First Energy Challenge - EROI and Peak Oil

For many years a number of energy analysts have warned of the dangers of declining EROI trends for both oil and gas. While oil was abundant and remained cheap, no one really cared to listen. Now, understanding EROI analyses and their link with the peaking of hydrocarbon supplies has become vitally important. As illustrated in Figure 11, EROIs decline fundamentally because resource exploitation progressively moves from “low hanging fruit”, those resources that are easy to access and exploit, to harder and harder ones requiring much more energy investments to find, access, transport and process them into useful products. As the peaks of fossil fuel production approach, EROIs begin to decline more rapidly.

Figure 11 – Peak Oil and EROI

When the peaks are passed, resource extraction becomes much more energy intensive and EROIs decline even more abruptly. The peak for conventional oil (also known as “sweet crude”) was passed around 2005. [1] The peaks for all other fossil fuels are being passed now (“peak everything”), hence the plunging EROIs being observed by energy analysts. [2]

The links between EROIs and the peaking of resources, as summarised above, as well as the links examined in the previous section between on the one hand EROIs, and thus the energy flowing through a country each year, and on the other hand its GDP, explain the strict constraints EROIs impose on the viability of a given economy and furthermore on the globalised industrial world taken as a whole. [3]

We have noted that EROIps for oil and gas had fallen down to 18:1 by 2006 (Figure 1, page 9), that is, below a critical viability threshold. As we will expand on further down (see page 27 onward), we must consider, as an order of magnitude, that below 20:1 for EROIp not enough net energy is available at the end user level (what is left once all direct and indirect energy costs of delivering that net energy have been deducted) to maintain the kind of consumerist world most people in the industrialised world have become used to and that those who do not enjoy it aspire to – drastic austerity regimes become the order of the day, as has been experienced increasingly since 2007.

In 2006 the LEAP (Laboratoire Européen d’Anticipation Politique – European Laboratory for Political Anticipation) anticipated the subprime crisis and what would ensue globally, which it has been chronicling and analysing ever since. In its analyses of what it has called the global systemic crisis, the LEAP has abundantly stressed that 2007 marks a clear break: there was the “world before” 2007 (i.e. before the advent of the “subprime crisis” and ongoing global financial and debt turmoil), while the “world after” remains to be built – on entirely new bases, hence the opportunities.

However, as highlighted by Richard Heinberg, Charles Hall and others, the thermodynamics of the prevailing global energy systems prevent a sustained return to the kind of “growth” that prevailed until 2007. For decades the industrial world has been living well above its energy means in defiance and/or ignorance of the principles of thermodynamics. Now the consequences are coming back home to roost.

Furthermore, in the face of the illusory prevailing focus in most countries on slowly unfolding, long-term, Climate Change as the prime rationale for “Energy Transition” policies and investments we must reemphasise the point made in previous postings, namely that the world is presently on a catastrophic, combined energy and ecological trajectory, that the highly destructive global impacts of the energy side are happening right now and are likely to rapidly worsen and that those of the ecological component are now expected to be abrupt and converge with the energy related ones in the near term. This means that in addition to the impact of rapidly declining EROIs for fossil fuels we must also expect enormous pressure to rapidly curb the use of fossil fuels in the immediate future, as a basic means to respond to the emerging threat of catastrophic runaway warming in the 2015 to 2040 period. We feel all the more impelled to insist on this point given the strong reluctance that we have been able to observe among many decision makers in industry as well as in political spheres to consider EROI matters, and through them, the thermodynamics of their own countries and of the whole world, instead of just thinking in traditional monetary terms that mask the immediacy of a real and present danger.

Awareness of the issues is slowly emerging. In recent years, researchers have been analysing climate change matters in terms of a “carbon budget”, that is, the total amount of carbon that could be burnt without global warming rising above 2oC the world and pointed out that that most of that carbon had already been burnt. In response to this data a growing number of politicians and finance advisors have been highlighting the dangers of a “carbon bubble”, that is, the danger that many assets of energy companies in the oil, gas, and coal industries, and downstream sectors such as power generation and transport will become “stranded” as being un-burnable and thus of very little value in the not distant future, with obvious dire financial consequences to the holders of equity is such companies. [4]

However, analysing the most recent data available and pointing out that a 50% chance of avoiding global catastrophe is not good enough, David Spratt has clarified in lay language what is becoming plainly clear, namely that all the carbon that could possibly burnt without triggering extremely dangerous climate change has already been burnt. [5]

It ensues from the links between rapidly declining EROIs from fossil fuels and the peaking of oil supplies on the one hand and the now immediate threat of abrupt climate and ecological change on the other hand that the First Energy Challenge simply cannot be addressed on the basis of searching for more fossil fuels. Some other solutions absolutely must be found, very rapidly.

[1] See Murray, James, and King, David, 2011, “Oil’s tipping point has passed, The economic pain of a flattening supply will trump the environment as a reason to curb the use of fossil fuels” in Nature, 26 January, Vol. 481.

[2] Concerning coal, see for example, Patzek and Croft, 2011, Op. Cit.

[3] See notably, Hall and Klitgaard, 2012, Op. Cit.; Heinberg, Richard, 2009, Searching For a Miracle: Net Energy Limits & the Fate of Industrial Society, Forum on Globalisation & The Post Carbon Institute, and Heinberg, Richard, 2011, The End of Growth, adapting to our new reality, New Society Publishers.

[4] See for example, Leaton, James, Ranger, Nicola, Ward, Bob, Sussams, Luke, and Brown, Meg, 2013, Unburnable Carbon 2013: Wasted capital and stranded assets, www.carbontracker.org in collaboration with the Grantham Research Institute on Climate Change and the Environment; Leaton, James, 2014, Carbon supply cost curves: evaluating Financial risk to oil capital expenditures, the Carbon Tracker Initiative (CTI), www.carbontracker.org; Weyzig, Francis, Kuepper, Barbara, Gelder, Jan Willem van, Tilburg, Rens van, 2014, The Price of Doing Too Little Too Late – The impact of the carbon bubble on the EU financial system, A report prepared for the Greens/EFA Group – European Parliament; Lewis, Mark, C., 2014, Energy transition & climate change, Stranded assets, fossilised revenues, USD28trn of fossil-fuel revenues at risk in a 450-ppm world, ESG Research, Kepler Chevreux.

[5] Spratt, David, 2014, The real budgetary emergency and the myth of burnable carbon, http://www.climatecodered.org/2014/05/the-real-budgetary-emergency-burnable.html.

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