Monday, May 22, 2017

The Dying Fossil Fuel Industry

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The classic shape of an economic bubble (source). Notice "New Paradigm" at the top, the point at which market participants decide "this can go forever." Big Oil CEOs think nothing can topple the technology that turns fossil fuel into energy — that unlike every other technology in history, their technology will never be replaced.

by Gaius Publius

Whom the gods would destroy, they first make mad.
Sophocles (tr. Longfellow)

We've written before about the coming crisis in the fossil fuel industry, the one that extracts oil, gas and coal from deep in the earth so it can be burned as fuel. For example, this from December 13:
and this from March 16:
Despite the stranglehold Big Oil has on energy production — to enhance their wealth and for no other reason — the industry is doomed to die. There are just three questions left unanswered:
  • Will the industry die quickly or slowly?
  • Will it be brought down in an orderly way, by government intervention, or by its own self-destructive internal forces?
  • Will the industry fatally worsen climate change before it goes, or will humans escape the grip of Big Oil in time to prevent most of the preventable damage? 
Because, make no mistake, Big Oil has a fatal disease, two of them in fact, and either or both are going to end its life as an industry. (The companies may survive, but not as carbon extraction companies; I have an interesting fantasy, in fact, about an event that would instantly kickstart a U.S. return to global climate change leadership, but I'll save it for later.)

Disease One — Vulnerability to Climate Change Itself

The first of those diseases is the industry's vulnerability to the inevitable climate crisis. There are only two ways our current, business-as-usual climate behavior — where we pump gigatons of CO2 into the atmosphere each year and watch ocean and atmospheric temperatures relentlessly rise — will end:

1. The Chaotic climate-response scenario — Humans don't stop pumping carbon into the air until, as a species, we're pre-industrial or worse; we live through the all the chaos that devolution implies; we lose the technology and numbers to do further damage; then we watch the result play out for centuries, if we survive that long. In other words, our response is to allow whatever happens to happen and try to live through it.

A chaotic, multi-decade transition from where we are now to that point (note: multi-decade, not multi-century) will be the stuff of dystopian nightmares. That transition will be global in scope, obvious as to its cause, and will play out monstrously in full view of anyone who lives into the 2030s. That's not too many years away. In fact, the transition has started already in the Middle East and Europe. (For more, see "Climate Change in the Age of Trump".)

Keep in mind, systemic collapses don't always happen quickly, but many do.

2. The Voluntary climate-response scenario — Humans voluntarily and proactively end the extractive carbon industry because it's an existential threat to survival. Whether humans do this in time to avoid the worst of what's coming is another question. The point is that we play an effective proactive role, not a passive, reactive one, before the chaos mentioned in the Chaotic scenario overwhelms everyone.

Either of these outcomes spells the end of the fossil fuel industry. In the Chaotic scenario, the end comes when global chaos shrinks the industrial base of the planet, causing fuel prices to rocket upward because of supply shortages, then collapse because of shrinking demand. Societies in chaos don't buy new Toyotas at anything like their old rate of purchase, and increasing the number of societies in chaos decreases the global market for all manufactured goods.

Bottom line: Climate change itself will end the industry if disease number two doesn't do it first.

Disease Two — Vulnerability to Its Own Internal Instability

The second factor that could end this industry is described in the two pieces linked at the beginning of this one. Even in the absence of a climate crisis, the industry itself is a dinosaur, a thing of the past providing the energy source of the past. Its dominant market position is extremely unstable, since its profitability depends entirely on massive capital infusions via subsidies and on a compliant political atmosphere — and complicit politicians — to keep it afloat.

What's more, the industry sits on a mountain of debt that can never be repaid, will never be repaid, and it's poised between two bad pricing decisions — keep prices low, which will accelerate the industry bankruptcies caused by those debts (which will also bankrupt some banks); or raise prices higher, making the fossil fuel industry's debt service more sustainable in the short term while driving an even faster transition to renewables in the long term.

Neither of those alternatives — death by low prices or death by higher prices — is a prescription for long life, or life at all. One alternative underfunds the industry, ultimate fatally. The other overprices its product in the midst of a decades-long recession. (For this will be a "decades-long recession," see "America Cannot Recover from This Recession Until It Writes Down Debt to What Can Be Paid".)

Bottom line: Even without a climate chaos event, Big Oil cannot survive as an industry because it's critically hooked to a last-generation energy technology and has within it fatal financing flaws.

Big Oil's Price Dilemma

This gloomy outlook for the industry is supported by many knowledgeable insider sources. Former Guardian writer Nafeez Ahmed, an expert on the industry, and on climate change dynamics generally, recently reported on its price and debt problems for Motherboard, supporting the points I made above. Note his reference to this industry analysis, one of several he could have chosen:
We Need to Accept That Oil Is a Dying Industry

The future is not good for oil, no matter which way you look at it.

A new OPEC deal designed to return the global oil industry to profitability will fail to prevent its ongoing march toward trillion dollar debt defaults, according to a new report [pdf] published by a Washington group of senior global banking executives.

But the report also warns that the rise of renewable energy and climate policy agreements will rapidly make oil obsolete, whatever OPEC does in efforts to prolong its market share.
About Big Oil's pricing problem, he writes:
[A]ccording to Michael Bradshaw, Professor of Global Energy at Warwick Business School, a price hike would not solve OPEC's deeper problems. In fact, it could speed up the transition away from oil....

As oil gets more expensive again, there is more incentive to use alternative, cheaper forms of energy—like solar photovoltaics, which can now generate more energy than oil for every unit of energy invested....

"We are not in a business as usual world," Bradshaw said. "Higher prices for oil and gas will drive investment in efficiency and demand reduction and also substitution, so they may actually promote structural demand destruction."
Please do note the second paragraph above. Photovoltaics can now generate more energy per unit of energy invested than oil. The technology that produced energy from fossil fuel is a dinosaur, inefficient and getting more so every day compared to what's emerging. It's only the political grip of the kings of that industry, the Rex Tillersons and the David Kochs, that keep it viable.

Big Oil's Debt Dilemma

About the industry's debt burden Ahmed writes:
It's not just OPEC that needs to be prepared. A report [pdf] published in October by the Group of 30 (G30), a Washington DC-based financial advisory group run by executives of the world's biggest banks, warns investors that the entire global oil industry has expanded on the basis of an unsustainable debt bubble....

The industry's long-term debts now total over $2 trillion, the report concludes, half of which "will never be repaid because the issuing firms comprehend neither how dramatically their industry has changed nor how these changes threaten to soon engulf them." [emphasis added]
A $2 trillion debt burden with $1 trillion doomed never to be repaid — will kill even the largest industry once investors become convinced they'll never get their money back.

Collapses Can Come Quickly

I'll say again, collapses often happen quickly, especially collapses of investor confidence. And when they do, they don't give much warning. The price floor simply gives way, and look out below.

The example most familiar to Americans is the stock market crash of 1929. But it's by no means alone. As an earlier classic example, here's what happened to the price of tulip bulbs, which had at one time been bid up by investors in a way that resembles the recent housing market. Once investors decided they could never get back what they paid for them — because there was no more "next fool" to sell to — the price collapsed almost immediately, each panicked seller panicking the next one.

Shown alongside that chart is the fate of the South Seas Company, a less-familiar bubble-and-bust investment of the same era. Different market, same story.


And here's the NASDAQ price chart in the lead-up to the Dot-Com crash of 2002:


Price collapses often happen this suddenly, especially in an industry as fueled by "delusions" as this one is. See the article itself for a list of those delusions.

The Question for Americans — Not When But How

The only real question for us is not when the industry collapses, but how it collapses. It can collapse later, with global society collapsing at the same time — in other words, our Chaotic scenario above. Or it can collapse in a managed way — our Voluntary scenario above. Or finally, it can collapse relatively soon, a victim of its own economics, as outlined by Ahmed in the article, prior to the fatal rise of social chaos.

A sudden collapse that happens fairly quickly would also be chaotic, but that may not be bad, all things considered. Imagine what could happen in the country and the world if oil prices fall to, say, $25 per barrel from today's price of about $50 per barrel. Smaller fossil fuel companies would disappear as suddenly as firefly light on a hot summer evening. The industry would be in economic turmoil, desperate for funding.

You can almost hear the cries for even greater government subsidies, added to the already massive global subsidies it now receives, $1.82 trillion, or 3.8 percent of global GDP. This would amount to our next big national bailout after the Wall Street bailout of 2009, as before with taxpayer money.

Would Americans foot the bill for a second massive bailout, so soon after the first? Would they do it if Big Oil is the recipient? I think the political chaos surrounding that public discussion would be deadly to Big Oil all on its own.

A chaotic event as well, yes, but also very welcome from a climate change standpoint. One alternative to a hated, massive Big Oil bailout would be to provide the same money as a subsidy to the renewables industry, giving it a needed "putting a man on the moon" boost to replace Big Oil. If that were the outcome of a Big Oil industry collapse, I'd take it tomorrow.

GP
   

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9 Comments:

At 11:57 AM, Anonymous Tom Wakely said...

There was a time that the Texas oil and gas industry fueled the nation. We can lead our country's​ transition to a renewal energy economy and in the process create millions of new jobs.

 
At 1:50 PM, Anonymous Hone said...

Thank you again, Gaius, for an excellent and hugely informational piece. The oligarchs in the oil industry will never let go. Never, Never. They will hold on until the end, either until the collapse of the environment or they are forced out.

Yes it would be far better for us to invest heavily now in alternative energies but Congress is far too much in the grip of the rich to do so. Also, they have shown more than ever that they are greedy folks without ethics or morality who do not give a hoot about representing the people who vote for them. Our politicians no longer function whatsoever in the best interests of the country, the people or the environment let alone democracy. The Republicans are by far the worst offenders but the Blue Dogs and the New Dems also stink to high hell.

If only the American people would wise up! It is not only health care at stake! So much more is at stake. The planet is at stake.

 
At 3:30 PM, Blogger Thomas Ten Bears said...

There has grown up in the minds of certain groups in this country the notion that because a man or corporation has made a profit out of the public for a number of years, the government and the courts are charged with the duty of guaranteeing such profit in the future, even in the face of changing circumstances and contrary to public interest.

This strange doctrine is not supported by statute or common law. Neither individuals nor corporations have any right to come into court and ask that the clock of history be stopped. Lazarus Long

 
At 4:41 PM, Anonymous Anonymous said...

Still plenty of time for Trump to unleash the oil industry on what remains of public lands. Dry holes ruin the land at least as much as every other form of energy extraction.

 
At 5:30 PM, Anonymous Anonymous said...

Not a chance in hell. There's enough in the ground and under the sea (clathrates) to keep humans burning shit for another century.

And that's exactly what we'll do. The stuff is too cheap and easy and energy-dense. And humans never fix anything of this scale. They allow it to kill them(selves, see: easter island).

7.5B humans now going rapidly to 10B in a generation or so mean that the easy shit for power is what we'll do.

Also, the industry knows that raising prices makes people turn to alternatives, and keeping prices low keeps people burning their shit. And we just elected a president running partially on a promise to mine and burn coal forever to keep those happy miners in gold and diamonds.

Humans are just too fucking stupid and lazy to ever demand that this changes, even to save our own pasty white skins. It's a fatal flaw.

Plus, scientifically, it's already too late to undo eventual global catastrophic climate change. Even if humans wanted to, which we don't, we could not.

 
At 1:06 AM, Anonymous Anonymous said...

ALL our activities are dependent on ENERGY usage. That ranges from our food intake to delay the ultimate oblivion of entropy all the way to the most esoteric examinations of the structure of matter/energy itself.

This, of course includes "the economy" which has been able to provide society so many "interesting" and wasteful products/pastimes.

The problem is that "economics" has been based on accounting for the flow of money instead of, accurately, for the flow of energy. The money price of fossil energy has never been commensurate with its a) importance nor b) its finite supply.

The fossil fuel industry only reached its point of power because we happily consumed the grossly under-priced energy it was providing. It will not simply "die" without serious societal and economic repercussions to those who gave it "life." The consumption pattern of the earth's population will not be able to continue - for lack of energy - even for those with $billions of dollars in their bank accounts.

The death of the fossil fuel industry occurs when it takes more energy to extract the next unit of energy from the earth than the energy content of that unit. That the industry is "ill" is proven by the fact that a higher and higher percentage of fossil fuel production is afforded by technologies that require massive expenditures of energy to produce new supplies of energy, for example, deep-water drilling, fracking and shale/tar sands.
(see "EROEI" > energy return on energy invested, for example: tinyurl.com/ov4pgqj)

The article cited suggests " ... (IF) solar power can produce up to approximately 14 times the amount of energy invested, it is already able to produce more energy than oil and gas for every unit of energy invested." Even IF that is true, it speaks less to the increased efficiency of solar energy harvesting technology than to the inevitable decrease in the energy-cheap sources of fossil fuels.

The BEST scenario is that we use the remaining fossil energy sources to build the solar energy harvesting infrastructure of the future. Of course, since, for example, it is difficult to conceive of solar/electrically-powered airliners, each filled with 100's of tourists, that scenario can only include drastic changes to the nature and expectation of "the economy" and the unavoidable results of climate change that our love affair with "cheap" energy has already mandated.

As already mentioned in comments above, when is the last recorded occurrence of humankind recognizing a major threat to itself and then following the best scenario to avoid it?

John Puma

 
At 6:34 AM, Blogger Eric Gregory said...

Great write up gaius.

 
At 6:43 AM, Blogger Thomas Ten Bears said...

I'll not argue anon, your analysis is spot on. The fly in the ointment: ten billion people on a planet that can barely sustain one. Do the math.

If that spectral being all these chosen people have entered into some kind of special contract with would hurry up and float down out of the sky on a flying rainbow unicorn with a thousand spectral helpers on flying rainbow unicorns and carry them all away to paradise we could get on with mitigating the damage.

What!? It's right there in the book, millions perhaps even a billion believe it so it must be so.

 
At 7:02 AM, Anonymous Anonymous said...

Good augmentations by JP and TTB. I've been trying to point out these things forever. It is unimportant that few understand any of this. It's already too late for climate. The geologic record shows us what happens when CO2 ==> 350 ppm, and that's where we're going. period.
Do not lament for yourselves, as this is a gradual (in human timelines) process. Lament for your young children and grandchildren, for they will likely live to see the human toll the planet will take.

The thing GP neglected is not only that humankind has NEVER even addressed such a positively lethal situation, much less solved it, but governments exist to ensure that the economic/energy producing entities (corporations) thrive while they remain indifferent to the plight of citizens. Also, this has always been so.

The charter of human governments has always been antithetical to the interests of the governed in these regards. One needs only to reflect on the actions of governments since 2008.

Fossil fuels will be around as long as human governments exist to keep them whole.

 

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