is going to deplete its supplies at an unacceptably fast rate — and overheat the planet in doing so — or it is going to have to make massive investments in energy efficiency, renewables and carbon capture. As things stand, the world simply doesn’t have the luxury of turning its back on nuclear power, despite the recent disaster in Japan. We follow up our World in 2050 report by arguing that the rise of emerging markets will impose new strains on energy supply. We conclude the world can grow and without excessive environmental damage — but it will need a change in human behaviour and massive collective government foresight.” To which GB says, really? When was the last time “government foresight” induced drastic change or when entire populations changed their behaviour out of their own wisdom? — except under sheer duress. Except under constraints of war or major catastrophe, people change by adopting radical innovations stemming from bold entrepreneurship.

  • Morgan, Tim. 2013. Perfect storm — Energy, finance and the end of growth. Tullett Prebon Group Ltd, financial brokers.

A rather explicit title. Dr Morgan’s analysis overlaps substantially with ours. He anticipated much of what happened since 2013.

  • Al-Hamad, Abdlatif and Verleger, Philip, Jr. 2016. Oil and the Global Economy — includes two papers: The Challenges Ahead for the Oil Producer and Consumer Countries in the Middle East and North Africa Region and Oil: An Ossified Industry. Occasional Paper №94, Group of Thirty, Washington, D.C.

Al-Hamad argues that structural and economic reforms are crucially important if states are to move away from undue reliance on oil, and to ensure sustainable growth and stability in the region; while Verleger argues that the world’s largest firms face huge challenges, from technological breakthroughs, to shifts in consumer preferences, to innovation, and that the business models used by the largest firms are out of step with the new economic and oil price reality. Verleger warns that much of the debt built up by oil majors in pursuit of their flawed strategies may never be repaid; if so, the defaults will cascade through the global financial system, with many negative effects.

  • Doshi, Viren, Clark, Andrew, del Maestro, Adrian. 2016. Oil and gas trends — Are you prepared for a future that limits fossil fuels? PriceWaterhouseCoopers.

The title is explicit. While the authors focus on carbon constraints related to policies to combat climate change, somewhat ironically they are nonetheless correct in concluding that much tighter constraints are in the making. In fact they are likely to occur much faster than they imagine as they are derived from the loss of access to all forms of carbon…

  • England, John W., 2016, Short of capital? Risk of underinvestment in oil and gas is amplified by competing cash priorities, Deloitte Center for Energy Solutions, Deloitte LLP.

Explores the dilemma affecting the oil industry as it struggles under OFDK in what we call a Big Mad Energy Scrambling mode (BigMES, that we will explore further in subsequent posts) and advises to plan for a capital-constrained future.

Regarding Deloitte’s above study, the Bank of England recently commented: “The embattled crude oil and natural gas industry worldwide has slashed capital spending to a point below the minimum required levels to replace reserves — replacement of proved reserves in the past constituted about 80 percent of the industry’s spending; however, the industry has slashed its capital spending by a total of about 50 percent in 2015 and 2016. According to Deloitte’s new study, this underinvestment will quickly deplete the future availability of reserves and production.”

  • England, John and Slaughter, Andrew. 2016. The crude downturn for exploration & production companies — One situation, diverse responses. Deloitte Center for Energy Solutions.

This study identified five options chosen by E&P companies… filing for bankruptcies (“Submit”), seeking aid from financial institutions (“Borrow”), venturing out to seize an opportunity or time the downturn (“Venture”), pulling financial levers to correct balance sheets (“Adjust”), and optimising operations (“Optimise”). In fact, from our point of view all options are variations of responses to OFDK in a BigMES mode. To date, most oil companies still struggle under one or more of these “options”.

  • Fustier, Kim, Gordon Gray, Christoffer Gundersen and Thomas Hilboldt. 2016. Global oil supply — Will mature field declines drive the next supply crunch? HSBC. This study echoes in part the work of Robelius. The question in its title is rhetorical.

The authors stress that: “near term productivity gains are temporarily masking a steady increase in mature field decline rates which could cut existing capacity by >40mbd (>42%) by 2040”. Although they misinterpret medium to long-term oil price prospects, they are correct in raising concerns about the likelihood of substantial supply issues in the medium-term.

  • Jefferson, Michael. 2016. A global energy assessment. WIREs Energy Environ 2016, 5:7–15. doi: 10.1002/wene.179.

Abstract: Against the background of IIASA’s massive (their word) ‘global energy assessment’ (GEA), this paper takes a closer look at the challenges posed by population growth, energy poverty, the fossil fuels and carbon storage, renewable energy, energy efficiency, natural catastrophes, and potential climatic change to offer a somber, although arguably more realistic, overview of what the future may hold than the GEA achieved.

Conclusion: “The World in the 21st Century is faced with huge challenges that go far beyond, but importantly include, energy challenges on the supply, access, and use sides. So severe are these challenges, mainly arising from the demands of a rapidly increasing human population on the Earth’s limited resources, that the future existence of large numbers of people may be threatened with extinction. In that sense, we may be observing the twilight of the Anthropocene (Human) Age. Energy transitions, as Vaclav Smil has constantly reminded us over the years, are protracted affairs. But as Julius Caesar wrote: ‘The unusual and the unknown make us either overconfident or overly fearful’. We should not assume either inexorable progress or unavoidable collapse.”

  • Stevens, Paul, 2016, International Oil Companies: The Death of the Old Business Model, Energy, Research Paper, Energy, Environment and Resources, Chatham House.

Another explicit title. Stevens demonstrates that the current oil industry model has no future.

Reviews recent reports by HSBC and European government scientists: “contrary to the commonplace narrative in the industry, even amidst the glut of unconventional oil and gas, the vast bulk of the world’s oil production has already peaked and is now in decline; while European government scientists show that the value of energy produced by oil has declined by half within just the first 15 years of the 21st century. The upshot? Welcome to a new age of permanent economic recession driven by ongoing dependence on dirty, expensive, difficult oil… unless we choose a fundamentally different path.”

Warns of supply concerns focusing essentially on the recent drop in exploration and production investments but fail to consider the ongoing decline in discoveries since the late 1940s.

Well known oil expert Berman debunks that the steep decline in breakeven prices are result of technology improvements. He stressed that: “sharply lower breakeven prices are 10 percent technology and 90 percent industry bust… Instead of celebrating lower breakeven oil prices, we should be lamenting lost future cash flows that an oil industry depression has wiped out.” In other words the decline is an effect of the BigMES and in particular the industry cannibalising itself in order to try and survive.

Reviews Wood Mackenzie’s analysis of the declining trends since the late 1940s only to try and reassure readers with fantasy hopes of an impossible rebound (in contrast with Robelius’ in-depth research work).

An article that illustrates the disconnect between investors and industry reality.

  • Brown James H., William R. Burnside, Ana D. Davidson, John P. Delong, William C. Dunn, Marcus J. Hamilton, Norman Mercado-Silva, Jeffrey C. Nekola, Jordan G. Okie, William H. Woodruff, and Wenyun Zuo. 2011. Energetic Limits to Economic Growth. BioScience 61: 19–26. doi:10.1525/bio.2011.61.1.7.

This paper contrasts with rather superficial main media articles on oil and energy. It highlights a number of fundamental aspects of energy and society, notably the pre-eminence of energy as a resource.

Abstract: The human population and economy have grown exponentially and now have impacts on climate, ecosystem processes, and biodiversity far exceeding those of any other species. Like all organisms, humans are subject to natural laws and are limited by energy and other resources. In this article, we use a macro-ecological approach to integrate perspectives of physics, ecology, and economics with an analysis of extensive global data to show how energy imposes fundamental constraints on economic growth and development. We demonstrate a positive scaling relationship between per capita energy use and per capita gross domestic product (GDP) both across nations and within nations over time. Other indicators of socioeconomic status and ecological impact are correlated with energy use and GDP. We estimate global energy consumption for alternative future scenarios of population growth and standards of living. Large amounts of energy will be required to fuel economic growth, increase standards of living, and lift developing nations out of poverty.

The prospect of drastic supply cuts in the order of several million barrels per day being low, in effect Goldman begins to read writings on some walls that prices are on a trend down and down…

An example of a growing number of articles contemplating some “peak” in oil demand in the medium to long-term, not realizing that the symptoms that they are mustering in the process have essentially to do with the BigMES that has been underway since at least 2014 in response to the impacts of OFDK.

This article attempts to review what happens when a major oil producing country is struck by the terminal decline of its key industry: there is no way out.

An example of a growing number of articles highlighting the need to focus on a weak and even declining demand for transport fuels.

  • Exxon Mobil Corporation, 2017, 2017 Outlook for Energy: A View to 2040, sourced from exxonmobil.com.

ExxonMobil, page 38, quoting IEA data, considers that over the 25 years between 2015 and 2040, some $11.25 trillion would have to be invested in exploration and production activities alone in order to attempt to alleviate an unavoidable drop from present conventional crude oil supply levels of approximately 85Mbbl/day down to approximately 18 Mbbl/day by 2040. Such a drop is roughly in line with our analysis. The difference of views between the likes of Exxon Mobil and us is that, for the thermodynamic reasons that we have analysed, we consider that no amount of investment can prevent such a drop.

  • Farrell, A. E. and Brandt, A. R. 2006. Risks of the oil transition. Environ. Res. Lett. 1 (2006) 014004 (6pp).

Abstract: The energy system is in the early stages of a transition from conventionally produced oil to a variety of substitutes, bringing economic, strategic, and environmental risks. We argue that these three challenges are inherently interconnected, and that as we act to manage one, we cannot avoid affecting our prospects in dealing with the others. We further argue that without appropriate policies, tradeoffs between these risks are likely to be made so as to allow increased environmental disruption in return for increased economic and energy security. Responsible solutions involve developing and deploying environmentally acceptable energy technologies (both supply and demand) rapidly enough to replace dwindling conventional oil production and meet growing demand for transportation while diversifying supply to improve energy security.

This brief article illustrates well the concerns raised by numerous parties about the grid management issues, risks of blackouts, that the emergence of EVs are bound to cause — an example of how BigMES responses to OFDK propagate to the entire non-oil energy supply part of the GIW.

An example of numerous articles raising concerns about future transport means.

  • Hughes, J. David. 2014. Drilling Deeper, A Reality Check on U.S. Government Forecasts for a Lasting Tight Oil & Shale Gas Boom. Post Carbon Institute.

Independent oil geologist Hughes develops a detailed critique of EIA forecast and shows that “tight oil production from major plays will peak before 2020. Barring major new discoveries on the scale of the Bakken or Eagle Ford, production will be far below the EIA’s forecast by 2040… These findings have clear implications for medium and long term supply, and hence current domestic and foreign policy discussions, which generally assume decades of U.S. oil and gas abundance”.

A further example of concerns about future transport means.

  • Lewis, Mark C. 2014. Toil for oil spells danger for majors — Unsustainable dynamics mean oil majors need to become “energy majors”. Kepler Cheuvreux, a leading independent European financial services company. Sourced from: https://www.keplercheuvreux.com/.

While not apparently aware of the thermodynamic challenges affecting the oil industry, Lewis, nonetheless identifies danger ahead and the need for the industry to transform if it is to avoid disappearing: “If we are right, the implications would be momentous: it would mean that the oil industry faces the risk of stranded assets not only under a scenario of falling oil prices brought about by the structurally lower demand entailed by a future tightening of climate policy, but also under a scenario of rising oil prices brought about by increasingly constrained supply… we think the conclusion for the majors is clear: their business model is already being eroded by rising capital intensity and diminishing returns, while in future they will face much greater competition from renewable energy in the road-transportation market. At the same time, the threat of tighter environmental and climate legislation at a global, regional, and national level is always looming in the background and pressure for more concerted climate-policy coordination will in our view only increase in future. As a result, we think they should already start directing much more of their future capital investments to renewable projects. This would enable them to become the energy majors of the future rather than ending up as the oil majors of the past”.

Another example of concerns about a prospects of declining demand for oil as large countries enter BigMES Mode and search for alternative solutions, including a shift to EVs.

  • Murphy, D.J., Hall, C.A.S., Adjusting the economy to the new energy realities of the second half of the age of oil. Ecol. Model. (2011), doi:10.1016/j.ecolmodel.2011.06.022.

The authors in our view wrongly expect future high prices resulting from “the depletion of conventional, and hence cheap, crude oil supplies (i.e. peak oil)” and that “increasing the supply of oil in the future would require exploiting lower quality resources (i.e. expensive)”; however they rightly conclude that: “the economic growth of the past 40 years is unlikely to continue unless there is some remarkable change in how we manage our economy.”

Analyses the major weaknesses and repeated failures of the oil industry’s forecasting.

A short article that further illustrates concerns that rather than focusing exclusively on an over abundance of oil supply one should pay attention on the reasons for a weak and even declining demand for transport fuels.

A simple quote summarises Ryle’s perspective: “When oil prices collapsed in late 2014, we may have witnessed the end of the oil age… oil’s time as a dominant resource may be over. And it would be especially ironic if it was Saudi Arabia that tipped the balance.”

Another indication that the global industry is losing the means of ensuring ongoing supplies. The article fail to acknowledge that the overall decline dates in fact from the late 1940s.

This article illustrates examples of the kind of business contraction and self-cannibalisation that occur when a mining industry enters terminal decline, which is now the case for oil under the BigMES precipitated by OFDK.

This articles echoes the concerns raised by Robelius, Exxon, Tverberg and many others that regardless of the amounts invested in exploration annual additions to oil reserves have been declining since the late 1940s, are now well below yearly oil consumption levels, and are unlikely to revert back to the much higher levels experienced in earlier decades. In short the industry is rapidly depleting its stocks and not replenishing them.

St Angelo shows that Saudi Arabia’s oil exports have substantially declined since the 1980s and that is foreign exchange reserves are now in steep fall.

St Angelo highlights the steep decline of the US oil industry’s profitability since 2011, i.e. well before the oil crash of late 2014.

The following quote summarises the perspective of actuary Gail Tverberg: “Most people assume that oil prices, and for that matter other energy prices, will rise as we reach limits. This isn’t really the way the system works; oil prices can be expected to fall too low, as we reach limits. Thus, we should not be surprised if the OPEC/Russia agreement to limit oil extraction falls apart, and oil prices fall further. This is the way the ‘end’ is reached, not through high prices… Oil prices have been too low for producers since at least mid-2014. It is possible to hide a problem with low prices with increasing debt for a few years, but not indefinitely. The longer the low-price scenario continues, the more likely a collapse in production is. Also, the tendency of international organizations of government to collapse… takes a few years to manifest itself, as does the tendency for civil unrest within oil exporters… Once an incorrect understanding of our energy problem becomes firmly entrenched, it becomes very difficult for leaders to understand the real problem.”

Tverberg stresses that in her analysis current “green” alternatives can’t fully substitute to oil and other fossil resources, and by a wide margin: “The ‘Wind and Solar Will Save Us’ story is based on a long list of misunderstandings and apples to oranges comparisons. Somehow, people seem to believe that our economy of 7.5 billion people can get along with a very short list of energy supplies. This short list will not include fossil fuels. Some would exclude nuclear, as well… we find ourselves with a short list of types of energy… hydroelectric, geothermal, wood, wood waste… liquid fuels from plants, Wind, and Solar… Unfortunately, a transition to such a short list of fuels can’t really work… In my opinion, the time has come to move away from believing that everything that is called ‘renewable’ is helpful to the system. We now have real information on how expensive wind and solar are, when indirect costs are included. Unfortunately, in the real world, high-cost is ultimately a deal killer, because wages don’t rise at the same time. We need to understand where we really are, not live in a fairy tale world produced by politicians who would like us to believe that the situation is under control.”

This article highlights the tight links between terrorism, wars in the MENA region and increasing stresses within the global oil industry.

Yet further concerns about weak demand versus abundant supply…

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Endnotes

[1] Pechelbronn was the birthplace in 1926 of now transnational oilfield services company Schlumberger.

[2] King Hubbert, M.: Nuclear Energy and the Fossil Fuels, Shell Development Company, Exploration and Production Research Division, Houston, TX, Publication №95, 1956. http://www.energybulletin.net/node/13630 (1956). Hubbert, Marion King, 1979, Hubbert Estimates from 1956 to 1974 of US Oil and Gas, in Grenon, Michel, Methods and Models for Assessing Energy Resources, First IIASA Conference on energy resources, May 20–21, 1975, Pergamon Press.

[3] Hubbert, Marion King. Note to Ivanhoe, L. F (Buz). Undated. Available from: http://www.oilcrisis.com/Hubbert/to_Nissen.htm, undated, probably from the 1970s.

[4] Robelius Frederik. Giant Oil Fields -The Highway to Oil. Giant Oil Fields and their Importance for Future Oil Production. Uppsala, Sweden: Acta Universitatis Upsaliensis. Digital Comprehensive Summaries of Uppsala Dissertations from the Faculty of Science and Technology. Uppsala; 2007. ISBN 978–91–554–6823–1.

[5] Concerning oil production and prices, this fuel gauge matches empirical data with correlation coefficients above 0.9, an overall error margin ±4.5% and has enabled THG to anticipate the Oil Pearl Harbor-like price crash of late 2014 by over 6 months when most pundits expected ongoing high prices — since then prices have remained below or on the MASOP curve, as dictated by the ETP fuel gauge (see figure 6 of our fourth post).

[6] Dittmar, Michael, 2016, Regional Oil Extraction and Consumption: A Simple Production Model for the Next 35 years Part I, Biophys Econ Resour Qual (2016)1:7 DOI 10.1007/s41247–016–0007–7; Dittmar, Michael, 2017, A Regional Oil Extraction and Consumption Model. Part II: Predicting the declines in regional oil consumption, arXiv:1708.03150v1 [physics.soc-ph] 10 Aug 2017.

[7] We use current dollars statistics and no purchasing power parity ones (PPP) because oil is sill traded essentially in current dollars.

[8] Grübler, Arthur. The rise and fall of infrastructures: dynamics of evolution and technological change in transport. Heidelberg. Physica-Verlag. 1990. Grübler, Arthur, Time for a change: on the pattern of diffusion of innovation. In: Ausubel, Jesse H, Langford, H. Dale. (eds.) Technological Trajectories and the Human Environment. Washington, D.C. National Academy Press; 1997. p. 14–32.

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Dr Louis Arnoux

Louis is the catalyst and main author for the Fourth Transition Initiative and Cool Planet Foundation.