Running Out Of Gas - Peak Easy Energy
Change of plans, I was going to post the final part of "Thinking In Systems" tonight but April Fool's Day gave us all a prank. It was announced this week that the Ghawar oil field in Saudi Arabia, their crown jew of easy oil, has had its output greatly over estimated by the "smart people". See the Saudi's never allowed anyone to audit their production, so people involved in the fossil fuel industry have made their best guesses. Turns out they were wrong. It will take me most of the week to read up and write a good summary for the Green Wizard community on why this new is shaking up investors and why we may be in for sizable price spike in gasoline and heating oil in the next two years.
In the mean time I am going to repost a article I wrote a while back that discusses an important concept when discussing Peak Oil and that is "Return on Investment" (aka ROI).
Imagine you get a phone call tomorrow. Its from a lawyer, who tells you your Aunt, you know the one everyone in the family always called a bit crazy, has died and left you her sizable fortune. A very sizable fortune. After you take a moment and jump up and down in excitement, he then explains the conditions of the Will and you figure out why everyone thought she was crazy.
Instead of hiding all her money under her mattress, your Aunt put it into the bank. Well, lots of banks. The lawyer gives you a list and its dozens of pages long. Banks in your city, banks in the suburbs, even banks several counties over. A few in the next state. The list also has the amounts in each account, some with several thousand dollars, some with much less.
You can visit any account and take out money BUT the catch is you can only do it once a day.
When discussing complex concepts like "Peak Oil", its easy to get lost in a hair splitting contest of numbers and how each side interrupts those numbers. Here at Green Wizards, what we try to do is give you a basic understanding of the concepts, and then let you make up your own mind. Thru Dissensus Comes Strength
Fossil fuels, coal and petroleum, are kind of like those bank accounts.
Our crazy Aunt, Mother Nature, has scattered the deposits all across the globe in various sizes and ease of access. Deposits laid down over hundreds of millions of years, and while huge, they are not infinite. Though they may have seemed unlimited when people first began exploiting them as an energy source.
While coal has been used as a fuel source since before recorded history, mined from surface deposits and outcroppings, fossil fuel exploitation only recently took off in the 18th century. Before that the renewable resource of wood was our primary way of powering our machines, heating our homes and cooking our foods. People understood the importance of not over cutting their forests too. With the discovery of steam power and the start of the Industrial Revolution, coal and then petroleum took an ascendancy.
We had hit the "Carbon Lotto", millions of years of stored energy from the Sun and like most winners of sudden wealth, we went hog wild.
Given the restrictions of your Aunt's Will, that you can only withdrawal money from one account a day, the smart thing to do would be to find the closest and largest deposits then tap those first. The exploitation cost of driving to the bank is there, but when the payoff is large then the cost of a bit of gas is negligible.
Where you had be living on a modest weekly salary from your employer, now you have available much more resources. When each day you can draw out many times that weekly salary, then you would probably forgo employment, to live on the money from your Aunt.
And like most faced with sudden wealth, your lifestyle would change, wouldn't it. Why drive that decade old used car, when you can buy a new one? Why live in a small cramped home, when you can buy one much bigger? Why eat soup, when you can eat steak?
With the past restrictions of living within the limits of a renewable wood stocks fundamentally over, Mankind exploded into a building frenzy. Beginning first in the developed countries of Europe, and then the newly colonized and expanding United States, the resources of the Carbon Lotto, coal, gas, and oil radically remade societies.
In a world where 90% of your population is rural and in the business of food production, the ability to put a machine to work at a task meant fewer and few people were stuck at subsistence level living. Transportation costs went down, no longer horse drawn wagons but rail roads and then trucks moved goods to market.
Many of those people freed from toil on farms then migrated to the cities and urban areas, seeking their own wealth and prosperity. And as the knowledge of how to use fossil fuels spread, so did the number of people on the move and looking for their share of wealth.
Wealth is a hard thing to hide. You can try and hide it, live like you did and hoard it but how many of us would do that? No, the secret of your Aunt's money would soon come out as your friends and family began to see how your lifestyle changed. Soon you would have a knock on your door. It might be a sibling, in need of a loan. Or a friend with a problem a few dollars would solve. Unless you were a total hard case, you would probably be willing to share the wealth. More needs and more expenses.
By now though, you would have probably tapped out the larger, closer and easier to get to accounts. You would have two choices then, to travel further away to larger accounts, there by raising the expense in gas and auto wear, or tap closer but smaller accounts. Smaller accounts would take less gas to get to, but as a percentage of the return, they would still be more expensive.
Probably you would do a combination of both. When the daily expenses of you and your extended family were small, tap smaller accounts, and when they were larger, travel further to get more money. You could also begin to cut back on some expenses, prioritizing them in importance.
The days of free spending would be over.
While coal has a variety of uses, from fuel to heat our homes, cook our food, and drive our engines, its oil and petroleum which really is versatile as an energy source and a raw material.
It was quickly discovered that oil could be converted into an amazing array of chemicals, from lubricants to food additives, from fragrances to cleaning agents. And not just chemicals, oil is that main raw material for the world's plastics. Consider how much plastic is in the world.
Then there is Food.
From fossil fueled farm equipment to fertilizers and herbicides, the Green Revolution of the past two centuries wouldn't have happened without oil. And that use of oil related products is what has directly lead to the spike in global population. There are few facets of modern life and global civilization that are not effected by oil and its ease of supplying energy for our needs.
Or should we say, "easy energy"?
The amounts in the remaining bank accounts start getting smaller and smaller. Having depleted the larger accounts, and now many of the smaller ones nearby, you are facing a tough time. You have tell your friends and extended family "No" more and more. You and your own family have to begin cutting out all those extra luxuries and expenses you could so easily afford when times were good.
You find that the cost of a tank of gas compared to the money gotten goes up and up. Where you spent $20 to get $2000, now you spend $20 to get $200. It doesn't matter that there is still plenty of money out there, the cost to get it is fast approaching too much.
You start taking the bus, cutting the cost of gas but increasing the time it takes. Or you drive to an area that has a few accounts, draw from one, then sleep in your car over night to tap another the next day. And you begin to think, perhaps its time to find a job again.
You will have to relearn how to live within the means of less.
If you take the time to do further research into Peak Oil, what you will often find from critics is the argument that there is still plenty of oil out there yet to be tap. Of course there is but just like the person in our story, it doesn't matter how much of a resource is out there. What matters is whether you can exploit it at a cost that make it feasible to do so.
The concept we need to discuss then is "Return on Investment" (aka ROI).
Simply put, Return On Investment is the Amount of Return (or Output) from a process divided by the Amount of Input (or Investment) needed to get that return.
An easy way to picture this when talking about energy, is the case of firewood. Anyone who has spent a long day felling a tree and then turning that into firewood knows there is a huge amount of input to get that done. There is first the effort to drop the tree. Then the time to remove the branches and limbs that you won't be using, and disposing of them in some fashion. Then first cutting the usable trunk and large branches into manageable portions, that you can then use a log splitter to turn into even smaller portions, and then sometimes and ax to turn those into pieces the size that will fit into your fireplace.
All of this physical work, the gas to run the chainsaws, log splitters and perhaps the truck to transport the finished wood to a place of storage, even the food you eat at midday, are all ROI Inputs. The Output then is the energy released as heat, by that wood, come a cold Winter day.
For energy we don't speak of ROI but "Energy Return On Investment" or EROI.
Consider a campfire made of wood versus a barbecue using charcoal. Cooking a meal over a wood fire uses more physical weight of wood to do the same job a barbecue with charcoal would. A pound of charcoal will keep generating heat long past the time a pound of wood will have turned to ash.
Similarly, a 5 pound bucket of coal will take up less space and return more heat than 5 pounds of wood. Consider how hard it is to fill up a bucket full of coal, and how hard it is to chop five pounds of wood? Coal then has a much higher EROI than wood, and is why it replaced wood as an energy source. Oil has an even higher EROI than coal.
Not all sources of coal or oil are as easily exploited as others. The cost of of a barrel of Saudi oil, which sits close to the ground is far less than a similar barrel of oil when pumped from a deep offshore platform in the Gulf of Mexico. Gulf oil therefore has a lower EROI than Saudi.
When the price you get for your oil, aka the Return, is high enough, then that difference in the Input costs, while there, doesn't matter as much. If the Saudi's are making 5 times as much as their inputs are, and you are only making 3 times, you are still making a profit.
Its when your Return suddenly tanks, like oil has done recently, that things get interesting. See you still have all those input costs no matter what the return you are getting.
That brings up one of a few important factors about ROI, Time.
The process that are covered by Return on Investment rarely take place in a brief period. Almost all happen over a long time, years and sometimes decades. In that time, the factors which define your return can change. Primarily as with oil, the cost you receive for the finished product and the ongoing costs of your inputs. A decision when your ROI is high may make sense, but when changing conditions makes it low, not so much.
Unfortunately you can often be locked into your input costs. We see that with the fraking boom here in the United States. Oil companies producing oil in that sector have huge input costs in the form of loans. It does matter how much they are getting as a return, they must still service those input costs. Its one of the reasons that they are still pumping, even in many cases where their EROI is negative.
(We will discuss the current low gas prices and why that doesn't mean peak easy energy is wrong in our next blog post.)
Now negative ROI is not always a bad thing.
Consider the home garden. I know many people recently had begun gardens, or have been gardening for years. They point to their basket of home grown tomatoes or their corn on the cob and are quite rightly proud of their ability to grow them. Yet take a moment and consider the true cost of that fresh food. Often times that basket of tomatoes comes at a large input of bought plants, bought compost, time spent weeding and watering, so that if the final cost of those vegetables was tallied people would be shocked.
Yet negative ROI makes complete sense if the reason you are doing the process isn't the final product of a basket of tomatoes, but instead, it is learning the skill to produce that basket. Just as the return can go down, as with gas prices now, the price of your return can go up. Spending resources to build infrastructure at a time when you have excess resources, aka you can afford to have a garden that doesn't pay for itself, makes complete sense if you expect that the price of fresh produce will go up as transportation costs climb.
In the "Age of Easy Energy", the margin between our ROI outputs and the inputs has been quite large. We could afford a bit of throw-away. As that margin gets tighter, as the return gets smaller and the costs get greater, we will all need to become smarter with our processes.
Next Up: "Externalization of Costs and Why Low Gas Is Really About The End of Easy Energy"
("self service gas station" by kozzi: http://www.kozzi.com/stock-photo-24745622-)