The Brent oil field, off the Scottish coast, is scheduled for decommissioning. Bente Stachowske/Greenpeace
https://www.vice.com/en_us/article/8848g5/government-agency-warns-global-oil-industry-is-on-the-brink-of-a-meltdown
We are
not running out of oil, but it's becoming uneconomical to exploit
it—another reason we need to move to renewables as quickly as possible.
A government research report produced by Finland warns that
the increasingly unsustainable economics of the oil industry could
derail the global financial system within the next few years.
The new report is published by the Geological Survey of Finland (GTK),
which operates under the government’s Ministry of Economic Affairs. GTK
is currently the European Commission’s lead coordinator of the EU’s
ProMine project, its flagship mineral resources database and modeling
system.
The
report
was produced as an internal research exercise for the Finnish
government, which until 2019 held the Presidency of the Council of the
European Union.
Signed off by GTK’s director of scientific
research Dr Saku Vuori, the report is written by GTK senior scientist Dr
Simon Michaux of the Ore Geology and Mineral Economics Unit. It
conducts a comprehensive global assessment of scientific research into
the state of the global oil industry with goal of determining how the
risks of a global supply gap could impact mining and mineral production.
The peer-reviewed report calls for the European Commission to
consider oil as the world’s most important "critical raw material."
Despite offering a scathing critique of conventional peak oil theory,
the report arrives at the shock conclusion that the economic viability
of the entire global oil market could come undone within the next few
years.
Oil, oil everywhere, too costly to drill
The
plateauing of conventional crude oil production in January 2005 was one
of the triggers of events leading to the 2008 global financial crash,
according to the report. As debt built-up in the subprime mortgage
sector, the crude oil plateau drove up the underlying energy costs for
the entire economy making that debt more difficult to repay—and
eventually resulting in catastrophic defaults. The report warns that
“unresolved” dynamics in the global energy system were only temporarily
relieved due to "Quantitative Easing"—the creation of new money by
central banks. A correction is now overdue, it warns.
The report says we are not running out of oil—vast reserves
exist—but says that it is becoming uneconomical to exploit it. The
plateauing of crude oil production was “a decisive turning point for the
industrial ecosystem,” with demand shortfall being made up from liquid
fuels which are far more expensive and difficult to extract—namely,
unconventional oil sources like crude oil from deep offshore sources,
oil sands, and especially shale oil (also known as "tight oil,"
extracted by fracking).
These sources require far more
elaborate and expensive methods of extraction, refining and processing
than conventional crude mined onshore, which has driven up costs of
production and operations.
Yet the shift to more expensive
sources of oil to sustain the global economy, the report finds, is not
only already undermining economic growth, but likely to become
unsustainable on its own terms. In short, we have entered a new era of
expensive energy that is likely to trigger a long-term economic
contraction.
The coming crash
‘Quantitative Easing’
or QE as it’s often known in shorthand, consists of massive programs of
money creation through central banks purchasing government debt. But the
report warns that the scale of QE could pave the way for another
financial crash as oil markets become unstable, most likely within half a
decade.
The role of QE in propping up the oil industry and
wider global economy was not anticipated in traditional peak oil theory,
which failed to predict the low oil prices endangering profitability.
The report concludes that: “The era of cheap and abundant energy is long
gone… Money supply and debt have grown faster than the real economy.
Debt saturation and paralysis is now a very real risk, requiring a
global scale reset.”
Although the world therefore needs to urgently transition away from
fossil fuels, it may well be too late to do so in a way that avoids an
economic crisis. And doing so will require industrial civilization as we
know it to be fundamentally transformed:
“To phase out
petroleum products (and fossil fuels in general), the entire global
industrial ecosystem will need to be reengineered, retooled and
fundamentally rebuilt," the report notes. "This will be perhaps the
greatest industrial challenge the world has ever faced historically.”
Professor Nate Hagens, a former Vice President at investment
firms Salomon Brothers and Lehman Brothers who now teaches ecological
economics at the University of Minnesota, said he "finds the report
quite plausible."
"But our institutions and policies and
expectations are ‘energy blind’,” he told me. He believes that the
report’s warning of a coming economic crisis is very likely.
“We optimize around growth, which requires energy which requires carbon
energy,” he said. “We have created approaching 300 trillion dollars in
financial claims, on a finite amount of high quality resources... All in
all, we’ve created too many claims for future energy and resources to
support.”
From Saudi peak to shale bubble
The report
offers the first independent public government assessment concluding
that Saudi Arabia, once the world’s largest oil producer, is now
probably approaching (and may already have passed) a production peak.
The study cites accelerating rig counts amid disproportionately low oil
output as mounting evidence of the Saudi oil sector’s declining
productivity. It also cites data from the
recent IPO
held by the Saudi national oil firm, Aramco, indicating that production
levels from the country’s largest field, Ghawar, is 1.2 million barrels
lower than previously claimed, suggesting the field is nearing
maturity.
Meanwhile, as Saudi Arabia has been unable to keep up with demand, US shale has stepped in, contributing to the
vast bulk of new global oil supply since 2005—71.4 percent of it to be exact.
The rest of the international oil market is dominated by
Russia and Iraq, with other members of the OPEC (Organization of the
Petroleum Exporting Countries) consortium of Middle East oil producers
overall contributing just 22 percent of total supply, barely enough to
cover losses from countries whose production has been declining.
A bubble ready to burst
The report warns that global production growth may therefore soon stall
due to the dodgy debt-driven economics of the US shale industry. While
Saudi Arabia will no longer be able to ramp up production much, the US
shale oil sector could be on the brink of unravelling due to massive
unrepayable debts, declining production rates, and poor well quality.
While the productivity of shale oil wells has increased at first
glance, the report says this has come at the expense of “observable
decreases in real productivity.” Increasing production “has come at a
cost of increased lateral drilling per hole and the increase of water,
chemical, and proppant.”
So while average production from
fracked US shale wells increased between 2010 and 2018 by 28 percent, in
the same period water injection, chemical and proppant use increased by
118 percent. The report says this indicates the huge spike in
extraction costs.
Meanwhile, the report warns that most shale oil companies
experience negative cash flow due to mounting unrepayable debt levels.
As a result, we are fast approaching a point where
investors are losing faith in the industry, which is now running out of money to sustain continued operations amidst declining profitability.
The exact date of a peak in US shale oil production is difficult to
estimate, but the report concludes that production “is likely to be in
terminal decline within the next 5 to 10 years, with the possibility
that it has already peaked due to contraction of upstream capital
investment.”
If that happens, it would mean we can no longer rely on the principal source of oil behind global production growth.
According to
World Oil, two major oil industry service providers, Halliburton and Schlumberger,
already believe
that despite production reaching record highs, US shale oil fracking
has already peaked and is in a period of sustained contraction.
A global peak?
The report is heavily critical of conventional peak oil theory, which
predicted that global oil production would peak and decline shortly
after 2000 due to ‘below-ground’ geological depletion, leading to
permanently spiralling oil prices. The approach is described as “too
simplistic” for overlooking “the complex and dynamic interactions of a
number of issues around the oil industry (most notably geopolitical
actions and the effect on Quantitative Easing).”
But the report
also dismisses the now fashionable rejection of the entire relevance of
peak oil. Although there is “plenty of oil left,” it is “increasingly
expensive to access”.
The current economic system cannot
sustain oil prices above $100 a barrel and keep growing, while producers
for most new fields cannot sustain profits at prices as low as $45 a
barrel without more borrowing.
According to Dr. Michaux, the
global economy is therefore caught between a rock and a hard place. “Oil
prices will be held low for a time,” he explained. “The problem is all
consumers at all scales in all sectors are saturated with debt. Costs
are going up, while the ability to generate wealth is contracting.”
This means that although the oil industry can’t cope with the
lower prices, the global economy can’t cope with high prices. “I now see
peak oil as being defined by a contracting window between an oil price
high enough to keep producers in business and a price low enough for
consumers to access oil derived goods and services,” said Michaux.
As a result of this combination of geological challenges and
above-ground market constraints, Michaux’s government study warns that a
global peak in total oil production is either “imminent” over the next
few years, or may already have happened, possibly in November 2018. But
we will only be able to fully confirm the peak around five years after
the fact.
More than half the world’s oil producing countries
are now in decline, the report claims, with the bulk of new production
concentrated among just six main producers. When looking specifically at
crude oil operations, the report says, about 81 percent of the world’s
oil fields are now in decline, with the rate of discoveries of new oil
fields declining to record lows.
By 2040, this means the world
would need to replace over four times the current crude oil output of
Saudi Arabia, just to keep output consistently flat.
Rather than
global oil supply being constrained simply by the volume of oil
deposits in the ground, as conventional peak oil theory assumes, the
report says that it is instead constrained “by the number of
economically viable projects available to be developed at a low enough
production cost.”
Currently, the bulk of continued expansion in global supply is
dependent on the United States. With the US shale sector on the verge
of breakdown, the report warns that the “window of oil market viability
is closing, which suggests the resumption of the 2008 correction will be
soon.”
According to Dr. Hagens, this new analysis confirms that
“‘peak oil’ is now really about ‘peak credit.’ If we can somehow
continue to keep growing our financial claims to allow us access to
future energy today, we’ll continue to be able to extract the next most
costly tranche of hydrocarbons.”
But as debt levels are
becoming dangerously unstable, this can only continue for so long; and
only pushes the problem forward, making future oil decline rates
steeper. Eventually the situation will become unworkable. He argues that
it’s the “global credit orgy of the last 50 years,” but especially
since 2008, that has kept the growth engine growing.
I asked
Hagens whether he agrees with the report’s verdict that an overall peak
could therefore be imminent. “I find it extremely plausible,” he said.
Global reset and the need for a new industrial paradigm
Because we are “using finance to paper over this biophysical gap”, he
added, this will eventually “lead to a deflationary pulse in global
economies.”
Levels of global debt are now thoroughly out of
control, the report says—finding that US government debt creation has
been approximately twice the rate of economic growth over the last 40
years. By increasing the volume of debt, countries were able to maintain
growth as costs of energy went up. As a result, most national economies
now have debt to GDP ratio exceeding 90 percent, which means that they
need to go further into debt just to keep their economies functioning
while maintaining debt repayments.
Growth in GDP therefore amounts to a “debt fueled mirage,”
according to the report. As we have not properly planned for the
possible phasing out of fossil fuel energy, it is entirely possible that
as energy systems, oil in particular, come to contract, we could
witness “the peak of industrial output per capita sometime in the next
few years.”
As oil markets become unreliable, the report urges,
the world needs to develop “an entirely new energy system based around
an entirely different paradigm.” The report calls on technical
professionals and policymakers to focus on how “to create a high
technology society” based on a smaller clean energy footprint that isn’t
reliant on endless material growth. “If this is not achieved, the
alternative is the degradation (and fragmentation) of the current
industrial ecosystem.”
In short, this means we need an extremely
rapid shift to renewables, along with a total reorganization of how our
societies function for the coming post-fossil fuels world.
All
major industrial nations need to “work together in how to transition
away from oil and fossil fuels in general,” the report concludes,
warning: “The alternative is conflict.” Industrial civilization will
need to “evolve” into “a lower energy consumption profile with less
complexity,” based on a “complete restructure of the demand side of
energy requirements.”
Right now, though, “no one is preparing
for this,” said Hagens. “Not only are we speeding, but we are wearing
energy blind-folds at the same time. But the momentum of our current
system forces us to have conversations about a bigger system not a
smaller one—so the correct and valid plans and blueprints are not
discussed… It is a perfect storm—and when the waters recede we are going
to have smaller, simpler and more local, regional economies.”
