Understanding the Energy Conundrum

Published conjointly by INSURGE INTELLIGENCE of Nafeez Ahmed and Medium  this beautiful contribution of Jonathan Rutherford explores the fundamental driver of global economic malaise: not debt; not banks; but a protracted, slow-burn crisis of ‘net energy decline.’ It is in the fifth contribution to a symposium, ‘Pathways to the Post-Carbon Economy’. We republish few excerpts in the hope that doing so will disseminate further what is said. It is in a way like the short version of the original article that is all about to discern some clear and realistic understanding of the energy conundrum. 

The MENA region petrodollar economies are best advised to enter into the dialogue and find their own way of a future that is being premised before our very eyes.  In the meantime, it is perhaps of importance to start by a good grasp of what follows.

Realistic Understanding of the Energy Conundrum

Energy and GDP Growth

Axiom 1: As the biophysical economists have shown global economic growth is closely correlated with growth in energy consumption.

Axiom 2: Economic growth depends not just on increases in gross energy consumption and energy efficiency, but the availability of net energy. Net energy can be defined as the energy left over after subtracting the energy used to attain energy — i.e. the energy used during the process of extraction, harvesting and transportation of energy. Net energy is critical because it alone powers the non-energy sectors of the global economy.

Insight: An important implication is that net energy can be in decline, even while gross primary energy supply is constant or even increasing.

Prospects for Gross Energy Consumption

Over the last decade, world primary energy consumption grew at an average annual rate of 1.8 percent. It’s important to note, however, as Jean- Jancovici shows, that in per-capita terms the rate of energy growth has significantly slowed since the 1980s, increasing at an average annual rate of 0.4% since that time, compared to 1.2% in the century prior. This is mainly due to the slowing growth in world oil supply, since the two oil shocks in the 1970s.

There are strong reasons for thinking that the rate of increase in gross energy availability will slow further in coming decades. Recently a peer reviewed paper estimated the maximum rate at which humanity could exploit all ultimately recoverable fossil fuel resources. It found that depending on assumptions, the peak in all fossil fuels would be reached somewhere between 2025–2050 (a finding that aligns with several other studies see i.e Maggio and Cacciola 2012; Laherrere, 2015).

This is highly significant because today fossil fuels make up about 86% of global primary energy use — a figure that, notwithstanding all global efforts to date, has barely changed in three decades. This surprising early peak estimate is substantially associated with the recent radical down-scaling of estimated economically and technically recoverable coal reserves.

The situation for oil is particularly critical, especially given that it is by far the world’s major source of liquid fuel, powering 95% of all transport. A recent HSBC report found that, already today, somewhere between 60–80% of conventional oil fields are in terminal decline. It estimated that by 2040 the world would need to find four Saudi Arabia’s (the largest oil supplier) worth of additional oil just to maintain current rates of supply and more than double that to meet 2040 projected demand.

And yet, as the same report showed, new oil discoveries have been in long term decline — lately reaching record lows notwithstanding record investments between 2001–2014. Moreover, new discoveries are invariably smaller fields with more rapid peak and decline rates. The recent boom in US tight oil — a bubble fueled by low interest rates and record oil industry debts — has been responsible for most additional supply since the peak in conventional oil in 2005, but is likely to be in terminal decline within the next 5–10 years, if it has not already peaked.

All this, as Nafeez Ahmed has argued, is generating the conditions within the next few years (once the current oil glut has been drawn down) for an oil supply crunch and price spike that has the potential to send the debt-ridden global economy into a bigger and better global financial crisis tailspin. It may well be a seminal event that future historians look back as marking the beginning of the end for the oil age.

An alternative currently fashionable view is that peak oil will be effectively trumped by a near-term voluntary decline in oil demand (so called ‘peak demand’), mainly due to the predicted rise of electric vehicles. One reason (among several), however, to be skeptical of such forecasts is that currently there is absolutely no evidence that oil demand is in decline — on the contrary, it continues to increase every year, and since the oil price drop in 2014, at an accelerating rate.

When peak oil does arrive, there are likely to be powerful incentives to implement coal-to-liquids or gas-to-liquids but, apart from the huge logistical and infrastructure problems involved, a move in this direction will only accelerate the near-term peaking of coal and gas supply, especially given the energetic inefficiencies involved in fuel conversion. Peak oil will also likely incentivise the acceleration towards electrification of transport and renewable energy, to which I will now turn.

Given peak fossil fuels, the prospects for increasing, or even just maintaining, gross energy depends heavily on how fast renewable energy and nuclear power can be scaled up. Nuclear energy currently accounts for 4.5% of energy supply, but globally is in decline and there are good reasons for thinking that it will not — and should not —play a major role in the future energy mix (see i.e Our Renewable Future, Heinberg & Findlay, 2016, p132–135).

In 2016, all forms of renewable electricity (i.e. excluding bio-fuel) accounted for about 10% of global energy consumption in 2016, but a large portion of this was hydroelectricity, which has limited potential for expansion. Wind, Solar PV and Concentrated Solar Power (CSP) are generally agreed to be the major renewable technologies capable of a large increase in capacity but, notwithstanding rapid growth in recent years, in 2016 they still accounted for just 2.2% of world primary energy consumption.

Insight: In recent years many ‘green-growth’ reports have been published with optimistic renewable energy forecasts — one even claiming that renewables could supply all world energy (not just electricity) by 2050. But, it should be recognised that this would require a very dramatic increase in the rate of growth in renewable capacity.

In the last six years, new investment (including government, private sector etc) in all forms of renewable energy has leveled off at around the $300 billion a year. Heinberg and Finlay (p.123) estimate that this rate of investment would have to multiplied by more than a factor of ten and continued each year for several decades, if renewable energy was to meet current global energy demand, let alone the projected doubling of demand in most mainstream energy scenarios.

In other words, it would require an upfront annual investment of US$3 trillion a year (and more over the entire life cycle). By comparison, in 2014 the IEA estimated that global investment for all energy supply (i.e fossil fuels and renewables etc) in 2035 would be US $2 trillion per year. In addition, if fossil fuel capacity is to be phased out entirely by 2050, it would require much premature scrapping of existing capital — depriving investors of making full returns on their capital — which can be expected to trigger fierce resistance from large sections, if not the entire, transnational capitalist class.

Currently both oil and gas supply, if not coal, are growing much faster than all renewables, at least in absolute if not percentage terms. No wonder that the most ambitious IPCC emission reduction scenarios assume continued large scale use of fossil fuels through to 2050, and rely instead on highly uncertain and problematic ‘net emission’ technologies (i.e Carbon Capture and Storage, massive planting of trees etc).

Based on current trends, Minqi Li’s recent energy forecast predicts that the growth of renewable energy will, at best, offset the inevitable decline in fossil fuel energy over coming decades. He forecasts that a peak in gross global energy supply (including fossil fuels and renewables) will be reached by about 2050.

This of course does not include the very real possibility of serious energy ‘bottlenecks,’ resulting, for example, from the peak in oil — for which no government is adequately preparing — and with no alternative liquid fuel source, on the scale required, readily available.

The Net Energy Equation

The foregoing has just been about gross energy, but as mentioned above, the real prospects for the growth-industrial economy depend on net energy, which alone fuels the non-energy sectors of the economy. This is where the picture gets really challenging.

With regards to fossil fuels, EROI is on a downward trajectory. The current estimate (in 2014) for global oil & gas is that EROI is about 18:1. And while it’s true that technological innovation can improve the efficiency of oil extraction, in general this is being overwhelmed by the increasing global reliance on lower EROI unconventional oil & gas sources — a trend which will continue from now until the end of the fossil fuel age.

Read more on the original publication.