IS THE LONG EMERGENCY UPON US?

Last month, I raised the possibility that President Brandon was simply left holding the bag when resource depletion hit the oil patch.  It might be that what James "Long Emergency" Kunstler (who I refer to in that way for his regular posts on that theme) anticipated back in the days of two weeks to slow the spread is now coming to pass.  "I’m not going to harp on this for now, but our energy supply situation is not what it’s cracked up to be, specifically shale oil, which depends utterly on a reliable stream of loans to keep up the incessant fracking — not a bright prospect with credit markets frozen — and above and beyond that, it’s an industry that doesn’t pay for itself, doesn’t make a red cent. So, watch for carnage in the shale oil patches."

Peak oil might be back.

Coal and natural gas spot prices have recently soared to record levels internationally, while oil is trading at over $80 a barrel—the highest price in seven years. Newspaper columnists are asking whether people in Europe and Asia who can't afford high fuel and electricity prices might freeze this winter. High natural gas prices are causing fertilizer prices to spike, which will inevitably raise costs to farmers, with eventual catastrophic impact on people who already have trouble paying for food.

Political commentators are naturally searching for culprits (or scapegoats). For those on the business-friendly political right, the usual target is green energy policies that discourage fossil fuel investment. For those on the left, the culprit is insufficient investment in renewable energy.

But there's another explanation for the high prices: depletion. I'm not suggesting we're about to completely run out of coal, oil, or gas; there's no immediate danger of that. However, the energy industry has historically targeted the highest-quality and easiest-accessed of these resources, which means that what's left, in most cases, are fuels that will be costlier to extract and process—and also more polluting.

There's a parable we sometimes tell about never running out: imagine a room full of whole peanuts, with kids let loose to eat the peanuts while they're required to leave the shells in the room as they eat. Early on, it's easy to find the whole peanuts, but as the room fills up with shells, it's harder to find them.  Locating exhaustible resources is like that, and we even have a Hotelling principle for the pricing of exhaustible resources that ought manifest itself if peak oil is indeed at hand.  The depletion article seems to miss that hypothesis.  If anybody is looking for a research project, there might be material to build upon.

Now, circumstances are changing and reality seems to be catching up with peak-supply forecasts. Many economic analysts attribute shortages and price hikes to failure by the fossil fuel industry to invest enough in exploration and production. But, to some extent, that's just a misleading way of acknowledging that, from now on, extracting fossil fuels from Earth's crust will take more money, technology, and energy than it used to.

So, to directly address the question with which this essay is titled: exactly how much of the world's current energy crisis is due to fossil fuel depletion, and how much to other factors? It's impossible to assign percentages. There has always been some volatility in fossil fuel markets. But as depletion continues, price spikes and troughs are likely to grow in amplitude, and to become more frequent. And that's precisely what we are seeing. Since 2005, when world conventional oil production stopped growing, petroleum prices have indeed become more volatile, with spot prices rising to the all-time record high of $147 (in July, 2008) and sinking to the all-time record low of -$37 (in April, 2020). Without depletion, there would still have been price variation—just as there would still be extreme weather events without climate change. But, like climate change, depletion is a slowly accumulating background condition that widens the envelope of day-to-day or year-to-year extremes.

Let's dig a little deeper into the "lack of investment" explanation for high fuel prices. As we've seen, higher rates of investment are needed because new projects are expensive. But, at the same time, it is also true that concern over climate change is leading major investors to reconsider long-standing practices of funding fossil fuel producers. Recently the highly influential International Energy Agency recommended that no new fossil fuel projects be approved after 2021—a suggestion inconceivable from that organization just a few years ago. The list of pension funds and banks that are divesting from fossil fuels grows with each passing month.

The regulatory uncertainty implicit in that appeal to "no projects be approved" is troubling; more troubling is that author's attitude toward managed decline.

Policy makers envision an energy transition in which solar and wind seamlessly and quickly substitute for coal, oil, and gas, leaving consumers enjoying just the same comforts and conveniences as they do now, while emitting no carbon. That's an exceedingly unlikely scenario. The real energy transition will almost certainly be a shift from using a lot to using a lot less.

If that's true, then what should we do? Over a dozen years ago, I was among several energy analysts and commentators who recommended the adoption of depletion protocols (which are essentially programs for conserving and rationing nonrenewable resources) as a policy tool for helping society adapt to the inevitable end of the fossil fuel era. Politicians were uninterested. Today, rationing is still the best policy response. Energy could be rationed in several different ways; in addition to depletion protocols, another rationing approach I've long liked is tradable energy quotas, which effectively provide monetary incentivizes to those who use less energy. With rationing, those who use the most sacrifice the most, while those who use the least maintain (or gain) access to necessities.

Never underestimate the ability of a self-styled progressive to provide for the most equitable sharing of the misery.  But did those same self-styled progressives create the misery in the first place?

Over the last decade, climate activists have successfully pressured governments, banks, and corporations to divest from oil and natural gas companies. At first such efforts appeared to be strictly symbolic. But in recent years years climate activists succeeded in driving public and private investment away from oil and gas exploration and toward renewables. The result is the worst energy crisis in 50 years.

The upcoming winter might be interesting.

As Europe struggles through an energy crisis, the United States could very well be on the precipice of our own. Prices are high—that is no secret. Production of oil is lower than it was before Covid, and there are concerns about a cold winter coming. And yet the situation may be worse than that. The U.S. may very well be facing a shocking dislocation of the energy economy.

There's more at work than Brandon's ukases.

The causes for this change in electricity pricing are three-fold. First of all, for the last 15 years, the U.S. has increasingly relied on natural gas for power generation as it tries to cut greenhouse-gas emissions. Second, just a couple of years ago, U.S. domestic natural-gas production exceeded demand, and we are actually producing more marketed natural gas today than before Covid. Nevertheless, the rise in production has not kept up with the rise in demand. Finally, speculation and inflation must not be ignored for a jump of more than 100% in the price of natural gas in the U.S. since the start of this calendar year.

Between 2005 and 2020, the U.S. became significantly more dependent on natural gas for power generation. In 2005, the U.S. produced 782,829 gigawatt-hours of electricity from natural gas. By 2020, we produced 113% more electricity from natural gas, while power generation from coal fell by 1,302,087 GWh. During that period, the percentage of all U.S. electricity generated from coal dropped from 26% to 10%. Meanwhile, natural gas increased from 9% to 19%, all while total power generation grew by just under 3%. We may have preferred that greener energies took up the slack from coal, but it didn’t happen. Nuclear power and hydropower barely grew, and solar power and geothermal power are still negligible. Only wind power grew markedly, from just under 17,881 GWh to 341,416 GWh.

In other words, our environmentalist policies have made us more reliant on natural gas.

That's neither the bad financials story nor the Hotelling principle at work, for now.