Irrational Exuberance

Refinery, Tulare, California. Photo: Jeffrey St. Clair.

In 1982 William R. Catton published OVERSHOOT The Ecological Basis of Revolutionary ChangeIn it Cattonl illustrates the trap we humans have set for ourselves. Fossil fuels have allowed humans to live from what Catton calls “ghost acres,” the land or ocean that would be necessary to produce the various goods we make or grow using fossil fuels. We are spending the capital of what from this perspective is nature’s bank account. This has allowed the population and the way of life for many to greatly exceed the carrying capacity of the planet. In so doing we have lost the ability to live within our means. We have overshot that ability by a wide margin.

Fossil fuels are a finite resource. We have now reached peak oil. Extraction of oil has exceeded discovery since 1980, and all oil wells deplete.

It is impossible to sustain civilization without fossil fuels. Alternative energy from renewables is a chimera. The benefits from wind and solar has proved elusive. Seven day lulls at wind farms are not unknown, and battery backup at grid scale would be enormously expensive. Gail Tverberg reports:

EIA reports the average cost for utility scale battery systems to be about $1500 per kWh. At that rate the batteries needed for backing up a solar or wind facility for three days cost around 30 times as much as the RE facility. But wind is often unpowered for more like seven days, during huge stagnant high pressure episodes. Thus the backup battery cost is more like 100 times the wind farm cost. Batteries are not feasible.

If not batteries then what? fossil fuel or atomic energy backups that were mostly idle? What of the cost? Nor is intermittency the only problem with wind and solar. They require a whole new and more elaborate grid and their management is far more difficult. For example, the use of rolling blackouts during demand spikes to prevent grid burnout is not feasible with such distributed sources of power. All this must be built with fossil fuels, which also must be used to mine rare earths required in wind turbine manufacture. When the costs are really totaled these are not economic alternatives. Germany, the poster child for alternative energy, is finding that out.

With Germany as inspiration, the United Nations and World Bank poured billions into renewables like wind, solar, and hydro in developing nations like Kenya.

But then, last year, Germany was forced to acknowledge that it had to delay its phase-out of coal, and would not meet its 2020 greenhouse gas reduction commitments. It announced plans to bulldoze an ancient church and forest in order to get at the coal underneath it.

…But Germany didn’t just fall short of its climate targets. Its emissions have flat-lined since 2009.

…Over the past five years alone, the Energiewende [energy change] has cost Germany €32 billion ($36 billion) annually, and opposition to renewables is growing in the German countryside.

Nor is there any hope for biofuels. Cattonl does a calculation:

In 1970 the entire United States corn crop came to about 4.15 billion bushels; this would have yielded about 9.67 billion gallons of alcohol—if we had been willing to forgo exporting any of the corn, or eating any of it, or feeding any of it to livestock. Since each gallon of alcohol has heat value equivalent to about 0.7 gallons of gasoline, this means the entire 1970 corn crop, converted to alcohol, could have supplied less than 7 1/2 percent of that year’s domestic demand for motor fuel! It would have supplied only 1.27 percent of total U.S. Energy consumption. Even the record corn crop tabulated in 1976 (just over 6 billion bushels) would have supplied less than 2 percent. (P45)

In 2019 the US corn crop is 13.019 billion bushels. Us Population 1970 – 205 million. US population 2018 – 327 million. Of course the corn crop requires more and more use of fossil fuels to produce. “Between 1910 and 1983, corn yields in the US increased by 346% (on a per area basis), which the energy inputs increased by 810%, also on a per area basis!”

We depend upon fossil deposits not only for fuel and food, but durable goods as well. Manufacturing cars, houses, I-phones and the like requires fossil fuels. We not only use them for energy, but make things from them, especially fertilizer. In short there is no way to maintain “civilization” as we know it without fossil fuels.

Catton points to an attitude of “exuberance” fostered by the discovery of America and the development of technology that allowed humans to use fossil energy. This was a normal, perhaps inevitable, attitude during the period when population did not exceed carrying capacity.That period ended around 1880, but the attitude of exuberance didn’t. This attitude is the American “can-do” attitude: optimistic, democratic, work-praising. In overshoot this attitude is obsolete, and will lead to catastrophe. Catton wrote to inspire us to challenge this attitude.

Fossil fuel wells deplete. The resources are finite. Of this there can be no doubt. All conjectures that they are a renewable resource fail in that if they were renewable at the rate we use them the earth would be swimming in oil. Given how much extraction exceeds discovery we can expect a decline in production relatively soon. This is likely to happen in an unexpected way. Recent years have seen ever more heroic efforts to extract oil. From Deepwater Horizon that blew up drilling a well five miles down in the Gulf of Mexico to the ponzi scheme of “fracking” tight oil, evidence for a “last-dregs” effort is everywhere.

Investors often consider oil drilling companies as “asset” plays. Their assets are the proven oil reserves. Proven reserves are reserves they predict will be economically producible – but at what price? Oil prices have continued to hover around $65. Proven reserves that are economically producible at $85 might not be at $65. Already reserves in Marcellus Shale have been downgraded.

The federal government gave the Marcellus shale a big thumbs down this week. It dramatically downgraded its estimate of technically recoverable natural gas in the formation, from 410 trillion cubic feet (Tcf) or enough to heat and power the U.S. for 20 years–to 141 Tcf, or about a 7 year national supply.

The Montery play in California is even worse:

In 2011, the EIA published a report that stated the Monterey Shale in California had 15.4 billion barrels of recoverable oil, or two-thirds of the then estimated recoverable tight oil in the US. The EIA subsequently downgraded its estimate to 13.7 billion barrels in 2013. Post Carbon Institute and PSE Healthy Energy doubted the veracity of these estimates, and I worked with them to assess the EIA’s claims by analyzing available drilling data and the geology of the Monterey formation. In December 2013 they published my report, Drilling California: A Reality Check on the Monterey Shale, which concluded that the EIA’s estimate was vastly overstated. A few months later, the EIA quietly downgraded its estimate by 96% to 600 million barrels, but the revision was picked up by the Los Angeles Times in May 2014.

Yesterday the U.S. Geological Survey (USGS) released a report stating that the mean technically recoverable oil resource in the Monterey was just 21 million barrels, a further 96% downgrade from the revised 2014 EIA estimate.

Oil companies that had been holding on in hopes of a higher price are being forced to give up. Here’s the New York Times:

In the last four years, roughly 175 oil and gas companies in the United States and Canada with debts totaling about $100 billion have filed for bankruptcy protection. Many borrowed heavily when oil and gas prices were far higher, only to collectively overproduce and undercut their commodity prices. At least six companies have gone bankrupt this year, and Weatherford International, the fourth-leading oil services company, which owes investors $7.7 billion, is expected to file for bankruptcy protection on Monday.

Gail Tverberg (Gail the Actuary) is good with numbers. She has predicted low oil prices and a consequent recession in 2020. She points out that world oil production has fallen since the fourth quarter 2018. This is in spite of sharp production increases in the United States as a result of “fracking,” that make up somewhat for declining production in the Middle East

In spite of this decline in production, oil prices have remained around $65 a barrel even though the oil operations producing this extra oil are not profitable at less than $80 a barrel, if they would be then. Ms Tverberg points out that “fracking” is such an oil consuming operation that the increased costs, if oil cost $80, might still make these operations unprofitable.

In any case, at $65 all the companies engaged in this activity have lost money. The stock of Chesapeake Oil, once the second largest producer of natural gas in the United States, has fallen from more than $60 to under a dollar while the stock market has climbed.

Steve Schlotterbeck, who led drilling company EQT as it expanded to become the nation’s largest producer of natural gas in 2017, arrived at a petrochemical industry conference in Pittsburgh Friday morning with a blunt message about shale gas drilling and fracking.

“The shale gas revolution has frankly been an unmitigated disaster for any buy-and-hold investor in the shale gas industry with very few limited exceptions,” Schlotterbeck, who left the helm of EQT last year, continued. “In fact, I’m not aware of another case of a disruptive technological change that has done so much harm to the industry that created the change.”

There are no longer any investors in these companies, and no one will lend them money. They are drilling very few new wells and their current wills deplete 60% in the first year.

Tad Patzek, head of the University of Texas at Austin’s department of petroleum and geosystems engineering, has commented that companies are trying to extract shale oil and gas as fast as possible. The danger of this is that, “we’re setting ourselves up for a major fiasco”. He notes that after production peaks in 2020 “there’s going to be a pretty fast decline on the other side” and ”that’s when there’s going to be a rude awakening for the United States.” He notes rather ominously that, “it cannot be good for the US economy.”

Arthur Berman an independent geologist claims that the U.S. has only 2 years worth of tight oil production left given current levels of consumption. He says that the US has about 10 billion barrels of proven plus proven undeveloped reserves left yet it is consuming 5.5. billion barrels of oil per year. On top of this was the 96% downgrade in shale oil reserves in the Monterey play in California last year by the EIA which was meant to have the largest shale oil reserves in the US.

Why can’t these companies sell such an essential product at a price that will allow them a profit? Gail Tverberg makes a good case for the obvious – demand falls off above that price. Income inequality has at last pushed poor people to the breaking point. When prices of oil go up any further people drive less or buy fewer durable goods. The little people can no longer tolerate a price above $65.

The sale of durable goods falls of sharply when the cost of oil pushes the prices up. A good proxy for this is car sales. Car sales have fallen slightly for three years in a row. Prior to that China had been responsible for almost all growth, which had been significant.

In light of a state that could be dubbed ‘peak car’ in developed markets, carmakers are particularly keen on tapping into the growing affluence of Asian countries to increase worldwide car sales. Passenger vehicle sales in China reached 23.7 million units in 2018, and Asia’s economic powerhouse has emerged as the number one sales market for passenger cars.

Market stalls on weak demand in Asia

However, China appears to be grappling with an economic slowdown in 2019. Although the economy is still growing, there are fears that a recession may be looming.

Car sales have fallen in China for the last two years.

The national auto industry body said total car sales fell 8.2% to just under 25.8 million in 2019, after having slid nearly 3% in 2018 in the first contraction since the 1990s. December car sales in China dipped 0.1%, according to the data, marking 18 straight months of declines.

So even with a decline in the amount of oil being extracted, the price will not be able to rise. If it does the sale of durable goods will contract still further and with it demand for oil. This means layoffs and still less demand. The work of all economists based on an $80 price for oil is flawed. The world economy is beginning to contract, and everyone is on the edge of panic. It is something like this dynamic that leads Ms Tverberg to predict a recession. Only this time, with the oil depletion storm rolling in, it is hard to see any shelter. Civilization is beginning a journey through energy shortage to social upheaval, then on to chaos, war and the end. It is interesting that in the near term it is income inequality that is the apparent cause.

The inevitable conclusion: either “civilization” as we know it, with all the extravagance, goes, or homo sapiens will. Anyone complaining about climate change ( to name just one small part of civilization’s damage) who imagines there is a solution that will allow him to live pretty much as he does now, is delusional, indeed as delusional as those who deny the climate catastrophe completely. Catton’s book demonstrates just how large overshoot was even in 1982. Obviously, it has gotten much, much worse. There is no alternative to fossil fuels, and they are in decline. We are beginning to slide down the slope on the other side of peak oil. We will soon realize that we have estimated that we have far more than we really do. Only a plan for a corresponding contraction of the need for fossil fuels, restricting their use to transition to a human world that has a much smaller population, is worth contemplating. That population will have to survive without advertising, vacations in Phuket, and the military-industrial complex.

If contraction to a population within the earth’s carrying capacity is not done through limiting birth rate, the four horsemen will do it. Such a thing could never be done through force from above. It would have to be a plan embraced by virtually all of human kind. Who knows? The sudden awareness of the dire situation might yet wake us up. Still it must have a leader, someone who merely speaks what everyone wants to say. One way or another, the human population will contract and “civilization” will disappear in the near future. Already we see many states beginning to crumble into nations, hastening the dissolution of the idea of a universal humanity and the possibility for world-wide action. The United States, unable to release the butterfly of “exuberance,” strangles itself in a cocoon of self-delusion. It seems bent on pointless war and national suicide. The chance to see our situation clearly and act with purpose is small and diminishing. If the human race could somehow manage an orderly retreat from “civilization,” all we would have to worry about is the sixth mass extinction.


Michael Doliner studied with Hannah Arendt at the University of Chicago and has taught at Valparaiso University and Ithaca College. He can be reached at: