Goildilocks and the Bears – oh for an oil price that is “just right”

Last week my reading caught two articles. Low oil prices will cause political upheaval and unrest and high oil prices will cause…

yes, you guessed it, political upheaval and unrest.

1) Carbon ‘bubble’ could cost global economy trillions in which the journalist reports on a report – this is an annoying modern (?) trend where there is no analysis – just “he said, she said” reporting. But I’ll stay off my soap box on that one for now…

The underlying research by a Cambridge academic can be paraphrased as a reworking of the “stranded assets” theory – that the rapid transition away from fossil fuels will leave assets stranded or dirt cheap due to a “a rapid sell off, of oil and gas reserves by producing countries eager to get rid of the fuels before they become worthless.” Ergo a massive tranche of the world economy is removed (since oil is a trillion $ business) and the resulting massive budget defecits in oil producing countries will cause political upheavel and unrest.

My first reaction to this was the same as to most “stranded assets” stories – that it is reliant on lazy and wishful thinking. These assets will be stranded if the world meets or exceeds the carbon reduction targets of 2 Deg C. What this fails to mention is that that target requires an 85% reduction in carbon (or possibly more according to Google engineers)- hence the argument that fossil fuels are “over”, are “done”… they cannot be produced if we are to meet the target… (an unchallenged assumption). Whilst this gets whoops and hollers at TED talks, and provides a good living for “futurists” and pundits, it singularly fails to ask what will happen to society when we have to use more expensive alternatives. In fact this question is not asked, it is not even considered – watch out for the journalistic slight of hand of “as we transition to cleaner and cheaper energy” Who are in denial now? Cleaner AND cheaper…? based on today’s technology this utopic vision has been widely disproved. Now that really is an inconvenient truth, but you won’t read about it as it doesn’t fit the narrative and in any case no one wants to hear it.

My second reaction to this was, damnation! I wrote the same stuff in a blog post here on Linkedin in January 2016… so I had drunk the kool-aid early on, but I now have a quite differing view – at least on timing. Mea Culpa 🙂 I now believe that Peak (oil) demand is still a long way off (whereas Peak Cheap Oil is almost certainly already behind us). One aspect that both I and the Cambridge authors missed is that if oil prices go so low as to create political upheaval in the producing countries as postulated – well, that will choke off supply and oil prices will go up again!

The second article is in the FT, Rising oil prices prompt fears of social unrest. This shows how high oil prices will hurt the economies of oil importing countries (a well worn pattern unfortunately). This is likely to be felt quickly as many counties took the opportunity to remove fuel subsidies during the low oil price period of 2014-2017. The effects of rising crude prices get passed through directly. Over the weekend Egypt announced increases of 50% to fuel prices. A fifty percent increase…

And its not just developing nations (Egypt, Brazil) – the UK, with a currency affect adding to the problem, has seen steep rises in the price of oil at the pump. No social unrest yet, but certainly grumblings.

…diesel prices have been rising for even longer, with supermarkets raising the price every single day since the 27 March.

Brazil was brought to a standstill two weeks ago by a truckers strike, which was resolved by the government ceding, Petrobras being forced to pick up the tab, the Petrobras share price tanking and the CEO resigning. Normal day at the office with volatile oil prices? One thing is also sure – when energy related panic starts, capital becomes “risk-off” and abandons emerging markets with reckless haste – so even oil producing counties get hit.

So is the porridge too hot or too cold?

To my mind I would be much more worried about the higher oil price scenario than the former. If the current modest ramp-up in prices of crude starts creating newsworthy unrest in Brazil and the UK (and soon Egypt?), the ramifications of what $150 or $200 oil will do are dire. As James Schlessinger said in 1977 when Secretary of Energy for the USA:

“we only have two modes – complacency and panic”

Currently there is huge complacency. I call this the Bookend Problem

On the future side of the bookend, we have a vision that we will all be driving EVs within ten years, and oil will be disrupted. At the other end we have a view that we are “awash with oil”, that the US shale revolution will lead to “energy independence” and/or “dominance”, so we have no problem between now and the EV future. This accepted narrative resonates with all the desired outcomes of the Energy Transition, but is almost certainly wrong at both ends. The transition to EVs will be longer and slower and have less effect on the oil demand than “futurists” would have you believe (although it is likely to happen, and I would be very happy to drive an EV). The amount of oil in the shale is probably huge – but the key is the cost of extraction. Throw enough money at it and you will extract huge volumes – but it is not a big supply of cheap oil.

World economic growth depends on surplus cheap energy, currently 85% of the worlds energy is fossil fuel based. Despite huge improvements in the cost base of renewables, the cost is still higher on an energy-returns basis. I have never seen any analysis of just how much renewables rely on cheap energy to underpin their cost base (please let me know via the comments).

Currently we use cheap energy (mostly fossil fuel derived) to mechanize the mining, transportation and refining of minerals, the manufacturing, transportation and installation of products, as well as the maintenance – what happens to the cost base of renewables when oil (energy) gets more expensive? You have to spend more to get more, which at some point becomes a game of diminishing returns. Obviously the same applies to oil itself. When Spindletop blew-out in in 1901 it is estimated that it was flowing 100,000 bopd. At current oil prices and drilling costs (assuming no blow-out) it would pay-back in about 2 days. The energy supplied to the world economy by such a well is essentially free. Mining oil-sands is very energy intensive, albeit still economically worthwhile on a pure energy-in energy-out basis of analysis.

Currently all energy production is “subsidised” by the cheap (mostly fossil) energy we have today. As the underlying energy supply becomes more expensive so the cost of all energy will rise – and this will reduce the scope for “growth” as more money and energy will be needed to stand still (the “Red Queen” problem).  According to some, the “energy transition” is a mirage, as the renewables don’t have enough “bang for your buck” to contribute. The doomsday scenario of hitting an EROEI (or EROI) cliff-edge, leading to the collapse of industrial society seems a bit far fetched. However, the direction of travel is pretty clear.

This isn’t an either/or scenario with respect to fossil fuels and renewables. A planet with 7 billion people needs a huge amount of energy as it is, without even looking at growth. That energy will come from a combination of many energy sources. Using the currently available cheap energy to build out as much renewable (actually “replacable”, you don’t “renew” solar panels or wind turbines, you must replace them) energy sources as possible will serve to slow the depletion of cheap oil (and other) fuel sources, thereby prolonging the transition to a lower EROEI mix.

An overly zealous transition could have severe unintended consequences, which could be far more immediate and impactful than the uncertain effects of Climate Change. Political unrest on minor changes in oil price may be the canary in the coal mine.

When thinking about energy, be careful what you wish for.

NB:

Yes, I know I spelled Goldilocks wrong… its intentional.