Some Thoughts on The Energy Transition

It’s tempting to conclude that because we have almost 68% inefficient power production that efficiency
gains or clean sources of power are going to be sufficient to perpetuate a growth economy. All scientific
evidence points to the fact that this is just not true. I could be wrong, but let me state my case.

Let me start by addressing what I believe are the two most important concepts to understand about
energy. Until I see these two items officially addressed, you can consider me skeptical of our chances
for making it through the next 10-20 years without witnessing something resembling a 3rd World War
and/or some kind of a major phase transition in of global money, financial & economic markets(…and
then, of course, war) (reference)

First, is the almost never discussed reality of Net Energy or Energy Return on Energy Invested (EROEI). It
takes energy to get energy and a society runs on the net amount of energy available to the non-energy
"producing" sectors of that society (in reality though, nothing is "produced" - it is extracted or
harvested as per the 1st Laws of Thermodynamics which states energy cannot be created or destroyed –
we just call it “production” because of the our utilitarian obsession with being “productive”). Gross
figures are essentially meaningless unless compared to the amount of energy required to get that
energy. (reference)

So, if someone is talking about the global energy situation, and they’re not talking about Net Energy or
EROEI – they’re lips may be moving, but they’re essentially saying nothing. Net Energy is probably the
single most important concept that policy makers, the market, and even otherwise well-informed
people are almost completely blind to. For example, if we took EROEI as a primary factor in energy
decision making, then corn ethanol would never have happened. Policies and market signals which
encourage the production of low (or negative) EROEI sources are essentially steps down the wrong path,
unless those efforts have a realistic chance of increasing that energy source’s EROEI to a level above the
minimal threshold to maintain the complex civilization we “enjoy” today. (reference)

If we want to avoid war, people I respect say that we should take our remaining net energy from fossil
fuels, and invest it in high-EROEI, non-fossil sources of energy with low environmental externalities.
Unfortunately, everything comes with tradeoffs. So, my sense, is although it still has a lot of problems, if
we don’t go nuclear immediately, I don’t see how we’ll be able to produce enough energy to “fund” the
transition to more sustainable sources of energy – and even then, it’s probably too late to avoid a
serious liquid fuels crunch within the next 3-5 years (my best guess). Not to mention, ore grades of
fissionable uranium are continuously declining (as are all mineral resources) and so, exponentially more
energy is required to extract it (i.e. the net energy goes down – even for nuclear energy sources).

The idea behind net energy analysis is so basic, but it can get very complex when you get into the
question of analytical boundaries (i.e. would you include in the calculation of the net energy of a
particular oilfield, the energy required for the guy that drives his car to the oilfields to drill the wells?).
The total amount of energy left over from what you put in to get energy is what society has to use.
When you think about it, oil, coal, and natural gas are really just like your “energy bank account” – and
“we” (in reality “we” didn’t even exist back then) were accumulating savings for over 100,000,000 years
before we tapped into that bank account (interestingly, an energy bank account knows no such thing as
compound interest…hmmm…implications?). Within 250 years, we’ve depleted about half of this
“energy bank account” that took, literally, millions upon millions of years to form.

And of course, because we always use up the good shit first (the high quality crude oil (the light, sweet),
the blackest coal (anthracite), and the easiest to get at conventional natural gas), we’re left with the
shitty stuff that is harder and harder to extract and yields continuously lower amounts of net energy (tar
sands and oil buried under 25,000 feet of ocean floor, lignite (shitty, brown coal), and shale gas (shitty
nat. gas) – not to mention the “renewables”). The reality is we’ve subsidized our entire way of life (as a
global civilization) by depleting our ecological capital. What we get in terms of ecological income (here
understood to be renewable resource stocks & flows managed sustainably) is laughable when compared
to what we get from drawing down the savings in our “energy bank account.” (see Chris Clugston’s eye-
opening “Societal Overextension Analysis” in Chapter 3 of his tour-de-force “On American Sustainability
– Anatomy of a Societal Collapse”)

So, as the net amount of energy available to non-energy producing parts of society declines (aka, the
savings in our “energy bank account” are depleted) what kinds of events or trends might you expect to
see? Some possibilities might include:

1. The untethering of the U.S. (and hence the world’s) monetary system from the thermodynamic
realities of a physically constrained economic system, with the closing of the ‘gold window’ by Nixon
in 1971. “Coincidentally”, this happened only one year after U.S. gross domestic oil production
peaked in 1970.
 2. Ever increasing levels of borrowing from the future (i.e. debt)…at compound interest of
course…in order to compensate for the fact that we could no longer fund today by “borrowing”
from the past as easily as we once did.

3. A situation where ever-more complex financial instruments used to price and distribute the risks
associated with growing levels of debt.

4. The continuous seeking out of the lowest cost operating environments and the transition to
“service” economies.

5. The shift to defined contribution pension plans.

6. The institutionalization of the temporary & contract worker.

7. Serial speculative bubbles.

I could probably go on for quite a while. The harsh reality is that as net energy declines, less physical
work can be done. So to keep the party going, the music gets louder, the smoke & mirror show
becomes ever more elaborate, to hide the unpleasant reality that it is becoming physically harder and
harder to create real wealth (not the paper claims on that real wealth). If we have reached peak
production of the most important energy resource (oil), and Liebig’s Law of the Minimum (see below)
states that the growth of a system is constrained by its scarcest, most important resource, would this
not suggest that we’re at Peak Everything?

Our entire way of life is dependent upon a system which is itself dependent on high EROEI sources of
energy. For example, Financial Return on Investment (FROI) is ultimately dependent upon Energy
Return on Energy Investment (EROEI) given that physical asset accumulation requires the energy to
“fund” it. So, if we’re at peak gross energy, then we’re already passed peak net energy and hence,
would it not make sense to conclude that we are passed Peak FROI?

The second major point about the problems facing the energy-
economic nexus, is Liebig's Law of the Minimum. This law (in
biology) states that the growth of a system is constrained by its
scarcest, most important resource (see image).

Eliyahu Goldratt kind of talks about this in

his book "The Goal," but we so rarely
extend our specialist knowledge of things to the big
picture (i.e. the microeconomic concept of declining marginal
utility doesn’t get extended to the macroeconomic landscape). If
we did, we would realize that the most important drivers of
economic growth (net energy & debt) are most likely already in
terminal decline or permanently impaired, and IF THIS IS TRUE,
then economic growth (as currently conceived) could
conceivably be over.
Regarding electricity production - it is “inefficient” because of the Laws of Thermodynamics - not
because scientists are dumb. Theoretically, this could be increased (i.e. using combined cycle nat. gas
turbines for example or combined heat & power stations). But, the reality is, our thermal power plants
the method by which the overwhelming majority of electricity is produced) is about as efficient as can
be – which is very inefficient. End use efficiency & conservation are areas where we could certainly
improve, but the conversion of primary energy into electricity using “heat engines” is an inherently
inefficient process. Putting solar panels on people’s rooves is definitely a wise idea in certain situations,
and it will be a booming industry given the fact that it’s 100% necessary, but it’s not going to solve the
problem – especially not the imminent liquids fuel crisis. It would appear that more interest is in large
solar farms – concentrating solar power to be exact (check out eSolar for example). Another supposedly
disruptive technology that only recently came out of stealth mode is Bloom Energy’s “Bloom Box” –
which is a stationary solid-oxide fuel cell (Kleiner Perkins sunk $400 million into it). Although the claims
about efficiency are probably true (twice the efficiency of a thermal power generation process), this
leads me to another bitch of the energy problem – namely, efficiency.

We must remember that with efficiency comes Jevons’ Paradox. This is the “dark side” of efficiency.
Jevons said “that technological progress that increases the efficiency with which a resource is used,
tends to increase (rather than decrease) the rate of consumption of that resource (wiki link). Although
efficiency has many other benefits, unless there were a “green tax” or something similar which was
levied to compensate increased demand due to higher efficiency and hence lower price, the ultimate
depletion of the finite resource would only be delayed. We should become more efficient in how we
“produce” & consume energy, but we must also recognize that finite sources of energy sooner or later
will be exhausted, and we need to learn to adapt to a world of LESS stuff (which I should note, does not
necessarily mean less happiness, although declines in material standards of living are often met with
war).

Then there is the temporal-scalar dimension to consider. The following I believe are some reasonable
numbers to work with. The IEA has said that conventional fields are already past-peak – this can be
seen by checking out the WEO 2009 report the IEA published last November. We are battling, what is
realistically a 4-5% decline rate in conventional oilfields already in production, which will likely
accelerate for a while before moderating. Given a fluctuation band of between 74-76 million barrels of
oil per day since roughly 2005, a 4.5% depletion rate equates to a 3.4 million barrels of oil per day per
year decline in production. That’s 7 million barrels in two years. That’s 14 million barrels in 4 years. A
single barrel of oil contains about 5.6 million BTUs. So, 14 million barrels per day X 5.6 million BTUs per
barrels X 365 per year = 28,616,000,000,000,000 BTUs (28.62 Quads). That’s how much we’ll have to
replace in terms of oil depletion within 5 years – and that’s just the gross figures - the net energy
produced is dropping EVEN FASTER. Problem is, because net energy analysis is so rarely considered, the
data on this phenomenon are very limited.

Bottom line is, we need to replace around 30 Quadrillion BTUs of energy within 5 years, JUST TO OFFSET
GROSS OIL DEPLETION (let alone grow production). If the economy has another leg down, the oil price
will probably fall again, causing investments in bringing on-stream new capacity to fall, due to a further
contraction in credit availability and a depressed oil price which makes it unprofitable to bring on-
stream the marginal barrel (which is around $80/barrel). While we might get a temporary respite in oil
prices (now over $80/bbl) if there is a double dip (a very real possibility) the very next time any
economic growth occurs, the pressure on the global supply system will be extremely tight – thus
increasing the chance of a resource-shortage driven geopolitical non-linearity.

I mean, if we started the transition 40 years ago when M. King Hubbert was proven dead right, then yes,
there would be no reason why we couldn’t have had a realistic chance of achieving a sustainable energy
system. But then Reagan tore down Carter’s Whitehouse solar panels while he declared it “a new
morning in America.”

America had its chance, and instead chose to waste 40 years. Now it’s the 11th hour and the only
response so far, seems to be war & geopolitical strategizing. Further debt creation may be impossible,
and hence, the “build-out” of the new energy paradigm may be not be able to be funded for both
energetic and financial reasons.

Lastly, regarding natural gas. Yes, natural gas is versatile. Yes, there has been some very interesting
developments with the shale gas plays in the US over the last 5 years. But there are a lot of problems
and misplaced hopes that come along with any “new” energy frontier. The truth is, the unconventional
shale gas reserves that are touted as "the bridge fuel to the 22nd Century" are really overhyped in some
cases. If you want a realistic assessment of the shale gas opportunity, I suggest you check out the work
of Arthur E. Berman who is a consulting geologist (see his ASPO slide deck here). The depletion in these
wells in unbelievable (over 50% in the 1st year is not uncommon). This makes it necessary to
continuously drill…because if you stopped, production would drop off of a cliff almost immediately.
What some have dubbed the “natural gas cliff.” The other important thing about shale gas is that it
relies on a technique called hydraulic fracturing which requires massive amounts of fresh water. I
recently heard Matt Simmons say that compared to the looming water shortages, Peak Oil is like child’s
play. So, if we think we’re going to switch from oil to shale gas as a bridge fuel, then we’ll run up against
water constraints sooner than we otherwise might have.

The laws of thermodynamics are a bitch set of laws. It doesn’t matter what you do….sooner or later, the
limits get you.

So, what’s the “solution”? Although I have no idea about how to get from here to there (without a
lot of suffering), it seems evident that we either transition to a steady state economy which is in line
with thermodynamic realties of the world, or we carry-on on the current trajectory towards a train-
wreck of epochal dimensions. I’m not that interested in resisting this change – given that I recognize it’s
futile to resist a shift that is rooted not in magic 8-ball predictions, but in hard geophysical realities. I’m
far more interested in figuring out what social, moral, and spiritual assumptions are going to be
completely inverted as a result of the decline in energy availability. I believe a fundamental shift in
perspective is coming (the consciousness revolution as some are calling it). I think there are the seeds of
a complete value-inversion being sown and are on the verge of really breaking through. This has
happened many times throughout history – and I believe we are in such a period right now. Although
this shift in values has traditionally played out over long periods of time, the coming shift in
consciousness has a reasonable degree of probability of happening extremely quickly. If you’re
interested in some trippy, but profound speculation about the future, check out this clip from the movie
called Waking Life – where the person being interviewed talks about “Telescopic Evolution.”
This is reasonable to assume if you look at trends in data production, manipulation & dissemination, and
the fact that now, as tensions mount, movements can coalesce and form extremely rapidly due to the
widespread use of social networks and decentralized information and communication technology
platforms. Although there is great promise in these tools, I see this awakening of the global
consciousness pitted against a future of authoritarian rule and a general move towards militarism. Who
will win out is a matter of considerable debate of course.

So. How do you operate in a “VUCA context” (volatile, uncertain, complex and ambiguous)? What
might be some strategic considerations? Rather than make this article any longer than it already is, I’ll
simply point you to the work of Noah Raford who is a PhD Candidate @ MIT who has done guest
lecturing at LSE on complex adaptive systems and strategy within this context. The presentation I
suggest is Raford’s presentation on competitive strategies for phase transitions (linked here)

If strategy is the alignment of one’s objectives and resources with the mandates of reality, then I believe
one must understand the way the world really works in order to develop that strategy. I believe that the
root of the problem that we face in the world today is a compound-interest bearing, fractional reserve,
fiat-monetary system coming up against the finite matter-energy system of the planet. This of course,
raises the age old philosophical question about what happens when an irresistible force meets an
immovable object?

I’ll let you ponder that one.