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Energy, Economy and the Impending Rite of Passage

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The American Dream. The meme was forged in the aftermath of World War II of the United States’ indominable spirit, and it embedded the promise of prosperity, success and upwards mobility into the country’s cultural lexicon. Owing to the nation’s abundant natural resources and penchant for innovation, the American Dream was a living, breathing part of the United States’ identity for decades, propelling the country to the commanding heights of industrial and then post-industrial development. During this period Americans enjoyed among the highest and fastest growing standards of living in the world.

Then something changed. The inflation-adjusted income of the average American, as estimated by per capita Gross Domestic Product, reached a peak in 2007 as the housing bubble burst, then fell into a tailspin before bottoming out in 2009. Throughout the post-2009 ‘recovery’, incomes have yet to surpass or even approach those recorded in 2007, and since 2011 they’ve largely stagnated.

Graphic 1

Why the end of growth? I could go on at length about the decay of America’s entrepreneurial spirit, misplaced regulatory incentives, predatory business practices, myopic planning and deadlocked politicians, but these are all distractions. The most important underlying cause of our economic woes is energy scarcity. With that in mind, this essay clarifies the links between energy and economic productivity and offers a path that can lead readers towards a sense of hope and resilience in the face of energy depletion, economic contraction and the end of The American Dream.

Energy and Economy

Personal incomes are built upon the buying and selling of goods and services. These goods and services don’t materialize from thin air, they’re made or offered by someone, and in this day and age that someone usually uses machines to enhance their productivity. Both people and their machines require fuels, which are transportable stores of energy that enable them to do physical work. For people, that fuel is food. For machines, fuel might be diesel, gasoline or electricity, among others. Beyond their direct need for fuel, machines require parts and labor during their manufacture and for their maintenance, which adds indirect energy costs to their total energy budget. Food production also entails direct and indirect energy costs associated with its production, particularly in our industrialized food system.

Fuels also don’t materialize out of thin air, we manufacture them from energy resources. Without energy resources we have no fuel, and without fuel man and machine sit idle, unable to produce the goods and services that generate incomes. Since fuel powers our economy, fuel prices – and more specifically people’s monetary expenditures on fuel – have powerful economic impacts. Most major recessions in recent US history are correlated with sudden increases in per capita fuel expenditures [1]. The underlying reason for this is straightforward: When fuel prices rise, people are forced to divert some of their discretionary income to covering the higher cost of fuel, reducing their spending on other things. As revenues outside the energy sector decline, businesses must either lay off workers or cut wages to balance their bottom lines, leading to falling incomes more generally since most people work outside the energy sector. Falling incomes eventually reduce fuel demand allowing prices to relax, calming markets and allowing for normalcy to resume.

Graphic2

Around the year 2000 oil prices started climbing, reaching over $70 per barrel by early 2007 and sending petroleum-derived fuel prices soaring. Consumers, with their fuel-inefficient cars and suburban homes situated far from important cultural and economic amenities, were forced to pay more for fuel and less on other things, sending revenues outside the energy sector into a downward spiral. Falling revenues triggered layoffs and pay cuts, and as incomes fell or vanished some people missed mortgage payments to keep food on the table and their gastanks full. As this happened on a larger and larger scale, well… The rest, they say, is history.

Officially the recession that started in 2007 was blamed on the unscrupulous accounting and lending practices of mortgage companies and banks. In a shallow sense this might be true, but the root cause – the cause that triggered longstanding accounting and lending practices to finally reach a tipping point – boils down to the cascading effects of rising fuel prices. The growth of the US economy is tightly linked to the availability of cheap fuel, so it should come as no surprise that when we reached the end of cheap fuel, the end of income growth came along for the ride.

Energy Scarcity

Rising energy expenditures in the US are driving our current recessionary pattern. Over timespans measured in years or decades people can reduce their fuel demand by making strategic choices about where they live and how, and to what degree, they travel, and if energy prices rise gradually governments can re-engineer society’s physical infrastructure to offset fuel price increases with efficiency gains. Over shorter timespans however, neither people nor governments have much control over fuel demand and price spikes cause the entire economic system to seize, causing recessions and making it challenging to fund efficiency projects of meaningful scale. Today energy companies struggle to supply enough fuels to control market volatility, and prices are too high to allow us to recover from our current recession and resume overall income growth.

‘Fossil’ energy resources coal, oil and natural gas deliver most of the fuels we use globally and within the United States. Scientists have pondered the process of fossil fuel depletion as early as the 1920s, but most credit our modern understanding to geophysicist M. King Hubbert who postulated that extraction rates would pass through stages of growth, peak and decline, forming a vaguely bell-shaped curve [2]. During its growth phase even a finite resource delivers growing supplies of fuel to the economy, but when the peaking phase emerges market constraints hinder supply expansion and the imbalance between rising demand and stagnating supply triggers the emergence of price volatility. Eventually the decline phase begins and fuel supply falls, further exacerbating supply-demand imbalances unless a substitute is found or demand is quelled.

Graphic 3

Of the fossil fuels, the depletion of oil has received the most attention. Although a range of techniques for predicting the peak of global oil supply are used, the most valuable tool we have is the supply curve [3]. Supply curves track the ability of producers to supply a good or service over a range of market prices. When prices are low only producers whose costs of production are low enough for them to turn a profit supply the good or service, but as market prices increase more producers enter the market and supply rises. In the absence of industry-wide constraints, a supply curve shows a roughly linear response of supply to prices, illustrating the entrepreneurial nimbleness people commonly associate with free markets.

The key phrase in that last paragraph is ‘in the absence of industry-wide constraints’. Industry-wide constraints are game changers, and an overarching constraint in the energy industry is the recessionary effects of rising fuel prices and fuel expenditures. When the cost of adding new oil supply rises above levels that trigger recessions, the price volatility that naturally emerges sends mixed signals to oil companies, stalling supply growth and causing their supply curve to curl sharply upwards. Recent price and supply data show oil’s supply curve curling strongly upwards beyond 84 million barrels per day, heralding the beginning of oil’s peaking phase and suggesting a peak supply no higher than 90 million barrels per day.

Graphic 4

Why is Peak Oil happening now? During oil’s growth phase oil companies readily see positive returns on investments in exploration and extraction and are easily able to replace reserves and even increase their total output, all while maintaining solid profit margins and selling fuel at reasonable prices. As the cheaper and more accessible oil deposits are exhausted, returns on investments in new exploration and extraction infrastructure become uncertain because the higher prices needed to cover costs are recessionary, trapping markets in long-lived patterns of price volatility and . Most economists accept that oil prices above $100 per barrel are recessionary in today’s markets, and the cost of adding new production capacity is about $100 per barrel [4].

Oil is not the only fossil fuel whose peaking phase may be near. Up until 2007 North American natural gas markets showed similar symptoms of an impending peak to those emerging in oil markets, although the controversial practice known as hydraulic fracturing has delivered a modest burst of new gas to markets and temporarily relaxed prices. Hydraulic fracturing, often called ‘fracking’, involves injecting a mix of toxic, caustic chemicals into gas or oil wells under very high pressure to fracture rock otherwise not porous enough for the resources to seep through. Once the rock is fractured, oil and gas can be extracted from the well for a short time before recovery tapers off and the well must be fractured again.

That oil and gas companies have turned to hydraulic fracturing speaks to how desperate they are to maintain their revenue streams in the face of depletion; they commonly overstate their reserves and must often sell their product below its cost of production in today’s saturated market brought on by the fracking boom [5]. These companies can sell below their costs of production for brief periods while padding their bottom lines with false promises and debt, but eventually investors will demand profits and at that point the ruse will end. Hydraulic fracturing isn’t the game-changer oil and gas companies claim, and I expect the fracking bubble to burst before the end of the decade, leaving North America once again to struggle against declining supplies of natural gas.

What about coal? For decades pundits have touted coal as the road to American energy independence. Recoverable coal resources are vast, but coal appears to be entering its peaking phase in lockstep with global oil. Despite steadily rising prices US coal production has been on a bumpy plateau for several years, and productivity at US mines has fallen by more than 20 percent since 2000, a complete trend reversal after decades of productivity increases due to mechanization. Beyond this, the application of modern assessment methods to US coal resources has lead to reserves in some areas being downgraded by as much as 90 percent, suggesting that much of the hype around coal as a source of US energy security is little more than industry pomp [6].

I don’t want to propagate the fear that fossil fuels will suddenly vanish. We won’t run out of oil, natural gas or coal anytime soon, and we’ll be using fuels derived from these resources for decades to come. I do want people to realize that fossil fuel supplies won’t increase for much longer, if at all, nor can we expect prices to fall much below today’s levels. Perpetuating our dependence on fossil fuels makes us vulnerable to the price volatility and economic impacts that naturally attend their depletion.

Not Just a Supply Problem

Supply. That’s where our discussion of energy scarcity started, but it can’t end there. Gross supply, as measured by the statistics we’ve so far seen, only tells part of the story, and in my opinion not the most important part. The real story is about constraints in net supply, particularly the net energy return we get from fossil fuels.

The story of net energy begins with the obvious fact that fuel isn’t free. It’s not free in monetary terms, since producers must invest cash to build and maintain their extraction, processing and distribution infrastructure. It’s also not free in energy terms, as it takes energy to build, maintain and operate infrastructure and this energy – often called a fuel’s embodied energy – ultimately comes from other fuels. The process of converting the stored energy in a fuel to usable work is also never 100 percent efficient, so beyond the need to divert the equivalent of its embodied energy back into the energy sector to make tomorrow’s fuel there are also efficiency losses due to friction and other mechanical limitations to account for. The embodied energy and efficiency losses associated with diesel fuel’s production cycle and burning diesel it in an engine make up 70 percent of the fuel’s heat content, leaving only 30 percent to do usable work [7].

Graphic 5

The lower a fuel’s embodied energy and the smaller the efficiency losses associated with its conversion into usable work, the higher its net energy return. Fuels with higher net energy returns are more valuable to society because they deliver more usable work for use outside of the energy sector, creating jobs and incomes. A society powered by fuels with high net energy returns will have a larger and more diverse economy, and its citizens will naturally see themselves as being more affluent. This leads us to another hidden danger of fossil fuels: their deteriorating net energy returns.

Graphic 6

In the distant past, when the energy costs of finding, extracting and processing fossil fuels were low, they delivered very high net energy returns. As companies exhausted the higher quality deposits that were easier to extract and process into usable fuels they were forced to develop more energy intensive technologies to extract and process lower quality resources that were more challenging to access. In the oil and gas industries this progression manifests as an increased reliance on energy-intensive technologies like hydraulic fracturing and deep-water drilling, and the increased dominance of shale oil, shale gas and tar sands compared to more conventional resources. In the coal industry the progression manifests as ever more mechanization even as lower quality coals dominate the market.

Depletion doesn’t play out solely in gross supply statistics. Our dependence on fossil fuels forces us to endure not only supply peaks and the price volatility they herald, but also declining net energy returns as companies are forced to search out ever more marginal deposits and apply ever more energy-intensive extraction and processing technologies to retrieve them. As fossil fuels’ energy returns decline, they’ll introduce even more upwards pressure on prices by demanding that we divert more fuel into the energy sector to produce tomorrow’s fuels, forcing consumers outside the energy sector to start a bidding war for what’s left. As our fuels’ net energy returns fall our affluence will erode, and at some point the remaining fossil energy resources will be of such low quality and require such highly energy-intensive technologies to turn into usable fuels that companies won’t be able to deliver fuels with positive energy returns at all. At that point, the fossil fuel era will be over.

No Energy Bailout

Concerns about fossil fuel depletion are usually dismissed with appeals to ‘alternative’ energy technologies like nuclear power, hydroelectricity, biomass, wind turbines and solar photovoltaics, among a few others. They all sounded appealing to me at various points in my life, but as I’ve realized how important fuel prices and expenditures are in the energy and economic picture I’ve been forced to rule them out, individually and collectively, as meaningful solutions to our predicament. Why? Because they cost too much, and if people adopted these technologies on a scale large enough to substitute for fossil fuels the resulting higher fuel expenditures would reduce people’s disposable income just like rising fossil fuel prices do, leading to the same economic consequences.

The permitting, construction and decommissioning of nuclear power plants is famously expensive, and what keeps nuclear electricity prices reasonable are the government interventions that limit the liability of plant operators in the event of a catastrophic accidents and relieve operators of the burden of paying for the long-term storage of radioactive waste. If it weren’t for these indirect subsidies, nuclear power plants would have been a non-starter. In the aftermath of the Fukushima-Daiichi accident in 2011, it’s hard to imagine the nuclear industry turning the tide of public opinion and enjoying the resurgence they’d spent decades lobbying for.

For hydropower, at least in the United States, the most cost-effective locations have already been developed and expansion would require the use of progressively more marginal locations. Yes, the cost of electricity from existing hydroelectric plants is competitive, but that’s because they were built years or even decades ago and their capital costs have been paid off or depreciated. New hydroelectric capacity won’t be nearly as cheap, and it’s new capacity we’d need to fill energy gaps opened by declines in fossil fuel supplies. The price of electricity from hydroelectric systems only goes up from here.

Biomass is cheap compared to fossil fuels in some areas, but its supply is constrained by its rate of regrowth, which in a world of changing climate is highly uncertain. An upsurge in demand would easily create local scarcities, driving prices into an upward spiral to parity with fossil fuels or beyond. Because of biomass’ low energy density, transporting it over long distances is very costly and often renders it uncompetitive. Although most biofuels deliver positive energy returns at the point of sale, some, such as ethanol from corn, don’t once efficiency losses associated with burning it in an internal combustion engine are accounted for, limiting these fuels’ scalability and cost-competitiveness in the absence of government subsidy.

Finally, although potential wind and solar resources in North America can easily provide for the continent’s energy needs, power from wind turbines and solar photovoltaics is diffuse and therefore expensive compared to fossil fuel equivalents, even with government subsidies. Although costs have come down somewhat over the last few decades, I expect bottlenecks in the rare earth minerals required for photovoltaic and turbine manufacture to prevent these technologies from enjoying the economies of scale necessary for their prices to fall below recessionary thresholds. Wind and solar represent very small proportions of US energy consumption, and I don’t expect that to change in my lifetime.

We’ll certainly use alternative energy technologies to varying degrees, but I don’t expect nuclear power or hydroelectricity to gain market share nor do I expect biomass, wind turbines or solar photovoltaics to substitute for fossil fuels to any meaningful extent. The costs of expanding our use of these technologies are too high, and beyond that all of these technologies have a range of non-monetary impacts that limit their attractiveness [8]. We aren’t going to arrest fossil fuel depletion, nor are we going to substitute our way out of it. We rode the growth phase of fossil fuels upwards, and eventually we will ride their decline phases back down, all the while using less energy and doing less usable work in our economy.

The Impending Rite of Passage

Believe it or not, I’m a friendly guy with a great sense of humor and a positive outlook on life, both for myself and for others. Friends constantly ask me how my upbeat demeanor coexists with my downbeat energy outlook. No, I don’t suffer from multiple personality disorder or have a superhuman capacity to cope with cognitive dissonance. The answer is simple: I see an easy way out.

Fossil fuel depletion and the inadequacy of alternative energy technologies to fill the resulting energy supply gaps at reasonable prices aren’t inherently problematic. Outside of civilization supplies of key resources rise and fall, and the ‘affluence’ of species that depend on those resources rises and falls with them. Despite the cyclical nature of life outside of civilization, animals generally don’t descend into depression or go psychotic. Perhaps my single most powerful revelation came when I realized that, growing up in an industrialized nation like the United States, I’d become so spoiled by the rising availability of cheap resources and had so infused the notion of perpetually increasing affluence into my identity that my worldview left no room for declines.

A worldview encompasses a person’s conception of how the world works, what’s possible, and what’s desirable. A key maladaptive feature of the worldview I grew up with is that I defined my success by the growth of my standard of living, the growth of my country’s economy and the growth of my country’s influence more generally. A look through history shows that growth in any metric is a fleeting part of the development of societies [9]. As I woke up to the realities of fossil fuel depletion and its economic consequences, I realized my first task would be to design more realism into my worldview.

In some societies children go through a rite of passage during which the child’s worldview – defined by rapid physical growth, no responsibilities and instant gratification – is extinguished [10]. As their rite progresses their worldview is re-formulated to accept the roles and responsibilities of adulthood in their community, whatever those might be. I can’t help but wonder if the growth fetish I found hidden in my worldview was a childish way of thinking that, psychologically, I never left behind in my transition into adulthood.

Over the past decade I’ve muddled through a series of informal rites of passage, each including the archetypal stages of preparation, severance, crossing a threshold, return and reintegration. Preparation involved recognizing that my worldview had some shortcomings, and taking stock of the physical, financial and community resources I had at my disposal. Severance involved articulating relevant parts of my current worldview and opening myself up to leaving them behind. Crossing the threshold demanded that I ask hard questions about how the world works, about my goals and intentions, and about what path forward was worth committing to. My return involved using the answers to these questions to design for myself a new worldview, and reintegration involved turning this worldview into habits and stories to help me avoid repeating past mistakes and falling back into old patterns. The process isn’t over. While large chunks of my old worldview have been extinguished and replaced with more adaptive beliefs and patterns, there are still a few relics I keep working on and I expect the work to continue throughout my adult life.

My emerging worldview places less importance on my income and consumptive habits as the basis for my identity, and more on the connections I create and nurture in my community. My goal in life is still growth, but not so much in the physical or monetary realms. In those areas I’m quite content with ‘enough’, and I’ve noticed that ‘enough’ tends to shrink over time on many fronts. I’ve stopped investing in the stock market and similar schemes, and instead invest surplus income collecting practical skills, starting hobbies that I can scale up to earn another income stream if needed, and building community with others who share my goals of creating resilience and adaptability.

Parting Thoughts

Earlier in this article I asked why we can’t seem to escape from our current economic recession, and answered with discussions of emerging fossil fuel supply constraints, declining net energy returns, and the inability to replace scarce fossil energy with alternatives. I noted the growth fetish hidden in my old worldview and the value of sculpting it into something more adaptive, something more in-tune with reality. That sculpting led naturally to a range of lifestyle choices that, overall, have given me a much greater sense of personal security and a higher quality of life.

When just one person follows this path it doesn’t help much. We need millions of people to jump on board, millions to muddle through their thresholds and millions to return to their communities with more adaptive worldviews and visions of how they can meaningfully contribute. Civilization itself needs a rite of passage, and perhaps the economic consequences of fossil fuel depletion will deliver exactly that. I can’t pretend to know the particulars of how the coming years and decades will progress, but I trust it will be powerful, enlightening, and certainly interesting. Perhaps more interesting than we’d prefer, but then we live in interesting times, so go figure. 

Notes

  1. Three laws of energy transitions (Bashmakov, 2007, Energy Policy).
  2. Energy from fossil fuels (Hubbert, 1949, Science).
  3. Oil’s tipping point has passed (Murray & King, 2012, Nature).
  4. Oil price likely to stay buoyed by marginal costs (Herron, 2012, The Wall Street Journal).
  5. US shale gas: less abundance, higher cost (Berman & Pittinger, 2011, www.TheOilDrum.com).
  6. Big Coal (Goodell, 2006); Coal: Resources and Future Production (Zittel et al., 2007, Energy Watch Group).
  7. An Overview of Biodiesel and Petroleum Diesel Life Cycles (Sheehan et al., 1998, National Renewable Energy Laboratory).
  8. Renewable Energy Cannot Sustain a Consumer Society (Trainer, 2007, Springer); Green Illusions (Zehner, 2012, University of Nebraska Press).
  9. The Collapse of Complex Societies (Tainter, 1988, Cambridge University Press).
  10. Rediscovering rites of passage: education, transformation, and the transition to sustainability (Lertzman, Ecology and Society, 2002); Wilderness rites of passage: initiation, growth and healing (Davis, 2003).

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