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Engineering in an Age of Limits, Pt. 9: No Bankable Projects
Engineers did not invent the steam engine — the steam engine invented them.
What will a post-oil society invent?
This is the ninth post in the series “Engineering in an Age of Limits”. We are facing limits in natural resources, particularly oil; there are limits to our finances (money seems to be increasingly disconnected from actual goods and services); and there are limits to how much we can continue dumping waste products into the air, the sea and on to land.
We are also facing a transition as the Oil Age comes to an end. This is not the first time that society has faced such a transition. At the beginning of the 18th century the principal source of energy in northern Europe was wood. However the forests were mostly depleted so a new source of energy, coal, had to be developed and exploited. The extraction of coal from underground mines posed new technical challenges particularly with regard to removing the water that flooded those mines. So new technologies, particularly the steam engine, had to be developed. Necessity was indeed the mother of invention. These technological developments led to many changes in society, including the creation of the profession of engineering. The transitions that we are currently experiencing as we look for alternatives to oil are likely to generate equally profound paradigm shifts. How this will impact the engineering profession remains to be seen.
The posts in this blog series so far along with those planned for the near future are:
2) Peak Forests
4) Four Strands
We have also, during the course of the last two years, published other posts to do with these topics. They are listed at our Welcome page.
This is the final post in the series to do with my personal journey into understanding the Age of Limits. We have already looked at resources and the environment — the third topic is money. It is also the most difficult to write about. Resources such as oil are moderately simple to measure and understand. And, to an engineer concepts such as the Hubbert Curve and Energy Returned on Energy Invested are not hard to grasp. Environmental issues are more complex but they also are physical phenomena that can be analyzed technically. But money is much more nebulous because it is a token for physical goods — it has no inherent value.
With regard to resources I have mentioned that a small number of people (Simmons and Hubbert in particular) provided me with a foundational understanding. With regard to environmental issues, particularly global warming, I have mainly soaked up information from many sources. I have already referenced Al Gore’s An Unpleasant Truth (in not an entirely complimentary vein). Other writers could be cited — sufficient to say that there is no shortage information about how we are wrecking the environment.
Which brings us to money. For understanding the role of money in the Age of Limits I have already referred to three writers in A Journey Part 3 — A Predicament. They are:
1) Richard Heinberg and his book The End of Growth: Adapting the Our New Economic Reality, published in the year 2011;
2) Gail Tverberg’s blog Our Finite World (where she pays particular attention to the role of debt); and
3) Chris Martenson’s Crash Course.
A few thoughts on financial topics are presented here — we will explore them in more detail in later posts. All I am trying to do for now is to describe my personal journey into understanding the Age of Limits and what it means for engineers. But, at the heart of this discussion, is a recognition that economic issues are not stand alone — they are connected to the world of physical resources. So, for example, adding money to the world’s economic systems in the hope that doing so will generate growth is foolhardy once one understands that there are insufficient resources to back up that stimulus, and even if we could jump start the economy in this manner we would simply add to our limits with regard to the environment.
At the heart of our economic predicament lies the inexorably declining value of Energy Returned on Energy Invested for oil and other critical energy resources. This is a concept I have discussed in Nine Pounds of Gold, and, because of its importance to all Age of Limits discussions, it will keep cropping up in future posts.
ERoEI simpy means that it takes ever-increasing amounts of money simply to find and extract oil from the ground then we would expect the price of oil to steadily increase. And that is what has been happening. The chart below shows the inflation-adjusted price of oil for the last twenty years. If we use a starting value $20 in the year 1970 and draw a straight line through the points to the year 2015 we see that the current price should be around $80. This gives an exponential growth in price of about 3% per annum over a 45 year period. (There is a good deal of scatter in the data — mostly due to short-term political events. But there is a clear trend of steadily increasing prices.)
This annual increase of around 3% is, in effect, a non-productive tax. It is the amount we pay to the oil producers to find, extract and refine the oil that is so necessary to our society. And it is incremental — every year the “tax” increases another 3%. And, given that we have already depleted the low-cost oil and gas fields, this tax will continue to increase. The goods and services that are used to produce the new oil are not available for other projects or activities. They are used, in ever increasing quantities, just to maintain the status quo ante.
Oil Production Rates
The world’s production of crude oil probably reached a peak around the year 2005. However, it is difficult to know exactly when that event occurred for the following reasons.
-On a year to year basis production rates do not change all that much, which is why I prefer not to use the term ‘Peak Oil’. It would be better to say ‘Peak Plateau’.
-There are many factors such as political and economic issues that can cause large fluctuations in the short term.
-The term ‘Crude Oil’ can mean different things to different people. In particular, it is important to know whether a person is including Natural Gas Liquids and Condensate as being part of the crude oil supply.
Given all these caveats, it appears as if the world’s production of conventional crude oil reached a plateau of around 75 million barrels per day in the year 2005 and has remained at that value since. In the last few years that number has been significantly supplemented by tight oil production from North America. However that source is already declining because the wells have a short life and lower prices make tight oil uneconomic.
Demand in the United States has fallen but in China and India it has gone up — so these two factors appear to have cancelled one another out and we are in rough equilibrium.
Projections for the next twenty years show a steep decline in production rates, as shown in the chart below.
The chart shows the production of conventional oil falling from 80 to 30 million barrels per day by the year 2030. Most of the gap is made up by production from ‘Unidentified Projects’, which, by definition, are unidentified. Even if those projects can be identified it will take many years to bring them up to speed but the chart shows that we do not have many years. Moreover, charts such as this make no mention of ERoEI — they make no mention as to how conventional oil will have to be diverted to provide the energy needed to develop and implement these Unidentified Projects.
Deflation / Inflation
I grew up at a time when inflation rates were high — and high inflation is something I never want to see again. When I first looked into the topic of Peak Oil I assumed that the price of oil would go up; this would be followed by general price increase and high inflation rates. However, at the the blog The Automatic Earth the authors Ilargi and Stoneleigh (Nicole Foss) make the argument that deflation is our biggest challenge. They make an argument on the following lines.
-Reduced supplies and increased prices for oil and other commodities reduces demand.
-The economy contracts — in particular, people lose their jobs.
-This reduces spending power and so prices fall.
-In such an environment cash is king and debt is to be avoided at all costs because jobs and other sources of income will dry up but debt payments will still have to be made.
In October 2009 Stoneleigh (Nicole Foss) made the following forecast.
. . . I would say that the energy prices that currently seem stubbornly high should fall substantially as the speculative premium evaporates and demand falls on a resumption of the credit crunch.
The result should be a reversal of a number of trends that depend on the ebb and flow of liquidity – we should see stock markets and commodity prices fall, a significant resurgence in the US dollar and a large contraction of credit. The scale of the reversal should be substantial, as should its effects on energy demand. Demand is not what one wants, but what one is ready, willing and able to pay for, and in a severe credit crunch the capacity to pay for supplies of most things will be severely reduced.
As demand falls, and with it prices, investment in the energy sector is likely to dry up. Many projects will be uneconomic at much lower prices, meaning that the projects which might have cushioned the downslope of Hubbert’s curve (and the much steeper net energy curve), are unlikely to be developed. In this way a demand collapse sets the stage for a supply collapse that could place a hard ceiling on any prospect of economic recovery. That is a recipe for extremely high energy prices in the future.
Apart from continued high stock prices her words are prescient. The recent drop in in oil prices was caused by short-term political issues. But behind the fall lies a reduction in demand as the economy contracts — or at least, fails to expand.
But — and there’s always a ‘but’ — many forecasters lose credibility when they make predictions of extreme events occurring in the near future. For example, in 40 ways to lose your future, Foss states,
Ordinary people are unlikely to be able to afford oil products AT ALL within 5 years.
Those words were written in June 2009 — more than five years ago — and our local freeway seems to be as congested as ever.
The above discussion points to the inexorable conclusion that economic growth is coming to an end thus taking us to the title of this post — the lack of “bankable projects”, a term introduced by Herman Daly of the Center for the Advancement of the Steady State Economy. He points out that, in spite of the availability of financial capital, few projects now generate an annual return of 10%, thus doubling in value every seven years or so. He says,
Where did all this excess financial capital come from? Not from savings (China excepted), but from new money and easy credit generated by our fractional reserve banking system, amplified by increased leverage in the purchase of stocks. In other words, capital is not created from savings or from returns on successful projects. And the reason for this is that we are depleting our natural resources.
And the reason that real growth cannot be achieved is that we no longer have the natural resources needed to sustain that growth.
. . . growth in yesterday’s empty-world economy was reasonable — in today’s full-world economy it is not.
In other words, few high return projects are available because we have entered and Age of Limits.
This post concludes my very brief overview of my personal journey into understanding the Age of Limits, how it will affect engineering and how engineers can help some of the wrenching changes that are about to occur. We will continue writing posts at this blog on a weekly basis, at time permits.
About the Author
Ian Sutton is a chemical engineer with over 30 years of design and operating experience in the process industries. He provides services in all areas of process design, plant operations and process safety management — both onshore and offshore. He provides consulting services to senior management on the implementation, effectiveness and cost of process safety and risk management programs. His clients include companies in oil and gas production and refining, pipelines, chemicals, minerals processing, and food production.
You can follow along with Ian’s thoughts and musing on process safety at his personal blog, The PSM Report here.
He has published the following books with Elsevier:
Engineering brings science and technology out of the lab and into the real world. Often without thinking about it, we engage every day with technology that is the product of careful, precise design and execution by engineers in electronics, optics, and communications; embedded systems; automotive, aerospace, and marine; mechanical; and many other disciplines. For decades, Elsevier has maintained and grown extensive collections in these and other cutting-edge areas, like biomechanics and nanotechnology, through our trusted imprints: Newnes, Academic Press, and Woodhead Publishing. In addition, our powerful online platforms like Knovel and Engineering Village help streamline research and development processes for users around the world.