The phase changes of high-cost energy

Are these two rocks the same or different?

The answer depends -- they are simultaneously the same and different.  The upper image is of a shale.  It is fine-grained and quite uniform.  The lower image is of a gneiss.  It is coarser grained with visible differences in color from point to point -- different minerals.  But the overall, bulk chemical composition is the same; it is only the arrangement of atoms into minerals and the size of the minerals that is different.

So while a chemist can say that these two rocks are the same, a geologist can say they are quite different.  The geologist might go on to explain how the molecules that make up the shale rearrange themselves into different minerals, different solid phases, when buried to sufficient depth (pressure and temperature) for a sufficiently long time.  The shale becomes a gneiss. 

There are some similarities with economic systems.  Our economic system, currently dependent on inexpensive fossil fuels, is changing.  Fossil fuels, of which there is no shortage in the lithosphere, have become significantly more expensive.  Despite vast amounts of reduced carbon in the lithosphere which theoretically can be oxidized for energy, the cost of exploiting this resource has risen dramatically over the past decade.  The higher cost is seen directly in much higher market prices, but more significantly in the detailed financial statements of most oil and gas companies.  These financial issues call attention to more fundamental economic issues such as return on investment (be it a financial return or energy return), relative efficiencies, and the role of energy in the economic process.

One can think of the higher energy prices and costs as analogous to the higher temperature and pressure.  And just as higher temperature and pressure cause atoms in a rock to rearrange themselves, so higher prices and costs are causing the economy to arrange itself differently.  As geologists say, the higher temperature and pressure leads to phase changes; with the elements of the system rearranging themselves into different solid phases.  Similarly, there is an economic phase change occurring in the economic system.

But such changes take time, in the case of the shale to gneiss transition, geologic time.   The economic changes will occur much more quickly, and this difference in the time scale is a major difference between the natural earth system and the economic system.  The difference is between the equilibrium of a static system, essentially time independent, and that of a dynamic system which is time dependent.  But in both types of system, the phase changes are related to rates of entropy production.
My point here is simply that the economic prices and costs of various energy sources determine the way the pieces of the economy work together.  Higher energy costs will therefore change, in some aspects significantly, the organization of the resulting economy; the economy will reorganize into different phases. Unless energy costs go back down, which doesn't seem likely, tomorrow's economy is going to be as different from today's as a shale is from a gneiss.  Or at least as different in all dimensions as the late 18th century solar-based economy was from the late 20th century oil-based economy.  Note that while technologic change was a necessary component of the differences between the 18th and 20th century economies, a more basic difference has been the relative prices and costs of energy in the economic process.   Postulating that technologic change has been the driving mechanism for the economic changes is similar to saying that the tail wags the dog.

The far more fundamental change from the late 18th century until the end of the 20th century has been the reorganization of the economic environment due to decreasing energy prices and costs.  We are now at the beginning of a new period of increasing prices and costs.  So an economic reordering has begun.  It will take decades (at a minimum) to have any sense about how the multi-dimensional reorganization will work out or what the new economic 'mineral assemblage' will look like.  But it won't look like the present.

Our multi-dimensional conundrum

Reflecting on the problems we face as a society and species, I see significant issues in three major areas (and that is just before my second cup of coffee this morning).

a) Energy -- the global economy runs on energy (indeed, everything runs on energy).  We have reached the limits of the cheap oil energy that has shaped the global economy for the past 150 years.  The basic issue is the cost of a unit of energy.  Perhaps more accurately, the cost of a replacement unit of energy.   While there is plenty of reduced carbon in the lithosphere (coal, natural gas, oil, etc.), these are increasingly expensive to extract.  There is also ample direct solar energy if we can harvest it economically.  A number of sub-issues belong here: cost and volume of energy storage; inertia of existing capital investment; technical familiarity with existing energy sources versus rapid technical advances with new energies; needing to change social perceptions based on 150 years of social mind-sets that have lived in a "cheap oil" world.

b) Climate and sustainability -- the evidence is clear that global climate is changing.  This is an issue that cannot be contained by nation-state boundaries.  The relationship between humans and the natural environment is thus called into question.  Our societies have evolved over a few thousand years of relative environmental stability, and a major environmental change is likely to require major human societal changes.  Time scale is an issue here, as the millennial changes are very rapid from an earth-systems perspective, but human individuals operate from an approximately single decade time framework.  The existing human-environment relationship, which presumes growth in many areas, is self-evidently not sustainable over long periods.

c) Economy and finance -- numerous writers have suggested that our species should be homo economicus (or some variant) rather than homo sapiens.  For most of the global population, some trade in an economic system is allowing a life that is significantly removed from existence in a hunter-gatherer pack.  At the top of the economic pyramid stand the OECD nations and their populations.  But unlike a pyramid, the global economy is becoming increasingly unstable.  Communications expose inequities in wealth distribution.  The amount of capital available for reinvestment seems insufficient for current societal needs, let alone future needs; at the same time the economic horizon becomes increasingly short.  And political structures, which are fundamentally just the organizational base of economic and financial structures, have significantly lagged so that the entire foundations of the system are faltering.

These three areas are orthogonal but intimately interrelated.  Hence an attempt to analyse, let alone "solve", an issue by looking at just one axis can at best be but partial.  And, as noted in the introduction, there are almost certainly other areas of major concern.  These are probably represented along additional orthogonal axes.  The future is always messy and will have unexpected turns; I think the next several decades will be even more so.

Mathematical problems with Peak Oil

M. King Hubbert’s classic 1956 paper has influenced the way we think about oil. Hubbert’s forecast, and most others following, have presumed a bell-shaped curve, with production increasing up to some point in time and then decreasing. The shape of the curve has led to the term “peak oil”, which is now commonly used in both popular and specialist discussions and articles.

The shape moulds our thinking about the availability of oil, although there is much discussion in the technical literature about details of the shape, how to use the associated mathematics, data definitions, and a host of additional details.  But the mathematical properties of the shape itself impose some constraints that can be tested against actual oil production data.  These tests show that the bell shape does not fit well.

Which raises the uncomfortable issue:  are we asking the right questions?

Hubbert himself used the bell-shaped curve defined by the logistics function.  The more familiar bell-shaped curve is the Gaussian normal distribution of elementary statistics.  But all bell-shaped curves have in common the fact that they are continuous functions which start at zero, rise to a peak, and then descend again to zero. This means that both the first and second derivatives of the bell-shaped curve must have topologically similar shapes.  Examples of these shapes for a symmetrical Gaussian normal curve look like this:

Fig. 1.  Gaussian distributions (from Glynn at http://research.stowers-institute.org/mcm/efg/R/Statistics/MixturesOfDistributions/index.htm)

So when we think about oil production as having a peak, we are also thinking that, for example, the second derivative of production will reach a minimum when the peak production is reached.

Looking at the data for oil production, we see the following:

Fig. 2a.  Oil production (data from Koppelhaar, 2012 and BP Statistical Data, 2013). Scale is 10^6 barrels per year.

The rate of change in oil production is

Fig. 2b. Rate of change in oil production.

And the rate of change in the rate of change (2nd derivative) is

Fig. 2c. Rate of change in the rate of change of oil production.

The derivative curves don't plot as expected for a bell-shaped curve.  Departures from the theoretical models have been noted before; and anyone who studies the oil industry will expect the data to be somewhat “noisey”. Furthermore, the fact that the earth is a finite body means that oil production will have to decrease at some point; when can be debated, but decline it must. Thus, some sort of bell-shape function for oil production seems reasonable. But, at best, it seems that factors other than simply the physical occurrence parameters for oil are of at least equal importance when it comes to how much is produced.

My point is NOT that there is abundant oil just waiting to be found because ‘peak oil’ is wrong. No. The point is that the models we have been using, and which are embedded in much thinking (including my own) may not be leading us in the most productive direction. In particular, it seems probable to me that political and economic factors influencing oil production have played a much more important role than we may have thought.  Indeed at first glance it appears that non-geologic factors have predominated since at least the 1970s.

The challenge is to find a model that will more fully explain the data than the physical supply, bell-shaped curves that have dominated the discussions. We need this new model so that our thinking will be more productive as we address both energy and environmental problems going forward.

Credit where credit is due: The above thoughts have been inspired considerably by Hall and Klitgaard’s 2012 book “Energy and the Wealth of Nations” and by discussion of a first draft of this posting with Roger Bentley. Thanks. Errors in the above discussion are all mine, not theirs.

Peak Fossil Fuels

Just over a year ago, Bob Hirsch’s presentation at ASPO was something like “there isn’t an energy problem; there is a liquids problem”.  He went on to recall the societal disruption of the 1973 oil embargo in the USA, and suggested that peak oil disruptions would, by analogy, be far more than simply disruptive.

While there have been significant strains, so far there hasn’t been a collapse.  Indeed, oil production continues to edge upwards year after year.  I don’t think there will be a collapse.  As I've said privately, those arguing for peak oil should declare a victory and move on.  The consistently higher price for oil over the past decade is evidence that the peak oil predictions were essentially correct.  But the fact is that the predictions were only valid for the boundary conditions, and these have now changed.

Whether the economic setting for oil is measured by price, EROI, rig count, or in some other way, there can be no doubt that the oil exploitation environment has changed significantly over the past decade.  This tells me that the entire peak oil analysis has a significant economic component.  It is not that there is suddenly an increased physical supply of crude oil as the result of higher prices; rather the higher prices are but one manifestation of the fact that the entire economic environment has changed in ways that are very complex.  By analogy, the bulk chemistry of a slate and a gneiss are similar, but the mineral assemblages are very different as a result of the differing pressure and temperature conditions.  In the energy economy the relative prices of oil, coal, natural gas and non-fossil fuels are changing; and the energy assemblage of our economy is reorganizing itself. 

The past 60+ years have been a relatively steady state with respect to energy economics.  Oil has been cheap, with additional supplies being available without much relative price increase.  That is no longer true.  As the economy adjusts, the the relative costs of different forms of energy are temporarily out of balance.

Of course, what we are all really interested in is the future.  It seems to be part of the human condition that we look forward, project, and otherwise plan for tomorrow.  And we would all like to know how the changes that the world energy economy is currently experencing will play out. 

I think one of the ways to look at this issue is to consider not peak oil, but rather to look at fossil fuels as a single energy source.  What can we say about “peak fossil fuel”?

This is the combined data for fossil fuels over the past 150+ years.  When this data is analysed using the mathematics that Deffeyes, following Hubbert, used to predict the oil peak the result is that the peak is already significantly behind us.  But the data clearly shows that this is not the case.

Note that Hubbert’s original paper foresaw a smooth transition from oil to nuclear power, which is probably the reason that we tend to use a roughly symmetrical curve to describe peak oil.  If the economy becomes truly constrained with respect to energy due to shortage of the supply of oil, or I would argue of total fossil fuels, then there will be no smooth transition to something else.  The result will be more like Bob Hirsch’s predictions for oil, and the downside will be quite abrupt as the economy shuts down.  Of couse, this means that almost half of the ultimate recoverable reserves would then be left in the ground, unexploited.

My own thinking is that the total fossil fuel peak is still some ways away.  And whether the peak will be symmetric or a rather sudden collapse is still unknown.  In brief, the peak can be symmetric only if fossil fuels are replaced by new non-fossil fuel energy sources that cost less.  If these are not available, the result will be collapse with a more sudden decrease in production levels.

The importance of relative costs can be seen within the total fossil fuels mixture.  

The data is from the long time series that Rembrandt Koppelaar published in The Oil Drum (http://www.theoildrum.com/node/8936) – thanks Rembrandt.  The gas numbers have probably been significantly under-reported, as even today they don’t include much of the gas that is flared in association with oil production.

As the above figure shows, and as we all know, the initial fossil fuel was coal, followed by exploitation of oil, and finally of natural gas.  This reflects the relative difficulty, i.e. cost, of transporting solids, liquids and gasses. 

One of the interesting things about fossil fuels is that the three types are relatively interchangeable.    Note, I do say relatively.  This both supports aggregating them for total energy analysis, and provides some insight into energy analyses by looking at the details of how one substitutes for another.  For example, natural gas is replacing coal for electricity generation in North America and the reverse is happening in Europe.  This is due to differences in transportation costs for supplying the respective fuels in these two markets, and the speed of the change has been quite rapid.  The technology is similar, making it both familiar and substitutable.  Banks, governments and utility companies like this, as it means the technologic risk is low.

Transportation – ocean shipping, land transport, air – can also substitute, probably more than is generally anticipated.  For example, North America, with more than a 4:1 energy cost benefit driving the process, is moving to use natural gas for fleets and long-distance trucking.  These are the markets which have the lowest infrastructure support investment, and these markets likely will provide the foundation for more widespread use.  Furthermore, as is the case for electricity generation, the technologies for transporting, storing and using natural gas instead of gasoline or diesel are in use, so there is minimal technologic risk to investments.

Which brings us back to the role of economics in determining the energy mix for the economy.  The present change from an oil-dominated energy economy to something different seems, at present, to be towards a combined fossil fuel energy economy.  This raises concerns both about when will we reach the inevitable fossil fuel peak, and for the amount of global warming that will be engendered by the time such a peak is reached.  But the continuing steep rise of total fossil fuel production makes me sceptical that the economic system has yet found an alternative for society’s energy demand.