This is both optimistic and troubling.
Fairfax media reports that “China has put the world’s oil cartel into a death spiral“.
On the one hand we need oil to die. Like, yesterday. Anyone who’s paying any attention to the state of the world’s climate must understand this by now. We’re not just talking about sea level rise and the possible loss of some beachfront property. Climate change isn’t just about bushfires and floods and cyclones, although all of these things are important and traumatic for the people who live through them, the insurance companies that end up paying for them, and everyone else when the insurance companies stop covering them. More important than all of this is the loss of biodiversity, the loss of a predictable climate, the loss of regular seasons and thus the loss of a large proportion of our global food supply. Not to mention the collapse of the logistics channels that takes that rice, should we happen to be successful in growing it, from its paddies in Indonesia to the kitchen table in Melbourne. Climate change isn’t just going to make life uncomfortable for us all. Unchecked, it will lead to the deaths of a large percentage of the current eight billion humans on the planet.
The burning of fossil fuels is the primary contributor to the imbalance in the planet’s energy equation. It just is. If you’re going to comment that the climate has always changed or that humans are inconsequential or something something sunspots, please go elsewhere. This blog respects the science.
It follows that a big part of stopping climate change – if that’s still even possible – is the immediate and complete cessation of the burning of fossil fuels. So you would think that any news of a “death spiral” in oil extraction would be a good thing. But it’s not. Because oil is vital for a lot more than just turning into petrol (gas).
Obviously the biggest use of oil is turning it into petrol and other refined fuels. “We’re still reliant on fossil fuels for about 80 per cent of all of our total primary energy.” The world is working on reducing this. Too slowly, of course, but we’re building solar farms and hydroelectric generators and fleets of electric cars. And now, apparently, a burgeoning electric car industry in China is going to put OPEC and oil producers into a “death spiral”.
To understand this we need to understand the concept of EROEI.
Energy Returned on Energy Invested
"It takes energy to get energy, and the ratio of energy returned versus energy spent (energy return on investment, or EROI) has historically been extremely high for fossil fuels, as compared to previous energy sources." (resilience.org)
Or, to put it another way, it’s becoming harder, and thus more expensive, to pump a barrel of oil. For countries and companies whose existence relies on selling that oil for more than they spend to extract it, and in fact who require that excess to be continually growing, this means oil prices need to be kept high. Any forces that might reduce the demand for oil, and thus lower its price, run counter to that requirement. This is why we see OPEC (and, separately, both Russia and Saudi Arabia) deliberately reducing their oil output to force the price to remain higher.
"US industry executives are now openly acknowledging that US oil production is likely to peak within the next five or six years, or perhaps in 2030. But there is mounting evidence that the peak will come much earlier, with some industry observers pinpointing its arrival as early as within the next one or two years." (resilience.org
OPEC and the oil-producing nations need oil to be expensive if they’re going to continue to make profit on extracting and refining it. Expensive oil means people look for alternatives. For a time, those alternatives included fracking in the US, but that bolster to oil supply is drying up.
Many observers of the past 15 years of fracking frenzy have pointed out that the industry’s ability to increase levels of oil production has depended on low interest rates, which enabled companies to produce oil now and pay the bills later. Now central banks are raising interest rates in an effort to fight inflation, which is largely the result of higher oil and gas prices. But hiking interest rates will only discourage oil companies from drilling. This could potentially trigger a self-reinforcing feedback loop of crashing production, soaring energy prices, higher interest rates, and debt defaults, which would likely cease only with a major economic crash.
As the demand for oil goes down the price to generate a barrel of oil goes up, due to peak oil and the exhaustion of good/easy sources. Decreasing demand and increasing price can only lead to the collapse of the market. As oil prices rise, the profitability of renewable alternatives continues to improve. This will only hasten the transition to solar power and renewables across all of society. As the cost of petrol inexorably increases, consumers will prefer to buy the ever-cheaper and ever improving electric cars. This will further reduce the demand for oil and require oil producers to lift the per-barrel cost even higher to preserve their profits.
"In the late 2020s, then, we will likely see oil demand begin to peak. This will be exacerbated by the fact that the global oil industry is going to become economically unsustainable by around 2030, when it will begin consuming a quarter of its own energy just to keep pumping out more oil."
Sooner or later this system has to break.
What about everything else?
Because of a combination of greed and circumstances, we’ve brought ourselves to a situation where oil is no longer profitable to extract. But we still need it for things other than burning for electricity and for powering our vehicles.
"Major sectors like agriculture could see a steep decline, due to the scarcity of oil-based fertilizers and fuel. The ripple effect could continue to shipping, transportation, and even the food and manufacturing industries. In a worst-case scenario, large areas of the world could experience famine because of higher food prices."
We use oil and its derivatives to create building materials. Large scale fertilisers, herbicides and insecticides that support our industrialised food industry. Plastics, which are the foundation of modern society. Medicines. Soap. A larger proportion of our oil, coal and gas is used in energy generation and fuels, but our society as we know it can’t work without oil.
So. Oil is hard and expensive to extract and refine. The only reason we continue to do so is that the world demand for petrol is so high. But that demand is going to collapse. We have alternatives to fossil fuels for energy generation, and these alternatives are increasingly cheaper and better than oil.
What happens to our plastics industry, our medicines, our agriculture sector, our soap, when it’s no longer economically viable to pump oil? We don’t have alternatives for plastic.
We’re not prepared for this transition. Governments continue to support the fossil fuel industries as if they can never be allowed to collapse. But economic forces are going to overwhelm such efforts – probably soon.
There will still be a market for oil. Even when we’re not burning it for energy, we will continue to need it. It’s just going to cost an enormous amount more than it does now.
What it likely means is that the cost of everything will skyrocket. When our cheapest sources of oil include high-cost investments such as mining landfill to reclaim billions of plastic bags to convert them back into oil, plastic will no longer be cheap and ubiquitous. Food won’t be plentiful. Millions will starve – not because we can’t practically feed them, but because we won’t be able to afford the fertiliser.
The longer the burning of fossil fuels goes on, the worse the problem will become. The cost of extracting oil will continue to increase as accessible reserves decrease. When we stop burning oil, all that will be left in the oilfields will be the expensive dregs to extract for making our soap. The sensible approach now would be to encourage the death spiral as quickly as possible. Force the end of fossil fuels for power and preserve as much of our reserves for the rest of society to use. But governments are generally not in the business of forcing huge industries to collapse.
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