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Be careful what you wish for

With the world’s great and good flying off to Davos to lecture the rest of us on lowering our carbon footprints, everyone from tech companies to hedge funds is suddenly keen to go “carbon neutral.”  Could it be that hard-headed billionaires have had their hearts melted by Greta Thunberg’s pleas? Or might there be a more sordid reason for the apparent Damascene conversion?  There might, indeed, according to Raúl Ilargi Meijer at the Automatic Earth:

“You see, Greta, the message the rich get is not that they must listen to you, it’s that others do listen who control a lot of money, individuals, governments, and so there will be money to be made if they just promote your ideas enough. You’ve been co-opted and pre-empted, so to speak. And what are you going to do now? You’re in cahoots, whether you like it or not, with the likes of Exxon, Shell, and Mercedes.

“The oil companies have long rebranded themselves as energy companies (this started when BP’s logo turned green years ago) and invested billions in solar and wind turbines. The carmakers are betting big on electric vehicles. And this is supposed to achieve your goal of carbon neutrality? Let’s get real, shall we?”

The global rich are listening to economists like William Nordhaus, who seems to believe that global capitalism will barely change after global temperature has risen 5 degrees above pre-industrial levels.  Their interest in environmental issues is solely in the taxpayer-funded gravy train that is the pipedream of a “net zero carbon” economy by the end of the decade.  As Meijer puts it:

“People like the idea of a green economy. They like the sound of it. But if you would ask them what it means in practice, they would picture something very close to the present economic system, just green, i.e. powered by electricity instead of fossil fuels.”

If there is money to be made from building wind turbines, solar panels, lithium ion batteries and electric vehicles, the global rich are more than happy to be the first to get their collective snouts into the government funding trough.  But nobody seriously believes that the economies of the world will be anything other than fossil fuelled well into the second half of the century.  Indeed, the tacit acceptance that humanity’s dependence upon oil will continue is the common ground shared by both environmental activists and their capitalist adversaries.

On the capitalist side, that old favourite “new technology,” in the shape of hydraulic fracturing and ultra-deep water drilling, has supposedly ushered in a “new century of energy independence” for those countries sensible enough to deploy it.  On the environmental side, while the prospect of another century of oil burning will be met with horror; there is tacit acceptance that the liquid black lifeblood of the global economy will flow for as long as it takes to build and deploy the eye-watering number of non-renewable renewable energy-harvesting technologies that would be required to replace the 85 percent of our energy that currently comes from fossil fuels.  In reality, environmental campaigners want an end to fossil fuels… just not immediately.

For the global energy industry, this is surely good news.  Even if the environmental campaigners get their way, the world will still need to consume oil, coal and gas in ever greater quantities in order to build, transport, deploy and maintain the 1,500 windfarms each covering 300 square miles that we would have to deploy every day between now and 2050 just to replace current fossil fuel energy.  There is, though, a glaring problem with this anticipated energy bonanza – it is completely unaffordable.

By unaffordable, I don’t mean that the world’s governments and central banks couldn’t conjure up the gazillions of dollars, euros, pound and yen to finance the kind of global “green new deal” that is being imagined.  Rather, we cannot afford the energy cost of the proposed transition.  Not all energy sources are equal; and while there is far more oil, gas and coal beneath the ground than all of the fossil fuels we have burned since 1800, almost all of it requires more energy to extract than it will provide in return.  Throwing fiat currency at the problem does nothing to change this – it merely lowers the value of the currency through inflation.

Twenty years ago, geologists and economists who saw that the world was running out of cheap and easy oil deposits imagined that as we switched to harder and more energy-expensive alternatives (like bitumen sands, shale plays and ultra-deep water deposits) so the price of oil would have to rise.  An oil price above $200 per barrel was widely expected by 2020.  There was, however, a minority view put forward by analysts such as Gail Tverberg, that it was oil consumers rather than oil producers who would ultimately determine the price of oil.

Historically, the world oil market enjoyed two periods of relative stability resulting from the ability of oil cartels to fix global prices.  Between the end of World War Two and 1971, the US Texas Railroad Commission used its position to set a price that encouraged economic growth while maintaining profits for the oil companies.  This cartel broke when America’s oil fields peaked in 1970; paving the way for the oil shocks of the 1970s and the eventual rise of the OPEC cartel.  Prices settled at a higher – but still acceptable – level through the 1990s and early 2000s; but broke once again when global conventional oil production peaked in 2005 – setting off the chain of events that led to the 2008 financial crash and the ensuing global depression.

In recent years, most economists assumed that the OPEC+Russia cartel would be able to set an even higher oil price – the Saudis talked about driving the price up to $100 per barrel – to allow the oil industry to remain profitable.  Instead, the oil price has bounced between a low of $35 in 2016 and a (brief) high of $86 in 2018.  For most of the last six years, though, the price has settled in a band between $40 and $60 that favours neither producers nor consumers.

Superficially, the reason the OPEC+Russia cartel could not force process up was that the US fracking industry could always ramp up production to replace any global shortages.  Behind the supposed fracking miracle, however, was a mountain of unrepayable debt caused by the policies of the central banks.  By lowering interest rates to zero (after inflation) the central banks forced investors to invest in riskier assets – such as the junk bonds used to finance fracking – that offered much higher rates.  This influx of fools’ money helped to cover the fact that the fracking industry was spending billions of dollars to produce millions of dollars’ worth of oil – the financial manifestation of using more energy than is extracted in return.

While fracking companies can go bust, have their debts written off and their assets stripped, this is not something that can go on indefinitely.  In energy terms, the more energy that is used to get energy, the less energy there is to power the wider economy:

 

The financial manifestation is complicated by the ability of governments, central banks and commercial banks to spirit new currency into existence either through new debt or through public spending on subsidies to the energy industry.  Nevertheless, in constant value, the effect is the same – the more currency that has to be used to subsidise the energy industry, the less is available to the wider economy.

One consequence of this – exacerbated where governments use tax hikes and austerity cuts in an attempt to balance the subsidies and tax breaks given to preferred industries like energy – is that we – collectively – have been losing purchasing power for the last 15 years.  This has been offset to some extent by the continued – but rapidly slowing – growth in emerging economies in Asia and Africa, which has helped to keep the price of consumer goods stable.  Nevertheless, the “retail apocalypse” that is gathering place across the developed regions of the world is a direct consequence of the loss of energy/purchasing power in the wider (non-energy) economy.

Faced with this situation, any attempt to raise the price of oil – or, indeed, energy of any kind – results in a fall in demand in the developed economies; with the knock-on result that demand for energy falls back.  If the energy cost of energy was stable, this would not necessarily be a problem.  The oil price could settle somewhere close to $50 per barrel; allowing at least some economic growth without bankrupting the energy companies.  The problem, though, is that the energy cost of energy rises remorselessly as we burn our way through the last cheap and easy deposits and are obliged to turn to ever harder and energy-intensive alternatives. This, in turn, puts political limits on the extent to which governments can continue to provide subsidies while cutting services and increasing (usually indirect) taxes to pay for them; which is why we are witnessing the collapse of orthodox centrist political parties around the world.

At the beginning of the new decade, most of us had believed that the energy cost of energy problem was – for the moment – limited to expensive unconventional oil such as Canadian tar sands and US fracking.  It had been assumed that big oil companies like Exxon and BP still had access to sufficient conventional oil deposits to remain profitable.  However, a recent report from the Institute for Energy Economics and Financial Analysis has found that the oil majors are experiencing similar free cash flow problems to the fracking industry:

“Since 2010, the world’s largest oil and gas companies have failed to generate enough cash from their primary business – selling oil, gas, refined products and petrochemicals – to cover the payments they have made to their shareholders. ExxonMobil, BP, Chevron, Total, and Royal Dutch Shell (Shell), the five largest publicly traded oil and gas firms, collectively rewarded stockholders with $536 billion in dividends and share buybacks since 2010, while generating $329 billion in free cash flow over the same period.

“The companies made up the $207 billion cash shortfall—equal to 39 percent of total shareholder distributions—primarily by selling assets and borrowing money.

“This practice reflects an underlying weakness in the fundamentals of contemporary oil and gas business models: revenues from the supermajors’ operations are not covering their core operational expenses and capital expenditures.”

Nor is it only the oil companies that are in trouble.  The global energy services industry is also experiencing financial stress according to a report by Kallanish Energy:

“The world’s largest oilfield services firm posted a double-digit full-year 2019 loss measured in billions of dollars, red ink being to be countered by the sale of underperforming assets, stacking frac fleets, closing locations and laying off personnel…

“Schlumberger reported a $10.1 billion loss in 2019 compared with a $2.2 billion profit in 2018. It had $32.9 billion in revenue for the year, up slightly from $32.8 billion in 2018.

Full-year earnings were dragged down by an $11.4 billion third-quarter loss, as the company wrote down the value of two past acquisitions and experienced nearly a year of weakened demand from its North American hydraulic fracturing business…

“In response, Schlumberger’s North American unit is selling noncore businesses, stacking nearly one-third of its frac fleet and closing one-fourth of its locations. Schlumberger also said it laid off 1,400 North American employees in the fourth quarter.”

Without a much higher oil price – far higher than the economy can withstand – selling assets and borrowing from suckers can only be a temporary fix.  Mergers may allow the industry to stagger on for a bit longer; and there is still scope for government tax breaks and subsidies to keep the oil flowing; although only at the cost of unleashing political forces that will make the current crop of national populists look benign.  But the killer blow here is that the global economy depends upon a growing supply of energy to produce the economic growth that a debt-based system needs if it is not to crash.  And whichever way you slice it, these latest reports from the energy industry point to an energy constrained future.

Some oil will no doubt continue to be produced for decades to come.  But once the energy industry has downsized to focus on the dwindling reserves of truly profitable oil, there is going to be a lot less of it and a great deal more competition to access it.  That, in turn, means that environmental campaigners will soon be getting a taste of what a low-carbon economy really looks like – and rest assured it will look nothing like our contemporary economy but with wind turbines instead of diesel engines.

The UK is a world leader in wind power; this morning, wind was providing less than five percent of UK electricity; which is just twenty percent of our total energy use. When renewable energy is all we have left, our lives will have to be radically different.  When everything we take for granted – from Facebook to food and from Uber to clean drinking water – becomes intermittent for want of energy to power it, my bet is that most of today’s net zero carbon enthusiasts will be the first to howl in protest.

As you made it to the end…

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