Irrational Exuberance

Posted By Michael Doliner On February 12, 2020

Refinery, Tulare, California. Photo: Jeffrey St. Clair.

In 1982 William R. Catton published OVERSHOOT The Ecological Basis of Revolutionary
Change. In it Cattonl illustrates the trap we humans have set for ourselves. Fossil fuels
have allowed humans to live from what Catton calls “ghost acres,” the land or ocean
that would be necessary to produce the various goods we make or grow using fossil
fuels. We are spending the capital of what from this perspective is nature’s bank
account. This has allowed the population and the way of life for many to greatly
exceed the carrying capacity of the planet. In so doing we have lost the ability to live
within our means. We have overshot that ability by a wide margin.

Fossil fuels are a finite resource. We have now reached peak oil. Extraction of oil has
exceeded discovery since 1980, and all oil wells deplete.
It is impossible to sustain civilization without fossil fuels. Alternative energy from
renewables is a chimera. The benefits from wind and solar has proved elusive. Seven
day lulls at wind farms are not unknown, and battery backup at grid scale would be
enormously expensive. Gail Tverberg reports:

EIA reports the average cost for utility scale battery systems to be about
$1500 per kWh. At that rate the batteries needed for backing up a solar or
wind facility for three days cost around 30 times as much as the RE facility.
But wind is often unpowered for more like seven days, during huge
stagnant high pressure episodes. Thus the backup battery cost is more like
100 times the wind farm cost. Batteries are not feasible.
If not batteries then what? fossil fuel or atomic energy backups that were mostly idle?
What of the cost? Nor is intermittency the only problem with wind and solar. They
require a whole new and more elaborate grid and their management is far more
difficult. For example, the use of rolling blackouts during demand spikes to prevent
grid burnout is not feasible with such distributed sources of power. All this must be
built with fossil fuels, which also must be used to mine rare earths required in wind
turbine manufacture. When the costs are really totaled these are not economic
alternatives. Germany, the poster child for alternative energy, is finding that out.

With Germany as inspiration, the United Nations and World Bank poured
billions into renewables like wind, solar, and hydro in developing nations
like Kenya.
But then, last year, Germany was forced to acknowledge that it had to delay
its phase-out of coal, and would not meet its 2020 greenhouse gas
reduction commitments. It announced plans to bulldoze an ancient church
and forest in order to get at the coal underneath it.
…But Germany didn’t just fall short of its climate targets. Its emissions
have flat-lined since 2009.
 …Over the past five years alone, the Energiewende [energy change] has
cost Germany €32 billion ($36 billion) annually, and opposition to
renewables is growing in the German countryside.
Nor is there any hope for biofuels. Cattonl does a calculation:
In 1970 the entire United States corn crop came to about 4.15 billion bushels; this
would have yielded about 9.67 billion gallons of alcohol—if we had been willing to
forgo exporting any of the corn, or eating any of it, or feeding any of it to livestock.
Since each gallon of alcohol has heat value equivalent to about 0.7 gallons of
gasoline, this means the entire 1970 corn crop, converted to alcohol, could have
supplied less than 7 1/2 percent of that year’s domestic demand for motor fuel! It
would have supplied only 1.27 percent of total U.S. Energy consumption. Even the
record corn crop tabulated in 1976 (just over 6 billion bushels) would have supplied
less than 2 percent. (P45)
In 2019 the US corn crop is 13.019 billion bushels. Us Population 1970 – 205 million.
US population 2018 – 327 million. Of course the corn crop requires more and more
use of fossil fuels to produce. “Between 1910 and 1983, corn yields in the US increased
by 346% (on a per area basis), which the energy inputs increased by 810%, also on a
per area basis!”

We depend upon fossil deposits not only for fuel and food, but durable goods as well.
Manufacturing cars, houses, I-phones and the like requires fossil fuels. We not only
use them for energy, but make things from them, especially fertilizer. In short there is
no way to maintain “civilization” as we know it without fossil fuels.
Catton points to an attitude of “exuberance” fostered by the discovery of America and
the development of technology that allowed humans to use fossil energy. This was a
normal, perhaps inevitable, attitude during the period when population did not exceed
carrying capacity.That period ended around 1880, but the attitude of exuberance
didn’t. This attitude is the American “can-do” attitude: optimistic, democratic, work-
praising. In overshoot this attitude is obsolete, and will lead to catastrophe. Catton
wrote to inspire us to challenge this attitude.
Fossil fuel wells deplete. The resources are finite. Of this there can be no doubt. All
conjectures that they are a renewable resource fail in that if they were renewable at
the rate we use them the earth would be swimming in oil. Given how much extraction
exceeds discovery we can expect a decline in production relatively soon. This is likely
to happen in an unexpected way. Recent years have seen ever more heroic efforts to
extract oil. From Deepwater Horizon that blew up drilling a well five miles down in the
Gulf of Mexico to the ponzi scheme of “fracking” tight oil, evidence for a “last-dregs”
effort is everywhere.
Investors often consider oil drilling companies as “asset” plays. Their assets are the
proven oil reserves. Proven reserves are reserves they predict will be economically
producible – but at what price? Oil prices have continued to hover around $65. Proven
reserves that are economically producible at $85 might not be at $65. Already
reserves in Marcellus Shale have been downgraded.

The federal government gave the Marcellus shale a big thumbs down this
week. It dramatically downgraded its estimate of technically recoverable
natural gas in the formation, from 410 trillion cubic feet (Tcf) or enough to
heat and power the U.S. for 20 years–to 141 Tcf, or about a 7 year national
supply.
The Montery play in California is even worse:
 In 2011, the EIA published a report that stated the Monterey Shale in
California had 15.4 billion barrels of recoverable oil, or two-thirds of the
then estimated recoverable tight oil in the US. The EIA subsequently
downgraded its estimate to 13.7 billion barrels in 2013. Post Carbon
Institute and PSE Healthy Energy doubted the veracity of these estimates,
and I worked with them to assess the EIA’s claims by analyzing available
drilling data and the geology of the Monterey formation. In December 2013
they published my report, Drilling California: A Reality Check on the
Monterey Shale, which concluded that the EIA’s estimate was vastly
overstated. A few months later, the EIA quietly downgraded its estimate by
96% to 600 million barrels, but the revision was picked up by the Los
Angeles Times in May 2014.
Yesterday the U.S. Geological Survey (USGS) released a report stating that
the mean technically recoverable oil resource in the Monterey was just 21
million barrels, a further 96% downgrade from the revised 2014 EIA
estimate.
Oil companies that had been holding on in hopes of a higher price are being forced to
give up. Here’s the New York Times:

In the last four years, roughly 175 oil and gas companies in the United
States and Canada with debts totaling about $100 billion have filed for
bankruptcy protection. Many borrowed heavily when oil and gas prices were
far higher, only to collectively overproduce and undercut their commodity
prices. At least six companies have gone bankrupt this year, and
Weatherford International, the fourth-leading oil services company, which
owes investors $7.7 billion, is expected to file for bankruptcy protection on
Monday.
Gail Tverberg (Gail the Actuary) is good with numbers. She has predicted low oil prices
and a consequent recession in 2020. She points out that world oil production has
fallen since the fourth quarter 2018. This is in spite of sharp production increases in
the United States as a result of “fracking,” that make up somewhat for declining
production in the Middle East
In spite of this decline in production, oil prices have remained around $65 a barrel
even though the oil operations producing this extra oil are not profitable at less than
$80 a barrel, if they would be then. Ms Tverberg points out that “fracking” is such an
oil consuming operation that the increased costs, if oil cost $80, might still make
these operations unprofitable.
In any case, at $65 all the companies engaged in this activity have lost money. The
stock of Chesapeake Oil, once the second largest producer of natural gas in the United
States, has fallen from more than $60 to under a dollar while the stock market has
climbed.
Steve Schlotterbeck, who led drilling company EQT as it expanded to become
the nation’s largest producer of natural gas in 2017, arrived at a
petrochemical industry conference in Pittsburgh Friday morning with a blunt
message about shale gas drilling and fracking.

“The shale gas revolution has frankly been an unmitigated disaster for any
buy-and-hold investor in the shale gas industry with very few limited
exceptions,” Schlotterbeck, who left the helm of EQT last year, continued.
“In fact, I’m not aware of another case of a disruptive technological change
that has done so much harm to the industry that created the change.”
There are no longer any investors in these companies, and no one will lend them
money. They are drilling very few new wells and their current wills deplete 60% in the
first year.
Tad Patzek, head of the University of Texas at Austin’s department of
petroleum and geosystems engineering, has commented that companies
are trying to extract shale oil and gas as fast as possible. The danger of this
is that, “we’re setting ourselves up for a major fiasco”. He notes that after
production peaks in 2020 “there’s going to be a pretty fast decline on the
other side” and ”that’s when there’s going to be a rude awakening for the
United States.” He notes rather ominously that, “it cannot be good for the
US economy.”

Arthur Berman an independent geologist claims that the U.S. has only 2
years worth of tight oil production left given current levels of consumption.
He says that the US has about 10 billion barrels of proven plus proven
undeveloped reserves left yet it is consuming 5.5. billion barrels of oil per
year. On top of this was the 96% downgrade in shale oil reserves in the
Monterey play in California last year by the EIA which was meant to have
the largest shale oil reserves in the US.
Why can’t these companies sell such an essential product at a price that will allow
them a profit? Gail Tverberg makes a good case for the obvious – demand falls off
above that price. Income inequality has at last pushed poor people to the breaking
point. When prices of oil go up any further people drive less or buy fewer durable
goods. The little people can no longer tolerate a price above $65.
The sale of durable goods falls of sharply when the cost of oil pushes the prices up. A
good proxy for this is car sales. Car sales have fallen slightly for three years in a row.
Prior to that China had been responsible for almost all growth, which had been
significant.
In light of a state that could be dubbed ‘peak car’ in developed markets,
carmakers are particularly keen on tapping into the growing affluence of
Asian countries to increase worldwide car sales. Passenger vehicle sales in
China reached 23.7 million units in 2018, and Asia’s economic powerhouse
has emerged as the number one sales market for passenger cars.

Market stalls on weak demand in Asia

However, China appears to be grappling with an economic slowdown in

2019. Although the economy is still growing, there are fears that a
recession may be looming.
Car sales have fallen in China for the last two years.
The national auto industry body said total car sales fell 8.2% to just under
25.8 million in 2019, after having slid nearly 3% in 2018 in the first
contraction since the 1990s. December car sales in China dipped 0.1%,
according to the data, marking 18 straight months of declines.
So even with a decline in the amount of oil being extracted, the price will not be able
to rise. If it does the sale of durable goods will contract still further and with it
demand for oil. This means layoffs and still less demand. The work of all economists
based on an $80 price for oil is flawed. The world economy is beginning to contract,
and everyone is on the edge of panic. It is something like this dynamic that leads Ms
Tverberg to predict a recession. Only this time, with the oil depletion storm rolling in,
it is hard to see any shelter. Civilization is beginning a journey through energy
shortage to social upheaval, then on to chaos, war and the end. It is interesting that
in the near term it is income inequality that is the apparent cause.
The inevitable conclusion: either “civilization” as we know it, with all the
extravagance, goes, or homo sapiens will. Anyone complaining about climate change (
to name just one small part of civilization’s damage) who imagines there is a solution
that will allow him to live pretty much as he does now, is delusional, indeed as
delusional as those who deny the climate catastrophe completely. Catton’s book
demonstrates just how large overshoot was even in 1982. Obviously, it has gotten
much, much worse. There is no alternative to fossil fuels, and they are in decline. We
are beginning to slide down the slope on the other side of peak oil. We will soon
realize that we have estimated that we have far more than we really do. Only a plan
for a corresponding contraction of the need for fossil fuels, restricting their use to
transition to a human world that has a much smaller population, is worth
contemplating. That population will have to survive without advertising, vacations in
Phuket, and the military-industrial complex.
If contraction to a population within the earth’s carrying capacity is not done through
limiting birth rate, the four horsemen will do it. Such a thing could never be done
through force from above. It would have to be a plan embraced by virtually all of
human kind. Who knows? The sudden awareness of the dire situation might yet wake
us up. Still it must have a leader, someone who merely speaks what everyone wants
to say. One way or another, the human population will contract and “civilization” will
disappear in the near future. Already we see many states beginning to crumble into
nations, hastening the dissolution of the idea of a universal humanity and the
possibility for world-wide action. The United States, unable to release the butterfly of
“exuberance,” strangles itself in a cocoon of self-delusion. It seems bent on pointless
war and national suicide. The chance to see our situation clearly and act with purpose
is small and diminishing. If the human race could somehow manage an orderly retreat
from “civilization,” all we would have to worry about is the sixth mass extinction.