Wall Street chanelling Charlie Hall

Greetings Peaksters

      I presume you all know who Prof Charlie Hall is, He's the guy who came up with the concept of looking at the energy situation through the lens of EROI (Energy returned on energy Invested).  He's been pounding the table for about 40 years trying to get someone to notice.

       I just came across a report put out by a wall street firm called Tullett Prebon .  According to wikipedia they are is "one of the largest inter-dealer  money brokers in the world.  They operate as an intermediary in wholesale financial markets

facilitating the trading activities of their clients, in particular commercial and investment banks".  So they are a player.

  These guys put together a report called   Perfect Storm   (PDF warning) .   And they  really hit it out of the park on a number of issues:.

  Its about 80 pages,  but a lot of those pages are pretty pictures -interestingly ; pictures ancient civilizations that have collapsed.  (!!)   

    Lets just say, its not your ordinary wall street report.

  Lets' go to the bottom line (spoiler alert!).  

They say EROI is dropping like a stone.  In 1990 it was about 40:1, by 2010 it dropped to 17:1, and they project a further slide to 11:1 in 2020, and 8:1 by 2030.      This is not the end of "civilization" (which Hall puts somewhere between 3 and 5:1) ,  but it is pretty much the end of high energy, consumer world we are used to. 

   Bottom Line:

 "...the economy, as we have known it  for more than two centuries, will cease

to be viable at some point within the next ten or so years unless, of course,  some way is found to reverse the trend."

But lets back up a minute.  Lets walk this through step by step.

  Looking at money/debt/ energy nexus, they say:

         

"The appreciation of the true nature of money as a tokenisation of energy also enables us to put debt into its proper context. Fundamentally, debt can be defined as ‘a claim on future money’. However, since we have seen that money is a tokenisation of energy, it becomes apparent that debt really amounts to ‘a claim on future energy’. Our ability, or otherwise, to meet existing debt commitments depends upon whether the real (energy) economy of the future will be big enough to make this possible.

"Therefore, the viability (or otherwise) of today’s massively-indebted economies depends upon the outlook for energy supply. If one chooses to believe that the exponential expansion in energy use that has powered the growth of the economy (and the global

population) since the dawn of the industrial age can continue into the future, debts may be serviceable and repayable out of the economic (for which read ‘energy’) enlargement of the future. If such enlargement cannot be relied upon, however, then the debt burden can only be regarded as unsustainable."

They then take a close look at energy, and the Hubbert curve, noting that critical question is not how much reserves there are, but what the EROI of those reserves are.  If they are too hard to get out of the ground,they will remain in the ground.  If the "cost" a lot of energy to remove, energy will be taken away from the rst of the economy to get them.  Energy we now use for MP3 players, SUV's, food and health care.

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EROI

"An absolute decline in available energy volumes, serious though that would be, is not the immediate concern. The truly critical issue is the relationship between energy extracted and the amount of energy consumed in the extraction process. Known as the Energy Return on Energy Invested (EROEI), this is the ‘killer equation’ where the viability of the economy is concerned. Put very simply, there is no point whatsoever in producing 100 barrels of oil (or its equivalent in other forms of energy) if 100 barrels (or more) are consumed in the extraction process.

"Below an EROEI of about 15:1, however, the “profit” element falls off a cliff, because there is an exponential increase in the “cost” component, which rises from 4.8% at an EROEI of 20:1 to 6.3% at 15:1, 9.1% at 10:1 and 16.7% at 5:1. This process of “cost”

escalation is illustrated in fig. 5.11, which shows that energy cost is yet another addition to the collection of exponential progressions (including population, energy consumption and economic output) which dominate the world as we know it. This time, however, the exponential progression is a negative one."

Then they have nice discussion of the EROI of various fuels

"Oil discoveries in the 1930s offered EROIs well in excess of 100:1, whereas this ratio had declined to about 30:1 by the 1970s, and few discoveries today offer an EROI of much better than 10:1. I

"Newer energy sources display a  similarly disturbing trend. At first glance, the claimed EROEIs for onshore wind power look pretty reasonable at perhaps 17:1. However, the returns claimed for wind seem to make some pretty heroic assumptions about the longevity of generating plant and, in any case, wind turbines produce electricity, not the highly-concentrated transport fuels upon which the economy depends.

"Other energy sources look even worse in EROEI terms. Biofuel EROEIs seldom exceed 3:1, and some are negative. 

"Policymakers who pin their hopes on unconventional hydrocarbon sources are guilty of a quite extraordinary degree of self-delusion.

"The EROEI of surface-mined tar sands is probably little better than 3:1 (if that), and those sands (accounting for about

four-fifths of the total) which cannot be surface-mined can only be extracted using massively energy-intensive techniques such as SAGD (steamassisted gravity drive), such that EROEIs are minimal, or even negative.

"The latest fashion in collective delusion concerns shale gas and oil. These may indeed exist in vast quantities, but EROEIs of barely 5:1 should make it abundantly clear that shales most emphatically are not the quick-fix that many governments (and their electorates) might like to suppose."

............

"In an excellent discussion published in 2010, analyst Andrew Lees suggests that the overall EROEI, having declined from 40:1 in 1990 to 20:1 in 2010, might fall to as little as 5:1 by 2020. Though Mr Lees does not cite sources for these numbers, his figures for 1990

and 2010 accord pretty closely with our own estimates.

"Policymakers must hope that he is very wrong indeed, however, about the global average EROEI in 2020 because, if this ratio does indeed decline to just 5:1 over the coming seven years, the economy as we know it is finished. It is as simple as that.

"The cost point here is critical. At the 40:1 ratio cited by Andrew Lees for 1990, the theoretical cost of energy would have been 2.43% (1/41) of GDP. If the correct figure for 2010 was indeed 20:1, then the ratio in that year would have been 4.76% (1/21), a painful increase since 1990 but, nevertheless, a ratio at which the surplus energy economy cans till function.

"At a ratio of 5:1, however, energy would absorb 16.67% (1/6) of GDP, meaning that energy costs would have increased by 250% (16.67 compared with 4.76) over just ten years. Put very simply, and ignoring (for now) intervening inflation, this would be equivalent to the annual average reference price of Brent crude oil having soared from $79.50/bbl to almost $280/bbl.

...................

They do their own projection of EROI and conclude that the EROI will drop to 12:1 in 2020, and 8:1 by 2030

"Though our forecasts and those of Mr Lees may differ in detail, the essential conclusion is the same. It is that the economy, as we have known it for more than two centuries, will cease to be viable at some point within the next ten or so years unless, of course,some way is found to reverse the trend.

They do a good explanation of what happens to the economy as EROI drops

"If EROEI falls sharply, as in fig. 5.15, much more of the gross energy is consumed in the extraction process,

resulting in a corresponding squeeze on the energy available to the economy. The essentials may still

be affordable, but the leverage in the equation is such that energy available for discretionary uses diminishes

very rapidly indeed. There, through the EROEI squeeze, goes the car, the holiday, the bigger home, the MP3,

the meal out, toys for the children, the afternoon at the golf club or the soccer match. If EROEI falls materially, our

consumerist way of life is over.

"There are two really nasty stings in  the tail of a declining EROEI. First, net energy availability may fall below the

amount required for essential purposes including healthcare, government and law. It is hardly too much to say that a

declining EROEI could bomb societies back into the pre-industrial age. 

"Indeed, a decrease in net energy below subsistence levels is an implicit consequence of EROEI decline beyond

a certain point – one which is difficult to estimate, but is likely to occur within the next decade – which means that

this is when the nastiest results of all start happening. Second, of course, a decline in net energy availability could (indeed,

almost certainly will) result in conflict driven by competition for access to diminishing surplus energy resources

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knowing the score

"Where the surplus energy equation is concerned, one question remains – how will we know when the decline

sets in?

The following are amongst the most obvious decline-markers:

- Energy price escalation. The

inflation-adjusted market prices of

energy (and, most importantly, of oil)

move up sharply, albeit in a zig-zag

fashion as price escalation chokes

off economic growth and imposes

short-term reverses in demand.

- Agricultural stress. This will be most

obvious in more frequent spikes in

food prices, combined with food

shortfalls in the poorest countries

-Energy sprawl. Investment in the

energy infrastructure will absorb a

steadily-rising proportion of global

capital investment.

- Economic stagnation. As the decline

in EROEIs accelerates, the world

economy can be expected to become

increasingly sluggish, and to fail to

recover from setbacks as robustly as

it has in the past.

- Inflation. A squeezed energy surplus

can be expected to combine with an

over-extended monetary economy

to create escalating inflation.

With the exception (thus far) of

inflation, each of these features has

become firmly established in recent

years, which suggests that the energysurplus

economy has already reached

its tipping-point.

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Read more here

http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

Perfect Storm

The economy as we know it is facing a lethal confluence of four critical
factors – the fall-out from the biggest debt bubble in history; a disastrous
experiment with globalisation; the massaging of data to the point where
economic trends are obscured; and, most important of all, the approach
of an energy-returns cliff-edge.



trend #1 – the madness of crowds
The first of the four highly dangerous
trends identified here is the creation,
over three decades, of the worst
financial bubble in history.

From the early 1980s, as figs. 1.1
and 1.2 show, an unmistakeable and
seemingly relentless upwards trend
in indebtedness became established.
Between 1981 and 2009, debt grew
by 390% in real terms, far out-pacing
the growth (of 120%) in the American
economy. By 2009, the debt ratio had
reached 381%, a level unprecedented
in history. Even in 1930, when GDP
collapsed, the ratio barely topped
300%, and thereafter declined very
rapidly indeed.


trend #2 – the globalisation disaster
The compounding mistake, where the
Western countries were concerned, was
a wide-eyed belief that ‘globalisation’
would make everyone richer, when
the reality was that the out-sourcing
of production to emerging economies
was a self-inflicted disaster with few
parallels in economic history. One would
have to look back to a Spanish empire
awash with bullion from the New World
to find a combination of economic
idiocy and minority self-interest equal
to the folly of globalization.
The big problem with globalisation
was that Western countries reduced
their production without making
corresponding reductions in their
consumption. Corporations’
outsourcing of production to
emerging economies boosted their
earnings (and, consequently, the
incomes of the minority at the very
top) whilst hollowing out their
domestic economies through the
export of skilled jobs.

trend #3 – an exercise in
self-delusion
One explanation for widespread public
(and policymaker) ignorance of the
truly parlous state of the Western
economies lies in the delusory nature
of economic and fiscal statistics, many
of which have been massaged out of
all relation to reality.

The critical distortion here is clearly
inflation, which feeds through into
computations showing “growth” even
when it is intuitively apparent (and
evident on many other benchmarks)
that, for a decade or more, the
economy has, at best, stagnated, not
just in the United States but across
much of the Western world. Distorted
inflation also tells wage-earners that
they have become better off even
though such statistics do not accord
with their own perceptions.

trend #4 – the growth dynamo
winds down
One of the problems with economics
is that its practitioners preach a
concentration on money, whereas
money is the language rather than
the substance of the real economy.
Ultimately, the economy is – and
always has been – a surplus energy
equation, governed by the laws of
thermodynamics, not those of
the market.

Research set out in this report suggests
that the global average EROEI, having
fallen from about 40:1 in 1990 to
17:1 in 2010, may decline to just
11:1 by 2020, at which point energy
will be about 50% more expensive, in
real terms, than it is today, a metric
which will carry through directly into
the cost of almost everything else –
including food.